Solution Manual for Intermediate Accounting (Volume 2) 8th Edition By Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Verified All Chapters | Complete Newest Version.

Solution Manual for Intermediate Accounting (Volume 2) 8th Edition By Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Verified All Chapters | Complete Newest Version. Camani Corporation has been negatively affected by economic conditions, and the 20X3 financial results are under particular scrutiny to determine the viability of the existing strategic model. The executive team will receive a ―return to profitability‖ bonus if 20X3 earnings are positive. Under these circumstances, there is obvious pressure to select reporting policies and estimates to support higher earnings. There are significant ethical pressures on all stakeholders in the company, but especially management. Issues 1. Calculate cash from operating activities, based on current draft financial statements. 2. Analyse reporting implications of identified estimated financial statements elements: legal issues, depreciation policy, technology contract, inventory valuation, restructuring and environmental liability. 3. Re-calculate cash from operating activities, based on revised financial statements Analysis and conclusions 1. Cash flow from operating activities, existing draft financial statements Based on the information provided in the question, a statement of cash flows may be prepared to determine cash flow from operations (Refer to Exhibit I in the solution). Exhibit 1 shows that cash flow from operating activities is a negative, at ($1,721). Earnings of $1,535 reflect cash flows of ($800), and dividends on common shares are another ($921). The negative operating cash flows are caused by large build-ups in account receivable and inventory. The increase in accounts payable and accrued liabilities works to mitigate this, but is not as large as the inventory build-up. © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-11 This is contrary to a return to profitability implied by positive earnings, and calls into question the declaration of common dividends. 2. Analysis of accounting policies and estimates a. Legal issues The accrual has been made based on one set of expected values, resulting in the accrual of $830. If a different, less optimistic set of probabilities is used, the accrual is $1,110: Total payment (in 000‘s) Alternate probability Expected value (000‘s) $ 100 0% 0 500 20 $ 100 1, 2, $ 1,110 This is an additional liability and expense of $280 ($1,110 calculation per above less $830 current accrual; Refer to Exhibit 2). b. Depreciation policy Retaining prior years‘ estimates for depreciation amounts would result in $200 additional depreciation. (Depreciation was recorded for $3,900 but if prior year estimates and amounts had been used, depreciation would be $4,100, an additional $200. Refer to Exhibit 2). c. Technology services CC had recorded $1,200 as an estimate for technology services rendered; if the $4,000 contract is considered 45% complete (rather than 30%), another $600 (15%) must be recorded. This is a liability and presumably an expense. ($4,000 * 30% = $1,200 versus $4,000 * 45% = $1,800, a difference of $600. Refer to Exhibit 2). d. Inventory valuation Retaining prior years‘ estimates for inventory valuation would result in $775 additional write-down ($3,125 - $2,350.) Note that inventory levels are higher in 20X3, which is not consistent with less need for a valuation adjustment. Much might © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-12 depend on the state of the economy, though, and a thorough review of the analysis the CC has prepared. (See Exhibit 2). e. Restructuring No accrual has yet been recorded for a restructuring. The plan has not been announced or approved, and the plan is not formal the plan at this stage. Only a formal plan, once communicated, would meet the requirements of a constructive liability. At this stage, recording is premature, and no accrual has been recorded. f. Environmental liability If the liability had been recorded at 5%, rather than 7%, $329 ($400, 4 years, 5%) would have been recorded, rather than $306. Interest would have been $16, not $21 (a $5 difference), and depreciation, over four years, would have been $82, rather than $77 (a $5 difference). These adjustments are minor, and are summarized in Exhibit 2. Overall effect on financial performance The adjustments indicated by these areas have been included in the revised draft statement of financial position and financial performance shown in Exhibit 3. The statement of earnings now reflects a loss of $320. This would eliminate any return to profitability bonus, and means that the operating strategy of the company needs to be assessed. 