Beechy/Conrod, Intermediate Accounting, 4th Edition

BEECHY/CONROD, INTERMEDIATE ACCOUNTING, 4th EDITION
SOLUTIONS TO CONCEPT REVIEW QUESTIONS
VOLUME 1
CHAPTER 1
Page 3
1. A bookkeeper is responsible for recording transactions. An accountant is respon-
sible for setting the accounting policies that determine how those transactions will
be recordedfor example, how to classify and record transactions, how to disclose
those transactions in the financial statements, and how to measure the value of
assets and liabilities and their related revenues and expenses.
2. Financial reporting is concerned mainly with producing, for use by both internal
and external stakeholders, financial statements that report on the economic
well-being of an organization and on the flow of its resources. In contrast,
management accounting is concerned mainly with the preparation and analysis of
information for the exclusive use of internal users (i.e., management). The level of
detail is much greater, and the basis of accountability may differ from that
presented in the organizations financial statements.
3. Point statements are prepared at a specific point in time and represent the stock
or balance at that time of certain accounts. The balance sheet is a point statement.
Flow statements report changes in accounts over time. Examples include the income
statement, statement of changes in retained earnings, and cash flow statement.
Page 6
1. A public corporation issues securities (debt or equity) to the public; a private cor-
poration does not. A public corporation must be registered with the securities
commissions in each province in which its securities are traded and must comply
with the reporting requirements of those commissions. In the Canadian economy,
most corporations are privately owned.
2. A corporation can obtain capital from external investors without registering
with provincial securities commissions (i.e., going public) by raising funds pri-
vately through institutional investors. Another alternative is to ensure that each
individual investor invests capital of at least a minimum amount of $150,000. Such
investors are presumed to be sophisticated and so to not require the protection
offered by provincial regulations.
3. A control block exists when a small number of related or affiliated shareholders
hold a majority of the voting shares, thereby having the ability to control the
corporation.
Page 13
Beechy/Conrod, Intermediate Accounting, 4th Edition
Copyright 2008 McGraw-Hill Ryerson Ltd.
1. Not all Canadian generally accepted accounting principles are found in the
CICA Handbook. A vast amount of accounting practice exists beyond the Handbook
and is derived from historical precedent and acceptance. Also, GAAP for
specialized industries is not found in the Handbook.
2. EIC Abstracts, while issued by the CICA and included as a primary source of
GAAP, constitute expert opinion only and do not have the same authority as the
recommendations in the CICA Handbook itself. They have a lower ranking in the
hierarchy within the primary sources of GAAP.
3. Qualifying private corporations are allowed to use differential reporting.
4. As recognized in the CICA Handbook, the purpose of financial statements is to
meet the common information needs of external users of financial information
about an entity. In certain situations, GAAP may not be able to satisfy such needs.
A company may therefore opt for a disclosed basis of accounting (DBA) instead of
GAAP as a means to produce custom designed financial information that will
meet the informational needs of its stakeholders.
Page 24
1. Before one accounting policy is selected over another, the financial reporting
objectives of a company must be established. That is, the financial reporting
objectives of an enterprise must be known in order to ensure that the accounting
policies chosen will achieve those objectives (in the face of the multitude of pos-
sible accounting treatments available to the accountant).
2. A public company must provide financial information to a wide variety of
stakeholders with diverse objectives. For example, a public company may focus on
the perception of profitability for the purposes of sustaining or improving market
confidence in their stock. Therefore, the financial reporting objectives of the public
company may be tilted toward income maximization, income smoothing, or
stewardship evaluation. In contrast, a private company is not concerned with the
informational requirements or perceptions of the general public vis--vis its
financial statements, and may be able to focus on objectives such as income tax
minimization, cash flow prediction, anal contract compliance (with specific
stakeholders such as banks).
3. Shareholders agreements may influence a companys financial reporting
objectives by stipulating the accounting methods to be used. For example, since
there is no public market for the shares of private corporations, the shareholders
agreement may stipulate that the share prices will be a function of accounting
income or accounting asset values. The agreement will also stipulate the
accounting policies to be used in determining such values.
4. The objectives of financial statement users may conflict with the motivations of
managers if the users lack the power to enforce the dominance of their objectives.
For example, a manager may wish to maximize income in order to convey the
perception of exceptional performance (perhaps for the sake of her annual bonus),
while shareholders may prefer cash flow projection statements, or income
minimization statements (to minimize tax and therefore improve cash flow for
dividends). When the shareholders/users do not have the power to impose their
demands on management, managements objectives in preparing statements will
conflict with those of the users.
CHAPTER 2
Page 43
1. Financial statement concepts are used by the following:
standard setters.
those working to understand the rationale for standards.
accountants who seek to establish appropriate accounting policy in areas
where there are no standards.
financial statement users who are interpreting information prepared in
conformity with the concepts.
2. General- purpose financial statements are those prepared for distribution to a wide,
undefined public. As such, the statements have not been designed, and may not be
suitable, for use in specific decisions.
3. In exercising ethical professional judgment, a professional accountant must take
into account a variety of factors including, but not limited to, the following:
The users of the financial statements, and their specific informational
needs.
The motivations of managers.
The organizations operations (e.g., type of ownership, sources of
financing, nature of its operating cycle).
Reporting constraints, if any.
Page 48
1. The separate entity assumption may not be valid for a small corporation with a
single shareholder, as the shareholder may enter into various (non-arms length)
transactions with the corporation, thereby blurring entity definitions. While a
corporation is legally a separate entity, the owner of a small corporation, having
full control over the affairs of the corporation, may mix business and personal
affairs by, for example, intermingling cash funds and interchanging business and
personal assets. The owner may extend loans to the corporation that are, in
substance, equity infusions. In recognition of this, a bank may require personal
guarantees from the owner of the corporations debts.
2. The continuity assumption may not be valid in two instances; first, if the
business is a limited-life venture intended only to exist for a limited period of time;
second, when a business is in financial difficulty and is expected to be shut down
or liquidated.
3. The alternative to the proprietary concept is the entity concept. The entity
concept considers that the owners (shareholders) are but one of many participants
in the enterprise and that the net value added by the enterprise is distributed to
the various factors of production. Factors of production include the providers of
capital and labour, and the government; the residual represents reinvestment in
the enterprise (the entity).

