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intermediate accounting volume 2

Questions and Answers of Intermediate Accounting Volume 2

Convertible Debt, Investor's Option: Nero Solutions Company issued an \(\$ 800,000,6 \%\), three-year bond for \(\$ 806,000\). The bond pays interest annually, at each yearend. At maturity, the bond
Convertible Bond, Investor's Option: Bixon Corp. Ltd. issued convertible bonds payable on 1 January \(20 \mathrm{Xl}\), when the market interest rate was \(10 \%\). The bond indenture stated: \(\$
NewTech Ltd. has a 31 December fiscal year-end. The company issued convertible bonds on 1 July 20X4. The \(\$ 5,000,000\) bonds pay annual interest of \(8 \%\) each 30 June and mature on 30 June
Convertible Debt, Three Cases: The following cases are independent:Case AOn 1 November 20X1, Bertha Builders Limited issued a convertible bond that was convertible in 15 years' time into 78,000
Ferguson Memorials Limited issued a \(\$ 1,000,000,5 \%\) annual interest non-convertible bond with detachable stock warrants. One warrant is attached to each \(\$ 1,000\) bond and allows the holder
Acorn Growth Limited is a small technology company listed on the TSX. To conserve cash, the company frequently settles obligations through the issuance of rights and options. Shares are now trading
Just In Co. issues 500,000 SARs to its eight-member top management group. These SARs allow the managers to receive a cash payment, after holding the SARs for five years. The SARs vest on the payment
Cash-settled: Sousa Minerals has a SARs program for managers. These individuals receive a cash payment after four years of service, calculated as the excess of share price over \(\$ 2\). In early
Ming Limited has an executive stock option plan as follows: Each qualified manager will receive, on 1 January, an option for the computed number of common shares at a computed price. The number of
Ding Solutions Limited is authorized to issue unlimited numbers of common shares, of which \(1,675,000\) have been issued at an average price of \(\$ 75\) per share. On 1 January 20X3, the company
Able Co. had compensation plans in effect for senior managers that included two long-term compensation elements. Retention levels were estimated to be \(80 \%\) at the end of \(20 \mathrm{X} 4\). SFP
Mercury Limited issued long-term compensation contracts for its 10 -member executive team as follows:1. Mercury issued a total of 40,000 SARs units at the beginning of \(20 \mathrm{X} 3\). These SARs
Treetoo Limited wishes to buy 10,000 shares of \(\mathrm{YCo}\), a publiclytraded company. Treetoo enters into a contract, through a broker, to buy the shares in 40 days' time, at a price of \(\$ 3\)
Starco Corp. wishes to purchase 5,000 shares of Gertrom Ltd., a publicly-traded company. Starco contracts to buy the shares from a related party, Unit Ltd., for \(\$ 62\) per share in 90 days' time.
Notting Hill Limited reported the following amounts on the 31 December 20X2 SFP:Notting Hill has material accounts receivable and purchase orders that are denominated in U.S. dollars. The company
Why is it common for companies to label income tax expense as a provision for income taxes?
How can differences between accounting and taxable income be classified? Define each classification.
XTE Corporation (a) uses straight-line depreciation for its financial accounting and accelerated depreciation on its income tax return and (b) expenses golf club dues for its top management. What
Temporary differences are said to "originate" and "reverse." What do these terms mean?
Give three examples of a permanent difference, and three examples of a temporary difference.
Explain the two acceptable alternative options for the extent of allocation possible in dealing with interperiod tax allocation.
Sometimes the taxes payable method is called the flow-through method. Why might this name seem appropriate? When is this method generally accepted in Canada?
Why is the balance in a deferred income tax liability account not discounted?
Thertot Limited reported \(\$ 100,000\) of income in \(20 \mathrm{X} 4, \$ 300,000\) of income in \(20 X 5\), and \(\$ 500,000\) of income in \(20 \times 6\). Included in \(20 \times 4\) income is an
ATW Corporation has completed an analysis of its accounting income, taxable income, and the temporary differences. Taxable income is \(\$ 200,000\), and there are two temporary differences, which
A company has \(\$ 200,000\) in originating temporary differences in \(20 \mathrm{X} 6\), its first year of operation. The temporary differences give rise to a deferred income tax liability. The tax
A company reports a \(\$ 1,000,000\) revenue (long-term receivable and associated revenue) in accounting income in year 1. It is taxable income when collected in year 4. What is the accounting
A company bought \(\$ 1,000,000\) of capital assets at the beginning of year 1. Year 1 amortization was \(\$ 200,000\) and CCA was \(\$ 100,000\). What is the tax basis of the assets at the end of
When do items on the statement of financial position have a different accounting carrying value and tax basis?
Do permanent differences cause the accounting carrying value and tax basis of the related item on the statement of financial position to differ?
