Advanced Financial Accounting 7th Edition Beechy Test Bank
Full download link at:
Test Bank: https://testbankpack.com/p/test-bank-for-advanced-financialaccounting-7th-edition-beechy-0132928930-9780132928939/
1) Which of the following organizations does IFRS 8 not apply to?
A) Banks
B) Mutual life insurance companies
C) Private companies
D) Cooperative business enterprises
Answer: C
Page Ref: 364
Learning Obj.: 7.1
Difficulty: Easy
2) Which of the following is not a requirement in defining an operating segment?
A) The particular component must be generating revenue.
B) The particular component's operating results must be reviewed regularly by responsible company officers.
C) The particular component's financial information is routinely available through the organization's financial reporting system.
D) The particular component incurs expenses in its normal cost of activities.
Answer: A
Page Ref: 364-365
Learning Obj.: 7.1
Difficulty: Moderate
3) Which of the following is not an aspect in identifying an operating segment?
A) The business component's operating results are reviewed regularly by the enterprise's chief operating decision maker.
B) It is a component of the enterprise that is expected to generate revenues and expenses.
C) Discreet financial information on the business component is regularly available through the company's financial reporting system.
D) Other companies in the same industry use similar operating segments.
Answer: D
Page Ref: 364-365
Learning Obj.: 7.1
Difficulty: Moderate
4) Which of the following is not a threshold for identifying a reportable segment?
A) The segment contributes at least 10% of the organization's total revenues.
B) The segment contributes at least 10% of the organization's operating profits.
C) The segment contributes at least 10% of the organization's combined assets of all operating segments.
D) The segment contributes at least 10% of the organization's total expenses.
Answer: D
Page Ref: 367
Learning Obj.: 7.1
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc.
5) At least 75% of an organization's consolidated external revenues are disclosed by separate operating segments. The remaining segments do not meet any of the reportable segment thresholds. Which of the following is true about the remaining segments?
A) They must still be reported as separate segments.
B) They can be combined only if they have similar economic characteristics.
C) They can be combined only if the segments are horizontally or vertically integrated.
D) They can be combined and classified as "other."
Answer: D
Page Ref: 367-369
Learning Obj.: 7.1
Difficulty: Moderate
6) The thresholds for segmental financial reporting exclude ________.
A) 10% of total internal and external revenues
B) 10% of total internal and external expenses
C) 10% of total assets
D) 10% of the absolute value of the larger of aggregate segment profits or aggregate segment losses
Answer: B
Page Ref: 367
Learning Obj.: 7.1
Difficulty: Easy
7) Faulk Ltd. has provided the following information:
Under the profit test only, which segments are reportable?
A) Segment A only
B) Segment C only
C) Segments A and C only
D) Segments C and D only
Answer: D
Page Ref: 367
Learning Obj.: 7.1
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc. 7-3
8) Faulk Ltd. has provided the following information:
Under the revenue test only, which segments are reportable?
A) Segments A and C only
B) Segments B and D only
C) Segments B, C, and D only
D) All the segments are reportable.
Answer: C
Page Ref: 367
Learning Obj.: 7.1
Difficulty: Moderate
9) Faulk Ltd. has provided the following information:
Under the asset test only, which segments are reportable?
A) Segments A, B, and C only
B) Segments A and D only
C) Segments B and C only
D) All the segments are reportable.
Answer: A
Page Ref: 367
Learning Obj.: 7.1
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc. 7-4
10) Faulk Ltd. has provided the following information:
Using all the applicable tests, which segments are reportable?
A) Segments B and C only
B) Segments B, C, and D only
C) Segment D only
D) All the segments are reportable.
Answer: D
Page Ref: 367
Learning Obj.: 7.1
Difficulty: Moderate
11) The following information on sales is available for the company's three operating segments:
Which of the operating segments must be reported separately?
A) Only Segment C
B) Only Segments B and C
C) Only Segments A and C
D) Segments A, B, and C
Answer: D
Page Ref: 369-371
Learning Obj.: 7.2
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc. 7-5
12) The following information on sales and operating profit is available for the company's three operating segments (in 000s):
Which of the operating segments must be reported separately?
A) Only Segment E
B) Only Segments D and F
C) Only Segments E and F
D) Segments D, E, and F
Answer: B
Page Ref: 369-371
Learning Obj.: 7.2
Difficulty: Moderate
13) An organization has identified the following segments:
Which of the identifiable segments above are reportable?