4. In a country with extreme annual inflation rates, the nominal dollar financial
capital maintenance assumption is not appropriate. In such countries, a business is
deemed to have earned a profit only if it has generated enough earnings to main-
tain the purchasing power of the owners equity. Due to high inflation, capital
assets and income measured in nominal dollars may materially misrepresent
financial performance, as their purchasing power may be severely eroded from
period to period.
Page 53
1. The concept of relevance is the most important qualitative characteristic of
accounting information. If the accounting information is to be of any use, it must
be relevant to its intended use.
2. The criterion of understandability does not imply that all information must be
reduced to the lowest common level or simplified so that the least sophisticated
investor would understand it. Rather, it is presumed that investors and creditors
have a reasonable understanding of business and economic activities, as well as
some understanding of accounting.
3. The three components of reliability are representational faithfulness (including
substance over form), verifiability, and freedom from bias (or neutrality).
4. The four characteristics of objectivity are quantifiability, verifiability, freedom
from bias, and non-arbitrariness.
5. There are often trade-offs between different qualitative criteria, as a given
qualitative criterion may be satisfied only at the expense of another. For example,
consider the concepts of relevance versus reliability: while financial information
may become more reliable as time goes on and facts are confirmed, such infor-
mation may be more relevant now, when decisions must be made.
Page 58
1. The seven elements of financial statements are: assets, liabilities, equity/net
assets (balance sheet), revenue, expenses, gains, and losses (income statement).
2. To justify recognition of an item in the financial statements, the following three
criteria must be met:
The item meets the definition of one of the seven elements.
The item has an appropriate basis of measurement, and a reasonable
estimate can be made of the amount.
For assets and liabilities, it is probable that the economic benefits will be
received or given up, i.e., realized.
3. Realization is the process of converting an asset, liability, or commitment into a

cash flow (transactional event). Recognition is the process of measuring and
including an item in the financial statements (accounting event). Recognition may

precede realization (e.g., in accrual accounting); however, once realization has
occurred, recognition must occur because there has been a cash flow impact that
cannot be ignored in the accounts.
4. Accrual accounting means that assets and liabilities are recognized in the period
in which the rights and obligations pertaining to them are established. Interperiod
allocation is the recognition as expenses of those amounts that were originally
recognized as assets, or the recognition of income for an item previously
recognized as a liability. Interperiod allocation follows accrual accounting, bring-
ing into income (or expense) assets or liabilities recognized in the accrual
accounting entry (in a previous period).
Page 62
1. Inventories are usually measured at historical cost, but will be reported at net
realizable value (NRV) if NRV is less than cost. Certain types of inventories, such
as agricultural and mineral inventories, may be valued at market value.
2. The three explicit conditions that must be met to recognize revenue are:
1. All significant acts required of the seller have been performed, and the risks
and rewards of ownership have passed to the buyer.
2. The consideration is measurable.
3. Collection is reasonably assured.
3. Period costs are only indirectly related to specific revenue-generating activities.
They do not lend themselves easily to matching to specific revenues. Therefore,
period costs are usually recognized as expenses during the time period in which
they are incurred.
4. Full disclosure means that the financial statements should contain all relevant
information bearing on the economic affairs of a business. However, it is not
practical to provide all available information in the disclosure notes. The goal is to
disclose enough supplemental information to keep from misleading the users of
the statements.

CHAPTER 3
Page 81
1. The income statement links a companys beginning and ending balance sheets
for a given accounting period. That is, the net change in the balance sheet (change
in retained earnings) is represented by the net income for the accounting period
(assuming there were no capital transactions or transactions charged to retained
earnings).
2. The events approach to accounting recognizes changes in the economic wealth or
value of assets regardless of whether a transaction has occurred. The transaction
approach relies on the occurrence of completed transactions (e.g., a sale of an asset
or purchase of an asset) to recognize income. Economic income is based on the
events approach, whereas accounting income is based on the transactions approach.
3. The vast majority of recognized changes in assets and liabilities are reported on
the income statement. However, there are some changes in value that are
recognized on the balance sheet, but which have not yet been realized. These are
generally value changes (1) that will be recognized in income only when realized,
or (2) that will be matched by an offsetting gain or loss in a future period. These
excluded items are reported in the statement of comprehensive income. Other
items excluded from the income statement are cumulative changes to retained
earnings that are the result of (1) changes in accounting policy or (2) corrections of
errors in prior periods. These items are reported in the statement of retained
earnings.
Page 88
1. The three basic sections of an income statement required by the CICA Handbook
are income from continuing operations, discontinued operations, and
extraordinary items.
2. In a single-step income statement, interest in respect of long-term debt appears
in the expenses or losses section, where operating and non-operating expenses are
aggregated. In a multiple-step income statement, interest in respect of long-term
debt may appear in the non-operations section or in another classification,
depending on the underlying activity funded by the debt.
3. Operating expenses relate to operations but are not included in cost of sales.
Other expenses reflect non-operating expenses, such as interest expense and
foreign exchange losses.
Page 91
1. A company may choose to have a year-end other than December 31 for the
following reasons:
If it is a low point in their seasonal pattern.
To have the same year-end as other companies in their industry.
To have the same year-end as their parent for easier consolidation.
If legislation mandates a certain year-end.
2. A Canadian company may choose to prepare its financial statements in U.S.
dollars because most of the companys business is conducted in U.S. dollars; or,
the companys major user groups (shareholders and/or lenders) may reside or
operate in the United States and for that reason prefer statements denominated in
U.S. dollars.
3. Comparative data are usually provided so that the companys performance can
be analyzed in relation to the prior year. Trends in financial information are much
more revealing than information for only one period.
Page 99
1. The three basic subsections of an income statement required by Canadian
GAAP are income from continuing operations, discontinued operations, and
extraordinary items.
2. Intraperiod tax allocation refers to the allocation of tax expense within a period
and within the income statement (and retained earnings statement) to various
items (e.g., the allocation of tax expense to continuing operations, discontinued
operations, and extraordinary items).
3. It is important to disclose discontinued operations separately, as the sale or
disposal of a segment of a business has important implications for predicting
future income and cash flow. Doing so highlights for users that a portion of the
business has been divested /disposed of, and that the revenues and costs
associated with that segment will therefore not be recurring.
4. The three criteria that a gain or loss must satisfy before it can be classified as
extraordinary are as follows:
(1) It is not expected to occur frequently over several years.
(2) It does not typify the normal business activities of the entity.
(3) It does not depend primarily on decisions or determinations by management
or owners (management cannot directly cause the gain /loss).
5. Extraordinary items have become rare in Canadian financial statements because
of the third criterion set out in the answer to question 4 above. Very few
transactions are considered to be outside the control of managers or owners.
Unusual items, by definition, are events or transactions that have a significant
impact on earnings but which are not part of normal operations. Management
has considerable discretion in determining what constitutes an unusual item
and hence they have become much more commonplace. Examples include
restructuring costs, writedowns of capital assets, and severance payments.
Page 103
1. The components of other comprehensive income are unrealized gains and losses
on available-for-sale financial assets, unrealized gains and losses from translating
the financial statements of foreign subsidiaries, unrealized gains and losses on
cash flow hedges, and unfunded pension liabilities that have not yet been
recognized as a gain.
2. An alternative title for other comprehensive income is other changes in
shareholders equity.
3. A financial asset is any contractual asset that gives the holder the right to receive
cash, and includes debt and shares of other corporations, as well as short-term
money market instruments. Available-for-sale financial assets are those that are
available for sale if the holder needs cash. This would exclude financial assets that
the holder intends to hold to maturity, such as long-term bonds, and also excludes
strategic investments that give the holder control over the issuer.
4. Comprehensive income is reported in the statement of comprehensive income

