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IF2 - Practice Problems

This document contains practice questions and solutions for Intermediate Financial Accounting 2 (ACCT 3211). It includes brief exercises on accounting for notes payable, with journal entries to record issuing notes, accruing interest expense over time, and repaying notes payable. Sample questions calculate interest rates on notes and journalize transactions for notes issued for purchases and cash borrowings.

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0% found this document useful (0 votes)

469 views320 pages

IF2 - Practice Problems

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saikrishnavn

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Available Formats

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Bob Gaglardi School of Business and

Economics

Practice Question Solutions

ACCT 3211
Intermediate Financial Accounting 2

Kieso, D. E., Weygandt, J. J., Warfield, T. D., Wiecek, I. M., & McConomy, B. J. (2022).
Intermediate accounting (13th Cdn. ed., Vol. 2) with WileyPLUS. John Wiley & Sons
Canada.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

ACCT 3211
Practise Question Solutions Chapters 13 to 17

CHAPTER 13
BRIEF EXERCISE 13.4

11/01/23 Cash .................................................... 40,000

Notes Payable ............................ 40,000

12/31/23 Interest Expense1 ............................... 600

Interest Payable ......................... 600
1
($40,000 X 9% X 2/12)

02/01/24 Notes Payable ..................................... 40,000

Interest Payable .................................. 600
Interest Expense2 ............................... 300
Cash ........................................... 40,900
2
($40,000 X 9% X 1/12)
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

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

BRIEF EXERCISE 13.5

01/01/24 Interest Payable .................................. 600

Interest Expense........................ 600

02/01/24 Notes Payable ..................................... 40,000

Interest Expense1 ............................... 900
Cash ........................................... 40,900
1
($40,000 X 9% X 3/12)

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

BRIEF EXERCISE 13.6

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

(a)
Using a financial calculator:
PV $ 60,000
I ? % Yields .744 % per month or 8.9% per year
N 3
PMT 0
FV $ (61,350)
Type 0

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

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Result: .0074444

(b)
11/01/23 Cash .................................................... 60,000
Notes Payable ............................ 60,000
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

12/31/23 Interest Expense1 ............................... 897

Notes Payable ............................ 897
1
($60,000 x .007444) = $447
($60,447 x .007444) = $450
($447 + $450) = $897
(alternately could record $1,350 X 2/3 = $900)

02/01/23 Interest Expense2 ............................... 453

Notes Payable ............................ 453
2
($1,350 – $897)
To accrue interest expense

Notes Payable ..................................... 61,350

Cash ........................................... 61,350
To record note repayment

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

EXERCISE 13.2
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

a. Sept. 1 Purchases ..................................... 50,000

Accounts Payable ................ 50,000
Purchase on account

Oct. 1 Accounts Payable ......................... 50,000

Notes Payable ...................... 50,000
Settlement of accounts payable
by issuing a note

Oct. 1 Cash .............................................. 75,000

Notes Payable ...................... 75,000
Borrowed cash and issued a
note

b. Dec. 31 Interest Expense1.......................... 1,000

Interest Payable ................... 1,000
1
($50,000 X 8% X 3/12)
To accrue interest expense on
8% note
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Dec. 31 Interest Expense2.......................... 1,500

Notes Payable ...................... 1,500
2
[($81,000 – $75,000) X 3/12]
To accrue interest expense on
non–interest-bearing note

c. (1) Note payable $50,000

Interest payable 1,000
$51,000

(2) Note payable at issuance $75,000

Interest accrued 1,500
Note payable balance $76,500

LO 3 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 13.3

a. Oct. 1/24 Interest Expense1 ....................... 3,000

Interest Payable .......................... 1,000
Notes Payable ............................. 50,000
Cash ..................................... 54,000
1
($50,000 X 8% X 9/12)
To record repayment of 8% note

Oct. 1/24 Interest Expense2 ....................... 4,500

Notes Payable ..................... 4,500
2
[($81,000 – $75,000) X 9/12]
To accrue interest expense on
non–interest-bearing note

Notes Payable ............................. 81,000

Cash ..................................... 81,000
To record repayment of non–
interest-bearing note
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

b. Orion Note:
Jan. 1 Interest Payable .................... 1,000
Interest Expense ............. 1,000

Oct. 1 Interest Expense....................... 4,000

Notes Payable ........................... 50,000
Cash ................................ 54,000

Bank Note: The use of reversing entries is more efficient for the
interest-bearing note. In this case, the bookkeeping staff will debit
interest expense for the full 12 months when the note is paid and,
in combination with the reversing entry, the expense in 2024 will
be correct. With the non–interest-bearing note, there is no need to
reverse the interest. When the note is paid at maturity, the
difference between the note’s carrying amount and the amount
paid is all charged – correctly – to interest expense.

If reversing entry used:

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Jan. 1 Notes Payable ................................ 1,500

Interest Expense .................. 1,500

Oct. 1 Interest Expense............................ 6,000

Note Payable ........................ 6,000
To accrue interest expense on
non–interest-bearing note

Notes Payable ................................ 81,000

Cash ...................................... 81,000
To record repayment of non–
interest-bearing note

If reversing entry not used:

Oct. 1 Interest Expense …………………. 4,500
Note Payable ……………… 4,500
To accrue interest expense on
non–interest-bearing note
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Notes Payable ................................ 81,000

Cash ..................................... 81,000
To record repayment of non–
interest-bearing note

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

EXERCISE 13.15

a. January 1, 2023
Drilling Platform 5,460,000
Cash 5,460,000

Drilling Platform1 419,063

Asset Retirement Obligation 419,063
1
$598,661.502 X 70% = $419,063
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

1. Using Table A.2 tables i=8% and n=6):

($950,000 X .63017) = $598,661.502

2. Using a financial calculator:

PV ? Yields $ 598,661.15
I 8%
N 6
PMT 0
FV $ (950,000)
Type 0
3. Using Excel: =PV(rate,nper,pmt,fv,type)
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Result: $598,661.15
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

b. December 31, 2023

Depreciation Expense3 979,844
Accumulated Depreciation –
Drilling Platform 979,844
3
($5,460,000 + $419,063) ÷ 6
To record depreciation expense

Interest Expense4 33,525

Asset Retirement Obligation 33,525
4
$419,063 X 8%
To record interest expense

Inventory 32,328
Asset Retirement Obligation 32,328
To record production of oil inventory
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

c. December 31, 2024

Depreciation Expense5 979,844
Accumulated Depreciation –
Drilling Platform 979,844
5
($5,460,000 + $419,063) ÷ 6
To record depreciation expense

Interest Expense6 38,793

Asset Retirement Obligation 38,793
6
($419,063 + $33,525 + $32,328) X 8%
To record interest expense

Inventory 34,914
Asset Retirement Obligation 34,914
To record production of oil inventory

d. December 31, 2028

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Asset Retirement Obligation 950,000

Gain on Settlement of ARO 28,000
Cash 922,000

e. January 1, 2023
Drilling Platform 5,460,000
Cash 5,460,000

Drilling Platform 419,063

Asset Retirement Obligation 419,063
Same amount as in (a)

December 31, 2023

Depreciation Expense7 979,844
Accumulated Depreciation –
Drilling Platform 979,844
7
($5,460,000 + $419,063) ÷ 6
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

To record depreciation expense

Accretion Expense8 33,525

Asset Retirement Obligation 33,525
8
$419,063 X 8%
To record accretion expense

Drilling Platform 32,328

Asset Retirement Obligation 32,328
To adjust asset retirement obligation

December 31, 2024

Depreciation Expense9 986,310
Accumulated Depreciation –
Drilling Platform 986,310
9
($5,460,000 + $419,063) ÷ 6 + $32,328 ÷ 5
To record depreciation expense
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Accretion Expense10 38,793

Asset Retirement Obligation 38,793
10
($419,063 + $33,525 + $32,328) X 8%
To record accretion expense

Drilling Platform 34,914

Asset Retirement Obligation 34,914
To adjust asset retirement obligation

December 31, 2028

Asset Retirement Obligation 950,000
Gain on Settlement of ARO 28,000
Cash 922,000

LO 5,9 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13.17
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

a. May 1, 2023

No entry – neither party has performed on May 1, 2023.

b. May 15, 2023

Cash .................................................................. 3,200

Unearned Revenue .................................. 3,200

c. May 31, 2023

Unearned Revenue ........................................... 3,200

Sales Revenue ......................................... 3,200
To record sales revenue

Cost of Goods Sold .......................................... 2,150

Inventory .................................................. 2,150
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

To record cost of goods sold

LO 6 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13.20

a. Estimated warranty expense for 2023:

On 2023 sales: $1,036,000 X .091 = $ 93,240

1
(2% of sales first year + 3% of sales second year + 4% of sales third year = 9% of
sales)

Sales 2021 2022 2023 2024 2025 Total

$810,000 $16,200 $24,300 $32,400 $72,900
1,070,000 21,400 32,100 $42,800 96,300
1,036,000 ______ ______ 20,720 31,080 $41,440 93,240
$16,200 $45,700 $85,220 $73,880 $41,440 $262,440
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Estimated warranty costs:

On 2021 sales $ 810,000 X .09 $ 72,900
On 2022 sales $1,070,000 X .09 96,300
On 2023 sales $1,036,000 X .09 93,240
Total estimated costs 262,440
Total warranty expenditures2 146,700
Balance of liability, 12/31/23 $115,740

2
2021—$16,500; 2022—$47,200, and 2023—$83,000.

The liability account has a balance of $115,740 at 12/31/23 based on the difference
between the estimated warranty costs (totalling $262,440) for the three years’ sales
and the actual warranty expenditures (totalling $146,700) during that same period.

b. The recording of assurance-type warranties is the same under IFRS and ASPE.
However, under ASPE it is based
on the principle that when revenue covers a variety of deliverables (bundled sales) it
should be unbundled and
the revenue allocated to the various goods or services that are required to be
performed.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 13.20 (CONTINUED)

c. The difference between actual warranty expenditures and the estimated amount would
be treated as a change in accounting estimate and applied to the current and future
years. The difference would be used as part of Cool Sound’s experience in setting the
rate for current and future years’ transactions. If the difference is considered material,
the additional warranty expenditures would be charged to the income statement in the
current year.

d. When arriving at the estimate of likely costs to be incurred in satisfying warranty

claims, Cool Sound could use information to generate predictive analytics regarding
matters such as which parts are most likely to fail, and the number and severity of
expected claims. Data analytics information about the parts used, customer feedback,
repair technician comments, and similar data can be important tools in estimating
warranty costs and highlighting quality issues that should be focused upon by
management.

LO 6, 8, 9 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001, cpa-t007 CM: Reporting and DAIS
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 13.21

a. Accounts Receivable.......................... 3,000,000

Sales Revenue1 .......................... 3,000,000
1
(500 X $6,000)
To record sales on account

Warranty Expense .............................. 30,000

Cash ........................................... 30,000
To record payment of warranty expense

Warranty Expense2 ............................. 90,000

Warranty Liability ...................... 90,000
2
($120,000 – $30,000)
To accrue warranty expense

b. Accounts Receivable.......................... 3,000,000

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Sales Revenue ........................... 2,840,000

Unearned Revenue .................... 160,000
To record sales on account

Warranty Expense .............................. 30,000

Cash. .......................................... 30,000
To record payment of warranty expense

Unearned Revenue ............................. 40,000

Warranty Revenue3 .................... 40,000
3
[$160,000 X ($30,000/$120,000)]
To remeasure unearned revenue

Sales Revenue $3,000,000 $2,840,000

Warranty Revenue 0 40,000
Warranty Expense (120,000) (30,000)
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Net Income $2,880,000 $2,850,000

Treating the warranty as an integral part of the sale under the assurance-type
(expense-based) approach for warranties will trigger a larger expense. This is because
the full cost of servicing the product over the course of the warranty period must be
estimated and disclosed in the period of sale. The warranty expense under a service-
type (revenue-based) approach for warranties consists of only expenses incurred in
the current period.

The presentation of sales revenue will also differ under the two approaches. Under the
assurance-type warranty, the sales proceeds from selling the product generate only
one revenue source. Under the service-type warranty approach, the sale of the product
generates two different revenue streams (the sale of the product and the sale of the
warranty contract as service revenue) as well as two gross profit sources (sales
revenue less cost of goods sold and warranty revenue net of warranty expense).

The service-type warranty approach generates a lower income in the current year
because a portion of the profit is deferred to future periods, when it is earned as the
service is provided.

d. The recording of assurance-type and service-type warranties is the same under IFRS
and ASPE. However, under ASPE, it is based on the principle that when revenue
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

covers a variety of deliverables (bundled sales) it should be unbundled and the

revenue allocated to the various goods or services that are required to be performed.

e. If the warranty costs are considered to be immaterial, the cash basis method could be
used and warranty costs recognized in the year they are incurred. However, if the
warranty costs are considered material to the company’s financial statements, the
company may have to defer recognizing the revenue from the sale of the product until
all costs can be measured and matched against the related revenues.

LO 6,9 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 13.22

a. Assurance-type (expense approach):

Accounts Receivable.......................... 3,000,000

Sales Revenue1 .......................... 3,000,000
1
(1,000 X $3,000)
To record sales on account

Warranty Expense .............................. 105,000

Cash. .......................................... 105,000
To record payment of warranty expense

Warranty Expense2 ............................. 95,000

Warranty Liability ..................... 95,000
2
[(1,000 X $200) – $105,000]
To accrue warranty expense
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

December 31, 2023 financial statement amounts reported:

Balance Sheet
Warranty liability $95,000

Income Statement
Sales revenue $3,000,000
Warranty expense 200,000

Service-type (revenue approach):

Accounts Receivable............................ 3,000,000

Sales Revenue ............................. 2,650,000
Unearned Revenue ...................... 350,000
To record sales on account

Warranty Expense ................................ 105,000

Cash. ............................................ 105,000
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

To record warranty expense

Unearned Revenue ............................... 183,750

Warranty Revenue1 ...................... 183,750
1
[$350,000 X ($105,000/$200,000)]
To remeasure unearned revenue

December 31, 2023 financial statement amounts reported:

Balance Sheet
Unearned revenue $166,250

Income Statement
Sales revenue $2,650,000
Warranty revenue 183,750
Warranty expense 105,000
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

b. The recording of assurance-type and service-type warranties is the same under IFRS
and ASPE. However, under ASPE it is based on the principle that when revenue
covers a variety of deliverables (bundled sales) it should be unbundled and the
revenue allocated to the various goods or services that are required to be performed.

c. When the assurance-type approach is used to account for warranty costs, sales
revenue will be higher because it is all considered to be earned upon the sale of the
product. As well, the expense on the income statement will represent the total
estimated costs of servicing the warranties (i.e., the actual costs of servicing the
warranty in the period, plus a year-end adjustment for expected future costs.)
Therefore, the total gross profit on the warranty work is recognized in the period the
equipment is sold.

When the service-type approach is used, sales revenue will be lower because the total
selling price is allocated between the sale of the product and the sale of the warranty
service. There will be an unearned revenue liability account for the portion of the
warranty that has not been taken into revenue at year end. Warranty expense will be
equal to the actual costs of servicing the warranty during the year. In summary, the
profit on the warranty work is recognized later under the revenue approach—in the
period in which the warranty work is performed.

In this situation, it makes more sense to choose the service-type approach. In this
way, income is reported as it is earned, and is a better measure of performance. In
addition, as the company is considering going public in a few years, and the
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

bifurcation of revenues to multiple deliverables is required by IFRS, the service-type

approach would be consistent with what will be required after the company goes
public. It would make sense to adopt this accounting policy now so that a
retrospective change is not required later.

LO 6,9 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13.29

1. The CPA Canada Handbook for Private Enterprises section 3290 requires that, when
some amount within the range appears at the time to be a better estimate than any
other amount within the range, that amount be accrued. When no amount within the
range is a better estimate than any other amount, the dollar amount at the low end of
the range is accrued and the dollar amount of the high end of the range is disclosed.
Since the information indicates that it is likely that a liability has been incurred at
December 31, 2023, and a range of possible amounts can be reasonably determined,
the criteria for recording a liability are met. In this case, therefore, Sugarpost Inc.
would report a liability of $900,000 at December 31, 2023.

2. Su Li Corp. would not be required to make any entry. The wage increase is for the
coming two years and does not relate to the current or prior years.

3.a. The loss should be accrued since both criteria (it is likely that a loss is incurred and
the amount of the loss can be reasonably determined) for recording the contingency
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

are met. Given that the loss is covered by insurance, except for the $500,000
deductible, only the $500,000 should be accrued.

b. Under IFRS requirements, the recognition criterion used to determine the chance of
occurrence of a confirming future event is “probable,” which is interpreted to mean
“more likely than not.” This is a somewhat lower hurdle than the “likely” required
under ASPE. If the amount cannot be measured reliably, no liability is recognized
under IFRS either; however, the standard indicates that it is only in very rare
circumstances that this would be the case. If recognized, IAS 37 requires the best
estimate and an “expected value” method to be used to measure the liability. As in
part a. above, this would be the $500,000 deductible.
PROBLEM 13.2

a.
Carrying
Interest Principal Amount of
Date Payment (5%) repayment Note

Jan. 1, 2023 $85,000

Jan. 1, 2024 $23,971 $4,250 $19,721 65,279
Jan. 1, 2025 23,971 3,264 20,707 44,572
Jan. 1, 2026 23,971 2,229 21,742 22,830
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Jan. 1, 2027 23,971 1,141 22,830 0

Total $95,884 $10,884 $85,000

Using a financial calculator:

PV ? Yields $ 84,999.98
I 5%
N 4
PMT $ (23,971)
FV 0
Type 0

Using a financial calculator:

PV $ 85,000
I ?% Yields 5.0 %
N 4
PMT $ (23,971)
FV 0
Type 0
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 13.2 (CONTINUED)

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

Result: $84,999.98
OR
Excel formula =RATE(nper,pmt,pv,fv,type)
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Result: 5%
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 13.2 (CONTINUED)

b.
Jan. 1 Equipment ................................ 85,000
2023 Notes Payable ................. 85,000

Dec. 31 Interest Expense.......................... 4,250

2023 Interest Payable .................... 4,250

Jan. 1 Interest Payable........................... 4,250

2024 Notes Payable ............................. 19,721
Cash ..................................... 23,971
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

c. Bian Inc.
Statement of Financial Position (partial)
December 31, 2023
Current Liabilities:
Interest Payable $4,250
Current portion of long-term note
payable 19,721 $23,971

Long-term Liabilities
Note Payable 85,000
Less: current portion (19,721) $65,279

d.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Bian Inc.
Statement of Financial Position (partial)
December 31, 2024
Current Liabilities:
Interest Payable $3,264
Current portion of long-term note
payable 20,707 $23,971

Long-term Liabilities
Note Payable 65,279
Less: current portion (20,707) $44,572
e. Bian Inc.
Statement of Financial Position (partial)
December 31, 2023
Current Liabilities:
Interest Payable1 $2,125
Current portion of long-term note
payable 19,721 $21,846
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Long-term Liabilities
Note Payable 85,000
Less: current portion (19,721) $65,279

1
$4,250 X 6/12 = $2,125

f. The fixed principal payments for each year would have been in the amount of $21,250
($85,000 ÷ 4).
Carrying
Interest Principal Amount of
Date Payment (5%) repayment Note

Jan. 1, 2023 $85,000

Jan. 1, 2024 $25,500 $4,250 $21,250 63,750
Jan. 1, 2025 24,438 3,188 21,250 42,500
Jan. 1, 2026 23,375 2,125 21,250 21,250
Jan. 1, 2027 22,312 1,062 21,250 -
Total $95,625 $10,625 $85,000
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

g. The higher interest costs are incurred with the fixed payment terms in part a.

h. As a lender, I would prefer to negotiate a fixed payment for the terms of repayment as I
would yield the higher return on the loan.

LO 2,3 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

4. This is a gain contingency because the amount to be received will be in excess of the
carrying amount of the plant. Under ASPE, gain contingencies are not recorded and
are disclosed in the notes only when the probabilities are high that a gain
contingency will become a reality.

LO 7,9 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 14

EXERCISE 14.3

1. Divac Limited:
a. 1/1/23 Cash ........................................ 300,000
Bonds Payable............... 300,000

b. 7/1/23 Interest Expense1 ................... 6,750

Cash ............................... 6,750
1
($300,000 X 9% X 3/12)

c. 12/31/23 Interest Expense ..................... 6,750

Interest Payable ............. 6,750

2. Verbitsky Inc.:
a. 6/1/23 Cash ........................................ 210,000
Bonds Payable............... 200,000
2
Interest Expense .......... 10,000
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

2
($200,000 X 12% X 5/12)

b. 7/1/23 Interest Expense3 ................... 12,000

Cash ............................... 12,000
3
($200,000 X 12% X 6/12)

c. 12/31/23 Interest Expense ..................... 12,000

Interest Payable ............. 12,000

Note to instructor: Some students may credit Interest Payable on 6/1/23. If they do so, the
entry on 7/1/23 will have a debit to Interest Payable for $10,000 and a debit to Interest
Expense for $2,000.

LO 2 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 14.4

a.
1/1/23 Cash ($800,000 X 102%) ............. 816,000
Bonds Payable ...................... 816,000

b.
7/1/23 Interest Expense1 ........................ 39,780
Bonds Payable ............................ 220
Cash2 ...................................... 40,000
1
($816,000 X 9.75% X 1/2)
2
($800,000 X 10% X 6/12)
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

c.
12/31/23 Interest Expense3 ........................ 39,769
Bonds Payable ............................ 231
Interest Payable..................... 40,000
3
($815,7804 X 9.75% X 1/2)

4
Carrying amount of bonds at July 1, 2023:
Carrying amount of bonds at January 1, 2023 $816,000
Amortization of bond premium
($40,000 – $39,780) (220)
Carrying amount of bonds at July 1, 2023 $815,780

LO 2 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.7

2. Using a financial calculator:

PV $ ? Yields $2,732,054
I 10%
N 4
PMT 0
FV $ (4,000,000)
Type 0
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

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

Result: $2,732,053.821 rounded to $2,732,054

A more accurate result is obtained using Excel or a financial calculator as compared to

using factors from tables as there are a limited number of decimal places in the tables.
This difference in most cases is immaterial.
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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.8

a. The purchase price of the land should be recorded at the present value of the future
cash flows of the instalment note at the imputed interest rate of 9%. This is the fairest
measure of the value of the asset obtained as it represents the present value of an
agreed series of future cash flows. The listing price represents a tentative amount
“asked” for the property and could be above or below the eventual agreed value.

b. Land will be recorded at $110,000 based on the calculations below:

2. Using a financial calculator:

PV ? Yields $ 109,999.94
I 9%
N 3
PMT $ (43,456)
FV $0
Type 0
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

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

Result: $109,999.941 rounded to $110,000

Effective Interest Amortization Table

Effective Interest Method – 9%

Note 9% Reduction Carrying

Year Payment Interest of Principal Amount
1/1/23 $110,000
12/31/23 $43,456 $9,900 $ 33,556 76,444
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

12/31/24 43,456 6,880 36,576 39,868

12/31/25 43,456 3,588 39,868 0
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

c. Land .................................................... 110,000

Notes Payable ........................... 110,000

d. Interest Expense ................................. 9,900

Notes Payable ..................................... 33,556
Cash............................................ 43,456

e. From the perspective of Safayeni Ltd., an instalment note provides for a reduced risk
of collection when compared to a regular interest-bearing note. In the case of the
interest-bearing note, the principal amount is due at the maturity of the note. Further,
the instalment note provides a regular reduction of the principal balance in every
payment received annually and therefore reduces Safayeni’s investment in the
receivable, freeing up the cash for other purposes. This is demonstrated in the
effective interest amortization table provided above for the instalment note.

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 cpa-t005

CM: Reporting and Finance
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.9

a. Equipment ......................................... 316,987

Notes Payable .......................... 316,987

1. Using tables

PV of $100,000 annuity @ 10% for 4

years: ($100,000 X 3.16987) = $316,987

2. Using a financial calculator:

PV $ ? Yields $316,986.54
I 10%
N 4
PMT $ (100,000)
FV $ 0
Type 0

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

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Result: $316,986.5446 rounded to $316,987

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

b. Interest Expense1 ............................. 31,699

Notes Payable ................................... 68,301
Cash ......................................... 100,000
1
(10% X $316,987)

Note 10% Reduction Carrying

Year Payment Interest of Principal Amount
1/2/23 $316,987
12/31/23 $100,000 $31,699 $68,301 248,686
12/31/24 100,000 24,869 75,131 173,555

c. Interest Expense ................................. 24,869

Notes Payable ..................................... 75,131
Cash ........................................... 100,000

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 14.13

a. 1. Using a financial calculator:

PV $ 2,783,713
I ?% Yield 12%
N 5
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PMT $ (300,000)
FV $ (3,000,000)
Type 0

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

Result: 12% rounded

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.13 (Continued)

a. (continued)

Schedule of Discount Amortization

Effective Interest Method (12%)
Debit Credit Carrying
Credit Interest Bond Amount of
Year Cash Expense Payable Bonds
(1) (2) (3) (4)
Jan. 1, 2023 $2,783,713
1
Jan. 1, 2024 $300,000 $334,046 $34,046 2,817,759
Jan. 1, 2025 300,000 338,131 38,131 2,855,890
Jan. 1, 2026 300,000 342,707 42,707 2,898,597
Jan. 1, 2027 300,000 347,832 47,832 2,946,429
Jan. 1, 2028 300,000 353,571 53,571 3,000,000

1
$334,046 = $2,783,713 X .12
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.13 (CONTINUED)

b. The straight-line method results in higher interest expense

for the year ended December 31, 2023, and the effective
interest method results in higher interest expense for the year
ended December 31, 2027. Under the straight-line method, the
amount that is amortized each year is constant. Under the
effective interest method, the amount amortized each year is
based on a constant percentage of the bonds’ increasing
carrying amount. Users who like the company’s income
statement to reflect the most faithfully representative
measure of net income would prefer that the company use
the effective interest method, under which interest expense
correlates more closely with the actual carrying amount of
the bond.

LO 2 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
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EXERCISE 14.19

1. Using a financial calculator:

PV $ 784,000
I ?% Yields 6.135%
N 40
PMT $ (48,000)
FV $ (800,000)
Type 0

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

Result: .061351945 rounded to three decimal places 6.135%

Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.19 (CONTINUED)

a. (continued)

Schedule of Bond Discount Amortization

Effective Interest Method
12% Semi-annual Bonds Sold to Yield 12.27%
6.0% 6.135%
Cash Effective Discount Carrying
Date Interest Interest Amortized Amount
June 30 2016 $784,000.00
Dec. 31 2016 $48,000.00 $48,098.40 $98.40 784,098.40
June 30 2017 48,000.00 48,104.44 104.44 784,202.84
Dec. 31 2017 48,000.00 48,110.84 110.84 784,313.68
June 30 2018 48,000.00 48,117.64 117.64 784,431.32
Dec. 31 2018 48,000.00 48,124.86 124.86 784,556.18
June 30 2019 48,000.00 48,132.52 132.52 784,688.70
Dec. 31 2019 48,000.00 48,140.65 140.65 784,829.35
June 30 2020 48,000.00 48,149.28 149.28 784,978.63
Dec. 31 2020 48,000.00 48,158.44 158.44 785,137.07
June 30 2021 48,000.00 48,168.16 168.16 785,305.23
Dec. 31 2021 48,000.00 48,178.48 178.48 785,483.71
June 30 2022 48,000.00 48,189.43 189.43 785,673.14
Dec. 31 2022 48,000.00 48,201.05 201.05 785,874.19
June 30 2023 48,000.00 48,213.38 213.38 786,087.57
$2,087.57

Although not required, the entry at the issuance of the

bonds is:

6/30/16 Cash ($800,000 X 98%) ................ 784,000

Bonds Payable ........................ 784,000

At June 30, 2023, the carrying amount of the bonds is as

indicated in the effective interest table: $786,087.57
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.19 (CONTINUED)

a. (continued)

June 30, 2023

Bonds Payable ........................................ 786,087.57
Loss on Redemption of Bonds .............. 45,912.43
Cash ................................................ 832,000.00
To record reacquisition of bonds
payable

Reacquisition price ($800,000 X 104%) . $832,000.00

Net carrying amount of bonds redeemed: 786,087.57
Loss on redemption ................................ $45,912.43

Cash ($1,000,000 X 102%) ...................... 1,020,000

Bonds Payable ............................... 1,020,000
To record issuance of new bonds

1. Using a financial calculator:

PV $ 1,020,000
I ?% Yields 4.885 %
N 40
PMT $ (50,000)
FV $ (1,000,000)
Type 0
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.19 (CONTINUED)

a. (continued)

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

Result: 0.048852691 rounded to three decimal places 4.885%

b. December 31, 2023

1
Interest Expense ............................... 49,827
Bonds Payable ................................... 173
Cash........................................... 50,000
1
($1,020,000 X 4.885% = $49,827)

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EXERCISE 14.20

a.
Reacquisition price ($850,000 X 102%) $867,000
Less: Net carrying amount of bonds redeemed:
Par value 850,000
Unamortized discount1 (43,917)
806,083
Loss on redemption $ 60,917
1
Calculation of unamortized discount—
Original amount of discount:
$850,000 X 3% = $25,500 $25,500
Bond issuance costs ($110,000 X
$850,000/$1,500,000 = 62,333

Amount to be amortized over 10 years $87,833

Amount of discount unamortized:
1
($87,833 X 5) ÷ 10 = $43,917

January 2, 2023
Bonds Payable ................................................ 806,083
Loss on Redemption of Bonds ..................... 60,917
Cash ........................................................ 867,000
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.20 (CONTINUED)

b. Had the costs of issuing the bond of $110,000 been expensed

on the date of issue (which is the required accounting
treatment for transactions costs when the debt is
subsequently measured at fair value rather than amortized
cost), the issue costs would have been charged to expense
in 2018.

