Intermediateg Accountingg Volumeg 1g 8Eg Thomasg H.g Beechy,g Joang E.g Conrod
,gElizabethgFarrell,gIngridgMcLeod-Dick,gKaylagTomulka,gRomi-LeegSevel
AllgChaptersg1-11g g [WithgAppendix]
Chapter 1: The Framework for Financial Reporting
g g g g g g
Caseg 1-1 MullagandgYang
1-2 RichardgWright
1-3 TaylorgJay
SuggestedgTime
Technical 1-1
g Chaptergoverview,gtrue-falseg.............................. 10
1-2 Chaptergoverview,gtrue-falseg.............................. 10
1-3 Acronyms……………………………………… 10
1-4 IFRSgorgASPE…………………………………. 10
1-5 IFRSgorgASPE…………………………………. 10
1-6 Disclosedgbasisgofgaccounting………………… 10
1-7 GAAPgandgreportinggcurrencyg........................... 10
1-8 GAAPgandgreportinggcurrencyg........................... 10
1-9 Usersgandgobjectives………………………….. 10
1-10 Requiredgfinancialgstatementsg............................ 10
Assignmentg1-1 IASBgstandard-setting...................................... 10
1-2 Internationalgcomparisons................................ 10
1-3 Accountinggchoicesg.......................................... 10
1-4 Effectgofgaccountinggpoliciesg .......................... 15
1-5 Reportinggalternativesg...................................... 10
1-6 Non-IFRSgsituationsg........................................ 15
1-7 Reportinggsituationsg......................................... 20
1-8 Reportinggsituationsg......................................... 15
1-9 Objectivesgofgfinancialgreportingg..................... 20
1-10 Impactgofgdifferinggobjectivesg ......................... 20
1-11 Accountinggpolicygdisagreement...................... 15
1-12 Accountinggpoliciesgandgreportinggobjectives.. 10
1-13 Policygchoiceg.................................................... 20
©g2022gMcGrawgHill.gAllgrightsgreserv
SolutionsgManualgtogaccompanygIntermediategAccounting,gVolumeg1,g8thg edi ed
tion 2-1
,Cases
Caseg1-1g(LO1.2,gLO1.3,gLO1.4,gLO1.5)
NotesgforgDiscussiongWithgElicia:
TheregisgagconflictgofginterestgbetweengthegobjectivesgofgEliciagandgDabikagduegtogthegbuy
outgclausegingthegshareholdergagreement.gEliciagwillghavegagmotivationgtogdecreasegshare
holders‘gequitygsincegthisgwillgreducegthegamountgthatgshegwillgbegrequiredgtogpaygtogbuyg
outgDabika.gDabikagwillgbeginterestedgingincreasinggshareholders‘gequitygtogincreasegthega
mountgshegwillgreceive.gItgmustgbegclarifiedgwhogIgamgworkinggforgsincegIgmayghavegagco
nflictgofginterestgsincegIgknowgbothgparties.
Itg isg importantg thatg allg accountingg policiesg areg ‗fair‘g tog bothg sides.g Whatg isg considered
‗fair‘?gFromgDabika‘sgperspective,gfairgcouldgbegaccountinggpoliciesgconsistentgwithgprio
rgyears.gFromgElicia‘sgperspective,gfairgcouldgbegifgthegeconomicgeventsgchangegthegaccou
ntinggpolicygwouldgchange.gFairgcouldgbegbothgsidesgsplitgthegdifferencegwheregDabikaga
ndgEliciagdisagreegongvalue.gIngthegfuturegitgisgimportantgthatgthegshareholdersgagreementg
isgmoregspecific.
DuegtogthegchoicesgallowedgwithingGAAPgagpolicygcouldgbegselectedgthatgwouldgbegmore
gbeneficialgtogonegofgthegparties.gItgisgassumedgsincegthisgisgagsmallgprivategcompanygthatg
theygaregusinggASPE.gTheregisgnogindicationgthatgneithergEliciagorgDabikagwouldgbegusin
ggIFRSgnorgthatgthegbankgrequiresgit.
