Financial Accounting IFRS, Global Edition, 12th edition Walter T. Harrison Solution Manual.pdf (22)

(15-20 min.) E 7-33B

Year 20X6 20X7 20X8 20X9

Units-ofProduction 3,920 5,320 2,520 5,040 €16,800

Straight-Line 4,200 4,200 4,200 4,200 €16,800

Double-DecliningBalance 9,750 4,875 2,175 -0€16,800

_____ Computations:

Straight-line: (19,500 − 2,700) ÷ 4 = 4,200 per year.

Units-of-production: (19,500 − 2,700) ÷ 30,000 miles =

€.56 per mile; 20X6 20X7 20X8 20X9

7,000 9,500 4,500 9,000

× × × ×

€.56 .56 .56 .56

= = = =

€3,920 5,320 2,520 5,040

Double-declining-balance — Twice the straight-line rate: 1/4 × 2 = 2/4 = 50% 20X6 19,500 × .50 = 9,750 4,875 4,875 − 20X7 (19,500 − 9,750) × .50 = residual value of 2,700 = 20X8 4,875 − 2,700 = €2,175

The units-of production method tracks the wear and tear on the van most closely.

For income tax purposes, the double-declining-balance method is best because it provides the most depreciation and, thus, the largest tax deductions in the early life of the asset.

The company can invest the tax savings to earn a return on the investment.

Financial Accounting: IFRS 12/e Solutions Manual

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(15 min.) E 7-34B INCOME STATEMENT Expenses: Depreciation expense — Building [(159,000 + 318,000 + 195,000) − 156,000] / 20… € 25,800 Depreciation expense — Furniture and Fixtures (177,000 × 2/5)…………………………………………

70,800

Supplies expense (29,400 − 4,500)………………………………………

24,900

BALANCE SHEET Current assets: Supplies………………………………………………….. € 4,500 PPE: Building (159,000 + 318,000 + 195,000).. €672,000 Less Accumulated depreciation………

(25,800)* 646,200 Furniture and fixtures…………………… € 177,000 Less Accumulated depreciation………

(70,800) 106,200 *(672,000 – 156,000)/20

STATEMENT OF CASH FLOWS Cash flows from investing activities: Purchase of buildings (159,000* + 195,000)……

(354,000) Purchase of furniture and fixtures………………… (177,000) _____ *Does not include the 318,000 note payable because Exquisite Eatery paid no cash on the note.

Chapter 7

PPE & Intangibles

(10-15 min.) E 7-35B SHORT-CUT SOLUTION: SL DDB Depreciation by the two methods……

45,000* 20,250* Extra depreciation provided by DDB (45,000 − 20,250)……………………..… €24,750 Multiply by the income tax rate………… × .40 Tax saved by using DDB = Extra cash to invest. € 9,900 Depreciation method for income tax: Double-decliningbalance Cash saved by using Double-declining-balance depreciation: SL 240,000 180,000 60,000

Cash revenues……………………………

Cash expenses……………………………

Cash provided by operations before income tax………………………………

Depreciation expense (a noncash expense): *SL: [(360,000 − 36,000) / 8 × 6/12]…

20,250 39,750 *DDB: (360,000 × 2/8 × 6/12)…………

Income before income tax………………

Income tax expense (40%)…………… € 15,900, Cash-flow analysis: Cash provided by operations before income tax………………………… € 60,000 Income tax expense………………

(15,900) Cash provided by operations….. € 44,100

Extra cash available for investment if DDB is used (54,000 – 44,100)……………………..

Financial Accounting: IFRS 12/e Solutions Manual

DDB 240,000 180,000 60,000

45,000 15,000 € 6,000

€ 60,000 (6,000) € 54,000

€ 9,900

(10-15 min.) E 7-36B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Year 20 Depreciation Expense [(876,000 − 144,000) ÷ 40]…………….

18,300 Accumulated Depreciation — Building 18,300 Year 21 Depreciation Expense…………………… 16,080* Accumulated Depreciation — Building _____ *Computation: Depreciable cost: €876,000 − €144,000 = 732,000 Depreciation through year 20: €732,000 ÷ 40 = 18,300 €18,300 × 20 = 366,000 Asset’s remaining depreciable book value: €876,000 − 366,000 – 27,600 = 482,400 New estimated useful life remaining: 15 years New annual depreciation: €482,400 ÷ 15 = €32,160

Chapter 7

PPE & Intangibles

16,080

(15-20 min.) E 7-37B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X7 Depreciation for 9 months: Sept. 30 Depreciation Expense………………… 1,512* Accumulated Depreciation — Fixtures………………………………..

Sale of fixtures: 30 Cash……………………………………… 2,200 Accumulated Depreciation — Store Fixtures (3,360 + 1,512)……..

4,872 Loss on Sale of Fixtures……………… 1,328** Fixtures………………………………..

CREDIT

1,512

8,400

_____ *20X6 depreciation: 8,400 × 2/5 = 3,360 20X7 depreciation: (8,400 − 3,360) × 2/5 × 9/12 = €1,512

**Loss is computed as follows:

Sale price of old fixtures……………………

Book value of old fixtures: Cost…………………………………………

Less: Accumulated depreciation………

Loss on sale…………………………………..

Financial Accounting: IFRS 12/e Solutions Manual

€2,200 8,400 (4,872)

3,528 €(1,328)

(10-15 min.) E 7-38B Cost of old truck……………………………………

€720,000

Less Accumulated depreciation: (720,000 − 200,000) ×

79 + 119 + 158 + 44 1,000

Book value of old truck……………………………

(208,000)a _______ €512,000

_____aAlternate solution setup for accumulated depreciation: (720,000 − 200,000) 1,000,000 miles

= €.52 per mile

79,000 + 119,000 + 158,000 + 44,000 = 400,000 miles driven Accumulated depreciation = 400,000 miles × €.52 =

€208,000

Calculation of gain or loss: Purchase price of Freightliner truck…….. €600,000 Cash paid for Freightliner truck ………….

48,000 Trade in value of Max truck ……………...

552,000 Book Value of Max truck ………………....

512,000 Net gain on disposal of Max truck ……… € 40,000

Chapter 7

PPE & Intangibles

(Continued) E 7-38B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X9 Truck-Freightliner…………………... 600,000 Accumulated Depreciation – Max Truck………………………………... 208,000 Truck – Max .…………………….

Cash……………………………….

Gain on Disposal of Max Truck

Financial Accounting: IFRS 12/e Solutions Manual

CREDIT

720,000 48,000 40,000

(10-15 min.) E 7-39B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

(a) Purchase of mineral assets: Mineral Asset………………………. 435,000 Cash………………………………

435,000

(b) Payment of fees and other costs: Mineral Asset (170 + 2,600 + 92,230)……

Cash………………………………

95,000

95,000*

(c) Depletion Expense………………… 106,000** Accumulated Depletion — Mineral Asset……………………

106,000

_____ *170 + 2,600 + 92,230 = €95,000

**435,000 + 95,000 = 530,000; 530,000 ÷ 400,000 tons = €1.325 per ton; 80,000 tons × 1.325 = €106,000

Mineral asset book value = €424,000 (530,000 – 106,000).

Chapter 7

PPE & Intangibles

(10-15 min.) E 7-40B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Part 1(a) Purchase of patent: Patents……………………………….. 780,000 Cash………………………………..

780,000

(b) Amortization for each year: Amortization Expense — Patents (€780,000 ÷ 8)……………………….. 97,500 Patents…………………………….

97,500

Part 2

Amortization for year 5: Amortization Expense — Patents.. 195,000* Patents…………………………….

_____ *Asset remaining book value: €780,000 − (€97,500 × 4) = €390,000 New estimated useful life remaining: 2 years New annual amortization: €390,000 ÷ 2 = €195,000

Financial Accounting: IFRS 12/e Solutions Manual

195,000

(5-10 min.) E 7-41B Req. 1 Cost of goodwill purchased: Millions €20

Purchase price paid for Southwest.com…………….

Market value of Southwest’s net assets: Market value of Southwest’s assets (10 + 18).. €28 Less: Southwest’s liabilities……………………….. (25) Market value of Southwest’s net assets………….

Cost of goodwill………………………………………….

3 €17

Req. 2

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Current Assets………………………………….. 10 Long-Term Assets……….……………………... 18 Goodwill…………………………….……………. 17 Liabilities………………………………………

Cash…………………………………………….

Purchased Southwest.com

25 20

Req. 3 Golden will determine whether its goodwill has increased or decreased in value. If the goodwill’s value has increased, there is nothing to record. But if goodwill’s value has decreased, Golden will record an impairment of goodwill and write down the book value of the goodwill.

Chapter 7

PPE & Intangibles

(10 min.) E 7-42B a.

Sale of building (or disposal of building)…………………….

€ 640,000

b. Insurance proceeds from fire (or disposal of building)…………………….

120,000

c.

d.

Renovation of store (or capital expenditures)……………………

(140,000)

Purchase of store fixtures (or capital expenditures)……………………

(100,000)

Financial Accounting: IFRS 12/e Solutions Manual

Challenge Exercises (10-15 min.) E 7-43 Let N = Number of hours of usage Units-of-production Cost − Residual value = depreciation Useful life, in hours

×

Number of hours of use

×

N

×

N

$120,000 − $12,000 $4,680

=

60,000 $1.80

$4,680

=

N

=

$4,680 $1.80

N

=

2,600 hours

Alternate solution setup: Depreciation Cost − Residual value per hour Useful life, in hours = $120,000 − $12,000 =

60,000

=

$1.80

Depreciation UOP

per hour =

Depreciation

$1.80

$4,680

=

N

=

$4,680 $1.80

N

=

2,600 hours

×

Number of hours of use

×

Chapter 7

PPE & Intangibles

N

(15-20 min.) E 7-44 Amounts in millions Property and Equipment Beg. bal.

22,011 Cost of prop.

Purchases 2,580 and equip. sold End. bal.

24,073 Accumulated Depreciation Accum. depr. of prop. Beg. bal.

X = 376 and equip. sold X Depr. exp.

End. bal.

X = 518

12,087 1,595 13,306

Sale price of property and equipment………….. $ 45 Book value sold: Cost…………………………………….. $ 518 Less: Accumulated depreciation…

(376) 142 (Loss) on sale……………………………………….. $ (97) Alternate solution setup: 20X6 Net PPE assets $9,924 Add: New PPE purchased 2,580 Less: Current year depreciation (1,595) Net PPE assets available 10,909 Less: 20X7 Net PPE assets (10,767) Net book value of PPE disposed $142 Sale price of PPE 45 Loss (gain) on sale of PPE 97

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 7-45 Millions $68

Net income under straight-line depreciation….

Difference in depreciation for 20X7 (year 2 of 8):

Straight line depreciation, as reported……... $36 DDB depreciation for year 2 (see below)……

54 Increase in depreciation expense…………....

18 Decrease in net income…………………………...

(18)

Net income Norzani can expect for 20X7 if the company uses DDB depreciation……..

$50

Millions DDB depreciation by year: Year DDB depreciation 1 $288 × 2/8……………………………………..

2 ($288 − $72) × 2/8…………………….............

Chapter 7

PPE & Intangibles

$72 54

(15-25 min.) E 7-46 Year 1

1. Total current assets 2. Equipment, net 3. Net income

2 3 4 Millions of Euros (€) No effects €6.3 u* €4.2 u** €2.1 u Correct 6.3 u* 2.1 o 2.1 o €2.1 o

_____ u = Understated o = Overstated * Cost (€8.4 million) − Depreciation expense (€2.1 million) = €6.3 million ** Cost (€8.4 million) − Two years’ depreciation (€4.2 million) = €4.2 million

Financial Accounting: IFRS 12/e Solutions Manual

Quiz Q7-47 b Q7-48 c Q7-49 a Q7-50 d Q7-51 d

Q7-52 c Q7-53 d Q7-54 b Q7-55 d Q7-56 a Q7-57 a

[$525,000 / ($525,000 + $350,000) × ($3,200,000 + $1,300,000)] ÷ 10 = $270,000 [($42,000 − $7,000) / 5 × 2 = $14,000; $42,000 − $14,000 = $28,000] [($42,000 − $7,000) / 5 × 2 = $14,000; ($42,000 − $14,000) / 8 = $3,500]

[($9,500 − $500) / 10 × 2 = $1,800; $9,500 − $1,800 = $7,700; $8,200 − $7,700 = $500]

Q7-58 Cash……………………………………… 8,200 Accumulated Depreciation…………… 1,800 Machinery (or Equipment)………..

9,500 Gain on Disposal………………......

500 Q7-59 Depreciation for 20X6

$ 900

Book value at Dec. 31, 20X7

$7,700

Q7-60 a Q7-61 c

($9,500 − $500)/ 10 = $900 $9,500 − $1,800 = $7,700)

($960,000 − $40,000) × (48,000 / 400,000) = $110,400 $68,000,000 − ($74,000,000 − $16,000,000) = $10,000,000

Chapter 7

PPE & Intangibles

Problems Group A (20-30 min.) P 7-62A Req. 1 LAND SALES GARAGE IMPROVEMENTS BUILDING BUILDING FURNITURE

ITEM

LAND

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)

$299,250 8,700

$ 80,750 $ 31,600

900 5,700

(l) (m) (n) (o) (p) (q) Totals $314,550

1,300 $

500 19,700 525,000 41,300 9,200

6,700* 53,100 7,600 4,950

$105,250

38,700

1,350

$593,100 $123,400

$79,900 1,800 $81,700

Computations: (a) Land: $315,000 / $400,000 × $380,000 = $299,250 (o) Garage building: $ 85,000 / $400,000 × $380,000 = $ 80,750 Land improvements: $ 45,000 × .11 = $ 4,950 Sales building: $ 45,000 × .86 = $38,700 Garage building: $ 45,000 × .03 = $ 1,350 _____ *It is also correct to debit this cost to the Land account.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 7-62A Req. 2

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X6

Dec. 31 Depreciation Expense — Land Improvements ($105,250 / 20 × 8/12) Accumulated Depreciation — Land Improvements……………

3,508* 3,508

31 Depreciation Expense — Sales Building ($593,100 / 40 × 8/12)……….………

9,885 Accumulated Depreciation — Sales Building…………….………

9,885

31 Depreciation Expense — Garage Building ($123,400 / 40 × 8/12)……… 2,057 Accumulated Depreciation — Garage Building……………………

2,057

31 Depreciation Expense — Furniture ($81,700 / 10 × 8/12)………

Accumulated Depreciation — Furniture……………………………..

5,447

5,447

____ *$3,285 ($98,550 / 20 × 8/12) if $6,700 (l in Req. 1) is debited to Land.

Chapter 7

PPE & Intangibles

(continued) P 7-62A Req. 3 This problem shows how to determine the cost of a plant asset. It also demonstrates the computation of depreciation for a variety of property, plant and equipment. Because virtually all businesses use property, plant and equipment, a manager needs to understand how those assets’ costs and depreciation amounts are determined. Depreciation affects net income. Managers need to understand the meaning, components, and computation of net income because often their performance is measured by how much net income the business earns. This problem covers all these concepts with specific examples.

Student responses will vary.

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) P 7-63A Req. 1

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Equipment………………………………….……….. 216,000 Cash……………………………………………….

216,000 Depreciation Expense — Buildings……………. 62,500 Accumulated Depreciation — Buildings…… ($1,418,000 − $168,000) / 20 = $62,500

62,500

Depreciation Expense — Equipment…………... 77,600 Accumulated Depreciation — Equipment….. [($810,000 − $530,000) × 2/10] + ($216,000 × 2/10 × 6/12) = $77,600

77,600

Req. 2 BALANCE SHEET Property, plant, and equipment: Land…………………………………………………………… $ 292,000 Buildings……………………………………………………...

1,418,000 Less: Accumulated Depreciation ($684,000 + $62,500)... (746,500) Equipment ($810,000 + $216,000)………………………... 1,026,000 Less: Accumulated Depreciation ($530,000 + $77,600)... (607,600)

Chapter 7

PPE & Intangibles

(25-35 min.) P 7-64A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Jan. 2 Equipment (new)……………………. 175,000 Accumulated Depreciation — Equipment……………………………. 65,000 Equipment (old)…………………...

Gain on disposal of equipment...

Cash ($175,000 − $75,000)………

136,000 4,000 100,000

June 30 Depreciation Expense — Building [($655,000 − $275,000) / 40 × 6/12]..

Accumulated Depreciation — Building……………………………

4,750 4,750

30 Cash…………………………………… 115,000 Note Receivable……………………... 405,250 Accumulated Depreciation — Building ($130,000 + $4,750)………. 134,750 Building……………………………

655,000

Oct. 29 Land [$221,100 / ($221,100 + $180,900) × $390,000]……………... 214,500 Building [$180,900 / ($221,100 + $180,900) × $390,000]………………. 175,500 Cash……………………………......

390,000

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 7-64A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Dec. 31 Depreciation Expense — Equipment ($175,000 × 2/5)………

Accumulated Depreciation — Equipment………………………..

31 Depreciation Expense — Buildings ($175,500 *.8 )/40 × 2/12 Accumulated Depreciation — Buildings…………………………

Chapter 7

CREDIT

70,000 70,000

585

PPE & Intangibles

585

(10-15 min.) P 7-65A Depreciation is the process of allocating the company’s property, plant and equipment’s cost to expense over the period the asset is used. Depreciation procedures are designed to match this expense against revenue over the asset’s life. The primary purpose of depreciation accounting is to measure income. Of less importance is the need to account for the decline in the asset’s usefulness. Depreciation does not mean that the business sets aside cash to replace assets as they wear out. The period over which an asset’s cost is depreciated depends on a number of factors, including physical deterioration of the asset and obsolescence.

The decreasing annual amounts indicate that the company is using an accelerated depreciation method, which allocates more asset cost to expense during the early years of asset use than during the later years. This pattern is not related to changes in the value of the asset, because depreciation is not a process of asset valuation. Even though the property values may be increasing, it is still necessary to record depreciation on the firm’s property, plant and equipment.

Student responses will vary

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.) P 7-66A Req. 1 Straight-Line Depreciation Schedule Depreciation for the Year DATE

1-09-20X6 12-31-20X6 12-31-20X7 12-31-20X8 12-31-20X9 12-31-20Y0

ASSET COST

DEPRECIATION DEPRECIABLE DEPRECIATION ACCUMULATED ASSET BOOK COST = EXPENSE DEPRECIATION VALUE RATE 

$280,000 1/5 1/5 1/5 1/5 1/5

$260,000 260,000 260,000 260,000 260,000

$52,000 52,000 52,000 52,000 52,000

$

Asset cost: $240,000 + $2,000 + $8,000 + $30,000 = $280,000 Depreciation for each year: ($280,000 − $20,000) / 5 years = $52,000

Chapter 7

PPE & Intangibles

52,000 104,000 156,000 208,000 260,000

$280,000 228,000 176,000 124,000 72,000 20,000

(continued) P 7-66A Req. 1 Units-of-Production Depreciation Schedule Depreciation for the Year DATE

ASSET COST

1-09-20X6 $280,000 12-31-20X6 12-31-20X7 12-31-20X8 12-31-20X9 12-31-20Y0 Total documents

DEPRECIATION NUMBER OF PER DOCUMENT  DOCUMENTS =

$2.08 2.08 2.08 2.08 2.08

30,000 27,500 25,000 22,500 20,000 125,000

DEPRECIATION ACCUMULATED ASSET BOOK EXPENSE DEPRECIATION VALUE

$62,400 57,200 52,000 46,800 41,600

$ 62,400 119,600 171,600 218,400 260,000

Depreciation per document: ($280,000 − $20,000) / 125,000 units = $2.08

Financial Accounting: IFRS 12/e Solutions Manual

$280,000 217,600 160,400 108,400 61,600 20,000

(continued) P 7-66A Req. 1 Double-Declining-Balance Depreciation Schedule Depreciation for the Year DATE

1-09-20X6 12-31-20X6 12-31-20X7 12-31-20X8 12-31-20X9 12-31-20Y0

ASSET COST

DDB RATE



ASSET BOOK DEPRECIATION ACCUMULATED ASSET BOOK VALUE = EXPENSE DEPRECIATION VALUE

$280,000 .40* .40 .40 .40

$280,000 168,000 100,800 60,480 36,288

* DDB rate: (1/5 years × 2) = 2/5 = .40 ** Depreciation for 20Y0: $36,288 - $20,000 = $16,288

Chapter 7

PPE & Intangibles

$112,000 67,200 40,320 24,192 16,288**

$ 112,000 179,200 219,520 243,712 260,000

$280,000 168,000 100,800 60,480 36,288 20,000

(continued) P 7-66A Req. 2 The depreciation method that maximizes reported income in the first year of the computer’s life is the straight-line method, which produces the lowest depreciation for that year ($52,000).

The method that maximizes cash flow by minimizing income tax payments in the first year is the double-declining-balance method, which produces the highest depreciation amount for that year ($112,000).

Financial Accounting: IFRS 12/e Solutions Manual

(20-25 min.) P 7-67A Req. 1

Cost of PPE……………………...............

Less: Accumulated depreciation………

Book value, net……………………………

Millions $4,835 (2,128) $2,707

Req. 2 Evidences of the purchase of property, plant and equipment and goodwill: 1. Historical cost of PPE increased on the balance sheet.

2. Goodwill increased on the balance sheet.

3. Statement of cash flows reported “Additions to property, plant, and equipment.”

Req. 3 Property, Plant, and Equipment

Accumulated Depreciation

2/28/X5 Bal. 4,198 Cost of Accum. depr.

2/28/X5 Bal. assets sold of assets sold Purchased Depr. during during 20X6 707 in 20X6 70 in 20X6 56 20X6 2/28/X6 Bal. 4,835 2/28/X6 Bal. 2/28/X5 Bal. Goodwill Purchased 520 during 20X6 40* 2/28/X6 Bal. 560

_____ *Determined by deduction, since there was no impairment on goodwill.

Chapter 7

PPE & Intangibles

1,724 460 2,128

(20-30 min.) P 7-68A Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Iron Ore………………………………… 5,600,000 Cash……………………………….

Iron Ore…………………………………

Cash……………………………….

136,000

Iron Ore…………………………………

Cash……………………………….

144,000

Iron Ore…………………………..........

Note Payable………………………

74,600

Depletion Expense…………………

Accumulated Depletion — Iron Ore [($5,600,000 + $136,000 + $144,000 + $74,300) / 198,000] × 34,500………………

1,037,544

5,600,000

136,000

144,000

74,600

1,037,544

Accounts Receivable (34,500 × $72) 2,484,000 Sales Revenue…………………..

Operating Expenses…………………

Cash……………………………….

500,000

Income Tax Expense (see Req. 2)…

Income Tax Payable……………

302,866

Financial Accounting: IFRS 12/e Solutions Manual

CREDIT

2,484,000

500,000

302,866

(continued) P 7-68A Req. 2 South Pacific Energy Company Income Statement — Iron Ore Operations Year 1 Sales revenue………………………… $2,484,000 Depletion expense…………………… $(1,037,544) Other operating expenses…………

(500,000) (1,537,544) 946,456 Income before tax…………………….

(302,866) Income tax expense (32%)………… $ 643,590 Net income……………………………

The iron ore operations were very profitable. Net income of $643,590 on sales of $2,484,000 is quite high (25.9% of sales).

Chapter 7

PPE & Intangibles

(30-40 min.) P 7-69A Req. 1 To determine the gain or loss on the sale of a plant asset, compare the cash received to the asset’s book value, as follows: All amounts in billions Cash received from sale of asset………………. $ 0.8 Book value of asset sold: Cost……………………………………………….. $ 2.4 Less: Accumulated depreciation…………….

(1.2) 1.2 (Loss) on sale………………………………………. $(0.4) Req. 2 Balance sheet at December 31, 20X6: Property, plant, and equipment ($8.8 + $3.6 − $2.4)……. $ 10.0 Less: Accumulated depreciation ($6.4 + $3.8 − $1.2)…..

(9.0) Property, plant, and equipment, net (book value)………. $ 1.0 Req. 3 Statement of cash flows for 20X6: Cash flows from operating activities: Net income ($53.2 − $42.4)……………………………….. $ 10.8 Reconciliation of net income to net cash provided by operations: Depreciation…………………………………………………

3.8 14.6 Net cash flow from operations Cash flows from investing activities: Purchases of property, plant, and equipment……………

Sales of property, plant, and equipment …………………

Financial Accounting: IFRS 12/e Solutions Manual

(3.6) 0.8

Problems Group B (20-30 min.) P 7-70B Req. 1 ITEM

LAND

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q)

€248,000 8,200

LAND SALES IMPROVEMENTS BUILDING GARAGE FURNITURE

€ 72,000 € 32,000

300 5,800

Totals 262,300

1,500 €

800 19,800 505,000 41,800 9,400

6,500* 52,800 7,100 4,000

103,900

34,400

1,600

569,400 115,400

Computations: (a) Land: 310,000 / 400,000 × 320,000 = €248,000 (o) Garage: 90,000 / 400,000 × 320,000 = € 72,000 Land improvements: 40,000 × .10 = 4,000 Sales building: 40,000 × .86 = 34,400 Garage: 40,000 × .04 = 1,600 _____ *It is also correct to debit this cost to the Land account.

Chapter 7

PPE & Intangibles

€78,200 1,200 79,400

(continued) P 7-70B Req. 2

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X6 Dec. 31 Depreciation Expense — Land Improvements (103,900 / 15 × 8/12)…... 4,618* Accumulated Depreciation — Land Improvements……………………

4,618

31 Depreciation Expense —Office Building (569,400 / 30 × 8/12)………….. 12,653 Accumulated Depreciation — District Office Building………………...

12,653

31 Depreciation Expense — Garage (115,400 /30 × 8/12)…………………….

2,564 Accumulated Depreciation — Garage……………………………………

2,564

31 Depreciation Expense — Furniture (79,400 / 8 × 8/12)……………. 6,617 Accumulated Depreciation — Furniture………………………………….

6,617

_____ *4,329 (97,400 / 15 × 8/12) if 6,500 (l in Req. 1) is debited to Land.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 7-70B Req. 3 This problem shows how to determine the cost of a plant asset. It also demonstrates the computation of depreciation for a variety of property, plant and equipment. Because virtually all businesses use property, plant and equipment, a manager needs to understand how those assets’ costs and depreciation are determined. Depreciation affects net income.

Managers need to understand the meaning, components, and computation of net income because often their performance is measured by how much net income the business earns. This problem covers all these concepts with specific examples.

Student responses will vary.

Chapter 7

PPE & Intangibles

(15 min.) P7-71B Req. 1

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Equipment…………………………………………... 208,000 Cash……………………………………………….

208,000 Depreciation Expense — Buildings……………. 61,600 Accumulated Depreciation — Buildings……

(1,408,000 − 176,000) / 20 = 61,600

61,600

Depreciation Expense —Equipment…………… 74,000 Accumulated Depreciation — Equipment……………………………………….. [(802,000 − 536,000) × 2/10] + (208,000 × 2/10 × 6/12) = €74,000

74,000

Req. 2 BALANCE SHEET Property, plant, and equipment: Land…………………………………………………………………. € 298,000 Buildings…………………………………………………………… 1,408,000 Less: Accumulated Depreciation (684,000 + 61,600)…….

(745,600) Equipment (802,000 + 208,000)……………………………... 1,010,000 Less: Accumulated Depreciation (536,000 + 74,000)…….

(610,000)

Financial Accounting: IFRS 12/e Solutions Manual

(25-35 min.) P 7-72B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X6 Jan. 2 Equipment (new)………………………… 179,000 Accumulated Depreciation — Equipment………………………………… 64,000 Loss on disposal of old equipment 1,000 Equipment (old)……………………….

138,000 Cash……………………………………..

106,000 June 30 Depreciation Expense — Building [(645,000 − 285,000) / 40 x 6/12]……..

Accumulated Depreciation — Building…………………………………

4,500 4,500

June 30 Cash…………………………………….…... 135,000 Note Receivable…………………………... 350,500 Accumulated Depreciation — 159,500 Building (155,000 + 4,500)…………….

Building…………………………………

645,000

Oct.

29 Land (108,900 / 363,000 × 340,000)……….

102,000 Building (254,100 / 363,000 × 340,000)……….

238,000 Cash……………………………….…….

340,000

Dec. 31 Depreciation Expense — Equipment (179,000 × 2/4)…………….

89,500 Accumulated Depreciation — Equipment.………………………………

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PPE & Intangibles

89,500

(continued) P 7-72B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X6

Dec. 31 Depreciation Expense — Building [(238,000 - 23,800) /40 x 2/12] Accumulated Depreciation — Building…………………………….

Financial Accounting: IFRS 12/e Solutions Manual

893 893

(10-15 min.) P 7-73B

Depreciation is the process of allocating the company’s property, plant and equipment’s cost to expense over the period the asset is used. Depreciation procedures are designed to match this expense against revenue over the asset’s life. The primary purpose of depreciation accounting is to measure income. Of less importance is the need to account for the decline in the asset’s usefulness. Depreciation does not mean that the business sets aside cash to replace assets as they wear out. The period over which an asset’s cost is depreciated depends on a number of factors, including physical deterioration of the asset and obsolescence.

The decreasing annual amounts indicate that the company is using an accelerated depreciation method, which allocates more asset cost to expense during the early years of asset use than during the later years. This pattern is not related to changes in the value of the asset, because depreciation is not a process of asset valuation. Even though the property values may be increasing, it is still necessary to record depreciation on the firm’s property, plant and equipment.

Student responses will vary.

Chapter 7

PPE & Intangibles

(30-40 min.) P 7-74B Req. 1 Straight-Line Depreciation Schedule Depreciation for the Year

DATE

ASSET COST

1-06-20X6 300,000 12-31-20X6 12-31-20X7 12-31-20X8 12-31-20X9 12-31-20Y0

DEPRECIATION DEPRECIABLE DEPRECIATION RATE × = COST EXPENSE

1/5 1/5 1/5 1/5 1/5

270,000 270,000 270,000 270,000 270,000

ACCUMULATED DEPRECIATION

ASSET BOOK VALUE

54,000 108,000 162,000 216,000 270,000

300,000 246,000 192,000 138,000 84,000 30,000

54,000 54,000 54,000 54,000 54,000

Asset cost: €265,000 + €6,400 + €800 + €27,800 = €300,000 Depreciation for each year: (€300,000 − 30,000) / 5 years = €54,000

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 7-74B Req. 1 Units-of-Production Depreciation Schedule Depreciation for the Year

DATE

ASSET COST

1-06-20X6 300,000 12-31-20X6 12-31-20X7 12-31-20X8 12-31-20X9 12-31-20Y0 Total documents

DEPRECIATION DOCUMENT

1.35 1.35 1.35 1.35 1.35

NUMBER OF DEPRECIATION ACCUMULATED ASSET BOOK DOCUMENTS = EXPENSE DEPRECIATION VALUE

45,000 42,500 40,000 37,500 35,000 200,000

60,750 57,375 54,000 50,625 47,250

60,750 118,125 172,125 222,750 270,000

Depreciation per exam: (300,000 − 30,000) / 200,000 documents = €1.35

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PPE & Intangibles

300,000 239,250 181,875 127,875 77,250 30,000

(continued) P 7-74B Req. 1 Double-Declining-Balance Depreciation Schedule Depreciation for the Year DATE

ASSET COST

1-06-20X6 300,000 12-31-20X6 12-31-20X7 12-31-20X8 12-31-20X9 12-31-20Y0

DDB RATE

×

.40* .40 .40 .40

ASSET BOOK DEPRECIATION VALUE EXPENSE =

300,000 180,000 108,000 64,800 38,880

*DDB rate = (1/5 years × 2) = 2/5 = .40 **Depreciation for 20Y0: 38,880 − 30,000 = €8,880

Financial Accounting: IFRS 12/e Solutions Manual

120,000 72,000 43,200 25,920 8,880**

ACCUMULATED DEPRECIATION

120,000 192,000 235,200 261,120 270,000

ASSET BOOK VALUE

300,000 180,000 108,000 64,800 38,880 30,000

(continued) P 7-74B Req. 2 (Depreciation for financial statements vs.