Reacquisition price ($850,000 X 102%) $867,000

Less: Carrying amount of bonds on the
reacquisition date = fair value at that date (see
assumption) 867,000
Gain/Loss on redemption $ -0-

Note to instructor: Since the bonds are carried at fair value, there
would be no separate gain or loss on retirement. All changes in
the fair value of the bonds would have already been recognized in
net income in prior years. If the company had adopted IFRS 9
early in prior years, all changes in the fair value of the bonds
(which relate to changes in credit risk) would have already been
recognized in Other Comprehensive Income.

January 2, 2023
Bonds Payable ................................................ 867,000
Cash ........................................................ 867,000
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.20 (CONTINUED)

c. If Kowalchuk were to follow IFRS, then the effective interest

method must be used to amortize any discounts or
premiums. Although the effective interest method is required
under IFRS per IFRS 9.5.4.1, accounting standards for private
enterprises do not specify that this method must be used and
therefore, the straight-line method is also an option. The
straight-line method is valued for its simplicity and might be
used by companies whose financial statements are not
constrained by IFRS.

Under IAS 39, where the fair value option is selected, credit
risk is incorporated into the measurement and resulting
gains/losses are booked through net income. However,
under IFRS 9, gains/losses related to changes in credit risk
are booked through Other Comprehensive Income.

(Note that under ASPE, where the fair value option is used,
credit risk is incorporated into the measurement and
resulting gains/losses are booked through net income.)

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EXERCISE 14.23

a. Transfer of property on December 31, 2023:

Strickland Inc. (Debtor):

Notes Payable........................................... 200,000
Interest Payable........................................ 18,000
Accumulated Depreciation—Machinery . 221,000
Machinery .......................................... 390,000
Gain on Disposal of Machinery1 ....... 11,000
Gain on Restructuring of Debt2 ........ 38,000

1
$180,000 – ($390,000 – $221,000) = $11,000
2
($200,000 + $18,000) – $180,000 = $38,000

Heartland Bank (Creditor):

Machinery ................................................... 180,000
Allowance for Expected Credit Losses3 ... 38,000
Notes Receivable ............................... 200,000
Interest Receivable ............................ 18,000

3
As given in the problem, this assumes Heartland had
previously recognized a loss when they determined the loan
was impaired and set up an allowance for expected credit
losses or had otherwise included this category of notes in
allowance calculations.

b. If “Gain on Disposal of Machinery” and “Gain on

Restructuring of Debt” do not occur frequently, they are still
presented as part of income from continuing operations. If
they are not material in amount, they are combined with the
other items in the income statement. If they are material,
they are disclosed separately. However, if the same types of
gains/losses recur each year, then they are not really
unusual and care must be taken to classify them with other
gains and losses as normal transactions.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 14.23 (CONTINUED)

c. Granting of equity interest on December 31, 2023:

Strickland Inc. (Debtor):

Notes Payable ...................................... 200,000
Interest Payable ................................... 18,000
Common Shares .......................... 190,000
Gain on Restructuring of Debt .... 28,000

Heartland Bank (Creditor):

FV-NI Investments................................ 190,000
Allowance for Expected Credit
Losses4................................................. 28,000
Notes Receivable ......................... 200,000
Interest Receivable ...................... 18,000

4
Assumes Heartland had previously recognized a loss
when they determined the loan was impaired and set up an
allowance for expected credit losses or had otherwise
included this category of notes in allowance calculations.

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a. The present value of the future cash flows totals $2,061,440.

1. Using tables:

Present value of the principal

$2,000,000 X .38554 (PV10, 10%) $771,080

Present value of the interest payments

$210,000* X 6.14457 (PVOA10, 10%) 1,290,360

Present value (selling price of the bonds) $2,061,440

*$2,000,000 X 10.5% = $210,000

2. Using a financial calculator:

PV $ ? Yields $2,061,446
I 10%
N 10
PMT $ (210,000)
FV $ (2,000,000)
Type 0
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 14.4 (CONTINUED)

a. (continued)

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

Result: $2,061,445.671 rounded to $2,061,446

Cash 1 .......................................................... 2,011,440

Bonds Payable.................................... 2,011,440
1
($2,000,000 + $61,440 – $50,000)
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 14.4 (CONTINUED)

b.
Cash Effective Premium Carrying
Interest Interest Amortiza- Amount of
Date 10.5% 10.4053% tion Bonds
1/1/23 $2,011,440
1/1/24 $210,000 $209,296 $704 2,010,736
1/1/25 210,000 209,223 777 2,009,959
1/1/26 210,000 209,142 858 2,009,101
1/1/27 210,000 209,053 947 2,008,154
1/1/28 210,000 208,954 1,046 2,007,108

c. Carrying amount as of 1/1/26 $2,009,101

Less: Amortization of bond premium
($947 ÷ 2) 474
Carrying amount as of 7/1/26 $2,008,627

Reacquisition price $1,065,000

Carrying amount as of 7/1/26 of bond
($2,008,627 ÷ 2) (1,004,314)
Loss on Redemption $ 60,686

Interest Expense ......................................... 52,263

Bonds Payable ($947 X 1/2 X 1/2) ............... 237
Cash ($210,000 X 1/2 X 1/2)............... 52,500
To record the payment of interest

Bonds Payable ......................................... 1,000,000

Loss on Redemption of Bonds ................. 60,686
Bonds Payable2 ....................................... 4,314
Cash .............................................. 1,065,000
To record retirement of the bonds
2
Premium as of 7/1/26 to be written off
($2,008,627 – $2,000,000) X 1/2 = $4,314
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 14.4 (CONTINUED)

a. By choosing to carry the bonds at fair value and expensing the

costs of issuing the bond in the amount of $50,000, the premium
on bonds payable would increase at the date of issuance by the
$50,000 expensed at issue. Correspondingly, the interest
expense recorded each year would be lower by the amount
charged to expense using the effective interest method for the
amortization of the additional $50,000 (the effective interest rate
would be 10% instead of the 10.4053% required due to the
capitalization of the bond issue costs). In total, the periodic
expense would be lower over the 10-year term of the bond by
$50,000, equal to the expense recognized at issuance. The total
costs would be ultimately charged to income. The only difference
would be that the charge would be completely expensed in the
year the bond was issued as opposed to spread over the ten-
year term of the bond.

Note: When a note or bond is issued, it should be recognized at

the fair value adjusted by any directly attributable issue costs.
However, note that where the liabilities will subsequently be
measured at fair value (e.g., under the fair value option or
because they are derivatives), the transaction costs should not
be included in the initial measurement (i.e., the costs should be
expensed) [CPA Canada Handbook, Part II, Section 3856.07 and
IFRS 9.5.1.1].

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PROBLEM 14.10
a.
Wilkie Inc.
Selling price of the bonds ($4,000,000 X 103%) $4,120,000
Accrued interest from January 1 to February
29, 2023 ($4,000,000 X 9% X 2/12) 60,000
Total cash received from issuance of the bonds 4,180,000
Less: Bond issuance costs1 27,000
Net amount of cash received $4,153,000

1
When a note or bond is issued, it should be recognized at the fair
value adjusted by any directly attributable issue costs. However,
note that where the liabilities will subsequently be measured at
fair value (e.g., under the fair value option or because they are
derivatives), the transaction costs should not be included in the
initial measurement (i.e., the costs should be expensed at the
time of issuance) [CPA Canada Handbook, Part II, Section
3856.07 and IFRS 9.5.1.1].

Langley Ltd.
Carrying amount of the bonds on 1/1/23 $469,280
Effective interest rate (10%) X 0.10
Interest expense to be reported for 2023 $ 46,928

Although the effective interest method is required under IFRS per

IFRS 9.5.4.1, accounting standards for private enterprises do not
specify that this method must be used and therefore the straight-
line method is also an option. The straight-line method is valued
for its simplicity and might be used by companies reporting under
ASPE.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 14.10 (CONTINUED)

c. Chico Building Inc.

Maturities and sinking fund requirements on long-term

debt are as follows:

2024 $400,000 2027 $200,000

2025 350,000 2028 350,000
2026 200,000 Thereafter 300,000

d. Czeslaw Inc.
Since three bonds reported by Czeslaw Inc. are secured by either
real estate, securities of other corporations, or plant equipment,
there are no debenture bonds outstanding for the company.
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CHAPTER 15

EXERCISE 15.1

Jan. 10 Cash (200,000 X $23) .............. 4,600,000

Common Shares ............... 4,600,000

Mar. 1 Cash (17,000 X $119) .............. 2,023,000

Preferred Shares............... 2,023,000

April 1 Land ......................................... 60,000

Common Shares ............... 60,000

May 1 Cash (20,000 X $18) ................ 360,000

Common Shares ............... 360,000

Aug. 1 Legal Expense ........................ 19,000

Common Shares ............... 19,000

Sept. 1 Cash (32,500 X $16) ................ 520,000

Common Shares ............... 520,000

Nov. 1 Cash (1,500 X $125) ................ 187,500

Preferred Shares............... 187,500
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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.2

a.
Original Subscription:
Share Subscriptions Receivable1 ........................ 880,000
Common Shares Subscribed ....................... 880,000
1
(40,000 shares X $22 each)

Collection of Down Payments:

Cash ($880,000 X .35) ........................................... 308,000
Share Subscriptions Receivable ................. 308,000

Collection of Balance:
Cash ($880,000 – $308,000) ................................. 572,000
Share Subscriptions Receivable ................. 572,000

Issuance of Shares:
Common Shares Subscribed .............................. 880,000
Common Shares ........................................... 880,000

b. Under ASPE, whether the Share Subscriptions Receivable

account should be presented as an asset or a contra equity
account is a matter of professional judgement, although
conceptually, it makes sense to show it as a reduction of
equity. Note that Section 3251.10 of the CPA Canada
Handbook, Part II requires that share purchase loans
receivables must be shown as contra equity unless the
borrower is fully responsible for declines in the value of the
shares and there is reasonable assurance that the full
amounts will be collected. In the United States, the SEC
requires the Share Subscriptions Receivable account to be
presented as a reduction of equity. Under IFRS, specific
guidance is not given, but using first principles, the company
would likely end up treating it the same as noted above.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.2 (CONTINUED)

c. If a subscriber is unable to pay all instalments and therefore

defaults on the agreement, the possibilities include: (1)
returning the amount already paid by the subscriber
(possibly after deducting some expenses), (2) treating the
amount paid as forfeited and therefore transferring it to the
Contributed Surplus account, or (3) issuing fewer shares to
the subscriber so that the number of shares issued is
equivalent to what the subscription payments already
received would have paid for fully.
LO 2,3,4 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.3

a.
1. Cash [(6,000 X $29) – $2,000] ......................... 172,000
Common Shares......................................
172,000

2. Land ................................................................ 130,000

Common Shares...................................... 130,000

Note: The appraised value of the land is used since IFRS 2

Share Based Payment assumes that the fair value of the
items acquired can be measured in most cases (IFRS 2.10
and .13). In this case, the appraisal supplies evidence of the
value. IFRS is a constraint since the company is a public
company as noted by the fact that the shares trade on a
national stock exchange.

3. Common Shares (500 X $30) .......................... 15,000

Contributed Surplus ............................... 1,000
Cash (500 X $28)...................................... 14,000

b. Share repurchases are recorded at the average issue price

or carrying amount per share, or the average price at which
the shares were issued for that class of shares. The original
issue price of the individual shares being repurchased is not
used. The original issue price of the individual shares
repurchased would be considered in the total issue price for
the class of shares but would be averaged with all other
shares of the same class.
LO 2 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.6

Preferred Common Total

1
a. One year in arrears $ 37,500 $ 37,500
Current year2 37,500 $180,000 217,500
255,000
Participating (5.2414%3) 32,758 157,242 190,000
$107,758 $337,242 $445,000
1
25,000 X $1.50 = $37,500
2
Pro rata share to common:
$3,000,000 X 6%4 = $180,000
3 $445,000 - $255,000 
  = 5.2414%
 $3,625,000 
5.2414% x 625,000 = 32,758
(rounded)
5.2414% x 3,000,000 = 157,242
4
Dividend rate per share for preferred shares is 6%
calculated: [$1.50 ÷ ($625,000 ÷ 25,000 shares)]

b. $37,500 $407,500 $445,000

c. Current year $37,500 $180,000 $217,500

Additional 4%5 to common 120,000 120,000
337,500
Participating (2.9655%6) 18,535 88,965 107,500
$56,035 $388,965 $445,000

6 $445,000 - $337,500 
  = 2.9655%
 $3,625,000 
2.9655% x 625,000 = 18,534 (rounded to 18,535)
2.9655% x 3,000,000 = 88,965
5
Dividend rate on common shares 10%
Less: matching amount ($37,500 / $625,000) (6%)
Additional rate to common shares 4%
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.6 (CONTINUED)

d.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.6 (CONTINUED)

Proportion of $445,000 dividend allocated to

Preferred and Common Shares
Preferred Common

(a) Cumulative; fully participating 107,758 337,242

(b) Non-cumulative; non-participating 37,500 407,500

(c) Non-cumulative; partially participating 56,035 388,965

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.7

a. Preferred Common Total

Dividends in arrears (1) $100,000 $100,000
Current year dividend (2) 50,000 $180,000 230,000
Participating dividend (3) 25,000 60,000 85,000
Total $175,000 $240,000 $415,000

(1) Dividends in arrears: 25,000 X $2 X 2 years = $100,000

(2) Current year dividend:

Preferred: 25,000 X $2 = $50,000

Common: Number of shares issued 60,000

X $3
$ 180,000

(3) Participating dividend:

Since the common shareholders will receive a $4 per
share dividend, $1 per share is in excess of the $3
dividend per share participation threshold.

Excess dividend $1
Number of common shares outstanding X 60,000
Excess total dividend $60,000
Common share capital ÷ $1,800,000
Excess return 3.3333%
Apply excess return to preferred
shareholders’ capital X $750,000
Participating dividend to preferred
shareholders $25,000
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.7 (CONTINUED)

b. Dividends1 .......................................... 405,000

Common Stock Dividends
Distributable........................... 405,000
1
(60,000 X 15% X $45)

c. Common Shares2 ............................... 315,000

Contributed Surplus .......................... 150,000
Retained Earnings ............................. 7,500
Cash (10,500 X $45) .................. 472,500
2
($1,800,000 / 60,000 X 10,500

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EXERCISE 15.12

a. 1. Dividends Payable
(Preferred - 2,000 X $8) .................... 16,000
Dividends Payable
(Common - 25,000 X $3)................... 75,000
Cash ............................................ 91,000

2. Common Shares1 ................................ 88,800

Contributed Surplus ........................... 40,700
Cash (3,700 X $35) ..................... 129,500
1
($600,000 / 25,000 X 3,700 = $88,800)

3. Cash (1,000 X $105) ............................ 105,000

Preferred Shares ........................ 105,000

4. Dividends............................................. 95,850
Common Stock Dividends
Distributable ......................... 95,850
[(25,000 – 3,700) X 10% X $45]

5. Common Stock Dividends

Distributable ................................. 95,850
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Common Shares ........................ 95,850

6. Dividends............................................. 70,860
Dividends Payable
(Preferred: 3,000 X $8) ............ 24,000
Dividends Payable
[Common: (25,000 – 3,700 + 2,130) X $2] 46,860
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.12 (CONTINUED)

b.
Falkon Corp.
Statement of Changes in Shareholders' Equity
For the Year Ended December 31, 2023
Acc.
Preferred shares Common Shares Other
Number Number Contrib. Retained Compr.
of sh. Paid-in of sh. Paid-in Surplus Earnings Income Total

Balance, January 1 2,000 $200,000 25,000 $600,000 $55,000 $250,000 $75,000 $1,180,000
Net income 450,000 450,000
Other comprehensive income 5,000 5,000
Comprehensive income 455,000
Repurchase of common shares (3,700) (88,800) (40,700) (129,500)
Issuance of preferred shares 1,000 105,000 105,000
Issuance of common shares
through stock dividend 2,130 95,850 (95,850) -
Cash dividend:
– preferred (24,000) (24,000)
– common (46,860) (46,860)
Balance, December 31 3,000 $305,000 23,430 $607,050 $14,300 $533,290 $80,000 $1,539,640
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.12 (CONTINUED)

c. Falkon Corp.
Shareholders’ Equity—December 31, 2023
Share capital
Preferred shares, $8, (10,000 shares
authorized, 3,000 shares issued) $ 305,000
Common shares, unlimited authorized,
23,430 shares issued 607,050
Total share capital 912,050
Contributed surplus 14,300
Total paid-in capital 926,350
Retained earnings 533,290
Accumulated other comprehensive income 80,000
Total shareholders’ equity $1,539,640

Calculations: [refer to part (b)]

Preferred shares: $200,000 + $105,000 = $305,000
Common shares: $600,000 – $88,800 + $95,850 = $607,050
Contributed surplus: $55,000 – $40,700 = $14,300
Retained earnings: $250,000 – $95,850 – $70,860 + $450,000 = $533,290
AOCI: $75,000 + ($455,000 – $450,000) = $80,000

Solutions Manual 17.85 Chapter 17

Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 15.12 (CONTINUED)

d.
Rate of return on common shareholders’ equity for 2023:
Net income – preferred dividends
Average common shareholders’ equity

$450,000 – $24,000
= 38.47%
$1,107,320 2
2
Average common shareholders’ equity = [($1,180,000 - $200,000) + ($1,539,640 –
$305,000)] ÷ 2 = $1,107,320

Rate of return on total assets for 2023:

Net income – preferred dividends
Average total assets

$450,000 – $24,000
= 17.91%
($2,140,000 + $2,616,000) / 2

Since Falkon’s rate of return on shareholders’ equity exceeds the rate of return on assets,
the company is trading on the equity, also known as “employing leverage” to the advantage
of the company. A common shareholder would generally favour a company that is trading
on the equity, because the company is using borrowed money at preferably fixed interest
rates (or issuing preferred shares with constant dividend rates) and earning a higher rate
of return on the money used.

Solutions Manual 17.86 Chapter 17

LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001 cpa-t005

CM: Reporting and Finance

Solutions Manual 17.87 Chapter 17

PROBLEM 15.4
a.
January 1, 2023
No entry.

January 10, 2023

Land ...................................................................... 450,000
Common Shares ............................................ 450,000

March 10, 2023

Cash...................................................................... 400,000
Preferred Shares (4,000 X $100) ................... 400,000

April 15, 2023

Vehicles ................................................................ 6,050
Common Shares (110 X $55) ........................ 6,050

August 20, 2023

Cash ($600,000 x 10%) ......................................... 60,000
Share Subscriptions Receivable ............................ 540,000
Common Shares Subscribed1 ........................ 600,000
1
(40 X 250 shares X $60)

October 11, 2023

Cash...................................................................... 230,000
Common Shares ............................................ 168,861
Preferred Shares ........................................... 61,139

Solutions Manual 17.88 Chapter 17

(3,000 X $58) + (600 X $105) = $237,000;

Common: $174,0002 / $237,000 X $230,000 = $168,861;
Preferred: $63,0003 / $237,000 X $230,000 = $61,139
2
(3,000X $58 = $174,000)
3
(600 X $105 = $63,000)

Solutions Manual 17.89 Chapter 17

PROBLEM 15.4 (CONTINUED)

a. (continued)

December 31, 2023

4
Dividends ............................................................... 18,400
Dividends Payable ........................................... 18,400
To record dividends declared on preferred shares
4
(4,000 + 600) X $4.00 = $18,400 for preferred shares

Dividends ($26,000 - $18,400) ................................. 7,600

Dividends Payable ........................................... 7,600
To record dividends declared on common shares

b. This transaction is a non-monetary exchange with a share-based payment. IFRS 2 Share-based

Payment indicates that the fair value of the asset acquired should be used to measure its
acquisition cost, and it presumes that this value can be determined except in rare cases. If the
asset’s fair value cannot be determined reliably, then its fair value and cost are determined by
using the fair value of the shares given in exchange. In this example, the company uses the fair
value of the shares given in exchange since only the fair value of the common shares is known.
The asking price for the used car does not represent the car’s fair value because the asking price
for the used car does not necessarily represent the exchange value of the vehicle between two
arm’s length parties. Valuing the used car using the fair value of the shares given in exchange
(which are publicly and actively traded) maintains the representational faithfulness and neutrality
of the financial statements. Alternatively, the fair value of the used car may be determinable by
direct comparison with a similar used car that was recently sold.

Solutions Manual 17.90 Chapter 17

LO 2 BT: AP Difficulty: S Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
PROBLEM 15.6

a.
1. Cash (12,000 X $10)......................................... 120,000
Share Subscriptions Receivable ....................... 192,000
Common Shares Subscribed 1 .................. 312,000
1
(12,000 X $26)

2. Cash (10,000 X $16)......................................... 160,000

Share Subscriptions Receivable................ 160,000

3. Common Shares Subscribed (2,000 X $26)...... 52,000

Share Subscriptions Receivable................ 32,000
Cash (2,000 X $10) ................................... 20,000
To record refund to defaulting subscribers

Common Shares Subscribed ............................ 260,000

Common Shares (10,000 X $26) ............... 260,000
To issue shares fully paid on subscriptions

4. Common Shares (22,000 X $4.822) .................. 106,040

Contributed Surplus .......................................... 310,000
Retained Earnings ............................................ 221,960
Cash (22,000 X $29) ................................. 638,000
2
($270,000 + $260,000) ÷ (100,000 + 10,000) = $4.82

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

Solutions Manual 17.91 Chapter 17

Common Shares (3,000 X $31) ................. 93,000

Preferred Shares3 ..................................... 207,000
3
Total received $300,000
Assigned to common shares (3,000 X $31) (93,000 )
Assigned to preferred shares $207,000

The company must use the residual value method to allocate the lump-sum issue since only the value
of the common shares is known. Since the value of the preferred shares is not known, the residual
value is assigned.

Solutions Manual 17.92 Chapter 17

PROBLEM 15.6 (CONTINUED)

b. The journal entries for transactions 2 to 4 are as follows:

2. No change.
3. Common Shares Subscribed (2,000 X $26)...... 52,000
Share Subscriptions Receivable................ 32,000
Contributed Surplus (2,000 X $10) ............ 20,000
To record forfeit of payment from defaulting subscribers
Common Shares Subscribed ............................ 260,000
Common Shares (10,000 X $26) ............... 260,000
To issue shares fully paid on subscriptions

4. Common Shares (22,000 X $4.824) .................. 106,040

Contributed Surplus .......................................... 310,000
Contributed Surplus5…………………………. .... 4,000
Retained Earnings ............................................ 217,960
Cash (22,000 X $29) ................................. 638,000
4
($270,000 + $260,000) ÷ (100,000 + 10,000) = $4.82 per share
5
Because this part of the Contributed Surplus came from a different type of transaction, ASPE
requires that it be reduced on a pro rata basis: 22,000/110,000 X $20,000 = $4,000

c. Using the market value or fair value of the common shares of a private company introduces
measurement uncertainty, because a liquid market for the shares is not available to provide

Solutions Manual 17.93 Chapter 17

evidence of fair value. Stellar may have determined the fair value of its common shares based on
a quoted price of the common shares of a similar size public company operating in the same
industry with the same number of shares outstanding (adjusted to include Stellar’s own data),
based on a discounted cash flow analysis of the company’s expected future cash flows (using as
many objectively determined market inputs as possible), or based on a calculation of the fair value
of the company’s net tangible assets.

PROBLEM 15.9

a. For Preferred in arrears:

Dividends1.................................................... 50,000
Common Shares ................................. 50,000

1
25,000 ÷ 10 = 2,500 common shares issued as dividend
2,500 X $20 market value = $50,000

For $2 Preferred current:

Dividends2.................................................... 50,000
Cash ................................................... 50,000
2
($2 X 25,000 shares)

For $0.70 per share Common:

Dividends3.................................................... 211,750
Cash ................................................... 211,750

Solutions Manual 17.94 Chapter 17

Since all preferred dividends must be paid before the common dividend, outstanding common
shares include—
3
As at Dec. 1, 2023 300,000 shares
Preferred distribution—1 common for
every 10 preferred shares 2,500 Shares
302,500 Shares
Common dividend X 0.70 per share
Amount of common cash dividend $211,750

b. Preferred in arrears ($2 X 25,000 shares) $ 50,000

Current preferred ($2 X 25,000 shares) 50,000
Common dividend ($0.70 X 300,000) 210,000
Total cash dividend $310,000

**Beginning Retained Earnings balance $327,000

Net income as estimated 56,000
Available to pay dividends $383,000

Solutions Manual 17.95 Chapter 17

PROBLEM 15.9 (CONTINUED)

b. (continued)

Total dividends would be $310,000, which is adequately covered by the cash balance. The
retained earnings balance, after adding the 2023 net income (estimated at $56,000), is also
sufficient to cover the dividends.

To determine the legality of dividends, various tests of corporate solvency have been used over
the years. Under the Canada Business Corporations Act (CBCA), dividends may not be declared
or paid if there are reasonable grounds for believing that (1) the corporation is, or would be after
the dividend, unable to pay its liabilities as they become due; or (2) the realizable value of the
corporation’s assets would, as a result of the dividend, be less than the total of its liabilities and
stated or legal capital for all classes of shares. There is no evidence in this case that these
considerations would be violated.
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Solutions Manual 17.96 Chapter 17

CHAPTER 16

EXERCISE 16.8

Type of financial Timing of Measurement Gains or

instrument recognition Losses
1. Financial derivative – When fair value PV of future cash Net income
forward contract fluctuates. Value flows
at acquisition is
$nil.
2. Non-financial When fuel prices PV of future cash Net income
derivative – fluctuate. Value at flows
exchange- traded acquisition is $nil.
futures
3. This is not a financial N/A N/A N/A
instrument
4. This is a purchase As these are not Not recognized N/A
commitment (and exchange traded unless onerous
therefore not and the company
exchange traded) intends to take
delivery of the
steel, these are
not recognized in
the financial
statements under
either ASPE or
IFRS.
5. Contra equity - this is When options are Cash paid N/A
a purchased call purchased and
option that is cash is paid.
settleable only in the

Solutions Manual 17.97 Chapter 17

entity’s own equity

instruments (fixed for
fixed)
6. Non-financial Initial margin is Cash deposited Net income
derivative – similar to a bank on margin
exchange- traded account.
futures
7. Liability. Increase in When shares are PV of future cash Net income
redemption amount issued. flows
makes it highly likely
company will redeem,
and imposes a
liability to deliver
cash or other assets
at the time of
redemption.

Solutions Manual 17.98 Chapter 17

EXERCISE 16.8 (CONTINUED)

Type of financial Timing of Measurement Gains or
instrument recognition Losses
8. Hybrid instrument. When debt is IFRS – debt at PV of Net income for
Warrants are written issued. future cash flows debt
call options, and debt and rest to equity component
is a liability. ASPE – may allocate including
$0 to the warrant or interest and
may bifurcate the gains/losses
initial amount upon
between debt and extinguishment
equity allocating the
more easily
measurable first
with the residual to
the other component
9. Hybrid instrument – When debt is IFRS – debt at PV of Net income for
conversion option is issued. future cash flows debt
a written call option and rest to equity component
and is equity since a ASPE– may allocate including
fixed number of $0 to the conversion interest and
shares will be issued. feature or may gains/losses
bifurcate the initial upon
amount between extinguishment
debt and equity
allocating the more
easily measurable
first with the
residual to the other
component
10. Liability – these are When Amount received Net income for
puttable shares and instruments debt
since the option to are issued. component

Solutions Manual 17.99 Chapter 17

put the shares back including

to the company is interest and
beyond the control of gains/losses
the entity, they are upon
liabilities unless extinguishment
certain specific
conditions are met.

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

Solutions Manual 17.100 Chapter 17

EXERCISE 16.9

1. Fair value of bonds without warrants is $285,000

($300,000 X .95)

Cash ($300,000 X 1.04) ....................... 312,000

Bonds Payable ............................ 285,000
Contributed Surplus—Stock Warrants 27,000

2. Under ASPE, the first option is to measure the component that is most easily measurable
first (often the debt component), and apply the residual to the other component. The
second option is to measure the equity component at $0. The entries under these two
approaches are, respectively, as follows:

Cash ($10,000,000 X .97) ............................9,700,000

Bonds Payable ............................ 9,300,000
Contributed Surplus—
Conversion Rights ................. 400,000

Cash ($10,000,000 X .97) .................... 9,700,000

Bonds Payable ............................ 9,700,000

3. Under ASPE, the first option is to measure the component that is most easily measurable
first, and apply the residual to the other component.