A) Segments A, B, and C only
B) Segments B, C, and E only
C) Segments B and C only
D) Segments A, B, C, and E only
Answer: D
Page Ref: 369-371
Learning Obj.: 7.2
Difficulty: Moderate
14) There is certain information that reportable segments are required to disclose only if that information is regularly reviewed by the chief operating decision-maker. Which of the following must be disclosed even if it is not regularly reviewed by the chief operating decision-maker?
A) Measure of profit/loss
B) Amortization and depreciation
C) Income tax expense/benefit
D) Interest revenue and expense
Answer: A
Page Ref: 371-372
Learning Obj.: 7.2
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc.
15) Under IFRS 8, certain reconciliations, such as total reportable segment revenues to the entity's revenues, are required. Why are these reconciliations required?
A) To prove that the consolidated financial statements balance
B) To ensure that all reportable segments have been identified
C) To show the relative contribution of each segment to the total
D) To show how reportable segments were identified
Answer: C
Page Ref: 372
Learning Obj.: 7.2
Difficulty: Moderate
16) IFRS 8 requires the disclosure of certain key information such as an organization's major customers and geographic areas of operations. Why are these disclosures required?
A) To demonstrate that the chief operating decision-maker has made prudent decisions
B) To allow users to assess potential business risks
C) To provide sufficient information to creditors
D) To allow users to see that the poor performance of one segment is usually offset by the good performance of other segments
Answer: B
Page Ref: 371-372
Learning Obj.: 7.2
Difficulty: Moderate
17) What is the main objective in disclosing segmented information?
A) It provides a broader view of the entire economic entity controlled by the parent.
B) It provides information to assess the risk of different operating units.
C) It increases the income of different operating segments.
D) It reduces the cost of financial reporting.
Answer: B
Page Ref: 371
Learning Obj.: 7.2
Difficulty: Easy
Copyright © 2014 Pearson Canada Inc.
18) Which of the following segment information must be disclosed?
A)
Breakdown between domestic and foreign non-current assets
Sales to single customers that had more than 10% of company's revenues
Yes Yes
B)
Breakdown between domestic and foreign non-current assets
Sales to single customers that had more than 10% of company's revenues
Yes No
C)
Breakdown between domestic and foreign non-current assets
Sales to single customers that had more than 10% of company's revenues
No Yes
D)
Breakdown between domestic and foreign non-current assets
Sales to single customers that had more than 10% of company's revenues
No No
Answer: A
Page Ref: 371-372
Learning Obj.: 7.2
Difficulty: Moderate
19) Which organizations are required to issue interim financial statements?
A) Public companies
B) Private enterprises
C) Both public companies and private enterprises
D) No organizations are required to issue interim financial statements.
Answer: A
Page Ref: 379
Learning Obj.: 7.3
Difficulty: Easy
20) Which of the following statements about interim financial statements for public companies is true?
A) Interim financial statements must be audited.
B) Interim financial statements should be in a format consistent with the year-end financial statements.
C) Interim financial statements must have the same level of detail as the annual financial statements.
D) Interim financial statements do not have to be in full compliance with IFRS.
Answer: B
Page Ref: 379
Learning Obj.: 7.3
Copyright © 2014 Pearson Canada Inc. 7-8
Difficulty: Moderate
21) With respect to interim financial statements, which of the following is not dictated by IFRS?
A) Content
B) Identification of recognition principles
C) Identification of measurement principles
D) Frequency of preparation
Answer: D
Page Ref: 380
Learning Obj.: 7.3
Difficulty: Easy
22) Which of the following is not included among requirements for interim financial reports for public companies?
A) Statement of comprehensive income
B) Statement of financial position
C) Statement of cash flows
D) Summary of significant accounting policies
Answer: D
Page Ref: 380-381
Learning Obj.: 7.3
Difficulty: Moderate
23) Rules for interim reporting require that comparative information be presented. What comparative information should the current statement of financial position include?
A) The same quarter, last year
B) The immediate preceding quarter
C) The year end, last year
D) As budgeted for the period
Answer: C
Page Ref: 380-381
Learning Obj.: 7.3
Difficulty: Difficult
24) Yang Ltd. will issue interim financial statements for its second quarter. Which statement(s) must report details of the second quarter as well as for the year to date?
A) Statement of comprehensive income only
B) Statement of changes in equity only
C) Statement of comprehensive income and statement of changes in equity only
D) Statement of comprehensive income, statement of changes in equity, and statement of cash flows only
Answer: A
Page Ref: 380-381
Learning Obj.: 7.3
Difficulty: Easy
Copyright © 2014 Pearson Canada Inc.