Depreciation for income tax purposes) The depreciation method that maximizes reported income in the first year of the computer’s life is the straight-line method.

Straight-line produces the lowest depreciation for that year (€54,000).

The method that maximizes cash flow by minimizing income tax payments in the first year is the double-declining-balance* method, which produces the highest depreciation amount for that year (€120,000).

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(20-25 min.) P 7-75B Req. 1

Cost of PPE………………………………

Less: Accumulated depreciation……..

Book value of PPE………………………

Millions € 4,830 (2,129) € 2,701

Req. 2 Evidences of the purchase of property, plant and equipment and goodwill: 1. Historical cost of PPE increased on the balance sheet.

2. Goodwill increased on the balance sheet.

3. Statement of cash flows reported “Additions to property, plant and equipment.”

Req. 3 Property, Plant, and Equipment 2/28/X5 Bal. Purchased during 20X6 2/28/X6 Bal.

4,192Cost of assets sold 716 in 20X6 4,830

Accumulated Depreciation

Accum. depr. of assets 78sold in 20X6

2/28/X5 Bal. Depr. during 57 20X6 2/28/X6 Bal.

1,728 458 2,129

Goodwill 2/28/X5 Bal..

Purchased during 20X6 2/28/X6 Bal.

514 38* 552

_____ *Determined by deduction, since there was no impairment on goodwill.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 7-76B Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Iron Ore ……………...………………

Cash………………………………

3,300,000

Iron Ore ………..……………………

Cash………………………………

96,900

Iron Ore ………...……………………

Cash……………………………….

106,500

Iron Ore ………...……………………

Note Payable…………………….

39,000

Depletion Expense…………………

Accumulated Depletion — Iron Ore [(3,300,000 + 96,900 + 106,500 + 39,000) / 192,000] × 31,500…………………………..

581,175

CREDIT

3,300,000

96,900

106,500

39,000

581,175

Accounts Receivable (31,500 × 32) 1,512,000 Sales Revenue……………………

11,512,000 Operating Expenses…………………

Cash………………………………

363,000

Income Tax Expense (see Req. 2)...

Income Tax Payable……………

141,956

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PPE & Intangibles

363,000

141,956

533

(continued) P 7-76B Req. 2 South Pacific Energy Company Income Statement — Iron Ore Mine Project Year 1 Sales revenue………………………….. €1,512,000 (581,175) Depletion expense……………………..

(944,175) (363,000) Operating expenses…………………...

567,825 Income before tax……………………...

(141,956) Income tax expense (25%)…………… € 425,869 Net income………………………………

The Iron Ore Mine project was very profitable. Net income of €425,869 on sales of €1,512,000 is outstanding (28.0% of sales).

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.) P 7-77B Req. 1 To determine the gain or loss on the sale of a plant asset, compare the cash received to the asset’s book value, as follows: All amounts in billions Cash received from sale of asset………………. € 0.6 Book value of asset sold: Cost……………………………………………….. 2.2 Less: Accumulated depreciation……………. (1.0) 1.2 (Loss) on sale……………………………………….

(0.6)

Req. 2 Balance sheet at December 31, 20X6: Property, plant, and equipment (9.2 + 3.2 − 2.2)….

Less: Accumulated depreciation (6.6 + 3.8 − 1.0)…

Property, plant, and equipment, net (book value)……..

€ 10.2 (9.4) 0.8

Req. 3 Statement of cash flows for 20X6: Cash flows from operating activities: Net income (52.2 − 42.0)………………………………

Reconciliation of net income to net cash provided by operations: Depreciation…………………………………………

€ 10.2

3.8

Cash flows from investing activities: Purchases of property, plant, and equipment…………. €(3..2) Sales of property, plant, and equipment ………………..

0.6

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535

Decision Cases (30-45 min.) Decision Case 1 Req. 1 La Petite France Bakery and Burgers Ahoy!

Income Statements For the Year Ended December 31 La Petite France (FIFO and SL) ACCOUNT TITLE Sales revenue………………… $350,000 Cost of goods sold…………..

Gross margin………………....

149,000* 201,000

Burgers Ahoy!

(LIFO and DDB) $350,000 161,000* 189,000

Operating expenses……….... $50,000 $50,000 Depreciation expense La Petite (SL): [($180,000 − $30,000) / 10]. 15,000 Burgers (DDB): ($180,000 × 1/10 × 2)……..

36,000 Total expenses………………..

65,000 86,000 Income before tax…………....

136,000 103,000 Income tax expense (35%)….

47,600 36,050 Net income……………………. $ 88,400 $ 66,950

Financial Accounting: IFRS 12/e Solutions Manual

(continued) Decision Case 1 Req. 1 *Cost of goods sold: La Petite (FIFO):

Units 10,000 5,000 7,000 6,000 28,000

Burgers (LIFO):

10,000 7,000 5,000 6,000 28,000

× × × ×

$4 5 6 7

= = = =

× × × ×

$7 6 5 4

= = = =

Chapter 7

Cost $ 40,000 25,000 42,000 42,000 $149,000 $ 70,000 42,000 25,000 24,000 $161,000

PPE & Intangibles

537

(continued) Decision Case 1 Req. 2 INVESTMENT NEWSLETTER TO:

Our Clients

FROM: [Student Name] RE:

Selecting the share of La Petite France Bakery or Burgers Ahoy! as a long-term investment

In picking a stock, we suggest you consider the following factors: La Petite France and Burgers Ahoy! are basically identical companies. The two companies started operations at the same time and engaged in essentially the same transactions. Their main difference lies in the accounting methods that they use.

1. La Petite France’s income statement reports a net income of $88,400 compared to $66,950 for Burgers Ahoy!. On the surface La Petite France appears to be more profitable. This difference is illusory, however, because La Petite uses the FIFO method to account for inventories and the straight-line method to account for depreciation of its property, plant and equipment. If prices continue to rise, use of these methods result in the highest possible reported income. However,

Financial Accounting: IFRS 12/e Solutions Manual

this may not result in a higher price for La Petite France’s shares.

2. Burgers Ahoy! Reports a lower net income than La Petite France, but Burgers has more cash to invest in promising projects because Burgers pays less in income taxes. Burgers uses the LIFO method for inventories and an accelerated depreciation method for depreciation. Neither the use of these methods costs Burgers Ahoy! any expense and are different from La Petite France only in terms of presentation.

These methods however, result in lower reported net incomes and hence a lower tax liability incurred. More importantly, LIFO and DDB result in the lowest amount of income tax and thereby save money that Burgers can invest in new projects.

3. Over the long run we favor Burgers Ahoy! because Burgers will have more cash to invest. That should result in higher real profits even if those profits don’t show up on the income statement immediately.

Student responses will vary.

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539

(20-30 min.) Decision Case 2 1. A dishonest manager might debit the cost of an expense to a PPE account in order to overstate reported asset and income amounts. Remember the WorldCom case discussed in the chapter.

2. A dishonest manager might debit an expense account for the cost of a PPE asset for two reasons: (1) To obtain a quicker tax deduction for the expense than for depreciation expense over the life of the asset, and (2) To understate reported asset and income amounts.

3. We support the recording and reporting of intangible assets at cost, less accumulated amortization, in accordance with GAAP because the business paid a price for intangibles like any other asset. The argument for recording intangibles at $1 or $0 is consistent with the perspective of a lender, who might reason that, in the liquidation of a business, most of its intangibles are worthless. However, accounting serves other users besides lenders. Also, someone who evaluates a company and believes its intangibles are worthless can simply subtract the intangibles’ cost from total assets and from total owners’ equity to compute revised totals for analytical purposes. But the reverse is not true. If intangibles Financial Accounting: IFRS 12/e Solutions Manual

were not reported on the balance sheet, a user of the statements who believes the intangibles have value could not add the unknown amount to compute revised total assets and total owner equity.

Student responses will vary.

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541

Ethical Issue Req. 1 The ethical issue in this case is “What is the proper amount of the purchase price to allocate to the land and the proper amount to allocate to the building?” The taxpayer wants to allocate as much of the purchase price as possible to the building because tax laws allow a deduction from taxable income for depreciation expense on property, plant and equipment other than land. The greater the allocation to the building, the greater the depreciation deduction, and therefore the lower the tax payments, because there is no tax deduction on the land. The cost of the land is not depreciated.

Req. 2 and Req. 3 The stakeholders in this situation include United Jersey Bank, their management, their shareholders, the Internal Revenue Service, and taxpayers in general. The immediate economic consequences of the decision are positive for United Jersey Bank as well as their management.

However, those

consequences, as well as legal consequences, could ultimately turn negative for them if an IRS audit finds them to be unlawfully evading taxes. United Jersey Bank’s allocation was

Financial Accounting: IFRS 12/e Solutions Manual

unethical. The nation’s taxpayers were deprived of fair and equitable treatment by this dishonest tactic.

Req. 4 United Jersey Bank should change the allocation of their purchase price to 60% building and 40% land. In the long run, for fair and equitable treatment for all taxpayers, as well as the best economic and legal outcome, there is nothing like the truth.

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543

Focus on Financials: Nestlé (30-40 min.)

1. Nestlé’s fixed assets comprise of Land and Buildings; Machinery and Equipment; Tools, furniture and other equipment; Vehicles; Assets under construction and advance payments.

2. Nestlé uses the Straight-Line depreciation method for shareholder and debt holder reporting purposes. Assuming Nestlé expects fairly constant net income for the next few years, they would likely be using Accelerated Depreciation method, as that would result in the most depreciation expense as quickly as possible. This decreases the immediate tax payments and as per time value of money, a dollar saved today is worth more than a dollar saved tomorrow.

3. The depreciation and amortisation expense in 2021 was CHF 3,440 million. Accumulated depreciation was CHF 28,382 million. Accumulated depreciation exceeds depreciation expense because the accumulated depreciation account keeps a running total of depreciation from prior periods. It is a permanent account, whereas the depreciation expense account is a temporary account and is closed at the end of each period.

4. Nestlé’s intangible assets include: Goodwill, Brands and intellectual property rights; Operating rights and others; Management Information Systems. Total amortization charge for 2021 is CHF 384 million.

5. Total impairment of Property Plant and Equipment amounted to CHF 280 million. Impairment refers to the writing down of value of the future economic benefits of an asset (carrying value of a long term exceeds the fair value, for instance). Typical impairments of Nestlé’s PPE would arise from plans to optimise industrial manufacturing capabilities by closing or selling of Financial Accounting: IFRS 12/e Solutions Manual

inefficient production facilities as well as underperforming businesses.

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Group Projects Student responses will vary.

Financial Accounting: IFRS 12/e Solutions Manual

Chapter 8 Investments & International Operations Short Exercises (10-15 min.) S 8-1 1.

(10-15 min.) S 8-1 Journal ACCOUNT TITLES AND EXPLANATION

DATE 20X6 Apr. 10 Investment in Newtown (FVPL) (400 × $46)….......

Cash………………………………………..

DEBIT CREDIT

July

22 Cash (400 × $2.50)…………………………..

Dividend Revenue……………………….

1,000

Dec.

31 Loss on Investments (P/L)……...............................

Investment in Newtown (FVPL)…………

8,000

2.

ASSETS Total current assets…………………………………........

Long-term investments (Investment in Newtown) at market value……………………………………........

SHAREHOLDERS’ EQUITY Share capital………………………………………………..

Retained earnings…………………………………………

Unrealized (loss) on investments……………………

Chapter 8

18,400

18,400 1,000 8,000

$ XXX 10,400 $ XXX (8,000)

Long-Term Investments and International Operations

547

(5-10 min.) S 8-2 1.

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X7 May 21 Cash (400 × $28)……………………… 11,200 Long-Term Investment……………

Gain on Sale of Investment………

2.

CREDIT

9,200 2,000

This gain on sale of investment is a realized gain. The loss recorded at December 31, 20X6 was unrealized because it resulted from a change in the investment’s market value, not from the sale of the investment.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) S 8-3 1.

Journal ACCOUNT TITLES AND EXPLANATION

DATE 20X6 Apr. 10 Investment in Galaxy (FVOCI) (600 × $42)….......

Cash………………………………………..

DEBIT CREDIT 25,200

July

22 Cash (600 × $1.50)…………………………..

Dividend Revenue……………………….

900

Dec.

31 Investment in Galaxy (FVOCI)….............................

Gain on Investment (OCI)…………

5,200

25,200 900 5,200

2.

ASSETS Total current assets…………………………………........

Long-term investments (Investment in Galaxy) at market value……………………………………........

30,400

SHAREHOLDERS’ EQUITY Share capital………………………………………………..

Retained earnings…………………………………………

Other Comprehensive Income Unrealized gain on investments……………………

$ XXX XXX 5,200

Chapter 8

$ XXX

Long-Term Investments and International Operations

549

(10-15 min.) S 8-4 1.

Journal DATE 20X7

June 20

ACCOUNT TITLES AND EXPLANATION

DEBIT

Cash (600 × $48)………………………

28,800

Loss on Investment (OCI)

1,600

Investment in Galaxy (FVOCI) ………

CREDIT

30,400

(10 min.) S 8-5 1. Equity method is appropriate because the investor (Fam Motors) holds a 40% investment in the investee company (Yoba).

2.

Journal ACCOUNT TITLES AND EXPLANATION

a. Long-Term Investment…………………………..

Cash……………………………………………...

To purchase equity-method investment.

DEBIT CREDIT

Millions 400 400

b. Long-Term Investment ($50 × .40)…………….

Equity-Method Investment Revenue……….

To record investment revenue.

20

c. Cash ($35 × .40)…………………………………..

Long-Term Investment……………………….

To receive cash dividend on equity-method investment.

14

3.

Financial Accounting: IFRS 12/e Solutions Manual

20

14

Long-Term Investment (Amounts in millions) Purchase 400 Dividends received 14 Net income 20 Balance 406

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551

(10 min.) S 8-6 Sale proceeds…………………………………………...

Carrying amount of the investment ($406 / 2)……..

(Loss) on sale of investment…………………………

$ 145 (203) $ (58)

(10-15 min.) S 8-7 1. A parent company is a corporation that owns a significant interest in another company (typically more than 50%) sufficient to influence and control said company. A subsidiary company is a company that is controlled by another corporation.

2. Consolidated financial statements combine the balance sheets, income statements, and cash-flow statements of a parent company with those of its subsidiaries as if the parent and its subsidiaries were one company.

3. The parent company’s name appears on the consolidated financial statements. To consolidate, the parent company must have control and influence over the subsidiary (typically by owning more than 50% of the subsidiary’s shares).

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) S 8-8 1. Goodwill is an intangible asset. Goodwill is the excess of the purchase price to acquire a subsidiary company over the sum of the market value of the subsidiary’s net assets (assets minus liabilities). Only the parent company reports the goodwill. Goodwill appears as an intangible asset on the consolidated balance sheet.

2. Non-controlling interest is the portion of a subsidiary’s shares that is not owned by the parent company. The parent company its

reports

non-controlling

interest

on

consolidated balance sheet among the shareholders’ equity.

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553

(5-10 min.) S 8-9 1.

Journal ACCOUNT TITLES AND EXPLANATION

DATE 20X7 June 20 Cash (600 × $48)………………………

Loss on Investment (OCI) Investment in Galaxy (FVOCI) ………

Financial Accounting: IFRS 12/e Solutions Manual

DEBIT

CREDIT

28,80 0 1,600 30,400

(10 min.) S 8-10 1.

Journal ACCOUNT TITLES AND EXPLANATION

DATE 20X7 Jun 20 Cash (600 × $48)……………………… e Loss on Investment (OCI) Investment in Galaxy (FVOCI) ………

Chapter 8

DEBIT

CREDIT

28,800 1,600 30,400

Long-Term Investments and International Operations

555

(5 min.) S 8-11 1. A. Operating B. Investing — Most closely related to this chapter.

C. Financing 2. Purchase of investment (or acquisition of other companies) Sale of investment (or sale of other companies)

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) S 8-12 DATE:

Early in 20X8

TO:

The ABC Company Shareholders

FROM:

Chief Executive Officer

RE:

Investing Activities During 20X7

ABC Company financed its 20X7 investments in the following ways.

ABC sold off $475 million of its investments, and then used that money to purchase new investments.

We had a positive cash flow of $100 million from disposing of some property, plant, and equipment. Additional inflow of $143 million came from selling and other investment activities.

As you can see, there was not much change in borrowing (financing), as ABC used a large portion of the money from operations to cover the additional costs of purchasing plant, property, and equipment for $782 million and other acquisitions.

Because of the large increase from the previous year in net positive cash flow from operations, ABC was able to invest in the additional assets and investments without additional borrowing.

Student responses may vary

Chapter 8

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557

Exercises Group A (10-15 min.) E 8-13A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

a. Long-Term Investment (470 × $32)……….. 15,040 Cash………………………………………...

15,040 b. Cash (470 × $1.80)…………………………

Dividend Revenue………………………..

846

c. Allowance to Adjust Investment to Market [470 × ($32 − $35)]…………………………… 1,410 Unrealized Gain on Investment………..

846

1,410

d. Cash (470 × $23)……………………………... 10,810 Loss on Sale of Investment………………... 4,230 Long-Term Investment…………………..

15,040

Financial Accounting: IFRS 12/e Solutions Manual

(15-25 min.) E 8-14A Req. 1 Shares

Cost

Current Market Value

Stockhol (1,700 × m $36) London (330 × $47.5)

= $61,200 (1,700 × $27.375)

=

=

15,675 (330 × $49.25)

=

45,000 (600 × $67.75)

=

Glasgow (600 × $75) =

$ 46,538 16,252

40,650

Total………………………$121,875 …………………103,440 …………

……..

Req. 2 Dec. 31

Loss on Investment (OCI) ($121,875 − $103,440)………………..

Investment in shares …………..

18,435 18,435

Req. 3 Income Statement (partial): Other comprehensive income: Unrealized (loss) on investments……….……...

$ (18,435)

Balance Sheet (partial): Chapter 8

Long-Term Investments and International Operations

559

ASSETS Long-term investments, at market value……

SHAREHOLDERS’ EQUITY Other comprehensive income: Unrealized (loss) on investments………………….

$103,440

$ (18,435)

(15-20 min.) E 8-15A DATE

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

a. Investment in Fire Cracker (FVPL) (650 27,300 × $42)………..

Cash………………………………………...

b. Cash (650 × $1.40)…………………………

Dividend Revenue……………………….. c. Loss on Investment (P/L) [650 × ($42 − $40)]……………………………

Investment in Fire Cracker (FVPL)……………….. d. Cash (650 × $43)……………………………...

Investment in Fire Cracker …………………..

Gain on Investment (P/L) Financial Accounting: IFRS 12/e Solutions Manual

27,300

910 910

1,300 1,300

27,950 26,000 1,950

(10-15 min.) E 8-16A DATE

Journal ACCOUNT TITLES AND EXPLANATION

a. Equity Investment in Associate……………………..

Cash……………………………………

DEBIT CREDIT

800,000

……

Purchased equity-method investment.

b. Equity Investment in Associate 85,000 ($340,000 × .25)….

Income from Associate .......... …..

To record investment revenue. c. Cash ($200,000 × 50,000 .25)………………………

Equity Investment in Associate …………………

To receive cash dividend on equity-method investment.

800,000

85,000

50,000

Ending balance in the investment account: $835,000 ($800,000 + $85,000 − $50,000)

Chapter 8

Long-Term Investments and International Operations

561

(10-15 min.) E 8-17A Equity Investment in Associate a. Purchase 800,000 c. Dividends b. Net income 85,000 Balance 835,000 Sale of investment for cash of ...........

Carrying amount of investment .........

Gain on sale of investment ................

Financial Accounting: IFRS 12/e Solutions Manual

$900,000 (835,000) $ 65,000

50,000

(15-20 min.) E 8-18A Req. 1 The equity method is appropriate for a 35% investment in another company’s share capital. Equity method is used for 20-50% investments.

Req. 2 Balance sheet (partial): ASSETS Long-term investments, at equity…………

$608,000*

Income statement (partial): Other revenue Equity-method investment revenue………

$ 70,000

_____ *Explanation: Long-Term Investment Cost

580,000

Share of net income

Share of dividends

($200,000 × 0.35)

70,000

Balance

608,000

Chapter 8

($120,000 × .35)

42,000

Long-Term Investments and International Operations

563

(20-25 min.) E 8-19A Req. 1 (consolidation work sheet and balance sheet)

Cash Accounts receivable, net Note receivable from XYZ Inventory Investment in Cressida Plant assets, net Other assets Total

XYZ, Inc. 51,000 85,000 — 57,000 103,000 291,000 22,000 609,000

Cressida Corp.

18,000 58,000 40,000 81,000 — 96,000 9,000 302,000

LIABILITIES AND SHAREHOLDERS’ EQUITY Accounts payable Notes payable Other liabilities Share capital Retained earnings Total

46,000 147,000 79,000 113,000 224,000 609,000

29,000 35,000 (b) 40,000 135,000 81,000 (a) 81,000 22,000 (a) 22,000 143,000 302,000

ASSETS

ELIMINATION DEBIT CREDIT

CONSOLIDATED BALANCE SHEET 69,000 143,000 (b) 40,000 — 138,000 (a)103,000 — 387,000 31,000 768,000

_______ 143,000

75,000 142,000 214,000 113,000 224,000 768,000

Req. 2 The shareholders’ equity of the consolidated entity is $337,000 ($113,000 + $224,000).

Financial Accounting: IFRS 12/e Solutions Manual

(10-20 min.) E 8-20A Req. 1

DATE

Journal ACCOUNT TITLES AND EXPLANATION

20X6 Jan. 1 Equity Investment in Associate………..

Cash……………………………………

DEBIT CREDIT

350,000 350,000

…...

31 Equity Investment in Associate (25,000 × 0.40) Income from Associates………………………..

10,000

31 Cash (20,000 × 0.40) Equity Investment in Associate

8,000

10,000

8,000

Ending balance in the investment account = $(350,000 + 25,000 – 8,000) = $367,000 Req. 2 20X7 June 30 Cash……………………………...

320,000 Loss on Sale of 32,00 Investment............................

0 Equity Investment in Associate 352,000 …………..

Chapter 8

Investments

(10-15 min.) E 8-21A Req. 1

DATE

Journal ACCOUNT TITLES AND EXPLANATION

20X6 Jan. 1 Equity Investment in Associate………..

Cash…………………………………… …...

Dec.

DEBICRED T IT 420,0 00 420,0 00

31 Loss from Associates (50,000 × 17,50 0.35) 0 Equity Investment in Associate 17,50 ……………

0

Ending balance in the investment account = $(420,000 – 17,500) = $402,500 Req. 2 20X7 June 30 Cash……………………………...

Equity Investment in Associate …………..

Gain on Sale of Investment

Financial Accounting: IFRS 12/e Solutions Manual

410,0 00 402,5 00 7,500

(15-20 min.) E 8-22A Sweet Land Doughnuts Statement of Cash Flows (partial) Fiscal Year 20X6 Millions Cash flows from investing activities: Capital expenditures ...........................................

$(10.0)

Sale of property, plant, and equipment .............

6.8

Sale of other businesses ....................................

1.4

Purchase of long-term investments ..................

(11.5)

Sale of investments .............................................

2.7

Net cash (used) in investing activities ...........

$(10.6)

Based on Sweet Land’s investing activities, it appears that the company is growing. Acquisitions of long-term assets and investments are greater than the sales of long-term assets and other businesses.

Chapter 8

Investments

(20-25 min.) E 8-23A

Journal Entry Cash………………………………………… 3,128,000 Notes Receivable………………………

3,128,000

Short-Term Investments………………... 3,475,000 Cash……………………………………...

3,475,000

Cash………………………………………… 1,600,000 Accumulated Depreciation……………... 3,800,000 Equipment………………………………

5,400,000

Cash…………………………………………

Investments…………………………….

Gain on Sale of Investment………….

479,000

Property and Equipment………………... 1,737,000 Cash……………………………………...

Financial Accounting: IFRS 12/e Solutions Manual

470,000 9,000

1,737,000

Exercises Group B (10-15 min.) E 8-24B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

a. Long-Term Investment (460 × €31)……….. 14,620 Cash………………………………………...

14,620 b. Cash (460 × €1.40)…………………………

Dividend Revenue………………………..

644 644

c. Allowance to Adjust Investment to Market 4,140 [460 × (31 − 40)]……………………………

Unrealized Gain on Investment………..

4,140 d. Cash (460 × €20)……………………………... 9,200 Loss on Sale of Investment………………... 5,060 Long-Term Investment…………………..

14,260

Chapter 8

Investments

(15-25 min.) E 8-25B Req. 1 Shares

Cost

Erie

(1,500 × $32)

Ontario

(440 × $45.5)

Current Market Value = €48,000

= 20,020

(800 × $73) = 58,400 Huron

(1,500 × $25.375)

=

(440 × $47.25)

= 20,790

(800 × $65.75)

€ 38,062

= 52,600

Total………………………€126,42 …………………€111,4 …………

0 ……..

52

Req. 2 Dec. 31

Loss on Investment (OCI) (€126,420 − €111,452)………………..

Investment in shares (FVOCI)…………..

Financial Accounting: IFRS 12/e Solutions Manual

14,968 14,968

Req. 3 Income Statement (partial): Other comprehensive income: Unrealized (loss) on investments……….……...

€ (14,968)

Balance Sheet (partial): ASSETS Long-term investments, at market value……

SHAREHOLDERS’ EQUITY Other comprehensive income: Unrealized (loss) on investments………………….

Chapter 8

Investments

€111,452

€ (14,968)

(15-20 min.) E 8-26B DATE

Journal ACCOUNT TITLES AND EXPLANATION

DEBICRED T IT

a. Investment in Cloud (FVPL) (800 × 28,80 €36)………..

0 Cash………………………………………...

b. Cash (800 × €1.20)…………………………

Dividend Revenue……………………….. c. Loss on Investment (P/L) [800 × (€36 − €34)]……………………………

Investment in Cloud (FVPL)……………….. d. Cash (800 × €39)……………………………...

Investment in Cloud …………………..

Gain on Investment (P/L)

Financial Accounting: IFRS 12/e Solutions Manual

28,80 0

960 960

1,600 1,600

31,20 0 27,20 0 4,000

(10-15 min.) E 8-27B

DATE

Journal ACCOUNT TITLES AND EXPLANATION

a. Equity Investment in Associate……………………..

Cash……………………………………

DEBIT CREDIT

600,000 600,000

……

Purchased equity-method investment.

b. Equity Investment in Associate 102,400 (€320,000 × .32)….

Income from Associate .......... …..

To record investment revenue. c. Cash (€225,000 × 72,000 .32)………………………

Equity Investment in Associate …………………

To receive cash dividend on equity-method investment.

102,400

72,000

Ending balance in the investment account: €630,400 (€600,000 + €102,400 − €72,000)

(10-15 min.) E 8-28B

a. Purchase b. Net income Balance

Long-Term Investment in Sam Software 600,000 c. Dividends 102,400 630,400 Chapter 8

Investments

72,000

Sale of investment for cash of €1,600,000 ...........................................

Carrying amount of (630,400) investment ....................................... Gain on sale of €969,600 investment ................................................

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 8-29B

Req. 1 The equity method is appropriate for a 20% investment in another company’s share capital. Equity method is used for 20-50% investments.

Req. 2 Balance sheet (partial): ASSETS Long-term investments, at equity…………………

€578,000*

Income statement (partial): Other revenue Equity-method investment revenue………………

€ 48,000

_____ *Explanation: Long-Term Investment Cost

550,000

Share of net income

Share of dividends

(€240,000 × 0.20)

48,000

Balance

578,000

Chapter 8

Investments

(€100,000 × .20)

20,000

E 8-30B Req. 1 (consolidation work sheet and balance sheet) ASSETS Cash Accounts receivable, net Note receivable from Gamma Inventory Investment in Hamlet Corp.

Plant assets, net Other assets Total LIABILITIES AND SHAREHOLDERS’ EQUITY Accounts payable Notes payable Other liabilities Share capital Retained earnings Total

Hamlet Gamma, Inc. Corp.

19,000 50,000 54,000 79,000 43,000 — 78,000 55,000 93,000 — 284,000 90,000 24,000 5,000 585,000 289,000

48,000 154,000 80,000 111,000 192,000 585,000

ELIMINATION CONSOLIDATED DEBIT CREDIT BALANCE SHEET 69,000 133,000 (b) 43,000 — 133,000 (a)93,000 — 374,000 29,000 738,000

27,000 31,000 (b) 43,000 138,000 78,000 (a) 78,000 15,000 (a) 15,000 136,000 289,000

_______ 136,000

75,000 142,000 218,000 111,000 192,000 738,000

Req. 2 The shareholders’ equity of the consolidated entity is €304,000 (111,000 + 193,000).

Financial Accounting: IFRS 12/e Solutions Manual

(10-20 min.) E 8-31B Req. 1

DATE

Journal ACCOUNT TITLES AND EXPLANATION

20X6 Jan. 1 Equity Investment in Associate………..

Cash……………………………………

DEBIT CREDIT

550,000 550,000

…...

31 Equity Investment in Associate (€125,000 × 0.40) Income from Associates………………………..

50,000

31 Cash (€80,000 × 0.40) Equity Investment in Associate

32,000

50,000

Ending balance in the investment account = € (550,000 + 50,000 – 32,000) = €568,000

Chapter 8

Investments

32,000

Req. 2 20X7 June 30 Cash……………………………...

Loss on Sale of Investment............................

Equity Investment in Associate …………..

520,0 00 48,00 0 568,0 00

(10-15 min.) E 8-32B Req. 1

DATE

Journal ACCOUNT TITLES AND EXPLANATION

20X6 Jan. 1 Equity Investment in Associate………..

Cash…………………………………… …...

Dec.

DEBIT CREDIT

630,000 630,000

31 Loss from Associates (75,000 × 26,250 0.35) Equity Investment in Associate 26,250 ……………

Ending balance in the investment account = €(630,000 – 26,250) = €603,750

Financial Accounting: IFRS 12/e Solutions Manual

Req. 2 20X7 June 30 Cash……………………………...

615,0 00

Equity Investment in Associate …………..

Gain on Sale of Investment

603,7 50 11,25 0

(15-20 min.) E 8-33B Glazed Doughnuts Statement of Cash Flows (partial) Fiscal Year 20X6 Millions Cash flows from investing activities: Capital expenditures ...........................................

€(10.7)

Sale of property, plant, and equipment .............

7.1

Sale of other businesses ....................................

1.8

Purchase of long-term investments ...................

(11.9)

Sale of investments .............................................

2.2

Net cash (used) in investing activities ............

€(11.5)

Based on Glazed Doughnut’s investing activities, it appears that the company is growing. Acquisitions of long-term assets and investments are greater than the sales of longterm assets and other businesses.

Chapter 8

Investments

(20-25 min.) E 8-34B

Journal Entry Cash………………………………………… €3,112,000 Notes Receivable………………………

3,112,000

Short-Term Investments………………...

Cash……………………………………...

3,454,000

Cash…………………………………………

Accumulated Depreciation……………...

Equipment………………………………

3,454,000

1,540,000 3,660,000

Cash…………………………………………

Investments…………………………….

Gain on Sale of Investment………….

499,000

Property and Equipment………………...

Cash……………………………………...