and in the statement of retained earnings.
Page 108
1. The five major components of a statement of retained earnings are:
Net income or loss for the period.
Dividends.
Prior-period error corrections.
Cumulative effect of retrospective changes in accounting policy.
Other changes such as capital transactions, appropriations, and restrictions.
2. Restrictions of retained earnings result from legal requirements, such as a
statutory requirement that retained earnings be restricted for dividend purposes by
the cost of any treasury stock held (an externally imposed requirement).
Appropriations of retained earnings result from formal decisions by the corporation
to set aside a specific amount of retained earnings (an internally imposed
requirement).
3. The normal approach to accounting for a change in accounting policy is to
retroactively apply the new policy and then restate the financial statements of
prior periods to reflect such changes, including the required adjustment to
opening retained earnings.
4. Errors in prior years statements are corrected by restating the financial
statements of prior periods. The transaction is backed out of the current years
income and recorded in the appropriate year. This treatment is retroactive.
Correction of accounting estimates is done on a prospective basis. The correction is
made in the current and future periods only. No adjustment is made to prior
periods.
5. Gains and losses from capital transactions are not reported on the income
statement because such transactions are not operating or income-earning activities
and because, furthermore, gains and losses created by such transactions are not
arms-length transactions, as they are conducted with the owners of the busi-
ness/corporate entity. Therefore, presentation on the income statement may be
misleading, as the amounts may not reflect arms-length values (whereas all other
amounts on the income statement presumably represent arms-length values of
transactions conducted in the normal course of business).
CHAPTER 4
Page 150
1. A companys major assets (i.e., the assets most important to its operations) may
not appear on its balance sheet for a number of possible reasons. Intangible assets
developed internally may not have clearly defined costs or may be discouraged
from capitalization under GAAP (e.g., goodwill, research and development costs).
The company may rely on leasing major capital assets as a means of financing.
Where such leases are structured as operating leases, the property is not recorded
on the balance sheet of the lessee.
2. Consolidated statements may raise a number of interpretive challenges. A large
conglomerate may own a number of subsidiaries operating in diverse industries.
The consolidated balance sheet of the entire group under common control may
distort the financial snapshot (i.e., the balance sheet amounts and relationships)
for any given industry in isolation. Through the process of preparing consolidated
balance sheets, the problems of one entity or industry may be masked. Also,
consolidated statements do not indicate which assets are available to satisfy
claims. In the event of a default, creditors have recourse only to the assets owned
by the legal entity to which credit has been extended; they cannot enforce their
claims on other corporations in the group (unless there is a prior agreement to
cross-guarantee debts).
3. For assets and liabilities, the definition of current is that such amounts are
expected to be realized within the normal operating cycle of the entity or within
one year from the balance sheet date, whichever is longer.
Page 158
1. Tangible capital assets include all property, plant, equipment, as well as resources
used in the companys production or service process; these are long-lived assets
with physical substance. Intangible capital assets are also long-lived but do not have
physical substance. Examples include brand names, copyrights, and patents.
2. In Canadian practice, assets typically are classified and presented in decreasing
order of liquidity (i.e., convertibility into cash). Therefore, cash and near-cash
assets are listed first, then all other current assets; long-lived capital assets with the
least liquidity are listed last.
3. Within shareholders equity there are three major classifications:
1. Contributed (or paid-in) capital.
2. Retained earnings.
3. Accumulated other comprehensive income (or other shareholders equity).
Page 167