Cash .................................................... 19,600,000

Bonds Payable ............................ 18,400,000

Solutions Manual 17.101 Chapter 17

Contributed Surplus—Stock Warrants 1,200,000

Value of bonds plus warrants ($20,000,000 X .98) $19,600,000

Value of warrants (200,000 X $6) 1,200,000
Value of bonds $18,400,000

Solutions Manual 17.102 Chapter 17

EXERCISE 16.9 (CONTINUED)

3. (continued)

The second option is to measure the equity component at $0.

Cash .................................................... 19,600,000

Bonds Payable ............................ 19,600,000

a) IFRS approach:
Loss on Redemption of Bonds ....... 65,000
Bonds Payable ................................. 9,925,000
Contributed Surplus—
Conversion Rights .......................... 270,000
Common Shares.......................... 10,195,000
Cash ............................................. 65,000

b) ASPE approach:
Loss on Redemption of Bonds1 ......... 30,000
Retained Earnings2 ............................. 35,000
Bonds Payable .................................... 9,925,000
Contributed Surplus—
Conversion Rights ........................ 270,000
Common Shares.......................... 10,195,000
Cash ............................................. 65,000

Solutions Manual 17.103 Chapter 17

1
$9,955,000 – ($10,000,000 – $75,000)
2
$65,000 – $30,000

Solutions Manual 17.104 Chapter 17

EXERCISE 16.9 (CONTINUED)

5. Fair value of bonds without warrants $475,000

($500,000 X .95)

Cash ($500,000 X 1.03) .......................... 515,000

Bonds Payable ............................... 475,000
Contributed Surplus—Stock Warrants 40,000

The warrants are equity instruments since they are fixed for fixed.
LO 2,4 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 16.19
a.
1/1/23 No entry

12/31/23 Compensation Expense .................. 840,000

Contributed Surplus—
Stock Options ...................... 840,000
($1,680,000 X 1/2)

12/31/24 Compensation Expense .................. 840,000

Contributed Surplus—
Stock Options ....................... 840,000

5/1/25 Cash (12,000 X $30) ......................... 360,000

Solutions Manual 17.105 Chapter 17

Contributed Surplus—
Stock Options1............................... 504,000
Common Shares ....................... 864,000
1
($1,680,000 X 12,000/40,000)

12/31/26 Contributed Surplus—

Stock Options ................................ 1,176,000
Contributed Surplus –
Expired Stock Options2 ......... 1,176,000
2
($1,680,000 – $504,000)

b. The market price of the Waldorf shares at the date of grant would likely be lower than the
exercise price. The objective of issuing the stock options is principally to motivate
employees to work at enhancing the market value of the company’s shares. The options
have a service period, typically of more than one year. Consequently, the company would
want to allow for an upward movement in the share price to justify the remuneration of key
employees whose work would have led to the increase in the market value of the shares.
If the market value of the shares at the date of grant was at or greater than the exercise
price, the incentive would be substantially removed, and so the plan would be less
effective.

Solutions Manual 17.106 Chapter 17

EXERCISE 16.19 (CONTINUED)

c. The market price of the Waldorf shares at May 1, 2025 of $34 is not used in recording the
exercise of the stock options. From an accounting perspective, the market price is not
relevant. It is nonetheless relevant to the executives in making their decision to exercise
their stock options. The market price is mentioned to indicate that the timing of the exercise
is justified, or at least makes sense. The market price of the shares exceeds the cash paid.
Executives exercising a stock option would have paid $30 and could resell the shares
immediately for $34, for a gain of $4 per share.

d. During 2026 the market price of the shares likely fell below $30 per share. This would
explain why no additional stock options were exercised, and were left to lapse, as there
was no benefit to be gained by the executives in exercising them. They could not recover
the cash required to exercise the stock option through the resale of the shares if the stock
price was below the exercise price of $30 per share.

e. The executives holding the stock options might delay the exercise of the options to
postpone the requirement of obtaining the necessary cash to exercise the option. Often
executives must sell the shares obtained on the exercise of stock options to pay off bank
loans secured to obtain the necessary cash required. Proceeds from the sale of the shares
are also used for the payment of the personal income tax that is assessed on the income
for tax purposes realized on the sale of the shares obtained through the exercise of stock
options. The risk involved in delaying the exercise of the options is that the market price
of the common shares may decline, making the options worthless.
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Solutions Manual 17.107 Chapter 17

CHAPTER 17

EXERCISE 17.1

a.
Dates Shares Resta- Fraction Weighted
Event Outstanding Outstanding tement of Year Shares

Beginning balance Jan. 1–April 1 300,000 1.1 3/12 82,500

Issued shares April 1–July 1 330,000 1.1 3/12 90,750
Stock dividend July 1–Nov. 1 363,000 4/12 121,000
Acquired shares Nov. 1–Dec. 31 353,000 2/12 58,833
Weighted average number of shares outstanding 353,083

b.
Dates Shares Resta- Fraction Weighted
Event Outstanding Outstanding tement of Year Shares

Beginning balance Jan. 1–April 1 300,000 .1 3/12 7,500

Issued shares April 1–July 1 330,000 .1 3/12 8,250
Reverse stock split July 1–Nov. 1 33,000 4/12 11,000
Acquired shares Nov. 1–Dec. 31 23,000 2/12 3,833
Weighted average number of shares outstanding 30,583

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 17.108 Chapter 17

EXERCISE 17.3
a.
Dates Shares Fraction Weighted
Event Outstanding Outstanding of Year Shares

Jan. 1 Jan. 1–May 1 210,000 4/12 70,000

Issued shares May 1–Oct. 31 218,000 6/12 109,000
Reacquired Oct. 31–
shares Dec. 31 204,000 2/12 34,000
213,000

b. Income per share before discontinued operations

($229,690 + $40,600 = $270,290;
($270,290 ÷ 213,000 shares) = $1.27
Discontinued operations loss per share, net of tax
($40,600 ÷ 213,000) (.19)
Net income per share ($229,690 ÷ 213,000) $1.08

c.
Weighted average number of shares outstanding—unadjusted 213,000
Stock split, January 31, 2024 3
Weighted average number of shares outstanding—adjusted 639,000
Income per share before discontinued operations $0.42
($229,690 + $40,600 = $270,290;
($270,290 ÷ 639,000 shares)

Solutions Manual 17.109 Chapter 17

Discontinued operations loss per share, net of tax

($40,600 ÷ 639,000) (.06)
Net income per share ($229,690 ÷ 639,000) $0.36

Solutions Manual 17.110 Chapter 17

EXERCISE 17.3 (CONTINUED)

d. Common shareholders need to know how much of a company’s available income can be
attributed to the shares they own. This helps them assess future dividend payouts and the
value of each share. When the income statement presents discontinued operations,
earnings per share should be disclosed for income from continuing operations,
discontinued operations, and net income. These disclosures make it possible for users of
the financial statements to assess the specific impact of income from continuing
operations on earnings per share, as opposed to a single earnings per share number,
which also includes the impact of a gain or loss from irregular items.

e. It is possible to have simple and complex capital structures over different fiscal years of a
corporation. For each accounting period a corporation would need to determine whether
options, warrants, convertible debt, or convertible preferred shares were outstanding
during the fiscal year. Issuance or redemption of such securities would lead to a change in
the capital structure from simple to complex or vice versa and this would be reflected in
the EPS disclosure.

f. If the company was using ASPE, there would be no requirement to calculate EPS, or to
report it on the face of the income statement.

EXERCISE 17.5

a.
Dates Shares Resta- Fraction Weighted
Event Outstanding Outstanding tement of Year Shares

Solutions Manual 17.111 Chapter 17

Beginning balance Jan. 1–Feb. 1 580,000 1.1 X 3.0 1/12 159,500

Issued shares Feb. 1–Mar. 1 760,000 1.1 X 3.0 1/12 209,000
Stock dividend Mar. 1–May 1 836,000 3.0 2/12 418,000
Acquired shares May 1–June 1 636,000 3.0 1/12 159,000
Stock split June 1–Oct. 1 1,908,000 4/12 636,000
Issued shares Oct. 1–Dec. 31 1,968,000 3/12 492,000
Weighted average number of shares outstanding 2,073,500

$2,500,000 (Net income)

b. Earnings Per Share = 2,073,500 (Weighted Average Shares) = $1.21

$2,500,000 – $800,000
c. Earnings Per Share = 2,073,500
= $0.82

Solutions Manual 17.112 Chapter 17

EXERCISE 17.5 (CONTINUED)

d. Income from continuing operationsa $1.30

Loss from discontinued operationsb (rounded) (.09)
Net income $1.21

Net income $2,500,000

Add loss from discontinued operations 200,000
Income from continuing operations $2,700,000
a
$2,700,000
= $1.30
2,073,500

b $(200,000)
2,073,500
= $(.09) rounded to balance net income

e. The earnings process occurs continuously throughout the fiscal

year. We must therefore recognize that the income for the year was
generated from the capital available throughout the year, rather
than the amount of capital from the common shares at any
particular point in time. It is necessary to adjust the denominator
of the EPS ratio to reflect the length of time during the year that
the different amounts of capital from the different number of
shares outstanding was available to finance the generation of
earnings during the year.
LO 2 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 17.10

a. (1) Number of shares for basic earnings per share.

Dates Shares Fraction Weighted

Outstanding Outstanding of Year Shares

Jan.1–April 1 800,000 3/12 200,000

Apr.1–Dec. 31 1,200,000 9/12 900,000

Solutions Manual 17.113 Chapter 17

Weighted average number of shares outstanding 1,100,000

(2) Number of shares for diluted earnings per share.

Dates Shares Fraction Weighted

Outstanding Outstanding of Year Shares

Jan. 1–April 1 800,000 3/12 200,000

April 1–July 1 1,200,000 3/12 300,000
July 1–Dec. 31 1,224,000* 6/12 612,000
Weighted average number of shares outstanding 1,112,000
*1,200,000 + [($600,000 ÷ $1,000) X 40]

b. (1) Earnings for basic earnings per share:

After-tax net income $1,540,000
(2) Earnings for diluted earnings per share:
After-tax net income $1,540,000
Add back interest on convertible
bonds (net of tax):
Interest (Schedule 1) $24,892
Less income tax (30%) 7,468 17,424
Total $1,557,424

Solutions Manual 17.114 Chapter 17

EXERCISE 17.10 (CONTINUED)

b. (continued)

Schedule 1 – Interest expense calculation:

Given that the convertible bonds are compound instruments, the

amount of the debt and equity elements must be separated to
calculate the interest expense to be added back, after tax, to the
net income.

The present value of the future cash flows of the bonds at an

effective rate of 10% is $497,837, leaving $102,163 to be allocated
to the conversion right from the total amount of cash received of
$600,000.

Using a financial calculator:

$ ?
PV Yields $497,837
I 10%
N 20
PMT $ (48,000)
FV $ (600,000)
Type 0

Solutions Manual 17.115 Chapter 17

EXERCISE 17.10 (CONTINUED)

b. (continued)

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

Result: $497,837.2354 Rounded: $497,837

The interest expense is therefore $497,837 X 10% X 6/12 = $24,892

[Note to instructor: In this problem, the earnings per share calculated

for basic earnings per share is $1.40 ($1,540,000 ÷ 1,100,000) and the
diluted earnings per share is $1.40 (technically $1.40056). As a result,
only one earnings per share number would be presented and it would
be labelled as basic and diluted earnings per share.]
LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 17.116 Chapter 17

EXERCISE 17.11

Basic EPS: $7,500,000 ÷ 2,000,000 shares = $3.75

b.
Potential dilution – if the convertible debentures had been converted
on January 2, 2023:

Additional income to common:

Carrying amount of debentures: $4M X .98 = $3,920,000
Interest expense, 2023:
$3,920,000 X 7.2886% = $285,713
1 – tax rate (25%) = X .75
After-tax interest $ 214,285

Additional common shares:

$4,000,000/$1,000 = 4,000 debentures
Increase in diluted earnings per share denominator:
4,000
X 18
72,000

$214,285 = $2.98; $2.98 < $3.75 therefore is dilutive

72,000

Diluted Earnings per Share:

$7,500,000 + $214,285 = $7,714,285 = $3.72
2,000,000 + 72,000 2,072,000

Solutions Manual 17.117 Chapter 17

EXERCISE 17.11 (CONTINUED)

c. If the convertible security were preferred shares, basic EPS would

be calculated after deducting the preferred share dividend
entitlement (for cumulative shares) and the preferred dividends
declared (for non-cumulative shares). This would reduce the basic
EPS below the amount in part (a) if there were any amount
attributed to preferred shareholders. Note that there would be no
tax implications on the payment of dividends.

Next, the test would be done to see if the conversion of the

preferred shares was, in fact, dilutive. If the relationship between
the preferred entitlement divided by the increased number of
common shares is greater than basic EPS, basic and diluted EPS
would be the same number. If the relationship is less than basic
EPS, then the numerator for basic would be increased by the
preferred entitlement previously deducted. The denominator
would be increased above the basic EPS denominator by the
additional number of common shares that would be issued on
conversion of the preferred shares.

d. Although the amount of interest is not actually saved immediately,

the reduction of the expense decreases the amount of the net loss
used in the EPS calculation. The corresponding amount of tax
applicable to this savings will also reduce any income tax that is
recovered from applying the current year’s loss back to any of the
three previous taxable fiscal years or accrued as a future tax from
carrying a smaller amount of loss forward. The accounting and tax
consequences will be accrued and so the effect on EPS should
also be included in the current year.

Disclaimer: For simplicity, ignore the IFRS requirement to record

the debt and equity components of the debentures separately.
LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 17.118 Chapter 17

EXERCISE 17.12

a. Basic EPS = $200,000 ÷ 100,000 = $2.00 per share

If bonds were converted to common:

Interest savings (net of tax)

($4,000,000 X 6% X (1–.25)] $180,000

Additional common shares

$4,000,000 ÷ $1,000 = 4,000 bonds
X 20
80,000 shares

Effect of conversion: $180,000 ÷ 80,000 = $2.25 per

additional share ($2.25 > $2.00)

Therefore, these bonds would be anti-dilutive. Proof:

Net income $200,000

Add: Interest savings (net of tax)
[$4,000,000X 6% X (1–.25)] 180,000
Adjusted net income $380,000

Diluted EPS: $380,000 ÷ (100,000 + 80,000) = $2.11

Basic and diluted EPS (both) = $2.00

Solutions Manual 17.119 Chapter 17

EXERCISE 17.12 (CONTINUED)

b. Basic EPS:

Income to common: $200,000 – $120,000* = $80,000

*The preferred shares are cumulative so they are entitled to
a 6% dividend ($2 M X 6% = $120,000).

Basic EPS: $80,000 ÷ 100,000 = $0.80

Effect of conversion of preferred shares:

Additional income to common = $120,000

Additional common shares outstanding
Shares assumed to be issued (20,0001 X 5) 100,000
1
$2,000,000 ÷ $100

Effect of conversion: $120,000 ÷ 100,000 = $1.20 per

additional share ($1.20 > $0.80)

Therefore, the preferred shares would be anti-dilutive.

Proof:

Income to common for basic EPS $120,000

Add: dividend savings, if converted 80,000
Adjusted net income for common $200,000

Diluted EPS: $200,000 ÷ (100,000 + 100,000) = $1.00

Therefore, both basic and diluted EPS = $0.80

Disclaimer: For simplicity, ignore the IFRS requirement to record

the debt and equity components of the bonds separately.

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

Solutions Manual 17.120 Chapter 17

EXERCISE 17.17

a. The warrants are dilutive because the option price ($10) is less
than the average market price ($23).

b. Basic EPS = $4.80

($480,000 ÷ 100,000 shares)

c. Diluted EPS = $4.36

($480,000 ÷ 110,174 shares)

Proceeds from assumed exercise:

(18,000 warrants X $10 exercise price) $180,000
Treasury shares purchasable with proceeds:
($180,000 ÷ $23 average market price) 7,826

Incremental shares issued:

(18,000 shares issued less 7,826 purchased) 10,174

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
PROBLEM 17.2

a. Weighted Average Shares

Before After
Stock Stock
Dividend Dividend1

Total as at June 1, 2022 1,000,000 1,200,000

Issue of September 1, 2022 500,000 600,000
Total as at May 31, 2023 1,500,000 1,800,000

1. May 31, 2024

1,800,000 X 12/12 = 1,800,000

2. 1,200,000 X 3/12 = 300,000

1,800,000 X 9/12 = 1,350,000

Solutions Manual 17.121 Chapter 17

Total, May 31, 2023 1,650,000

1
Effect of the stock dividend is reflected in the May 31, 2023 weighted
average number of shares for comparative purposes on the 2024
financial statements.

Solutions Manual 17.122 Chapter 17

PROBLEM 17.2 (CONTINUED)

b. LORETTA CORPORATION
Comparative Income Statement
For the Years Ended May 31,

2024 2023

Income from continuing operations

before income tax $800,000 $1,200,000
Income tax 160,000 240,000
Income from continuing operations 640,000 960,000
Loss from discontinued operations,
less applicable income tax of
$20,000 80,000 _
Net income $560,000 $960,000

Earnings per common share

Income from continuing operations $0.30 $.52
Loss from discontinued
operations, net of tax (0.04) _ _
Net income $0.26 $.52

2024 2023
Income from continuing operations $640,000 $960,000
Preferred dividend (1) (100,000) (100,000)
540,000 860,000
Weighted average number of shares 1,800,000 1,650,000

Income from continuing operations $ 0.30 $ .52

Loss from discontinued operations $(80,000)

Weighted average number of shares 1,800,000
Discontinued operations loss per share $ (0.04)

(1) Preferred dividends = 200,000 X $10 X .05 = $100,000

Solutions Manual 17.123 Chapter 17

PROBLEM 17.2 (CONTINUED)

2024
Net income – Preferred dividend $ 460,000
Weighted average number of shares 1,800,000
Net income per share $ 0.26

c. 1. A corporation’s capital structure is regarded as simple if it consists

only of common shares or includes no potentially dilutive securities.
Loretta Corporation has a simple capital structure because it has
not issued any convertible securities, warrants, or stock options,
and there are no existing rights or securities that have a potentially
dilutive effect on its earnings per common share.
2. A corporation having a complex capital structure would be required
to make a dual presentation of earnings per share; i.e., both basic
earnings per share and diluted earnings per share. This assumes
that the potentially dilutive securities are actually dilutive.
The basic earnings per share calculation uses only the
weighted average of the common shares outstanding. The diluted
earnings per share calculation assumes the conversion or exercise
of all potentially dilutive securities.

3. EPS is useful in assessing management stewardship and

predicting a company’s future value. Diluted EPS is particularly
useful in understanding how currently existing situations may
impact the future value of common shares. EPS may also be used
in determining the valuation of common shares and in calculating
the price earnings ratio.

4. IFRS requires the disclosure of basic and diluted earnings per

share be made on the face of the income statement. Companies
that report a discontinued operation must present per share
amounts for this line item either on the face of the income statement
or in the notes to the financial statements. ASPE does not have any
requirements for calculation or presentation of EPS.

Solutions Manual 17.124 Chapter 17

LO 1,2,4 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

PROBLEM 17.5

a. Weighted average number of shares:

Beginning balance Jan. 1, 450,000 X 7/12 = 262,500

Balance from July 31, to Dec. 31 600,000 X 5/12 = 250,000
Total number of common shares to calculate
basic earnings per share 512,500

b.
Basic Earnings Per Share Income Shares EPS
Income from continuing operations $1,300,000
Dividends on preferred shares
(20,000 X $3.00) (60,000)
Basic EPS $1,240,000 512,500 $2.42

c.
Individual earnings per share calculations are done for each potentially
dilutive security to determine if securities are in fact dilutive when
compared to basic earnings per share of $2.42. Only dilutive securities
will be used in the calculation of diluted earnings per share. Each will
be used in sequence, from most dilutive to least dilutive to arrive at the
most diluted earnings per share result. In the ranking of securities, stock
options will be used first if they are in the money (exercise price of $3
is below the average market price of $5). The warrants are not in the
money as their exercise price of $7 is above the average market price
of $5 and they are therefore ignored for purposes of calculating diluted
earnings per share.

Solutions Manual 17.125 Chapter 17

PROBLEM 17.5 (CONTINUED)

c. (continued)

For Options:
Use treasury stock method to determine incremental
shares outstanding.
Proceeds from exercise of options
(20,000 X $3) $60,000

Shares issued upon exercise of options 20,000

Shares purchasable with proceeds
(Proceeds ÷ Average market price)
($60,000 ÷ $5) 12,000
Incremental shares outstanding 8,000

For 4% convertible bonds:

Maturity value $1,000,000
Stated rate X 4%
Interest expense 40,000
1 – tax rate (20%) X .80
After-tax interest $ 32,000

$1,000,000/$1,000 = 1,000 bonds

Increase in diluted earnings per share denominator: 1,000
X 25
25,000

Individual EPS calculation: $32,000 / 25,000 = $1.28 < $2.42

Shares
Diluted Earnings Per Share Income EPS
Basic $1,240,000 512,500 $2.42
Options 8,000
1,240,000 520,500 2.38
Bonds 32,000 25,000
Diluted Earnings Per Share $1,272,000 545,500 $2.33

Solutions Manual 17.126 Chapter 17

Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, , Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition

PROBLEM 17.5 (CONTINUED)

c. (continued)

Shares
Basic EPS: Income EPS
Income before discontinued
operations $1,240,000 512,500 $2.42
Discontinued operation loss (200,000) 512,500 (0.39)
Net Income $1,040,000 512,500 $2.03

Shares
Diluted EPS: Income EPS
Income before discontinued
operations $1,272,000 545,500 $2.33
Discontinued operation loss (200,000) 545,500 (0.361)
Net Income $1,072,000 545,500 $1.97
1
(rounded)

d.
Partial Income Statement
Income from continuing operations $1,300,000
Loss from discontinued operations
(net of tax recovery) 200,000
Net Income $1,100,000

Basic earnings per share:

Income from continuing operations $2.42
Discontinued operations loss (.39)
Net Income $2.03

Diluted earnings per share:

Income from continuing operations $2.33
Discontinued operations loss (.36)
Net Income $1.97

Disclaimer: For simplicity, ignore the IFRS requirement to record the

debt and equity components of the bonds separately.
LO 1 BT: AP Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting
PROBLEM 17.9

Solutions Manual 17.127 Chapter 17

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Kieso, Weygandt, Warfield, , Wiecek, McConomy Intermediate Accounting, Twelfth Canadian Edition

The calculations of Twilight Limited’s basic and diluted earnings per share
for the 2023 fiscal year are shown below.

a.
Basic Earnings Per Share Income Shares EPS
Net Income $2,500,000
Dividends on preferred
(600,000 x $.68) (408,000)
Basic EPS $2,092,000 3,000,000 $0.70

b.
Step 1: Determine, for each dilutive security, the incremental per share effect
if the security is exercised or converted.
Individual earnings per share calculations are done for each potentially
dilutive security to determine if the securities are in fact dilutive when
compared to basic earnings per share of $0.70. Only dilutive securities
will be used in the calculation of diluted earnings per share. Each will
be used in sequence, from most dilutive to least dilutive, to arrive at the
most diluted earnings per share result. In the ranking of securities,
options will be used first if they are in the money (exercise price of $8 is
below the average market price of $14).

For Options:
Use treasury stock method to determine incremental
shares outstanding.
Proceeds from exercise of options
(100,000 X $8) $800,000

Shares issued upon exercise of options 100,000

Shares purchasable with proceeds
(Proceeds ÷ Average market price)
($800,000 ÷ $14) 57,143
Incremental shares outstanding 42,857

Solutions Manual 17.128 Chapter 17

PROBLEM 17.9 (CONTINUED)

b. (continued)

For 4% convertible bonds:

Maturity value $2,000,000
Stated rate X 4%
Interest expense 80,000
1 – tax rate (25%) X .75
After-tax interest $ 60,000

$2,000,000/$1,000 = 2,000 bonds

Increase in diluted earnings per share denominator: 2,000
X 100
200,000

Individual EPS calculation: $60,000 / 200,000 = $0.30 < $0.70

For 6% convertible bonds:

Maturity value $3,000,000
Stated rate X 6%
Interest expense – annual 180,000
Pro-rated to seven months X 7/12
Interest expense 105,000
1 – tax rate (25%) X .75
After-tax interest $ 78,750

$3,000,000/$1,000 = 3,000 bonds X 7/12 = 1,750

Increase in diluted earnings per share denominator: 1,750
X 100
175,000

Individual EPS calculation: $78,750 / 175,000 = $0.45 < $0.70

— Ranked third most dilutive.

For preferred shares:

Dividends avoided from conversion $0.68 X 600,000 shares =
$408,000 divided by 600,000 additional common shares (one to one
ratio) = $0.68 < $0.70

Solutions Manual 17.129 Chapter 17

PROBLEM 17.9 (CONTINUED)

b. (continued)

Step 2: Rank the results from the lowest earnings effect per share to the
largest; that is, rank the results from the most dilutive to least dilutive.

1. For options: most dilutive as no numerator effect.

2. For 4% bonds $0.30 < $0.70 — Ranked most dilutive after options.
3. For 6% bonds: $0.45 < $0.70 — Ranked third most dilutive.
4. For preferred shares: $0.68 < $0.70 — Ranked least dilutive.

Step 3: Beginning with the basic earnings per share based on the
weighted average number of common shares outstanding, recalculate
the earnings per share by adding the most dilutive per share effect from
the first step. If the result from this recalculation is less than EPS in the
prior step, go to the next most dilutive per share effect and recalculate
the earnings per share until a security maintains or increases the EPS,
and is antidilutive.

Shares
Diluted Earnings Per Share Income EPS
Basic (a) above $2,092,000 3,000,000 $0.70
Options 42,857
2,092,000 3,042,857 0.69
4% bonds 60,000 200,000
2,152,000 3,242,857 0.66
6% bonds 78,750 175,000
Diluted Earnings Per Share 2,230,750 3,417,857 0.65
Preferred shares 408,000 600,000
$2,638,750 4,017,857 $0.66

Solutions Manual 17.130 Chapter 17

PROBLEM 17.9 (CONTINUED)

b. (continued)

The preferred shares, although initially appearing dilutive, ultimately

would cause diluted earnings per share to become greater. The
preferred shares are therefore excluded from the diluted earnings per
share calculation. Diluted earnings per share remain $0.65.

Disclaimer: For simplicity, ignore the IFRS requirement to record the

debt and equity components of the bonds separately.

c. Preferred dividends were not declared in 2023; however, one year of

dividends on the convertible preferred shares was deducted from net
income to arrive at net income available to common shareholders in
calculating basic earnings per share. This is because the convertible
preferred shares are cumulative, meaning that the annual dividend not
paid in any given year must be made up in a later year before any
profits can be distributed to common shareholders. In calculating
diluted earnings per share, the effect of converting the convertible
preferred shares into common shares was considered (including
elimination of the annual preferred share dividend), and it was
determined that conversion of the preferred shares would not reduce
diluted earnings per share. Therefore, the effect of converting the
preferred shares was excluded from the calculation of diluted earnings
per share, and the annual preferred share dividend was deducted from
net income to arrive at net income available to common shareholders.

Common shareholders need to know how much of the company’s

available income can be attributed to the shares that they own, and they
refer to earnings per share information to help them assess future
dividend payouts and the value of each common share. Therefore, the
effect of cumulative dividends on convertible preferred shares must be
carefully considered in calculating basic and diluted earnings per share.

Solutions Manual 17.131 Chapter 17

PROBLEM 17.9 (CONTINUED)

d. If diluted EPS was not reported, a potential shareholder would only be

presented with basic EPS, which would not reflect the significant
adverse effect of conversion or exercise of all potentially dilutive
securities. EPS is also used in the calculation of the price earnings ratio
(market price per share / EPS), and diluted EPS should be presented
on the company’s financial statements to provide a calculation of the
diluted EPS for comparison to market price per share.

LO 2,3 BT: AP Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 cpa-t005 CM: Reporting and
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Solutions Manual 17.132 Chapter 17

Solutions Manual 17.133 Chapter 17

Solutions Manual 17.134 Chapter 17

Solutions Manual 17.135 Chapter 17

Solutions Manual 17.136 Chapter 17

Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

ACCT 3211
Practise Question Solutions Chapters 18 to 23

CHAPTER 18
BRIEF EXERCISE 18.4

(a) X(.25) = $200,000 taxes due for 2023

X = $200,000 ÷ .25
X = $800,000 taxable income for 2023

(b) Taxable income [from part (a)]................................ $800,000

Excess of CCA over depreciation........................... 160,000
Dividend income ...................................................... 23,000
Unearned rent .......................................................... (60,000)
Accounting income for 2023 ........................... $923,000
LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 18.5

The $40,000 reversing difference that occurs in the first fiscal year
of Mazur Corp. results in a taxable temporary difference at
December 31, 2023. The carrying amount is greater than the UCC
(tax base) by $40,000. $40,000 X 30% tax rate = $12,000 deferred
tax liability.