1,735,000

Financial Accounting: IFRS 12/e Solutions Manual

5,200,000

490,000 9,000

1,735,000

Challenge Exercises (15-20 min.) E 8-35 Req. 1 a. Consolidation

b. Available for sale

c. Equity

Req. 2 Heyya’s net income for 20X6: a. Increased by $230,400 (₤130,000 × $1.92). b. Increased by $25,000. c. Increased by $225,000 ($500,000 × .45).

Req. 3 b. Long-term investments, at market value ($1,600,000 − $350,000)………………

$1,250,000

c. Long-term investment, at equity [$500,000 + .45 ($500,000 − $25,000)………….

$713,750

Chapter 8

Investments

(20 min.) E 8-36

Req. 1 The two components of accumulated other comprehensive income are: 1. Unrealized gains (losses) on available-for-sale investments.

2. Foreign-currency translation adjustments.

Req. 2 An unrealized gain (loss) on available-for-sale investments produces a positive (negative) balance.

A foreign-currency translation adjustment is positive when the net assets of a foreign subsidiary are translated into more dollars than the shareholder’s equity (total assets less total liabilities translated at today’s dollars exceed shareholders’ equity translated at the time of purchase/period over which income was earned).

The foreign-currency translation adjustment is negative when the shareholder’s equities of a foreign subsidiary are translated into more dollars than the net assets.

Financial Accounting: IFRS 12/e Solutions Manual

Quiz Q8-37 Q8-38 Q8-39

Q8-40 Q8-41 Q8-42 Q8-43 Q8-44 Q8-45 Q8-46 Q8-47 Q8-48

a [(1,200 × $75) + (150 × $13) + (700 × $27) = c $110,850] [(1,200 x $2.10) + (150 x $1.40) + (700 x $0.8) = $3,290] Cash (1,200 × $74)………

88,800 Long-Term Investments (1,200 × $61)……………

73,200 Gain on Sale of Investments.

15,600 c b a d ($100,000 × .05) = $5,000 b c c c c [$250,000 + $80,000 × 0.40 – $50,000 × 0.40 = $262,000]

Chapter 8

Investments

Problems Group A (45-60 min.) P 8-49A Req. 1

DATE

Journal ACCOUNT TITLES AND EXPLANATION

20X5 Jan. 1 Equity Investment in Associate………..

Cash……………………………………

DEBIT CREDIT

750,00 0 750,000

…...

Dec.

Dec.

31 Equity Investment in Associate ($250,000 × 0.40) Income from Associates………………………..

100,00 0 100,000

31 Cash ($150,000 × 0.40) 60,000 Equity Investment in Associate 60,000

Ending balance in the investment account = $ (750,000 + 100,000 – 60,000) = $790,000

Financial Accounting: IFRS 12/e Solutions Manual

Req. 2 20X6 May

15 Cash……………………………...

Equity Investment in Associate …………..

Gain on Sale of Investment ...........

830,0 00 790,0 00 40,00 0

Req. 3 As at December 31, 20X5 Income Statement (partial): Income from operations Other Revenue: Income from associates

XXX $100,000

Balance Sheet (partial): ASSETS Equity Investment in Associate

790,000

Cash Flow Statement (partial) Investing activities Investment in associates Dividend received from associates

(750,000) 60,000

Chapter 8

Investments

(20-30 min.) P 8-50A Req. 1 Current market value is used to account for the availableforsale investment in Columbus because the investor expects to sell the shares at its market value. Market value is clearly relevant to the investors’ decisions about this investment.

Market value is not used for the 30% investment in Woburn because the investor holds the shares to influence the operations of the investee company, not to sell the shares.

Woburn should be accounted for using the equity-method investment.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 8-50A Req. 2 Balance sheet: ASSETS Total current assets ..................................................... Available for sale investments, at market value ........ Long-term $ XXX investments, at equity ............................... Property, 30,000 plant, and equipment, net ...........................

528,400* XXX SHAREHOLDERS’ EQUITY Share capital .................................................................

Retained earnings ........................................................

Accumulated other comprehensive income: Unrealized (loss) on available for sale investments [$30,000 − (900 × $40.00)] ..........................................

Income statement: Income from operations ...............................................

Other revenue: Equity-method investment revenue ($580,000 × .30) Dividend revenue (900 × $.38) ..................................

Net income ....................................................................

Other comprehensive income: Unrealized gain (loss) on investment ......................

$

XXX XXX

(6,000)

$

XXX 174,000 342 XXX (6,000)

_____ *Long-Term Investment in Woburn Shares Purchase

380,000

Net income

Dividends received (20,000 × $1.28) 174,000

($580,000 × .30) Balance

528,400

Chapter 8

Investments

25,600

(45-60 min.) P 8-51A Req. 1

DATE

Journal ACCOUNT TITLES AND EXPLANATION

Mar. 16 Investment in Carbon (FVOCI) (700 × $14.00)……

Cash………………………………………

DEBIT CREDIT

9,800 9,800

……

Purchased FVCOI investment.

May 21 Cash (700 × $1.85)…………………………

Dividend Revenue……………………………

Received cash dividend.

1,295 1,295

Aug. 17 Cash……………………………………… ………..

43,000 Equity Investment in Associates 43,000 Received cash dividend on equity-method investment.

Dec. 31 Equity Investment in Associates ($260,000 × .20)…………………………………..

Income from Associates……..

To record investment revenue.

31 Investment in Carbon (FVOCI) ($13,300 − $9,800)………………………………

Financial Accounting: IFRS 12/e Solutions Manual

52,000 52,000

3,500

Gain on Investment (OCI)……………

Adjusted investment to market value.

3,500

Req. 2 Equity Investment in Associates Jan 1 Balance 306,00Aug. 17 Dividend .

0 s Dec31 Net income 52,000 .

Dec31 Balance 315,00 .

0

43,000

Req. 3 Total current assets…………………………………….

Investment in Carbon (FVOCI), at market value…..

Equity Investment in Associates ………

Chapter 8

Investments

$ XXX 13,300 315,000

(20-30 min.) P 8-52A Req. 1 Debt ratio of Fixed considered alone

=

Total liabilities = Total assets

$65.1 $89.7

=

0.726

Req. 2 Consolidated Fixed FMCC Eliminations Totals $244.0 − 14.1 Total assets………………….. $89.7 $170.7 − 2.3 $219.4 Total liabilities………………. $65.1 $156.6 − 2.3 Total shareholders’ equity… 24.6 14.1 − 14.1 Total liabilities and equity… $89.7 $170.7 − 16.4 − 16.4

24.6 $244.0

Req. 3 Consolidated debt ratio of Fixed

=

Total liabilities = Total assets

$219.4 = 0.899 $244.0

Consolidation of the finance subsidiary increased Fixed’s reported debt ratio from 0.726 to 0.899. Companies would prefer to report a lower debt ratio, so they would prefer not to consolidate the financial statements of their financing subsidiaries because that makes their debt ratio appear too high.

Financial Accounting: IFRS 12/e Solutions Manual

(35-45 min.) P 8-53A Rose, Inc. Consolidation Work Sheet September 30, 20X6 ELIMINATION ASSETS

ROSE

MOUNTAIN

Cash Accounts receivable, net Note receivable from Mountain Inventory Investment in Mountain Plant assets, net Total

60,000 194,000 175,000 305,000 453,000 403,000 1,590,000

59,000 86,000 — 458,000 — 524,000 1,127,000

LIABILITIES AND SHAREHOLDERS’ EQUITY Accounts payable Notes payable Other liabilities Share capital Retained earnings Total

122,000 410,000 216,000 556,000 286,000 1,590,000

67,000 312,000 295,000 268,000 185,000 1,127,000

Chapter 8

Investments

DEBIT

CREDIT

(b) 175,000 (a) 453,000

(b) 175,000 (a) 268,000 (a) 185,000 628,000

_______ 628,000

CONSOLIDATED AMOUNTS

119,000 280,000 0 763,000 0 927,000 2,089,000

189,000 547,000 511,000 556,000 286,000 2,089,000

(30-40 min.) P 8-54A Req. 1 Journal DATE ACCOUNT TITLES AND EXPLANATION In Million 20X5 Jan. 1 Investment in Earth (FVOCI) .................

DEBIT CREDIT $

$ 783 783

Cash…………………………………… …...

Dec.

Dec.

31 Cash…………………………

Dividend Revenue………………………..

31 Loss on Investment (OCI) [783 - 750]……………………………

Investment in Earth (FVOCI)………………..

20X6 Jan. 1 Cash ……………………………...

Loss on Investment (OCI) Investment in Earth (FVOCI)…………………..

Financial Accounting: IFRS 12/e Solutions Manual

150 150

33 33

713 37

750

Req. 2 As at December 31, 20X5 (In Million $) Income Statement (partial): Income from operations Other Revenue: Dividend Revenue

XXX $150

Balance Sheet (partial): ASSETS Long-term investments, at market value

$750

EQUITY Other Comprehensive Income Loss on investment (OCI)

$33

Chapter 8

Investments

(20-25 min.) P 8-55A Req. 1 Journal DATE ACCOUNT TITLES AND EXPLANATION In Million 20X5 Jan. 1 Investment in Earth (FVOCI) .................

DEBIT CREDIT $ 783

783

Cash…………………………………… …...

Dec.

Dec.

31 Cash…………………………

Dividend Revenue………………………..

31 Loss on Investment (OCI) [783 - 750]……………………………

Investment in Earth (FVOCI)………………..

20X6 Jan. 1 Cash ……………………………...

Loss on Investment (OCI) Investment in Earth (FVOCI)…………………..

Financial Accounting: IFRS 12/e Solutions Manual

$

150 150

33 33

713 37

750

Req. 2 As at December 31, 20X5 (In Million $) Income Statement (partial): Income from operations Other Revenue: Dividend Revenue

XXX $150

Balance Sheet (partial): ASSETS Long-term investments, at market value

$750

EQUITY Other Comprehensive Income Loss on investment (OCI)

$33

Chapter 8

Investments

Problems Group B

(45-60 min.) P 8-56B Req. 1 Journal DATE ACCOUNT TITLES AND DEBICRED EXPLANATION T IT In Million $ $ 20X5 783 Jan. 1 Investment in Earth (FVOCI) .................

Cash……………………………………

783 …...

Dec.

Dec.

31 Cash…………………………

Dividend Revenue………………………..

31 Loss on Investment (OCI) [783 - 750]……………………………

Investment in Earth (FVOCI)………………..

20X6 Jan. 1 Cash ……………………………...

Loss on Investment (OCI) Investment in Earth (FVOCI)…………………..

Financial Accounting: IFRS 12/e Solutions Manual

150 150

33 33

713 37

750

Req. 2 As at December 31, 20X5 (In Million $) Income Statement (partial): Income from operations Other Revenue: Dividend Revenue

XXX $150

Balance Sheet (partial): ASSETS Long-term investments, at market value

$750

EQUITY Other Comprehensive Income Loss on investment (OCI)

$33

(20-30 min.) P 8-57B Current market value is used to account for the available-forsale investment in Bangkok because the investor expects to sell the shares at its market value. Market value is clearly relevant to the investors’ decisions about this investment.

Market value is not used for the 40% investment in Brentwood because the investor holds the shares to influence the operations of the investee company, not to sell the shares.

Brentwood should be accounted for using the equity-method investment.

Chapter 8

Investments

(continued) P 8-57B Req. 2 Balance sheet: ASSETS Total current assets .................................................

Available for sale investments, at market value ...

Long-term investments, at equity ..........................

Property, plant, and equipment, net .......................

€

XXX 30,300 521,870* XXX

SHAREHOLDERS’ EQUITY € XXX Share capital .............................................................

XXX Retained earnings ....................................................

Accumulated other comprehensive income: Unrealized (loss) on available for sale investments [(900 × €43.00) − €30,300] .....................................

(8,400) Income statement: Income from operations ..........................................

Other revenue: Equity-method investment revenue (530,000 × .40) Dividend revenue (900 × €.32) .............................

Net income ................................................................

Other comprehensive income: Unrealized (loss) on investment .......................... _____

€

XXX 212,000 288 XXX (8,400)

*Long-Term Investment in Brentwood Shares Purchase

330,000

Net income

Dividends received 212,000 (16,500 × $1.22)

(530,000 × .40) Balance

521,870

Financial Accounting: IFRS 12/e Solutions Manual

20,130

(45-60 min.) P 8-58B Req. 1

DATE

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Mar. 16 Investment in Meteor (FVOCI) (1,050 × €14.00)……

14,700 Cash……………………………………… ……

Purchased FVCOI investment.

May 21 Cash (1,050 × €1.75)…………………………

Dividend Revenue……………………………

Received cash dividend.

1,838 1,838

Aug. 17 Cash………………………………………64,500 ………..

Equity Investment in Associates Received cash dividend on equity-method investment.

Dec. 31 Equity Investment in Associates (€390,000 × .20)…………………………………..

Income from Associates……..

To record investment revenue.

31 Investment in Meteor (FVOCI) (€19,950 − €14,700)………………………………

Chapter 8

Investments

14,700

64,500

78,000 78,000

5,250

Gain on Investment (OCI)……………

Adjusted investment to market value.

5,250

Req. 2 Equity Investment in Associates Jan 1 Balance 459,00Aug. 17 Dividend .

0 s Dec31 Net income 78,000 .

Dec31 Balance 472,50 .

0

64,500

Req. 3 Total current assets…………………………………….

Investment in Meteor (FVOCI), at market value…..

Equity Investment in Associates ………

€ XXX 19,950 472,500

(20-30 min.) P 8-59B Req. 1 Debt ratio of Space considered alone

=

Total liabilities Total assets =

Financial Accounting: IFRS 12/e Solutions Manual

€65.7 €89.5

= 0.734

Req. 2 Consolidated Space SMCC Eliminations Totals 242.8 − 2.8 − 14.7 Total assets ......................... 89.5 170.8 $219.0 Total liabilities ..................... 65.7 23.8 $156.1 − 2.8 242.8 Total shareholders’ equity .. 23.8 14.7 − 14.7 Total liabilities and equity ... €89.5 170.8 − 17.5 − 17.5

Req. 3 Consolidated debt ratio of Space

=

Total liabilities €219.0 = Total assets €242.8

= 0.902

Consolidation of the finance subsidiary increased Space’s debt ratio from 0.734 to 0.902. Companies would prefer to report a lower debt ratio, so they would prefer not to consolidate the financial statements of their financing subsidiaries because that makes their debt ratio appear too high.

I

Chapter 8

Investments

(35-45 min.) P 8-60B Req. 1 Ronney Inc. Consolidation Work Sheet September 30, 2010 ELIMINATIONS DEBIT CREDIT

RONNEY

DINETTE

Cash Accounts receivable, net Note receivable from Dinette Inventory Investment in Dinette Plant assets, net Total

54,000 195,000 192,000 278,000 346,000 397,000 1,462,000

52,000 89,000 — 452,000 — 457,000 1,050,000

LIABILITIES AND SHAREHOLDERS’ EQUITY Accounts payable Notes payable Other liabilities Share capital Retained earnings Total

127,000 399,000 249,000 577,000 110,000 1,462,000

79,000 329,000 (b) 192,000 296,000 259,000 (a) 259,000 (a) 87,000 87,000 538,000 1,050,000

ASSETS

Financial Accounting: IFRS 12/e Solutions Manual

(b) 192,000 (a)346,000

_______ 538,000

CONSOLIDATED AMOUNTS

106,000 284,000 0 730,000 0 854,000 1,974,000

206,000 536,000 545,000 577,000 110,000 1,974,000

(30-40 min.) P 8-61B Req. 1 Journal DATE ACCOUNT TITLES AND EXPLANATION In Thousand 20X5 Jan. 1 Investment in Sigma (FVOCI) .................

DEBICRED T IT € € 1,566 1,566

Cash…………………………………… …...

Dec. 31 Cash…………………………

Dividend Revenue………………………..

Dec.

31 Loss on Investment (OCI) [1,566 – 1,500]……………………………

Investment in Earth (FVOCI)………………..

20X6 Jan. 1 Cash ……………………………...

Loss on Investment (OCI) Investment in Earth (FVOCI)…………………..

300 300

66 66

1,426 74 1,500

Req. 2 Chapter 8

Long-Term Investments and International Operations

As at December 31, 20X5 (In Thousand €) Income Statement (partial): Income from operations Other Revenue: Dividend Revenue

XXX €300

Balance Sheet (partial): ASSETS Long-term investments, at market value EQUITY Other Comprehensive Income Loss on investment (OCI)

Financial Accounting: IFRS 12/e Solutions Manual

€1,500

€66

(20-25 min.) P 8-62B Req. 1 Journal DATE ACCOUNT TITLES AND DEBIT CREDIT EXPLANATION In Thousand € 20X5 € € Jan. 1 Equity Investment in Associates 9,930 ………..

Cash……………………………………

9,930 …...

Dec.

Dec.

31 Equity Investment in Associate ($5,500 × 0.30) Income from Associates………………………..

1,650

31 Cash ............................................

Equity Investment in Associate

1,320

1,650

1,320

20X6 10,450 Jan. 1 Cash……………………………...

Equity Investment in Associate 10,260 …………..

190 Gain on Sale of Investment ...........

Ending balance in the investment account on December 31, 20X5 = € (9,930 + 1,650 – 1,320) = €10,260 Workings: Dividend received for 30% investment in Neptune = €1,320 Total dividend paid by Neptune = 1,320/ 0.30 = €4,400 Chapter 8

Long-Term Investments and International Operations

Earnings of Neptune for the year 20X5 = 4,400/ 0.80 = €5,500 Req. 3 Income Statement (partial): Income from operations Other Revenue: Income from associates

XXX €1,650

Balance Sheet (partial): ASSETS Equity Investment in Associate

10,260

Cash Flow Statement (partial) Investing activities Investment in associates Dividend received from associates

(9,930) 1,320

(

Decision Cases (20-30 min.) Decision Case 1 1. The Jafar Office Systems investment cannot be used to generate the needed income because the appropriate way to account for this investment is either the equity method or the consolidation method since Jafar Office Systems is 50% owned (depending on the degree of influence and control Barham has over Jafar Office Systems).

Under

both

methods,

dividends

received

from

associates/subsidiaries are not accounted for as income. In Financial Accounting: IFRS 12/e Solutions Manual

the equity method, dividends received are recorded as decrease

in

consolidation

the

investment

method,

carrying

amount.

subsidiary-parent

For

the

dividends

are

eliminated.

2. The SABIC shares can be used to generate the needed income, as follows: Sale price of the investment in SABIC shares (6,000 × $53)……………………………………….

Less: Cost of the SABIC shares (6,000 × $38)………………………………………

Gain on sale of the SABIC shares……………

$318,000 228,000 $ 90,000

Recommendation: Sell the Microsoft shares.

Cathy should note that by selling the SABIC shares Barham ostentatiously met its earnings target for the year (it would be income projects by just above $5,000), a part of that income will come from the sale of the SABIC shares (which is a nonrecurring income item).

More discerning investors may choose to exclude Barham’s non-recurring income and make their investment decisions based on recurring income from operating activities.

Chapter 8

Long-Term Investments and International Operations

Ethical Issue Req. 1 The issue: Should Cohen have used his power to influence Web Talk to pay a large cash dividend when they have to borrow to do so?

Req. 2 and Req. 3

The stakeholders are Cohen, other shareholders of Media One, Web Talk, its shareholders.

The immediate economic consequences of the decision for Web Talk to pay a large dividend to Cohen are positive, to the detriment of Web Talk and its other shareholders because Web Talk had to borrow in order to finance the dividends and will incur interest expenses that it may ill afford given the prevailing recession.

There is apparently nothing illegal about this action. Cohen is acting within his authority to influence Web Talk to pay large cash dividends. The board of directors has the authority to declare and pay dividends.

Financial Accounting: IFRS 12/e Solutions Manual

The ethics of Cohen’s actions are questionable. As the president of Media One, Cohen is responsible for stewardship of company resources, including its investment in Web Talk. As a member of Web Talk’s board of directors, Cohen is also responsible for the careful stewardship of Web Talk’s resources. It appears that Cohen is using his position to pad his own bonus, even if it hurts Web Talk. His actions could also hurt Web Talk’s creditors if Web Talk fails to pay its debts, especially because of the need to borrow in order to pay the dividend.

Req. 4 Student responses will vary on this.

Discuss the pros and

cons.

Req. 5 Under the equity method, investor (Media One) income is increased when the investee company (Web Talk) earns income.

Receipts of dividends have no effect on investor income (revenue) under the equity method.

Under the market value method, receipts of dividends increase investor income (revenue). In this case, Cohen is manipulating Media One’s income — and his own bonus — by having Web Talk pay high dividends to Media One. Chapter 8

Long-Term Investments and International Operations

Investment income under the equity method depends on the investee company’s net income, which in turn depends on many factors beyond the investor’s control. Therefore, it is more difficult for the investor company to manipulate its income — and for Cohen to manipulate his bonus — under the equity method than under the market-value method.

Focus on Financials: Nestlé (30-40 min.)

1. For financial instruments quoted in active markets, the fair value is based on the quoted security’s closing price at the balance sheet date. For those that are not actively quoted, the fair value is determined by valuation techniques using observable market data. Otherwise, if the fair value cannot be determined with sufficient reliability, the value is determined at cost less impairment. Adjustments to their fair value are reflected in the consolidated statement of comprehensive income.

2. The 6 classes are Cash at bank and in hand; Commercial paper; Time deposits; Bonds and debt funds; Equity and equity funds; Other financial assets. Cash at bank and in hand is reported at amortised cost and not as an available for sale financial asset as it is an asset class that cannot be further “sold” to be converted into cash. Commercial paper is reported as an available for sale asset as Nestlé might have the intentions to sell this asset.

Financial Accounting: IFRS 12/e Solutions Manual

3. It can be deduced that Nestlé owned foreign subsidiaries as there are translation differences on the consolidated statement of comprehensive income.

4. In 2015, the Swiss Franc was stronger, as foreign exchange gains transferred to income statement were negative. That means that for every unit of foreign denominated income Nestlé earns, it will be worth less in Swiss Francs, hence the negative amount. Conversely, in 2016, the Swiss Franc was weaker, as foreign exchange gains transferred to income statement were positive.

5. Cumulative net loss of CHF 18,799 million (foreign currency reserve) from the consolidated statement of changes in equity.

6. The equity method is used to account for investments in other companies. We use the method when we own anywhere between 20-50% of the investee’s stocks.

In 2016, Nestlé recognised CHF 807 million of net income from its associates (Note: Include only L’Oreal and Other Associates).

DR Investments in associate (B/S)

807 CR Share of results in associates (I/S) To record share of results of associates

807

DR Dividend income 472 CR Investment in associate 472 To eliminate dividend income against investment account

Group Project (2 – 3 hours) Student responses will vary.

Chapter 8

Long-Term Investments and International Operations

Chapter 9 Liabilities Short Exercises (10 min.) S 9-1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X0 Sept. 30 Inventory…………………………………….. 4,000 Note Payable, Short-Term……………..

Purchased inventory by issuing a note payable

4,000

20X1 June 30 Interest Expense ($4,000 × .08 × 9/12)….

Interest Payable…………………………

Accrued interest expense.

240 240

Sept. 30 Note Payable, Short-Term………………... 4,000 Interest Payable…………………………….

240 Interest Expense ($4,000 × .08 × 3/12)….

80 Cash……………………………………….

4,320 Paid note payable and interest at maturity.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 9-2 Req. 1

ASSETS

Balance Sheet June 30, 20X1 LIABILITIES Current liabilities: Note payable, short-term…

Interest payable ($4,000 × .08 × 9/12)…..

$4,000 240

Income Statement Year Ended June 30, 20X1

Revenues: Expenses: Interest expense ($4,000 × .08 × 9/12)……………..

$ 240

Req. 2 The 20X2 income statement will report: Interest expense ($4,000 × .08 × 3/12)……….

Chapter 9

$80

Liabilities

(10 min.) S 9-3 Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Cash ($485,000 × .30)…………………..….. 145,500 Notes Receivable ($485,000 − $145,500).. 339,500 Sales Revenue……………………………

To record cash sales and sales on account.

Warranty Expense ($485,000 × .06)………

29,100 Provision for Warranty Repairs……….

To accrue warranty expense. Provision for Warranty Repairs……….....

Cash…………………………………….….

18,000

CREDIT

485,000

29,100

18,000 To pay warranty claims.

Req. 2 Provision for Warranty Repairs Bal. 11,000 18,000 Bal. 29,100 22,100

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 9-4 Warranty expense = $29,100 The matching principle addresses this situation. The warranty expense for the year does not necessarily equal the year’s cash payments for warranties. Cash payments for warranties do not determine the amount of warranty expense for that year. Instead, the warranty expense is estimated and matched against revenue during the period of the sale, regardless of when the company pays for warranty claims.

Note that the relevance qualitative characteristic also applies. If warranty costs are not expensed at the same period as revenue generated, it reduces the predictive value of the financial information produced.

Student responses may vary.

Chapter 9

Liabilities

(5-10 min.) S 9-5

1. When it is probable that OC Petroleum Inc. will be liable to pay for the damage caused by the rig incident, and the damage can be estimated reliably, it will have to recognize a provision instead of a contingent liability.

2. The company would have to recognize an expense in accordance with the provision. This has the effect of increasing the amount of liabilities on its balance sheet, and decreasing the net income for the year.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 9-6 a. $451,500

($ 600,000 × .7525)

b. $613,500

($ 600,000 × 1.0225)

c. $579,000

($ 600,000 × .9650)

d. $622,500

($ 600,000 × 1.0375)

(5 min.) S 9-7 a. Discount b. Par (face) value c. Discount d. Premium

Chapter 9

Liabilities

(5-10 min.) S 9-8

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X0 a. July 1 Cash…………………………………………… 140,000 Bond Payable……………………………..

To issue bond payable at par. b. Dec. 31 Interest Expense ($140,000 × .075 × 6/12) Interest Payable…………………………..

To accrue interest expense.

20X1 c. Jan.

20Z5 d. July

1 Interest Payable……………………………..

Cash………………………………………..

To pay semiannual interest on bond payable.

CREDIT

140,000

5,250 5,250

5,250 5,250

1 Bond Payable………………………………... 140,000 5,250 Interest Expense……………………………..

Cash………………………………………...

145,250 To pay final interest payment and to redeem bond at maturity.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) S 9-9 (PV of $1 = $0.390; PV Annuity of $1 = $15.247) 1. Amortization table

Period

B

Interest Payment

Interest Expense

Discount Amortization

Discount Account Balance

Bond Carrying Amount

(c% x Maturity)

(i% x E)

(B - A)

(D-C)

(Maturity - D)

175 182 190

6,865 6,689 6,507 6,317

23,135 23,311 23,493 23,683

0 1 2 3

0 925 932 940

750 750 750

C

E

A

D

2.

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X0 Mar. 31

Cash …………… Discount on

23,135

Bonds

6,865

Payable……

Bonds

Payable…………………

Sept. 30

Interest Expense………………….

CREDIT

30,000 925

Discount on Bonds Payable…

175

Cash……………………………..

750

Chapter 9

Liabilities

(10 min.) S 9-10 1. Borrowed $46,271 Pay back $60,000 at maturity 2. Pay cash interest of $1,500 each six months.

3. Interest expense: Sept. 31, 20X0……………..

Mar. 31, 20X1……………….

$1,851 $1,865

Interest expense increases because the bond carrying amount increases as the bonds move toward maturity. An increasing bond carrying amount produces an increasing amount of interest expense each period.

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) S 9-11

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X0 a. July 1 Cash ($260,000 × 0.377 + 0.04 x 260,000 x 12.462)………………………

Discount on Bonds Payable……………...

Bonds Payable…………………………...

To issue bonds at a discount. b. Dec. 31 Interest Expense ($227,625 x 0.10 x 6/12)……………………………

Discount on Bonds Payable Interest Payable ($260,000 × .08 × 6/12) To accrue interest and amortize bonds.

227,625 32,375 260,000

11,381 981 10,400

20X1 c. Jan. 1 Interest Payable…………………………….. 10,400 Cash………………………………………..

To pay semiannual interest.

Chapter 9

CREDIT

Liabilities

10,400

(10 min.) S 9-12 The present value of lease payments = $30,000 × PVIFA (5%, 5) = $30,000 × 4.3295 = $129,884* *Any difference is due to rounding of time value factors.

The lease amortization schedule is as follows: Period

Towards Lease Liability

Ending Lease Liability

$ 23,506 24,681

$ 106,378

31 Dec. 20X1

$ 129,884 $ 30,000 106,378 $ 30,000

(4) = (2) × 5% $ 6,494 5,319

31 Dec. 20X2

81,697 $ 30,000

4,085

25,915

55,782

31 Dec. 20X3

55,782 $ 30,000

2,789

27,211

28,571

31 Dec. 20X4

28,571 $ 30,000

1,429

28,571

0

(1) 31 Dec. 20X0

Beginning Payment Lease Liability (2)

(3)

Towards Interest

Financial Accounting: IFRS 12/e Solutions Manual

81,697

(10-15 min.)S 9-13 Plan A Borrow $7,000,000 at 8% $600,000

Plan B Issue $7,000,000 of Common Shares

Net income before expansion……………….. $600,000 Project income before interest and income tax……………………………... $1,000,000 $1,000,000 Less interest expense ($7,000,000 × .08)….. (560,000) -0Project income before income tax………….. 440,000 1,000,000 Less incremental income tax expense (35%) 154,000) (350,000) Project net income……………………………..

286,000 650,000 Total company net income…………………… $886,000 $1,250,000 Earnings per share including expansion: Plan A ($886,000 / 100,000 shares)………

Plan B ($1,250,000 / 200,000 shares)………

$8.86 $6.25

Recommendation: To increase earnings per share, Hilltown Marina should borrow the money.

Chapter 9

Liabilities

20X0 Jan. 1

Right-of-use Asset Lease Liability To record lease arrangement ($30,000 per year for 5 years @ 5%)

20X0 Dec. 31 Lease Liability Interest Expense Cash To record first lease payment

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 9-14 $ $ 129,884 129,884

23,506 6,494

30,000

(10 min.) S 9-15 LIABILITIES Current: Accounts payable………………………..

Current portion of bonds payable…….

Interest payable…………………………..

Total current liabilities……………….

$ 35,000 50,000 2,000 $ 87,000

Non-current: Notes payable, long-term……………….

Bonds payable…………………………… $402,000 Less: Discount on bonds payable…….

(11,000) Total liabilities……………………………….

Chapter 9

320,000 391,000 $798,000

Liabilities

Exercises Group A (5-15 min.) E 9-16A Errata: During 20X0, the business paid $5,000 to satisfy the warranty claims, not $54,000. Please note we have used the correct value for the computation of the solution and will update the print book.

Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Warranty Expense (12,000 + 3,000 – 5,000) Provision for Warranty Repairs…..

10,000

Provision for Warranty Repairs…..….. 5,000 Cash……………………………………

CREDIT

10,000

5,000

Req. 2 INCOME STATEMENT Warranty Expense………………………………

10,000

BALANCE SHEET Current liabilities Provision for Warranty Repairs

$12,000

Req. 3 Financial Accounting: IFRS 12/e Solutions Manual

Provision for Warranty Repair, a current liability, will cause a company’s current ratio to decrease.

Chapter 9

Liabilities

(10-15 min.) E 9-17A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X0 Oct. 1 Cash…………………………………………. 1,620 Unearned Subscription Revenue…….

Sales Tax Payable ($1,500 × .08)……..

1,500 120

Nov. 15 Sales Tax Payable…………………………

Cash……………………………………….

120

Dec. 31 Unearned Subscription Revenue……….

Subscription Revenue ($1,500 × 3/12)

375

120

BALANCE SHEET Current liabilities: Unearned subscription revenue ($1,500 − $375).

