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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

(Effect of accounting on business decisions, LO 6, 9) Judge Ltd. (Judge) operates a small chain of auto supply shops. The company has been in business for many years and for most of that time it was
(Effect of accounting on business decisions, LO 2, 3, 6) Togo Ltd. (Togo) and Fairfax Inc. (Fairfax) are small property development companies. Ms. Bessnerdium owns 60% of the shares of each of the
(Basket purchase, LO 2, 3, 5) Quabbin Corp. (Quabbin) is a small manufacturing company in Regina. It is owned by five shareholders, two of whom manage the company. The other three are silent
(Preparing amortization schedules, LO 2, 3, 4, 6) In July 2002 Yreka Palladium Mines Inc. (Yreka), a public company, began operation of its new palladium mine.Geologists estimate that the mine
(Full costing versus successful efforts, LO 3, 4, 9) Forillon Exploration Ltd.(Forillon) and Gullbridge Gas Inc. (Gullbridge) are natural gas exploration and development companies. In 2005 both
(Full costing versus successful efforts, LO 3, 4, 9) Droxford Exploration Ltd.(Droxford) and Bartibog Inc. (Bartibog) are oil exploration and development companies. In 2003 both companies did
(Observing the effects of accounting choices on the cash flow statement, LO 4, 8)Barkway Inc. (Barkway) is in the process of finalizing its cash flow statement for 2006.The statement has been
(Observing the effects of accounting choices on the cash flow statement, LO 4, 8)Juskatla Ltd. (Juskatla) is in the process of finalizing its cash flow statement for 2004.The statement has been
(Evaluating and interpreting the effects of a write-down, LO 4, 6) Meridian Ltd.(ML) is a public company that manufactures machine parts. In its most recent financial statements ML wrote down
Explain what the balance reported on MWW’’s balance sheet for capital assets represents.
What types of capital assets does MWW own? Describe what each category represents.
What is the historical cost of MWW’s capital assets on January 27, 2001?
How much amortization has been accumulated against MWW’’s capital assets on January 27, 2001?
Does MWW own all the capital assets it reports on its balance sheet? Explain.
At the end of fiscal 1999 MWW owned a piece of land that had a cost of $45,000 and a NBV of $45,000. Explain why the cost.of the land and the NBV of the land were the same.
How does MWW amortize its capital assets?’ Why does MWW amortize its capital assets (aside from the fact it is required by GAAP)?
Under what circumstances do you think how MWW amortizes its capital assets would matter to some of its stakeholders?
How much cash did MWW spend on capital assets during fiscal 2001? Where did you find the answer?
Explain what liabilities are and how they are valued.
Describe the nature and type of current liabilities and how current liabilities are accounted for.
Recognize the characteristics of bonds and other forms of long-term debt and explain how the values of these liabilities are determined.
Discuss how to account for bonds and other forms of long-term debt.
Explain the fundamentals of leasing and how leases are accounted for and reported in the financial statements.
Characterize the basics of pensions and pension accounting.
Describe future income taxes and explain how they arise.
Recognize the nature of contingencies, commitments, and subsequent events, and understand the reporting issues surrounding each.
Analyze and interpret information about liabilities in financial statements.
Explain the following terms as they relate to bonds:effective rate of interest- coupon rate maturity date. proceeds ep cao face value
What is off-balance-sheet financing? Why is off-balance-sheet financing attractive for some entities? How does off-balance-sheet financing affect financial statement users’ ability to interpret
Hyannas Inc. has recently arranged financing for its planned expansion. The company arranged a $5,000,000 bank loan that is secured against the inventory, receivables, and certain capital assets. The
What is a sale-leaseback transaction? Why do entities enter into sale-leaseback transactions? How are gains and losses on sale-leaseback transactions accounted for? Do you agree with this treatment?
Why does recording an “interest-free” loan at its face value result in the understatement of net income? Explain.