25) What is the difference between the way taxes are treated under the discreet approach and under the integral approach?
A) Under the discreet approach, taxes are estimated by applying an average tax rate to pre-tax interim net income, but taxes are calculated separately for each interim period under the integral approach.
B) Under the integral approach, taxes are estimated by applying an average tax rate to pre-tax interim net income, but taxes are calculated separately for each interim period under the discreet approach.
C) Under the discreet approach, taxes are recognized as they are incurred and paid, but under the integral approach, taxes are estimated by applying an average tax rate to pre-tax interim net income.
D) Under the integral approach, taxes are recognized as they are incurred and paid, but under the discreet approach, taxes are estimated by applying an average tax rate to pre-tax interim net income.
Answer: B
Page Ref: 383-384
Learning Obj.: 7.4
Difficulty: Moderate
26) During the first quarter of the company's fiscal year, HA Inc. paid $100,000 to an arbitrator, who assisted in negotiating an end to a strike by factory workers, and $200,000 for annual property taxes. How much of these costs should be expensed in the first quarter under the discreet approach and under the integral approach?
Answer: B
Page Ref: 383-384
Learning Obj.: 7.4
Difficulty: Difficult
27) When can benefits of an income tax loss in an interim period not be recognized in that period?
A) If the loss will be offset by taxable income later in that year
B) If the loss can be used as a loss carryback
C) If it is more likely than not that a tax loss carryforward benefit will be realized
D) If the loss occurs in the first interim period
Answer: D
Page Ref: 385-386
Learning Obj.: 7.5
Copyright © 2014 Pearson Canada Inc. 7-10
Difficulty: Moderate
28) In practice, most companies use the discreet approach in preparing their internal interim financial statements. Which of the following costs is usually not included in the financial statements?
A) Insurance
B) Income taxes
C) Maintenance
D) Bonuses to employees
Answer: B
Page Ref: 384
Learning Obj.: 7.4
Difficulty: Moderate
29) Under IAS 34, which of the following costs is not viewed as a constructive obligation?
A) Contingent lease payments in excess of a contractual base amount
B) Year-end bonuses
C) Quantity discounts or rebates
D) Maintenance costs
Answer: D
Page Ref: 385
Learning Obj.: 7.5
Difficulty: Moderate
30) The recommendation for interim income tax expense requires the use of which of the following rates in the first quarter?
A) Estimated average
B) Marginal
C) Applicable progressive
D) Loss carryforward
Answer: A
Page Ref: 385
Learning Obj.: 7.5
Difficulty: Moderate
31) In Canada and the United States, at a minimum, how often are interim financial statements required to be issued?
A) Monthly
B) Bi-monthly
C) Quarterly
D) Semi-annually
Answer: C
Page Ref: 389
Learning Obj.: 7.3
Difficulty: Easy
Copyright © 2014 Pearson Canada Inc. 7-11
32) The Alfred Company has operations in several international regions. These regions reported the following information:
Which of these segments are reportable? Fully document all supporting calculations.
Answer:
Revenue test
Threshold $12,800 × 10% = $1,280
Reportable segments A, B, D, E
Profits test
Threshold $1,100 × 10% = $110
Reportable segments A, B, C, D
Assets test
Threshold $29,800 × 10% = $2,980
Reportable segments A, B, D
Therefore, all segments must be reported separately as each segment qualifies under one or more of the threshold tests.
Page Ref: 367-369
Learning Obj.: 7.1
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc. 7-12
33) Ravens Inc. sells office furniture, including desks, chairs, partitioning walls, and office supplies, in more than six countries. The company is publicly traded and files annual statements with the securities regulator. The following information was provided by the controller for the most recent year ended December 31, 20X9.
Required:
Explain the nature of the disclosures that would be required by Ravens.
Answer: Ravens Inc. is a public company and must report segmented information as required by IFRS 8. For entity-wide disclosures, public companies must disclose key information on types of products and services sold, even if these do not qualify as separate reportable segments. Ravens would then have to disclose the four types of revenues. In addition, companies are required to break down revenues by each material geographic segment. For geographic segments, if revenues are material, they should be disclosed separately. If we assume that 10% of revenue is material, then Canada, the United States, and Australia must be disclosed separately. For reportable segments where additional information would be required, (using the 10% of revenue threshold, which is $24 million), the segments for desk, chairs, and partitions must be disclosed separately. For these segments, information related to revenues, expenses, assets, and liabilities must be disclosed.
