Ch - 23 Book Solutions - Kieso, Intermediate Accounting, 12e Canadian, Volume 2 PDF

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Kieso, Intermediate Accounting, 12e Canadian, Volume 2...

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

CHAPTER 23 OTHER MEASUREMENT AND DISCLOSURE ISSUES Learning Objectives 1. Understand the importance of disclosure from a business perspective. 2. Review the full disclosure principle and how it is implemented, and explain how companies use accounting policy notes. 3. Describe the disclosure requirements for major segments of a business. 4. Describe the requirements and accounting problems associated with interim reporting. 5. Discuss the accounting issues for related-party transactions. 6. Identify the accounting issues relating to subsequent events and those faced by unincorporated businesses. 7. Identify the major considerations relating to bankruptcy and receivership. 8. Identify the major disclosures found in the auditor’s report. 9. Describe methods used for basic financial statement analysis and summarize the limitations of ratio analysis. 10. Identify the major differences in accounting between IFRS and ASPE, and what changes are expected in the near future.

Solutions Manual

23-1

Chapter 23

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, Twelfth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Ite m

LO

BT Item

1. 2. 3. 4. 5 6.

1 2 2 2 2 3

C C C C C C

1. 2. 3.

2 2 2

C C C

1. 3 AP 2. 2,10 C 3. 6 AP 1. 1,4

AN

1. 4,5

AN

1. 3,8 2. 5,6

AP AP

Solutions Manual

LO

BT Item LO BT Item LO BT Item LO BT

Brief Exercises 7. 3 AP 13. 5 AP 19. 7 C 25. 8. 3 AP 14. 5 AP 20. 8 C 26. 9. 3 AP 15. 5 AP 21. 8 C 10. 4 K 16. 5 C 22. 9 AP .11. 4,10 C 17. 6,10 C 23. 9 AP 12. 5,10 AP 18. 6 C 24. 9 C Exercises 4. 3 AP 7. 6 C 10. 2,8 C 13. 5. 5 AP 8. 6 K 11. 9 AP 14. 6. 5 AP 9. 7,8 C 12. 9 AP 15. Problems 4. 2 C 7. 2,6 C 10. 6 AP 5. 2 C 8. 2 C 11. 9 AP 6. 3 C 9. 2 AP Cases 2. 3. Integrated Cases 2. 1,2 AN 3. Research and Analysis 3. 4 AP 5. 4 AP 6. 6,7,9 AN 7. 4. 4 AP

23-2

9 AP 3,9 AP

2,9 AP 2,9 AP 9 AP

10

AP

Chapter 23

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, Twelfth Canadian Edition

Summary of Legend: The following abbreviations will appear throughout the solutions manual file. LO BT

Difficulty:

Time: AACSB

CPA CM

Solutions Manual

Learning objective Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to complete in minutes Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflective Thinking Reflec. Thinking CPA Canada Competency Map Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation

23-3

Chapter 23

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, Twelfth Canadian Edition

ASSIGNMENT CLASSIFICATION TABLE Topics

Brief Exercises

Exercises Problems

1.

Disclosure from a business perspective.

2.

Full disclosure principle 2, 3, 4, 5 and accounting policy notes.

1, 2, 3, 10 2, 3, 4, 5, 7, 8

3.

Segment reporting; diversified firms.

6, 7, 8, 9, 25

4,

Interim reporting.

10, 11

5.

Related-party transactions.

12, 13, 14, 15, 16

5, 6

6.

Subsequent events.

17, 18

7, 8,

2, 3, 7, 11

5.7.

Bankruptcy and receivership

19

9,

5

8.

Auditor’s report.

20, 21

9, 10

4, 5

Financial statement analysis.

22, 23, 24, 25, 26

11, 12, 13, 12 14, 15

54.

9.