What is an executory contract? How are executory contracts accounted for according to GAAP? What is the reason for this treatment? What are some of the problems with it? Can you‘think of any
Do you agree with the statement, “All liabilities reported on a GAAP balance sheet are legally enforceable”? Explain.
What are bond discounts and premiums? Why are bonds sometimes sold at a discount or premium?Q10-1 1. What are restrictive covenants? Why are restrictive covenants sometimes included as part of debt
Because of an increase in competition in the industry, a respected bond-rating agency recently downgraded its rating on Quaw Inc.'s (Quaw) corporate bonds. A downgrade means that the bonds are
Distinguish between primary and secondary capital markets.
According to the GAAP characteristics for liabilities, is a future income tax liability really a liability? Explain.
Explain the effective interest method of amortizing bond discounts and premiums.
How does the effective interest method differ from the straight-line method?
Explain the difference between a capital lease and an operating lease. Explain how each type of lease is accounted for and the effect that each has on the balance sheet and income statement.
What is a contingency in accounting? Under what circumstances should a contingency be accrued in the financial statements? Under what circumstances should a contingency be disclosed in the notes to
One of the criticisms often made about accounting for future income taxes is that the amounts reported on the financial statements are not discounted. What is the problem with not discounting future
What is an accrued liability? How does an accrued liability differ from an account payable? Under what circumstances are accrued liabilities required?
Because it is so difficult to estimate the cost of providing defined-benefit pensions to employees who will retire many years in the future, it would make more sense, and result in more accurate
Why is the current portion of long-term debt classified separately as a current asset? What would be the impact on users of the financial statements if the current portion of long-term debt were not
What is a liability? What are the three characteristics that, according to GAAP, a liability must have? Do you think these characteristics capture every obligation an entity has? Explain.
Rykerts Ltd. reports a pension liability of $3,250,000 on its December 31, 2004 balance sheet. Provide an interpretation of this account and the balance in the account.
Why do managers sometimes have incentives to understate liabilities? What are the implications for the financial statements of understating liabilities? Provide exam- ples of how a manager could
Why is the actual cost of borrowing usually lower than the stated rate of interest that the borrower pays to a lender such as a bank? Can you think of a situation where the actual cost of borrowing
Identify and explain the criteria that the CICA Handbook provides to assist in the classification of leases. What are the problems and benefits of providing preparers of the financial statements with
Entities that use future income tax accounting show two components of the income tax expense: the current expense and the future expense. Define and explain these two components of the income tax
(Determining the proceeds from a bond, LO 3) On July 15, 2006, Dyce Inc. (Dyce)will be making a $2,000,000 bond issue to public investors. The bond matures in five years on July 14, 2011, has a
(Determining the proceeds from a bond, LO 3) On December 1, 2005 Koidern Inc. (Koidern) will be making a $5,000,000 bond issue to public investors. The bond matures in eight years on November 30,
(Accounting for gift certificates, LO 2, 9) Juno Boutique Inc. (Juno) operates a small chain of fashion boutiques. Juno usually opens its stores in upscale shopping malls in major cities. In 2004