1. The disclosure notes to financial statements provide qualitative information to
readers. Readers are then able to make their own assessment of the information
presented. Disclosure notes have the following functions: they provide accounting
policy information that allows users to evaluate data; they describe recognized
items that may be unusual or warrant explanation; they describe material but
unrecognized items; they provide information regarding future cash flows; they
provide alternative measurement bases for recognized and unrecognized
amounts; and they provide measures to help investors assess return on
investment.
2. Users of financial information may find segmented information useful because
when a company operating in diverse business segments/regions consolidates its
statements, the problems of individual business segments/regions may be
masked. When information for specific segments is provided, readers can see the
individual performances of various business segments and regions.
All public companies must identify their various operating segments, and
segments provided must account for 75 percent of total revenue. The definition of
segment allows for considerable judgment; for that reason, the disclosed segments
may still not yield meaningful details.
3. A related party transaction is one in which one of the parties is able to influence
the actions of the other. These transactions are not at arms length and may not
reflect fair market value.
4. The two conditions that must be fulfilled in order for a contingent liability to be
recognized (as opposed to merely disclosed) are as follows:
It is likely that a future event will confirm that an asset has been impaired or a
liability incurred at the date of the financial statements; and
The amount of the loss can be reasonably estimated.
5. Measurement uncertainty is the uncertainty or potential change in financial
statement items resulting from the use of estimated values for items.
6. When a firm is a questionable going concern, clear disclosure of the seriousness
of the situation is required. The required note is given a prominent position so that
it should not be missed by readers.
7. The purpose of the management discussion and analysis (MD&A) is to provide
information about the firms earnings and financial position for the reporting
period, the effects of laws and other environmental aspects, and the effects of
economic and business trends on the firm. It is expected to place particular
emphasis on the future; however, projections are not required. Most companies are
reluctant to discuss future plans.
The provincial securities commissions require an MD&A in annual reports of
public companies.

CHAPTER 5
Page 206
1. The three categories of cash flows that should be reported on a companys cash
flow statement are operating activities, investing activities, and financing
activities.
2. Cash for the purposes of the cash flow statement is best described as the
amount of funds that can be accessed by the company at any time. This generally
includes actual cash on hand (i.e., kept in a bank account) and cash equivalents
(short-term deposits and securities). Investments that are readily convertible to a
known amount of cash with no significant risk of change in value are included in
cash equivalents. Overdrafts are included when the balance fluctuates regularly
from positive to negative.
3. Cash from operations differs from net income as the latter is affected by
accounting policy choices (i.e., when to recognize revenues, expenses, assets, and
liabilities). However, cash flows are not affected by accounting policy choices. Net
income is based on the accrual concept and cash flow from operations is based on
receipts and disbursements.
Page 216
1. Amortization is added in deriving cash flow from operations from a starting
point of net operating income because it is a non-cash expense deducted in the
determination of net income. It is not a source of funds, as cash is not received
by the company for the amortization. Rather, it is an expense that did not require a
(current) outlay of cash and therefore must be added back. Recall that where net
operating income is the starting point, all accrual items, including non-cash
depreciation, have been included in that figure.
2. A gain on the sale of equipment is subtracted in the reconciliation of income
and operating cash flows as the gain figure is not a cash amount; rather, it is a
function of the sale price (proceeds) and the net book value (accounting accruals)
amounts. Therefore, the non-cash amount of the gain must be subtracted, and the
actual cash proceeds are recorded.
3. The change in the balance of accounts receivable is disclosed in the cash flow
statement under the indirect approach because the net income figure (the starting
point) is a function of the revenues recognized by the company in the year. The
revenue figure may differ from the actual amount of cash received in the year due
to credit sales. Therefore, the indirect method adjusts for non-cash sales by
recording the movement in the accounts receivable account (i.e., an increase in
accounts receivable represents an increase in outstanding credit sales, or revenues
recognized exceed cash collected in respect of those sales). The change in accounts
receivable is not disclosed under the direct approach, as the sales figure represents
the amount of sales for which cash has been collected.
4. An increase in salaries payable implies that salary expense exceeded salary
payments, as it indicates that an amount of salary costs accrued in the year remain
unpaid.
Consider the following example: The opening salary payable balance is $0. The
annual accrual of salary expense is recorded as follows:
Dr. Salary expense 100

Cr. Salary payable 100
If the balance remaining in the salaries payable account at the end of the year is
$25, it implies that the expense of $100 exceeded the amount paid of $75 in the
year.
5. Extraordinary items, to the extent that they do not reflect cash flow, are
adjusted as a non-cash item in the operating section of the cash flow. The cash
inflows or outflows are reported in the investing or financing section as
appropriate, on a before-tax basis.
6. Cash paid for interest that is reported on the income statement must be
disclosed on the cash flow statement. It may be disclosed in the notes or on the
face of the statement.
Page 218
1. When cash flow from operating activities moves in the same direction as net
income it means that the company has a high quality of earnings.
2. Development costs that are deferred and amortized are reported as an
investing activity in the cash flow statement. If they are expensed, they are
reported as an operating activity; they are an expense that is reflected in net
income.
Page 229
1. The $3,000 loss is included in net income, and because the short-term
investment is classified as a cash equivalent, there is no adjustment required.
2. The acquisition of the capital assets through the issuance of common shares is a
non-cash transaction. Thus it would have no impact on the cash flow statement.
However, the transaction would be described in the disclosure notes.
3. The investing and operating sections of the cash flow statement are identical
under the direct and indirect methods.
4. Canadian and IAS standards differ in the treatment of interest paid and
received, and dividends paid and received. In Canadian practice, if interest paid or
interest received is included in net income, then the interest will be included in the
operating activities section of the CFS. IAS 7 permits interest paid to be included
in operating activities or financing activities while interest received may be
included in operating activities or investing activities. In Canadian practice,
dividends received are included in operating activities while IAS 7 permits either
operating or investing activities, and dividends paid are included in financing
activities while IAS 7 permits either operating or financing activities.