Solutions Manual

1

1, 6, 9

10

23-4

Chapter 23

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, Twelfth Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Description

Level of Time Difficulty (minutes)

E23.1 E23.2 E23.3 E23.4 E23.5 E23.6 E23.7 E23.8 E23.9 E23.10 E23.11 E23.12 E23.13 E23.14 E23.15

Disclosure Illegal acts Accounting policies Segmented reporting Related-party transaction Related-party transaction Subsequent events Subsequent events Receivership and bankruptcy Auditor’s report Percentage analysis Percentage analysis Percentage analysis Ratio analysis Analysis of given ratios

Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Complex Moderate Moderate Moderate

15-20 15-20 10-15 10-15 20-25 20-25 15-20 10-15 10-15 10-15 20-25 35-45 15-20 20-25 20-25

P23.1 P23.2 P23.3 P23.4 P23.5 P23.6 P23.7

Segmented reporting General disclosures Subsequent events Disclosures required in various situations Disclosures required in various situations Segment reporting—theory Disclosures, conditional and contingent liabilities General disclosures, inventories, property, plant, and equipment Segment reporting Subsequent events Ratio analysis and projections

Moderate Moderate Complex Moderate Moderate Simple Simple

25-30 30-40 40-50 20-25 30-35 20-25 25-30

Simple

10-20

Moderate Moderate Complex

30-35 20-25 50-60

Item

P23.8 P23.9 P23.10 P23.11

Solutions Manual

23-5

Chapter 23

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, Twelfth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 23.1 Full disclosure is essential to the proper functioning of capital markets because the information provided in financial statements and the accompanying notes to financial statements is used by investors in making their investing decisions. Investors rely on this information to compare the performance of similar companies and to assess the relative risks and returns of different investments. Full disclosure of all material information helps to ensure that investors can make their investing decisions based on faithfully representative information. Full disclosure also specifically supports relevance, the ability to use the financial information to predict future cash flows and to confirm that information in the future. Private companies generally have fewer disclosure requirements because many private entities have less complex business transactions and stakeholders of private companies (such as shareholders) tend to have greater access to information about the entity. Overall, increased disclosure requirements for public companies helps to ensure that economic resources are allocated efficiently and helps to ensure the proper functioning of capital markets. LO 1 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

23-6

Chapter 23

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, Twelfth Canadian Edition

BRIEF EXERCISE 23.2 a.

The increased likelihood that the company will suffer a costly strike requires no disclosure in the financial statements. The possibility of a strike is an inherent risk of many businesses. It, along with the risks of war, recession, etc., is in the category of general news and reporting on such a general contingency is beyond the scope of financial reporting.

b.

A note to the financial statements should provide a description of the discontinued operation in order that the financial statement user has some understanding of the nature of this item and its effect on financial performance and position. The reason for the disposition should also be included in the note.

c.

Gain contingencies and contingent assets are not recorded in the accounts. However, contingent assets that may materially affect a company’s financial position should be disclosed where an inflow of economic benefits is probable. In most situations, an asset would not be recognized until the claim settlement occurs, at which time the related asset is no longer a contingent asset, and its recognition is appropriate.

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

Solutions Manual

23-7

Chapter 23

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, Twelfth Canadian Edition

BRIEF EXERCISE 23.3 The reader should recognize that the firm has an obligation for lease payments of approximately $6,711,000 for each of the next three years. In certain situations, this information is very important in determining: (1) the ability of the firm to use additional lease financing, and (2) the nature of maturing commitments and the amount of cash expenditure involved. Off–balance-sheet financing is common and the investor should be cognizant that the company has a commitment even though it is not reflected in the liability section of the SFP. The rental income from the subleases also provides useful information concerning the company’s ability to generate revenues and to cover, in part, the cash flow commitment in the three-year period. LO 2 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

23-8

Chapter 23

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, Twelfth Canadian Edition

BRIEF EXERCISE 23.4 The reader should recognize that there are dilutive securities outstanding but the overall impact on earnings per share must be compared to recent and current EPS to be meaningful. In addition, the purchase of shares enabled the company to increase its earnings per share. LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 23.5 I disagree with the president. Although Uddin may have had a longstanding practice to distribute dividends in a consistent and timely fashion over the years, this practice is at the discretion of the board of directors and could change at any time. Shareholders know the limitation of dividends and would likely be confused concerning any entitlement should a statement concerning dividends appear in the list of accounting policies of the company. The dividend payments are a practice of the business and not a policy, in the sense of an accounting policy to the financial statements. The additional section of the Management Discussion and Analysis (MD & A) to the annual report will contain such management statements as it is intended to view the company through the eyes of management. The MD & A is not audited. LO 2 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