Financial Accounting: IFRS 12/e Solutions Manual

CREDIT

375

$1,125

(10 min.) E 9-18A INCOME STATEMENT Expenses: Payroll expense………………………………………. $220,000 Payroll tax expense ($220,000 × .08)……………

17,600 BALANCE SHEET Current liabilities: Salary payable………………………………………

Payroll tax payable…………………………………...

Chapter 9

$ 8,200 700

Liabilities

(5-10 min.) E 9-19A Req. 1 Interest to = $170,000 × .06 × 8/12 accrue at Dec. 31, 20X0

=

$6,800

Req. 2 Final payment = $170,000 + ($170,000 × .06) = $180,200 on May 1, 20X1

Req. 3 Interest expense for: 20X0 = $170,000 × .06 × 8/12 20X1 = $170,000 × .06 × 4/12

Financial Accounting: IFRS 12/e Solutions Manual

= =

$6,800 $3,400

(10-15 min.) E 9-20A Axis’ balance sheet at December 31, 20X1, reported: Income tax payable…………………………………... $596,000* Axis’ 20X1 income statement reported: Income tax expense ($2,600,000 × .36)…………… $936,000 _____ * Beginning income tax payable………………… + Income tax expense (and payable) for the year ($2,600,000 × .36)……………………………… − Income tax payments during the year………… = Ending income tax payable………………………

Chapter 9

$380,000 936,000 (720,000) $596,000

Liabilities

(10-20 min.) E 9-21A Req. 1 Accounts payable are amounts owed to suppliers for products or services that have been purchased on account.

Accrued expenses are expenses that the company has incurred but not paid. They are liabilities for expenses such as interest and income taxes.

Employee compensation and benefits are amounts owed to employees for salaries and other payroll-related expenses.

Current portion of long-term debt is the portion of the long-term debt that is due within next year.

Long-term debt is the amount of long-term notes and bonds payable that the company expects to pay after the coming year.

Postretirement benefits are the company’s liabilities for providing benefits — mainly health care — to retirees.

The other liabilities are a catch-all group of liabilities that do not fit one of the more specific categories and are not significant enough to have a category of their own. The other liabilities are long-term, as shown by the fact that they are not listed among the current liabilities.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) E 9-21A Req. 2 Total assets = $3,995 million, the sum of total liabilities and shareholders’ equity Debt ratio =

Total liabilities ($3,995 million − $2,027 million)* = 0.49 Total assets ($3,995 million)

A debt ratio of 49% is satisfactory. ____ *Or, $340 + $1,494 + $122 + $12 = $1,968

Chapter 9

Liabilities

(5-10 min.) E 9-22A Req. 1 Rupert Security Systems should report this situation in a note to the financial statements. The note should convey essentially the same message given in Note 14.

Req. 2 Rupert would report: INCOME STATEMENT Estimated loss (or expense)………………

$1,800,000

BALANCE SHEET Estimated liability……………………………

$1,800,000

Note 14 Same as above.

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X0 Estimated Loss (or Expense)…... 1,800,000 Estimated Liability…………….

Financial Accounting: IFRS 12/e Solutions Manual

1,800,000

(15-20 min.) E 9-23A Boni Electronics Balance Sheet (partial) June 30, 20X0 Current liabilities: a. Estimated warranty payable [$35,000 + $168,000 − $52,000]……… $151,000 14,000 b. Current portion of long-term note payable……...

280 Interest payable ($56,000 × .06 × 1/12)……………

60,000 c. Unearned sales revenue ($135,000 − $75,000)…. d. Employee withheld income tax payable………… 33,000 FICA tax payable ($270,000 × .0765)………………

20,655 Total current liabilities………………………….. $278,935 Non-current liabilities: Note payable ($56,000 − $14,000)……………... $42,000

Chapter 9

Liabilities

(10-15 min.) E 9-24A (PV of $1 = 0.610; PV Annuity of $1 = 15.589)

Period

0 1 2 3 4

B

Interest Payment

Interest Expense

Premium Amortization

Premium Account Balance

Bond Carrying Amount

(c% x Maturity)

(i% x E)

(A - B)

(D-C)

(Maturity + D)

91,747 94,041 96,392 98,802

2,330,100 2,238,353 2,144,311 2,047,919 1,949,117

32,330,100 32,238,353 32,144,311 32,047,919 31,949,117

900,000 900,000 900,000 900,000

0 808,253 805,959 803,608 801,198

C

E

A

D

Req 1, 2, and 3

Journal DATE

20X0 Jan. 31

July.

31

ACCOUNT TITLES AND EXPLANATION

Cash ……………

DEBIT

32,330,100

Premium on Bonds Payable

2,330,100

Bonds Payable……………

30,000,000

Interest Expense………………….

808,253

Premium on Bonds Payable…

91,747 900,000

Cash……………………………..

Dec.

31

CREDIT

Interest Expense………………….

671,632*

Premium on Bonds Payable…..

78,368

Interest Payable……………..

Financial Accounting: IFRS 12/e Solutions Manual

750,000*

*5/6 x 805,958 = 671,632 ** 5/6 x 94,042 = 78,368 ***5/6 x 0.03 x 30,000,000 = 750,000

Chapter 9

Liabilities

(10-15 min.) E 9-25A 1. Cash received = $300,000 × 1.03 = 2. Principal………………………………………………………

$309,000

Interest ($300,000 × .07 × 20)……………………..............

Total cash paid………………………………………………

$300,000 420,000 $720,000

3. Total cash paid………………………………………………

Less: Cash received……………………………………...

Difference = Total interest expense……………………...

$720,000 (309,000) $411,000

4. If straight-line amortization is used, the interest rate will be equal for each period and a multiplication of the interest expense by 20 will equal to the amount calculated in requirement 3.

Interest expense (411,000 / 20) = $ 20,550

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 9-26A (PV of $1 = 0.312; PV Annuity of $1 = 11.470) Req. 1 (amortization table) A

SEMIANNUAL INTEREST DATE

B C D INTEREST EXPENSE (6% OF INTEREST DISCOUNT PAYMENT PRECEDING ACCOUNT BOND (5% OF BALANCE DISCOUNT MATURITY CARRYING AMORTIZATION (PRECEDING VALUE) AMOUNT) (B – A) D – C)

Dec. 31, 20X0 June 30, 20X1 $62,500 Dec. 31, 20X1 62,500 June 30, 20X2 62,500 Dec. 31, 20X2 62,500

$143,125 $66,413 66,647 66,896 67,160

$3,913 4,147 4,396 4,660

139,213 135,065 130,669 126,009

Chapter 9

E

BOND CARRYING AMOUNT ($1,250,000 – D)

$1,106,875 1,110,788 1,114,935 1,119,331 1,123,991

Liabilities

(continued) E 9-26A Req. 2

DATE 20X0

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Dec. 31 Cash………………………………..

1,106,875 143,125 Discount on Bonds Payable……

Bonds Payable………………..

1,250,000 To issue bonds at a discount.

20X1 June 30 Interest Expense ..................................

66,413 Cash .................................................

62,500 Discount on Bonds Payable ...........

3,913 To pay semiannual interest and amortize discount on bond payable.

20X1 Dec. 31 Interest Expense ..................................

66,647 Cash .................................................

62,500 Discount on Bonds Payable ...........

4,147 To pay semiannual interest and amortize bonds.

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 9-27A (PV of $1 = 0.305; PV Annuity of $1 = 34.761) Req. 1 (amortization table)

Period

0 1 2 3 4

A

B

Interest Payment

Interest Expense

Premium Amortization

Premium Account Balance

Bond Carrying Amount

(c% x Maturity)

(i% x E)

(A - B)

(D-C)

(Maturity + D)

147,921 146,629 145,312 143,968 142,597

997,921 996,629 995,312 993,968 992,597

21,250 21,250 21,250 21,250

C

0 19,958 19,933 19,906 19,879

1,292 1,317 1,344 1,371

D

E

Req. 2 (amortization table)

Journal DATE

ACCOUNT TITLES AND EXPLANATION

20X0 Jun. 30

Dec.

31

Cash ……………

DEBIT

CREDIT

997,921

Premium on Bonds Payable

147,921

Bonds Payable……………

850,000

Interest Expense………….

19,958

Premium on Bonds Payable…

1,292 21,250

Cash…………………………….

20X1 Jun.

30 Interest Expense………….

19,933 Chapter 9

Liabilities

Premium on Bonds Payable…

Cash…………………………….

Financial Accounting: IFRS 12/e Solutions Manual

1,317 21,250

(15-20 min.) E 9-28A (PV of $1 = 0.386; PV Annuity of $1 = 6.145)

A

B Interest

Date

Payment Expense Amortization Balance

Jan. 1, 20X0 Dec. 31, 20X0 Dec. 31, 20X1 Dec. 31, 20X2 Dec. 31, 20X3 Dec. 31, 20X4 Dec. 31, 20X5 Dec. 31, 20X6 Dec. 31, 20X7 Dec. 31, 20X8 Dec. 31, 20X9

$8,800 8,800 8,800 8,800 8,800 8,800 8,800 8,800 8,800 8,800

C Interest

$9,654 9,739 9,833 9,936 10,050 10,175 10,312 10,464 10,630 10,671

D Discount

$ 854 939 1,033 1,136 1,250 1,375 1,512 1,664 1,830 1,871

E Discount

$13,464 12,610 11,671 10,638 9,502 8,252 6,877 5,365 3,701 1,871 0

F Bond Carrying Amount $96,536 97,390 98,329 99,362 100,498 101,748 103,123 104,635 106,299 108,129 110,000

Note: Computer-generated solutions may contain slight rounding differences.

Chapter 9

Liabilities

(15-20 min.) E 9-29A Req. 1 Period

Begin LL Payment

A 1 2 3 4

B

158,500* 50,000 124,350 50,000 86,785 50,000 45,464 50,000

Interest

Principal

End LL

C (0.1*A) 15,850 12,435 8,679 4,536**

D (B-C) 34,150 37,565 41,321 45,464

E (A-D) 124,350 86,785 45,464 0

DEBIT

CREDIT

50,000 x 3.170 = 158,500 ** Slight rounding difference

Journal DATE

ACCOUNT TITLES AND EXPLANATION

Dec. 31 Lease Liability………………………. 34,150 Interest Expense ..............................15,850 Cash 50,000

Financial Accounting: IFRS 12/e Solutions Manual

(20-25 min.) E 9-30A Req. 1

Net income before expansion…………….

Projected income before interest and income tax..

Less interest expense ………….

Projected income before income tax………

Less income tax expense (25%)………….

Projected net income…………………………

Total company net income……………

Earnings per share including new project: Plan A ($1,421,000 / 450,000 shares)…

Plan B ($1,457,000 / 750,000 shares)…

PLAN A

PLAN B

$800,000

$800,000

$900,000 72,000

$900,000 24,000

(900,000 × 8%) (300,000 × 8%) 828,000 207,000 621,000

876,000 219,000 657,000

$1,421,000

$1,457,000

$3.16 $1.94

Req. 2 Plan A generates higher earnings per share for the firm. However, before making the final choice, additional criteria such as control of the business, magnitude of financial risk associated with the plan and ease of borrowing must also be considered.

Chapter 9

Liabilities

(15-20 min.) E 9-31A Req. 1 PLAN B ISSUE PLAN A $900,000 BORROW $900,000 OF COMMON SHARES AT 10% Net income before expansion…………………….. $600,000 $600,000 $800,000 Project income before interest and income tax.. $800,000 -0Less interest expense ($900,000 × .10)………….

90,000 Project income before income tax……………….

710,000 800,000 Less income tax expense (25%)………………….

177,500 200,000 Project net income…………………………………..

532,500 600,000 Total company net income……………………. $1,132,500 $1,200,000 Earnings per share including new project: Plan A ($1,132,500 / 200,000 shares)………. $5.66 Plan B ($1,200,000 / 425,000 shares)………… $2.82

Financial Accounting: IFRS 12/e Solutions Manual

(continued) E 9-31A Req. 2 MEMORANDUM TO:

Board of Directors of First Bank Financial Services

FROM:

[Student Name]

SUBJECT:

Financing plan to expand operations

Plan A (borrowing) results in much higher earnings per share.

Plan A also allows the existing shareholders to retain control of the company because the company issues no new shares. But Plan A also creates more financial risk because borrowing obligates the company to pay the interest and the principal of the debt. On balance, I prefer Plan A, assuming the company’s level of debt is not already too high.

Students can defend either plan based on their preferences for control of the business, avoidance of risk, and higher earnings per share.

Chapter 9

Liabilities

Exercises Group B

(5-15 min.) E 9-32B

Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Warranty Expense …..

Provision for Warranty Repairs…..

13,000

Provision for Warranty Repairs…..….. 5,000 Cash……………………………………

CREDIT

13,000

5,000

Req. 2 INCOME STATEMENT Warranty expense…………………………………

13,000

BALANCE SHEET Current liabilities Provision for Warranty Repairs………….…

12,000

Req. 3 Provision for Warranty Repairs, a current liability, will cause a company’s current ratio to decrease.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 9-33B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X0 Oct. 1 Cash…………………………………………. 1,526 Unearned Subscription Revenue…….

Sales Tax Payable (1,400 × .09)……..

1,400 126

Nov. 15 Sales Tax Payable…………………………

Cash……………………………………….

126

31 Unearned Subscription Revenue……….

Subscription Revenue (1,400 × 3/12)

350

126

BALANCE SHEET Current liabilities: Unearned subscription revenue (1,400 − 350)……

Chapter 9

CREDIT

350

1,050

Liabilities

(10 min.) E 9-34B INCOME STATEMENT Expenses: Payroll expense……………………………………….

Payroll tax expense (180,000 × .09)………………

180,000 16,200

BALANCE SHEET Current liabilities: Salary payable…………………………………………

Payroll tax payable…………………………………...

7,800 750

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) E 9-35B Req. 1 Interest to accrue at Dec. 31, 20X0

=

160,000 × .05 × 10/12 = 6,667

Req. 2 Final payment = on March 1, 20X1

160,000 + (160,000 × .05)

= 168,000

Req. 3 Interest expense for: 20X0 = 160,000 × .05 × 10/12 20X1 = 160,000 × .05 × 2/12

= =

Chapter 9

6,667 1,333

Liabilities

(10-15 min.) E 9-36B Infinity’s balance sheet at December 31, 20X1, reported: Income tax payable…………………………………... 125,000* Infinity’s 20X1 income statement reported: Income tax expense (800,000 × .25)…………… _____ * Beginning income tax payable………………… + Income tax expense (and payable) for the year (800,000 × .25)……………………………… − Income tax payments during the year………… = Ending income tax payable………………………

Financial Accounting: IFRS 12/e Solutions Manual

200,000

80,000 200,000 (155,000) €125,000

(10-20 min.) E 9-37B Req. 1 Accounts payable are amounts owed to suppliers for products or services that have been purchased on account.

Accrued expenses are expenses that the company has incurred but not paid. They are liabilities for expenses such as interest and income taxes.

Employee compensation and benefits are amounts owed to employees for salaries and other payroll-related expenses.

Current portion of long-term debt is the portion of the long-term debt that is due within next year.

Long-term debt is the amount of long-term notes and bonds payable that the company expects to pay after the coming year.

Postretirement benefits are the company’s liabilities for providing benefits — mainly health care — to retirees.

The other liabilities are a catch-all group of liabilities that do not fit one of the more specific categories and are not significant enough to have a category of their own. The other liabilities are long-term, as shown by the fact that they are not listed among the current liabilities.

Chapter 9

Liabilities

(continued) E 9-37B Req. 2 Total assets = €3,998 million, the sum of total liabilities and shareholders’ equity Debt ratio =

Total liabilities (€3,998 million − 2,030 Million)* = 0.49 Total assets (€3,998 million)

A debt ratio of 49% is satisfactory ____ *Or, €340 + 1,488 + 129 + 11 = 1,968

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) E 9-38B Req. 1 Edward Security Systems should report this situation in a note to the financial statements. The note should convey essentially the same message given in Note 14.

Req. 2 Edward would report: INCOME STATEMENT Estimated loss (or expense)………………

€2,300,000

BALANCE SHEET Estimated liability……………………………

€2,300,000

Note 14 Same as above.

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X0 Estimated Loss (or Expense)…... 2,300,000 Estimated Liability…………….

Chapter 9

2,300,000

Liabilities

(15-20 min.) E 9-39B Hi-Tech Electronics Balance Sheet (partial) September 30, 20X0 Current liabilities: a. Estimated warranty payable [34,000 + 112,500 − 57,000]……… b. Current portion of long-term note payable……...

Interest payable (44,000 × .04 × 1/12)…………… c. Unearned sales revenue (100,000 − 85,000)…. d. Employee withheld income tax payable…………

FICA tax payable (250,000 × .0765)………………

Total current liabilities…………………………..

Non-current liabilities: Note payable (44,000 − 11,000)……………...

Financial Accounting: IFRS 12/e Solutions Manual

89,500 11,000 147 15,000 30,000 19,125 164,772 33,000

(10-15 min.) E 9-40B (PV of $1 = 0.744; PV Annuity of $1 = 8.530)

Period

0 1 2 3 4

A

B

C

Interest Payment

Interest Expense

Discount Amortization

(c% x Maturity)

(i% x E)

(B - A)

600,000 600,000 600,000 600,000

0 689,220 691,897 694,653 697,493

89,220 91,897 94,653 97,493

D

E Bond Carrying Amount

Discount Account Balance

(Maturity - D)

(D-C)

1,026,000 936,780 844,883 750,230 652,737

22,974,000 23,063,220 23,155,117 23,249,770 23,347,263

Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

a. Jan. 31 Cash ……………

22,974,000 Discount on Bonds Payable………… 1,026,000 Bonds Payable……………………

24,000,000

To issue bonds at a discount. b. July 31 Interest Expense ...................................689,220 Cash ($24,000,000 × .05 × 6/12) ........

Discount on Bonds Payable .............

600,000 89,220

To pay interest and amortize discount on bond payable. c. Dec 31 Interest Expense .................................... 576,581* Interest Payable………………….......

Chapter 9

500,000** Liabilities

Discount on Bonds Payable.............

To accrue interest and amortize bonds.

*691,897 x 5/6 = 576,581 **600,000 x 5/6 = 500,000 ***576581 – 500,000 = 76,581

Financial Accounting: IFRS 12/e Solutions Manual

76,581***

(10-15 min.) E 9-41B 1. Cash received = 200,000 × 1.04 =

€208,000

2. Principal………………………………………………………

Interest (200,000 × .09 × 20)……………………..............

Total cash paid………………………………………………

200,000 360,000 €560,000

3. Total cash paid………………………………………………

Less: Cash received……………………………………...

Difference = Total interest expense……………………...

€560,000 (208,000) $352,000

4. Market interest rate = 8.575% Interest expense for: 20X0 = 20X1 =

208,000 × .08575 207,836 × .08575

= =

17,836 17,822

*Note: Market interest rate needs to be computed to attempt this question. Interest expense will gradually decrease over the life of the bond. The sum of the total interest expense will equal to the amount calculated in requirement 3.

If straight-line amortization is used, the interest rate will be equal for each period and a multiplication of the interest expense by 20 will equal to the amount calculated in requirement 3.

Chapter 9

Liabilities

(15-20 min.) E 9-42B (PV of $1 = 0.377; PV Annuity of $1 = 12.462)

Req. 1 (amortization table) A Period

Interest Payment (c% x Maturity)

0 1 2 3 4

75,600 75,600 75,600 75,600

B

C

D

E

Interest Expense

Discount Amortization

Discount Account Balance

Bond Carrying Amount

(i% x E)

(B - A)

(D-C)

(Maturity - D)

3,174 3,333 3,500 3,675

104,513 101,338 98,005 94,506 90,831

1,575,487 1,578,662 1,581,995 1,585,494 1,589,169

0 78,774 78,933 79,100 79,275

Financial Accounting: IFRS 12/e Solutions Manual

(continued) E 9-42B Req. 2 Journal ACCOUNT TITLES AND EXPLANATION

DATE DEBIT CREDIT 20X0 Dec. 31 Cash .......................................................... 787,744 Discount on Bonds Payable ................... 52,256 Bonds Payable ....................................

840,000 To issue bonds at a discount.

20X1 June 30 Interest Expense ...................................... 39,387 Cash .....................................................

37,800 Discount on Bonds Payable ...............

1,587

To pay semiannual interest and amortize discount on bond payable.

20X1 Dec. 31 Interest Expense ......................................

Cash .....................................................

39,467

Discount on Bonds Payable ...............

37,800 1,667

To pay semiannual interest and amortize bonds.

Chapter 9

Liabilities

(15-20 min.) E 9-43B (PV of $1 = 0.415; PV Annuity of $1 = 13.008) Req. 1 (amortization table) Period

0 1 2 3 4

A B C D Interest Interest Premium Discount Payment Expense Amortization Account Balance (D-C) (c% x (i% x E) (A - B) Maturity)

170,000 170,000 170,000 170,000

0 163,006 162,691 162,363 162,019

Financial Accounting: IFRS 12/e Solutions Manual

6,994 7,309 7,637 7,981

222,360 215,366 208,057 200,420 192,439

E Bond Carrying Amount (Maturity + D) 3,622,360 3,615,366 3,608,057 3,600,420 3,592,439

(continued) E 9-43B Req. 2 (journal entries) DATE

Journal ACCOUNT TITLES AND EXPLANATION

20X0 June 30 Cash ………..

Bonds Payable…………………

DEBIT

CREDIT

3,622,360 3,400,000

Premium on Bonds Payable…

222,360

To issue bonds at a premium.

Dec. 31 Interest Expense…………………….

Premium on Bonds Payable………

Cash ……………………………….

163,006 6,994 170,000

To pay semiannual interest and amortize bond premium.

20X1 June 30 Interest Expense…………………….

Premium on Bonds Payable.……...

162,691 7,309

Cash………………………………..

170,000

To pay semiannual interest and amortize bonds.

Chapter 9

Liabilities

(15-20 min.) E 9-44B (PV of $1 = 0.322; PV Annuity of $1 = 5.650) A

B

C

D

E

Interest Interest Discount Discount Payment Expense Amortization Balance

Date Jan. 1, 20X0 Dec. 31, 20X0 82,500 Dec. 31, 20X1 82,500 Dec. 31, 20X2 82,500 Dec. 31, 20X3 82,500 Dec. 31, 20X4 82,500 Dec. 31, 20X5 82,500 Dec. 31, 20X6 82,500 Dec. 31, 20X7 82,500 Dec. 31, 20X8 82,500 Dec. 31, 20X9 82,500

84,915 85,205 85,529 85,893 86,300 86,756 87,267 87,839 88,479 89,192

2,415 2,705 3,029 3,393 3,800 4,256 4,767 5,339 5,979 6,692

42,375 39,960 37,255 34,226 30,833 27,033 22,777 18,010 12,671 6,692 0

F Bond Carrying Amount 707,625 710,040 712,745 715,774 719,167 722,967 727,223 731,990 737,329 743,308 750,000

*Note: Computer-generated solutions may contain slight rounding differences.

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 9-45B Req. 1 Period

Begin LL Payment

A 1 2 3 4

B

119,232* 36,000 92,770 36,000 64,192 36,000 33,328 36,000

Interest

Principal

End LL

C (0.08*A) D 9,538 (B-C) 7,422 26,462 5,136 28,578 2,672** 30,864 33,328

E (A-D) 92,770 64,192 33,328 0

36,000 x 3.312 = 119,232 ** Slight rounding difference

Journal DATE

ACCOUNT TITLES AND EXPLANATION

Dec. 31 Lease Liability……………………….

Interest Expense ..............................

Cash

DEBIT

CREDIT

26,462 9,538 36,000

Req. 2

Journal DATE

ACCOUNT TITLES AND EXPLANATION

Dec. 31 Lease Expense…………………….

Cash

DEBIT

CREDIT

36,000 36,000

Req 3 An Operating Lease is treated like rental agreements between the lessor and lesse, while a Capital Lease is treated like a sale.

Therefore, the treatment for both types of leases is different.

Chapter 9

Liabilities

(20-25 min.) E 9-46B Req. 1 Net income before expansion………

Projected income before interest and income tax…………...

Less interest expense ………

PLAN A €1,200,000 €1,350,000 108,000 (€1,350,000 × 8%) 1,242,000 310,500 931,500 €2,131,500

Projected income before income tax……

Less income tax expense (25%)………

Projected net income………………………

Total company net income…………

Earnings per share including new project: Plan A (€2,131,500/ 675,000 shares)……

Plan B (€2,185,500 / 1,125,000 shares)…..

PLAN B €1,200,000 €1,350,000 36,000 (€450,000 × 8%) 1,314,000 328,500 985,500 €2,185,500

€3.16 €1.94

Req. 2 Plan A generates higher earnings per share for the firm.

However, before making the final choice, additional criteria such as control of the business, magnitude of financial risk associated with the plan and ease of borrowing must also be considered.

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 9-47B Req. 1 PLAN B ISSUE PLAN A €650,000 BORROW €650,000 OF COMMON SHARES AT 5% €400,000 Net income before expansion…………………….. €400,000 550,000 Project income before interest and income tax.. 550,000 Less interest expense (650,000 × .05)………….

32,500 -0Project income before income tax……………….

517,500 550,000 Less income tax expense (40%)………………….

207,000 220,000 Project net income………………………………….. 310,500 330,000 730,000 Total company net income……………………. 710,500 Earnings per share including new project: Plan A (710,500 / 100,000 shares)…………...

7.11 Plan B (730,000 / 200,000 shares)…………...

3.65

Chapter 9

Liabilities

(continued) E 9-47B Req. 2 MEMORANDUM TO:

Board of Directors of First Federal Financial Services

FROM:

[Student Name]

SUBJECT:

Financing plan to expand operations

Plan A (borrowing) results in much higher earnings per share.

Plan A also allows the existing shareholders to retain control of the company because the company issues no new shares. But Plan A also creates more financial risk because borrowing obligates the company to pay the interest and the principal of the debt. On balance, I prefer Plan A, assuming the company’s level of debt is not already too high.

Students can defend either plan based on their preferences for control of the business, avoidance of risk, and higher earnings per share.

Financial Accounting: IFRS 12/e Solutions Manual

Challenge Exercises (10-15 min.) E 9-48

Current ratio =

Total current assets $324,700 = = 1.68 Total current liabilities $193,400

Pratt Marketing Services should pay off $88,360* of current liabilities. Then the current ratio will be: $324,700 − $105,867 _____

$193,400 − $105,867

=

$218,833 $87,533

=

2.5

*Computation: Let X = amount of current liabilities to pay in order to achieve a current ratio of 2.5. $324,700 − X = 2.5 $193,400 − X $324,700 − X = 2.5 ($193,400 − X) −X

=

1.5X

=

X

=

$483,500 − 2.5X − $324,700 $158,800 $105,867

Chapter 9

Liabilities

(20-25 min.) E 9-49 Req. 1

Bonds Payable, 5 3/4%……………………………

Bonds Payable, 11%………………………..

Cash…………………………………………...

Gain on Retirement of Bonds Payable…..

Millions 150 85 10 55

Req. 2 (Dollar amounts in millions)

Annual interest expense…..

Old Bonds

New Bonds

$150 × .0575

$85 × .11

= $8.63

= $9.35

Req. 3 Possible reasons for the debt refinancing: 1. To decrease annual interest expense: No, because annual interest expense on the old bonds is a less ($720,000) than interest expense on the new bonds.

2. Yes, To increase becausenet theincome: gain on retirement of bonds payable added $55 million to net income (less the $720,000 incremental interest expense).

3. To decrease the debt ratio: Yes, as follows: (Dollar amounts in millions) Before Refinancing

Debt Total liabilities = = ratio Total assets

$357 $497 = 0.72

Financial Accounting: IFRS 12/e Solutions Manual

After Refinancing

$357 − $150 + $85 $497 − $10 = 0.60

(20-30 min.) E 9-50 Req. 1 20X0 Mar. 15 Cash ($800,000 × .945)………………

Discount on Bonds Payable………..

Bonds Payable…………………….

756,000 44,000 800,000

Holiday Corporation issued the bonds payable to bondholders in order to borrow $756,000 ($800,000 × 0.945) from the bondholders. Holiday Corporation received the cash that the bondholders paid.

Req. 2 $48,000 ($800,000 × 0.12 × 6/12)

Chapter 9

Liabilities

(continued) E 9-50 Req. 3

x

Initial carrying amount of notes ($800,000 × 0.945) Semiannual market interest rate Semiannual interest expense

$756,000 6.5% $49,140

*Note: Market interest rate needs to be computed to attempt this question.

Req. 4 Effective-interest amortization method (amounts in thousands):

SEMIANNUAL INTEREST DATE Mar. 15, 20X0 Sept. 15 Mar. 15, 20X1 Sept. 15 Mar. 15, 20X2

A

B

INTEREST PAYMENT (0.06 × $700,000)

INTEREST EXPENSE (0.065 × E)

C

D

E BOND CARRYING DISCOUNT AMOUNT BALANCE ($700,000 − D)

DISCOUNT AMORTIZATION D − C)

$44,000 $756,000 $48,000 48,000 48,000 48,000

$49,140 49,214 49,293 49,377

$1,140 1,214 1,293 1,377

42,860 757,140 41,646 758,354 40,353 759,647 38,976 761,024

Interest exp. for yr. 1: $98,354 ($49,140 + $49,214) yr. 2: $98,670 ($49,293 + $49,377) Interest expense is greater in the second year because the bond carrying amount increases as the bonds are amortized toward their maturity value.

Financial Accounting: IFRS 12/e Solutions Manual

Quiz Q9-51 Q9-52 Q9-53 Q9-54 Q9-55 Q9-56 Q9-57 Q9-58 Q9-59 Q9-60 Q9-61 Q9-62

Q9-63

Q9-64

Q9-65 Q9-66 Q9-67 Q9-68 Q9-69

d d d a d c a b e c b e

[($450,000 + $750,000) × .06] − $3,150 − $30,000 = $38,850

Under effective interest amortization method, the interest expense is different every year Interest Expense (192,000 x 0.125 x 18,000 9/12)……………………….

Interest Payable ($200,000 × .12 × 9/12) 18,000 *Note: Implied market interest rate for a price of 96 is 12.73%. Using a market rate of 12.5% will yield an interest expense similar to cash interest payable, which result in zero amortization.

Interest Payable………………………........ 18,000 Interest Expense…………………………… 6,000 Cash ($200,000 × .12)…………………...

24,000 e a b a c

[($275,695 x .07) = $19,299]

Chapter 9

Liabilities

Problems Group A

(15-20 min.) P 9-70A a. Sales tax payable ($140,000 × .05) ........................... .

$7,000

b. Note payable, short-term ......................................... . $85,000 Interest payable ($87,000 × .04 × 4/12) .................... .

1,160 c. Unearned service revenue ($2,700 × 4/6) ................ . $1,800 d. Estimated warranty payable ($11,800 + $34,400 − $34,800) ..............................

$11,400

e. Portion of long-term note payable due within one year ..................................................... . $30,000 Interest payable ($60,000 × .12) ............................... .

7,200

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.) P 9-71A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X0 Mar. 3 Inventory ....................................................144,000 Note Payable, Short-term ....................

144,000 May 31 Cash ...........................................................150,000 Note Payable, Short-term ....................

Note Payable, Long-term .....................

30,000 120,000

Sept. 3 Note Payable, Short-term .........................144,000 Interest Expense ($144,000 × .04 × 6/12) 2,880 Cash ......................................................

146,880 Dec. 31 Warranty Expense ($384,000 × .03) .......... 11,520 Provision for Warranty Repairs ..........

11,520

31 Interest Expense ($150,000 × .05 × 7/12) 4,375* Interest Payable ....................................

4,375 20X1 May 31 Note Payable, Short-term .........................30,000 Interest Payable ......................................... 4,375 Interest Expense ($150,000 × .05 × 5/12)… 3,125* Cash ......................................................