Stmt of (Taxable) Deferred

Fin Pos Temporary Tax Tax
Account Difference X Rate (Liability)

PP & E ($40,000)* 30% ($12,000)

Solutions Manual 18.1 Chapter 18

*Carrying amount and tax base are not given in the exercise; only
the net difference is provided.
LO 2,3,4 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.2 Chapter 18

BRIEF EXERCISE 18.6

Divided by
Accounting
@ 25% Income
Accounting income $156,000 $39,000 25.0%
Non-deductible
insurance expense 5,000 1,250 0.8%
$ 40,250 25.8%

Effective tax rate ($40,250/$156,000) 25.8%

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

Solutions Manual 18.3 Chapter 18

BRIEF EXERCISE 18.7

(a)
Basic Calculations of Capital Cost Allowance, Amounts, and Balances:
(C-B)
(A) CCA (B) (A – B) (C) Carrying Reversing
Year Base Rate CCA UCC Deprec. Amount Difference
2023 $30,000 45% $13,500 $16,500 $6,000 $24,000 $(7,500)
2024 16,500 30% 4,950 11,550 6,000 18,000 1,050
2025 11,550 30% 3,465 8,085 6,000 12,000 2,535
2026 8,085 30% 2,426 5,659 6,000 6,000 3,574
2027 5,659 30% 1,698 3,961 6,000 $0 4,302

(b)
Deferred
Deductible Deferred Tax Asset Inc. in
Tax (Taxable) Tax (Liability) Deferred
Date Base Carrying Temporary Tax Asset before Tax Asset
(UCC) Amount Difference Rate (Liability) Adjustment (Liability)
12/31/2023 $16,500 $24,000 $(7,500) 0.25 $(1,875) $0 $(1,875)
12/31/2024 11,550 18,000 (6,450) 0.25 (1,613) (1,875) 262
12/31/2025 8,085 12,000 (3,915) 0.25 (979) (1,613) 634
12/31/2026 5,659 6,000 (341) 0.25 (85) (979) 894
12/31/2027 3,961 0 3,961 0.25 990 (85) 1,075
LO 2,4 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.4 Chapter 18

BRIEF EXERCISE 18.8

Balance (Taxable) Deferred

Sheet Tax Carrying Temporary Tax Tax
Account Base – Amount = Difference X Rate = (Liability)

Equip. $136,000 $178,000 $(42,000) 30% $(12,600)

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

BRIEF EXERCISE 18.9

Accounting income $ 275,000

Reversing difference: CCA > Deprec. (40,000)
Taxable income 235,000
X 30%
Income tax payable $ 70,500

Stmt of (Taxable) Deferred

Fin Pos Temporary Tax Tax
Account Difference X Rate (Liability)

PP & E ($40,000)* 30% ($12,000)

Solutions Manual 18.5 Chapter 18

*Carrying amount and tax base are not given in the exercise, only the net difference is
provided.

Current Tax Expense ......................................... 70,500

Income Tax Payable ................................... 70,500
To record current tax expense

Deferred Tax Expense........................................ 12,000

Deferred Tax Liability ................................. 12,000
To record deferred tax expense
LO 3,4 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.6 Chapter 18

BRIEF EXERCISE 18.10

Deductible Deferred
SFP Tax Carrying Temporary Tax Tax
Account Base – Amount = Difference X Rate Asset

Warranty
Liability $0 – (256,000) = $256,000 X 25% = $64,000

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

BRIEF EXERCISE 18.14

Deferred Tax Asset......................................... 160,000

Deferred Tax Benefit1 ............................. 160,000
1
($3,200,000 X 5%)
LO 3,5 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.7 Chapter 18

BRIEF EXERCISE 18.15

Income Tax Receivable ................................... 168,900

Current Tax Benefit1 ............................... 168,900
1
[$120,900 + ($160,000 X 30%) = $168,900]
LO 6 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 18.16

Income Tax Receivable ......................................... 138,000

Current Tax Benefit 1 ..................................... 138,000
1
($460,000 X 30%)
To recognize benefit of loss carryback

Deferred Tax Asset................................................ 36,000

Deferred Tax Benefit2 ................................... 36,000
2
[($580,000 – $460,000) X 30%]
To recognize benefit of loss carryforward

LO 6 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 18.3

a. b.

Solutions Manual 18.8 Chapter 18

1. Reversing diff. Future deductible amounts Deferred tax asset

2. Reversing diff. Future deductible amounts Deferred tax asset
3. Permanent diff. No effect on future tax returns No deferred taxes
4. Permanent diff. No effect on future tax returns No deferred taxes
5. Reversing diff. Future taxable amounts Deferred tax liab.
6. Reversing diff. Future taxable amounts Deferred tax liab.
7. Permanent diff. No effect on future tax returns No deferred taxes
8. Permanent diff. No effect on future tax returns No deferred taxes
9. Permanent diff. No effect on future tax returns No deferred taxes
10. Reversing diff. Future deductible amounts Deferred tax asset
11. Reversing diff. Unrealized gains:
future taxable amounts Deferred tax liab.
12. Reversing diff. Holding/unrealized losses:
future deductible amounts Deferred tax asset
13. Reversing diff. Future deductible amounts Deferred tax asset
14. Reversing diff. Future taxable amounts Deferred tax liab.
LO 2,3 BT: K Difficulty: S Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.9 Chapter 18

EXERCISE 18.4
Capital Cost Allowance Schedule for Class 10, 30%.
CCA UCC
UCC, 01/01/2021 $ 0
Additions during 2021: 29,200
Disposals during 2021: 0
CCA, 2021: $29,200 X 30% X 1.5 $13,140 (13,140)
UCC, 12/31/2021 $16,060

UCC, 01/01/2022 $16,060

Additions during 2022: 4,800
Disposals during 2022
(lesser of cost of $8,000 and
proceeds of $7,000): (7,000)
UCC, before CCA 13,860
CCA, 2022: $13,860 X 30%
(net additions must be greater
than zero for 1.5 year rule) $4,158 (4,158)
UCC, 12/31/2022 $9,702

UCC, 01/01/2023 $9,702

Additions during 2023: 5,000

Solutions Manual 18.10 Chapter 18

Disposals during 2023: 0

CCA, 2023: $5,000 X 30% X 1.5 $ 2,250
$9,702 X 30% 2,911 (5,161)
UCC, 12/31/2023 $9,541

UCC, 01/01/2024 $9,541

Additions during 2024: 5,000
Disposals during 2024: 0
1
CCA, 2024: ($9,541 + $5,000) X 30% 4,362 (4,362)
UCC, 12/31/2024 $10,179
1
2024 to 2027 inclusive, 1.5 rate reduced to 1.0 (that is, additions are not subject to the 1.5
year rule or the half-year rule for 2024-2027).
EXERCISE 18.4 (CONTINUED)

UCC, 01/01/2025 $10,179

Additions during 2025: 0
Disposals during 2025: 0
CCA, 2025: $10,179 X 30% 3,054 (3,054)
UCC, 12/31/2025 $7,125

UCC, 01/01/2026 $7,125

Additions during 2026: 0

Solutions Manual 18.11 Chapter 18

Disposals during 2026: 0

CCA, 2026: $7,125 X 30% 2,138 (2,138)
UCC, 12/31/2026 $4,987

UCC, 01/01/2027 $4,987

Additions during 2027: 0
Disposals during 2027: 0
CCA, 2027: $4,987 X 30% 1,496 (1,496)
UCC, 12/31/2027 $3,491

UCC, 01/01/2028 $3,491

Additions during 2028: 5,000
Disposals during 2028: 0
CCA, 2028: $5,000 X 30% X 0.51 750
$3,491 X 30% 1,047 (1,797)
UCC, 12/31/2028 $6,694

1
2028 forward, implement the half-year rule for net additions. The half-year rule is used
irrespective of when in the year the purchase was made.

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

Solutions Manual 18.12 Chapter 18

EXERCISE 18.15

a. 2024
Deductible
SFP (Taxable) Deferred Tax
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2024 Base* Amount* Differences Rate (Liability)
Equipment $(70,000) 0 $(70,000) 25% $(17,500)
Deferred tax liability, December 31, 2024 (17,500)
Deferred tax liability before adjustment (28,500)
Decrease in deferred tax liability, and deferred tax benefit for 2024 $ 11,000
*Values not provided in this exercise

Future years
Total 2025 2026
(Taxable) temporary differences
Depreciation in excess of CCA $70,000 $30,000 $40,000
Tax rate enacted for the year 25% 25%

Deferred tax liability $17,500 $7,500 $10,000

Solutions Manual 18.13 Chapter 18

EXERCISE 18.15 (CONTINUED)

a. (continued)

2025
Deductible
SFP (Taxable) Deferred Tax
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2025 Base* Amount* Differences Rate (Liability)
Equipment $(40,000) 0 $(40,000) 25% $(10,000)
Deferred tax liability, December 31, 2025 (10,000)
Deferred tax liability before adjustment (17,500)
Decrease in deferred tax liability, and deferred tax benefit for 2025 $ 7,500
*Values not provided in this exercise

Future year
Total 2026
(Taxable) temporary differences
Depreciation in excess of CCA $40,000 $40,000
Tax rate enacted for the year 25%
Deferred tax liability $10,000 $10,000

Solutions Manual 18.14 Chapter 18

EXERCISE 18.15 (CONTINUED)

b.
2024 2025
Pre-tax accounting income $ 180,000 $ 180,000
Reversing differences –
CCA < depreciation expense 25,000 30,000
Taxable income $ 205,000 $ 210,000

Taxable income $ 205,000 $ 210,000

Enacted tax rate X 30% X 25%
Current income tax expense $ 61,500 $ 52,500

c.
2024
Current Tax Expense ......................................... 61,500
Income Tax Payable ................................... 61,500
To record current tax expense

Deferred Tax Liability ......................................... 11,000

Deferred Tax Benefit................................... 11,000
To record deferred tax benefit

2025
Current Tax Expense ......................................... 52,500
Income Tax Payable ................................... 52,500
To record current tax expense

Deferred Tax Liability ......................................... 7,500

Deferred Tax Benefit................................... 7,500
To record deferred tax benefit

Solutions Manual 18.15 Chapter 18

EXERCISE 18.15 (CONTINUED)

d.
2024
Income before income tax $ 180,000
Income tax
Current $ 61,500
Deferred (benefit) (11,000) 50,500
Net income $ 129,500

2025
Income before income tax $ 180,000
Income tax
Current $ 52,500
Deferred (benefit) (7,500) 45,000
Net income $ 135,000

LO 2,3,4,5 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.16 Chapter 18

EXERCISE 18.16

a.
Accounting income $105,000
Permanent differences:
Non-deductible fines 15,000
120,000
Reversing differences:
Excess of CCA over depreciation (16,000)
Excess rent collected over rent earned 24,000
Taxable income $128,000
Current income taxes – 30% $38,400
b.
Deductible Deferred
SFP (Taxable) Tax
Temporary Asset
Tax
Account Differences X Rate (Liability)
$(4,800)
PP & E $(16,000)* 30%
Unearned
rent revenue 24,000 30% 7,200
Deferred tax asset, Dec. 31, 2023 2,400
Deferred tax asset before adjustment 0
Incr. in deferred tax asset, and deferred
tax benefit for 2023 $ 2,400
*Carrying amount and tax base are not given in the exercise,
only the net difference is provided.
c. Current Tax Expense ...................................... 38,400
Income Tax Payable ................................ 38,400
To record current tax expense

Deferred Tax Asset1 ........................................ 7,200

Deferred Tax Benefit ............................... 2,400
Deferred Tax Liability1 ............................ 4,800
1
or a net debit to Deferred Tax Asset of $2,400
To record deferred tax benefit

Solutions Manual 18.17 Chapter 18

Because of a flat tax rate, these totals can be reconciled:

($24,000 – $16,000) X 30% = $2,400 OR $7,200 + $(4,800) = $2,400.

Solutions Manual 18.18 Chapter 18

EXERCISE 18.16 (CONTINUED)

d. Income before income tax $105,000

Income tax expense
Current $38,400
Deferred (benefit) (2,400) 36,000
Net income $69,000

e.
Divided by
Accounting
@ 30% Income
Accounting income $105,000 $ 31,500 30.0%
Non-deductible fines 15,000 4,500 4.3%
$ 36,000 34.3%

Effective tax rate ($36,000/$105,000) 34.3%

f. Long-term assets
Deferred tax asset $2,400

LO 3,4,8 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.19 Chapter 18

Solutions Manual 18.20 Chapter 18

EXERCISE 18.18

a. 2024
Deductible
SFP (Taxable) Deferred Tax
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2024 Base Amount Differences Rate (Liability)
Warranty liability 0 $(100,000) $100,000 25% $25,000
Deferred tax asset, December 31, 2024 25,000
Deferred tax asset before adjustment 37,500
Decrease in deferred tax asset, and deferred tax expense for 2024 $(12,500)

Future years
Total 2025 2026
Deductible temporary difference

Warranty liability $100,000 $35,000 $65,000

Tax rate enacted for the year 25% 25%
Deferred tax asset $25,000 $8,750 $16,250

Solutions Manual 18.21 Chapter 18

EXERCISE 18.18 (CONTINUED)

a. (continued)

2025
Deductible
SFP (Taxable) Deferred Tax
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2025 Base Amount Differences Rate (Liability)
Warranty liability 0 $(65,000) $65,000 25% $16,250
Deferred tax asset, December 31, 2025 16,250
Deferred tax asset before adjustment 25,000
Decrease in deferred tax asset, and deferred tax expense for 2025 $(8,750)

Future year
Total 2026
Deductible temporary difference
Warranty liability $65,000 $65,000
Tax rate enacted for the year 25%
Deferred tax asset $16,250 $16,250

Solutions Manual 18.22 Chapter 18

EXERCISE 18.18 (CONTINUED)

b.
2024 2025
Pre-tax accounting income $ 155,000 $ 155,000
Reversing difference – Warranty costs
incurred > warranty expense (50,000) (35,000)
Taxable income $ 105,000 $ 120,000

Taxable income $ 105,000 $ 120,000

Enacted tax rate X 25% X 25%
Current income tax expense $ 26,250 $ 30,000

c.
2024
Current Tax Expense ............................................. 26,250
Income Tax Payable ...................................... 26,250
To record current tax expense

Deferred Tax Expense............................................ 12,500

Deferred Tax Asset ......................................... 12,500
To record deferred tax expense

2025
Current Tax Expense ............................................. 30,000

Solutions Manual 18.23 Chapter 18

Income Tax Payable ...................................... 30,000

To record current tax expense

Deferred Tax Expense............................................ 8,750

Deferred Tax Asset ......................................... 8,750
To record deferred tax expense

Solutions Manual 18.24 Chapter 18

EXERCISE 18.18 (CONTINUED)

d.
2024
Income before income tax $ 155,000
Income tax
Current $ 26,250
Deferred 12,500 38,750
Net income $ 116,250

2025
Income before income tax $ 155,000
Income tax
Current $ 30,000
Deferred 8,750 38,750
Net income $ 116,250

e. The net income is identical for 2024 and 2025. Although the temporary balances have
changed, their changes were accrued at the expected future income tax rates in 2023.
Subsequent reversals of balances in the temporary differences reduce the deferred tax
asset account at the expected amounts each subsequent year.

This trend in net income is not a coincidence. The net income remains constant due to
the consistent amount of income before income tax.

Solutions Manual 18.25 Chapter 18

LO 2,3,4 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 18.26

2020
Current Tax Expense ($80,000 X 25%) ............... 20,000
Income Tax Payable .................................... 20,000

2021
Income Tax Receivable ...................................... 48,000
($160,000 X 30%)
Current Tax Benefit ($160,000 X 30%) ...... 48,000

2022
The 2022 loss of $380,000 is carried back, $250,000 to 2019 and $80,000 to 2020, leaving
$50,000 to carry forward.

Income Tax Receivable ...................................... 95,000

Current Tax Benefit 1 .................................. 95,000
1
($250,000 X 30% + $80,000 X 25%)
To record benefit from loss carryback

Deferred Tax Asset............................................. 12,500

Deferred Tax Benefit2 ................................. 12,500
2
($50,000 X 25%) - $-0-
To record deferred benefit from loss carryforward

Solutions Manual 18.26 Chapter 18

2023
3
Current Tax Expense ........................................ 20,000
Income Tax Payable .................................. 20,000
3
[25% X ($130,000 – $50,000 loss carryforward)]
To record current tax expense

Deferred Tax Expense4 ...................................... 12,500

Deferred Tax Asset ..................................... 12,500
4
($0 – $12,500)
To record deferred tax expense

2024
Current Tax Expense ($145,000 X 25%) ............ 36,250
Income Tax Payable ................................... 36,250
LO 5,6,7,8 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.27 Chapter 18

PROBLEM 18.1

(a) Basic Calculations of Capital Cost Allowance, Amounts, and Balances 2022 - 2026:

(Taxable) (C-B)
(A) CCA (B) (A – B) (C) Carrying Temporary Reversing
Year Base Rate CCA UCC Deprec. Amount Difference Difference
2022 $900,000 30% $270,000 $630,000 $75,000 $825,000 $(195,000) $(195,000)
2023 630,000 20% 126,000 504,0002 150,000 675,0001 (171,000) 24,000
2024 504,000 20% 100,800 403,200 150,000 525,000 (121,800) 49,200
2025 403,200 20% 80,640 322,560 150,000 375,000 (52,440) 69,360
2026 322,560 20% 64,512 258,048 150,000 225,000 33,048 85,488

Taxable temporary difference, Dec. 31, 2022 X tax rate = Deferred tax liability, Dec. 31, 2022
($825,000 – $630,000) X tax rate = $58,500
Tax rate = 30%
1
$900,000 – $75,000 – $150,000 = $675,000
2
$900,000 – ($900,000 X 20% X 150%) – $126,000 = $504,000

Solutions Manual 18.28 Chapter 18

PROBLEM 18.1 (CONTINUED)

a. (continued)

Deductible Tax Deferred

SFP (Taxable) Rate Tax
Account Tax Carrying Temporary (see Asset
Dec. 31, 2023 Base Amount Differences below) (Liability)
Property, plant, & equip. $504,0002 $675,0001 $(171,000) 30% $(51,300)
Prepaid rent (2024 expense) -0- 18,750 (18,750) 30% (5,625)
Prepaid rent (2025 expense) -0- 18,750 (18,750) 30% (5,625)
Warranty liability -0- (4,500) 4,500 30% 1,350
Deferred tax liability, December 31, 2023 (61,200)
Deferred tax liability before adjustment (58,500)
Incr. in deferred tax liability, and deferred tax expense for 2023 $(2,700)

1
$900,000 – $75,000 – $150,000 = $675,000
2
$900,000 – ($900,000 X 20% X 150%) – $126,000 = $504,000

Solutions Manual 18.29 Chapter 18

PROBLEM 18.1 (CONTINUED)

b.
Accounting income $60,000
Permanent differences:
50% of meals expense ($12,000 X 50%) $6,000
Golf club fees 9,000 15,000
75,000
Reversing differences:
Depreciation 150,000
Capital cost allowance (126,000) 24,000
Rent paid (56,250)
Rent expense 18,750 (37,500)
Warranty expense 9,000
Warranty payments (4,500) 4,500
Taxable income $66,000
Current income taxes – 30% $19,800

c. Current Tax Expense ................................... 19,800

Income Tax Payable .......................... 19,800
To record current tax expense

Deferred Tax Expense ............................... 2,700

Deferred Tax Liability ......................... 2,700
To record deferred tax expense

Solutions Manual 18.30 Chapter 18

Income before income tax $60,000

Income tax
Current $19,800
Deferred 2,700 22,500
Net income $37,500

Solutions Manual 18.31 Chapter 18

PROBLEM 18.1 (CONTINUED)

e. Statement of financial position, December 31, 2023

Long-term liabilities:
Deferred tax liability [$56,925 + ($5,625 - $1,350)] $61,200

IFRS require that all deferred tax assets and liabilities be reported as non-current items on a
classified SFP.

LO 2,4,8 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 18.3

a.
Excess CCA over Deprec. 2024 2025 2026 2027 Total
Future taxable amounts $ 37,500 $ 37,500 $ 37,500 $ 37,500 $ 150,000
Tax rate enacted for the year 25% 25% 25% 25%
Deferred tax liability $ 9,375 $ 9,375 $ 9,375 $ 9,375 $ 37,500

Unearned Rent 2023 2024 2025 Total

Future deductible amounts $20,000 $20,000 $20,000 $60,000
Tax rate enacted for the year 30% 25% 25%
Deferred tax asset $6,000 $ 5,000 $5,000 $16,000

Solutions Manual 18.32 Chapter 18

Deductible Deferred
SFP (Taxable) Tax
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2022 Base Amount Differences Rate (Liability)
PP&E (table above) * * $(150,000) 25% $(37,500)
Unearned Rent (table above) -0- $(20,000) 20,000 30% 6,000
Unearned Rent (table above) -0- (40,000) 40,000 25% 10,000
Deferred tax liability, December 31, 2022 $(21,500)
*Amounts not given in the problem

Solutions Manual 18.33 Chapter 18

PROBLEM 18.3 (CONTINUED)

b. Calculation of effect of disposal of equipment on temporary differences:

Original cost of disposed equipment $ 105,000

Accumulated depreciation of disposed equipment (37,000)
Reduction in carrying amount of equipment 68,000
Reduction in CCA pool (UCC) for proceeds
90,000
Reversing difference in 2023 22,000 $22,000
CCA > depreciation, 2023 100,000
Excess of carrying amount over tax base, January 1, 2023 150,000
Excess of carrying amount over tax base, Dec.31, 2023 $272,000

Carrying amount > tax base,

equipment 2024 2025 2026 2027 Total
Future taxable amounts $ 68,000 $ 68,000 $ 68,000 $ 68,000 $ 272,000
Tax rate enacted for the year 25% 25% 25% 25%
Deferred tax liability $ 17,000 $ 17,000 $ 17,000 $ 17,000 $ 68,000

Unearned Rent 2024 2025 Total

Future deductible amounts $20,000 $20,000 $40,000
Tax rate enacted for the year 25% 25%
Deferred tax asset $5,000 $ 5,000 $10,000

Solutions Manual 18.34 Chapter 18

PROBLEM 18.3 (CONTINUED)

b. (continued)

(Taxable) Deferred
SFP Deductible Tax
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2023 Base Amount Differences Rate (Liability)
PP&E (table above) * * $(272,000) 25% $(68,000)
Unearned Rent (table above) -0- $(20,000) 20,000 25% 5,000
Unearned Rent (table above) -0- (20,000) 20,000 25% 5,000
LT Investment * * 75,000 25% 18,750
Deferred tax liability, December 31, 2023 (39,250)
Deferred tax liability before adjustment (21,500)
Incr. in deferred tax liability, and deferred tax expense for 2023 $(17,750)
*Amounts not given in the problem
c.
Deferred Tax Expense .................................. 17,750
1
Deferred Tax Asset ..................................... 12,750
($18,750 + $5,000 + $5,000 – op. bal. $16,000)
Deferred Tax Liability1 ........................... 30,500
($68,000 – op. bal. $37,500)
1
Alternately – net the two
Deferred Tax Asset/Liability .................. 17,750
To record deferred tax expense

Solutions Manual 18.35 Chapter 18

Solutions Manual 18.36 Chapter 18

PROBLEM 18.3 (CONTINUED)

c. (continued)

Accounting income $633,000

Permanent differences:
Dividends received that are not taxable ($15,000)
Late interest penalties on tax instalments
2,880 (12,120)
620,880
Reversing differences:
Gain on disposal of equipment (22,000)
Impairment loss on investments 75,000
Excess of rent revenue over cash received
($60,000 – $40,000) (20,000)
CCA > Depreciation (100,000)

Taxable income $553,880

Current income taxes at 30% current rate $166,164

Current Tax Expense .................................... 166,164

Income Tax Payable ............................. 166,164
To record current tax expense

Solutions Manual 18.37 Chapter 18

PROBLEM 18.3 (CONTINUED)

d. Statement of financial position classification:

2023 2022
Long-term liabilities
Deferred tax liability 39,250 21,500

IFRS require that all deferred tax assets and liabilities be reported
as non-current items on a classified SFP.

e.
Income statement presentation:
Income before income tax $633,000
Income tax
Current tax $ 166,164
Deferred tax 17,750 183,914
Net income $449,086

f.
÷ Account-
@ 30% ing Income
Accounting income $633,000 $189,900 30.0%
Non-taxable dividends (15,000) (4,500) (0.7)%
Non-deductible penalties 2,880 864 0.1%
$186,264 29.4%
Net taxable temporary differences
taxed at lower 25% rate:
($272,000 – $150,000) X 5% = $(6,100)
$75,000 X 5% = 3,750 (2,350) (0.4)%
$183,914 29.0%
Effective tax rate ($183,914 / $633,000) (rounded) 29.0%

The effective tax rate differs from the statutory rate because there
is no tax effect on the permanent differences, and because of the
deferment of taxes to the future at a 25% rate rather than the
current rate of 30%.

Solutions Manual 18.38 Chapter 18

LO 2,4,5,8,9 BT: AP Difficulty: C Time: 60 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 18.39 Chapter 18

PROBLEM 18.5

a. Basic Calculations of Capital Cost Allowance, Depreciation and Balances:

(C-B)
(A) (B) (A – B) (C) Reversing
Carrying
Year Base CCA UCC Deprec. Amount Difference

2022 $1,000,000 X 20 % X 1.5 $300,000 $ 700,000 $125,000 $875,0001 $(175,000)

2023 700,000 X 20 % 140,000 560,000 125,000 750,0002 (15,000)

1
$1,000,000 - $125,000 = $875,000
2
$1,000,000 - $125,000 - $125,000 = $750,000
(b)

2023

Deferred
SFP (Taxable) Tax
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2023 Base Amount Differences Rate (Liability)
Property, plant, & equip. $560,000 $750,000 $(190,000) 30% $(57,000)
Deferred tax liability, December 31, 2023 (57,000)

Solutions Manual 18.40 Chapter 18

Deferred tax liability before adjustment ($175,000 X 30%) (52,500)

Incr. in deferred tax liability, and deferred tax expense for 2023 $(4,500)

Solutions Manual 18.41 Chapter 18

PROBLEM 18.5 (CONTINUED)

b. (continued)

Calculation of current income tax expense:

Accounting income $ 1,400,000
Permanent difference – tax exempt interest (60,000)
1,340,000
Reversing difference - [part (a)] 15,000
Taxable income on regular operations 1,325,000
Income tax expense and payable @ 30 % $ 397,500

c.
Current Tax Expense ................................... 397,500
Income Tax Payable ............................. 397,500
To record current tax expense

Deferred Tax Expense ................................. 4,500

Deferred Tax Liability ............................ 4,500
To record deferred tax expense

d. Income before income tax $1,400,000

Income tax expense
Current $397,500
Deferred 4,500 402,000

Solutions Manual 18.42 Chapter 18

Net income $ 998,000

Earnings per share:

Net income $9.98

Solutions Manual 18.43 Chapter 18

PROBLEM 18.5 (CONTINUED)

e. Net deferred tax liability at December 31, 2023.

(See part (b))

Long-term liabilities
Deferred tax liability $57,000

LO 2,4,5,8 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM

PROBLEM 18.9

Part 1

a. Mixed tax rates

Alia Future Years

2024 2025 2026 2027 2028 Total

Future taxable amounts $(600) $(600) $(600) $(400) $(200) $(2,400)

Tax rate enacted for the year 25% 25% 25% 30% 30%

Deferred tax (liability) $(150) $(150) $(150) $(120) $ (60) $ (630)

Solutions Manual 18.44 Chapter 18

Future Years
2024 2025 2026 2027 2028 Total

Future deductible amounts $3,600 $3,600

Tax rate enacted for the year 25% 25% 25% 30% 30%
Deferred tax asset - - - $1,080 - $1,080

Solutions Manual 18.45 Chapter 18

PROBLEM 18.9 (CONTINUED)

Part 1 (continued)

a. (continued)

Deductible
SFP (Taxable) Deferred Tax
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2023 Base* Amount* Differences Rate (Liability)
Property, plant, and equipment $(2,400) Mixed $(630)
Litigation liability 3,600 30% 1,080
Deferred tax asset (net), December 31, 2023 450
Deferred tax liability before adjustment (1,000)
Increase in deferred tax asset, and deferred tax benefit for 2023 $1,450
* not given in the problem

Alia will report a Deferred Tax Asset of $450 in non-current assets on the SFP.