3. Cash flow from operating activities, revised draft financial statements The reported loss of $320 is more consistent with the negative cash flow from operating activities. Exhibit 4 shows the revised operating activities section of the SCF. Cash used by operating activities is unchanged, at ($1,721). This demonstrates the reason that many focus on the SCF, since it is unaffected by estimates that underlie earnings measurement. Conclusion Additional information should be requested by the audit committee in each these areas, to gather evidence to support the accrual that has been made, or suggest a more appropriate amount. Since profits are marginal and there is significant incentive for management to show profit in 20X3, very careful evaluation of these areas is warranted. © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-13 Exhibit 1 Operating activities, SCF Existing draft summarized financial statements Camani Corporation Operating Activities Section of the Statement of Cash Flow Year ended 31 December 20x3 Operating Activities: Net income .......................................................................... $1,535 Adjustments for non-cash items: Depreciation ....................................................................... 3,900 Interest ............................................................................... 21 5,456 Changes in current assets and current liabilities: Increase in accounts receivable .......................................... (3,740) Increase in inventory .......................................................... (6,950) Increase in prepaids ........................................................... (87) Increase in accounts payable and accrued liabilities .......... 4,521 (800) Cash paid for common dividends ($1,535 + $643 = $2,178- $1,257) (921)* Net cash provided (used) by operations .................................... $(1,721) *assuming dividends are recorded as operating activities and not as financing activities in IFRS Exhibit 2 Camani Corporation Adjustments based on estimated amounts 1) Expense ($1,110 - $830) ................................................................ 280 Accrued liabilities .................................................................. 280 2) Depreciation Expense ($4,100 - $3,900) ....................................... 200 Plant and equipment (net) ...................................................... 200 3) Expense ......................................................................................... 600 Accrued liabilities .................................................................. 600 4) Expense ($3,125 - $2,350) ............................................................ 775 Inventory ................................................................................ 775 5) None © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-14 6) Depreciation expense ($82 - $77) .................................................. 5 Asset ($329-$306) less $5 extra depreciation ................................ 18 Interest expense ($21 - $16) ................................................... 5 Accrued liabilities ($329 - $306) less $5 change in interest .. 18 Exhibit 3 Camani Corporation REVISED Summarized Draft 20X3 Financial Statements REVISED Summarized Draft Statement of Financial Position At 31 December (in 000‘s) Assets 20X3 20X2 Cash $ 2,340 $ 1,680 Accounts receivable 16,780 13,040 Inventory (-$775) 61,145 54,970 Prepaids 542 455 Land 5,860 5,860 Plant and equipment (net) (-$200 +$18) 19,538 18,650 Other assets 650 290 Total assets $106,855 $94,945 Liabilities Accounts payable and accrued liabilities(+$280 + $600) 48,268 42,867 Long-term debt (+$18) 53,545 46,200 Equity Common shares 5,640 5,235 Retained earnings ($643 -$320 loss - $921 divs) (598) 643 Total liabilities and equity $106,855 $94,945 REVISED Summarized Draft Statement of Earnings For the year ended 31 December 20X3 Sales revenue $104,910 Cost of goods sold (+$775) (67,005) Depreciation expense (+$200 + $5) (4,105) Operating, administration and marketing (+$280 + $600 - $5) (34,120) Earnings and comprehensive income $ (320) © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-15 Exhibit 4 REVISED Operating activities, SCF Revised draft summarized financial statements Camani Corporation Operating Activities Section of the Statement of Cash Flow Year ended 31 December 20x3 Operating Activities: Net income (loss) ................................................................ ( $320) Adjustments for non-cash items: Depreciation ....................................................................... 4,105 Interest ............................................................................... 16 3,801 Changes in current assets and current liabilities: Increase in accounts receivable .......................................... (3,740) Increase in inventory .......................................................... (6,175) Increase in prepaids ........................................................... (87) Increase in accounts payable and accrued liabilities .......... 