37,500

*Rounded off to the nearest whole number.

Chapter 9

Liabilities

(20-25 min.) P 9-72A Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X0 a. May 31 Cash ($4,000,000 × 1/2)…………... 2,000,000 Bonds Payable………………….

To issue bonds at par. b. Nov. 30 Interest Expense…………………... 100,000 Cash ($2,000,000 × .10 × 6/12).

To pay interest on bonds. c. Dec. 31 Interest Expense ($2,000,000 × .10 × 1/12)…………..

Interest Payable………………...

To accrue interest.

Financial Accounting: IFRS 12/e Solutions Manual

2,000,000

100,000

16,667*

20X1 d. May 31 Interest Payable……………………

16,667 Interest Expense ($2,000,000 × .10 × 5/12)………….. 83,333* Cash ($4,000,000 × .10 × 6/12).

To pay interest on bonds.

*Rounded off to the nearest whole number.

CREDIT

16,667

100,000

(continued) P 9-72A Req. 2 (reporting the liabilities on the balance sheet at December 31, 20X0) Current liabilities: Interest payable .....................................

$

Non-current liabilities: Bonds payable ......................................

$2,000,000

16,667

(30-40 min.) P 9-73A Req. 1 The 8% bonds issued when the market interest rate is 7% will be priced at a premium. They are relatively attractive in this market, so investors will pay a price above par value to acquire them.

Req. 2 The 8% bonds issued when the market interest rate is 9% will be priced at a discount. They are relatively unattractive in this market, so investors will pay less than par value to acquire them.

Chapter 9

Liabilities

(continued) P 9-73A (PV of $1 = 0.503; PV Annuity of $1 = 14.212) Req. 3

Period

0 1 2 3 4

A

B

Interest Payment

Interest Expense

Premium Amortization

Premium Account Balance

Bond Carrying Amount

(c% x Maturity)

(i% x E)

(A - B)

(D-C)

(Maturity + D)

1,999 2,069 2,141 2,216

57,184 55,185 53,116 50,975 48,759

857,184 855,185 853,116 850,975 848,759

32,000 32,000 32,000 32,000

0 30,001 29,931 29,859 29,784

C

D

E

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X0 a. Feb. 28 Cash ......................................................857,184 Premium on Bonds Payable Bonds Payable .................................

CREDIT

57,184 800,000

To issue bonds at a premium.

b. Aug. 31 Interest Expense 30,001 Premium on Bonds Payable ................ 1,999 Cash .................................................

To pay interest and amortize bonds.

c. Dec. 31 Interest Expense……………………….. 19,954 Financial Accounting: IFRS 12/e Solutions Manual

32,000

Premium on Bonds Payable ................ 1,379 Interest Payable………….………..

21,333

To accrue interest and amortize bonds.

20X1 d. Feb. 28 Interest Payable (from Dec. 31)………. 21,333 Interest Expense 9,977 Premium on Bond Discount 690 Cash

32,000

To pay interest and amortize bonds.

Chapter 9

Liabilities

(continued) P 9-73A Req. 4 (reporting the liabilities on the balance sheet at December 31, 20X0) Current liabilities: Interest payable…………………………

$ 21,333

Non-current liabilities: Bonds payable…………………………. $800,000 Add: Premium on bonds payable…..

53,806* 853,806 *57,184 – 1,999 – 1,379 = 53,806

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.) P 9-74A (PV of $1 = 0.456; PV Annuity of $1 = 13.590)

Period

0 1 2 3 4

B

Interest Payment

Interest Expense

Premium Amortization

Premium Account Balance

Bond Carrying Amount

(c% x Maturity)

(i% x E)

(A - B)

(D-C)

(Maturity + D)

13,788 14,340 14,913 15,510

405,300 391,512 377,172 362,259 346,749

6,405,300 6,391,512 6,377,172 6,362,259 6,346,749

0 270,000 256,212 270,000 255,660 270,000 255,087 270,000 254,490

C

E

A

D

Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X0 Jan. 1 Cash .....................................................6,405,300 Premium on Bond Payable ...........

405,300 Bonds Payable…………………….

6,000,000

To issue bonds at a premium.

July 1 Interest Expense ................................. 256,212 Premium on Bond Payable ................ 13,788 Cash

270,000

To pay interest and amortize bonds.

Chapter 9

Liabilities

Dec 31 Interest Expense Premium on Bond Payable

255,660 14,340

Interest Payable

270,000

To accrue interest and amortize bonds.

20X1 Jan. 1 Interest Payable ................................. 270,000 Cash ...............................................

270,000

To pay interest.

2020 Jan. 1 Bonds Payable ....................................6,000,000 Cash ................................................

6,000,000 To pay bonds at maturity.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 9-74A Req. 2 Carrying amount at December 31, 20X0 = 6,377,172

Req. 3 a. Interest expense

= $256,212

b. Cash interest paid

= $270,000

The interest expense is lower than the cash interest paid because the bond was issued at a premium and the company must pay back the full face value of the bonds at maturity.

Amortization of the bond premium over the life of the bond causes the amount of cash interest paid to exceed the interest expense on the bonds.

Chapter 9

Liabilities

(30-45 min.) P 9-75A Req. 1 a. Maturity value is $3,500,000 b. Annual cash interest payment is $245,000 ($3,500,000 × .07) c. Carrying amount is $3,337,635

Req. 2 (amortization table) (PV of $1 = 0.630; PV Annuity of $1 = 4.623) A

B C D E INTEREST EXPENSE (8% OF INTEREST DISCOUNT PAYMENT PRECEDING ACCOUNT BOND BALANCE CARRYING ANNUAL (7% OF BOND DISCOUNT AMOUNT INTEREST MATURITY CARRYING AMORTIZATION (PRECEDING ($3,500,000–D) DATE VALUE) AMOUNT) (B – A) D – C) Dec. 31, Yr. 1 $162,365 $3,337,635 Dec. 31, Yr. 2 $245,000 $267,011 3,359,646 $22,011 140,354 Dec. 31, Yr. 3 $245,000 2,283,418 268,772 23,772 116,582 Dec. 31, Yr. 4 $245,000 3,409,091 270,673 25,673 90,909 Dec. 31, Yr. 5 $245,000 63,182 3,436,818 272,727 27,727

Interest expense for the year ended December 31, Year 4, is $270,673.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 9-75A Req. 3 (reporting the liabilities at December 31, Year 4) Current liabilities: Current installment of notes payable……..

$ 55,000

Non-current liabilities: Bonds payable………………………………... $3,500,000 Less: Discount on bonds payable………. ( 90,909) 3,409,091 275,000 Notes payable…………………………………

Chapter 9

Liabilities

(40-50 min.) P 9-76A Req 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Dec. 31 Lease Asset……………………….

348,700 20X0 Lease Liability ............................

348,700 To record capital lease.

Dec. 31 Lease Expense……………………

20X1 Lease Liability…………………….

Cash………………………...

Financial Accounting: IFRS 12/e Solutions Manual

34,870 75,130

110,000

(20-30 min.) P 9-77A Req. 1 TO:

Management of Viola Sporting Goods

FROM:

[Student Name]

SUBJECT:

Advantages and disadvantages of borrowing versus issuing shares to raise cash for expansion

Raising money by borrowing has at least two advantages over issuing common shares. Borrowing does not change the present ownership of the business. It enables the present owners to keep their proportionate interests in the business and to carry out their plans without interference from a new group of shareholders. Under normal conditions, borrowing results in a higher earnings per share of common shares because the interest expense on the debt is tax-deductible. And higher earnings per share usually lead to higher share prices for company owners.

The main disadvantage of borrowing is that the debt increases the financial risk of the company. The principal and the related interest expense must be paid whether the company is earning a profit or not. If times get sufficiently bad, the debt burden could threaten the ability of the business to continue as a going concern.

Chapter 9

Liabilities

(continued) P 9-77A The main advantage of issuing shares is that owners avoid the burden of making interest and principal payments on the debt.

Issuing shares creates no liability to pay anything to the owners. If the directors consider it necessary, they can refuse to pay dividends in order to conserve cash. Therefore, it is safer to issue shares.

One disadvantage of issuing shares is dilution of the ownership interests of existing shareholders if the purchasers of new shares are outsiders. The new shareholders may have different ideas about how to manage the business and that may pose difficulties for the original shareholder group. Another disadvantage of issuing shares is that earnings per share are usually lower because of (1) the greater number of shares of shares outstanding, and (2) the non-tax-deductibility

of

dividends paid on the shares.

There is insufficient information available upon which to make a decision. Viola Sporting Goods’ management must prepare budgets which indicate the impact of the new stores in terms of net income and cash flow. Management must also estimate the cost of borrowing the funds.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 9-78A Req. 1 Quinzel Foods, Inc. Partial Balance Sheet December 31, 20X0 PPE: Current liabilities: Mortgage note Equipment .............$745,000 Accumulated payable, current ......... depreciation ....... (164,000) Bonds payable, current portion ...........

Interest payable .............

Total current liabilities .....

$ 94,000 400,000 72,000* $566,000

Non-current liabilities: Mortgage note payable Long-term… $ 319,000 Bonds payable. $1,200,000 Discount on bonds payable…….

(27,000)* 1,173,000 Net Pension liability ......

60,000** Total non-current liabilities $1,552,000 Notes: * The order of listing current liabilities and non-current liabilities is optional.

However, Discount on Bonds Payable should come immediately after Bonds Payable. Also, it is customary to report Interest Payable after the related liability accounts, Mortgage Note Payable and Bonds Payable, Current Portion. ** Computation of pension liability: Accumulated pension benefit obligation…………….……............ $465,000 Less: Pension plan assets, at market value………………............ (405,000) Net Pension liability to be reported on the balance sheet……… $ 60,000

Chapter 9

Liabilities

(continued) P 9-78A Req. 2 a. Carrying amount of bonds payable: Current portion………………………………

Long-term portion ($1,200,000 − $27,000)…

Carrying amount………………………………..

$ 400,000 1,173,000 $1,573,000

b. Interest payable is the amount of interest that Quinzel owes at year end. Interest expense is the company’s cost of borrowing for the full year.

Req. 3 Times-interest-earned ratio =

Operating income $ 400,000 = Interest expense $ 222,000

= 1.80 times

Financial Accounting: IFRS 12/e Solutions Manual

Problems Group B

(15-20 min.) P 9-79B a. Sales tax payable (€120,000 × .08) .........................

€9,600

b. Note payable, short-term ........................................

Interest payable (€81,000 × .04 × 4/12) ...................

€81,000 1,080 €1,000

c. Unearned service revenue (€1,500 × 4/6) ............... d. Estimated warranty payable (€11,400 + €31,200 − €34,600) ...........................

€8,000

e. Portion of long-term note payable due within one year ....................................................

Interest payable (€88,000 × .10) ..............................

€24,000 8,800

Chapter 9

Liabilities

(30-40 min.) P 9-80B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X0 Mar. 3 Inventory…………………………………… 70,000 Note Payable, Short-term…………….

70,000

May 31 Cash…………………………………………. 150,000 Note Payable, Short-term…………….

Note Payable, Long-term……………..

30,000 120,000

Sept. 3 Note Payable, Short-term……………….. 70,000 3,500 Interest Expense (70,000 × .10 × 6/12).

Cash……………………………………...

73,500 Dec. 31 Warranty Expense (396,000 × .015)…..

Provision for Warranty Repairs ......

Dec. 31 Interest Expense (150,000 × .08 × 9/12)……………………..

Interest Payable………………………..

5,940 5,940

9,000 9,000

20X1 May 31 Note Payable, Short-term……………….. 30,000 9,000 Interest Payable……………………………

Interest Expense (150,000 × 0.08 × 3/12).. 3,000 Cash [30,000 + (150,000 × .08)]..…...

42,000

Financial Accounting: IFRS 12/e Solutions Manual

(20-25 min.) P 9-81B Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X0 a. May 31 Cash .............................................3,000,000 Bonds Payable .......................

To issue bonds at par.

3,000,000

b. Nov. 30 Interest Expense………………... 120,000 Cash (3,000,000 × .08 × 6/12)…

To pay interest on bonds. c. Dec. 31 Interest Expense (3,000,000 × .08 × 1/12) ...............

Interest Payable .....................

To accrue interest.

20X1 d. May 31 Interest Payable ..........................

Interest Expense (3,000,000 × .08 × 5/12) ...............

Cash …………………………..

To pay interest on bonds.

120,000

20,000 20,000

20,000 100,000 120,000

Chapter 9

Liabilities

(continued) P 9-81B Req. 2 (reporting the liabilities on the balance sheet at December 31, 20X0) Current liabilities: Interest payable…………………………….

€

Non-current liabilities: Bonds payable……………………………...

€3,000,000

20,000

(30-40 min.) P 9-82B Req. 1 The 6% notes issued when the market interest rate is 5% will be priced at a premium. They are relatively attractive in this market, so investors will pay a price above par value to acquire them.

Req. 2 The 6% notes issued when the market interest rate is 7%will be priced at a discount. They are relatively unattractive in this market, so investors will pay less than par value to acquire them.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 9-82B (PV of $1 = 0.372; PV Annuity of $1 = 25.103) Req. 3

Period

0 1 2 3 4

A

B

Interest Payment

Interest Expense

Premium Amortization

Premium Account Balance

Bond Carrying Amount

(c% x Maturity)

(i% x E)

(A - B)

(D-C)

(Maturity + D)

2,809 2,879 2,951 3,025

187,635 184,826 181,947 178,996 175,971

1,687,635 1,684,826 1,681,947 1,678,996 1,675,971

45,000 45,000 45,000 45,000

C

0 42,191 42,121 42,049 41,975

D

E

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X0 a. Feb. 28 Cash…………………………

Preimum on Bonds Payable……………

CREDIT

1,687,635 187,635 1,500,000

Bonds Payable………………………………..

To issue bonds payable at a premium.

b. Aug. 31 Interest Expense………………………………….

Premium on Bonds Payable……………….

42,191 2,809

Cash………………

45,000

To pay interest and amortize bonds payable. c. Dec. 31 Interest Expense (42,121 x 4/6)…………….

Premium on Bonds Payable (2,879 x 4/6)....

28,081 1,919

Interest Payable ($45,000  4/6)…………….

Chapter 9

30,000

Liabilities

To accrue interest and amortize bonds payable.

20X1 d. Feb. 28 Interest Payable (from Dec. 31)…………………

Interest Expense(42,121-28,081)……………..

Premium on Bonds Payable(2,879-1,919)....

Cash ($1,800,000 × .06 × 6/12)…………….

To pay interest and amortize bonds payable.

Financial Accounting: IFRS 12/e Solutions Manual

30,000 14,040 960 45,000

(continued) P 9-82B Req. 4 (reporting the liabilities on the balance sheet at December 31, 20X0) Current liabilities: Interest payable ...............................

€ 30,000

Non-current liabilities: Notes payable .................................. €1,500,000 Add: Premium on notes payable 182,907* 1,682,907 *187,635 – 2,809 – 1,919 = 182,907

Chapter 9

Liabilities

(30-40 min.) P 9-83B (PV of $1 = 0.554; PV Annuity of $1 = 14.877)

Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X0 Jan. 1 Cash .....................................................2,149,390 Premium on Bonds Payable .........

149,390

Bonds Payable ...............................

2,000,000

To issue bonds at a premium.

July 1 Interest Expense ................................... 64,482 Premium on Bonds Payable ............... 5,518 70,000

Cash To pay interest and amortize bonds.

Dec. 31 Interest Expense ................................... 64,316 Premium on Discount Bond……….

5,684 Interest Payable……

70,000

To accrue interest and amortize bonds.

20X1 Jan. 1 Interest Payable………………………

Cash…………………………………

Financial Accounting: IFRS 12/e Solutions Manual

70,000 70,000

To pay interest.

2020 Jan. 1 Bonds Payable………………………

Cash………………………………

2,000,000 2,000,000

To pay off bonds at maturity.

Chapter 9

Liabilities

(continued) P 9-83B Req. 2 Carrying amount at December 31, 20X0 = 2,138,188*

*2,149,390 − 5,518 − 5,684 Req. 3 a. Interest expense

= $64,482

b. Cash interest paid

= $70,000

The interest expense is lower than the cash interest paid because the bond was issued at a premium and the company must pay back the full face value of the bonds at maturity.

Amortization of the bond premium over the life of the bond causes the amount of cash interest paid to exceed the interest expense on the bonds.

Financial Accounting: IFRS 12/e Solutions Manual

(30-45 min.) P 9-84B Req. 1 a. Maturity value is €6,500,000. b. Annual cash interest payment is 260,000 (6,500,000 × .04). c. Carrying amount is €6,168,760.

Req. 2 (amortization table) (PV of $1 = 0.746; PV Annuity of $1 = 5.076) A

ANNUAL INTEREST DATE

Dec. 31, Yr. 1 Dec. 31, Yr. 2

B C D INTEREST EXPENSE (5% OF INTEREST DISCOUNT PRECEDING PAYMENT ACCOUNT BOND (4% OF BALANCE DISCOUNT MATURITY CARRYING AMORTIZATION (PRECEDING VALUE) AMOUNT) (B – A) D – C)

260,000 260,000 Dec. 31, Yr. 3 260,000 260,000

308,438 310,860 313,403 316,073

€48,438 50,860 53,403 56,073

E

BOND CARRYING AMOUNT ($6,500,000 – D)

€331,240 €6,168,760 6,217,198 6,268,058 282,802 6,321,461 231,942 178,539 122,466

6,377,534

Dec. 31, Yr.4 Dec. 31, Yr.5

Interest expense for the year ended December 31, Year 4 is €313,403.

Chapter 9

Liabilities

(continued) P 9-84B Req. 3 (reporting the liabilities at December 31, Year 4) Current liabilities: Current portion of notes payable ........... € 60,000 Non-current liabilities: Bonds payable ......................................... € 6,000,000 Less: Discount on bonds payable € (178,539) €6,321,461 Notes payable €300,000 (360,000 − 60,000) .................................

Financial Accounting: IFRS 12/e Solutions Manual

(40-50 min.) P 9-85B Req 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Dec. 31 Lease Asset……………………….

314,364 20X0 Lease Liability ............................

314,364 To record capital lease.

Dec. 31 Lease Expense……………………

20X1 Lease Liability…………………….

Cash………………………...

25,149 42,851

Chapter 9

68,000

Liabilities

(15-30 min.) P 9-86B TO:

Management of Veronica Sporting Goods

FROM:

[Student Name]

SUBJECT:

Advantages and disadvantages of borrowing versus issuing shares to raise cash for expansion

Raising money by borrowing has at least two advantages over issuing common shares. Borrowing does not change the present ownership of the business. It enables the present owners to keep their proportionate interests in the business and to carry out their plans without interference from a new group of shareholders. Under normal conditions, borrowing results in a higher earnings per share of common shares because the interest expense on the debt is tax-deductible. And higher earnings per share usually lead to higher share prices for company owners.

The main disadvantage of borrowing is that the debt increases the financial risk of the company. The principal and the related interest expense must be paid whether the company is earning a profit or not. If times get sufficiently bad, the debt burden could threaten the ability of the business to continue as a going concern.

Financial Accounting: IFRS 12/e Solutions Manual

The main advantage of issuing shares is that owners avoid the burden of making interest and principal payments on the debt.

Issuing shares creates no liability to pay anything to the owners. If the directors consider it necessary, they can refuse to pay dividends in order to conserve cash. Therefore, it is safer to issue shares.

One disadvantage of issuing shares is dilution of the ownership interests of existing shareholders if the purchasers of new shares are outsiders. The new shareholders may have different ideas about how to manage the business and that may pose difficulties for the original shareholder group. Another disadvantage of issuing shares is that earnings per share are usually lower because of (1) the greater number of shares of shares outstanding, and (2) the non-tax-deductibility

of

dividends paid on the shares.

There is insufficient information available upon which to make a decision. management must prepare budgets Veronica’s which indicate the impact of the new stores in terms of net income and cash flow. Management must also estimate the cost of borrowing the funds.

Student responses may vary.

Chapter 9

Liabilities

(20-30 min.) P 9-87B Req. 1 Isley Foods, Inc. Partial Balance Sheet December 31, 20X0 PPE: Current liabilities: Equipment….. €746,000 Bonds payable Accumulated current portion………… € 500,000 depreciation. (165,000) Mortgage note payable 581,000 current portion………..

95,000 Interest payable………….

72,000* Total current liabilities…… 667,000 Non-current liabilities: Mortgage note payable…

313,000

Bonds payable. 200,000 Discount on bonds 23,000* payable…….

Net Pension liability……

Total non-current liabilities

177,000 50,000** 540,000

_____ Notes: * The order of listing non-current liabilities is optional. However, Discount on Bonds Payable should come immediately after Bonds Payable. Also, it is customary to report Interest Payable after the related liability accounts. ** Computation of pension liability: Accumulated pension benefit obligation…………………….. €460,000 Less: Pension plan assets, at market value…………………. (410,000) Net Pension liability to be reported on the balance sheet…

50,000

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 9-87B Req. 2 a. Carrying amount of bonds payable: Current portion ....................................................

Long-term portion (200,000 - 23,000) ................

Carrying amount .................................................

€ 500,000 177,000 €677,000

b. Interest payable is the amount of interest that Isley owes at year-end. Interest expense is the company’s cost of borrowing for the full year.

Req. 3 Times-interest-earned ratio =

Operating income 360,000 = Interest expense 224,000

= 1.6 times

Chapter 9

Liabilities

Decision Cases (15-20 min.) Decision Case 1 Req. 1 Panel A – Bond Data A1 A 1 Issue date 2 Face (or par or maturity) value

B C D January 1, Maturity date 20X3 $1,000,000 Number of periods

3 Stated interest rate (per year)

9% per year

4 Stated interest rate (per period) Issue price 5

4.5% per period

Market interest rate at issuance (per year) Market interest rate at issuance (per period)

E December 31, 20X7 10 periods 10% per year

5% per period

= PV = (market rate per period, number of periods, interest $961,390 payment per period, face value)

Panel B - Bond Amortization Table A1 A

1

Semiannual Interest Payment Dates

G F Bond Ending Discount Bond Interest Beginning Interest Bond Account Payment Discount Bond Expense Carrying Carrying (Market Balance Amount Rate × B) (Bond Rate Amortization (C – D) (Preceding Amount × Face (Face F – E) Value) Value – F) B

C

D

E

(Issuance) 2 1 Jan 20X3 3 (#1) 30 Jun 20X3 4 (#2) 31 Dec

$ 38,610

$ 961,390

$ 961,390

$ 48,070

$ 45,000

$ 3,070

35,540

964,460

964,460

48,220

45,000

3,220

32,320

967,680

Financial Accounting: IFRS 12/e Solutions Manual

20X3 5 (#3) 30 Jun 20X4

967,680

48,380

45,000

3,380

28,930

971,070

6 (#4) 31 Dec 971,070 48,550 45,000 3,550 25,380 974,620 20X4 7 (#5) 30 Jun 974,620 48,730 45,000 3,730 21,650 978,350 20X5 8 (#6) 31 Dec 978,350 48,920 45,000 3,920 17,730 982,270 20X5 9 (#7) 30 Jun 982,270 49,110 45,000 4,110 13,620 986,380 20X6 10 (#8) 31 Dec 986,380 49,320 45,000 4,320 9,300 990,700 20X6 11 (#9) 30 Jun 990,700 49,540 45,000 4,540 4,760 995,240 20X7 12 (#10) 31 995,240 49,760 45,000 4,760 0 1,000,000 Dec 20X7 13 14 Notes: 15 Column B Beginning bond carrying amount, which is equal to preceding Column G 16 For issuance, carrying amount is the face value of the bond less bond discount (Column F) 17 Column C Interest expense each period, calculated as market rate per period : the beginning bond carrying amount in Column B 18 Column D Fixed interest payment each period, calculated as bond rate per period : the face value of the bond 19 Column E Bond discount amortization is the difference between interest expense (Column C) and interest payment (Column D) 20 Column F Bond discount balance is the preceding balance (Column F) adjusted for current period amortization (Column E) 21 Column G Ending bond carrying amount, which is face value of the bond less the bond discount account balance (Column F) 22

Thus, the carrying amount of the bond as at December 31, 20X6 is $990,700. This represents unamortized discount of $9,300 against the $1,000,000 par value.

Chapter 9

Liabilities

Req. 2 Here, the company has two options to execute the early retirement – to call the bond at $101 or to buy them at $99 in the open market.

Here, market price is, obviously, the better choice because the market price is lower than the call price.

$ Par value of bonds being retired Less: Unamortized discount

1,000,000 9,300

Carrying amount of the bonds being retired

990,700

Market price (1,000,000 × 0.99)

990,000

Gain on retirement of bonds payable

700

Since, early retirement of the bonds payable will result in a gain of $700, Trackon should retire the bonds payable by purchasing them from open market.

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.) Decision Case 2 Req. 1 (Analysis of financing plans) PLAN A

Net income before expansion Project income before interest and income tax Less interest expense ($6,000,000 × .06) Project income before income tax Less income tax expense (35%) Project net income Less preferred dividends (100,000 × $3.75) Additional net income available to common shareholders Total company net income Earnings per share including new project: Plan A ($4,241,000 / 1,000,000 shares) Plan B ($4,475,000 / 1,100,000 shares)

PLAN C ISSUE $3.75 NONVOTING BORROW COMMON PREFERRED AT 6% SHARES SHARES $3,500,000 $3,500,000 $3,500,000 $1,500,000 $1,500,000 $1,500,000 -0360,000 -01,500,000 1,140,000 1,500,000 525,000 399,000 525,000 975,000 741,000 975,000 -0-0375,000 975,000 741,000 600,000 $4,241,000 $4,475,000 $4,100,000

$

PLAN B ISSUE

4.24

$

4.07

Plan C ($4,100,000 / 1,000,000 shares)

$

Chapter 9

Liabilities

4.10

(continued) Decision Case 2 Req. 2 (Recommendation) The best choice appears to be Plan A — borrowing at 6% — because: (1) Borrowing allows the family to maintain control of the business; (2) EPS is higher under borrowing than under issuing preferred shares (which would also maintain family control); and (3) EPS under borrowing is higher than it would be if common shares were issued. Also, cash flow under Plan A (borrowing) may be almost as good as under Plan B (issuing common shares) after considering shareholders’ demands for dividends.

Financial Accounting: IFRS 12/e Solutions Manual

Ethical Issue 1 Req. 1 A company would prefer not to disclose its contingent liabilities because they cast a shadow on the business and create a negative impression. Contingent liabilities relating to defending legal suits may be taken as admission of legal responsibility when disclosed.

Req. 2 and 3 The potential parties and economic consequences of the decision not to disclose contingent liabilities are:

1.

With misleading The bank and its shareholders: information, they might extend additional funds to the borrower assuming a better ability to pay back the funds than actually exists. A contingent liability creates risk for a company. If the contingent liability is not reported, the bank may view the company as low-risk. This may lead the bank to loan money at low interest rates and with easy payment terms. With knowledge of the contingent liability, the bank might not have made the loan at all. Or the bank might have required a higher interest rate or more stringent payment terms. Making loans on too-easy terms expropriate the bank’s owners of their money.

Chapter 9

Liabilities

(continued) Ethical Issue 1 2. The company seeking the loan: Might become overextended in its borrowing and risk default on debt in the future.

Req. 3 Economic, legal, and ethical consequences

Banks have legal requirements to keep certain ratios of assets and liabilities Failure of a on their books or risk default. company to report its contingent liabilities to a bank requesting this disclosure could subject the company to a lawsuit later on.

From an ethical standpoint, reporting a contingent liability requires a delicate balancing act. Ethics require that outsiders’ interests be protected. The company must disclose enough information to give outsiders a reasonable basis for making informed decisions about the company. At the same time, the company should avoid giving away secrets that could damage its owners’ investment in the business. This dilemma is clear when a defendant fears losing an important lawsuit. Fortunately for accountants, most companies settle out of court those lawsuits that they expect to lose. In such cases, there are no contingent liabilities to disclose.

Financial Accounting: IFRS 12/e Solutions Manual

Ethical Issue 2 1. The ethical issue is whether to structure this lease to avoid its having to be disclosed as a capital lease. The company will do that if it is possible. It appears that Gocker and Moran have some flexibility in setting the life of the lease (4-6 years). If they set the term of the lease at 4 years, it will be only 66 2/3 percent of the economic life of the asset (6 years). Thus, the lease will fail all of the mechanical tests for the lease to be treated as a capital lease, and by default, it will be treated as an operating lease, and Gocker can avoid capitalizing the asset and including the liability on her financial statements. If they set the term of the lease at 5 or 6 years, it will exceed 75% of the economic life of the asset, and thus the lease will have to be capitalized.

2. The stakeholders are Gocker, the lessee; Morgan, the lessor; and Last National Bank, Gocker’s present creditor.

The

potential consequences to the stakeholders are:

a. economic: If the lease is structured as a capital lease, Gocker will violate its long-term loan covenant with Last National Bank.

As a result, the bank might demand immediate payment of their

Chapter 9

Liabilities

(continued) Ethical Issue 2 loan.

This may damage Gocker’s credit rating and create

difficulty getting future bank loans. Alternatively, Last National Bank may waive the loan covenant in exchange for a higher interest rate or more stringent repayment terms. This too could cause Gocker Morgan is not affected financial difficulties. economically, because Morgan will receive its payments on the leased property regardless of how the transaction is disclosed.

b. legal: If we assume that GAAP substitutes for legal requirements, if Gocker is careful to structure the lease terms so that it avoids the requirements for a capital lease, there should be no problem stating that the lease agreement complies with GAAP.

Thec.substance ethical: of a capital lease is one that transfers the risks and rewards of ownership to the lessee. If in fact, the substance of the terms of this lease do that, the equipment should be capitalized by the lessee regardless of the form of the lease terms. To use mechanical rules to avoid recognizing assets and liabilities hardly seems like a truthful way to do business. Nevertheless, U.S. GAAP presently allow it!

Financial Accounting: IFRS 12/e Solutions Manual

(continued) Ethical Issue 2 3. Student responses will vary on this question. Some will say that, if the rules allow it, then why not engineer the transaction in such as way as to benefit Gocker by keeping the asset, and the lease obligation, off the books. After all, this is perfectly legal, and perfectly in accordance with existing U.S. GAAP (FAS 13). In the view of the authors, Gocker should evaluate whether, in fact, she obtains the rights and rewards associated with ownership of the machine. If so, she could so structure the lease that it fits the economic substance of the transaction, which is what should also be disclosed in the financial statements. If it turns out that the equipment and the related lease obligation will have to be added to assets and liabilities in the balance sheet, thus causing Gocker to default on the loan covenant, she should attempt to obtain a waiver of the covenant. This option is going to prove costly for Gocker, so she’s going to have to be convinced that she did the right thing in order to be motivated to follow this course of action.

Chapter 9

Liabilities

Focus on Financials: Nestlé (30-40 min.)

1. Trade payables (including other payables) for Nestlé increased in 2021, to CHF 20,907 million from CHF 18,515 million the year before. This represented an increase of 12.92%.

This might have been caused by higher credit purchase of inventory as evident from the following figures of Cost of inventory purchased calculated based on cost of goods sold and opening and closing inventory values.

Cost of inventory purchased (2020) = 42,971 + 10,101 – 9,343 = 43,729 Cost of inventory purchased (2021) = 45,468 + 11,982 – 10,101 = 47,349 2. Nestlé’s income tax expense in 2021 was CHF 2,261 million. 3.

Nestlé borrowed more, as total financial debt increased by CHF 6,627 million from 2020 to 2021.

4. As of December 31, 2016, Nestlé is exposed to contingent liabilities from potential litigations amounting to CHF 1505 million.