Page Ref: 367-372
Learning Obj.: 7.1, 7.2
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc. 7-13
34) The controller of Getaway Corporation has prepared and summarized the following information for her company (all in millions of $):
Required:
Identify which segments are reportable. Also discuss any ethical issues related to reporting of segmented information.
Answer: (All discussion in millions of dollars.)
Based on total revenues (including external and internal) of $2,113, any segment with more than $211 of revenues will be reportable. This test results in hotels, car rentals, and bus tours being reportable based on the revenue.
Based on total profits, the threshold is 10% of $165 ($89 + $65 + $11), which is $16.50. Hotels, car rentals, and guided tours are reportable segments based on the profit threshold test.
Based on the asset threshold test, any segment with assets of $226 is reportable. Based on this test, only the hotels, car rentals, and bus tour segments are reportable.
Based on the above analysis hotels, car rentals, guided tours, and bus tours are reportable.
From an ethical perspective, companies may attempt to hide poor operating results by combining segments. It is up to management to define the segments, which could be based on products, services, geographies, or customers. It may be that segregation by products/services would show some segments to show losses and some profits. On the other hand, segmentation by customer type (business and residential, for example) might report all segments being profitable, which would provide a more favourable picture.
Page Ref: 364-369
Learning Obj.: 7.1
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc. 7-14
35) Explain what an operating segment is. For each of the examples below, determine what operating segments the company has and why.
a. A beverage company sells beer, wine, and bottled water. The beer and wine are sold through liquor store outlets and directly to restaurants. The bottled water is sold to retailers.
b. A company sells leather apparel. The company designs, manufactures, and retails these goods through its own retail outlets. There are primarily three divisions: (1) designing and sourcing and purchasing various raw materials; (2) manufacturing; and (3) distribution and retail. The design and raw materials flow through to the manufacturing division. All output of the manufacturing division is transferred to the distribution and retail division. Only the distribution and retail division has external revenues. The other divisions have internal revenues only.
c. A drug company researches, manufactures, and distributes its drugs to pharmacies and hospitals in Canada, the United States, and Australia. It currently manufactures three drugs. Two of these drugs treat diabetes, and one drug is used to treat arthritic pain. The company has a fourth drug that is in phase three of the research process, awaiting final approval. This drug will also be used to treat pain, but mainly headache pain.
Answer: An operating segment is defined as having three criteria as outlined in IFRS 8:
1. It is a component of the enterprise that is expected to generate revenues and incur costs.
2. Discreet financial information is regularly available through the company's accounting system.
3. The business component's operating results are regularly reviewed by the chief operating decisionmaker.
First of all, we assume that all the divisions have discreet financial information available that is regularly reviewed by the chief operating decision maker.
a. Beer and wine and bottled water could be seen as three separate operating segments, having separate managers and being distinct products. On the other hand, beer and wine are sold in the same markets to the same type of customer and could be grouped as alcoholic beverages. Bottled water would then be a separate operating segment.
b. For the leather apparel company, there are three divisions, but all the output is sold by the distribution and retail division. There are no materials bought from external suppliers by the manufacturing or the distribution and retail division. Although each division does generate revenues and expenses, it is likely that they would all be aggregated together as a single vertically integrated segment, rather than as three separate segments.
c. The company currently has four products, three of which produce revenue and one that is expected to generate revenue. So based on product lines, the company would possibly identify four segments. However, based on the type of disease that these products are marketed to, there are two segments–diabetes and pain; or three segments–diabetes, arthritic pain, and headache pain. A final segmentation would be based on geographic markets: Canada, the United States, and Australia. The final determination of which segments to report would be based on how the assessment of the chief operating decision-maker.
Page Ref: 364-365
Learning Obj.: 7.1
Difficulty: Difficult
Copyright © 2014 Pearson Canada Inc. 7-15
36) Explain what entity-wide disclosures are required by a public company. Why is this disclosure required under IFRS 8, and how is this information useful?
Answer: Entity-wide disclosures are required to provide the user with information to assess the nature and financial results of the various principal activities that the company is involved in, as well as the business risks inherent in those activities. Business risk is dependent on the types of products and services that a company sells, as different products and services may be impacted by commodity prices, competitive pressures, and economic conditions. Specifically, the geographic areas in which companies operate impact foreign exchange rate risk, political risk, and inflationary risk. Another major risk is the extent to which an enterprise is dependent upon a few customers. Users need to know how reliant the company is on a few customers in order to assess customer risk and credit risk. Therefore, entity-wide disclosures are required on products and services that are sold, geographic areas that the company operates in, and any major customers.