CHAPTER 6
Page 272
1. The general revenue recognition principle is that changes in net assets (as a
result of the earnings process) should be recognized in the financial statements
when (1) performance is complete and has been accepted by the customer, and (2)
the consideration and any future costs can be measured with reasonable
assurance.
2. When revenue is recognized, accounts receivable is recorded if the sale is on
credit. Otherwise, cash is increased. In addition, inventory and deferred costs are
reduced and charged to cost of sales. Estimated future costs, such as warranty
costs, are recorded as a liability, and if cash had been previously received from the
customer in advance, the unearned revenue is transferred from the balance sheet.
3. The critical event in revenue recognition is the event that results in revenue
recognition. This is generally when the sale is made and the product or service is
transferred to and accepted by the customer.
4. Revenue might be recognized at more than one point in time if
1. A receipt of cash is the critical event and the buyer is paying in installments;
or
2. The earnings process spans more than one accounting period and the nature
of the process makes it possible for a portion of the total revenue to be recognized
in each period.
Page 276
1. The following criteria must be satisfied before revenue for a sale can be
recognized:
The sellers performance is complete and the seller has transferred the
significant risks and rewards of ownership.
The seller can reliably measure all costs relating to the transaction, past and
future.
The amount of revenue can be measured reliably.
The seller retains no continuing managerial involvement or control over the
goods sold.
2. If a buyer has not accepted the risks and rewards of the item being sold, the
transfer is not complete. If a buyer delays or refuses acceptance, the sale is not
complete and revenue should not be recognized.

3. When revenue is recognized, all costs, both past and present, must be
measurable. If the seller cannot reliably measure after-sale costs, revenue
recognition must be delayed until the costs are known or measurable, whichever
comes first. In addition, the amount of revenue must be measured reliably. For
example, there should be no revenue that is contingent on future events or
performance, and the collectibility of amounts owing must be reasonably assured.
4. Automobile manufacturers have been known to require dealers to accept the

manufacturers excess inventories at the end of the fiscal year. This is an example
in which the seller controls the product even after the sale.
Page 283
.1. Revenue recognition may be delayed beyond delivery if there are significant
uncertainties surrounding the transactionfor example, where there are uncer-
tainties regarding the costs associated with the remaining activities in the earnings
process (trial period, warranties, etc.), collection of the proceeds of the sale, or
measurement of costs.
2. Until the after-sale costs are known or measurable, revenue cannot be
recognized. Only when revenue is recognized does the net asset value of the
company change.
3. Under the installment sales method, both revenue and profit are recorded when
cash is received. Under the cost recovery method, the seller recognizes profit only
after sufficient cash has been received to offset all the related costs incurred.
4. A non-monetary transaction is any exchange of non-monetary assets, liabilities,
or services for other non-monetary assets, liabilities, or services, or any exchange
that has little or no monetary consideration involved.
Page 293
1. Qualitative characteristics better served by the completed-contract reporting
method are reliability and verifiability.
2. Financial reporting objectives better served by the percentage-of-completion
method are timeliness and relevance.
3. Estimates required in order to use the percentage-of-completion method include
estimates of revenues, estimated total costs, estimated costs to complete, and costs
estimated to be incurred in the current period.
4. Under the percentage-of-completion method, the construction in progress
account records inventory at cost plus recognized gross profit. In contrast, under
the completed-contract method the construction in progress is carried at cost.
Accordingly, the construction in progress account is higher under the percentage-
of-completion method.

Page 296
1. A contract should be accounted for as a multiple-deliverable contract only if
each component of the contract has value to the customer on a stand-alone basis,
and there is objective and reliable evidence of the fair value of each component.
2. The basis of valuation for the several parts of a multiple-deliverable contract are
the relative fair values of the components of the contract.
3. Revenue recognition often involves many estimates, thereby allowing managers

the ability to manipulate revenue and profit numbers. Accountants must be aware
of the unethical practices in order to thwart the attempt to mislead financial
statement users.
Page 298
1. A situation wherein a company might recognize a gain due to an event rather
than a transaction is when inventory items carried on the balance sheet are
reported at market values instead of cost. Examples include commodities and
marketable securities.
2. Adjustments to revenue (or accruals related to revenue) required in the prepa-
ration of the cash flow statement include changes in the trade accounts receivable
balance (e.g., credit sales), non-cash expenses recognized in order to achieve
matching to revenues (e.g., amortization and credit purchases), and unearned
revenues for which cash has been received but revenues not recognized.
3. The choice of a particular revenue recognition policy can have an enormous

impact on a companys earnings. It is important for a company to disclose its
policies in order for an investor to properly evaluate the companys prospects.
Page 304
1. A cost is incurred when there is an agreement to pay out cash. An expenditure is

the payment of the cash. An expense is when the cost or expenditure is recognized
for accounting purposes on the income statement.
2. The general recognition criteria for financial statement elements are that an item
must meet the definition of a financial statement element (asset, liability, equity,
revenue, expense, gain, or loss) and that it must have a valid basis of measurement
and an amount.

3. A cost is reported as an asset if a future economic benefit will arise from it. If
there is no such benefit, the item is an expense as it has no intrinsic value or future
cash flow.

CHAPTER 7
Page 337
1. Monetary items include money, as well as claims to or for money if the amount is
fixed by contract or agreement. Examples include cash, cash equivalents, accounts and
notes receivable, and accounts and notes payable.
2. Cash that is in a foreign currency fluctuation daily in terms of Canadian dollars as
the relevant exchange rate changes. In practice, the Canadian dollar equivalent,
calculated using the current exchange rate, is only computed at reporting dates.
3. A basic principle of internal control is the division of dutiesthe person who
handles the asset (e.g., cash) must not also keep the books. Access to both the asset and
the recordkeeping would allow an individual to steal the asset and create fictitious
accounting entries to cover up the fraud in the records of the enterprise.
4. A regular bank reconciliation is a crucial internal control exercise as it allows
management to compare its accounting records to records kept independently by
another companythe bank. The reconciliation enables the company to ensure that the
books are being kept accurately and that all expenditures and receipts are appropriate.
Since cash forms a part of so many transactions, the accuracy of the cash account may
be a good surrogate for the accuracy of other accounts.
Page 349
1. An allowance for doubtful accounts is established in an effort to value accounts
receivable properly. Uncollectible receivables are generally inevitable and without an
appropriate allowance the asset would be overstated.
2. The purpose of an aging schedule for accounts receivable is to create a profile of the
period outstanding for credit balances. This information may be used to assess the
amount of accounts receivable that is expected to become uncollectible (e.g., 50 percent
of accounts over 90 days have defaulted in the past) and, by correlation, to assess
managements performance in managing credit sales.
3. The transfer of accounts receivable without recourse means that the risk of non-
payment on the receivables sold is assumed by the finance company. If the accounts
cannot be collected in full, the financing company must absorb the loss. Since risk is
transferred, the vendor company will not show the receivable or a related liability on
its financial statements. The transfer of accounts receivable with recourse means that
the risk of nonpayment on factored accounts receivable remains with the vendor of the
accounts. If the finance company cannot collect the full amount of the factored
receivables, the vendor company must make good on the deficiency. As the risk of
default and ultimate liability remains with the vendor company, the receivables and
the liability to the finance company typically remain on its balance sheet.