5. The debt ratio of Nestlé is defined as Total Liabilities / Total Assets. Nestlé’s debt ratio stood at 61.39% in the year 2021, down from 62.49% in the year 2020. Though the position has slightly improved, the figure (61.39%) is relatively risky, as the profit before taxes, associates and joint ventures was down by 22.38%. Some qualitative factors could include Nestlé’s relationships with banks and the capital markets, its credit ratings, and the stability of its income streams.

Financial Accounting: IFRS 12/e Solutions Manual

6. Nestlé has Restructuring, Legal and indirect tax provisions. A provision is recognized only when a past event has created a legal or constructive obligation, an outflow of resources is probable, and the amount of the obligation can be estimated reliably. Nestlé needs provisions for restructuring to recognize the cost of exiting and ceasing the use of its sites and assets - it must recognize an expense to match against the revenues that these sites and assets bring. A provision is a present liability but a contingent liability is a possible future liability.

Group Projects

Student responses will vary.

Chapter 9

Liabilities

Chapter 10 Shareholders’ Equity Short Exercises (5 min.) S 10-1 Corporation’s advantages: • Separate legal entity • Continuous life • Transferability of ownership • Limited liability of the shareholders • Ease of raising capital Corporation’s disadvantages: • Corporate taxation • Government regulation • Separation of ownership and management

Financial Accounting: IFRS 12/e Solutions Manual

(5 min.) S 10-2 1. The shareholders hold ultimate power in a corporation.

2. The chairperson of the board of directors is usually the most powerful person in a corporation. Title is CEO. 3. The president is in charge of day-to-day operations. Title is COO. 4. The chief financial officer is in charge of accounting and finance. Title is CFO*. *An alternative title is the chief accounting officer, CAO.

Chapter 10

Shareholders’ Equity

(5-10 min.) S 10-3 1. The ordinary shareholders are the real owners of a corporation 2. Preference shareholders have priority over ordinary shareholders in (1) receipt of dividends and (2) receipt of assets if the corporation liquidates. Preference shareholders may also have the right to receive skipped past years’ dividends before ordinary dividends can be declared (cumulative rights).

3. Ordinary shareholders benefit more from a successful corporation because the preference shareholders’ dividends are limited to a specified amount. The ordinary shareholders take more risk so their potential for gains through an increase in the company’s share price is correspondingly greater.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 10-4 DATE:

_____________

TO:

Kitty Page and Jean Scott

FROM:

[Student Name]

RE:

Steps in forming a corporation

The first step in organizing a corporation is to obtain a charter from the state. The charter authorizes the corporation to issue a certain number of shares to the owners of the business, who are called shareholders. The corporation will exist when the incorporators • Pay fees, • Sign the charter, • File documents with the state, and • Agree to a set of bylaws to determine how the corporation is to be governed internally.

• Later steps include the shareholders will electing a board of directors who in turn appoint officers to manage the corporation on a day-to-day basis. These officers consist of the chairperson of the board (the chief executive officer) and the president (the chief operating officer) who lead the chief financial officer who manage the day to day operations of the controller (accounting officer) and treasurer (finance officer).

Chapter 10

Shareholders’ Equity

(5-10 min.) S 10-5 The $74,925,000 was paid-in capital. It was not a profit and therefore had no effect on net income.

The par value of shares has no effect on total paid-in capital.

Total paid-in capital is the total amount that shareholders have invested in (paid into) a corporation, including the par value of shares issued plus any additional paid-in capital.

(10 min.) S 10-6 Millions Faster Printer: Cash……………………………………………. 34,448 Share capital………………………………..

Additional Paid-in Capital………………..

Delightful Doughnuts: Cash…………………………………………….

Share capital………………………………..

Financial Accounting: IFRS 12/e Solutions Manual

48 34,400

588 588

(10 min.) S 10-7 Case A — Issue shares and buy the assets in separate transactions:

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Cash………………………………………..

Share capital (20,000 × $20)…….......

Paid-in capital in excess of par…….

Issued shares.

Building……………………………………

Equipment…………………………………

Cash……………………………………..

CREDIT

1,700,000 400,000 1,300,000

1,240,000 460,000

1,700,000

Purchased PPE.

Case B — Issue shares to acquire the assets:

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Building……………………………………

1,240,000 Equipment………………………………...

460,000 Share capital (20,000 × $20)………...

400,000 Paid-in capital in excess of par…....

1,300,000 Issued shares to acquire building and equipment.

The balances in all accounts are the same: Building……………………………………

Equipment……………………………….…

Share capital (10,000 x $20)……………

Paid-in capital in excess of par………..

Chapter 10

$1,240,000 460,000 400,000 1,300,000

Shareholders’ Equity

(5-10 min.) S 10-8 Thousands Shareholders’ equity: Share capital, $.01 par, 800 shares issued Paid-in capital in excess of par………………….

Retained earnings………………………………….

Other shareholders’ equity……………………….

Total shareholders’ equity………………………..

$

8 392 1,296 (44) $1,652

(10 min.) S 10-9 a.

b.

c.

Amounts in Thousands Total revenues……………………………………….. $2,860 Total expenses………………………………………..

(1,616) Net income………………………………….………… $ 1,244 Accounts payable……………………………………

Other current liabilities……………………………...

Long-term debt……………………………………….

Total liabilities………………………………………...

Total liabilities (from Req. b)……………………….

Total shareholders’ equity (from S 10-7)………

Total assets……………………………………………

Financial Accounting: IFRS 12/e Solutions Manual

$ 900 5,158 54 $6,112 $6,112 1,652 $7,764

(5 min.) S 10-10

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Treasury shares…………………………….

Cash………………………………………..

Cash…………………………………………..

CREDIT

Millions 24 24 6

Treasury shares………………………….

Paid-in Capital from Treasury share Transactions…………………………..

Overall, shareholders’ equity decreased by $18 million ($24 million paid − $6 million received).

Chapter 10

Shareholders’ Equity

2 4

(15-20 min.) S 10-11 Req. 1 MEMORANDUM TO:

PIE Investments, Board of Directors

FROM:

[Student Name]

RE:

How the purchase of treasury shares will make it more difficult for outsiders to take over the company

Purchasing treasury shares decreases the amount of shares outstanding. If PIE Investments holds a sufficient quantity of company shares in the treasury, outsiders may not be able to acquire a controlling interest (>50%) of the outstanding shares from the remaining shareholders. Because it takes cash to buy treasury shares, the purchase decreases the size of the corporation. Reducing the company’s cash position may make the company sufficiently unattractive to cause the outside investors to abandon their takeover plan.

Req. 2 Sales of treasury shares at prices above the purchase price increase company assets because of the greater amount of assets coming in from the sale than went out to buy the shares.

Treasury shares transactions do not affect liabilities, so the sale of treasury shares also increases shareholders’ equity. These sales of treasury shares will not affect net income because the company is dealing with its owners. Transactions between the corporation and its owners cannot generate a profit or a loss that is reported on the income statement.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) S 10-12

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

20X6 Dec. 15 Retained Earnings ($150,000 × .06) + (75,000 × $1.00)… 84,000 Dividends Payable…………………

Declared a cash dividend……………

20X7 Jan. 4 Dividends Payable…………………… 84,000 Cash………………………………….

Paid cash dividend.

CREDIT

84,000

84,000

During 20X6, Retained Earnings increased by $63,000 (net income of $147,000 − dividends of $84,000).

(5-10 min.) S 10-13 1. $640,000 (400,000 shares × $1.60 per share) 2. Preference: $640,000 Ordinary: $ 60,000 3. Cumulative, because it is not labeled noncumulative 4. Preference: $1,920,000 ($640,000 × 3) Ordinary: $880,000 ($2,800,000 − $1,920,000)

Chapter 10

Shareholders’ Equity

(5-10 min.) S 10-14 Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

May 11 Retained Earnings (12,000 × .15 × $25.00)…..

45,000 Share capital (12,000 × .15 × $3)……….......

Paid-in Capital in Excess of Par-Ordinary..

5,400 39,600

Req. 2 No effect on total assets.

No effect on total liabilities.

No effect on total shareholders’ equity.

(10 min.) S 10-15 Total shareholders’ equity…………………………….

Less: Preference shares……………………………..

Preference dividends in arrears (68,000 × .04 × $5 x 3)………………………

Ordinary equity………………………………………….

Number of ordinary shares outstanding (128,000 – 2,800)……………………………………….

Book value per share of ordinary shares…………..

Financial Accounting: IFRS 12/e Solutions Manual

$8,302,000 (396,000) (40,800) $7,865,200 ÷ 125,200 $ 62.82

(5-10 min.) S 10-16 DATE

Journal ACCOUNT TITLES AND EXPLANATION Treasury shares……………………………..

Cash………………………………………..

DEBIT CREDIT Millions 36 36

Cash…………………………………………..

Treasury shares………………………….

Capital Reserve

14

Share Capital ………………………………..

Additional Paid-in Capital ………………..

Treasury Shares

1 5

Chapter 10

8 6

6

Shareholders’ Equity

(10-15 min.) S 10-17 Since Eagle Corporation’s preference shares are noncumulative in nature, arrear preference dividend is not payable and hence this will not form part of the preference equity while determining the book value per share of the company’s ordinary shares.

Total shareholders’ equity…………………………….

Less: Preference equity Redemption value of preference shares (500 × 140) Ordinary equity………………………………………….

Number of ordinary shares outstanding (7,500 – 5,000)…………………………

Book value per share of ordinary shares…(190,000 ÷ 7000).

Financial Accounting: IFRS 12/e Solutions Manual

$260,000 (70,000) $190,000 7,000 $

27.14

(20-30 min.) S 10-18 1. Corporations report share capital and retained earnings separately as prescribed by the relevant laws and accounting standards. The laws and standards require corporations to report shareholders’ equity by source to distinguish paid-in capital, which cannot be used for cash dividends, from retained earnings.

2. We should first determine the market value of the land. Then divide the land’s value by the market value of each share of shares. The result will tell us how many shares of our shares to issue for the land.

3. Investors buy ordinary shares in the hope of potentially earning higher returns on their investment than are available on an investment in preference shares.

4. The redemption value of our preference shares requires us to pay the preference shareholders this amount when we buy back the preference shares.

5.

Book value per share of ordinary shares

=

Total shareholders’ equity − Preference equity Number of shares of ordinary shares outstanding

There may be other market sentiments that affect the market value per share, as opposed to book value per share which does not take these into account.

Chapter 10

Shareholders’ Equity

(5-10 min.) S 10-19 Billions Cash flows from financing activities: Paid off long-term notes payable……………………

Issued share capital……………………………………

Purchased treasury shares…………………………..

Paid cash dividends……………………………………

Cash flows from financing activities

Financial Accounting: IFRS 12/e Solutions Manual

$(2.5) 1.2 (3.6) (1.6) $(6.5)

Exercises Group A (5-10 min.)

E 10-20A

Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Jan. 19 Cash (15,000 × $6.00).......................... 90,000 Share capital (15,000 × $2.00) ....... Paid-in 30,000 capital in excess of par ....

60,000 Apr.

3 Cash ..................................................... 82,500 82,500 Preference shares ..........................

11 Inventory .............................................. 24,300 Equipment ........................................... 14,700 Share capital (5,700 × $2.00) .........

Paid-in capital in excess of par ....

11,400 27,600

Req. 2 Shareholders’ equity: Preference shares, no par 10,500 shares authorized, 750 shares issued……. $82,500 Share capital, $2.00 par, 41,400 180,000 shares authorized, 20,700 shares issued…

Paid-in capital in excess of par-ordinary 87,600 ($60,000 + $27,600)…………………………………….

Retained earnings (deficit)………………………….…… (67,500) Total shareholders’ equity……………………….……$144,000

Chapter 10

Shareholders’ Equity

(10-15 min.) E 10-21A Shareholders’ Equity Preference shares, 10,000 shares authorized, 1,600 shares issued ............................. $ 48,000 Share capital, $1.50 par, 40,000 shares authorized, 10,000 shares issued ....................................................

15,000 Paid-in capital in excess of par .................................... 164,400* Retained earnings .........................................................

90,000 Total shareholders’ equity ...................................... $317,400 _____ *Computation: April 23: 3,600 shares × ($16.50 − $1.50) =…………………

May 12: $40,000 + $80,000 − (6,400 shares × $1.50) =……

$54,000 110,400 $164,400

Journal entries (not required): Apr. 23 Cash……………………………………... 59,400 Share capital ..................................

Paid-in capital in excess of par….

May

2 Cash ..................................................... 48,000 Preference shares ..........................

5,400 54,000

48,000

12 Inventory ..............................................

40,000 Equipment ........................................... 80,000 Share capital ..................................

9,600 Paid-in capital in excess of par….

110,400

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) E 10-22A Paid-in capital consists of: Preference equity: Issued for cash (4,500 shares × $120) ...........

Ordinary equity: Issued for cash (30,000 shares × $1.00)……

Issued for organizing the corporation Issued for patent………………………………..

Total paid-in capital……………………………………

$540,000 30,000 33,000 124,500 $727,500

Unused data: Net income Dividends declared

Short-cut solution : 1. $ 33,000 2. 124,500 3. 540,000 (4,500 × $120) 4.

30,000 (30,000 × $1.00) $727,500 = Total paid-in capital

Chapter 10

Shareholders’ Equity

(10-15 min.) E 10-23A Shareholders’ Equity (Thousands) Share capital, $0.75 par, 800 shares authorized, 320 shares issued……………………… $ 240 Paid-in capital in excess of par…………………………

899

Retained earnings…………………………………………

2,220

Other shareholders’ equity………………………………

(730)

Less: Treasury shares, ordinary, 100 shares at cost. (1,150) Total shareholders’ equity…………………………... $1,479

Parker Software paid a higher price to acquire treasury shares than the price Parker received when it issued its shares. This explains why Treasury shares have a greater balance than the sum of Share Capital plus Paid-in Capital in Excess of Par.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 10-24A

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Jan. 17 Cash (4,200 × $10)…………………….....

Share capital (4,200 × $2.50)………..

Paid-in capital in excess of par……

To issue share capital.

42,000

May 23 Treasury shares - Ordinary (800 × $12).

Cash……………………………………...

To purchase treasury shares.

9,600

CREDIT

10,500 31,500

Jul. 11 Cash (600 × $20)………………………….... 12,000 Treasury shares - Ordinary (600 ×$12) Paid-in Capital from Treasury Shares Transactions………………..

To sell treasury shares.

9,600

7,200 4,800

Overall effect on shareholders’ equity ($42,000 − $9,600 + $12,000) — $44,400 increase

Chapter 10

Shareholders’ Equity

(10 min.) E 10-25A

Journal DATE

b.

c.

d.

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Millions Cash (9 million × $13.50)…………………… 121.5 Share capital (9 million × $2.00)…….....

18 Paid-in capital in excess of par….……..

103.5 Treasury shares………………………………

Cash………………………………………….

16

Retained Earnings……………………………

32

16

Dividends Payable…………………………

Dividends Payable……………………………

Cash……………………………………….… or one entry only: Retained Earnings …………………………...

Cash……………………………………….…

Financial Accounting: IFRS 12/e Solutions Manual

32 32 32

32 32

(10 min.) E 10-26A

Shareholders’ Equity: Share capital, $2.00 par value, 2,109 million shares issued ($4,200 + $18.0) Capital in excess of par value ($8,400 + $103.5) Retained earnings ($250 + $446 − $32)……….

Treasury shares (70 + 16)…………………..……

Total shareholders’ equity……………………

Chapter 10

Dollars in Millions $ 4,218 8,503.5 664 (86) $13,299.5

Shareholders’ Equity

(20-30 min.) E 10-27A Req. 1 Conversion of preference shares into ordinary shares Retirement of preference shares Req. 2 Issuance of ordinary shares: a. To preference shareholders who converted their preference shares into ordinary shares b. For cash or other assets c. Shares dividend

Req. 3 (Millions of shares) Dec. 31, 20X7 Ordinary shares issued…………………………….

300 Less: Treasury shares, number of shares…….

(52) Ordinary shares outstanding……………………...

248

Financial Accounting: IFRS 12/e Solutions Manual

(continued) E 10-27A Req. 4

Dividends during 20X7

Retained Earnings (Millions) Dec. 31, 20X6 176 20X7 Net income Dec. 31, 20X7

Bal. 5,066 1,380 Bal. 6,270

Req. 5 (All amounts in millions) December 31, Purchases 20X7 20X6 During 20X7 Cost of treasury shares……………. $1,144 − $228 = $ 916 Treasury shares, number of shares 52 − 12 = $22.90 ÷ 40 Average price per share paid for treasury shares purchased during 20X7.

Chapter 10

Shareholders’ Equity

(15 min.) E 10-28A PREFERENCE ORDINARY 20X6

20X7

Total dividend…………….

Current year — 20X6: 50,000 shares X $0.50(par) per share X .09 = Total to preference………...

Remainder to ordinary….

$ 70,000

$2,250 $67,750

$130,000

Total dividend…………….

Preference dividends: Current year — 20X7: 50,000 shares X $0.50(par) per share X .09 = Remainder to ordinary….

Financial Accounting: IFRS 12/e Solutions Manual

TOTAL

$2,250 $127,750

(15-20 min.) E 10-29A Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

May 11 Retained Earnings (200,000 × .15 × $19)… 570,000 Share capital (200,000 × .15 × $0.80).

Paid-in Capital in Excess of Par - Ordinary…………………………

To distribute a shares dividend.

CREDIT

24,000 546,000

Req. 2 Shareholders’ equity Share capital, $0.80 par, 1,300,000 shares authorized, 230,000 issued ($160,000 + $24,000)……….. $ 184,000 Paid-in capital in excess of par - ordinary ($153,600 + $546,000)……………………

699,600 Retained earnings ($3,561,000 − $570,000)..

2,991,000 Other…………………………………………………..

(100,000) Total shareholders’ equity…………………….. $3,774,600

Chapter 10

Shareholders’ Equity

(continued) E 10-29A Req. 3 The shares dividend did not change total shareholders’ equity because the company didn’t distribute assets to the shareholders as it would in a traditional dividend. The company merely transferred $570,000 from Retained Earnings to Share Capital ($24,000) and Paid-in Capital in Excess of Par ($546,000).

Req. 4 CD’s maximum cash dividend is limited to $290,000, the balance of its cash account.

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 10-30A a. Decrease shareholders’ equity by $75 million. b. No effect. c. No effect. d. Decrease shareholders’ equity by $9,450 (1,800 × $5.25). e. Increase shareholders’ equity by $5,600 (800 × $7).

f.

No effect.

Chapter 10

Shareholders’ Equity

(10-15 min.) E 10-31A Shareholders’ equity: Millions Share capital, $1.50 par, 2,250 million shares (750 million × 3) authorized, 1,230 million shares (410 million × 3) issued… $ 615 Additional paid-in capital…………………………….

318

Retained earnings……………………………………..

2,399

Other……………………………………………………..

(148)

Total shareholders’ equity………………………. $3,184

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 10-32A Req. 1 Ordinary: Total shareholders’ equity…………………………..

Less: Preference equity — redemption value…..

Total ordinary equity………………………………....

Book value per share ($118,000 / 14,000 shares)….

$226,000 (108,000) $118,000 $ 8.43

Req. 2 Ordinary: Total shareholders’ equity…………………………...

Less: Preference equity [$108,000 +($72,000 ×.04 × 3)] Total ordinary equity………………………………….

Book value per share ($109,360 /14,000 shares)………..

$ 226,000 (116,640) $ 109,360 $ 7.81

Req. 3 Exquisite Tapestry’s shares are not necessarily a good buy.

Investment decisions should be based on more than one ratio.

Chapter 10

Shareholders’ Equity

(10-15 min.) E 10-33A Req. 1 Ordinary: Total shareholders’ equity…………………………..

Less: Preference equity - redemption value (600 × 150) Total ordinary equity………………………………....

Book value per share ($265,000 / 14,700 shares)….

Req. 2 Ordinary: Total shareholders’ equity…………………………...

Less: Preference equity [$90,000 +($48,000 ×.05 × 4)] Total ordinary equity………………………………….

Book value per share ($255,400 /14,700 shares)………

$355,000 (90,000) $265,000 $ 18.03

$ 355,000 (99,600) $ 255,400 $ 17.37

Req. 3 Grace Hotels’ shares are not necessarily a good buy. Investment decisions should be based on more than one ratio.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 10-34A Mathews Corp.

Balance Sheet (partial) December 31, 20X6

Shareholders’ equity: Preference shares, 5%, $120 par, 10,000 shares authorized, 3,200 shares issued……………………. $ 900,000 384,000 Share capital, no-par, 800,000 shares 552,400 authorized, 360,000 shares issued…………………. $1,836,400 Retained earnings………………………………………….

Total shareholders’ equity…………………………… _____ Computations: Preference shares: 3,200 × $120 = $384,000 Equity shares: 360,000 for $900,000 Retained earnings: $550,000 + $240,000 − ($384,000 ×.05 × 3) − (360,000 × $.50) = $552,400

(10 min.) E 10-35A Cash flows from financing activities: Payment of long-term debt………………………..

Proceeds from issuance of share capital…….

Borrowings…………………………………………...

Dividends paid……………………………………….

$(17,090) 8,600 6,570 (230)

Exercises Chapter 10

Shareholders’ Equity

Group B (5-10 min.)

E 10-36B

Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

Aug. 19 Cash (36,000 × 7.50)…………………

Share capital (36,000 × 3.50)…..

Paid-in capital in excess of par Apr.

DEBIT

270,000 126,000 144,000

3 Cash ..................................................... 112,000 Preference shares ..........................

11 Inventory ..............................................

Equipment ...........................................

Share capital (8,000 × 3.50) ............

Paid-in capital in excess of par

CREDIT

112,000

36,800 21,200 28,000 30,000

Req. 2 Shareholders’ equity: Preference shares, no par 16,000 shares authorized, 1400 shares issued………112,000 Share capital, €3.50 par, 240,000 shares authorized, 44,000 shares issued… 154,000 Paid-in capital in excess of par - ordinary (144,000 + 30,000)………………………………………. 174,000 Retained earnings (deficit)………………………….…… (96,000) Total shareholders’ equity……………………….…… €344,000

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 10-37B Shareholders’ Equity Preference shares, no-par, 16,000 shares authorized, 1,000 shares issued ............................. € 64,000 Share capital, €2.00 par, 32,000 shares authorized, 10,000 shares issued 20,000 Paid-in capital in excess of par.................................... 149,000* Retained earnings .........................................................

90,000 Total shareholders’ equity ...................................... €323,000 _____ *Computation: JUNE 23: 2,800 shares × (17.50 − 2.00) =……………………

JULY 12: 36,000 + 84,000 − (7,200 shares × 2.00) =……….

$43,400 105,600 €149,000

Journal entries (not required): Jun. 23 Cash……………………………………... 49,000 Share capital ..................................

Paid-in Capital in Excess of Par… July

2 Cash ..................................................... 64,000 Preference shares ..........................

5,600 43,400

64,000

12 Inventory ..............................................

36,000 Equipment ........................................... 84,000 Share capital ...................................

14,400 Paid-in Capital in Excess of Par… 105,600

Chapter 10

Shareholders’ Equity

(10 min.) E 10-38B Paid-in capital consists of: Preference equity: Issued for cash (8,000 shares × €90) ...........

Ordinary equity: Issued for cash (36,000 shares × €18.00) Issued for organizing the corporation Issued for patent………………………………..

Total paid-in capital……………………………………

Unused data: Net income Dividends declared

Short-cut solution: 1. € 50,000 2. 174,000 3. 720,000 (8,000 × €90) 4. 648,000 (36,000 × €18.00) €1,592,000 = Total paid-in capital

Financial Accounting: IFRS 12/e Solutions Manual

€720,000 648,000 50,000 174,000 €1,592,000

(10-15 min.) E 10-39B Shareholders’ Equity (Thousands) Share capital, €0.50 par, 900 shares authorized, 300 shares issued……………………… € 150 Paid-in capital in excess of par…………………………

897

Retained earnings…………………………………………

2,270

Other shareholders’ equity………………………………

(726)

Less: Treasury shares, ordinary, 100 shares at cost. (1,610) Total shareholders’ equity…………………………... € 981

Baikal Software paid a higher price to acquire treasury shares than the price Baikal received when it issued its shares. This explains why Treasury shares has a greater balance than the sum of Share capital plus Paid-in Capital in Excess of Par.

Chapter 10

Shareholders’ Equity

(10-15 min.) E 10-40B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

Mar. 17 Cash (5,000 × $7)…………………………..

Share capital (5,000 × $1.50)…………

Paid-in capital in excess of par…….

To issue share capital.

DEBIT

CREDIT

35,000 7,500 27,500

Apr. 20 Treasury shares-Ordinary (1,400 × $16).. 22,400 22,400 Cash……………………………………....

To purchase treasury shares.

Aug. 8 Cash (1,000 × $17)………………………….. 17,000 Treasury shares-Ordinary (1,000 × $16) Paid-in capital from treasury shares transactions………………..

To sell treasury shares.

Overall effect on shareholders’ equity ($35,000 − 22,400 + 17,000) — $29,600 increase

Financial Accounting: IFRS 12/e Solutions Manual

16,000 1,000

(10 min.) E 10-41B

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Millions b.

c.

d.

Cash (10 million × 12.50)……………………. 125 Share capital (10 million × 1.50)…….....

Paid-in capital in excess of par…….…..

15 110

Treasury shares………………………………

Cash………………………………………….

15 15

Retained earnings…………………………….

Dividends payable…………………………

35

Dividends payable……………………………

Cash……………………………………….…

35

or one entry only: Retained earnings…………………………....

Cash……………………………………….…

35

Chapter 10

35

35

35

Shareholders’ Equity

(10 min.) E 10-42B

Shareholders’ Equity: Share capital, €1.50 par value, 1,700 million shares issued (2,550 + 15) Capital in excess of par value (7,650 + 110) Retained earnings (260 + 447 − 35)…………

Treasury shares...…………………………………..

Total shareholders’ equity……………………..

Financial Accounting: IFRS 12/e Solutions Manual

Dollars in Millions € 2,565 7,760 672 (25) €10,972

(20-30 min.) E 10-43B Req. 1 Conversion of preference shares into share capital Retirement of preference shares

Req. 2 Issuance of ordinary shares: a. To preference shareholders who converted their preference shares into ordinary shares b. For cash or other assets c. Shares dividend

Req. 3 (Millions of shares) Dec. 31, 20X7 Ordinary shares issued…………………………….

500 Less: Treasury shares, number of shares…….

(54) Ordinary shares outstanding……………………...

446

Chapter 10

Shareholders’ Equity

(Continued) E 10-43B Req. 4

Dividends during 20X7

Retained Earnings (Millions) Dec. 31, 20X6 203 20X7 Net income Dec. 31, 20X7

Bal. 5,025 1,478 Bal. 6,300

Req. 5 (All amounts in millions) December 31, Purchases 20X7 20X6 During 20X7 Cost of treasury shares…………….. 1,242 − 280 = € 962 Treasury shares, number of shares 54 − 14 = €24.05 ÷ 40 Average price per share paid for treasury shares purchased during 20X7.

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) E 10-44B PREFERENCE ORDINARY 20X6

20X7

Total dividend…………….

Preference dividends in arrears: 20X4: 60,000 shares X 1.50 (par) per share X .07 = 20X5: 60,000 shares X 1.50 (par) per share X .07 Current year — 20X6: 60,000 shares X 1.50 (par) per share X .07 = Total to preference………...

Remainder to ordinary….

Total dividend…………….

Preference dividends: Current year — 20X7: 60,000 shares X 1.50 (par) per share X .07 = Remainder to ordinary….

TOTAL € 110,000

6,300 6,300

6,300 18,900 91,100 €220,000

6,300 213,700

Chapter 10

Shareholders’ Equity

(15-20 min.) E 10-45B Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Aug. 11 Retained Earnings (250,000 × .20 × €15) 750,000 Share capital (250,000 × .20 × €0.30) Paid-in Capital in Excess of Par Ordinary…………………………

To distribute a share capital dividend.

CREDIT

15,000 735,000

Req. 2 Shareholders’ equity Share capital, €0.30 par, 1,100,000 shares authorized, 300,000 issued (75,000 + 15,000)……….. € 90,000 Paid-in capital in excess of par - ordinary (204,800 + 735,000)………………………..

939,800 Retained earnings (3,566,500 − 750,000)….

2,816,500 Other…………………………………………………..

(92,500) Total shareholders’ equity…………………….. €3,753,800

Financial Accounting: IFRS 12/e Solutions Manual

(continued) E 10-45B Req. 3 The shares dividend did not change total shareholders’ equity because the company gave its shareholders no assets. The company merely transferred €750,000 from Retained Earnings to Share Capital (15,000) and Paid-in Capital in Excess of Par (735,000).

Req. 4 HD’s maximum cash dividend is limited to €285,000, the balance of its cash account.

Chapter 10

Shareholders’ Equity

(15-20 min.)

E 10-46B

a. Decrease shareholders’ equity by €88 million. b. No effect. c. No effect. d. Decrease shareholders’ equity by €10,000 (1,600 × €6.25). e. Increase shareholders’ equity by €7,200 (800 × €9).

f.

No effect.

(10-15 min.) E 10-47B Shareholders’ equity: Millions Share capital, €0.10 par, 1,500 million shares (500 million × 3) authorized, 1,380 million shares (460 million × 3) issued… € 138 Additional paid-in capital…………………………….

315

Retained earnings……………………………………..

2,393

Other……………………………………………………..

(146)

Total shareholders’ equity………………………. €2,700

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 10-48B Req. 1 Ordinary: Total shareholders’ equity………………………….

Less: Preference equity — redemption value….

Total ordinary equity………………………………...

Book value per share (€205,000 / 22,000 shares)

€262,000 (57,000) €205,000 € 9.32

Req. 2 Ordinary: Total shareholders’ equity…………………………... € 262,000 Less: Preference equity [57,000 + (42,000 ×.10 × 3)] (69,600) Total ordinary equity…………………………………. € 192,400 Book value per share (192,400 / 22,000 shares)…….€ 8.75

Req. 3 Elegant Tapestry’s shares are not necessarily a good buy.

Investment decisions should be based on more than one ratio.

Chapter 10

Shareholders’ Equity

(10-15 min.) E 10-49B Req. 1 Ordinary: Total shareholders’ equity…………………………..

Less: Preference equity - redemption value (800 × €120)

€ 607,000 (96,000)

Total ordinary equity………………………………....

€ 511,000

Book value per share (€511,000 / 24,300 shares)….

€ 21.02

Req. 2 Ordinary: Total shareholders’ equity…………………………...

Less: Preference equity [€96,000 +(€48,000 ×.05 × 4)] Total ordinary equity………………………………….

Book value per share (€501,400 /24,300 shares)………..

€ 607,000 (105,600) € 501,400 € 20.63

Req. 3 Ashoka Hotels’ shares are not necessarily a good buy.

Investment decisions should be based on more than one ratio.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 10-50B Bevan Corp.

Balance Sheet (partial) December 31, 20X6 Shareholders’ equity: Preference shares, 5%, € 120 par, 15,000 shares authorized, 4,800 shares issued…………………….

Share capital, no-par, 1,200,000 shares authorized, 480,000 shares issued………………….

Retained earnings………………………………………….

Total shareholders’ equity……………………………

€ 576,000 1,350,000 887,400 € 2,813,400

_____ Computations: Preference shares: 4,800 × € 120 = € 576,000 Equity shares: 480,000 for € 1,350,000 Retained earnings: € 825,000 + € $360,000 − (€ 576,000 ×.05 × 2) − (480,000 × €.50) = € 887,400

(10 min.) E 10-51B Cash flows from financing activities: Payment of long-term debt………………………. €(17,120) Proceeds from issuance of share capital…….

8,485 Borrowings…………………………………………..