Inventory
Eliciagwantsgtogwritegoffgtheginventorygvaluegforgtheggardenggnomesgandgstatuesgandgthisg
willgdecreasegthegamountgofgthegpaymentgtogDabika.gAccordinggtogASPE,ginventorygwoul
dgbegvaluedgatgtheglowergofgcostgandgnetgrealizablegvalue.gEvengthoughgthisginventoryghas
gbeengsittinggingtheggardeninggcentregtheregisgstillgagfewgbeinggsoldgeachgyear.gThisgindicat
esgtheregisgstillgsomegvaluegassociatedgwithgtheginventorygandgthereforegitgshouldgnotgbeg
writtengdowngtogzero.gItgshouldgbegdeterminedgwhatgthegnetgrealizablegvaluegofgthisginven
torygisgtogdeterminegthegamountgofgthegwritegoff.gIfgitgisgallgwrittengoffgandgthengsoldgatgag
latergdategthisgwouldgnotgbegfairgtogDabikagsincegEliciagwouldggetgthegbenefitgofgagreduce
dgshareholders‘gequitygandgthusgaglowergpaymentgrequiredgtogDabika.gThegpurchasegofgthi
sginventorygwouldghavegbeengagdecisiongmadegbygbothgDabikagandgEliciagsogifgtheginvent
orygisgunsellablegtheygshouldgbothgbeargthegimpactgofgthisgdecision.
Warranty
AccordinggtogASPEgthegaccountinggpolicygisgappropriategandgagwarrantygexpensegshouldg
begincludedgforgthegguarantee.gThegimpactgisgthatgthisgwouldgdecreasegshareholders‘gequit
ygandgthegamountgofgthegpaymentgtogDabika.gThisgisgagnewgpolicygthatgdidgnotgexistguntilg
thisgyear.gThegestimategofg5%gwasgonlygbasedgongsalesgfromgthegfall.gSincegitgisgagnewgpo
licygthatgwasgmadegbygEliciagonghergowngitgmaygbegappropriategthatgthegimpactgofgthisgisg
excludedgfromgthegcalculationgofgshareholders‘gequity.gAtgagminimumgthegestimategshoul
d
g©2022gMcGrawgHill.gAllgrights greserved
2-2 SolutionsgManualgtogaccompanygIntermediategAccounting,gVolumeg1,g8thg edi
tion
,begreviewedgtogdeterminegifgitgisgreasonable.gFurthermore,gthegestimate,gifgincludedgingthe
gshareholders‘gequitygcalculation,gshouldgbegagreedgupongbygbothgEliciagandgDabika.
ComputergEquipment
ASPEgisgflexiblegingthegmethodgusedgtogdepreciategassets.gThegdeclininggbalancegmethodg
usingg40%gwouldgwritegoffgthegvaluegofgthegcomputersgingapproximatelygtwogyears.gThisg
isgverygfastgespeciallygforgagsmallgcompanygthatgisglikelygtogusegagcomputergforgaglongerg
periodgofgtimegduegtoglimitedgresourcesgasgcomparedgtogaglargergcompany.gJustgbecausegth
egcomputergmaygbecomegobsoletegquicklygdoesgnotgmeangthegbusinessgwillgnotgcontinuegt
ogderivegbenefitgfromgthegcontinuedgusegofgthegcomputer.gThegimpactgofghighergdepreciati
ongisgagreductiongingthegpaymentgtogDabika.gIfgweglookgatgconsistencygwithgothergassetsgit
gwouldgbegappropriategtogusegthegstraightglinegmethod.gWegshouldginquiregwithgEliciagasgt
oghergrationalegforgchoosinggdeclininggbalanceginsteadgofgthegstraight-
linegdepreciatoingmethodgusedgforgallgothergassetsgandgdeterminegthegdeclininggmethodgre
flectsgthegactualgusagegofgthegassetg(i.e.gmoregofgthegassetgusedgearliergon).gSincegagaingsi
ncegthisgwasgagdecisiongmadegonlygbegEliciagmaybegitgshouldgbegexcludedgfromgthegcalcu
lationgorgmaybegthegpolicygshouldgbegconsistentgwithgtheirgothergassetsgbutgfurtherginform
ationgisgrequired.
Caseg1-2g(LO1.2,gLO1.3,gLO1.4,gLO1.5)
DeargRichardgWright:
Igamghappygtogrespondgtogyourgquestionsgregardinggthegaccountinggchangesgthatgthegnewg
bankerghasgrequested.gItgisgimportantgthatgyougrealizegthatgthegneedsgofgthegbankergaregdif
ferentgthangyourgneeds.gThegbankgisginterestedgingyourgabilitygtogmakegloangpayments;gthe
refore,gthegbankergwantsgtogassessgfuturegcashgflows,gcollateralgandgyourgabilitygtogpaygba
ckgthegloan.