Page 356
1. A low-interest loan carries an interest rate below the market rate for a comparable
loan. The loan is valued at its present value, calculated by using the market rate.
2. Over time, the discount on a note payable is amortized until its balance becomes
zero. The offsetting entry is a charge to interest expense.
3. A blended payment is a payment on a loan that contains both an interest component
and a principal repayment. A common example is a home mortgage loan requiring
payments over 25 years.
Page 363
1. The major categories of current liabilities are accounts payable, short-term notes
payable, dividends payable, advances and returnable deposits, taxes, bonuses,
monetary accrued liabilities, current loans payable, current portion of long-term
liabilities, non-monetary accrued liabilities, and unearned revenues.
2. GST is remitted on a net basis. GST paid on purchases is deducted from GST
collected during a period before the difference is remitted to the government.
3. Monetary items denominated in a foreign currency should be translated at the
current exchange rate on the balance sheet date.

CHAPTER 8
Page 402
1. Four policy issues to be considered when accounting for inventory are:
1. the determination of items/costs to be included in inventory
2. choice of accounting procedure (periodic versus perpetual systems)
3. cost flow assumptions for measuring cost of sales
4. the application of lower of cost or market valuations.
2. A manufacturer would have the following categories of inventory: raw materials,
work in progress, finished goods, and supplies inventories.
3. The three elements of cost that should be included in a manufacturers finished-
goods inventory cost are the laid-down cost of material, the cost of direct labour
applied to the product, and the applicable share of overhead expense properly
chargeable to production.
Page 407
1. Net realizable value is the estimated sale price less costs expected to be incurred in
preparing the item for sale. Net realizable value can also be taken further by deducting
the expected costs of sale as well as a normal gross profit margin.
2. A valuation allowance is a means of recording inventory at the lower of cost or

market (LCM). The inventory remains at historical cost on the books, but is reported on
the balance sheet net of the valuation allowance. Under the direct inventory reduction
method, each item of inventory is at LCM. If LCM has been applied to inventory
groups, it is impossible to record the writedown to specific inventory items and thus
the valuation method is used. Another advantage of the valuation allowance method is
the ease with which reversals can be handled.
3. Inventories may be valued at net realizable value, even if it is higher than historical
cost, in the case of commodity products. A public auction market exists for the
commodities and a sale can be completed at any time with minimal effort.
Therefore, the net realizable value of inventory may be recognized prior to sale, even if
it is higher than historical cost.
4. If NRV is to be used as the inventory measurement method for commodities, there

must be an active market for the commodity and the risk of not selling the product
must be negligible.
Page 415
1. A company may use an inventory estimation method as a cross-check on the results
of accounting inventory systems. The estimate allows a reconciliation of accounts to
identify discrepancies. Also, the estimation method allows for the preparation of

periodic financial statements between physical inventory counts for companies using
the periodic inventory method.
2. The retail inventory method differs from the gross margin method in that it uses a
computed cost ratio based on the actual relationship between cost and retail for the
current period, rather than the historical ratio used by the gross margin method.
3. Markdowns are excluded from the cost ratio when the retail method is used in order
to provide a conservative cost ratio. Inclusion of markdowns in the denominator of the
cost ratio results in a higher cost ratio, thereby potentially overstating the value of
ending inventory.
Page 428
1. In a periodic inventory system, the ending inventory quantities are determined at the
end of the accounting period. The unit costs are then applied to compute the ending
inventory valuation. Cost of goods sold is the cost of goods available for sale less the
ending inventory.
In a perpetual inventory system, each receipt and issue of an inventory item is
recorded in the inventory records to maintain an up-to-date perpetual inventory
balance at all times.
2. Management is most likely to choose the FIFO (first-in, first-out) method, which
values the inventory remaining at the most recent unit costs.
3. LIFO (last-in, first-out) is not an acceptable cost flow method under Canadian GAAP,
nor is it acceptable for income tax purposes.

CHAPTER 9
Page 456
1. Tangible assets have a physical presence (i.e., can be touched); intangible assets do
not have a physical substance.
2. Intangible capital assets are separately identifiable, they have been acquired (as
opposed to being internally developed/generated), and they are used to generate
revenue.
3. If fair values of capital assets were to be recorded, the adjustment would be reflected
in other comprehensive income and reported in shareholders equity on the balance
sheet.
4. An aggressive capitalization policy will result in higher amounts of current income
on the income statement, capital assets on the balance sheet, and future amortization. It
will also result in higher cash flow from operations on the cash flow statement
although the total cash flow will not change.
Page 464
1. It is necessary to allocate the overall cost of a basket purchase of assets to the
individual assets in the basket in order to record amortization properly because
different assets may require different amortization periods.
2. An asset purchased for common shares that does not have a ready market value may
be recorded at the fair market value of the securities issued, if this market value is
reliably determinable.
3. A company can capitalize interest cost when the interest has actually been paid, the
loan is specifically related to the construction of the asset, and the companys policy is
to capitalize such interest.
4. A company must record the present value of the cost of future asset retirement
when there is a legal obligation and there is adequate information to assess the
probabilities or the future cash flows at the time the asset is acquired. The present
value is calculated by estimating the amount at which the liability could be settled in a
current transaction and discounting the cash flow at the companys credit-adjusted
risk-free interest rate.
Page 470
1. Research is defined as planned investigation undertaken with the hope of gaining
new scientific or technical knowledge and understanding. Development is the
translation of research findings or other knowledge into a plan or design for new or
substantially improved materials, devices, products, processes, systems, or services
prior to the commencement of commercial production or use.
2. It is appropriate to capitalize development costs when all of the following criteria
have been met:
1. The asset must be proven to be technologically feasible so it will be
available for sale or use.