6,580 Dividends paid………………………………………

(225)

Chapter 10

Shareholders’ Equity

Challenge Exercises (20-25 min.) E 10-52

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

(a) Cash (51,000* × $3) ................................. 153,000 Share capital ......................................

Additional Paid-in Capital .................

Issued ordinary shares. (b) Treasury shares (1,000 × $9)…………

Cash…………………………………….

Purchased treasury shares.

9,000

(c) Cash………………………………………..

Treasury shares ($9,000 − $7,650)..

Resold treasury shares.

1,350

CREDIT

51,000 102,000

9,000

1,350

(d) Revenues…………………………………. 178,000 Expenses………………………………

Retained Earnings…………………...

Closed net income to Retained Earnings.

118,000 60,000

(d) Retained Earnings ($60,000 − $35,000) 25,000 Cash…………………………………….

Declared and paid dividends.

25,000

_____ *$51,000 ÷ $1 par value per share = 51,000 shares issued.

Financial Accounting: IFRS 12/e Solutions Manual

(20-25 min.) E 10-53 Statement of cash flows: Cash Flows from Financing Activities: Issuance of share capital……………………….

Purchase of treasury shares…………………..

Sale of treasury shares…………………………

Payment of dividends…………………………..

$153,000 (9,000) 1,350 (25,000)

Journal entries are given in the solution to Exercise 10-52.

T-accounts of the shareholders’ equity accounts:

Dividends

Purchase Balance

Share capital Issuance of shares Balance

51,000 51,000

Additional Paid-in Capital Issuance of shares Balance

102,000 102,000

Retained Earnings 25,000 Net income Balance

60,000 35,000

Treasury shares 9,000 Sale 7,650

Chapter 10

1,350

Shareholders’ Equity

(15 min.) E 10-54 Preference shares: Moon Walk retired preference shares of $130 million ($740 − $610).

Share capital and Additional paid-in capital: Moon Walk issued 16 million shares of ordinary shares for $49 million, computed as follows: Share capital ($908 − $889)……………………….

Additional paid-in capital ($1,512 − $1,482)……

Total received for issuance of ordinary shares

Millions $ 19 30 $49

Millions Retained earnings: Beginning balance…………………………………….. $19,100 Add: Net income……………………………………..

2,950 Less: Dividends……………………………………….

(1,415)* Ending balance………………………………………… $20,635 *$19,100 + $2,950 − $20,635 = $1,415 Treasury shares: Moon Walk purchased treasury shares for $185 million ($2,785 − $2,600).

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) E 10-55

Amounts in Millions Balance, Dec. 31, 20X6.........

Issuance of shares…………

Shares dividend……….........

Purchase of treasury shares Net income…………………..

Cash dividends……………..

Balance, Dec. 31, 20X7……

Share Capital + $ 71 52 1.23

Additional Paid-in Retained Treasury Total Capital + Earnings − Shares = Equity $10 $35 $52 152 20 65 (7.2)4 — 24 (13)

$13.2

$31

$38.8

$(8)6

$(8)

(8) 24 (13) $75

Computations (not required): 1

7,000,000 $1par par = $7,000,000 5,000,000 ×× $1 = $5,000,000

2

5,000,000 × ($4 − $1) = $15,000,000 3

(7,000,000 + 5,000,000) × .10 × $1 par = $1,200,000

4

(7,000,000 + 5,000,000) × .10−×$1,200,000 $6 market par value $7,200,000 $7,200,000 market value value ==$6,000,000

5 6

4,000,000 × $2 per share = $8,000,000

Chapter 10

Shareholders’ Equity

Quiz Q10-56 Q10-57 Q10-58 Q10-59 Q10-60 Q10-61 Q10-62 Q10-63 Q10-64

d c e d c b a b c

($317,000 + $220,000 + $85,000 = $622,000) ($622,000 + $71,300 − $5,200 = $688,100) {($119,100 − $8,500) / [($681,500 + $603,100*) 2] = .172} *$688,100 − $85,000 = $603,100

Q10-65 Q10-66 Q10-67 Q10-68 Q10-69 Q10-70 Q10-71 Q10-72 Q10-73 Q10-74

a b e b d c b d b a

Q10-75

b.

40,000 × $100 × .08 = $320,000 ($500,000 − $320,000) / 40,000 = $4.50

Total shareholdersequity - Preference equity Number of ordinary shares outstanding

Financial Accounting: IFRS 12/e Solutions Manual

Problems Group A (30-45 min.) P 10-76A Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

May 6 Organization Expense…………………… 22,500 Share capital (900 × $8)………………

Paid-in Capital in Excess of Par - Ordinary………....................

Issued shares to promoter for assisting with issuance of shares.

CREDIT

7,200 15,300

9 Cash (22,000 × $25 per share)…………. 550,000 Share capital (22,000 × $8)…………..

176,000 Paid-in Capital in Excess of Par - Ordinary………...................

374,000 Issued ordinary shares for cash.

10 Patent………………………………………. 20,000 Preference shares…….....................

Issued preference shares to acquire a patent.

26 Cash (1,000 × $25)………………………... 25,000 Share capital (1,000 × $8)……………

Paid-in Capital in Excess of Par - Ordinary………....................

Issued share capital for cash.

Chapter 10

20,000

8,000 17,000

Shareholders’ Equity

(continued) P 10-76A Req. 2 Cullen Canoes, Inc. Balance Sheet (partial) May 31, 20X6 Shareholders’ equity: Preference shares, no-par, 10,000 shares authorized, 800 shares issued ……………………………………

$20,000

Share capital, $8 par, 80,000 shared authorized, 23,900 shares issued*.

191,200

Paid-in capital in excess of par - ordinary**…………...

406,300

56,000 Retained earnings…………………………………………..

Total shareholders’ equity……………………………. $673,500 _____ * 900 + 10,000 + 12,000 + 1,000 = 23,900 shares **$15,300 + $374,000 + $17,000 = $406,300

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) P 10-77A Garry Corp.

Balance Sheet (partial) December 31, 20X6 Shareholders’ equity: Preference shares, 5%, $140 par, 8,000 shares authorized, 1,600 shares issued…………………….

$224,000

Share capital, no-par, 600,000 shares authorized, 120,000 shares issued………………….

540,000

Retained earnings………………………………………….

98,600

Total shareholders’ equity……………………………

$862,600

_____ Computations: Preference shares: 1,600 × $140 = $224,000 Share capital: Balance given as $540,000 Retained earnings: $75,000 + $94,000 − ($224,000 ×.05 × 2) − (120,000 × $.40) = $98,600

Chapter 10

Shareholders’ Equity

(20-30 min.) P 10-78A Share capital [(950,000 + 760,000) × $6] + $718200.

$ 10,978,200

Additional paid-in capital 950,000 × ($8 − $6)………………………………...........

760,000 × ($10 − $6)……………………………………..

80,000 × ($10 − $7.25)…………………………………..

From shares dividend…………………………………..

1,900,000 3,040,000 220,000 564,300

Retained earnings ($2,000,000 − $1,200,000 − $1,282,500)

(482,500)

Treasury shares [(120,000 − 80,000) × $7.25]……………

(290,000)

Total shareholders’ equity……………………………….

$15,930,000

Total assets……………………………………………..

$29,600,000

− Total liabilities…………………………………………..

(13,670,000)

= Total shareholders’ equity……………………………

$15,930,000

Financial Accounting: IFRS 12/e Solutions Manual

(25-35 min.) P 10-79A [Errata: Total shareholders’ equity should be 20,607,000, not 20407,000. We have used the correct value for the computation of this solution. The print book will be updated.]

Req. 1 Carved Outdoor Furniture Company has Class A cumulative preference shares, Class B cumulative preference shares, and ordinary shares outstanding.

Req. 2

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Cash…………………………………. 2,765,000 Class A Preference shares…..

2,765,000

Cash…………………………………. 3,080,000 Class B Preference shares…..

3,080,000

Cash ($840,000 + $5,542,000)…

6,382,000 Share capital……………………

840,000 Additional Paid-in Capital Ordinary……………………..

5,542,000 Req. 3 Carved Outdoor Furniture would have to pay all preference dividends in arrears and pay the current year’s dividends before paying dividends to ordinary shareholders because the preference shares are cumulative.

Chapter 10

Shareholders’ Equity

(continued) P 10-79A Req. 4 Carved must pay preference dividends of $379,925 each year to avoid having preference dividends in arrears. _____ Computation: Class A Preference: 79,000 x $35 × 0.065 = $179,725 Class B Preference: 88,000 x $35 × 0.065 = 200,200 Total preference dividends………………….. $379,925

Req. 5

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X7 Feb. 28 Retained Earnings……………………….. 860,000 Dividends Payable, Class A Preference ($2,765,000 ×.065 × 2) 359,450 400,400 Dividends Payable, Class B 100,150 Preference ($3,080,000 ×.065 × 2) Dividends Payable, Ordinary ($860,000 − $359,450 − $400,400).

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) P 10-80A Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Feb. 13 Cash (10,800 × $6)………………………….

Share capital (10,800 × $4)…………....

Paid-in capital in excess of par Ordinary………………………………

64,800

7 Retained earnings…………………………

420

Jun.

CREDIT

43,200 10,800

Dividends payable (600 shares × $0.70)……………………

24 Dividends payable………………………...

Cash………………………………………

Aug.

9 Retained earnings (23,800 shares × 0.10 × $7)………………

Share capital 23,800 × 0.10 × $4)……

Paid-in capital in excess of par Ordinary………………………………

Oct. 26 Treasury shares (1,000 × $8)………………

Cash………………………………………

Nov. 20 Cash (400 × $13)…………………………...

Treasury shares, (400 × 8)……………

Paid-in capital from treasury

420 420 420

16,660 9,520 7,140 8,000 8,000 5,200 3,200 2,000

shares transactions………………..

Chapter 10

Shareholders’ Equity

(continued) P 10-80A Req. 2 Shareholders’ equity: $.70 cumulative preference shares, $5 par, 600 shares issued………………………………………………………….

Share capital, $4 par, 26,180 shares issued ($52,000 + $43,200 + $9,520)……………………………

Paid-in capital in excess of par - ordinary ($35,600 + $21,600 + $7,140)……………………………

Paid-in capital from treasury shares transactions……

Retained earnings ($50,000 + $56,000 − $420 − $16,660)………………....

Less: Treasury shares, 600 shares at cost ($8,000 − $3,200)……………………………………

Total shareholders’ equity……………………………..

Financial Accounting: IFRS 12/e Solutions Manual

$ 3,000 104,720 64,340 2,000 88,920

(4,800) $258,180

(20-30 min.) P 10-81A ASSETS

= LIABILITIES +

SHAREHOLDERS’ EQUITY

Feb.

3

+ 890,000

=

0

Mar.

19

− 130,000

=

0

Apr.

24

+ 85,800

=

0

0

=

+ 14,800

14,800 = = 0

− 14,800

+

0

0

+

0

Chapter 10

Shareholders’ Equity

Aug. 15 Sept.

1

Nov.

22

−

+

+ 890,000

+

− 130,000 + 85,800 −

14,800

(40-50 min.) P 10-82 Req. 1 Pelican Designers, Inc. Balance Sheet December 31, 20X6 ASSETS LIABILITIES Current: Current: Cash…………………... $ 55,000 Accounts payable………... $136,000 Accounts rec., net…..

34,000 Dividends payable………..

6,000 Inventory……………...

93,000 Accrued liabilities………...

24,000 Prepaid expenses.…..

13,000 Total current Total current liabilities….……………. 166,000 99,000 assets…………….. 195,000 Long-term note payable……

265,000 Total liabilities……………….

Property, plant, and equipment, net……… 364,000 SHAREHOLDERS’ EQUITY Intangible assets: Preference shares, $.50, Goodwill………………

13,000 no-par, 11,000 shares Trademarks, net…….

4,000 authorized and issued…... $ 29,700 Share capital, $2 par, 600,000 shares authorized, 116,000 shares issued……………... 232,000 Paid-in capital in excess of par — ordinary…………

20,000 Retained earnings…………..

53,300* Less: Treasury shares, ordinary, 21,000 shares at cost……………………….

(24,000) Total shareholders’ equity... 311,000 Total liabilities and Total assets……………. $576,000 shareholders’ equity…….. $576,000 *Retained earnings = Total assets − Total liabilities − Total paid-in capital = $576,000 − $265,000 − $29,700 − $232,000 − $20,000 − (− $24,000) = $53,300 Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 10-83A

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT CREDIT

Millions Retained earnings……………………………….. 1,850 Dividends payable…………………………….

1,850 Dividends payable……………………………….. 1,850 Cash……………………………………………..

1,850

Retained earnings……………………………….. 1,850 Cash……………………………………………..

1,850

Cash………………………………………………… 1,243 Share capital……………………………….....

1,243

OR

Cash…………………………………………………

Long-term notes payable…………………...

52 52

Treasury shares………………………………….. 3,060 Cash……………………………………………..

Long-term notes payable……………………….

Cash……………………………………………..

Chapter 10

3,060

165

Shareholders’ Equity

165

Problems Group B (30-45 min.) P 10-84B Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

Jan. 6 Organization Expense……………………………

DEBIT

CREDIT

7,500

Share capital (500 × 8)………………….......

4,000

Paid-in Capital in Excess of Par - Ordinary……………………………...

3,500

Issued shares to promoter for assistance in issuing share capital.

9 Cash (19,000 × €15)……………………………… 285,000 Share capital (19,000 × €8)………………….

152,000

Paid-in Capital in Excess of Par - Ordinary……………………………...

133,000

Issued ordinary shares for cash.

10 Patent………………………………………………. 12,000 Preference shares……………………….……

12,000

Issued preference shares to acquire a patent.

26 Cash………………………………………………… 21,000 Share capital (1,400 × €8)……………………

11,200

Paid-in Capital in Excess of Par - Ordinary……………………………...

Issued share capital for cash.

Financial Accounting: IFRS 12/e Solutions Manual

9,800

(continued) P 10-84B Req. 2 Laurel Canoes, Inc. Balance Sheet (partial) January 31, 20X6 Shareholders’ equity: Preference shares, no-par, 8,000 shares authorized, 600 shares issued………………………………………..

€ 12,000

Share capital, €8 par, 120,000 shares authorized, 20,900 shares issued*…………............... 167,200 Paid-in capital in excess of par - ordinary……………… 146,300** Retained earnings……………………………………………

56,000 Total shareholders’ equity……………………………... €381,500

_____ *500 + 19,000 + 1,400 = 20,900 shares **3,500 + 133,000 + 9,800 = 146,300

Chapter 10

Shareholders’ Equity

(10-15 min.) P 10-85B Harry Corp.

Balance Sheet (partial) December 31, 20X6 Shareholders’ equity: Preference shares, 8%, 120 € par, 5,000 shares authorized, 1,000 shares issued……………………………………...

€120,000

Share capital, no-par, 400,000 shares authorized, 80,000 shares issued…………………………………….

520,000

Retained earnings……………………………………………

Total shareholders’ equity……………………………...

89,800

€ 729,800

_____ Computations: Preference shares: 1,000 × €120 = €120,000 Share capital: Balance given as €520,000 Retained earnings: 72,000 + 93,000 − (120,000 × 0.08 x 2) – (80,000 x 0.70) = 89,800

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 10-86B Share capital [(1,000,000 + 790,000) × $3] + $429,600.

$ 5,799,600

Additional paid-in capital 1,000,000 × (€6.00 − €3.00)……………………………….

790,000 × (€9.00 − €3.00)……………………………….

76,000 × (€8 − €7.25)……………………………………

From shares dividend………………………………….

3,000,000 4,740,000 57,000 8,59,200

Retained earnings (€2,500,000 – 1,600,000 − €1,288,800).

(388,800)

Treasury shares [(124,000 − 76,000) × 7.25]……………

(348,000)

Total shareholders’ equity……………………………….

€13,719,000

Total assets……………………………………………..

€28,600,000

− Total liabilities………………………………………….. =

(14,881,000)

Total shareholders’ equity……………………………

€13,719,000

Chapter 10

Shareholders’ Equity

(25-35 min.) P 10-87B Req. 1 Rustic Outdoor Furniture Company has Class A cumulative preference shares, Class B cumulative preference shares, and ordinary shares outstanding.

Req. 2

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Cash……………………………….

Class A Preference shares..

1,540,000

Cash……………………………….

Class B Preference shares..

1,960,000

Cash (€960,000 + €5,328,000) Share capital…………………

Additional Paid-in Capital Ordinary……………………

6,288,000

CREDIT

1,540,000

1,960,000

960,000 5,328,000

Req. 3 Rustic Outdoor Furniture would have to pay all preference dividends in arrears before paying dividends to ordinary shareholders because the preference shares are cumulative.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 10-87B Req. 4 Rustic must pay preference dividends of €140,000 each year to avoid having preference dividends in arrears. _____ Computation: Class A Preference: 77,000 x $20 × 0.04 = € 61,600 Class B Preference: 98,000 x $20 × 0.04 = 78,400 Total preference dividends……………….. €140,000

Req. 5

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

20X7 Feb. 28 Retained Earnings……………………….. 840,000 Dividends Payable, Class A Preference (€1,540,000 × .04 × 2) 123,200 156,800 Dividends Payable, Class B 560,000 Preference (€1,960,000 × .04 × 2) Dividends Payable, Ordinary (€840,000 −€$123,200 − $156,800)

Chapter 10

Shareholders’ Equity

(15-20 min.) P 10-88B Req. 1

Journal DATE

Feb.

June

ACCOUNT TITLES AND EXPLANATION

13 Cash (10,400 × 7)……………………………. 72,800 Share capital (10,400 × 2)…………….

Paid-in capital in excess of par Ordinary………………………………...

7 Retained earnings…………………………..

Dividends payable (400 shares × 0.80)……………………...

24 Dividends payable…………………………..

Cash………………………………………...

Aug.

Oct.

Nov.

DEBIT

CREDIT

20,800 52,000

640 640 640 640

9 Retained earnings (23,000 shares × 0.20 × 8)………………… 36,800 Share capital (23,000 × 0.20 × 2)……..

Paid-in capital in excess of par Ordinary………………………………...

27,600

26 Treasury shares, Ordinary (1,800 × 9)....... 16,200 Cash………………………………………..

16,200

20 Cash (1,200 × 14)……………………………. 16,800 Treasury shares, Ordinary (1,200 × 9)..

Paid-in Capital from Treasury Shares Transactions…………………...........

Financial Accounting: IFRS 12/e Solutions Manual

9,200

10,800 6,000

(continued) P 10-88B Req. 2 Shareholders’ equity: €0.80 cumulative preference shares, €15 par, 800 shares issued………………………………………. € 12,000 Share capital, €2 par, 27,600 shares issued (€25,200 + 20,800 + 9,200)……...............................

55,200 Paid-in capital in excess of par – ordinary 114,400 (€34,800 + 52,000 + 27,600)………………………….

6,000 Paid-in capital from treasury shares transactions…..

56,560 Retained earnings (€46,000 + 48,000 − 640 − $36,800) Less: Treasury shares, ordinary, 600 shares at cost (16,200 – 10,800)………………………….

(5,400) Total shareholders’ equity…………………………….. €238,760

Chapter 10

Shareholders’ Equity

(20-30 min.) P 10-89B

Feb.

4

Mar.

20

SHAREHOLDERS’ ASSETS = LIABILITIES + EQUITY +720,000 = 0 + +720,000 -96,800 = 0 -96,800

Apr.

25

+55,800

=

0

Aug.

17

0

=

+24,000

Sept.

8

- 24,000

=

-24,000

+

0

Nov.

28

0

=

0

+

0

Financial Accounting: IFRS 12/e Solutions Manual

+

+55,800 -24,000

(40-50 min.) P 10-90B Req. 1 Eagle Designers, Inc. Balance Sheet December 31, 20X6 ASSETS LIABILITIES Current: Current: Cash……………………. € 43,000 Accounts payable............….. € 133,000 Accounts receivable, Dividends payable...........…..

12,000 Accrued liabilities............…..

27,000 net…………………….

22,000 94,000 16,000 Long-term note payable.....….. Total current liabilities.….. 172,000 Inventory……………….

96,000 Prepaid expenses…….

Total current assets. 175,000 Total liabilities....................…... 268,000 SHAREHOLDERS’ EQUITY Property, plant, and equipment, net……….. 359,000 Preference shares, $.50 Intangible assets: no- par, 12,000 Trademarks, net……… 10,000 shares authorized, Goodwill………………..

11,000 12,000 shares issued.........… € 32,400 Share capital, $2 par, 300,000 shares authorized, 117,000 shares issued...................….. 234,000

Total assets…………….. 555,000 €

Additional paid-in capital — ordinary...........…..

0 Retained earnings...............…..

42,600* Less: Treasury shares, ordinary 19,000 shares at cost..........… ( 22,000) Total shareholders’ equity....... 287,000 Total liabilities and shareholders’ equity........….. 555,000 €

_____ *Retained earnings

= Total assets − Total liabilities − Total paid-in capital = 555,000 −268,000 − 32,400 − 234,000 − (− 22,000) = 42,600

Chapter 10

Shareholders’ Equity

(20-30 min.) P 10-91B

Journal ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Retained earnings…………………………… 1,880 Dividends payable………………………..

1,880

Dividends payable…………………………… 1,880 Cash…………………………………………

1,880

Retained earnings…………………………… 1,880 Cash…………………………………………

1,880

Cash……………………………………………. 1,236 Share capital………………………………

1,236

OR

Cash……………………………………………

Long-term notes payable……………….

59 59

Treasury shares……………………………… 3,084 Cash…………………………………………

Long-term notes payable…………………..

Cash ………………………………………..

Financial Accounting: IFRS 12/e Solutions Manual

3,084

1226, 100 1262 ,100

Decision Cases (30-45 min.) Decision Case 1 Req. 1

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Santiago, Capital…………………………

25,000 Perez, Capital……………………………… 25,000 Share capital……………………………

50,000 To incorporate the business, close the capital accounts of Santiago and Perez, and issue share capital to them.

Req. 2

Journal DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Plan 1: Cash…………………………………………. 100,000 Preference shares (1,000 × $100)……

100,000 To issue preference shares to outside investors.

Plan 2: Cash…………………………………………. 60,000 Preference shares……………………..

To issue preference shares to outside investors.

Cash…………………………………………. 50,000 Share capital……………………………

To issue ordinary shares to outside investors.

Chapter 10

60,000

50,000

Shareholders’ Equity

(continued) Decision Case 1 Req. 3 Plan 1: Shareholders’ Equity Preference shares, 6%, $100 par, nonvoting, 10,000 shares authorized, 1,000 shares issued.

$ 100,000

Share capital, $1 par, 500,000 shares authorized, 50,000 shares issued………………………………..

50,000

Retained earnings ($120,000 − $30,000)…………….

90,000

Total shareholders’ equity…………………………

$240,000

Plan 2: Shareholders’ Equity Preference shares, $5, no-par, 5,000 shares authorized, 600 shares issued……………………………………

$ 60,000

Share capital, $1 par, 500,000 shares authorized, 100,000 shares issued………………………………

100,000

Retained earnings ($120,000 − $30,000)…………….

90,000

Total shareholders’ equity…………………………

$250,000

Financial Accounting: IFRS 12/e Solutions Manual

(continued) Decision Case 1 Req. 4 Plan 1 appears to fit the plans of Santiago and Perez better than Plan 2 because: • Their primary goal is to raise as much capital as possible without giving up control of the business. Under Plan 2, the outside shareholders would have 80,000 votes [50,000 ordinary votes + 30,000 preference votes (600 shares × 50 votes per share)]. Santiago and Perez would lose control of the business because they would have only 50,000 votes.

• Under Plan 1 preference shareholders have no votes.

Santiago and Perez would have complete control since they would hold all the voting shares.

• Plan 2 would raise only $10,000 more than Plan 1 whilst giving up more than 50% of the voting control in the company.

Chapter 10

Shareholders’ Equity

(15-20 min.) Decision Case 2 Req. 1 The shares dividend does not affect your proportionate ownership in the company because all the shareholders receive 10% new shares. All shareholders are in the same relative position after the dividends as they were before.

Req. 2 Cash dividends received last year were $8,250 (10,000 shares × $0.825 per share). Cash dividends after the share dividend will be $8,250 (11,000 shares × $0.75 per share). Thus, there is no change in cash dividends.

Req. 3 You incur no loss in value because the market value of your investment after the shares dividend — $610,500 (11,000 shares × $55.50) — is the same as it was before the dividend — 10,000 shares × $61.05. The increase in the number of shares you own at $55.50 per share offsets the decrease in the market price per share.

Req. 4 If the company continues paying the $0.825 cash dividend per share, after issuing the 10% shares dividend, total cash Financial Accounting: IFRS 12/e Solutions Manual

dividends will increase. (Your annual dividends will rise to $9,075 [11,000 shares × $0.825].) The increase in dividends might attract new investors, who view the increased cash dividends as an indication that the business is operating quite well. This investor interest may result in an increase in the market value of UPS shares, or at least keep the value higher than it would be without the increase in cash dividends.

Chapter 10

Shareholders’ Equity

Ethical Issue 1 Req. 1 The ethical issue is, “What is the correct amount at which to record and disclose the value of the franchise on Campbell’s balance sheet?”

Req. 2 and Req.3 The stakeholders in the transaction include Campbell, the potential buyers of the franchises, and potential lenders who loan them the money to buy the franchises in the future.

Campbell and the corporation are effectively the same entity.

The third party serves no purpose other than as an accomplice to overvalue the franchise.

Analysis of the decision to overvalue the franchise: (a) Economic:

Campbell is better off temporarily, unless

potential buyers sue him for damages, in which case he could be worse off.

Potential buyers of the individual-language

franchises can be harmed. Campbell’s balance sheet overstates his assets. If outsiders believe his balance sheet, they may be induced to pay Campbell more than the individual-language franchises Lenders can are also worth. be harmed by loaning money to Campbell on more favorable terms than his financial position warrants.

Financial Accounting: IFRS 12/e Solutions Manual

(b)potential If Legal: buyers are damaged by Campbell’s actions, they might sue him for recovery of those damages. In this situation, the public is also defrauded if Campbell amortizes the cost of the franchise for income tax purposes. Basing amortization on $500,000 overstates tax deductions and understates Campbell’s income. As a result, his tax payments are lower than they should be. This could expose Campbell to future investigations from the IRS.

(c) Ethical: This type of scheme is harmful to everyone involved.

It is not truthful, and it violates the rights of individuals and business entities to full and complete disclosure of the proper valuation It is an example of a business. of the type of transaction that meets the letter of the law without meeting the spirit of the law.

Req. 4 The franchise should be valued at its true value, which is $50,000. Campbell should focus his time and energy on ways to make the business profitable in the long run in other ways, rather than focusing on turning a quick buck and playing legal games that could well get him into trouble with a lot of other parties.

Note: One of the authors experienced this actual situation in his first job after college.

Chapter 10

Shareholders’ Equity

Ethical Issue 2 Req. 1 The ethical issue is whether the company acted properly in purchasing their shares on the open market based on inside information known only to them.

Req. 2 and Req. 3 Stakeholders include the company, its officers and directors, the shareholders from whom the shares were purchased, and the general public.

(a) Economic analysis: The company, and likely its officers and directors, benefitted temporarily at the other shareholders’ expense. The managers purchased the shares at $6 and could sell it for $27. Thus, the managers enriched shareholders who held on to their shares at the expense of the shareholders who sold company shares at $6.

Had the shareholders known of the oil discovery, those selling shareholders probably would have held their St. Genevieve shares. Shareholders wanting to sell company shares would have demanded a price based on all relevant information about the company, including news of the discovery.

Financial Accounting: IFRS 12/e Solutions Manual

(b) Legal analysis: If St. Genevieve is a public company, their actions are illegal.

The Securities Exchange Act of 1934

prohibits insider trading. It imposes stiff penalties for unethical conduct of this type. The SEC will prosecute them for insider trading, probably fine them, and possibly send the officers and directors In addition, responsible actions for such theas decision these tohave prison. been the basis for numerous civil shareholder lawsuits, to recover monetary damages suffered because of the actions of the company.

(c) Ethical The managers analysis: clearly did not behave ethically, violating the rights of existing shareholders as well as the good faith of the investing public. Managers defrauded the shareholders by withholding important information prior to buying company shares.

Req. 4 The correct way to handle this transaction is never to have proposed it in the first place. However, if it did happen, the disclosure principle is relevant to the situation. The transaction should be disclosed in the footnotes to the financial statements, and if potential liability to the SEC or others is probable and can be estimated, a loss be disclosed in the income statement and a liability should be accrued on the balance sheet.

Chapter 10

Shareholders’ Equity

Focus on Financials: Nestlé (30-40 min.)

1. Nestlé has a single class of shares. As of December 31, 2021, Nestlé has share capital of total value of CHF 288 million.

2. According to Note 17, Nestlé purchased 67.1 million treasury shares for the year ended December 31, 2020.

From the Consolidated Cash Flow Statement, the company spent CHF 6,814 million to purchase these shares.

Therefore, each share should cost the company CHF 101.55.

3. The company earned and reported net income of CHF 16,905 million (after deducting for portion earned by minority interests). This amount appears in the Consolidated Income Statement and is booked under retained earnings in the balance sheet. Additionally, the account is also affected by dividends of CHF 7,681 million that were paid out for the year ending December 31, 2021.

This sum would appear under the Statement of Consolidated Cash Flows as well.

4.

DR. Income Summaries 16,905 CR. Retained Earnings 16,905 DR. Retained Earnings 7,681 7,681 CR. Dividends Payable DR. Dividends Payable 7,681 7,681 CR. Cash DR Share Capital 6,772 CR Treasury Shares 6,772 The T accounts are as follows:

Financial Accounting: IFRS 12/e Solutions Manual

Reta ined Earnings (in CHF million) Dr Cr 76,812 Beg Bal Profit for the 16,905 year Other comprehensive 7,681 2,718 income Dividends Equity Movement of compensation treasury plans shares 80 72 Changes in noncontrolling interests 382 Reduction in share capital 6,772 Other movements 229 81,363 End Bal

Chapter 10

Shareholders’ Equity

5. As the result of payment of dividend, shareholders’ equity has decreased by CHF 7,681 million. On the other hand, due to cancellation of treasury shares, shareholders’ equity has decreased by CHF 6,772 million.

Thus, because of the two transactions, shareholders’ equity has decreased by CHF (7,681 + 6,772) million = CHF 14,453 million.

Financial Accounting: IFRS 12/e Solutions Manual

Group Project in Ethics (1-3 hours, including discussion) Req. 1 Stakeholders in a corporation vary widely with the nature of the corporation. In the case of the corporations included in this case (GM, Chrysler, AIG, Citibank, Bank of America) because of their size and the scope of their operations, stakeholders include the shareholders, employees,

bondholders,

other

creditors,

suppliers, customers, local, regional, national and international economies, federal, state and local governments—just about everyone in the broadest sense of the term.

Req. 2 Student opinions on this will vary. It might be interesting to divide the class into two teams and conduct a debate, each team taking a side.

Chapter 10

Shareholders’ Equity

Req. 3 The measures of “deficiency” can vary, but usually are: excessively high debt ratios, continuing and increasing deficits in retained earnings, debt covenants that are being violated, labor troubles, litigation. If the company is not too far gone, in some cases, downsizing helps by cutting costs to be more in line with revenues. Students’ teams might brainstorm this question as well.

Req. 4 Student opinions on this will vary.

Req. 5 Student opinions on this will vary and should be related to the opinions they express in requirement 4. This question has economic, political and social ramifications. Some would say that government taking equity positions in private businesses violates principles of free market economics and tends toward socialism. If the equity positions were carefully crafted and sufficiently restricted to appear to have more debt than equity features, perhaps this could be justified in some people’s minds.