(Classifying liabilities, LO 2, 3) How would each of the following items be classified on Atluck Grocery Store Corp.’s (Atluck) September 30, 2006 balance sheet?Explain your reasoning.a. A $250,000
(Valuing liabilities, LO 1) On March 31, 2005 Etzikom Inc. (Etzikom) purchased a corporate jet from the manufacturer for $7,500,000. Etzikom paid $500,000 in cash to the manufacturer and received a
(Collections on behalf of third parties, LO 2) For the following two independent situations, prepare the journal entry that Durrell Ltd. (Durrell) should record. Record the entry for both the amounts
(Calculating the interest expense, LO 3, 4) During 2005 Goffs Ltd. (Goffs) had the following amount of debt outstanding in each quarter of the year:The average interest rate that Goffs paid on its
(Understanding bond accounting relationships, LO 3, 4) Complete the following table by indicating whether the stated components of a bond will increase, decrease, or be unchanged as the bond
(Classifying transactions and economic events, LO 8) Classify the following transactions and economic events that Floral Ltd. (Floral) was involved with as commitments, subsequent events, or
(Future income taxes, LO 7) Use the following information to calculate the balance in the future income tax account for a machine owned by the entity: Cost of the machine when it was purchased:
(Future income taxes, LO 7) Use the following information to calculate the balance in the future income tax account for a building owned by the entity: Cost of the machine when it was purchased:
(Future income taxes, LO 7) For the fiscal year ended November 30, 2004 Vibank Ltd. (Vibank) has income before taxes of $4,500,000. Vibank’s tax return shows taxable income of $4,950,000 for that
(Accounting for bonds, LO 3, 4) On November 1, 2005 Nordin Inc. (Nordin)issued a $2,000,000 bond with a 7% coupon rate and a maturity date of October 31, 2010. Interest is paid annually on October
(Accounting for bonds, LO 3, 4) On September 1, 2004 Yone Ltd. (Yone) issued a$4,000,000 bond with a 10% coupon rate and a maturity date of August 31, 2010.Interest is paid annually on August 31. The
(Accounting for bonds, LO 3, 4) On February 1, 2006 Jura Corp. (Jura) issued a$12,000,000 bond with an 8% coupon rate and a maturity date of January 31, 2012.Interest is paid annually on January 31.
(Future income taxes and pensions, LO 8) Orthez Inc. (Orthez) funds a defined- benefit pension plan for its employees. The plan began in 2003. Contributions to the pension plan are made in accordance
(Early retirement of bonds, LO 4) In fiscal 2008 Ruthilda Inc. (Ruthilda) decided to exercise its option to redeem its outstanding bond issue before the bonds matured in 2015. The bonds had a face
(Early retirement of bonds, LO 4) In fiscal 2006 Hurette Inc. (Hurette) decided to exercise its option to redeem its outstanding bond issue before the bonds matured in 2011. The bonds had a face
(The effect of different amortization methods on future income taxes, LO 7)Caycuse Inc. (Caycuse) has just completed its first year of operations on December 31, 2005. The company owns a single asset
(Cost of borrowing, LO 3) For each of the following situations, determine the entity’s after-tax cost of borrowing:a. A corporation has a $1,000,000 bond with a coupon rate of 10%. The corporation
(Accounting for mortgages, LO 4) On November 1, 2006 Astwood Inc. (Astwood)purchased a small apartment building for $3,000,000. Astwood paid $500,000 in cash and arranged a 10-year, 8% mortgage with
(Accounting for mortgages, LO 4) On May 1, 2005 Duricle Inc. (Duricle) purchased land for $1,000,000. Duricle plans to build an office building or a condominium on the land some time in the future.