5,401 (800) Cash paid for common dividends (unchanged) ......................... (921) Net cash provided (used) by operations .................................... $(1,721) © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-16 Technical Review Technical Review 12-1 (LO12.1, LO12.2, LO12.3, LO12.4, LO12.5, LO12.8) 1. T 2. F – The effective interest method is required in IFRS. 3. F – The gain or loss is recognized in earnings. 4. T – if each point in the range is equally likely 5. F – the refinancing must be completed by the year-end date for the mortgage to be classified as long term Technical Review 12-2 (LO12.1, LO12.2, LO12.3, LO12.4, LO12.5, LO12.8) 1. F – only legal obligations are included not constructive obligations. 2. T 3. T 4. F – if each point in the range is equally likely the lower end of the range not the midpoint would be used. 5. T © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-17 Technical Review 12-3 (LO12.5) Case Most likely outcome Expected value To record 1. Most likely outcome is 0, p = 30% Expected value is ($100,000 x 10%) + ($200,000 x 10%)+ ($300,000 x 5%)+ ($400,000 x 5%) = $65,000. (Still less than the amount of one payout) No accrual based on most likely outcome, which is less than 50%. 2. The most likely payout is $200,000 (60% chance of two payouts at $100,000 each) Expected value is ($100,000 x 10%) + ($200,000 x 60%) + ($300,000 x 5%) + ($400,000 x 15%) = $205,000. (Very close to most likely outcome) Accrual of $200,000 based on most likely outcome. 3. Likely (90%) chance of payout. The most likely payout is $100,000 (30% chance of one payout). However, based on cumulative probabilities (20% chance of 2 payouts, 20% chance of 3 payouts, 20% chance of 4 payouts), there is a 60% chance that at least two will be paid out therefore the most likely payout is $200,000. Expected value is ($100,000 x 30%) + ($200,000 x 20%) + ($300,000 x 20%) + ($400,000 x 20%) = $210,000. (NOT close to most likely outcome) Accrual of $210,000. 60% chance that payout is higher than $100,000 so accrual of most likely outcome is not adequate. However, expected value is close to the cumulative probabilities. Technical Review 12-4 (LO12.2) A guarantee is measured at its fair value. It would be measured at $300,000 x 30% = $90,000. © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-18 Technical Review 12-5 (LO12.2) Requirement 1 Warranty expense in April, $24,750 ($550,000 × 4.5%) Requirement 2 Balance in the warranty provision account at the end of April is $18,450 ($16,400 + $24,750 – $8,700 – $14,000) Technical Review 12-6 (LO12.3) 1) The Canadian equivalent of the payable when it is first recorded is US $150,000 x Cdn @ .75 = $112,500. The inventory would be valued at $112,500. 2) The amount in the exchange gain or loss account at the end of the year would be year end US $150,000 x Cdn @ .72 = $108,000. Therefore, the difference of $112,500 – 108,000 = 4,500 would be in the exchange gain or loss account. The $4,500 represents a foreign exchange gain (credit to the account). Technical Review 12-7 (LO12.2) 1 October 20x6 Cash ............................................................................................... 120,000 Note payable .......................................................................... 120,000 31 December 20x6 Interest expense ($120,000 x 9% x 3/12) ...................................... 2,700 Interest payable ................................................................. 2,700 30 September 20x7 Interest expense ($120,000 x 9% x 9/12) ..................................... 8,100 Interest payable .............................................................................. 2,700 Cash (120,000 x 9%)......................................................... 10,800 31 December 20x7 Interest expense ($120,000 x 9% x 3/12) ...................................... 2,700 Interest payable ................................................................. 2,700 30 September 20x8 Interest expense ($120,000 x 9% x 9/12) ..................................... 8,100 Interest payable .............................................................................. 2,700 Cash (120,000 x 9%)......................................................... 10,800 Note payable .................................................................................. 120,000 Cash ....................................................................................... 120,000 © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-19 Technical Review 12-8 (LO12.6) Requirement 1 Principal $250,000 (P/F, 7%, 2) = $250,000 × (0.87344) ......................................$218,360 Interest $5,000 (P/A, 7%, 2) = $5,000 × (1.80802) ................................................ 9,040 $227,400 Requirement 2 (1) Opening Net Liability (2) Interest Expense 7% Market Rate (3) Interest Paid (4) Discount Amortization (2) – (3) (5) Closing Net Liability (1) + (4) $227,400 $15,918 $5,000 $10,918 $238,318 238,318 16,682 5,000 11,682 250,000 © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-20 Technical Review 12-9 (LO12.6) Requirement 1 Present value $420,000 (P/F, 6%, 10) = $420,000 × (0.55839) .............................