Solutions Manual 18.46 Chapter 18

Solutions Manual 18.47 Chapter 18

PROBLEM 18.9 (CONTINUED)

Part 1 (continued)

b.
Current Tax Expense1 .......................................... 2,000
Income Tax Payable..................................... 2,000
1
($8,000 X 25%)
To record current tax expense

Deferred Tax Liability2 .......................................... 1,000

Deferred Tax Asset 2……………………………… . 450
Deferred Tax Benefit .................................... 1,450
To record deferred tax expense
2
Alternately: one debit to Deferred Tax Asset/Liability for $1,450

Solutions Manual 18.48 Chapter 18

PROBLEM 18.9 (CONTINUED)

Part 2

a. Mixed tax rates

Khoi Future years

2024 2025 2026 2027 Total

Future taxable amounts $(800) $(800) $(800) $(800) $(3,200)

Tax rate enacted for the year 25% 25% 25% 30%
Deferred tax (liability) $(200) $(200) $(200) $(240) $(840)

Future years
2024 2025 2026 2027 Total

Future deductible amounts $6,000 $6,000

Tax rate enacted for the year 25% 25% 25% 30%
Deferred tax asset – – $1,500 – $1,500

Solutions Manual 18.49 Chapter 18

PROBLEM 18.9 (CONTINUED)

Part 2 (continued)

a. (continued)

Deductible
SFP (Taxable) Deferred Tax
Account Tax Carrying Temporary Tax Asset
Dec. 31, 2023 Base* Amount* Differences Rate (Liability)
Property, plant, and equipment $(3,200) Mixed $(840)
Litigation liability 6,000 25% 1,500
Deferred tax asset, December 31, 2023 660
Deferred tax asset before adjustment 1,200
Decrease in deferred tax asset, and deferred tax expense for 2023 $540
*not given in the problem
b.
Current Tax Expense3 .......................................... 2,000
Income Tax Payable..................................... 2,000
3
($8,000 X 25%)
To record current tax expense

Deferred Tax Expense ......................................... 540

Deferred Tax Asset ...................................... 540
To record deferred tax expense

Solutions Manual 18.50 Chapter 18

PROBLEM 18.9 (CONTINUED)

c. Part 1 – All SFP deferred tax accounts are presented as non-

current, regardless of origin.

Alia Corp.
Statement of Financial Position (partial)
December 31, 2023

Non-current assets
Deferred tax asset $450

Part 2 – All SFP deferred tax accounts are presented as non-

current, regardless of origin.

Khoi Corp.
Statement of Financial Position (partial)
December 31, 2023

Non-current assets
Deferred tax asset $660

d. Under ASPE, there would be no difference, except for a possible

use of different terminology (future taxes instead of deferred
taxes).

LO 2,4,5,8,9 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

CHAPTER 19
BRIEF EXERCISE 19.8

(in hundreds of thousands)

Past service cost $35
Current service cost 19
Net interest cost 11% ($11 – $11) 0

Defined benefit expense $54

Solutions Manual 19.51 Chapter 19
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Remeasurement gain or loss (OCI):

Actuarial loss on fund assets (11% X $100) - $9
2
Actuarial loss on DBO 15

Total remeasurement loss (OCI) $17

Under IFRS, the pension plan results in total defined benefit

expense and decrease in net income and retained earnings of $54,
and total remeasurement loss (OCI) and decrease in accumulated
other comprehensive income of $17. Combined, this reduces
shareholders’ equity by $54 + $17 = $71.
LO 5 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.52 Chapter 19

BRIEF EXERCISE 19.9

Current service cost $58,000

1
Net interest/finance cost
Defined Benefit Obligation ($210,000 x 10%) 21,000
Plan Assets – Opening ($200,000 x 10%) (20,000)
Plan Assets – Contributions made evenly
during the year ($77,000 x ½ x 10%) (3,850) (2,850)
Defined benefit expense $55,150
1
The net interest/finance cost can also be calculated based on the
DBO less average plan assets:
[$210,000 - ($200,000 + ½ of $77,000)] x 10% =
[$210,000 - $238,500] X 10% = ($2,850)

Remeasurement (gain) or loss (OCI):

Remeasurement gain on fund assets
Actual return on fund assets $(25,000)
Expected return on fund assets
Plan Assets – opening ($200,000 x 10%) 20,000
Plan Assets – increase due to contributions made
evenly during the year ($77,000 x ½ x 10%) __3,850
(1,150) 2
Actuarial loss on DBO 14,000
Net remeasurement loss (OCI) $12,850
2
The Actuarial gain on fund assets can also be calculated
follows: ($25,000) – ($238,500 X 10%) = ($1,150)

Under IFRS, the pension plan results in total defined benefit

expense and a related decrease in net income and retained
earnings of $55,150, and a remeasurement loss (OCI) and
decrease in accumulated other comprehensive income of
$12,850, for a total reduction in shareholders’ equity of $68,000.
LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.53 Chapter 19

BRIEF EXERCISE 19.10

Current service cost $58,000

Net interest/finance cost1
Defined Benefit Obligation ($210,000 x 10%) 21,000
Plan Assets – Opening ($200,000 x 10%) (20,000)
Plan Assets – Contributions made evenly
during the year ($77,000 x ½ x 10%) (3,850) (2,850)

Actuarial gain on fund assets

$25,000 – ($238,500 X 10%) (1,150)
Actuarial loss on DBO 14,000
Defined benefit expense $68,000
1
The net interest/finance cost can also be calculated based on the
DBO less average plan assets:
[$210,000 - ($200,000 + ½ of $77,000)] x 10% =
[$210,000 - $238,500] X 10% = ($2,850)
Under ASPE, the pension plan results in total defined benefit
expense and a related decrease in net income and retained
earnings of $68,000, for a total reduction in shareholders’ equity
of $68,000.
LO 5 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.54 Chapter 19

BRIEF EXERCISE 19.11

IFRS

RUI CORPORATION
General Journal Entries Mem

Remeasu- Annual Net Def.

rement Defined Benefit Define
(Gain) Benefit Liability/ Benefi
Items Loss (OCI) Expense Cash Asset Obligati

Balance, 1/1/23 -0- 250,000

Service cost 27,500 Dr 27,500
Net interest/finance
cost 0 Dr 25,000
Remeasurement gain
on plan assets 5,000 Cr
Past service cost 29,000 Dr. 29,000
Contributions 20,000 Cr
Benefits paid 000 Dr29, 17,500
Expense entry 5,000 Cr 56,500 Dr ________ 51,500 Cr
Contribution entry 20,000 Cr 20,000 Dr
Bal. 12/31/23 31,500 Cr 314,000

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

EXERCISE 19.3

1) a. Defined benefit obligation, 1/1/23

$2,000,000
Interest cost ($2,000,000 X10%) 200,000
Current service cost 235,000
Past service 50,000
Benefits paid (100,000)
Defined benefit obligation, 12/31/23 $2,385,000
2)
3)
4) b. Plan assets, 1/1/23 $1,600,000
5) Actual return on plan

Solutions Manual 19.55 Chapter 19

assets 160,000
6) Contribution into plan
262,500
7) Benefits paid
(100,000 )
Plan assets, 12/31/23 $1,922,500
8)
9)
10) c. Defined benefit expense, 2023
Current service cost $235,000

Past service cost

50,000
Net interest/finance cost
($2,000,000 – $1,600,000) x 10% 40,000
Defined benefit expense for 2023 $325,000

d. Defined Benefit Expense ............................. 325,000

Net Defined Benefit Liability/Asset...... 325,000

(Note: there are no actuarial gains or losses in 2023 related to

the DBO or the plan assets, so there are no remeasurement
gains or losses to recognize in OCI)

Net Defined Benefit Liability/Asset ............. 262,500

Cash........................................................ 262,500

Solutions Manual 19.56 Chapter 19

EXERCISE 19.3 (CONTINUED)

e. Net defined benefit liability/(asset), 1/1/23 $ 400,000

Contribution (262,500)
Defined benefit expense 325,000
Net defined benefit liability/(asset), 12/31/23 $ 462,500

Alternatively, the amount could also be reconciled as

follows:

Defined benefit obligation $(2,385,000)

Plan assets at fair value 1,922,500
DBO in excess of plan assets (plan deficit) $ (462,500 )
LO 3,4,5,7 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.57 Chapter 19

EXERCISE 19.4

a.
Rebek Corporation
Pension Work Sheet—2023
General Journal Entries Memo Record
Annual
Defined Net Def. Defined
Benefit Benefit Benefit Plan
Expense Cash Liab/Ass Obligation Assets
et
Balance, 01/01/2023 400,000 Cr. 2,000,000 Cr. 1,600,000 Dr.
Current service cost 235,000 Dr. 235,000 Cr.
Past service cost 50,000 Dr. 50,000 Cr.
Net interest/finance cost1 40,000 Dr. 200,000 Cr. 160,000 Dr.
262,500 Dr.
Contributions
_______ 262,500 Cr. 100,000 Dr. 100,000 Cr.
Benefits paid _______0 000,00 000,000 Dr.
325,000 Dr. 325,000 Cr.
Expense entry 00,000 Dr. 262,500 Dr.
Contribution entry 262,500 Cr. 0 Dr.
462,500 Cr. 2,385,000 Cr. 1,922,500 Dr.
Balance, 12/31/2023
1$40,000 = ($2,000,000 - $1,600,000) X 10%

Solutions Manual 19.58 Chapter 19

EXERCISE 19.4 (CONTINUED)

b. Defined Benefit Expense ............................. 325,000

Net Defined Benefit Liability/Asset...... 325,000

(Note: there are no actuarial gains or losses in 2023 related to

the DBO or the plan assets, so there are no remeasurement
gains or losses to recognize in OCI)

Net Defined Benefit Liability/Asset ............. 262,500

Cash........................................................ 262,500

c. Calculation of plan surplus/deficit, December 31, 2023

Defined benefit obligation $(2,385,000 )

Plan assets at fair value 1,922,500
Plan deficit $ (462,500 )

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

Solutions Manual 19.59 Chapter 19

EXERCISE 19.5

a. Assumes the company applies IFRS and has a significant

plan surplus and current period remeasurement gain prior
to the following events in the current year:
Defined Pension Defined Remeasur-
Benefit Plan Plan Benefit ement
Obligation Assets Surplus Expense Gain (OCI)
Current service cost I NE D I NE
Actual return on plan NE I I NE I
assets is > expected based
on DBO discount rate
(assess only the impact of
the difference between the
actual return and the
expected return here)
Return on plan assets at NE I D D NE
the interest/discount rate
Past service costs due to I NE D I NE
plan revision
Liability actuarial gain D NE I NE I
Liability actuarial loss I NE D NE D
Employer contributions on NE I I NE NE
last day of fiscal year
Benefits paid to retirees on D D NE NE NE
last day of fiscal year
An increase in the average I NE D NE D
life expectancy of
employees

b. Assuming the company uses ASPE instead of IFRS, all the

answers to the DBO, plan assets, and plan surplus columns
would not change. In the defined benefit expense column,
differences will exist between the ASPE answer and the IFRS
answer only where the remeasurement gain (OCI) is affected.
This is because ASPE recognizes the items directly in
defined benefit expense on the income statement, while IFRS
splits the effects between the income statement expense
account and its OCI account. When the last two IFRS columns
are netted together, the net result is the same as the ASPE
solution, although disclosed separately.

Solutions Manual 19.60 Chapter 19

LO 3,4,5 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.61 Chapter 19

EXERCISE 19.11

a. Defined benefit expense, 2023:

Current service cost $ 63,000
Net interest/finance cost:
($255,000 + $140,400 - $297,000) X 10% 9,840
Asset remeasurement loss:
At 10% discount rate (10% X $297,000) $(29,700)
Actual return (8% X $297,000) 23,760
Asset remeasurement loss 5,940
Past service cost 140,400
$219,180

Defined Benefit Expense ................................ 219,180

Net Defined Benefit Liability/Asset ........ 219,180
To record defined benefit expense

Net Defined Benefit Liability/Asset................ 79,200

Cash ......................................................... 79,200
To record contributions to the pension
fund

b. Net defined benefit asset, Jan. 1, 2023

Plan surplus ($297,000 plan assets
less DBO of $255,000) $ 42,000 Dr.
2023 defined benefit expense recognized 219,180 Cr.
Funding contributions, 2023 79,200 Dr.
Net defined benefit liability, Dec. 31, 2023 $ 97,980 Cr.

Solutions Manual 19.62 Chapter 19

EXERCISE 19.11 (CONTINUED)

c.
Antoine Corporation
Pension Work Sheet—2023

General Journal Entries Memo Record Entries

Annual
Defined Net Def. Benefit Defined
Benefit Liability/ Benefit Plan
Items Expense Cash Asset Obligation Assets

Balance, Jan. 1, 2023 42,000 Dr. 255,000 Cr. 297,000 Dr.

(a) Past service cost 140,400 Dr. 140,400 Cr.
(b) Current service cost 63,000 Dr. 63,000 Cr.
(c) Net interest/finance cost 9,840 Dr. 39,540 Cr. 29,700 Dr.
(d) Asset remeasurement loss 5,940 Dr. 5,940 Cr.
(e) Contributions 79,200 Cr. 79,200 Dr.
(f) Benefits paid 43,200 Dr. 43,200 Cr.
219,18021
Expense entry—2023 219,180 Dr. 000 Dr. 219,180 Cr.
Contributions entry—2023 79,200 Cr. 79,200 Dr. 0,000______ Cr. 0,00 ___
Balance, Dec. 31, 2023 97,980 Cr. 454,740 Cr. Cr
356,760 Dr.

(c) $9,840 = ($255,000 + $140,400 - $297,000) X 10%; $39,540 = ($255,000 + $140,400) X 10%; $29,700 = $297,000 X 10%
(d) $5,940 = $29,700 – ($297,000 X 8%)

Solutions Manual 19.63 Chapter 19

EXERCISE 19.11 (CONTINUED)

d. Defined benefit obligation, Jan. 1/23 $255,000

Past service cost, Jan. 1/23 140,400
395,400
Interest cost ($395,400 x 10%) 39,540
Current service cost 63,000
Benefits paid (43,200)
DBO, Dec. 31/23 (or see worksheet) $454,740

Plan assets, Jan. 1/23 $297,000

Actual return on plan assets ($297,000 x 8%) 23,760
Contributions 79,200
Benefits paid (43,200)
Plan assets, Dec. 31/23 (or see worksheet) $356,760

Plan deficit, Dec. 31/23 (net obligation) $ 97,980

Net defined benefit liability – part (b) $ 97,980 Cr.

e. The plan surplus/deficit and the balance sheet account should be the
same amount because the same items and amounts that affect the
DBO and plan assets also affect the defined benefit expense and
contribution journal entries in the net defined benefit liability/asset
account. The exception to this statement is the amount of benefits
paid, as this does not affect either the net amount of the plan
surplus/deficit, nor the balance sheet account.
If you review all the other items that affect the DBO and the plan
assets and identify them as debits and credits, you will see that the
two entries made to the net defined benefit liability/asset contain the
same debits and credits.

Solutions Manual 19.64 Chapter 19

EXERCISE 19.11 (CONTINUED)

f. The only difference if Antoine Corp. reported under IFRS instead of

ASPE is that the remeasurement loss would be reported in OCI
instead of being included in defined benefit expense on the income
statement. That is, its total defined benefit expense would be
$219,180 - $5,940 = $213,240, and it would have a loss of $5,940
reported in OCI. Comprehensive income would remain the same, as
the remeasurement loss is still included, but as a component of OCI
instead of net income. Under ASPE, the past service cost would be
considered a remeasurement that must be presented separately
either on the income statement or in the notes. Aside from the
corresponding changes in retained earnings and accumulated other
comprehensive income, everything else would remain the same on
the balance sheet.

Solutions Manual 19.65 Chapter 19

EXERCISE 19.11 (CONTINUED)

LO 3,4,5,6,8 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001, cpa-t007 CM: Reporting and DAIS

Solutions Manual 19.66 Chapter 19

EXERCISE 19.14

a. Current service cost $ 57,000

Net interest/finance cost:
10% X ($110,000 - $42,000) 6,800

Post-retirement benefit expense 2023 $63,800

11) b. Remeasurement loss on assets:

12) (10% X $42,000) - $3,000 $1,200
13) Actuarial loss on obligation 31,000
14) Post-retirement benefit remeasurement
15) loss (OCI) $32,200
16)
17)
18) c. Plan assets, 1/1/23 $42,000
19) Actual return on plan assets
3,000
20) Contributions 22,000
21) Benefits paid out
(6,000 )
Plan assets, 12/31/23 $61,000
22)
23) Defined post-retirement benefit obligation, 1/1/23 $110,000
Interest cost ($110,000 x 10%) 11,000
Current service cost 57,000
Actuarial loss 31,000
24) Benefits paid
(6,000)
Defined post-retirement benefit obligation,12/31/23 $203,000

Defined post-retirement benefit obligation $(203,000)

Plan assets at fair value 61,000
Plan deficit, 12/31/23 $(142,000 )
25)

Solutions Manual 19.67 Chapter 19

EXERCISE 19.14 (CONTINUED)

d. Net post-retirement benefit liability, 1/1/231 $ 68,000

Post-retirement benefit expense 2023 63,800
Remeasurement loss (OCI) 32,200
Contributions (funding) during 2023 (22,000 )
Net post-retirement benefit liability,12/31/23 $142,000
1
$110,000 - $42,000 = $68,000

e. There is no need to reconcile – these two have the same balance

because the inputs that affect the balance of each are identical.

LO 3,4,5,6 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

CHAPTER 20

EXERCISE 20.1

a. Assuming this is a manufacturer/dealer lease:

Initial Measurement of Right-of-Use Asset and Lease Liability
Contractual Rights and Obligations under Lease,
Jan. 1, 2023

Annual lease payment:

Yearly payment $73,580.00
Executory costs 2,470.29
Annual lease payment $71,109.71

1. Using tables:
PV of lease payments
$71,109.71 X 6.32825 = $450,000.00

2. Using a financial calculator:

Solutions Manual 19.68 Chapter 19

PV $ ? Yields $450,000
I 12%
N 10
PMT $(71,109.71)
FV $0
Type 1

Solutions Manual 19.69 Chapter 19

EXERCISE 20.1 (CONTINUED)

a. (continued)

3. Excel formula =PV(rate,nper,pmt,fv,type)

Result: $450,000 rounded

1/1/23 Right-of-Use Asset ......................... 450,000.00

Insurance Expense ......................... 2,470.29
Lease Liability ..................... 378,890.29
Cash .................................... 73,580.00

Solutions Manual 19.70 Chapter 19

EXERCISE 20.1 (CONTINUED)

b.
MALEKI CORP.
Lease Amortization Schedule
(Lessee)

Interest
Annual Pmt. (12%) Reduction Balance
Excl. on Unpaid of Lease of Lease
Date Exec. Costs Liability Liability Liability

$450,000.00
Jan. 1, 2023 $71,109.71 $71,109.71 378,890.29
Jan. 1, 2024 71,109.71 $45,466.83 25,642.88 353,247.41
Jan. 1, 2025 71,109.71 42,389.69 28,720.02 324,527.39
Jan. 1, 2026 71,109.71 38,943.29 32,166.42 292,360.97
Jan. 1, 2027 71,109.71 35,083.32 36,026.39 256,334.58
Jan. 1, 2028 71,109.71 30,760.15 40,349.56 215,985.02
Jan. 1, 2029 71,109.71 25,918.20 45,191.51 170,793.51
Jan. 1, 2030 71,109.71 20,495.22 50,614.49 120,179.02
Jan. 1, 2031 71,109.71 14,421.48 56,688.23 63,490.79
Jan. 1, 2032 71,109.71 7,618.92 63,490.79 0
$711,097.10 $261,097.10 $450,000.00

c.
12/31/23 Depreciation Expense1 ................... 45,000.00
Accumulated Depreciation—
Right-of-Use Asset ........ 45,000.00
1
($450,000 ÷ 10)
To record depreciation expense

12/31/23 Interest Expense ........................... 45,466.83

Lease Liability ..................... 45,466.83
To record interest

Solutions Manual 19.71 Chapter 19

EXERCISE 20.1 (CONTINUED)

c. (continued)

1/1/24 Insurance Expense ....................... 2,470.29

Lease Liability ............................... 71,109.71
Cash .................................... 73,580.00
To record lease payment

12/31/24 Depreciation Expense .................. 45,000.00

Accumulated Depreciation—
Right-of-Use Asset ........ 45,000.00
To record depreciation expense

12/31/24 Interest Expense ........................... 42,389.69

Lease Liability...................... 42,389.69
To record interest

d. Note X: The following is a schedule of future lease payments under

a contract-based lease liability expiring December 31, 2032
together with the balance of the lease liability.

Year ending December 31

2025 $73,580
2026 73,580
2027 73,580
2027 73,580
2029 73,580
2030 and beyond 220,740
Total lease payments 588,640
Less amount representing executory costs 19,763
568,877
Less amount representing interest at 12% 215,630
Balance of the lease liability $353,247

Solutions Manual 19.72 Chapter 19

EXERCISE 20.1 (CONTINUED)

LO 4,5,8 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: cpa-t001, cpa-t007 CM: Reporting and DAIS

Solutions Manual 19.73 Chapter 19

EXERCISE 20.3

a. Initial Measurement of Right-of-Use Asset and Lease Liability

Contractual Rights and Obligations under Lease,
July 1, 2023, using 1. tables

$20,066.26 Annual rental payment

X 4.23972 PV of annuity due of 1 for n = 5, i = 9%
$85,075.32 PV of periodic rental payments

$ 4,500.00 Bargain purchase option

X .64993 PV of 1 for n= 5, i = 9%
$ 2,924.69 PV of bargain purchase option

$85,075.32 PV of periodic rental payments

+ 2,924.69 PV of bargain purchase option
$88,000.01 Net investment at inception of lease

2. Using a financial calculator:

1.1.1.1.1.1 Yields $
$ ?
PV 88,000.01
I 9%
N 5
PMT $ (20,066.26)
FV $ (4,500)
Type 1

Solutions Manual 19.74 Chapter 19

EXERCISE 20.3 (CONTINUED)

(a) (continued)

3. Excel formula =PV(rate,nper,pmt,fv,type)

Result: $88,000.01 rounded

b. The lease would be set up as a right-of-use asset and lease liability

under IFRS as it would not qualify for a short-term or low-value
exemption.

Solutions Manual 19.75 Chapter 19

EXERCISE 20.3 (CONTINUED)

c. This is a finance lease for the lessor for the following reasons:
1. The lease agreement has a purchase option that is
reasonably certain to be exercised and
2. The PV of the minimum lease payments ($88,000) is equal to
the fair value of the leased equipment allowing the lessor to
recover all of its investment and earn a return on its
investment in the leased equipment.
The lease is a manufacturer/dealer lease as it gives rise to a
profit (fair value of the assets of $88,000 exceed the cost of
$60,000 by $28,000).

d.
Russell Corporation (Lessee)
Lease Amortization Schedule

Annual
Lease Interest (9%) Reduction Balance
Payment on Unpaid of Lease Lease
Date Plus BPO Liability Liability Liability
7/1/23 $88,000.00
7/1/23 $ 20,066.26 $20,066.26 67,933.74
7/1/24 20,066.26 *$ 6,114.04* 13,952.22 53,981.52
7/1/25 20,066.26 * 4,858.34* 15,207.92 38,773.60
7/1/26 20,066.26 * 3,489.62* 16,576.64 22,196.96
7/1/27 20,066.26 * 1,997.73* 18,068.53 4,128.43
6/30/28 4,500.00 * 371.571 4,128.43 0.00
$ 104,831.30 *$16,831.30* $88,000.00
1
Rounding error is $.01 cent.

e.
7/1/23 Right-of-Use Asset ......................... 88,000.00
Lease Liability ...................... 67,933.74
Cash ...................................... 20,066.26
To record inception and payment of lease

Solutions Manual 19.76 Chapter 19

EXERCISE 20.3 (CONTINUED)

e. (continued)

12/31/23 Interest Expense1.......................... 3,057.02

Lease Liability ...................... 3,057.02
1
($6,114.04 X 6/12 = ($3,057.02)
To record interest
Depreciation Expense2 .................. 4,400.00
Accumulated Depreciation
—Right-of-Use Asset ....... 4,400.00
2
($88,000.00 ÷ 10 =
($8,800.00; $8,800.00 X 6/12 = $4,400)
To record depreciation expense

7/1/24 Interest Expense3 .......................... 3,057.02

4
Lease Liability .............................. 17,009.24
Cash..................................... 20,066.26
3
($6,114.04 – $3,057.02)
4
($20,066.26 – $3,057.02)
To record lease payment

12/31/24 Interest Expense5 .......................... 2,429.17

Lease Liability ..................... 2,429.17
5
($4,858.34 X 6/12 = ($2,429.17)
To record interest

12/31/24 Depreciation Expense6 ................. 8,800.00

Accumulated Depreciation
—Right-of-Use Asset . 8,800.00
6
($88,000.00 ÷ 10 years = ($8,800.00)
To record depreciation expense

(Note to instructor: Because a purchase option was reasonably

certain to be exercised, the leased asset is depreciated over its
economic life rather than over the lease term.)

LO 4,5,6,11 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.77 Chapter 19

EXERCISE 20.5

a. Initial Measurement of Right-of-Use Asset and Lease Liability

Contractual Rights and Obligations under Lease,
Jan. 1, 2024

1. Using a financial calculator:

PV $ ? Yields $164,995
I 10.5%
N 8
PMT $ (28,500)
FV $ 0
Type 1

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

Result: $164,995 rounded

b. The lease would be set up as a right-of-use asset and lease liability

under IFRS as it would not qualify for a short-term or low-value
exemption.

Solutions Manual 19.78 Chapter 19

EXERCISE 20.5 (CONTINUED)

c. Xu Ltd.
Lease Amortization Schedule
(Lessee)

Interest
Annual (10.5%) Reduction Balance
Lease on Unpaid of Lease of Lease
Date Payments Liability Liability Liability

$164,995
2024
Jan. 1, $28,500 $28,500 136,495
Jan. 1, 2025 28,500 $14,332 14,168 122,327
Jan. 1, 2026 28,500 12,844 15,656 106,671
Jan. 1, 2027 28,500 11,200 17,300 89,371
Jan. 1, 2028 28,500 9,384 19,116 70,255
Jan. 1, 2029 28,500 7,377 21,123 49,132
Jan. 1, 2030 28,500 5,159 23,341 25,791
Jan. 1, 2031 28,500 2,709 1 25,791 (0)
$228,000 $63,005 $164,995
1
$ 1 rounding

Solutions Manual 19.79 Chapter 19

EXERCISE 20.5 (CONTINUED)

d.
1/1/24 Right-of-Use Asset ..................... 164,995
Lease Liability ..................... 136,495
Cash .................................... 28,500
To record inception and payment of lease

12/31/24 Depreciation Expense2 .............. 20,624

Accumulated Depreciation—
Right-of-Use Asset ......... 20,624
2
($164,995 ÷ 8)
To record depreciation expense

12/31/24 Interest Expense ........................ 14,332

Lease Liability ..................... 14,332
To record interest

1/1/25 Lease Liability ............................ 28,500

Cash .................................... 28,500
To record lease payment

12/31/25 Depreciation Expense ................ 20,624

Accumulated Depreciation—
Right-of-Use Asset ........ 20,624
To record depreciation expense

12/31/25 Interest Expense ........................ 12,844

Lease Liability...................... 12,844
To record interest

Solutions Manual 19.80 Chapter 19

EXERCISE 20.5 (CONTINUED)

e. Xu Ltd.
Statement of Financial Position (partial)
December 31,
2025 2024

Property plant and equipment

Right-of-use asset $164,995 $164,995
Less accumulated depreciation 41,248 20,624
123,747 144,371
Current liabilities
Lease liability. 28,500 28,500
Long-term liabilities
Lease liability (Note X) 106,671 122,327

f Note X: The following is a schedule of future lease payments

under contract-based lease liability expiring December 31, 2031
together with the balance of the lease liability.

Year ending December 31

2026 $28,500
2027 28,500
2028 28,500
2029 28,500
2030 28,500
2031 28,500
Total lease payments 171,000
Less amount representing interest at 10.5% 48,673
Balance of the lease liability $122,327

Solutions Manual 19.81 Chapter 19

EXERCISE 20.5 (CONTINUED)

g. When negotiating a lease arrangement, the lessor sets the lease

payments receivable to obtain the appropriate return for the asset
leased. The amounts arrived at are negotiable. In this case, the
lessor likely tried to obtain an amount near to or exceeding the
resale price of the equipment and arrived at annual payments in
round amounts ($28,500). The PV of the minimum lease payment
approximated the resale price without being exactly equal (99.4%
in this case). This is a natural outcome from the negotiations
process between the parties involved.
LO 3,5,8 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.82 Chapter 19

EXERCISE 20-8

a. When using this approach, the longest possible lease term that is
“more likely than not” to occur, is used in the calculations of the
discounted contractual lease payments liability.

Because the payments under the renewal are 125% of the original
lease payment ($135,000 X 125% = $168,750), two calculations
need to be made.

The first will be for the first term of the lease involving an annuity
due of $135,000 for three years at 8%, the implicit rate in the lease,
known to Cuomo.

The second will be for the renewal option involving a single

payment.