On the statement of financial position, are deferred income taxes debits or credits? Explain. Is a debit to a deferred income tax account always a decrease, and a credit always an increase? Explain.
Assume that a company reports a deferred income tax liability of \(\$ 500,000\). The enacted tax rate goes down. How will the account on the statement of financial position change if the liability
What kinds of differences cause a company to report taxes at a rate different than the statutory rate?
What is an investment tax credit?
Explain two different approaches to account for an investment tax credit for a capital asset.
How might an ITC received because of qualifying expenditures for capital assets be reported on the statement of financial position?
Deep Harbour Limited (DHL) is a private company owned by Daniel Lalande. Lalande started the company in 20X1, and DHL has reported reasonably consistent growth in profits from fiscal 20X1 to 20X7.
Canadian Products Limited (CPL) is a very large private Canadian company. CPL has been contemplating going public, which, according to business analysts, is just a matter of time. Recently, the
You are a professional accountant in public practice. You have just left a meeting with Michel Lessard, a local entrepreneur, who is considering a potential acquisition. Mr. Lessard, with four
Describe the main categories of shareholders' equity.
If common shares are issued for capital assets, how is a value determined for the transaction?
What is the difference, from an accounting perspective, between par and no-par shares?
Briefly explain the alternatives for accounting for share issue costs.
When a company has 100,000 shares issued, and 10,000 shares held as treasury shares, how many shares are outstanding? If a cash dividend of \(\$ 2\) per share were declared, how much total dividend
How can shares that are not callable be reacquired by a company? Why must corporations exercise caution in these transactions?
Why will EPS increase when shares are retired?
Identify and explain a transaction that causes other contributed capital to increase but does not result in any increase in assets or decrease in the liabilities of a corporation.
Explain how the purchase price is allocated when shares are reacquired and retired at a cost lower than average issuance price to date. What changes if average issuance price is lower?
When shares are retired, is the original issue price of those individual shares relevant? Why or why not?
What is the effect on assets, liabilities, and shareholders' equity of the (a) purchase of treasury stock and (b) sale of treasury stock?
Explain the difference between cumulative and non-cumulative preferred shares, and the difference between non-participating, partially participating, and fully participating preferred shares.
What are fractional share rights and why are they sometimes issued in connection with a stock dividend?
How is the entry to record a (cash) liquidating dividend different from the entry to record a normal cash dividend?
What do shareholders receive when a scrip dividend is declared?
Compare a stock split, both its substance and accounting recognition, to a large stock dividend. In what ways are the two the same or different?
If a shareholder donates a valuable piece of art to a company, to be displayed in the company boardroom, does the company record a gain on the transaction?
What are the common sources of reserves in equity?
Topsail Ltd. was founded ten years ago by Dave Jetson, a carpenter and entrepreneur. Topsail Ltd. is a growing construction company, building houses and doing major renovations for residential
Birch Corporation is a small, owner-managed company that manufactures and distributes wood mouldings. At 30 June 20X6, Reg Muise owned \(70 \%\) of the shares of Birch while Fran Cote owned the
In September 20X4, Giovanni Lorenzoni purchased a 40 hectare grape vineyard in southern Ontario. Giovanni is a successful restaurateur who owns and operates a familyoriented restaurant that offers
What three time elements are embedded in the definition of a liability?
What is a non-financial liability? Provide three examples, and explain how such liabilities are measured.
A firm is being sued for \($550,000\) by an unhappy customer; the lawsuit is in its early stages, and the firm feels that it has a good case and is willing to defend itself.However, legal costs will
A company signs a purchase order for 5,000 cases of a product at \($10\) per case. The product will be delivered next year. Is a liability for \($50,000\) recorded? Under what conditions will some
A company issues 10,000 coupons that allow a discount of \($1\) off the retail price of a \($14\) product. Will some liability be recorded? Explain.
The statement of financial position includes an obligation for insurance for a com¬ pany that self-insures. How is, this obligation measured? What is not included in this obligation?
A company borrows \($10,000\) for two years, interest free, when the market interest rate is 10%, compounded annually. At what amount should the liability be valued? How would your answer change if
Distinguish between the par value and the issue price of a bond. When are they the same? When are they different? Explain. If a \($5,000\) bond is sold for 101, how much cash is paid/received?
What is the primary conceptual difference between the straight-line and effective- interest methods of amortizing a discount or premium on a bond or note payable? Why is the effective-interest method
Explain why and how a bond discount and bond premium affect (a) the statement of financial position and (b) earnings of the issuer of the bond.
When the end of the accounting period of the issuer is not on a bond interest date, adjusting entries must be made for (a) accrued interest and (b) discount or premium amortization. Explain in
When bonds are sold (or purchased) between interest dates, accrued interest must be recognized. Explain why.