First,gtheregisgthegissuegofgmovinggtogthegaccrualgbasis.gWhilegit‘sgtruegthat,gultimately,gw
hatgyougearngisgthegnetgcashgingyourgpocket,gthegcashgbasisgofgaccountinggdoesn‘tgwhollyg
capturegallgofgthegcashgflowsgthatgwillghappengingthegfuture.gYourgbankergwantsgtogknowg
whatgliabilitiesgyou‘llghavegtogpaygingthegcominggmonthsg(andgyears),gandgwhatgamountsg
yougcurrentlygaregowedgthatgwillgbegcollectedgingthegfuturegweeksgorgmonths.gThegaccrual
gmethodgreallyggivesgagcleargpicturegofgfutureg―cashgflow‖.
It‘sgforgmuchgthegsamegreasongthatghegwishesgyougtogshowgyourgcattlegatgmarketgvalue.gI‘
mgsureghegrecognizesgthatgbothgyourgdairygcattlegandgyourgbreedersgaregintendedgforg cont
inuedgusegandgaregnotgforgsalegingthegnormalgcoursegofgbusiness.Asgsaleablegstock,gthegcat
tlegrepresentgagpotentialgcashgresourcegingthegeventgofgbankruptcygorgdefault.gAftergall,gyo
ugprobablygusegthegcattlegasgcollateralgforgloans,gandghegneedsgtogknowgthegvaluegofgthatgc
ollateral.
Yougshouldgnotgtrygtogestimategthegvaluegofgyourgstockgbygyourself.gForgcredibility,gyougs
houldgobtaingangindependentgestimate.gThegvaluationgwillgrequiregagprofessionalgevaluati
ong(andgthegcostgthereof),gbutgwillgbegnecessarygingordergtogsatisfygthegbank.
©g2022gMcGrawgHill.gAllgrightsgreserv
SolutionsgManualgtogaccompanygIntermediategAccounting,gVolumeg1,g8thg edi ed
tion 2-3
, Sincerely,gA
ndriana
Caseg1-3g(LO1.1,gLO1.2,gLO1.3,gLO1.4,gLO1.5)
Overview
Thisgcasegisgintendedgtoggetgstudentsgtogfocusgongthegdifferencesgbetweengcompaniesgandg
thegvariousgfactorsgthatghavegagbearinggongtheirgfinancialgreportinggobjectives.gStudentsgar
egaskedgtog prioritizegthegfactorsgorgcharacteristicsgthatgaregmostglikelygtogaffectgeachgcom
pany‘sgfinancialgreporting.
CompanygCharacterics
Allgthreegcompaniesgaregprivategenterprises.gSignificantgcharacteristicsgofgeachgaregasgfoll
ows:
BreezegInc. SaturngSoftware Intern’lgAutogParts
Business Newgmobilegphonegnetwork Customgsoftware Autogpartsgforginternational
development autogmakers
Owners Privateginvestorsgandgventure Twogentrepreneurs,gnot Wealthygfamily
capitalists wealthy
Otherg capitalg Egyptiangfund Pensiongfund— Debtgthroughginvestmentgfun
sources pref.gsharesgBankglinegofgcred dsgandgbygU.S.gandgCdn.
it banks
Capitalgrequire Capitalgintensivegstart-up Salary- Establishedgmanufacturer;
ments basedgoperation;gworki gexpandinggtoggaingforeig
nggcapitalgneeded n
customers
Constraints Egyptgfundghasg3gboardgseats Bankgcovenants: Probablegdebtgcovenants
– restrictionsgongdivide
nd/salarygpayouts
– newgdebt
Preferredgdividendgrequired
Reporting CRTC Pensiongfund Investmentgfundsgandgbanks
requirements Egyptgfund;gJapangpartner Bank Potentialgnewgcustomers
IPO Notgingthegforeseeablegfuture Unlikely Yes,ganticipatedging2-3gyears
probable?
g©2022gMcGrawgHill.gAllgrights greserved
2-4 SolutionsgManualgtogaccompanygIntermediategAccounting,gVolumeg1,g8thg edi
tion