1. Using Tables
$135,000 Annual rental payment
X 2.78326 PV of annuity due of 1 for n = 3, i = 8%
$375,740.10 PV of periodic rental payments
$ 168,750 PV of renewal option rental in 3 years
X .79383 PV of 1 for n = 3, i = 8%
$133,958.81 PV of renewal option rental
$375,740.10 PV of periodic rental payments
+133,958.81 PV of renewal option rental
$509,698.91 PV of contractual lease payments liability

2.Using a financial calculator:

$ ? 1.1.1.1.1.2
PV Yields $509,699.93
I 8%
N 3
PMT $(135,000)
FV $(168,750)
Type 1
EXERCISE 20-8 (CONTINUED)

Solutions Manual 19.83 Chapter 19

a. (continued)

3. Excel formula =PV(rate,nper,pmt,fv,type)

Result: $509,699.93 rounded $509,700

b. Cuomo Mining Corporation

Lease Amortization Schedule
Interest
Annual (8%) Reduction Balance
Lease on Unpaid of Lease of Lease
Payments Liability Liability Liability
Date
$509,700
Apr. 1 2023 $135,000 $135,000 374,700
Apr. 1 2024 135,000 $29,976 105,024 269,676
Apr. 1 2025 135,000 21,574 113,426 156,250
Apr. 1 2026 168,750 12,500 156,250 0
$573,750 $64,050

Solutions Manual 19.84 Chapter 19

EXERCISE 20-8 (CONTINUED)

c. April 1, 2023
Right-of-use Asset .............................. 509,700
Lease Liability ............................ 374,700
Cash ........................................... 135,000
To record inception of lease and first payment

December 31, 2023

Interest Expense ................................. 22,482
Lease Liability ............................ 22,482
($29,976 X 9 ÷ 12 = $22,482)
To record interest

Depreciation Expense......................... 95,569

Accumulated Depreciation-
Right-of-Use Asset ............... 95,569
($509,700 ÷ 4 years X 9 ÷ 12 = $95,569)
To record depreciation expense

April 1, 2024
1
Interest Expense ................................ 7,494
Lease Liability ..................................... 127,506
Cash ........................................... 135,000
1
($29,976 X 3 ÷ 12 = $7,494)
To record lease payment

December 31, 2024

2
Interest Expense ................................ 16,181
Lease Liability ............................ 16,181
2
($21,574 X 9 ÷ 12 = $16,181)
To record interest

Depreciation Expense3 ....................... 127,425

Accumulated Depreciation-
Right-of-Use Asset ............... 127,425
3
($509,700 ÷ 4 years = $127,425)
To record depreciation expense

Solutions Manual 19.85 Chapter 19

EXERCISE 20-8 (CONTINUED)

d. Cuomo Mining Corporation

Statement of Financial Position – Partial
December 31, 2024

Property, plant, and equipment

Right-of-use asset $509,700
Accumulated depreciation4 (222,994)
Net 286,706

Liabilities:
Current liabilities:
Lease Liability5 129,607

Long-term liabilities:
Lease Liability ($285,8576 - $129,607) 156,250
Total liabilities $285,857

e.
Income statement
Depreciation expense $127,425
Interest expense7 23,675
$151,100
4
Depreciation expense 2023 ................ $ 95,569
Depreciation expense 2024 ................ 127,425
Total .................................................... $222,994
5
[$135,000 - ($21,574 X 3 ÷ 12 = $5,393*)] = $129,607
*rounded
6
($374,700 + $22,482 - $127,506 + $16,181) = $285,857
7
Refer to total interest expense in journal entries
$7,494 + $16,181 = $23,675
LO 4,5,8 BT: AP Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.86 Chapter 19

EXERCISE 20.12

a.
1. Using tables
Fair value of leased asset to lessor $305,000.00
Less: PV value of unguaranteed
residual value $45,626 X .56447
(PV of 1 at 10% for 6 periods) 25,754.51
Amount to be recovered through lease payments $279,245.49

Six periodic lease payments $279,245.49 ÷ 4.790791 $58,288

1
PV of annuity due of 1 for 6 periods at 10%

2. Using a financial calculator:

PV $ (305,000)
I 10%
N 6
1.1.1.1.1.3 Yields
$ ?
PMT $58,288
FV $ 45,626
Type 1

Solutions Manual 19.87 Chapter 19

EXERCISE 20.12 (CONTINUED)

a. (continued)

3. Excel formula =PMT(rate,nper,pv,fv,type)

Result: $58,288 rounded

Solutions Manual 19.88 Chapter 19

EXERCISE 20.12 (CONTINUED)

b. Matta Leasing Limited (Lessor)

Lease Amortization Schedule

Annual
Lease Interest Net Balance
Payment (10%) on Net Investment of Net
Date Plus URV Investment Recovery Investment
1/1/23 $305,000
1/1/23 $ 58,288 $ 58,288 246,712
1/1/24 58,288 $24,671 33,617 213,095
1/1/25 58,288 21,310 36,978 176,117
1/1/26 58,288 17,612 40,676 135,441
1/1/27 58,288 13,544 44,744 90,697
1/1/28 58,288 9,070 49,218 41,479
12/31/28 45,626 4,1471 41,479 0
$395,354 $90,354 $305,000
1
rounding of $1

This is not a manufacturer’s lease to the lessor as the cost is

equal to the FMV at the time of leasing.

Solutions Manual 19.89 Chapter 19

EXERCISE 20.12 (CONTINUED)

c.
1/1/23 Cash................................................ 58,288
2
Lease Receivable .......................... 337,066
Equipment Acquired for Lessee 305,000
Unearned Interest Income ..... 90,354
2
(58,288 x 5 + 45,626)
To record inception of lease and collection of lease
payment

31/10/23 Unearned Interest Income ............. 20,559

Interest Income3 ..................... 20,559
3
($24,671 ÷ 12 X 10)
To record interest

1/1/24 Cash................................................ 58,288

Lease Receivable ................... 58,288
Collection of lease payment

31/10/24 Unearned Interest Income ............. 21,870

4
Interest Income ..................... 21,870
4
($24,671 ÷ 12 X 2) + ($21,310 ÷ 12 X 10)
To record interest

d.
Matta Leasing Limited
Statement of Income (partial)
For the Year Ended October 31,

2024 2023
Revenue
Interest income $21,870 $20,559
LO 3,11BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.90 Chapter 19

EXERCISE 20.14

a. Calculation of annual payments

1. Using tables
Cost (fair value) of leased asset to lessor $135,000.00
Less: PV of residual value
$13,000 X .82645
(PV of 1 at 10% for 2 periods) (10,743.85)
Amount to be recovered through lease payments $124,256.15

Two periodic lease payments

$124,256.15 ÷ 1.735541 $71,595.09
1
PV of ordinary annuity of 1 for 2 periods at 10%

2. Using a financial calculator:

PV $ (135,000)
I 10%
N 2
PMT $ ? Yields $71,595.24
FV $ 13,000
Type 0

Solutions Manual 19.91 Chapter 19

EXERCISE 20.14 (CONTINUED)

a. (continued)

3. Excel formula =PMT(rate,nper,pv,fv,type)

Result: $71,595 rounded

Calculation of lease receivable

Annual payments ($71,595 X 2) $143,190
Residual value 13,000
Lease receivable $156,190

Calculation of unearned interest income

Gross investment by lessee $156,190
Asset cost (fair value) 135,000
Unearned interest income $ 21,190

Solutions Manual 19.92 Chapter 19

EXERCISE 20.14 (CONTINUED)

b. Castle Leasing Corporation should classify the lease as a finance

lease because Castle is not a manufacturer or dealer and the lease
meets the criteria for a capital lease (similar to the criteria
discussed in part I below, but IFRS does not use numerical
thresholds). Wai Corporation, the lessee, will treat the leased
equipment as right-of-use asset (it does not meet the IFRS
exception of being a short-term or low value lease)

c. For ASPE, a classification approach is used. A lease that transfers

substantially all of the benefits and risks of property ownership
should be capitalized. Quantitative criteria are used. The lease is
capitalized if any one of the following are applicable:
1. the term of the lease is greater than or equal to 75% of the
remaining economic life of the asset,
2. the PV of the minimum lease payments is greater than or
equal to 90% of the fair value of the asset, or
3. the transfer of title to the asset, perhaps represented by the
presence of a bargain purchase option (n/a for this lease).
The lease is a capital lease for Wai, the lessee as both criteria 1
(2/2 = 100%) and 2 (100% as shown in part (a) above) have been
met.

For Castle Leasing, the lessor, the lease would receive the
same treatment as under IFRS, as the two ASPE revenue
recognition-based tests concerning collectability and estimating
unreimbursable costs are passed. Under ASPE, the lease would
be considered a direct financing lease.

Solutions Manual 19.93 Chapter 19

EXERCISE 20.14 (CONTINUED)

d. CASTLE LEASING CORPORATION (Lessor)

Lease Amortization Schedule

Annual Pmt. Interest Net

Excl. Ins. on Net Investment Net
Date Costs Investment Recovery Investment
(10%)

1/1/23 $135,000
12/31/23 $71,595 *$13,500 $58,095 76,905
12/31/24 71,595 * 7,690 63,905 13,000
*$21,190
e.
1/1/23 Lease Receivable1 ...................... 156,190
Equipment Acquired for Lessee 135,000
Unearned Interest Income ... 21,190
1
($71,595 x 2 + $13,000)
To record inception of lease

12/31/23 Cash ($71,595.09 + $5,000)......... 76,595

Insurance Expense .............. 5,000
Lease Receivable ................. 71,595
Collection of lease payment

Unearned Interest Income .......... 13,500

Interest Income .................... 13,500
To record interest

12/31/24 Cash............................................. 76,595

Insurance Expense .............. 5,000
Lease Receivable ................. 71,595
Collection of lease payment

Unearned Interest Income .......... 7,690

Interest Income .................... 7,690
To record interest

Solutions Manual 19.94 Chapter 19

EXERCISE 20.14 (CONTINUED)

f.
12/31/24 Cash............................................. 13,000
Lease Receivable................ 13,000
Collection of lease payment

g. Upon signing the lease, Wai Corporation, the lessee, should

record a right-of-use asset and lease liability at the present value
of the two lease payments of $71,595 each plus the present value
of the option to purchase the equipment for $13,000, and therefore
the same amount used by the lessor or $135,000. The lessee
includes the option payment, as there is reasonable assurance
that Wai will exercise the option to purchase.
LO 5,6,9,11 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.95 Chapter 19

EXERCISE 20.15

a. Part 1. Annuity Due:

1. Using Tables:
Fair value of leased asset to lessor $415,000.00
Less: PV of unguaranteed
residual value $25,000 X .68058
(PV of 1 at 8% for 5 periods) 17,014.50
Amount to be recovered through lease payments $397,985.50

Five periodic lease payments $397,985.50 ÷ 4.312131 $92,294.41

1
PV of annuity of 1 for 5 periods at 8%.

2. Using a financial
calculator:
PV $ (415,000)
I 8%
N 5
1.1.1.1.1.4 Yields
$ ?
PMT $92,294.46
FV $ 25,000
Type 1

3. Excel formula =PMT(rate,nper,pv,fv,type)

Results $92,294.46 rounded

Solutions Manual 19.96 Chapter 19

EXERCISE 20.15 (CONTINUED)

a. Part 2. Ordinary Annuity:

Five periodic lease payments $397,985.50 ÷ 3.992712 $99,678.04

2
PV of annuity due of 1 for 5 periods at 8%

2.Using a financial calculator:

Solutions Manual 19.97 Chapter 19

PV $ (415,000)
I 8%
N 5
1.1.1.1.1.5 Yields
$ ?
PMT $99,678.02
FV $ 25,000
Type 0

3. Excel formula =PMT(rate,nper,pv,fv,type)

Result: $99,678 rounded

Solutions Manual 19.98 Chapter 19

EXERCISE 20.15 (CONTINUED)

b. 1.

URV = Unguaranteed Residual Value

* Rounding .01
2.

* Rounding .11

Solutions Manual 19.99 Chapter 19

EXERCISE 20.15 (CONTINUED)

c.
1/1/23 Equipment Acquired for Lessee .. 415,000
Cash ...................................... 415,000
To record purchase of equipment

Cash .............................................. 96,294

4
Lease Receivable ......................... 394,178
Repairs and Maintenance Expense 4,000
Unearned Interest Income ... 71,472
Equipment Acquired for Lessee 415,000
4
[($92,294.46 x 4) + $25,000]
To record lease

during Repairs and Maintenance Expense 7,000

2023 Cash ...................................... 7,000
To record annual repairs and maintenance payment

12/31/23 Unearned Interest Income ......... 25,816

Interest Income ................. 25,816
To record interest

1/1/24 Cash .............................................. 96,294

Repairs and Maintenance Expense 4,000
Lease Receivable ................. 92,294
Collection of lease payment

during Repairs and Maintenance Expense 7,000

2024 Cash ...................................... 7,000
To record annual repairs and maintenance payment

12/31/24 Unearned Interest Income ......... 20,498

Interest Income ................. 20,498
To record interest

Solutions Manual 19.100 Chapter 19

EXERCISE 20.15 (CONTINUED)

d. Vick Leasing Inc.

Statement of Financial Position (Partial)
December 31, 2023
2023
Current assets
Net investment in leases $92,294
Non-current assets
Net investment in leases 256,228
Balance $348,522

Reconciliation of net investment in leases: 2023

Beginning balance after first payment .......... $322,706
Add accrued interest ...................................... 25,816
Ending balance ............................................... $348,522
e. Note X: (on Vick Leasing Inc.’s 2024 financial statements)
The company's net investment in a financing lease includes the
following:
Total lease receivable $301,882
Unearned interest income 45,654
$256,228
Future lease payments receivable under the financing lease are as
follows:
Year ending December 31
2025 $92,294
2026 92,294
2027 92,294
Total lease payments receivable 276,882
Unguaranteed residual value 25,000
$301,882
Vick Leasing would also need to disclose any contingent rental
income in the year, the allowance for expected credit losses, and
general information about their leasing arrangement with Rock
River Inc.
LO 3,10,11 BT: AP Difficulty: C Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.101 Chapter 19

EXERCISE 20.17

a. (1) Calculation of gross investment:

$24,736 X 6 = $148,416

(2) Calculation of unearned interest income:

Gross investment $148,416
Less: Fair value of machine1 123,500*
Unearned interest income $ 24,916

1. Using Tables:
1
$24,736 X 4.99271 (PV factor of annuity due at 8% for
6 periods)

2. Using a financial calculator:

$ ? 1.1.1.1.1.6
PV Yields $123,499.68
I 8%
N 6
PMT $ 24,736
FV $ 0
Type 1

Solutions Manual 19.102 Chapter 19

EXERCISE 20.17 (CONTINUED)

a. 2 (continued)

3. Excel formula =PV(rate,nper,pmt,fv,type)

Result: $123,499.68 rounded

(3) Net investment in lease:

Lease receivable $148,416
Less: Unearned interest income 24,916
$123,500

Solutions Manual 19.103 Chapter 19

EXERCISE 20.17 (CONTINUED)

b.
1/1/23 Cash .................................................... 24,736
Lease Receivable ................................ 123,680
Cost of Goods Sold ............................ 99,000
Sales Revenue ........................... 123,500
Inventory .................................... 99,000
Unearned Interest Income ......... 24,916
To record inception of lease and cost of goods sold

12/31/23 Unearned Interest Income .................. 7,901

Interest Income2 ........................ 7,901
2
[($123,500 – $24,736) X .08]
To record interest
LO 9,10 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.104 Chapter 19

PROBLEM 20.5

a. The lease would be set up by Labonté Ltée. as a right-of-use asset and

lease liability under IFRS as the lease is not eligible for a short-term or
low-value exemption.

For LePage, the collectibility of the lease payments is not reasonably

predictable, and there are important uncertainties surrounding the costs
yet to be incurred. Accordingly, the earnings process is not considered
complete and, in spite of the fact that the fair value ($560,000) of the
equipment exceeds the lessor’s cost ($420,000), the lease cannot be
recorded as a sales-type lease by LePage and must be recorded as an
operating lease.

b. Calculation of annual rental payment:

To calculate the amount of the payments using 1. Tables:

($560,000 + $2,500) - ($80,000 X .37594 1)

= $111,282
4.78448 2
1
PV of $1 at 15% for 7 periods.
2
PV of an annuity due at 15% for 7 periods.

2. Using a financial calculator:

PV $ (562,500)
I 15%
N 7
1.1.1.1.1.7 Yields
$ ?
PMT $111,282
FV $ 80,000
Type 1

Solutions Manual 19.105 Chapter 19

PROBLEM 20.5 (CONTINUED)

b. (continued)

3. Excel formula =PMT(rate,nper,pv,fv,type)

Result: $111,282

c.
7/15/23 Right-of-Use Asset .......................... 562,500
Lease Liability .......................... 451,218
Cash ........................................ 111,282

12/31/23 Depreciation Expense3.................... 31,592

Accumulated Depreciation
-Right-of-Use Asset ............. 31,592
3
($562,500 - $80,000) ÷ 7 X 5.5/12
To record depreciation expense

Interest Expense4............................ 31,021

Lease Liability .......................... 31,021
4
($451,218 X .15 X 5.5/12)
To record interest

Solutions Manual 19.106 Chapter 19

PROBLEM 20.5 (CONTINUED)

c. (continued)

7/15/24 Lease Liability ................................. 74,620

Interest Expense5............................ 36,661
Cash .................................... 111,282
5
($451,218 X .15 X 6.5/12)
To record lease payment

12/31/24 Depreciation Expense6.................... 68,929

Accumulated Depreciation
-Right-of-Use Asset ............. 68,929
6
($562,500 - $80,000) ÷ 7
To record depreciation expense

Interest Expense7............................ 28,024

Lease Liability .......................... 28,024
7
[($451,218 + $31,021 – $74,620) X .15 X 5.5/12]
To record interest

e.
7/15/23 Rental Equipment .......................... 420,000
Inventory .................................. 420,000
To record rental equipment
Cash ............................................... 111,282
Unearned Rent Revenue ......... 111,282
To record collection of rent
Rental Equipment ........................... 2,500
Cash ........................................ 2,500
To record capitalized legal costs

Solutions Manual 19.107 Chapter 19

PROBLEM 20.5 (CONTINUED)

e. (continued)

12/31/23 Unearned Rent Revenue ................ 51,004

Rent Revenue8 ........................ 51,004
8
($111,282 X 5.5/12)
To record rent

Depreciation Expense9.................... 22,426

Accumulated Depreciation
-Rental Equipment ............... 22,426
9
($422,500 - $80,000) ÷ 7 X 5.5/12
To record depreciation expense

7/15/24 Unearned Rent Revenue ................ 60,278

Rent Revenue10 ....................... 60,278
10
($111,282 X 6.5/12)
To record rent
Cash ............................................... 111,282
Unearned Rent Revenue ......... 111,282
To record collection of rent

12/31/24 Depreciation Expense11 .................. 48,929

Accumulated Depreciation
-Rental Equipment ............... 48,929
11
($422,500 - $80,000) ÷ 7
To record depreciation expense
12/31/24 Unearned Rent Revenue ................ 51,004
Rent Revenue12 ....................... 51,004
12
($111,282 X 5.5/12)
To record rent

Solutions Manual 19.108 Chapter 19

PROBLEM 20.5 (CONTINUED)

d. f.
Labonté LePage
Right-of- Operating
Use Lease
Statement of financial position:
Property, Plant, and Equipment:
Right-of-use asset $562,500
Rental equipment $ 422,500
Less: Accumulated depreciation (31,592) (22,426)
530,908 400,074
Current liabilities:
Lease liability13 74,620
Unearned rent revenue 60,278

Long-term liabilities:
Lease liability13 482,240
Less: Current portion
(74,620)
407,619

Statement of income:
Rent revenue $ 51,004
Depreciation expense $ 31,592 22,426
Interest expense 31,021

13
Includes interest accrued of $31,021

Solutions Manual 19.109 Chapter 19

PROBLEM 20.5 (CONTINUED)

g. Although it might seem odd that the same asset is reported on two
different statements of financial position, the collection risks under
which the lessor, LePage, is operating do not justify the recognition of
income under a sales-type lease. There are too many uncertainties
surrounding the related costs and collections under the terms of its
lease with Labonté. Should Labonté default on the lease, LePage might
have to rent the used equipment to another lessee or resell it as used
inventory. It is also not unreasonable to consider that the residual value
“guarantee” by Labonté should not be considered in the calculations
(e.g., for depreciation) as that company’s financial situation may make
them unable to “make good” on the guarantee.
LO 3,4,5,6,11,12 BT: AP Difficulty: C Time: 60 min. AACS

CHAPTER 21
EXERCISE 21.1

Restatement
of Prior Years
Item in Comparative
Change Type of Change Financial
Statements

1. This appears to be a voluntary change in an Yes

accounting policy, which is allowed under ASPE.
ASPE allows voluntary changes in accounting policy
between alternative ASPE methods of accounting for
income taxes, without having to meet the “reliable, but
more relevant” test. Therefore, there is no requirement
to disclose why the change was made or why it is
relevant.
2. This is a change in an accounting estimate. No

Solutions Manual 19.110 Chapter 19

3. This may represent a change in an accounting policy

or a change in an estimate.

If it is a change in the accounting policy to expense all Yes

development costs from now on, then under ASPE,
there is no requirement to disclose why the change
was made or why it is more relevant. ASPE allows
voluntary changes in accounting policy between
alternative ASPE methods of accounting for
development costs, without having to meet the
“reliable, but more relevant” test. Retrospective
application would be required and prior years would
be adjusted.

However, it may be that the conditions for these

particular development costs have changed. This No
would mean that the estimated future benefits arising
from these capitalized development costs have
changed (declined), which would be a change in
estimate and treated prospectively. Disclosure would
be required if material.

Solutions Manual 19.111 Chapter 19

EXERCISE 21.1 (CONTINUED)

Restatement
of Prior Years
Item in Comparative
Change Type of Change Financial
Statements

4. This is treated as a change in classification. Like an Yes

error correction, prior years in comparative financial
statements would also have to be restated.

5. This is an error correction. Yes

6. This is a change in estimate due to a change in the No

pattern of benefits.

7. Under ASPE, the company has a choice to report Yes

subsidiaries as consolidated, or use either the equity
method or the cost method. ASPE allows voluntary
changes in accounting policy between alternative
ASPE methods of accounting for investments in
subsidiary companies, without having to meet the
“reliable, but more relevant” test. Therefore, there is
no requirement to disclose why the change was
made or why it is more relevant. This is a voluntary
change in an accounting policy and requires
retrospective application.

8. Not a change in accounting policy. Simply, a change No

in tax accounting; done prospectively.

9. This change should not have any impact on the n/a

financial statements. Cost of goods sold and ending
inventory should be the same regardless of whether
the periodic or perpetual inventory method was
used.

10. A change in accounting policy that results from Yes/No*

applying a primary source of GAAP.
* The treatment would be specified in the transitional provisions of the new
accounting pronouncement.
LO 1 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 CM: Reporting

Solutions Manual 19.112 Chapter 19

EXERCISE 21.2

a. 1. Change in estimate – prospectively.

2. Change in estimate – prospectively.
3. Accounting error correction – full retrospective application.
4. Change in accounting policy – full retrospective
application.1
1
GAAP specifies that changes in policy should be accounted
for retrospectively with full application to prior periods. In
certain cases, it may be impracticable to determine estimates
for prior periods, in particular if it is impossible to assess
circumstances and conditions in prior years that need to be
known in order to develop those estimates. Partial
retrospective or prospective application would then have to be
used.

b. Event #3:
Equipment ....................................................... 220,000
Depreciation Expense2.................................... 47,500
Accumulated Depreciation - Equipment
($47,500 X 2) .......................................... 95,000
3
Retained Earnings .................................. 120,750
4
Deferred Tax Liability ............................. 51,750
2
($220,000 – $30,000)/4 = $47,500
3
($220,000 – $47,500) X (1 – 30%) = $120,750
4
($220,000 – $47,500) X 30% = $51,750

Note to Instructor: The Deferred Income Tax effect for the current
year is not included in the above entry as noted in the question.

Solutions Manual 19.113 Chapter 19

EXERCISE 21.2 (CONTINUED)

b. (continued)

Event #4:
Retained Earnings ........................................... 10,500
Income Tax Payable ($15,000 X 30%) ............ 4,500
Inventory .................................................. 15,000

Changes for 2020 and 2021 have not been included since
inventory changes are counterbalancing and their impact on
opening 2023 retained earnings is nil.

Note to Instructor: Also note that the CRA generally requires a

company to use the same inventory costing method for tax as it uses
for financial reporting purposes. Therefore, the effect of the change in
inventory costing method will result in a current tax amount, not a
deferred tax asset or liability.
LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: CPA: cpa-t001 CM: Reporting

Solutions Manual 19.114 Chapter 19

EXERCISE 21.5

a. and b. Accounting treatment under IFRS:

a. b.
Accounting treatment Type of change
1. P Change in estimate
2. R Accounting error correction
3. P Change in estimate
4. NA* Change in policy
5. P Not an accounting change –
selection of policy for first time.
6. P Change in estimate
7. R Accounting error correction
8. P Change in estimate
9. P Change in estimate
10. R Accounting error correction

*The accounting treatment would be specified in

the transitional provisions of the new source of GAAP. If not
specified, then apply retrospectively.

Note that the only two approaches that are permitted for reporting
changes are retrospective and prospective treatment. When new
or revised sources of primary GAAP are adopted,
recommendations are usually included that specify how an entity
should handle the transition. These are called transitional
provisions.

Under IFRS, when there is a retrospective change, an opening

statement of financial position must be provided for the earliest
comparative period provided and adjusted basic and fully diluted
earnings per share (EPS) must be reported. Under IFRS, the entity
should report information about new standards that have been
issued but are not yet effective and have not yet been applied.
IFRS also requires that the entity disclose information about
measurement uncertainty, including sensitivity of carrying
amounts to changes in assumptions.

Solutions Manual 19.115 Chapter 19

EXERCISE 21.5 (CONTINUED)

c. Accounting treatment under ASPE (if different than part (a) for
IFRS):

For corrections of errors, ASPE assumes that the impact on each

specific prior period is measurable, and therefore only allows full
retrospective restatement. IFRS acknowledges that the full impact
of the error may not be determinable and allows partial
retrospective restatement in these circumstances.

Under ASPE, when there is a retrospective change, there is no

requirement to provide an opening statement of financial position,
or to report adjusted basic and fully diluted earnings per share
(EPS). Under ASPE, there is no requirement to report information
about new standards that have been issued but are not yet
effective and have not yet been applied.

There would be no differences to the accounting treatment for the

various items between IFRS and ASPE, however some items have
special considerations worth noting.

(5) IAS 23 requires that interest be capitalized for qualifying assets,

whereas ASPE still permits a choice between capitalization and
expense, provided that the company is consistently applying the
policy. Given that this is the first time the entity has constructed a
building for its own purposes, capitalization of the related interest
is not an accounting change, but rather selection of a policy for
the first time.

Solutions Manual 19.116 Chapter 19

EXERCISE 21.5 (CONTINUED)

c. (continued)

(9) Under IFRS, if the outcome cannot be reliably measured,

recoverable revenues equal to costs are recognized (sometimes
referred to as the zero-profit method). No gross profit is recorded
until the contract is completed and the gross profit can be reliably
measured. IFRS does not allow use of the completed contract
method. Under ASPE, the completed-contract method is allowed
as a default method for long-term contracts where the percentage
complete cannot be reliably measured. Under the completed
contract method, revenue would only be recorded when the
contract is completed.

d. Under IFRS, one of the following two situations is required for a

change in an accounting policy to be acceptable:
1. The change is required by a primary source of GAAP.
2. A voluntary change results in the financial statements
presenting reliable and more relevant information about the
effects of the transactions, events, or conditions on the
entity’s financial position, financial performance, or cash
flows.

ASPE provides for further situations where an accounting policy

change may be made without having to meet the “reliable and
more relevant” criteria noted above. It allows the following
voluntary changes in policy to be made:

Solutions Manual 19.117 Chapter 19

EXERCISE 21.5 (CONTINUED)

d. (continued)

3. Between or among alternative ASPE methods of accounting

and reporting for investments in subsidiary companies, and
in companies where the investor has significant influence or
joint control; for expenditures during the development phase
on internally generated intangible assets; for defined benefit
plans; for accounting for income taxes; and for measuring
the equity component of a compound financial instrument.