2. Management must have the intent to complete and then produce and
market, or use, the asset.
3. The entity must be able to use or sell the asset.
4. The probable future economical benefits for (or external market or internal
usefulness) of the product or process is clearly established.
5. Adequate resources exist, or are expected to be available, to complete the
project.
6. Costs must be identifiable.
3. Companies that develop software for their own use are typically involved in
expensive, large-scale systems and program development. The following circumstances
support the capitalization of costs associated with internally developed software: the
software is clearly identifiable, the cost is reliably measurable, the entity controls the
software, and future economic benefits flow from it.
4. The two accounting methods available for exploration and development (ED)
costs are the full cost method and the successful efforts method. The full cost method
capitalizes all ED costs for the companys entire sphere of operations and amortizes
such costs on the basis of global production. The successful efforts method expenses
(once a site has been determined to be unproductive) ED costs relating to unsuccessful
exploration and development of a specific geographic region; the ED costs of successful
sites are segregated and amortized by geographic region.
Page 471
1. An involuntary conversion is the disposal of an asset that is not at the choice of the
company. It includes assets lost through a natural disaster or a disposal forced by
government.
2. A company may dispose of an asset at a loss for many reasons, including a natural
disaster, an expropriation, or simply because it no longer needs the asset. It doesnt
change the economic value of the company but simply recognizes the change in value
in the accounting records. A loss on disposal is an accounting resultproceeds less
unamortized historical cost. Insofar as depreciation is not intended to value the asset,
the loss represents the difference between the net book value (original cost less
accumulated depreciation) and the market value at the time of disposal.
3. A gain on the disposal of a capital asset is a change in estimate. It means that the
depreciation charges over the life of the asset were too high.
Page 478
1. In order to determine the amount at which to record an asset acquired in an
exchange transaction we must first determine if the transaction has commercial
substance. If there is no commercial substance the asset is recorded at the book value of
the asset given up. If there is commercial substance the asset is recorded at the fair
value of the asset given up or the asset acquired, whichever can be measured more
reliably.

2. Expenditures made after the acquisition of a capital asset may be capitalized when
they increase the service potential of the asset above the original level estimated at
acquisition.
3. Maintenance is the regular, continuous upkeep and repair of capital assets and is
usually expensed (e.g., lubrication, cleaning, adjustment, painting). Maintenance
preserves the service potential of an asset. Betterments are costs incurred to enhance
the service potential of a capital asset. They often involve replacing a major component
of a capital asset with a significantly improved component. Betterments, as
improvements in the usefulness of assets, are usually capitalized.
Page 485
1. Goodwill, which represents the value associated with favourable characteristics of a

firm that result in earnings in excess of those expected from identifiable assets of the
firm, is internally generated, but is recorded only when purchased, along with
identifiable tangible and intangible assets that constitute an operating unit.
2. Goodwill is computed as the difference between the actual purchase price of an
acquired firm or operation and the estimated fair market value of the identifiable net
assets acquired.
3. In a non-monetary exchange of assets, the transaction does not involve cash. Hence it
is not recorded on the cash flow statement.
4. A policy of aggressive capitalization of intangible assets will result in a cash outflow
being reported in the investment section of the cash flow statement in the year of
acquisition. Under the indirect method, the amortization recognized in respect of the
capitalized asset in subsequent years is added back in the operating section. No
adjustment is made under the direct method. A company that has a policy of
expensing capital expenditures will report a cash outflow under the operating section
using the direct method; no adjustment is made under the indirect method. Aggressive
capitalization will result in higher cash flow from operations.
5. Goodwill must be shown separately on the balance sheet.

CHAPTER 10
Page 522
1. The main causes of declines in value or usefulness of capital assets are physical
factors such as wear and tear (e.g., usage of assets), and obsolescence by advances in
technology (e.g., passage of time).
2. Amortization is not an accurate measure of the decline in the value of assets as it is
not concerned with, nor does it attempt to make, a determination of value.
Amortization is merely the allocation of capital (historical) cost over the useful life of
the asset.
3. Three asset categories that do not have to be amortized are land, intangible capital
assets with an indefinite life, and goodwill. These are not amortized since their useful
life is assumed to be indefinite.
Page 526
1. The most popular method of amortization in Canada is the straight-line method.
2. Factors affecting managements choice of amortization policies include nature and
use of asset, corporate reporting objectives, industry norms, parent company
preferences, simplified reporting, and accounting information system costs (i.e.,
complexity and flexibility of system). (Any 3 of these would be acceptable.)
3. Estimates required prior to amortizing a capital asset include the acquisition costs
(pre and post acquisition costs), the useful life of the asset (e.g., number of years, or
production output), and the residual value of the asset.
Page 531
1. A company is most likely to use a usage-based amortization method when
obsolescence is not a significant factor in the useful life of an asset (i.e., when decline in
usefulness or value of an asset is driven primarily by wear and tear through usage), the
assets utilization varies significantly from period to period, and when it is possible to
capture the annual usage data needed to apply the method.
2. Under the double-declining balance amortization method, the amortization rate
used is double the normal straight-line rate; the result is an aggressive amortization
rate.
3. By using an amortization method that coincides with the capital cost allowance
method required for tax purposes, a company may reduce the record-keeping expenses
otherwise required to maintain two sets of records for fixed assets. The company will
also be able to avoid future (deferred) income tax balances arising from differences
between the accounting book value and the tax value of capital assets.
Page 538
1. It may be considered pointless to calculate and record amortization to the exact
number of days of ownership as amortization is, in and of itself, an arbitrary allocation
and involves many estimates. It makes little sense to try to be highly precise about an
inherently arbitrary number.