1. Disclosure of the revenues for each segment's product and services is required.
2. For each geographic area, companies must disclose:
• revenues from external customers in foreign countries;
• revenues from external customers in the company's home country;
• non-current assets located in foreign countries; and
• non-current assets located in the company's home country.
Where the revenues or assets in an individual foreign country are material, they must be disclosed separately.
3. Finally, where a single customer represents 10% or more of the total revenues of the company, this fact and the related amounts of revenue must be disclosed. The name of the customer is not required. Customers under common control are treated as a single customer.
Page Ref: 371-372
Learning Obj.: 7.2
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc. 7-16
37) HB Company is a private company with a significant amount of long-term debt. The company reports under IFRS. One of the conditions of the debt-financing indenture is that it must provide quarterly financial statements to the lender. HB pays tax at the rate of 20% on the first $200,000 of income and 40% on any income in excess of $200,000. During 20X5, the company earned $500,000 and paid tax at an average rate of 32%. Similar results were expected for 20X6.
HB realized the following actual results for the year ended December 31, 20X6 (in thousands): Quarter
Required:
Calculate income tax expense (recovery) for each quarter in 20X6 and for the year in total under the:
a. discreet approach
b. integral approach
Answer:
a. Discreet approach (in thousands)
b. Integral approach (rounded to nearest thousand)
Copyright © 2014 Pearson Canada Inc. 7-17
38) Blue Sky Inc. (BSI) is a public company that is required to file interim statements on a quarterly basis. BSI has a loss carryforward available of $150,000, which has not been recognized as a deferred tax asset. In the first interim period, the company earns $80,000, and it is expected that it will earn the following amounts in each of the next three quarters: $50,000 in quarter two, $170,000 in quarter three, and $200,000 in quarter four. The company pays a tax rate of 30%, excluding any loss carryforwards.
Required:
Calculate the tax expense for each interim period assuming that the company follows the requirements of IAS 34.
Answer: The amount of tax expected to be paid for the year, using the loss carryforward, is: ((80,000 + 50,000 + 170,000 + 200,000) - 150,000) × 30% = ($500,000 - 150,000) × 30% = $105,000.
The average tax rate is then calculated to be 105,000 / 500,000 = 21%.
Taxes for each interim period:
Quarter 1 $80,000 × 21% = $16,800
Quarter 2 $50,000 × 21% = $10,500
Quarter 3 $170,000 × 21% = $35,700
Quarter 2 $200,000 × 21% = $42,000
Page Ref: 383-386
Learning Obj.: 7.5
Difficulty: Difficult
39) Under IAS 34, companies generally should use the discreet approach for interim reporting. However, IAS 34 outlines exceptions to this rule. Explain what these exceptions are and how they are treated in interim reports. What argument does IAS 34 provide for this treatment?
Answer: IAS 34 specifically discusses year-end bonuses, customer/purchaser rebates, contingent rents, employer payroll taxes, and income taxes as exceptions to the discreet approach. The guidance is to use the integral approach for these types of costs. The argument is that these types of expenses give rise to constructive obligations and therefore should be recorded as the obligation arises in each interim period. Companies should estimate or project what these costs might be for the entire year and then accrue the costs in the interim period.
1. Year-end bonuses: These bonuses are accrued in each interim period provided there is a legal or constructive obligation to pay and a reliable estimate can be made.
2. Customer volume rebates: If the required level of sales to the customer is expected to be achieved by the end of the year, and the rebate is probable, then the volume rebates should be accrued in each interim period. Similar treatment can be used by the purchaser who has earned the rebate and therefore accrues the receivable as purchases are made in each interim period.
3. Contingent lease payments: If the required level of sales is expected to be achieved over the year, then the lease payment obligation should be accrued in each interim period as the sales are recognized.
4. Income taxes: The interim income tax expense should be determined using the estimated average effective income tax rate.
5. Employer payroll taxes: Payroll taxes for employees change depending on the level of wages paid. As a result, the company estimates the taxes based on a full year's compensation.
Page Ref: 385-386
Learning Obj.: 7.5
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc. 7-18
40) Sharst Link Company (SLC) is a public company and must file interim statements. SLC experienced the following events during the third quarter of 20X9:
1. A large marketing plan was rolled out for a new product costing $9,000,000. The plan is expected to drive sales for the next four quarters.
2. A lawsuit was settled and the company must pay $15 million within the next 90 days. There was no payment made by the end of the third quarter. In previous quarters, there was no provision made for this settlement since it was determined to be not probable.