(Accounting for leases, LO 5) On February 1, 2005 Flatwater Ltd. (Flatwater) signed a five-year lease for four delivery trucks. According to the terms of the lease, Flatwater must make annual lease
(The effect of interest rates on capital leases, LO 5) On June 1, 2006 Grumbler Corp. (Grumbler) signed a six-year lease for heavy equipment. The lease requires Grumbler to make annual lease payments
(The effect of bond transactions on the cash flow statement, LO 3, 4) Wivenhoe Ltd. (Wivenhoe) includes a cash flow statement in the financial statement package it prepares for the bank. Wivenhoe
(Lease accounting and financial ratios, LO 5,9) Zeballos Inc. (Zeballos) is planning to lease new equipment for its distribution centre. The terms that Zeballos has agreed to require that it pay
(Accounting for bonds, LO 4) On June 1, 2006 Joffre Inc. (Joffre) issued a$2,000,000, 10-year bond with a 10% coupon rate. Proceeds from the bond issue were $2,200,000. Interest is to be paid
(Determining whether certain economic events are liabilities, LO 1) Explain whether each of the following would be considered a liability according to GAAP(using the three criteria from the chapter)
(Determining whether certain economic events are liabilities, LO 1) Explain whether each of the following would be considered a liability according to GAAP(using the three criteria from the chapter)
(Effect of transactions and economic events on ratios, LO 2, 4, 5, 7, 8, 9) The president of Oskelaneo Ltd. (Oskelaneo) wants to know the effect that a number of transactions and economic events will
(Effect of transactions and economic events on ratios, LO 4, 5, 6, 7, 8,9) The president of Ruskin Inc. (Ruskin) wants to know the effect that a number of transactions and economic events will have
(Accounting for possible unexpected warranty costs, LO 8) Nouvelle Ltd.(Nouvelle) is a privately owned industrial-products manufacturer located in Sherbrooke, Québec. The president of Nouvelle owns
(Accounting for a rebate promotion, LO 1, 2, 8) Urling Inc. (Urling) is a small public company that produces packaged consumer foods. Urling began operations about 22 years ago and has been a public
(Accounting for a possible loss, LO 8) Hoselaw Ltd. (Hoselaw) is a privately owned manufacturing company in eastern Ontario. The company is owned by five shareholders, three of whom are not active in
(Future income taxes, LO 7) Noggle Inc. (Noggle) processes fresh apples that it purchases from local farmers into apple juice and applesauce. All of Noggle’s processing equipment was purchased in
(Future income taxes and pensions, LO 7, 8) Azen Inc. (Azen) funds a definedbenefit pension plan for its employees. The plan began in 2005. Contributions to the pension plan are made in accordance
(Accounting for leases, LO 5) Vista Inc. (Vista) is a new manufacturing company that was formed in January 2007 to supply certain specialized machine parts to a large public company. Vista’s
(Accounting for leases, LO 5) In May 2005 Isachsen Inc. (Isachsen) signed a fouryear lease with an office supply company to supply Isachsen with all required office equipment over the lease period.
(The effects of buying versus leasing on the financial statements, LO 5)Winterton Rail Ltd. (Winterton) is considering obtaining some new locomotives.The purchase price of the locomotives is
(Lease accounting and financial ratios, LO 5, 9) Uphill Corp. (Uphill) operates four amusement arcades in Calgary. Uphill’s summarized balance sheet on March 31, 2004 is shown on page 645.The
(Accounting for bonds, LO 3, 4) On May 1, 2003 Kuldo Inc. (Kuldo) issued a$20,000,000 bond with a 7% coupon rate and a maturity date of April 30, 2007.Interest will be paid semi-annually on April 30
(Accounting for bonds, LO 3, 4) On August 1, 2004 Quilty Inc. (Quilty) issued an$8,000,000 bond with a 9% coupon rate and a maturity date of July 31, 2010.Interest will be paid semi-annually on July
Examine MWW’s balance sheet, statement of earnings, and statement of cash flow(including the supplementary schedules):How much does MWW report in current liabilities on January 27, 2001?What was
Examine Note 11 to MWW’s financial statements on commitments and contingent liabilities (page A-56).. Which users of financial statements would be interested in the information in Note 11? Explain.
Examine Note 10 to MWW’s financial statements (page A-55). During the fiscal year ended January 27, 2001, MWW purchased some of its franchise stores and converted them to corporate stores.a. How
Examine Note 9 to MWW’s financial statements (page A-54) and consider the $75,000,000 credit facility available from a syndication of Canadian chartered banks.a. What is the interest rate that
Examine Note 10 to MWW’s financial statements (page A-55).a. How much long-term debt did MWW have on January 27, 2001? How much of that debt was interest-bearing?b. What amount of principal
Examine Note 10 to MWW’s financial statements (page A-55).a. What amount of MWW’s long-term debt pertains to leased assets under capital leases?b. What is the average interest rate on the fixture

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