These further situations, allowed under ASPE as an

acceptable change in accounting policy, relate to standards
where accounting policy choices have to be made. These
changes are treated as voluntary changes, but they do not
have to meet the “reliable and more relevant” hurdle required
of other voluntary changes. Although not specifically stated
in the actual standard, it is assumed that once that choice
has been made, the same policy is followed consistently.
LO 1,3 BT: C Difficulty: S Time: 25 min. AACSB: None CPA: CPA: cpa-t001 CM: Reporting

Solutions Manual 19.118 Chapter 19

EXERCISE 21.8
2020
a. Retained earnings, January 1, as reported ......... $160,000
Cumulative effect of change in accounting
principle to weighted average cost1................. (13,000)
Retained earnings, January 1, as adjusted ......... $147,000
1
[ – $8,000 (2018) – $5,000 (2019)]

2023
b. Retained earnings, January 1, as reported ......... $590,000
Cumulative effect of change in accounting
principle to weighted average cost2................. (15,000)
Retained earnings, January 1, as adjusted ......... $575,000

2
[– $8,000 (2018) – $5,000 (2019) – $5,000 (2020)
+ $10,000 (2021) – $7,000 (2022)]

2025
c. Retained earnings, January 1, as reported ......... $780,000
Cumulative effect of change in accounting
principle to weighted average cost3................. (9,100)
Retained earnings, January 1, as adjusted ......... $770,900
3
[–$15,000 at 12/31/2022 + $5,900 (2023)]

2021 2022 2023

d. Net Income .............................. $130,000 $293,000 $310,900
LO 1 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 CM: Reporting

EXERCISE 21.11

a.
1. Accumulated Depreciation—Machinery .......... 15,000
Depreciation Expense ............................... 5,000
Retained Earnings ..................................... 10,000

2021-2022 2023

Solutions Manual 19.119 Chapter 19

Depreciation taken *$150,0001 $75,000

Depreciation (correct) * 140,000* 70,000
*$ 10,000* $ 5,000
1
$450,000 X 1/6 X 2

2. Salaries and Wages Expense ........................... 47,000

Retained Earnings ..................................... 47,000

3. Current Tax Expense ........................................ 81,000

Retained Earnings ..................................... 81,000

4. Goodwill ............................................................. 225,000

Amortization Expense ............................... 50,000
Retained Earnings ($50,000 X 3.5 years).. 175,000

In addition, the company should test goodwill for impairment.

5. No entry necessary.

6. Retained Earnings ............................................. 63,000

Loss on Impairment................................... 63,000

Solutions Manual 19.120 Chapter 19

EXERCISE 21.11 (CONTINUED)

b. 1. Error correction
2. Error correction
3. Error correction
4. Error correction
5. Change in accounting policy
6. Error correction
c.
1. Accumulated Depreciation—Machinery .......... 15,000
Depreciation Expense ............................... 5,000
Retained Earnings ..................................... 7,500
Deferred Tax Liability ................................ 2,500

2. Salaries and Wages Expense ........................... 47,000

Retained Earnings ..................................... 35,250
Income Tax Payable .................................. 11,750

3. Current Tax Expense ........................................ 81,000

Retained Earnings1 .................................... 81,000
1
Since the full $81,000 was charged to Retained Earnings, the same
amount is reversed without factoring in the income tax effect.

4. Goodwill ............................................................. 225,000

Amortization Expense ............................... 50,000
2
Retained Earnings .................................... 131,250
3
Deferred Tax Liability ............................... 43,750
2
($50,000 X 3.5 years X (1 – 25%))
3
($50,000 X 3.5 years) X 25%
In addition, the company should test goodwill for impairment.

5. No entry necessary.
6. Retained Earnings ............................................. 47,250
Income Tax Payable .......................................... 15,750
Loss on Impairment .................................. 63,000
LO 1 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: CPA: cpa-t001 cpa-t006 CM: Reporting and Tax

Solutions Manual 19.121 Chapter 19

PROBLEM 21.3

a. (1)
Litigation Expense ...................................................... 50,000
Litigation Liability ................................................. 50,000

(2)
1
Loss on Impairment ................................................... 14,850
Allowance for Expected Credit Losses ................ 14,850
1
($19,800 ÷ 2%) X 1.5% = $14,850

(3)
Land ........................................................................... 70,000
Accumulated Depreciation—Equipment2 .................... 56,000
Depreciation Expense ......................................... 14,000
Retained Earnings ............................................... 42,000
Equipment ........................................................... 70,000
2
$70,000 ÷ 5 = $14,000 per year;
$14,000 X 4 years = $56,000

(4)
There would be no adjustment to opening retained earnings for any
previous years since changes in estimate are accounted for prospectively.
The books are still open for 2023, so the depreciation expense for 2023 will
be revised for that year only to the straight-line method.

Accumulated Depreciation—Buildings ........................ 29,925

Depreciation Expense3 ........................................ 29,925
3
($63,175 – $33,250)

Carrying amount of the building at January 1, 2023:

Cost less accumulated depreciation to Dec. 31/22
= $1,400,000 - $70,000 - $66,500 = $1,263,500
Remaining useful life from Jan. 1/23 = 38 years
Correct Depreciation Expense, 2023 (straight-line basis)
= $1,263,500 ÷ 38 = $33,250

Solutions Manual 19.122 Chapter 19

PROBLEM 21.3 (CONTINUED)

a. (continued)
(5)
Accumulated Depreciation—Equipment...................... 8,000
Depreciation Expense ......................................... 8,000
($75,000 – $5,000) ÷ 5 = $14,000 per year
($75,000 – [$14,000 X 3] – $3,000) ÷ 5 = $6,000
($14,000 – $6,000 = $8,000)

(6)
No entry required. This is an error in classification. No amounts or items are
missing in the financial statements.

Note to Instructor: Corrections to Deferred Income Tax are only necessary

when a retrospective adjustment is being made and where the item involves
a temporary difference between accounting and taxable income. The entry
below assumes that the income tax entry for 2023 income taxes will be made
subsequently.

Item 3 is the only entry that would be different from the entries in Part a.

(3)
Land ................................................................ 70,000
Accumulated Depreciation—Equipment........... 56,000
Deferred Tax Liability ($42,000 X 25%) ............... 10,500
Depreciation Expense ......................................... 14,000
Retained Earnings [$42,000 X (1 – 25%)] ........... 31,500
Equipment ........................................................... 70,000

Solutions Manual 19.123 Chapter 19

PROBLEM 21.3 (CONTINUED)

c. 1. This item is an adjustment to the current year financial statements. It

is not an error in a prior year’s financial statements and does not
require retrospective adjustment.

2. This is a change in estimate – prospective treatment.

3. This is an error in a prior year – retrospective treatment.

4. This is a change in estimate – prospective treatment, but requiring a

change in the current year as adjustments have already been
recorded.

5. This is a change in estimate – prospective treatment, but requiring a

change in the current year as adjustments have already been
recorded.

6. This is a SFP change in classification. No journal entry and no

adjustment to opening retained earnings are required. However,
comparative financial information will need to be restated to properly
reflect the change in classification. A note indicating the nature of the
adjustment would be included.
LO 1 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: CPA: cpa-t001 CM: Reporting
PROBLEM 21.14

a. JACOBSEN CORPORATION
Adjusting Journal Entries
December 31, 2023

1. Allowance for Expected Credit Losses1 ....... 5,000*

Loss on Impairment.............................. 5,000
To reflect reduction in loss experience rate.
1
$1,000,000 X (2% – 1½%)

2. Investment Income or Loss2 ......................... 13,000

FV-NI Investments ............................. 13,000
To reduce trading securities to fair value.
2
$78,000 – $65,000

Solutions Manual 19.124 Chapter 19

3. Retained Earnings ....................................... 8,900

Cost of Goods Sold...................................... 4,700
Inventory .............................................. 13,600
To adjust for overstatements in opening and closing
Inventories.

4. Equipment ................................................... 30,000

Depreciation Expense.................................. 2,500
([$30,000 – $5,000] ÷ 10)
Retained Earnings................................ 27,500
($30,000 – $2,500)
Accumulated Depreciation—
Equipment3....................................... 5,000
To correct posting of equipment purchase
as expense in 2022.
3
$2,500 X 2

Accumulated Depreciation—Equipment ...... 17,500

Equipment ............................................ 14,700
Gain on Disposal of Equipment ............ 2,800
To correct the recording of the disposal of equipment.

Solutions Manual 19.125 Chapter 19

PROBLEM 21.14 (CONTINUED)

a. (continued)

5. Prepaid Insurance ....................................... 2,350

Insurance Expense ($4,700 ÷ 4) .................. 1,175
Retained Earnings4 .............................. 3,525
4
($4,700 – $1,175)
To adjust for nonrecognition of prepaid expense
in 2022.

6. No entry is required. The items will be properly reclassified as part

of the financial statement preparation.

b. JACOBSEN CORPORATION
Computation of Corrected Net Income
For the Years Ended December 31, 2023 and 2022

2023 2022

Reported income $220,000 $195,000

Change in accounts receivable loss
experience rate from 2% to 1½% 5,000 —
Loss on FV-NI investments (13,000)
Ending inventories overstated:
December 31, 2022 8,900 (8,900)
December 31, 2023 (13,600)
Misposting of equipment purchase
Decrease in operating expenses—2022 27,500
Incr. in depreciation expenses—2023 (2,500)
Misposting of proceeds of equipment sold 2,800
Recognition of prepaid insurance (1,175) 3,525
Corrected net income $206,425 $217,125

Solutions Manual 19.126 Chapter 19

PROBLEM 21.14 (CONTINUED)

c. JACOBSEN CORPORATION
Calculation of Corrected Retained Earnings
At January 1, 2023

Retained earnings, January 1, $247,000

Change in accounts receivable loss
experience rate from 2% to 1½% —
Loss on FV-NI investments —
Ending inventories overstated:
December 31, 2022 (8,900)
Misposting of equipment purchase
Decrease in operating expenses—2022 27,500
Recognition of prepaid insurance 3,525
Retained earnings, January 1, restated $269,125

LO 1,4 BT: AP Difficulty: C Time: 60 min. AACSB: None CPA: CPA: cpa-t001 CM: Reporting

CHAPTER 22
EXERCISE 22.1

a. STRONG HOUSE INC.

Statement of Cash Flows
For the Year Ended December 31, 2023

Cash flows from operating activities

Net income $42,000
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation expense (a) $13,550
Gain on disposal of investment in bonds (b) (500) 13,050
Net cash provided by operating activities 55,050

Cash flows from investing activities

Solutions Manual 19.127 Chapter 19

Purchase of land (c) (5,500)

Proceeds on sale of investment in bonds (d) 15,500
Net cash provided by investing activities 10,000

Cash flows from financing activities

Dividends paid (e) (19,000)
Payments to retire bonds payable (f) (10,000)
Proceeds from issuance of common
shares (g) 20,000
Net cash used by financing activities (9,000)

Net increase in cash 56,050

Cash balance, January 1, 2023 10,000
Cash balance, December 31, 2023 $66,050

Non-cash investing and financing activities

Issuance of bonds for equipment $32,000

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Interest $4,150
Income taxes 19,500

Solutions Manual 19.128 Chapter 19

EXERCISE 22.1 (CONTINUED)

b. Dear Mr. Brauer:

Enclosed is your statement of cash flows for the year ended

December 31, 2023. I would like to take this opportunity to explain
the changes that occurred in your business as a result of cash
activities during 2023. (Please refer to the attached statement of
cash flows.)

The first category shows the net cash flow that resulted from all
of your operating activities. Operating activities are those
activities engaged in for the routine conduct of business,
involving most of the transactions used to determine net income.
Therefore, the cash inflow from operations that affects this
category is net income. However, this figure must be adjusted,
first for depreciation (item a)—because this expense did not
involve a cash outlay in 2023—and second for the $500 gain on the
disposal of your bond investment (item b). The gain must be sub-
tracted from this section because it was included in net income,
but it is not the result of an operating activity—it is an investing
activity.

The second category, cash flows from investing activities, results

from the acquisition/disposal of plant assets and investments
including the purchase of another entity’s debt such as bonds or
loans and notes. Your purchase of land (item c) as well as the sale
of your investment in bonds (item d) represents your investment
activities during 2023, the purchase being a $5,500 outflow and the
sale being a $15,500 inflow.

Cash flows arising from the issuance and retirement of debt and
equity are properly classified as “Cash flows from financing activi-
ties.” These inflows and outflows generally include the long-term
liability and equity items on the SFP. Examples of your financing
activities which resulted in cash flows are the payment of divi-
dends (item e), the retirement of your bonds payable (item f), and
your issuance of common shares (item g).

Solutions Manual 19.129 Chapter 19

EXERCISE 22.1 (CONTINUED)

b. (continued)

Note that, although $32,000 worth of bonds were issued for the
purchase of equipment, the transaction has no effect on the
change in cash from January 1, 2023 to December 31, 2023 and so
it does not appear on the face of the statement of cash flows but
in the notes to your financial statements.

I hope this information helps you to better understand the

enclosed statement of cash flows. If I can further assist you, please
let me know.

Sincerely,

c.
STRONG HOUSE INC.
Statement of Financial Position (condensed)
December 31, 2023
Assets
Cash $66,050
Current assets other than cash 34,000
Bond investment at amortized cost 25,000 (1)
Plant assets (net) 75,950 (2)
Land 44,000 (3)
$245,000
Liabilities and Equity
Current liabilities $14,500
Long-term notes payable 30,000
Bonds payable 54,000 (4)
Common shares 100,000 (5)
Retained earnings 46,500 (6)
$245,000
(1) $40,000 – $15,500 + $500
(2) $57,500 – $13,550 + $32,000

Solutions Manual 19.130 Chapter 19

(3) $38,500 + $5,500

(4) $32,000 + $32,000 – $10,000
(5) $80,000 + $20,000
(6) $23,500 + $42,000 – $19,000

Solutions Manual 19.131 Chapter 19

EXERCISE 22.1 (CONTINUED)

d. The statement of cash flows used to be called the statement of

changes in financial position because it used to report the
sources of increases and decreases in working capital. It also
included all transactions affecting the entity’s assets and capital
structure, regardless of whether or not the transactions involved
cash flows.

The former statement did not focus on cash, but on working

capital. The improvements that were achieved in the changes to
the current statement of cash flow have proven useful to users
and involve communicating more relevant information in the
assessment of performance. Relevance has been enhanced by
providing information to assess the liquidity and solvency as well
as the company’s earnings quality. In addition, the statement
helps users predict future cash flows and assess management’s
ability to generate cash from operating activities, instead of using
net income as the main measure of performance. The statement of
cash flows is less susceptible to earnings management than the
statement of comprehensive income, which has more subjective
accruals and deferrals.

LO 1,6,8,9 BT: AP Difficulty: M Time: 45 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

Solutions Manual 19.132 Chapter 19

EXERCISE 22.2

a. 1. Operating activities:

Cash received from customers

Sales revenue $295,000
Less: Increase in accounts receivable (10,000)
Cash received from customers $285,000

2. The approach is to prepare a T-account for property, plant, and

equipment.

Property, Plant and Equipment

12/31/22 147,000
Equipment from exchange of B/P 20,000
Paid for purchase of PP&E ? 45,000 Equipment sold
12/31/23 177,000

Payments = $177,000 + $45,000 – $147,000 – $20,000

= $55,000

The purchase of property, plant, and equipment is an investing

activity. Note that the acquisition of property, plant, and
equipment in exchange for bonds payable would be disclosed
as a non-cash investing and financing activity and the details
of this exchange would be provided in a note to the financial
statements.

Solutions Manual 19.133 Chapter 19

EXERCISE 22.2 (CONTINUED)

a. (continued)

3. The approach is to set up a T-account for accumulated

depreciation.

Accumulated Depreciation
67,000 12/31/22

33,000 Depreciation expense

Equipment sold ?
78,000 12/31/23

Accumulated depreciation on equipment sold = $67,000 +

$33,000 – $78,000 = $22,000

The entry to reflect the sale of equipment is:

Cash (proceeds from sale of equipment)

($45,000 + $14,500 – $22,000) 37,500 (force)
Accumulated Depreciation 22,000 (above)
Property, Plant, and Equipment 45,000 (given)
Gain on Disposal of Equipment 14,500 (given)

The proceeds from the sale of equipment of $37,500 are

reported as investing activities inflow.

4. The cash dividends paid can be determined by analyzing T-

accounts for retained earnings and dividends payable.

Retained Earnings
91,000 12/31/22
Dividends declared ? 31,000 Net income
104,000 12/31/23

Solutions Manual 19.134 Chapter 19

EXERCISE 22.2 (CONTINUED)

a. (continued)

4. (continued)

Dividends declared = $91,000 + $31,000 – $104,000

= $18,000

Dividends Payable
5,000 12/31/22
18,000 Dividends declared
Cash dividends paid ?
8,000 12/31/23

Cash dividends paid = $5,000 + $18,000 – $8,000

= $15,000

Because of the choice made by Pavicevic Ltd., the cash paid

for dividends will appear in the operating activities as a cash
outflow of $15,000.

5. The amount of the redemption of bonds payable is determined

by setting up a T-account.

Bonds Payable
146,000 12/31/22
20,000 Issuance of B/P for PP&E
Redemption of B/P ?
149,000 12/31/23

Solutions Manual 19.135 Chapter 19

The problem states that the bonds were issued at par and so
the redemption of bonds payable is the only change not
accounted for.

EXERCISE 22.2 (CONTINUED)

a. (continued)

5. (continued)

Redemption of bonds payable = $146,000 + $20,000 – $149,000

= $17,000

Financing activities include all cash flows involving non-

operating liabilities and shareholders’ equity items. Therefore,
redemption of bonds payable is considered a financing activity
outflow.

6. The approach is to set up a T-account for FV-NI Investments.

FV-NI Investments
12/31/21 49,000
17,000 Investments sold
3,000 Unrealized loss
Investments purch. ?
12/31/23 41,000

Proceeds on sale of FV-NI investments sold = $17,000 + $5,000

= $22,000

The entry to reflect the sale of investments is:

Solutions Manual 19.136 Chapter 19

Cash (proceeds—sale of investments) 22,000 (above)

FV-NI Investments 17,000 (given)
Investment Income or Loss 5,000 (given)

The proceeds from the sale of FV-NI investments of $22,000

are reported as operating activities inflow.

EXERCISE 22.2 (CONTINUED)

a. (continued)

7. To solve for the amount of the purchase of FV-NI investments,

use the “T” account for the FV-NI investments above. ($41,000
+ $17,000 + $3,000 – $49,000 = $12,000)

The purchase of FV-NI investments of $12,000 is reported as

operating activities outflow.

b. Had Pavicevic Ltd. been following ASPE, there would be no choice

on how to classify interest and dividends paid in the statement of
cash flows. The dividends paid (item 4) of $15,000 would be
reported as a financing activity. Under ASPE, financing activities
include all cash flows involving non-operating liabilities and
shareholders’ equity items.
LO 2,10 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.137 Chapter 19

EXERCISE 22.3

a.
2023
May 1 Cash ....................................................... 22,500
Accumulated Depreciation-Equipment 31,0001
Gain on Disposal of Equipment ...... 1,500
Equipment......................................... 52,000
1
$52,000 – $21,000

June 15 Accumulated Depreciation-Equipment 5,500

Loss on Disposal of Equipment........... 500
Equipment......................................... 6,000

Sept. 1 Equipment ............................................. 7,700

Cash .................................................. 7,700

Dec. 30 Notes Receivable .................................. 75,000

Gain on Disposal of Land ................ 30,000
Land .................................................. 45,000

31 Depreciation Expense .......................... 16,600

Accumulated Depreciation-Equipment 16,600

b. Indirect method:
Operating activities:
Depreciation expense $16,600
Loss on disposal of equipment 500
Gain on disposal of equipment (1,500)
Gain on disposal of land (30,000)

Investing activities:
Sale of equipment 22,500
Purchase of equipment (7,700)

Solutions Manual 19.138 Chapter 19

Note X: Significant non-cash investing and financing

activities: A mortgage note receivable of $75,000 was obtained
from the sale of land.

Solutions Manual 19.139 Chapter 19

EXERCISE 22.3 (CONTINUED)

c. Direct method:
Operating activities:

None of the operating activity items in part (b) above would be

shown separately on the statement of cash flows using the direct
approach.

Investing activities:
Sale of equipment 22,500
Purchase of equipment (7,700)

(Note: investing activities are unchanged from (b) above)

Note X: Significant non-cash investing and financing

activities: A mortgage note receivable of $75,000 was obtained
from the sale of land.

d. At first glance it might appear as if the total operating activities

using the two formats would differ. In fact, they would not. For the
indirect method, the four adjustments remove the effect of the
items from net income (the starting point of the indirect method).
These four items are listed to adjust accrual net income to cash
from operating activities. Under the direct method, the four items
listed would not be relevant.
LO 2,5,6,8 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 22.7

1. Equipment cost $40,000)

Accumulated depreciation ([$40,000 ÷ 10] X 6) 24,000)
Carrying amount at date of sale 16,000)
Sale proceeds (5,300)
Loss on disposal $10,700)

Solutions Manual 19.140 Chapter 19

The loss on disposal of plant assets is reported in the operating

activities section of the statement of cash flows. It is added to net
income to arrive at net cash provided by operating activities.

The sale proceeds of $5,300 are reported in the investing section

of the statement of cash flows as follows:

Proceeds from sale of equipment $5,300

2. Shown in the financing activities section of a statement of

cash flows as follows:

Sale of common shares $410,000

3. The write off of the uncollectible accounts receivable of $27,000 is

not reported on the statement of cash flows. The write off reduces
the Allowance for Expected Credit Losses balance and the
Accounts Receivable balance. It does not affect cash flows.

Solutions Manual 19.141 Chapter 19

EXERCISE 22.7 (CONTINUED)

4. The net loss of $10,000 should be reported in the operating

activities section of the statement of cash flows. Depreciation of
$22,000 is added to income in the operating section of the
statement of cash flows. The gain on disposal of land is deducted
from income (loss) in the operating activities section of the
statement of cash flows. The proceeds from the sale of land of
$39,000 are reported in the investing activities section of the
statement of cash flows. These four items might be reported as
follows:

Cash flows from operating activities

Net loss $(10,000)
Adjustments to reconcile net income
to net cash provided by operations1:
Depreciation expense 22,000
Gain on disposal of land (9,000)
Loss on disposal of equipment 10,700

1
Either net cash used or provided depending upon other adjust-
ments. Given only the adjustments, the “net cash provided” would
be used.

Cash flows from investing activities

Proceeds from sale of land $39,000

5. The purchase of the Canadian Treasury bill is not reported in the

statement of cash flows. This instrument is considered a cash
equivalent and is therefore included in cash and cash equivalents.

6. The impairment loss on goodwill does not involve cash and would
have caused a reduction of net income. It is reported in the
operating activities section of the statement of cash flows. It is
added to net income in arriving at net cash provided by operating
activities.

Solutions Manual 19.142 Chapter 19

EXERCISE 22.7 (CONTINUED)

7. The patent amortization of $18,000 is reported in the operating

activities section of the statement of cash flows. It is added to net
income in arriving at net cash provided by operating activities.

8. The exchange of common shares for an investment in TransCo

Corp. is reported as a “non-cash investing and financing activity”
in the notes to the financial statements. It is shown as follows:

Non-cash investing and financing activities

Purchase of investment by issuance
of common shares $900,000

9. The accrual of an unrealized loss does not involve cash and would
have caused a reduction of net income. It is reported in the
operating activities section of the statement of cash flows. It is
added to net income in arriving at net cash provided by operating
activities.

LO 1,2,6,8,10 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 22.9

a.
1. Using tables: - Regular annuity
Present value of the payments in the future
$545,000 X 4.62288 $2,519,469.60

2. Using a financial calculator:

PV ? Yields $2,519,469.42
I 8%
N 6
PMT ($545,000)
FV $0
Type 0

Solutions Manual 19.143 Chapter 19

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

Result: $2,519,469.417 Rounded to $2,519,469.42

Present value of remaining six payments $2,519,469.42

Add initial payment 545,000.00
Total present value $3,064,469.42

Solutions Manual 19.144 Chapter 19

EXERCISE 22.9 (CONTINUED)

a. (continued)
Alternately, use annuity due calculations:
1. Using tables: - Annuity due
Present value of the payments
$545,000 X 5.62288 $3,064,469.60

2. Using a financial
calculator:
PV ? Yields $3,064,469.42
I 8%
N 7
PMT ($545,000)
FV $0
Type 1

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

Result: $3,064,469.417 Rounded $3,064,469.42

Solutions Manual 19.145 Chapter 19

EXERCISE 22.9 (CONTINUED)

b.
July 1, 2022

Right-of-Use Asset .............................. 3,064,470

Lease Liability ............................ 3,064,470
To record right-of-use asset

Lease Liability ..................................... 545,000

Cash ........................................... 545,000
To record lease payment

December 31, 2022

1
Interest Expense ................................ 100,779
Interest Payable ......................... 100,779
1
($3,064,470 – $545,000) x 8% = $2,519,470 x 8% = $201,558
($201,558 X 6/12 = $100,779)
To accrue interest expense

Depreciation Expense2 ....................... 218,891

Accumulated Depreciation—
Right-of-Use Asset............ 218,891
2
($3,064,470 ÷ 7 years X 6/12 = $218,891)
To record depreciation expense

July 1, 2023
Interest Expense ................................. 100,779
Interest Payable .................................. 100,779
Lease Liability ..................................... 343,442
Cash ........................................... 545,000
To record lease payment

December 31, 2023

3
Interest Expense ................................ 87,041
Interest Payable ......................... 87,041
3
($2,519,470 – $343,442) x 8% = $2,176,028 x 8% = $174,082
($174,082 X 6/12 = $87,041)

Solutions Manual 19.146 Chapter 19

To accrue interest expense

Solutions Manual 19.147 Chapter 19

EXERCISE 22.9 (CONTINUED)

b. (continued)

Depreciation Expense4 ....................... 437,781

Accumulated Depreciation—
Right-of-Use Asset............ 437,781
4
($3,064,470 ÷ 7 years = $437,781)
To record depreciation expense

c.
Wagner Inc.
Statement of Cash Flows – Partial
For the Year ended December 31,
2023 2022
Cash provided by (used in)
Operating activities – Direct Method
Payments of interest ........................... $(201,558) -0-
Cash provided by (used in)
Financing activities
Repayments of lease liability ............. (343,442) $(545,000)
Net decrease in cash .................................. $(545,000) $(545,000)

Note X: During 2022, Wagner Inc. signed finance leases to acquire

a fleet of trucks for the amount of $3,064,470.

d. Separate disclosure is required of changes in liabilities arising

from financing activities, including changes arising from cash
flows and non-cash changes. This disclosure is meant to assist
users in their evaluation of such changes. Companies are
encouraged, but not required, to provide a reconciliation of items
such as long-term borrowings and lease liabilities: disclosing
opening balances, cash-flow related changes, non-cash changes,
and a reconciliation of the closing balances of these financing-
related items.

Solutions Manual 19.148 Chapter 19

EXERCISE 22.11

a.
1. (3) Investing activity.
2. (4) Financing activity for redemption cash paid; (1 or 2)
operating add to income any loss and deduct from income
any gain resulting from the redemption.
3. (5) Significant non-cash investing and financing activity.
4. (3) Investing activity for any cash proceeds received from the
sale; (1 or 2) operating add to income any loss and deduct
from income any gain resulting from the sale.
5. (1) Operating—add to net income.
6. (5) Significant non-cash investing activity; (1 or 2) If any gain
is recorded on the exchange, deduct from income in
operating activities and add back any loss.
7. (4) Financing activity.
8. (1) Operating—add to net income.
9. (4) Financing activity.
10. (5) Significant non-cash investing and financing activity.
11. (1) Operating—add to net income.
12. (1) Operating—add to net income.
13. (2) Operating activity because of the choice made by
management.
14. (2) Operating—deduct from net income.
15. (1) Operating—add to net income.
16. (5) Significant non-cash investing and financing activity.
17. (4) Financing activity for principal paid on lease liability;
financing activity for interest paid; operating add to income
for the interest expense.
18. (6) None of these options; part of cash and cash equivalents.
19. (6) Operating activity already reflected in the income
statement so no adjustment to income is required.

Solutions Manual 19.149 Chapter 19

EXERCISE 22.11 (CONTINUED)

a. (continued)

20. (2) Operating—deduct from net income.

21. (4) Financing activity.
22. (4) Financing activity.
23. (4) Financing activity because of the choice made by
management; operating add to income for the interest
expense.
24. (3) (2) Investing activity because of the choice made by
management; operating deduct from net income for the
interest earned.
25. (6) None of these options; part of cash and cash equivalents.

b. The following answers would be different under ASPE:

17. (4) Financing activity for principal paid on lease obligation;

operating activity for interest paid, no adjustment to
income is required when using the indirect method.
23. (6) Operating activity if recognized in net income; if
already reflected in the income statement, no adjustment to
income is required when using the indirect method.
24. (6) Operating activity already reflected in the income
statement so no adjustment to income is required when
using the indirect method.
25. (3) Investing activity.

LO 2,8,11 BT: C Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.150 Chapter 19

EXERCISE 22.12

a.
Malouin Corp.
Partial Statement of Cash Flows
For the Year Ended December 31, 2023
Cash flows from operating activities
Cash received from customers $797,000 (a)
Cash paid
To suppliers $486,000 (b)
For income taxes 60,500 (c) 546,500
Net cash provided by
operating activities $250,500

(a) Computation of cash received from customers:

Service revenue $778,000
Add: Decrease in accounts receivable
Add: ($54,000 – $35,000) 19,000
Cash received from customers $797,000

(b) Computation of cash paid to suppliers:

Operating expenses per income statement $499,000
Deduct: Increase in accounts payable
Deduct: ($44,000 – $31,000) (13,000)
Cash paid to suppliers $486,000

(c) Computation of cash paid for taxes:

Income tax expense per income statement $58,000
Add: Decrease in income tax payable
Add: ($8,500 – $6,000) 2,500
Cash paid for income taxes $60,500

Solutions Manual 19.151 Chapter 19

EXERCISE 22.12 (CONTINUED)

b. Current cash debt coverage ratio in 2023

Current cash debt coverage ratio

= Net cash provided by operating activities / Average current
liabilities
= $250,500 / [($31,000 + $8,500) + ($44,000 + $6,000)] / 2
= 5.6

Current cash debt coverage ratio is a measure of the company’s

ability to pay off its current liabilities in a specific year from its
operations. An increase in the company’s current cash debt
coverage ratio from 4.5 to 5.6 is an improvement and a sign of
better liquidity in 2023. A creditor is interested in analyzing the
company’s liquidity (short-term ability to repay maturing
obligations) and current cash debt coverage ratio to help
determine the level of credit risk associated with lending to the
company. A creditor may interpret the increase in current cash
debt coverage ratio as an indication that it is less likely that the
company will experience difficulty in meeting its current liabilities
as they come due, and that the credit risk associated with lending
to the company in the short-term has decreased.