2. The half-year convention for capital asset amortization charges only a half-years
amortization on all assets acquired or disposed of during the year. The implicit
assumption is that assets are acquired throughout the year and are, presumably on
average, acquired half way through the year. This assumption simplifies the
amortization calculation.
3. Group and composite systems of amortization may be useful for large companies as
they simplify record keeping. There is no need to maintain detailed cost and
amortization records for each asset. As well, there is no need to figure out when an
asset is scrapped or sold, exactly which asset it was, and its initial cost and
accumulated depreciation amounts.
Page 547
1. In an impairment test, the carrying value of property, plant, and equipment is
compared to its fair value in use. If the assets fair value is less than its carrying value
on the companys books, the asset has suffered impairment and must be written down.
The asset is written down to the fair value as estimated on the basis of discounted cash
flows.
2. The two-step impairment test involves the following:
Step 1 The fair value of a unit is compared with its total net book value. If the fair
value of the unit is higher than the net book value of all assets and liabilities,
the impairment test stops here and no impairment loss is needed.
Step 2 The goodwill calculation done at acquisition is repeated, using current fair
values (for each asset and liability) and current book values. Goodwill is then
calculated as the purchase price less the current fair value of the net assets. If
this is a lower goodwill than recorded on the books, an impairment loss is
recorded.
3. Canadian accounting standards require that once a writedown has occurred, the
written down amount must become the new carrying value of the asset. This loss
should not be reversed even if the asset value recovers. In contrast, the vast majority of
industrialized countries either permit or require written down capital assets to be
written back up if their values recover.

CHAPTER 11
Page 588
1. An investment in bonds would be classified as held-to-maturity when it has a
maturity date, it has fixed or determinable payments, and management intends to hold
it until the maturity date. If any one of these conditions is not met, it is classified as
held-for-sale
2. In order to be classified as a held-to-maturity investment, an investment must have a
maturity date. Common shares do not have a maturity date and therefore cannot be
classified as held-to-maturity.
3. If a company sells all its held-to-maturity investments because market values
appreciated significantly, no investment will be permitted to be classified as held-to-
maturity in the following two fiscal years.
4. Generally, 40% is evidence enough to conclude that significant influence exists, but
this is a guideline, not a rule and other information should be examined. For example,
is the remaining 60% closely or widely held?
5. Control would exist. The fact that they have chosen not to get involved does not
negate that fact that they have the power to do so.
Page 593
1. Using the fair value method, unrealized holding gains and losses are recognized in
either net income or other comprehensive income. They are recognized in net income
when they relate to trading securities and in other comprehensive income when they
relate to investments held-for-sale.
2. Under the equity method, investment income is the investors proportionate share of
the investees net income. It is not based on dividends.
3. An investment in a subsidiary account will not appear on consolidated financial
statements. It is removed and replaced by the assets and liabilities of the investee.
4. Consolidation reporting includes 100% of a subsidiarys assets and liabilities (offset

by minority shareholders interest where applicable) in the parents financial
statements. Proportionate consolidation includes only the pro-rata share of the
investors assets and liabilities.
5. If a company adopts differential reporting, a subsidiary may be accounted for using

the cost or equity method.
Page 599
1. There is no gain or loss on sale because the investment is initially recorded at $14,000
and accrued interest of $700 recorded. The interest is recorded as it accrues over time
with a debit to accrued interest and a credit to interest revenue. The disposal is
recorded as a credit to investment of $14,000 and a credit to accrued interest of $900,
with no gain or loss.

2. The market value of a bond is determined by multiplying the face value by the quote
(as a percentage of face value).
3. The interest revenue on a held-to-maturity investment is not necessarily just the cash
entitlement. If the investment is purchased at a premium or discount the interest
revenue will reflect the amortization of the premium or discount.
4. The value of a held-to-maturity investment may fall below its cost without their
necessarily being a writedown. This type of investment is not intended to be sold
and therefore market value is not relevant.
Page 605
1. Available-for-sale investments are recorded using the fair value gains and losses
are included in other comprehensive income. This means that no gain or loss would be
included in net income until the year three when a gain of $11,000 ($21,000 less
$10,000) would be recorded.
2. If the investment is classified as a held-for-trading investment, it is recorded using

the fair value gains and losses are included in net income. In year three, $5,000 would
be included in net income ($21,000 - $16,000).
3. If the decline in value is considered a normal fluctuation in market value there will
not be any amount included in net income. If the decline is considered an impairment,
the $10,000 loss would be included in net income.
Page 612
1. The equity method is sometimes called the one-line consolidation method because it has
the same effects on the investors earnings and net assets as would arise from
consolidating the financial statements of the investor and investee companies, but does
not actually combine the companies financial statements.
2. Unrealized profits refers to sale transactions (of assets) between the investor (parent)
and investee (subsidiary) for which a profit has been recognized by the selling
company although the goods have not actually been sold to a third party. Unrealized
profits should be removed when financial statements of the parent are prepared, as the
profit on such transactions has not been validated by an arms-length party and all
that has happened is a sale to a customer that the vendor can significantly influence.
If unrealized profits did not have to be removed, the parent could force its subsidiary
to purchase inventory at inflated prices, thereby creating fictitious profits.
3. The income from equity reported investments and the cash flow from those
investments are related but distinctly different items. The income reported from equity
investments represents the investors share of the subsidiarys net income. The cash
flows from an investment are the actual dividends received by the investor.


Beechy/Conrod, Intermediate Accounting, 4th Edition

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Beechy/Conrod, Intermediate Accounting, 4th Edition

Загружено:

Авторское право:

Доступные форматы

BEECHY/CONROD, INTERMEDIATE ACCOUNTING, 4th EDITION

SOLUTIONS TO CONCEPT REVIEW QUESTIONS