3. Goodwill was tested for impairment and determined to have an impairment loss of $10 million.
4. In the previous interim period, due to a significant drop in the selling price of the inventory, the inventory was written down to its net realizable value of $9 million from a cost of $10 million. In this quarter, the inventory is still on hand and the circumstances have again changed, resulting in the net realizable value increasing to $12 million.
5. Customers earn volume rebates when annual sales volumes exceed $6 million. This is a contractual agreement that the company has made to pay rebates of 4% on total sales for the year once the amount of $6 million is achieved. Currently, there were sales of $2 million to one customer for the quarter. In each of the previous quarters, sales of $1.5 million had been made to this customer. It is expected that sales of $2 million will be made in quarter four to this customer also.
Required:
For each event, indicate the impact on the interim statement for the third quarter using the guidance required by IAS 34.
Answer: The discussion below outlines the treatment of each event required under IAS 34:
1. The large marketing plan is a cost of the interim period and cannot be deferred and spread over future periods. Therefore, a marketing cost of $9 million will show in the expenses in the third interim period.
2. The settlement of the lawsuit is a cost of the current period and will be recognized as a liability since it has not yet been paid. The cost of $15 million will show as a cost in the third quarter.
3. The goodwill impairment loss must be recorded in the interim period when it arises. Therefore, an impairment loss of $10 million is recognized in quarter three.
4. The inventory impairment from the second interim period may be reversed in the third interim period. So there will be a reversal of the impairment loss of $1 million recognized in the third interim period.
5. Since the customer rebates are contractual, they can be estimated and accrued in each interim period if it is likely that the rebates will be paid. In this case, the sales in the first three interim periods total $5 million. It is expected that another $2 million of sales will be made to this customer in the fourth interim period. Consequently, a liability for the rebate $80,000 on the current sales of $2 million should be recognized. This assumes that the liability has also been recognized in the previous interim statements. If this is not the case, then the total liability accrued to date of $200,000 (4% × $5 million) should be recognized.
Page Ref: 382-386
Learning Obj.: 7.5
Difficulty: Moderate
Copyright © 2014 Pearson Canada Inc. 7-19
41) Sparky Limited (SPL) is a public company and must file interim statements. SPL experienced the following events during the second quarter of 20X11:
1. In the first quarter, an impairment loss on goodwill was recognized in the amount of $5 million. The circumstances leading to this loss have now changed, and the value of the goodwill is once again above its original cost.
2. During the second quarter, the company shut down its manufacturing plant for annual maintenance. The annual maintenance costs totalled $7.5 million in the quarter.
3. As per a lease agreement, the company must pay additional rent charged at 3% of sales if annual sales are greater than $12 million. The contingent rent is payable on the total annual sales. The company reported sales in the first quarter related to this leased location of $3 million, and in the second quarter sales totalled $4 million. It is expected that sales for the third and fourth quarters will be $5 million and $3 million, respectively.
4. The company made a large sale to a new customer for $6 million. This sale relates to a contract of services that will be provided over the next nine months, which commences in the first month of the second interim period.
Required:
For each event, indicate the impact on the interim statement for the second quarter using the guidance required by IAS 34.
Answer: The discussion below outlines the treatment of each event required under IAS 34:
1. Impairment losses on goodwill cannot be reversed. Even though the reversal takes place in the next interim period, and within the same annual period, the loss cannot be reversed. The impairment loss is treated in the same way as though the interim period was a year-end. Therefore, there is no impact of this event in the second interim period.
2. Annual maintenance is expensed in the interim period in which it occurs. It cannot be deferred since it does not meet the definition of an asset at the interim period report date. In this case, the maintenance costs of $7.5 million will be reported in the second interim period.
3. Contingent rents are accrued if the required sales level is expected to be achieved. In this interim period, a contingent rent cost and liability will be recognized of $120,000 ($4 million × 3%). This assumes that the contingent rent liability was also recognized in the first interim period. If this was not the case, then the contingent rent cost and liability to be recognized in the second quarter would be $210,000 ($7 million × 3%).
4. The large sale is for services to be performed over the next nine months, starting the first month of the second interim period. As a result, only three of nine months will be reported as revenue in the second quarter, which calculates to be $2 million. $4 million will be recognized as deferred revenue and brought into income over the next two quarters.
Page Ref: 382-386
Learning Obj.: 7.5
Difficulty: Difficult
Copyright © 2014 Pearson Canada Inc. 7-20