LO 3,9 BT: AN Difficulty: S Time: 30 min. AACSB: Analytic CPA: cpa-t001 cpa-t005

CM: Reporting and Finance

EXERCISE 22.14

a.
Tuit Inc.
Statement of Cash Flows
For the Year Ended December 31, 2023
Cash flows from operating activities
Cash received from customers (1) $331,150
Cash paid to suppliers for goods (2) $139,000
Cash paid for other operating

Solutions Manual 19.152 Chapter 19

expenses (3) 28,000

Cash paid to and on behalf of
employees (4) 65,000
Cash paid for interest 11,400
Cash paid for taxes (5) 6,125 249,525
Net cash provided by operating activities 81,625a

Cash flows from investing activities

Proceeds on sale of equipment (6) 8,000
Purchase of equipment (7) (44,000)
Net cash used by investing activities (36,000)

Cash flows from financing activities

Principal payments on short-term loans (2,000)
Principal payments on long-term loans (9,000)
Dividends paid (6,000)
Net cash used by financing activities (17,000)

Net increase in cash 28,625

Cash, January 1, 2023 25,000
Cash, December 31, 2023 $ 53,625

Solutions Manual 19.153 Chapter 19

EXERCISE 22.14 (CONTINUED)

a. (continued)

Computations:
(1) Cash received from customers
Sales revenue $338,150
Less: Increase in accounts receivable (7,000)
Cash received from customers $331,150

(2) Cash paid to suppliers for goods

Cost of goods sold $165,000
Less: Decrease in inventory (20,000)
Purchases 145,000
Less: Increase in accounts payable (6,000)
Cash paid to suppliers for goods $139,000

(3) Cash paid for other operating expenses

Operating expenses $120,000
Less: Salaries and wages expense (69,000)
Depreciation expense (7) (24,000)
Add: Increase in prepaid rent 1,000
Cash paid for other operating expenses $28,000

(4) Cash paid to and on behalf of employees

Salaries and wages expense $69,000
Increase in salaries and wages payable (4,000)
Cash paid to and on behalf of employees $65,000

(5) Income taxes paid

Income tax expense $4,125
Decrease in income tax payable 2,000
Income taxes paid $6,125

Solutions Manual 19.154 Chapter 19

EXERCISE 22.14 (CONTINUED)

a. (continued)

(6) Calculation of proceeds from sale of equipment:

Cost of equipment sold $ 20,000
Accumulated depreciation of equipment sold (70%) (14,000)
Carrying amount of equipment sold 6,000
Gain on disposal of equipment 2,000
Proceeds on sale of equipment $ 8,000

(7) Calculation of cost of new equipment purchased:

Equipment Jan. 1, 2023 $ 130,000
Equipment Dec. 31, 2023 154,000
Net increase in equipment 24,000
Cost of equipment sold 20,000
Cost of equipment purchased during year $ 44,000

(8) Calculation of depreciation expense:

Accumulated depreciation Jan. 1, 2023 $ (25,000)
Accumulated depreciation of equipment sold 14,000
Accumulated depreciation Dec. 31, 2023 35,000
Depreciation expense for the year $ 24,000

Solutions Manual 19.155 Chapter 19

EXERCISE 22.14 (CONTINUED)

b.
Tuit Inc.
Statement of Cash Flows
For the Year Ended December 31, 2023
Cash flows from operating activities
Net income $9,625
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $24,000
Impairment loss, goodwill 30,000
Gain on disposal of equipment (2,000)
Increase in accounts receivable (7,000)
Decrease in inventory 20,000
Increase in prepaid rent (1,000)
Increase in accounts payable 6,000
Increase in salaries and wages payable 4,000
Decrease in income tax payable (2,000)
Total adjustments 72,000
Net cash provided by operating activities 81,625

Cash flows from investing activities

Proceeds on sale of equipment 8,000
Purchase of equipment (44,000)
Net cash used by investing activities (36,000)

Cash flows from financing activities

Principal payments on short-term loans (2,000)
Principal payments on long-term loans (9,000)
Dividends paid (6,000)
Net cash used by financing activities (17,000)

Net increase in cash 28,625

Cash, January 1, 2023 25,000
Cash, December 31, 2023 $53,625

Solutions Manual 19.156 Chapter 19

EXERCISE 22.14 (CONTINUED)

b. (continued)

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Interest $11,400
Income taxes $6,125

c. Because Tuit Inc. follows ASPE, there is no choice on how to

classify interest and dividend payments in the statement of cash
flows.

Companies that adopt IFRS do have some choice. Under IFRS,

interest paid and received and dividends paid and received can be
recognized as operating cash flows. Alternatively, interest paid
can be recognized as a financing outflow while interest and
dividends received can be recognized as investing inflows. A
choice is permitted for dividends paid: a financing outflow as a
return to equity holders, or an operating outflow as a measure of
the ability of operations to cover returns to shareholders.

Solutions Manual 19.157 Chapter 19

EXERCISE 22.14 (CONTINUED)

d. Tuit Inc.’s operating activities generate significant positive cash

flow, which supports the company’s investing and financing
activities. The company is using the significant cash generated
from its operations to expand by purchasing equipment and to
repay creditors and pay dividends to shareholders, which is a sign
of a mature, successful company. The company is expanding by
purchasing equipment, likely due to high forecasted demand for
the company’s product(s). The only item of concern is the $20,000
decrease in inventory, a substantial amount as revealed in the
statement prepared using the indirect format. The company repaid
creditors and paid dividends to shareholders, and still generated
a significant increase in net cash and cash equivalents in 2023. An
investor who is interested in investing in mature, successful
companies may view Tuit Inc. favourably, and decide to invest in
the company.

LO 5,6,8,9 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 cpa-t005

CM: Reporting and Finance

Solutions Manual 19.158 Chapter 19

EXERCISE 22.15

a. Both the direct method and the indirect method for reporting
cash flows from operating activities are acceptable in preparing
a statement of cash flows. However, accounting standards
encourage the use of the direct method. Under the direct
method, the statement of cash flows reports the major classes
of cash received and cash disbursed, and discloses more
information; this may be the statement’s principal advantage.
Under the indirect method, net income on the accrual basis is
adjusted to the cash basis by adding or deducting non-cash
items included in net income, thereby providing a useful link
between the statement of cash flows and the income statement
and SFP.

b. The Statement of Cash Flows for Guas Inc. for the year ended
May 31, 2023, using the direct method, is presented below.

Solutions Manual 19.159 Chapter 19

EXERCISE 22.15 (CONTINUED)

b. (continued)

Guas Inc.
Statement of Cash Flows
For the Year Ended May 31, 2023
Cash flows from operating activities
Cash received from customers $1,326,600
Cash paid
To suppliers for goods for resale $795,700
To suppliers for other operating
expenses 26,600
To and on behalf of employees 218,800
For interest 64,600
For income taxes 65,400 1,171,100
Net cash provided by operating activities 155,500

Cash flows from investing activities

Purchase of plant assets (44,000)

Cash flows from financing activities

Proceeds from issuance of
common shares 4,750
Dividends paid (78,000)
Principal payment of mortgage (25,000)
Net cash used by financing activities (98,250)

Net increase in cash 13,250

Cash, June 1, 2022 20,000
Cash, May 31, 2023 $33,250

Note 1: Schedule of non-cash investing and financing activities:

Issuance of common shares for plant assets

$51,000

Solutions Manual 19.160 Chapter 19

EXERCISE 22.15 (CONTINUED)

b. (continued)

Supporting calculations:
Collections from customers
Sales revenue $1,345,800
Less: Increase in accounts receivable 19,200
Cash collected from customers $1,326,600

Cash paid to suppliers for goods for resale

Cost of goods sold $814,000
Less: Decrease in inventory 10,300
Increase in accounts payable 8,000
Cash paid for goods for resale $795,700

Cash paid for other operating expenses

Other expenses $24,800
Add: Increase in prepaid expenses 1,800
Cash paid for other operating expenses $ 26,600

Cash paid to and on behalf of employees

Salaries and wages expense $207,800
Add: Decrease in salaries and wages
payable 11,000
Cash paid to and on behalf of employees $218,800

Cash paid for interest

Interest expense $66,700
Less: Increase in interest payable 2,100
Cash paid for interest $64,600

c. The calculation of the cash flow from operating activities for Guas
Inc. for the year ended May 31, 2023, using the indirect method, is
presented below.

Solutions Manual 19.161 Chapter 19

EXERCISE 22.15 (CONTINUED)

c. (continued)
Guas Inc.
Statement of Cash Flows (partial)
For the Year Ended May 31, 2023
Cash flows from operating activities
Net earnings $141,100
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $26,000
Decrease in inventory 10,300
Increase in accounts payable 8,000
Increase in interest payable 2,100
Increase in accounts receivable (19,200)
Increase in prepaid expenses (1,800)
Decrease in salaries and wages
payable (11,000) 14,400
Net cash provided by operating activities $155,500

d. Under IFRS, a choice is permitted for dividends paid: a financing

flow as a return to equity holders, or an operating flow as a
measure of the ability of operations to cover returns to
shareholders. However management views these specific flows,
once the choice is made, it is applied consistently from period to
period.

e. The dividend payout ratio for the year ended May 31, 2023 can be
easily calculated using amounts reported on the statement of cash
flows. The dividend payout ratio is 55% [$78,000 (dividends paid)
divided by $141,100, (net earnings)]. From the perspective of a
shareholder, this would be a positive ratio, as shareholders are
recipients of this return on investment. The company’s operations
generated the cash required to pay this dividend, which is a
positive sign that the company may be able to sustain payment of
dividends in the future.
LO 3,5,8,9 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 cpa-t005

Solutions Manual 19.162 Chapter 19

CHAPTER 23
EXERCISE 23.4

a. Revenue test: 10% X $398,000 = $39,800

Segments A ($140,000), B ($40,000), and D ($190,000) meet this

test.

b. Operating profit test:

10% of the greater of (in absolute terms) segments with a loss or

segments with profit:

Loss segments: $5,000 + $2,000 = $7,000

Profitable segments: $25,000 + $8,000 + $500 = $33,500

(greater of above x 10%): 10% X $33,500 = $3,350

Segments A ($25,000), B ($8,000), and C ($5,000 absolute amount)

meet this test.

c. Identifiable assets test: 10% X $351,000 = $35,100.

Segments A ($240,000), C ($36,000), and D ($49,000) meet this test.

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

Solutions Manual 19.163 Chapter 19

EXERCISE 23.5

a. Maffin Corp.:
Buildings ........................................................... 700
Retained Earnings ............................................. 100
Contributed Surplus .......................................... 200
Cash .......................................................... 1,000

The transaction is not in the normal course of operations for the

two companies and there is arguably no material change in the
ownership interest in the building. The transaction would
therefore be measured at its carrying amount.

The adjustment to contributed surplus / retained earnings is

considered to be a capital payment by Maffin Corp. and a capital
receipt by Grey Inc.

Grey Inc.:
Cash ................................................................... 1,000
Accumulated Depreciation–Buildings1 ............ 24,300
Contributed Surplus ................................. 300
Buildings .................................................. 25,000
1
($25,000 - $700)

b. Maffin Corp.:
Cash ................................................................... 1,100
Gain on Disposal of Buildings ................. 400
Buildings .................................................. 700

A gain of $400 on sale of the building is recognized as income by

Maffin Corp. It is not appropriate to reverse the original credit of
$300 made to equity and recognize a gain in Grey Inc. now that
Maffin Corp. has sold the building.

c. If Maffin could purchase the building at an amount less than the

carrying amount on Grey’s financial statements, consideration
should be given to whether the value of the building is impaired

Solutions Manual 19.164 Chapter 19

and should be written down in Grey’s books prior to transfer at the

reduced carrying amount.

Solutions Manual 19.165 Chapter 19

EXERCISE 23.5 (CONTINUED)

d. Maffin Corp.:
Buildings ........................................................... 1,000
Cash .......................................................... 1,000

The transaction is in the normal course of operations for the two

companies and there is commercial substance. It is therefore
appropriate for Grey to recognize a gain of $300. Maffin would
record the building at the exchange amount.

Grey Inc.:
Cash ................................................................... 1,000
Accumulated Depreciation–Buildings2 ............ 24,300
Gain on Disposal of Buildings ................. 300
Buildings ................................................... 25,000
2
($25,000 - $700)

Maffin Corp. – Sale of building in 2024

Cash ................................................................... 1,100
Gain on Disposal of Buildings ................. 100
Buildings ................................................... 1,000

e. Option 1: Transaction measured at carrying amount:

2023:
Maffin Corp. – No impact on the income statement $0
Grey Inc. – No impact on the income statement 0

2024:
Maffin Corp. – Gain 400
Total income for 2023 and 2024 $ 400

Solutions Manual 19.166 Chapter 19

EXERCISE 23.5 (CONTINUED)

e. (continued)

Option 2: Transaction measured at exchange amount:

2023:
Maffin Corp. – No impact on the income statement $0
Grey Inc. – Gain of $300 300

2024:
Maffin Corp. – Gain of $100 100
Total income for 2023 and 2024 $ 400

Regardless of the method used, the combined income for the

consolidated reporting unit will be the same. The purchase and
sale of the building between Maffin and Grey become cancelled in
the process of eliminating intercompany balances. The
transaction with the “unrelated” external party provides the
objective measurement of the gain to the reporting unit.

However, Grey, and to the lesser extent, Maffin, are required to

report to certain of their users as separate reporting units. In this
case, the measurement of intercompany transactions becomes
important in accurately reflecting economic substance. We can
see that under option two, a portion of the gain ($300) is earned by
Grey and the remainder is earned by Maffin, whereas under option
one, the entire amount of the gain is earned by Maffin. The method
of reporting will have an impact on the income of each company.

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

Solutions Manual 19.167 Chapter 19

EXERCISE 23.6
a. The transaction is not in the normal course of operations and the
transaction has commercial substance:

Verez Limited:
Machinery (new)................................................. 700
Accumulated Depreciation–Machinery1 ........... 6,100
Retained Earnings ............................................. 200
Machinery (old) ......................................... 7,000
1
($7,000 - $900)
Consior Inc.:
Machinery (new)................................................. 900
Accumulated Depreciation–Machinery2 ............ 24,300
5,300
Contributed Surplus ................................. 200
Machinery (old) ......................................... 6,000
2
($6,000 - $700)

Since the transaction is not in the normal course of operations for

the two companies and there is no change in the ownership
interest in the machinery, the transaction is measured at its
carrying amount.

b. The transaction is not in the normal course of operations and the

transaction does not have commercial substance:

The entries are the same as for part (a). Since the transaction is not
in the normal course of operations for the two companies and there
is no change in the ownership interest in the machinery, the
transaction is measured at its carrying amount regardless of
whether the transaction has commercial substance or not.

A related-party transaction that is not in the normal course of

operations requires additional support for the substance of the
transaction in order for the exchange amount to be used for
financial reporting purposes. This is considered to occur when a
change in the ownership interests in the item transferred is
substantive and the exchange is supported by independent
evidence.

Solutions Manual 19.168 Chapter 19

EXERCISE 23.6 (CONTINUED)

b. (continued)

In this case, the exchange amount is more representative of the

economic reality of the transaction than the carrying amount and
is sufficiently reliable to be used for financial reporting purposes.

c. The transaction is in the normal course of operations and the

transaction has commercial substance:

Verez Limited:
Machinery (new) ................................................ 1,000
Accumulated Depreciation–Machinery3 ........... 6,100
Gain on Disposal of Machinery ............... 100
Machinery (old) ......................................... 7,000
3
($7,000 - $900)

Consior Inc.:
Machinery (new) ................................................ 1,000
Accumulated Depreciation–Machinery4 ........... 5,300
Gain on Disposal of Machinery ............... 300
Machinery (old) ......................................... 6,000
4
($6,000 - $700)

As long as the amount of the exchange is supported by

independent evidence, the transaction is recorded at the exchange
amount and a gain or loss is recorded on each company’s income
statement.

d. The transaction is in the normal course of operations and the

transaction does not have commercial substance:

The entries are the same as for part (a). A nonmonetary

transaction that does not have commercial substance would be
measured at the carrying amount. In such a case, the adjustment
to retained earnings is considered a capital payment by Verez and
a capital receipt by Consior.

Solutions Manual 19.169 Chapter 19

EXERCISE 23.6 (CONTINUED)

e. Under ASPE, certain related-party transactions must be

remeasured to the carrying amount of the underlying assets or
services that were exchanged. This is the case if the transaction
is not in the normal course of business, there is no substantive
change in ownership, and/or the exchange amount is not
supported by independent evidence. Transactions that are in the
normal course of business that have no commercial substance
must also be remeasured, and where the transaction is also a
nonmonetary transaction, no gain or loss should be recognized.

Under IFRS, if there is no commercial substance (as is the case for

b and d) we should measure at the carrying amount (per IAS16.24)
For b and d the journal entries would be as follows:

Verez Limited:
Machinery (new) ................................................ 900
Accumulated Depreciation–Machinery5 ........... 6,100
Machinery (old) ......................................... 7,000
5
($7,000 - $900)

Consior Inc.:
Machinery (new) ................................................ 700
Accumulated Depreciation–Machinery6 ........... 5,300
Machinery (old) ......................................... 6,000
6
($6,000 - $700)

For scenario a and c, the entries would be recorded as in part c.

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

Solutions Manual 19.170 Chapter 19

EXERCISE 23.7

a. (1) The issuance of common shares is an example of a

subsequent event which provides evidence about conditions
that did not exist at the SFP date but arose subsequent to that
date. Therefore, no adjustment to the financial statements is
recorded. However, this event should be disclosed in the
notes, a supplemental schedule, or even through pro-forma
financial data as the issuance of the shares is dilutive for the
existing shareholders.

(2) The changed estimate of tax payable is an example of a

subsequent event that provides additional evidence about
conditions that existed at the SFP date. The income tax
liability existed at December 31, 2023, but the amount was not
certain. This event affects the estimate previously made and
should result in an adjustment of the financial statements. The
correct amount ($1,200,000) would have been recorded at
December 31 if it had been available. Therefore, Jason should
increase the income tax expense in the 2023 income statement
by $200,000. In the SFP, income tax payable should be
increased and retained earnings decreased by $200,000.

Solutions Manual 19.171 Chapter 19

EXERCISE 23.7 (CONTINUED)

b. The income tax payable as at December 31, 2023 should be

increased to $1.2 million because the information about the
increased estimate is available before the financial statements are
considered authorized by the board of directors for issue (March
10, 2024). In the time between December 31, 2023 and March 10,
2024, the company is preparing to issue its financial statements
and annual report, including preparing the necessary adjusting
entries to ensure that all material transactions are reflected in the
financial statements. Accordingly, an additional accrual of
$200,000 dated December 31, 2023 should be recorded to reflect
the additional income tax expense for 2023. Investors would rely
on the financial statements in assessing the company’s
performance, making their investing decisions and predicting
future cash flows. Therefore, investors would support increasing
the estimate of income tax payable as at December 31, 2023 so
that they may make their decisions based on financial statements
that are relevant, faithfully representative, complete, and free from
material error.

c. The accounting treatment and answers provided in (a) and (b)

would not change had Jason Corporation followed ASPE.

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

Solutions Manual 19.172 Chapter 19

EXERCISE 23.8

1. a. 4. b. 7. c. 10. c.
2. c. 5. c. 8. b. 11. a.
3. b. 6. c. 9. a. 12. b.
LO 6 BT: K Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.173 Chapter 19

PROBLEM 23.3
a.
SAMSON CORPORATION
Statement of Financial Position
As at December 31, 2023

Assets
Current assets
Cash ($571,000 – $400,000) $ 171,000
Accounts receivable
($480,000 + $30,000) $ 510,000
Less allowance for
expected credit losses 30,000 480,000
Notes receivable 162,300
Inventory (FIFO) at LC&NRV 645,100
Prepaid expenses 47,400
Total current assets $1,505,800

Long-term investments
Investments in land 185,000
Cash surrender value of
life insurance 84,000
Cash restricted for plant
expansion 400,000 669,000

Property, plant, and equipment

Plant and equipment
(pledged as collateral
for bonds)
($4,130,000 + $1,430,000) 5,560,000
Less accumulated
depreciation 1,430,000 4,130,000
Land 446,200 4,576,200

Goodwill 252,000
Total assets $7,003,000

Solutions Manual 19.174 Chapter 19

PROBLEM 23.3 (CONTINUED)

a. (continued)

Liabilities and Shareholders’ Equity

Current liabilities
Accounts payable $ 510,000
Income taxes payable 145,000
Dividends payable 200,000
Salaries and wages payable 275,000
Unearned revenue 489,500
Interest payable
($750,000 X 8% X 8/12) 40,000
Total current liabilities $1,659,500

Long-term liabilities
Notes payable (due 2025) 157,400
8% bonds payable (due 2028; secured
by plant and equipment)1 705,939 863,339

Total liabilities 2,522,839

Shareholders’ equity
Common shares, unlimited authorized
184,000 shares issued and
outstanding 1,840,000

Retained earnings2 2,490,161

Accumulated other comprehensive income 150,000

Total shareholders’ equity 4,480,161
Total liabilities and
shareholders’ equity $7,003,000

Solutions Manual 19.175 Chapter 19

PROBLEM 23.3 (CONTINUED)

a. (continued)
1
To find the effective interest rate on the note:
($750,000 x 93.4 = $700,500)

Using a financial calculator:

PV $ 700,500
I ? Yields 9.73%
N 5
PMT $(60,000)
FV $(750,000)
Type 0
Using Excel formula: =RATE(nper,pmt,pv,fv,type)

Result: .097290274 rounded to 9.73 %

Solutions Manual 19.176 Chapter 19

PROBLEM 23.3 (CONTINUED)

a. (continued)

Interest expense = $700,500 X 9.73% X 8/12 = $45,439

Interest payable = $750,000 X 8% X 8/12 = $40,000
$45,439 – $40,000 = $5,439 amortization of discount for 2023

Carrying amount of bonds payable: $700,500 + $5,439 = $705,939

2
Retained earnings $2,810,600
Salaries and wages expense omitted (275,000 )
Interest expense omitted (45,439)
$2,490,161
Additional comments:

1. The information related to the competitor should be disclosed because

this innovation may have a significant effect on the company. The value
of the inventory is overstated because of the need to reduce selling
prices. This factor along with the net realizable value of the inventory
and the specially designed new plant should be disclosed.
Consideration should be given as to whether or not Samson is a going
concern under these circumstances or whether any of Samson’s
product lines and the associated plant assets (where the fixed costs
may only be partially recovered) have suffered impairment.

2. The pledged assets should be described in the SFP as indicated or in a

footnote.

3. The error in calculating inventory will have been offset, so no adjustment

is needed in the SFP. The comparative income statement and
statement of changes in shareholders’ equity for 2022 will need to be
restated to reflect the correction of this error. If 2021 is also disclosed
on the income statement, it too will need to be corrected for cost of
goods sold. If 2021 is a period covered in the statement of shareholders’
equity, it will need to be restated as well.

4. Salaries and wages payable is included as a liability and retained

earnings are reduced, ignoring income tax effects.

Solutions Manual 19.177 Chapter 19

PROBLEM 23.3 (CONTINUED)

a. (continued)

5. The fact that the gain on sale of plant assets was credited directly to
retained earnings has no effect on the SFP presentation; the income
statement and statement of changes in shareholders’ equity will need
to be corrected, ignoring any tax effects.

6. The plant and equipment account should be separately disclosed and

depreciation calculated on each item individually; accumulated
depreciation should be also split out on the SFP or in the financial
statement notes. However, the information to divide the accounts was
not given in this problem.

7. Accrued interest on the bonds ($750,000 X 8% X 8/12 = $40,000) was

not recorded. Interest expense will reduce retained earnings ($700,500
X 9.73% X 8/12 = $45,439). The related discount ($45,439 – $40,000 =
$5,439) will increase the carrying amount of the bonds and will be
amortized over the life of the bonds.

8. The company needs to include a summary of accounting policies in its

notes, detailing its accounting policies for inventory (FIFO), depreciation
method for plant and equipment (straight-line), revenue recognition
policy, and any other policies used.

9. The inventory needs to be reported at the lower of cost and net

realizable value.

10. There is no adjustment needed for the change in the percentage of

sales used for estimating the loss on impairment of receivables. This
change is treated as a change in an accounting estimate.

11. The uninsured damage to the plant would require disclosure if it is

significant (but it would not result in an adjustment to the financial
statements).

Solutions Manual 19.178 Chapter 19

PROBLEM 23.3 (CONTINUED)

b. Management has the primary responsibility for the preparation, integrity,

and objectivity of the company’s financial statements. If management
wishes to present information in a certain way, it may do so. If the auditor
objects because GAAP is violated, some type of audit report exception
will be required.
LO 6 BT: AP Difficulty: C Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 19.179 Chapter 19

Solutions Manual 19.180 Chapter 19

PROBLEM 23.5

a. The auditor might recommend the following notes be appended to the

financial statements in regard to item 2 and item 3.

Note A. In 2023, depreciation of plant assets is calculated by the

straight-line method. In prior years, depreciation was calculated using
an accelerated method. The new method of depreciation was adopted
to better represent the pattern of benefit provided by these assets and
has been applied prospectively effective January 1, 2023. The change
in accounting estimate has not affected prior year comparative amounts.
Other Observations
1 The change in method of calculating depreciation for all capital
assets represents a change in accounting estimate and as such is
accounted for on a prospective basis.

2. Accordingly, the new method should be reflected in the current-year

financial statements, and the financial statements included for
comparative purposes should not be restated.

Note B. The Canada Revenue Agency (CRA) is examining the federal

income tax return, filed by the Corporation’s domestic subsidiary for the
year 2021. The CRA has questioned the amount of a deduction claimed
for a loss sustained by the subsidiary in 2021. The examination by the
CRA has not progressed to the point that would indicate the extent of
the subsidiary’s liability, if any. The Company believes that it will not be
subject to any substantial consolidated income tax liability with respect
to this matter.

Solutions Manual 19.181 Chapter 19

PROBLEM 23.5 (CONTINUED)

a. (continued)

Note C. The company’s wholly owned subsidiary, Row Inc. is currently

involved in an investigation of alleged questionable acts, and possibly
illegal acts, on the part of its officers and employees. An investigation is
underway and no conclusion has yet been reached by the RCMP
investigating the matter. Row Inc. is vigorously defending itself. The
company has guarantees in place for Row Inc.’s bank loans
outstanding. Any adverse consequences stemming from the outcome
of this matter will not significantly affect the operations of the company
and appropriate provisions have been put into place and charged to
income in the current fiscal year.

Comments and assumptions concerning Note C:

The issues surrounding Row Inc.’s bribery charges are of a different

nature than the previous 3 items in this question. The issues in this case
reside with the wholly owned subsidiary and not directly with Khim Inc.

It is assumed that the amounts of the loan guarantees are not going to
jeopardize the future operations of Khim. Khim will not be involved in
Row’s bankruptcy except as an unsecured creditor. As the owner of
Row, Khim has limited liability over the other unpaid debts of Row
following bankruptcy. Based on Row’s legal counsel’s opinion, Khim’s
investment in Row should be written off immediately. The liabilities for
the amounts owed on bank loans guaranteed by Khim need to be
accrued along with the recording of a corresponding loss on Khim’s
income statement. There is no need to issue a modified auditor’s report
on the part of the auditor as all of these adjustments and disclosures
have been made to the consolidated financial statements.

Solutions Manual 19.182 Chapter 19

PROBLEM 23.5 (CONTINUED)

b. Item 1. Non-accounting matters such as management changes and

pending proxy fights are not disclosed unless such information is
needed for the proper interpretation of the financial statements. The
president should be informed that notes are an integral part of the
financial statements and as such should be limited to information that
relates to the financial statements. Furthermore, there is no certainty
that a proxy fight will materialize and, hence, in view of the uncertainty,
no reason for note disclosure. Disclosure of events that have no
relevance to those matters essential to proper interpretation of the
financial statements frequently creates doubt as to the reasons for
disclosure and inferences drawn could be misleading. Information about
the pending proxy fight might be included in the president’s letter to the
shareholders, which is usually an integral part of a company’s annual
report.
LO 2 BT: C Difficulty: M Time: 35 min. AACSB: Audit CPA: CPA: cpa-t001 cpa-t004 CM: Reporting and Audit

Solutions Manual 19.183 Chapter 19

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