$234,524 Requirement 2 (1) Opening Net Liability (2) Interest Expense @ Market Rate (1)  6% (3) Closing Net Liability (1) + (2) $234,524 $14,071 $248,595 248,595 14,916 263,511 263,511 15,811 279,322 (three years only) Requirement 3 Revised present value $490,000 (P/F, 8%, 7) = $490,000 × (0.58349) ..................$285,910 Interest expense, 20X8 (line 3 of table above) ........................................................ $ 15,811 Adjustment to asset and obligation ($285,910 less $279,322 (Table, above)) ....... $ 6,588 Technical Review 12-10 (LO12.8) 1. Current 2. Current 3. Current 4. Non-current 5. Current © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-21 Assignments Assignment 12-1 (LO12.1, LO12.2, LO12.11) Requirement 1 Liabilit y Financial or non-financial liability Explanation A Non-financial liability The liability relates to future delivery/provision of goods or services B Financial liability There is another party with a financial asset; there is a contract in place C Non-financial liability There is no contract in place D Financial liability Contract in place; Will be settled in cash E Non-financial liability There is no contract in place F Financial liability Contract in place; Will be settled in cash G Financial liability Contact in place or constructive obligation; Will be settled in cash H Non-financial liability There is no contract in place; not payable in cash Requirement 2 IFRS recognizes both legal and constructive obligations. Under ASPE only legal obligations are recognized. © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-22 Assignment 12-2 (LO12.2, LO12.11) Requirement 1 a. Dr. Purchases $256,000 Cr. Accounts payable $256,000 b. Dr. vehicle $25,000 Cr. Cash $5,000 Cr. Note payable $20,000 To accrue interest for October: 20,000 x 6 % / 12 = 100 Dr. Interest expense $100 Cr. interest payable $100 c. Dr. Accounts payable $64,000 (256,000 x 25%) Cr. Cash $64,000 d. Dr. Dividends Declared (or retained earnings) $20,000 Cr. Dividends payable $20,000 e. Dr. Cash $3,000 Cr. Customer deposit liability $3,000 f. Dr. Property tax expense $250 Cr. Property tax payable $250 (Accounts payable is acceptable as well) g. Dr. Salaries and wages expense $7,200 Cr. Salaries and wages payable $7,200 (Accounts payable is acceptable as well) h. Dr. Utilities expense $1,555 Cr. Accounts payable (or Utilities payable) $1,555 i No entry required since loan guarantees are not recorded if there is a 0% chance of payout. Note that loan guarantees that are recorded are financial liabilities of the guarantor. Requirement 2 None of the liabilities are non-financial. © 2022 McGraw Hill Ltd. All rights reserved. Solutions Manual to accompany Intermediate Accounting, Volume 2, 8th edition 14-23 Assignment 12-3 (LO12.2) Requirement 1 a. Office supplies inventory .......................................................... 5,200 Accounts payable ................................................................... 5,200 b. Cash........................................................................................... 30,000 Note payable ......................................................................... 30,000 c. Inventory .................................................................................. 143,000 Accounts payable ..................................................................... 143,000 d. Utilities expense ........................................................................ 2,600 Accounts payable .................................................................... 2,600 e. Dividends, preferred (or retained earnings) .............................. 6,000 Dividends, common (or retained earnings) ............................... 5,000 Dividends payable ................................................................. 11,000 f. Accounts payable ...................................................................... 35,200 Inventory .................................................................................. 35,200 g. Accounts payable ...................................................................... 53,900 Cash ($143,000 - $35,200) x 50% ........................................... 53,900 h. Interest expense ($30,000 x 10 % x 1/12) ................................. 250 Interest payable ........................................................................ 250 i. Rent expense ............................................................................. 2,400 Accounts payable .................................................................. 2,400 Note: Students may record utilities and rent is separate payable accounts, or in accounts payable. Both are acceptable. Requirement 2 Accounts payable 64,100 cr. (1) Note payable 30,000 cr. Interest payable 250 cr. Dividends payable 11,000 cr. (1)