How would the payment of a \($5,000\) upfront administration fee on a \($50,000\), 6%, five-year loan affect subsequent recognition of interest expense?
When does capitalization of borrowing costs begin, if a company borrows money to finance the acquisition of capital assets that have a lengthy delivery period?
A company has a \($2\) million operating line of credit at an interest rate of 4% and (general use) long-term loans of \($8\) million at an interest rate of 7%. If general bor¬ rowings are used to
Under what circumstances will a gain or loss occur on the repayment of a bond payable?
When will a bond discount or premium be included in an entry to retire bonds? How is the amount calculated?
What is meant by defeasance? Can debt that is subject to a defeasance arrangement be derecognized? Contrast this with an in-substance defeasance.
Assume that a Canadian company borrowed US\($325,000\), for five years, when US\($1\) = Cdn\($1.10\). If the exchange rate at the end of the first year is US\($1\) = Cdn\($1.08\), and at the end of
Interest expense of \($45,500\) is recorded, after discount amortization of \($4,500\). Interest payable has increased by \($2,000\) during the year. How much cash was paid for interest?
“Kevin, it’s such a relief to get this \($2,000,000\) of financing in place at a reasonable cost. We finally have the go-ahead for that new equipment! If we order now, we’ll have it in place
Homebake Inc. is a growing company in the consumer small appliance industry. After months of research and testing, Homebake introduced its new home breadmaker in retail stores in September 20X5, just
Sable Company purchased merchandise for resale on 1 January 20X5, for \($5,000\) cash plus a \($20,000\), two-year note payable. The principal is due on 31 December 20X6; the note specified 3%
Pinnacle Limited issued \($5,000,000\) in secured notes payable on 30 April 20X0. The notes mature on 30 April 20X6, and bear interest at 5% per annum, payable every 30 October and 30 April. The
ABC Company issues a \($5,000,000,\) 8 1/2% bond on 1 October 20X4. At this time, market interest rates are in the range of 8%. The bond had a 20-year life from 1 October 20X4, and paid interest
Ayaz MacDonald Ltd. (AML) issued \($3,000,000\) of 5% bonds payable on 1 September 20X9 to yield 6%. Interest on the bonds is paid semi-annually, and is payable each 28 February and 31 August. The
On 1 January 20X1, Omega Additives Limited issued \($500,000\) of eight-year, 7.5% debentures at a net price of \($485,635.\) Interest is payable annually, on the anniversary date of the bond. The
Radian Company issued to Seivers Company \($30,000\) of three-year, 6% bonds dated 1 December 20X5. Interest is payable semi-annually on 31 May and 30 November. The bonds were issued on 28 February
A 2% loan was granted to Pegasus Technology Limited. The principal amount was \($750,000\) and the term was three years. Interest is paid at the end of each year. In addition, the lender charged an
On l January 20X8, a borrower arranged a \($500,000\) three-year 2% note payable, with interest paid at the end of each loan year. There was an upfront fee of \($53,460,\) which was deducted from the
On 1 July 20X2, Copp Corporation issued \($600,000\) of 5% (payable each 30 June and 31 December), 10-year bonds payable. The bonds were issued to yield 6%. The company uses effective interest
The following three cases are independent.Case A On 31 December 20X7, a company has the following bond on the statement of financial position:On 28 February 20X8, 20% of the bond was retired for
At 31 December 20X8, Hulu Ltd. reports the following on its statement of financial position:On 1 March 20X9,40% of the bond issue was bought back in the open market and retired at 99 plus accrued
On I June 20X5, Bridle Corp. issued \($40,000,000\) of 7.5% bonds, with interest paid semi-annually on 30 April and 31 October. The bonds were originally dated 1 November 20X4, and were 15-year
Computer Medic Limited issues \($800,000\) of 9.5% bonds on 1 July 20X1. Additional information on the bond issue is as follows:Required:1. Record the bond issue and the first interest payment under
Batra Company sold \($1,500,000\) of five-year, 12% bonds on 1 August 20X2. Additional information on the bond issue is as follows:Required:1. Record the bond issuance on 1 August 20X2.2. Prepare the
On l May 20X9, Nahal imports Limited (NIL) obtained a five-year loan from a major New York bank. The loan is for US\($13,000,000,\) bears interest at 5% per annum (paid annually on the loan
You are a senior auditor auditing the December 31, 2023 financial statements of Hoang Inc., a manufacturer of novelties and party favours and a user of ASPE. During your inspection of the company
Big Country Corporation is in the business of selling cattle. Due to recent diseases plaguing cattle, Big Country is experiencing a cash shortage. Big Country issued a $280,000, six-year,
Anaconda Inc. has issued three types of debt on January 1, 2023, the start of the company’s fiscal year:1. $10 million, 10-year, 13% unsecured bonds, with interest payable quarterly, priced to

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