23-9

Chapter 23

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, Twelfth Canadian Edition

BRIEF EXERCISE 23.6 It should be emphasized that because a company discloses its segmented results, this does not relieve the necessity for providing consolidated results as well. Sometimes individuals become confused because they believe that using segmented reporting means that consolidated statements should not be presented. There is a need to provide both types of information. The consolidated results provide information on overall financial position and profitability, while the segmented results provide information on the specific details that comprise the overall results. Segmented information is needed in part because (a) sales and earnings of individual segments are needed to forecast consolidated profits because of the differences among segments in growth rate, risk, and profitability, and (b) segmented reports disclose the nature of a company’s businesses and the relative size of the components, which aids in evaluating the company’s investment worth. LO 3 BT: C Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 23.7 Total revenues: $600 + $650 + $250 + $375 + $225 + $200 + $700 = $3,000 Revenue threshold: $3,000 X 10% = $300 Therefore, Gamma, Kennedy, Red Moon, and Nuhn meet this test and are reportable segments under IFRS. Note that the revenue employed in this calculation includes both sales to external customers and intersegment sales or transfers, not consolidated revenue. Segmented reporting is not required under ASPE. LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

23-10

Chapter 23

Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Wiecek, McConomy

Solutions Manual

Intermediate Accounting, Twelfth Canadian Edition

23-11

Chapter 23

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, Twelfth Canadian Edition

BRIEF EXERCISE 23.8 Greater of a or b (in absolute terms) compared to operating profit or loss: a. Segments reporting a loss: (40) + (20) = (60) x 10% = $6 b. Operating profits: $90 + $25 + $50 + $34 + $100 = $299 Operating profits threshold: $299 X 10% = $29.9 Therefore, Gamma, Kennedy (loss), Red Moon, Tsui, and Nuhn meet this test and are reportable segments under IFRS. LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 23.9 Segment assets: $500 + $550 + $400 + $400 + $200 + $150 + $475 = $2,675 Segment assets threshold: $2,675 X 10% = $267.5 Therefore, Gamma, Kennedy, RGD, Red Moon, and Nuhn meet this test and are reportable segments under IFRS. LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

23-12

Chapter 23

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, Twelfth Canadian Edition

BRIEF EXERCISE 23.10 The accounting problems related to the presentation of interim data include: (a)Changes in accounting policies or methods. (b)The difficulty of allocating costs, such as income tax, pensions, etc., to the proper quarter. (c)Presentation of earnings per share (EPS) figures (basic and diluted). (d)Seasonality. (e)Auditor’s involvement in interim reports. LO 4 BT: K Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

23-13

Chapter 23

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, Twelfth Canadian Edition

BRIEF EXERCISE 23.11 Seasonality affects interim reports when wide fluctuations in profits occur because off-season sales do not absorb the company’s fixed costs. These costs often tend to remain fairly constant regardless of sales or production. Revenues and expenses must be recognized and accrued when they are earned or incurred according to IFRS. Companies can only defer recognition of costs or revenues when it is appropriate to do so. Deferral of costs is not appropriate unless the costs meet the definition of an asset. (Note: ASPE does not contain any guidance for reporting segmented information or interim reporting.) It is difficult to completely overcome the problem of seasonality, but disclosure as to the nature of the seasonality factors that face the business and the pattern of revenues and expenses (including comparative data) may help users of the financial statements to understand whether seasonality is an adverse issue in any particular case. The effects of seasonality would be the same for companies following IFRS and ASPE, except that the level of disclosure would be enhanced for those using IFRS. LO 4,10 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

23-14

Chapter 23

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, Twelfth Canadian Edition

BRIEF EXERCISE 23.12 (a)

ASPE: Land............................................................ Cash.....................................................

390,000 390,000

This is a related-party transaction. The transaction is considered not to be in the normal course of operations of the company. Since the land is acquired from the company president (assuming the president is not a significant shareholder) there is a change in ownership of the land. As well, the amount of the exchange is supported by an independent appraisal. The transaction is therefore measured at the exchange amount. Disclosure of the transaction would include a description of the relationship, a description of the transaction and amount, measurement basis, and any amounts due to the company president. However, if the president is a significant shareholder, and especially if the president holds a controlling interest and this is a noncash transaction, a different conclusion may be reached as to how the transaction should be valued, as there is no beneficial change in ownership in the assets. ...