Financial Accounting: IFRS 12/e Solutions Manual

Chapter 11 The Statement of Cash Flows Short Exercises (10 min.) S 11-1 The statement of cash flows helps investors and creditors: a. Predict future cash flows by reporting past cash receipts and payments, which are reasonably good predictors of future cash receipts and payments. The statement of cash flows reports on the entity’s ability to distribute dividends and pay interest and return principal on loans.

b. Evaluate management decisions by reporting whether the entity has the ability to generate funds from operations, to raise funding from shareholders and creditors and how managers used cash generated to run the business.

Chapter 11 The Statement of Cash Flows

(10-15 min.) S 11-2

DATE:

_______________

TO:

Managers of U.S. Fondue Inc.

FROM:

[Student Name]

SUBJECT: Purposes of the statement of cash flows The statement of cash flows is designed to help predict the future cash flows of a business. The statement of cash flows measures past cash flows, which are a reasonably good predictor of future cash flows. Net income is an important measure of management performance, but it takes cash to pay the bills. Also, a manager’s performance should be evaluated on how well he or she uses cash. This information is given in the statement of cash flows.

In evaluating the ability to repay a loan, a creditor examines the statement of cash flows to learn how the borrower has gained and spent cash. As U.S. Fondue’s situation indicates, income may increase while cash decreases. Therefore, the statement of cash flows should be used in conjunction with the income statement and the balance sheet in evaluating a company.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

S 11-3 Three things that could cause operating cash flows to be positive (under the indirect method) are: 1.

Increase in net income

2.

Decreases rather than increases in non-cash current

assets 3.

Increases rather than decreases in current liabilities

4.

Depreciation and amortization

Students need to identify 3 items.

Chapter 11 The Statement of Cash Flows

(15-30 min.) S 11-4

DATE:

_______________

TO:

Managers of Tranquility Inns

FROM:

[Student Name]

SUBJECT: Assessment of 20X6 and Outlook for the Future 20X6 was not a good year. Most of the increase in net income resulted from the exceptional gain from a lawsuit won against a competitor, which means that normal operations were not very profitable. This is confirmed by the increase in receivables, which hints that collections are lagging.

The cash-flow data paint a similar picture. Operating activities used cash, which is bad news. Over the long run, operations should provide the bulk of the cash if the business expects to succeed.

During 20X6, investing activities showed a large cash inflow, indicating a shrinking pool of fixed assets that could be crucial to maintaining daily operations. The insurance recovery helped investing activities produce a net cash inflow. Ordinarily, investing activities should produce net cash outflows as a continual renewal and replacement of operational assets.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) S 11-4 Growth is usually indicated by investments in new assets, but during 20X6 net cash flows from investing activities was positive, which means that net investments were negative.

Although the net cash flow provided by investing activities may be temporary, it does not reflect especially well on the company. It means that, in part at least, the company is maintaining its cash position by liquidating fixed assets. This is a bad sign.

Financing activities provided a net cash inflow, which is normal. However, coupled with the net cash used for operations and the net cash provided by investing activities, the additional debt created in 20X6 may be hard to pay back.

Unless next year turns out to be much better than 20X6, the outlook for the company is not bright.

Student responses may vary. The key conclusion is that 20X6 was not a good year, and the outlook is not bright.

Chapter 11 The Statement of Cash Flows

(5-10 min.) S 11-5

Cash flows from operating activities: Net income……………………………………………….. $26,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………………... 18,000 Loss on sale of land………………………………….

6,000 6,000 Decrease in accounts receivable, inventory, 24,000 and prepaid expenses ($118,000 − $112,000)… $80,000 Increase in current liabilities ($66,000 − $42,000).

Net cash provided by operating activities:…

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) S 11-6 O− a. Decrease in accrued liabilities F b. Issuance of shares O− c. Gain on sale of building O+ d. Loss on sale of land O+ e. Depreciation expense O− f.

Increase in inventory O+ g. Decrease in accounts Receivable

O+ h. Increase in accounts payable I i. Purchase of equipment O+ j. Decrease in prepaid expense N k. Collection of cash from customers O+ l.

Net income N m. Retained earnings F n. Payment of dividends

(10 min.) S 11-7 Samuel Corporation Statement of Cash Flows (partial) Year ended June 30, 20X6 Cash flows from operating activities: Net income……………………………………….. $ 134,000* Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………... $ 24,000 Decrease in current assets other than cash…………………………………………. 72,000 Increase in current liabilities………………

16,000 112,000 $ 246,000 Net cash provided by operating activities…..

_____ *$460,000 − $234,000 − $68,000 − $24,000 = $134,000

Chapter 11 The Statement of Cash Flows

(15 min.) S 11-8 Samuel Corporation Statement of Cash Flows Year ended June 30, 20X6 Cash flows from operating activities: Net income……………………………………….. $ 134,000* Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………... $ 24,000 Increase in current assets other than cash………………………………………….

72,000 Decrease in current liabilities………………

16,000 112,000 246,000 Net cash provided by operating activities…..

Cash flows from investing activities: Purchase of equipment…………………………

Proceeds from sale of land…………………….

Net cash provided by investing activities…..

$(88,000) 58,000 (30,000)

Cash flows from financing activities: Proceeds from issuance of ordinary shares.. $ 54,000 Payment of note payable………………………. (64,000) Payment of dividends………………………….. (11,400) Purchase of treasury shares………………….. Net (14,000) (35,400) cash used for financing activities………. Net $ 180,600 increase in cash………………………………..

_____ *$230,000 − $117,000 − $34,000 − $12,000 = $67,000

Financial Accounting: IFRS 12/e Solutions Manual

(10 min) S 11-9 a. Acquisitions of PPE = $162,000, as follows: PPE, net Beg. bal. $376,000 +

Book value of End. + Acquisitions − Depreciation − assets sold = bal. − $0 X − $ 80,000 = $458,000 X = $ 458,000 − $376,000 + $80,000 X = $ 162,000

Beg. bal.

Acquisitions End. bal.

PPE, net 376,000 162,000 Depreciation 458,000

80,000

b. Proceeds from the sale of long-term investments = $50,000, as follow: Long-term investments Beg. bal. $158,000

+ +

Purchases 0 X X

− −

Book value of investments sold X

= =

End. bal. $108,000

= $158,000 − $108,000 = $50,000

With no gain or loss, proceeds from the sale must be the same as the book value of the investments sold, $50,000.

Beg. bal.

End. bal.

Long-Term Investments 158,000 Book value of investments sold 108,000

50,000

Chapter 11 The Statement of Cash Flows

(15 min.) S 11-10 a. New borrowing on long-term notes payable = $30,000 ($138,000 − $108,000) This is clear from the increase in long-term notes payable. b. Issuance of ordinary shares = $20,000 ($96,000 − $76,000) This is clear from the increase in ordinary shares. c. Payment of dividends (same as amount of dividends declared) Beginning retained earnings

+

= $372,000, as follows:

Net income

−

Dividend declarations

Ending =

$474,000

retained earnings $482,000

+

$380,000

−

X

=

=

$474,000 + $380,000 − $482,000

=

$372,000

X X

Retained Earnings Dividend declarations Beg. bal. (same amount paid) 372,000 Net income End. bal.

Financial Accounting: IFRS 12/e Solutions Manual

474,000 380,000 482,000

(15 min.)S 11-11 a. Collections from customers = $789,000, as follows: Collections from customers

=

Sales Revenue − Increase in Accounts Receivable

= $1,600,000 − $22,000 ($108,000 − $86,000) = $1,578,000 Accounts Receivable 86,000 1,600,000 Collections 108,000

Beg. Bal. Sales End. Bal.

1,578,000

b. Payments for inventory = $646,000, as follows: Payments for = inventory

Cost of Goods Sold

= $680,000

−

Decrease in inventory −

Increase in Accounts Payable

− $24,000 $10,000 ($178,000 − $154,000) ($96,000 − $86,000)

= $646,000 Beg. bal.

Purchases End. bal.

Payments for inventory

Inventory 178,000 656,000Cost of goods sold 154,000 Accounts Payable Beg. bal.

646,000Purchases End. bal.

680,000

86,000 656,000 96,000

Chapter 11 The Statement of Cash Flows

(10 min.) S 11-12

a. Payments to employees = $96,000, as follows: Payments to employees

Salary expense

= =

$100,000

Increase in Salary Payable

−

$4,000 ($52,000 − $48,000)

$96,000

=

Payments to employees

−

Salary Payable Beg. bal.

96,000 Salary expense End. bal.

48,000 100,000 52,000

b. Payments for other expenses = $368,000, as follows: Payments of other expenses

=

Other expenses

+

=

$360,000

+

Increase in prepaid expenses $2,000

+

+

Decrease in accrued liabilities $6,000

($12,000 − $10,000) ($38,000 − $32,000) =

$368,000

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) S 11-13

Horse Heaven Farm Statement of Cash Flows Year 20X6 Cash flows from operating activities: Collections from customers………………… $ 480,000 Payments to suppliers and employees…… (300,000) Net cash provided by operating activities..

$ 180,000

Cash flows from investing activities: Purchase of equipment……………………… $(138,000) Net cash used for investing activities…….

(138,000)

Cash flows from financing activities: Issued note payable to borrow money……. $ 25,000 Payment of dividends………………………...

(47,000) Net cash used for financing activities……..

(22,000) Net increase in cash…………………………... $ 20,000 Cash balance, beginning………………………..

180,000 Cash balance, ending…………………………… $ 200,000

Free Cash Flow = net cash provided by operating activities – cash payments for investments in PPE = $180,000 - $138,000 = $42,000 Cash realization ratio = Ratio of CFO/Net Profit = $180,000/ 270,000* = 0.67

*Net Profit = $600,000 – 330,000 = $270,000

Chapter 11 The Statement of Cash Flows

(5 min.) S 11-14

Middleton Golf Club, Inc. Statement of Cash Flows (partial) Year ended September 30, 20X6 Cash flows from operating activities: Collections from customers………………… $204,000 Payments to suppliers………………………..

(90,000) Payments to employees……………………… (75,000) Payment of income tax………………………. (15,000) Net cash provided by operating activities... $24,000

Financial Accounting: IFRS 12/e Solutions Manual

(15 min.) S 11-15

Middleton Golf Club, Inc. Statement of Cash Flows Year ended June 30, 20X5 Cash flows from operating activities: Collections from customers…………………….. $204,000 Payments to suppliers…………………………… (90,000) Payments to employees…………………………. (75,000) Payment of income tax…………………………... (15,000) Net cash provided by operating activities……. $ 24,000 Cash flows from investing activities: Purchase of equipment………………………….. $ (43,000) Proceeds from sale of land……………………… 62,000 19,000 Net cash provided by investing activities…….

Cash flows from financing activities: Proceeds from issuance of shares……………. $ 18,000 Payment of note payable………………………… (16,000) Payment of dividends…………………………….

(8,000) Purchase of treasury shares…………………….

(5,800) Net cash used for financing activities…………

(11,800) Net increase in cash…………………………………. $ 31,200

Free Cash Flow = net cash provided by operating activities – cash payments for investments in PPE = $24,000 - $43,000 = ($19,000) Cash realization ratio = Ratio of CFO/Net Profit = $24,000/ 102,000* = 0.235

*Net Profit = $214,000 – 105,000 – 7,000 = $102,000 Chapter 11 The Statement of Cash Flows

Exercises Group A ( (10-15 min.) E 11-16A O+ a.

Net income

I+

k.

F–

Payment of long-term debt

F+

l.

Issuance of long-term note payable to borrow cash

O-

m.

Increase in prepaid expenses

F–

n.

Payment of cash dividend

O+

o.

O+

p.

NIF

q.

Loss on the sale of equipment Decrease in merchandise inventory Acquisition of equipment by issuance of note payable

O+

r.

O+

s.

b.

N

c.

Accrual of salary expense

I+

d.

Cash sale of land

I– I– F–

e.

f.

Purchase of long-term investment Acquisition of building by cash payment Purchase of treasury shares

g.

F+

h.

O–

i.

O+

j.

Issuance of shares for cash Decrease in accrued liabilities Depreciation of equipment

Financial Accounting: IFRS 12/e Solutions Manual

Sale of long-term investment

Increase in accounts payable Amortization of intangible assets

(5-10 min.) E 11-17A

a. b. c. d. e. f.

Operating

g.

Operating

Financing

Financing

h.

Investing

Investing

Financing

i. j. Operating

Investing

Financing

k.

Operating

l.

Investing

m.

Noncash investing and financing

Chapter 11 The Statement of Cash Flows

(10-15 min.) E 11-18A

Cash flows from operating activities: Net income…………………………………. $ 78,000 Adjustments to reconcile net income to net cash used for operating activities: Depreciation…………………………….. $ 36,000 Loss on sale of land……………………

46,000 (50,000) Increase in current assets other (38,000) than cash………………………………

Decrease in current liabilities………...

(6,000) Net cash provided by operating activities…………………………………….. $72,000

Evaluation: Operating cash flow is positive, but relatively weak, as shown by the fact that net cash provided by operating activities was less than net income.

Normally, cash provided by operations is more than net income because of the depreciation add-back.

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) E 11-19A

Cash flows from operating activities: Net income…………………………………….. $10,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………. $ 2,500 Increase in accounts receivable……... (50,000) Increase in inventory……………………. (51,000) Increase in accounts payable…………. 55,500 Decrease in accrued liabilities………… (3,000) (46,000) Net cash used by operating activities………………………………………… $(36,000)

Nutritious seems to be having a very difficult time collecting receivables and selling its inventory. There are large build-ups in both Accounts Receivable and Inventory. All of the inventory buildup is being financed by those companies supplying the inventory as reflected in the growth of accounts payable. While Nutritious is earning net income, cash flow from operations is negative.

Chapter 11 The Statement of Cash Flows

(20-30 min.) E 11-20A Req. 1 Newbury Travel Products, Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income…………………………………………... $ 68,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ 26,000 Decrease in accounts receivable……………. 17,000 Decrease in inventory………………………….. 61,000 Increase in prepaid expenses…………………

(700) Increase in accounts payable…………………

11,000 Decrease in accrued liabilities……………….. (81,000) 33,300 Net cash provided by operating activities….

102,200 Cash flows from investing activities: Acquisition of PPE………………………………… $(170,000) Proceeds from sale of land……………………….. 28,000 Net cash used for investing activities……….

(142,000)

Cash flows from financing activities: Proceeds from issuance of shares……………… $ 90,000 Payment of long-term note payable…………….. (18,000) Payment of dividends …………………………….. (13,000) Net cash provided by financing activities…..

Net increase in cash……………………………………

Cash balance, December 31, 20X5…………………..

Cash balance, December 31, 20X6…………………..

59,000 $ 19,200 10,800 $ 30,000

Noncash investing and financing activities: Acquisition of PPE by issuing note payable

Financial Accounting: IFRS 12/e Solutions Manual

$ 52,000

(continued) E 11-20A Req. 2 Free Cash Flow = net cash provided by operating activities – cash payments for investments in PPE = $102,200 - $170,000 = ($67,800) Cash realization ratio = Ratio of CFO/Net Profit = $102,200/ 68,900 = 1.48 Evaluation: Newbury’s cash flows look strong. Operations are the main source of cash. The company is investing in new PPE without having to borrow. It was able to issue shares, pay dividends, and pay off a longterm note payable — both financing transactions.

The cash realization ratio is relatively strong as well. The free cash flow is negative due to the investment in new PPE. Overall, these signs are favorable.

Chapter 11 The Statement of Cash Flows

(5-10 min.) E 11-21A Huey

-

Issuing shares generated the cash to acquire PPE. Operations used cash due to an increase in net current assets while in cases B and C operations provided cash.

Dewey - A combination of operations and issuing shares generated most of the cash for acquisition of PPE. Operations provided more cash than did cases A or C. The large Louie - sale of PPE generated the cash needed to acquire PPE.

Most healthy financially - Dewey Mid-range

- Louie

Least healthy financially - Huey

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 11-22A

a. Cash proceeds of sale = Book value of asset sold, $15,000* − Loss on sale, $2,000 = $13,000 _____ *$56,000 + $17,000 − $5,000 − Book value sold (X) = $53,000 Book value sold = $15,000

PPE, Net Beginning balance

56,000 Depreciation

5,000

Purchases

17,000 Book value sold

15,000

Ending balance

53,000

b. Cash dividend payments = $12,500 $24,000 + $29,500 − $4,000 − Cash dividends (X) = $37,000 Cash dividends = $12,500 Retained Earnings Share dividends

4,000 Beginning balance

24,000

Cash dividends

12,500 Net income

29,500 37,000

Ending balance

Chapter 11 The Statement of Cash Flows

(10-15 min.) E 11-23A

Cash flows from operating activities: Receipts: Collections from customers ($100,000 + $68,000)………………

Collection of dividend revenue…….

Total cash receipts………………..

$ 168,000 24,000 192,000

Payments: To suppliers…………………………… $(118,000) To employees…………………………. (72,000) For interest……………………………. (36,000) For income tax………………………... (50,000) Total cash payments……………...

(276,000) Net cash used by operating activities. $ (84,000)

Evaluation: Operating cash flow is weak as shown by the net cash used by operating activities.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) E 11-24A

Salary Payable — Report cash payments to employees as an operating cash flow.

Buildings — Report acquisitions of buildings and the proceeds from sales of buildings as investing cash flows.

Notes Payable — Report issuance and payments of notes payable as financing cash flows.

Chapter 11 The Statement of Cash Flows

(20-30 min.) E 11-25A Req. 1 Hilltop Heaven, Inc. Statement of Cash Flows Year Ended April 30, 20X6 Cash flows from operating activities: Receipts: Collections from customers ($464,000 + $28000)……………………….. $ 492,000 Dividends received……………………………….

22,000 Total cash receipts……………………………

514,000 Payments: To suppliers ($216,000 + $23,000 - $3,000)…. $(236000) To employees ($92,000 + $6,000)……………… (98,000) For income tax……………………………………. (18,000) For interest…………………………………………

(4,200) Total cash payments …………………………

(356,200) Net cash provided by operating activities……

157,800 Cash flows from investing activities: Acquisition of PPE…………………………………... $(200,000) Proceeds from sale of land………………………… 60,000 Net cash used for investing activities………...

(140,000)

Cash flows from financing activities: Proceeds from issuance of shares……………….. $ 188,000 Payment of long-term note payable………………. (36,000) Payment of dividends……………………………….. (19,000) Net cash provided by financing activities……

133,000 Net increase in cash…………………………………….. $ 150,800 Cash balance, April 30, 20X5…………………………..

40,000 Cash balance, April 30, 20X6………………………….. $ 190,800 Noncash investing and financing activities: Acquisition of PPE by issuing note payable Financial Accounting: IFRS 12/e Solutions Manual

$ 90,000

(continued) E 11-25A Req. 2 Evaluation: Free Cash Flow = net cash provided by operating activities – cash payments for investments in PPE = $157,800 - $200,000 = ($42,200) Cash realization ratio = Ratio of CFO/Net Profit = $157,800/70,800 = 2.23 Hilltop Heaven’s cash flows look strong. Operations are the main source of cash. The company is investing in new PPE without having to borrow. Hilltop Heaven was able to issue shares and pay off a long-term note payable — both financing transactions. The cash realization ratio is also strong. The free cash flow was negative as the company invested in new PPE. All of these signs are favorable.

Chapter 11 The Statement of Cash Flows

(10-15 min.) E 11-26A

$4,000 decrease in a. Cash collections = $ 63,000 + Accounts Receivable ($25,000 − $21,000) = $ 67,000

b.

Cash payments for inventory = $78,000 +

$2,000 increase in

$3,000 decrease in + Accounts Payable Inventory ($29,000 − $27,000) ($11,000 − $8,000)

= $83,000

Financial Accounting: IFRS 12/e Solutions Manual

Exercises Group B (10-15 min.) E 11-27B

I+ a. Sale of long-term investment

I– j. Acquisition of building by cash payment

F+

b. Issuance of shares for cash

O+ k. Decrease in merchandise inventory

O+ c. Increase in accounts payable

O+ l. Depreciation of equipment

O+ d. Amortization of intangible assets O+ e. Loss on sale of equipment

O– m. Decrease in accrued liabilities F– n. Payment of cash dividend

F– f. Payment of long-term debt I– I+

o. Purchase of long-term investment

g. Cash sale of land F+ p. Issuance of long-term note

F–

h.

O+ i.

Purchase of treasury shares Net income

payable to borrow cash O– q. Increase in prepaid expenses N

r. Accrual of salary expense

NIF s. Acquisition of equipment by issuance of note payable

Chapter 11 The Statement of Cash Flows

(5-10 min.) E 11-28B

a.

Investing

Financing h. Financing

b.

Operating

Noncash i.

Investing

c.

investing and k. j.

Operating Financing Operating Financing Investing

d.

l.

Operating

e. m. Investing g.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 11-29B

Cash flows from operating activities: Net income………………………………….

Adjustments to reconcile net income to net cash used for operating activities: Depreciation……………………………..

Loss on sale of land……………………

Decrease in current assets other than cash………………………………

Increase in current liabilities………...

Net cash provided by operating activities……………………………………..

€82,000

32,000 36,000 58,000 48,000 174,000 €256,000

Evaluation: Operating cash flow is very strong, as shown by the net cash provided by operating activities.

Chapter 11 The Statement of Cash Flows

(15-20 min.) E 11-30B

Cash flows from operating activities: Net income……………………………………..

70,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………. 18,000 Increase in accounts receivable……...

(2,000) Increase in inventory…………………….

(6,000) Increase in accounts payable…………. 218,000 Decrease in accrued liabilities………… (12,000) 216,000 Net cash provided by operating €286,000 activities…………………………………………

Fresh Fruit Traders shows no sign of trouble collecting receivables or selling inventory. There is no build-up in either Accounts Receivable or Inventory in addition Fresh Fruit Traders has done an excellent job getting their suppliers to finance their costs. Also, cash flow from operations is positive and greatly exceeds net income.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) E 11-31B Req. 1 Norton Travel Products, Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income…………………………………………...

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………...

Decrease in accounts receivable…………….

Decrease in inventory…………………………..

Increase in prepaid expenses…………………

Increase in accounts payable…………………

Decrease in accrued liabilities………………..

Net cash provided by operating activities….

32,600

33,000 16,000 39,000 (900) 15,000 (29,000)

73,100 105,700

Cash flows from investing activities: Acquisition of PPE……………………………….... (145,000) Proceeds from sale of land……………………….. 49,000 Net cash used for investing activities……….

(96,000)

Cash flows from financing activities: Proceeds from issuance of shares……………… 34,000 Payment of long-term note payable…………….. (16,000) Payment of dividends …………………………….. (9,000) Net cash provided by financing activities…..

Net increase in cash……………………………………

Cash balance, December 31, 20X5…………………..

Cash balance, December 31, 20X6…………………..

9,000 18,700 13,300 € 32,000

Noncash investing and financing activities: Acquisition of PPE by issuing note payable

€ 35,000

Chapter 11 The Statement of Cash Flows

(continued) E 11-31B Req. 2 Evaluation: Free Cash Flow = net cash provided by operating activities – cash payments for investments in PPE = 105,700 - 145,000 = (39,300) Cash realization ratio = Ratio of CFO/Net Profit = 105,700/ 32,600 = 3.24 Norton’s cash flows look strong. Operations are the main source of cash. The company is investing in new PPE without having to borrow. It was able to issue shares, pay dividends, and pay off a longterm note payable — both financing transactions.

Its cash realization ratio is also strong. Norton’s free cash flow is negative as it invested heavily in new PPE. All of these signs are favorable.

Financial Accounting: IFRS 12/e Solutions Manual

April

(5-10 min.) E 11-32B - The sale of PPE generated the cash needed to acquire new PPE. Operations provided more cash than Case B but less than Case C.

May

- Issuing shares generated the cash to acquire PPE but operations did not provide positive cash flow due to large increase in net current assets.

June -

A combination of operations, issuing shares and selling PPE generated most of the cash for acquisition of PPE. Operations provided more cash than did cases A and B.

Most healthy financially - June Mid-range

- April

Least healthy financially - May

Chapter 11 The Statement of Cash Flows

(10-15 min.) E 11-33B a. Cash proceeds of sale = Book value of asset sold, €42,000* + Gain on sale, 12,000 = €54,000 _____ *€204,000 + 60,000 − 26,000 − Book value sold (X) = €196,000 Book value sold = 42,000

PPE, Net Beginning balance 204,000 Depreciation

26,000

Purchases

60,000 Book value sold

42,000

Ending balance

196,000

b. Cash dividend payments = €30,000 92,000 + 98,000 − 20,000 − Cash dividends (X) = €140,000 Cash dividends = €30,000 Retained Earnings Share dividends

20,000 Beginning balance

92,000

Cash dividends

30,000 Net income

98,000

Ending balance

Financial Accounting: IFRS 12/e Solutions Manual

140,000

(10-15 min.) E 11-34B

Cash flows from operating activities: Receipts: Collections from customers (160,000 + 72,000)………………

Collection of dividend revenue…….

Total cash receipts………………..

€ 232,000 16,000 248,000

Payments: To suppliers…………………………… (104,000) To employees………………………….

(80,000) For interest…………………………….

(28,000) For income tax………………………...

(18,000) Total cash payments……………...

(230,000) Net cash provided by operating activities. € 18,000

Evaluation: Operating cash flow is satisfactory, but not great, as shown by the net cash provided by operating activities.

Chapter 11 The Statement of Cash Flows

(5-10 min.) E 11-35B

Salary Payable — Report cash payments to employees as an operating cash flow.

Buildings — Report acquisitions of buildings and the proceeds from sales of buildings as investing cash flows.

Notes Payable — Report issuance and payments of notes payable as financing cash flows.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) E 11-36B Req. 1 Eternity Resorts, Inc. Statement of Cash Flows Year Ended November 30, 20X6 Cash flows from operating activities: Receipts: Collections from customers (446,000 + 35,000)…………………………..

Dividends received……………………………….

Total cash receipts……………………………

Payments: To suppliers (204,000 + 28,000 + 2,200)….

(234,200) To employees (84,000 – 3,600)………………

(80,400) For income tax…………………………………….

(16,000) For interest…………………………………………

(9,000) Total cash payments …………………………

Net cash provided by operating activities……

(339,600) 162,400

Cash flows from investing activities: Acquisition of PPE…………………………………... (220,000) Proceeds from sale of land…………………………

48,000 Net cash used for investing activities………...

(172,000)

481,000 21,000 502,000

Cash flows from financing activities: Proceeds from issuance of shares……................. 176,000 Payment of long-term note payable………………. (28,000) Payment of dividends……………………………….. (16,000) Net cash provided by financing activities……

132,000 Net increase in cash……………………………………..

122,400 Cash balance, November 30, 20X5……………………

44,000 Cash balance, November 30, 20X6…………………… € 166,400 Noncash investing and financing activities: Acquisition of PPE by issuing note payable

€ 96,000 Chapter 11

The Statement of Cash Flows

(continued) E 11-36B

Req. 2 Evaluation: Free Cash Flow = net cash provided by operating activities – cash payments for investments in PPE = 162,400 - 220,000 = (57,600) Cash realization ratio = Ratio of CFO/Net Profit = 162,400/ 88,000 = 1.85 Eternity Resorts’ cash flows look strong. Operations are the main source of cash. The company is investing in new PPE without having to borrow. Eternity Resorts was able to issue shares and pay off a long-term note payable — both financing transactions. Its cash realization ratio is strong as well. Free cash flow is negative as Eternity Resorts invested in new PPE. All of these signs are favorable.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 11-37B

a. Cash collections =

5,000 decrease in 62,000 + Accounts Receivable (22,000 − 17,000) =

b.

67,000

Cash payments for inventory = €79,000 −

3,000 decrease in

2,000 increase in

Inventory (28,000 − 25,000)

Accounts Payable (12,000 − 14,000)

= 74,000

Chapter 11 The Statement of Cash Flows

Challenge Exercises (20-30 min.) E 11-38 (All amounts in thousands)

a. Collections

= $23,959 =

Sales $23,948

+ +

Decrease in Accounts Receivable ($614 − $603)

Cost

b. Payments for inventory

= $18,150 =

*$3,140 − $2,872 = $ 268

**$1,551 − 1,371 = $ 180

c. Payments for other operating = $3,554 = expenses

d. Payment of income tax

= $559

e. Proceeds from Issuance of Shares

= $70:

Increase in Increase in of sales + Inventory − Accounts Payable $18,062 + $268* − $180**

=

Other Operating Expenses $3,857

Increase in − Accrued Liabilities − ($935 − $632)

Income

Increase in − Income Tax Payable − ($197 − $193)

Tax Expense $563 Beg. Share Capital + $445 +

End. Share Issuance = Capital = X $515 X

f. Payment of dividends

= $611:

=

$ 70

Beg. Ret. Net End. Ret. Earnings + Income − Dividends = Earnings $3,828 + $1,210 − X = $4,427 X

Financial Accounting: IFRS 12/e Solutions Manual

= $611

(20 min.) E 11-39 a.

(All in thousands) Loss on sale of property and = equipment

Proceeds from dispositions −

Book value sold

$170 =

$740

−

$910

Property & Equipment, Net Bal., 12/31/X5 9,360 Capital Depreciation 1,950 expenditures 4,090 Book value of property and equipment sold X = 910 Bal., 12/31/X6 10,590

b.

Repayment

Long-Term Notes Payable Bal., 12/31/X5 80 Proceeds from issuance LT debt issued for something other than cash Bal. 12/31/X6

3,080 1,250

X = 350 4,600

Chapter 11 The Statement of Cash Flows

Quiz Q11-40 Q11-41 Q11-42 Q11-43 Q11-44 Q11-45 Q11-46 Q11-47

c d b d d a d Receiving dividends operating Paying dividends financing

Q11-48

b

Q11-49

d

Q11-50 Q11-51 Q11-52

b a d

[Book value = $12,000 ($22,000 − $10,000; Gain = $2,000; Proceeds = $14,000 ($12,000 + $2,000)] (Net Income, Depreciation, Gain on Sale of Equipment, Changes in Accounts Receivable, Inventory, Accounts Payable and Accrued Liabilities) (Sale and Acquisition of equipment) Net inc. Gain

Depr.

A / Rec

Invy.

[$40,500 − $10,000 + $7,500 + ($13,000−$5,000) − ($11,000−$10,000)

A / Pay

Accr. Liab.

− ($9,000 − $8,000) + ($6,000 − $4,000) = $46,000]

Q11-53 Q11-54

a a

Q11-55 Q11-56 Q11-57

a a b

Cash received = $32,000 ($22,000 + $10,000) Cash paid = $55,500 ($71,000 − $22,000 − $7,500 + $X = $97,000; X = $55,500) Net cash used = $23,500 ($55,500 − $32,000)

Cash received from issuance of shares = $9,000 ($18,000 − $9,000) Cash paid for dividends (X) = $44,000 ($65,000 + net income $40,500 − $X = $61,500; Dividends = $44,000) Cash received from debt issuance = $15,000 ($25,000 - $10,000) Net cash used = $20,000 ($44,000− $9,000 - $15,000)

Financial Accounting: IFRS 12/e Solutions Manual

Q11-58 Q11-59

d d

($830,000 − $60,000 = $770,000) [$60,500 − ($5,500 − $4,000) = $59,000]

Chapter 11 The Statement of Cash Flows

Problems Group A (40 min.) P 11-60A Req. 1 Luxe Auto of Abu Dhabi, Inc. Income Statement Year Ended December 31, 20X6 Sales revenue………………………….........................

Cost of goods sold [$420,000 + (1 × $90,000)]……...

Salary expense……………………………………………

Depreciation expense ($380,000 / 5)………………….

Rent expense……………………………………………..

Income tax expense……………………………………..

Net income………………………………………………...

$992,000 510,000 250,000 76,000 36,000 25,000 $ 95,000

Req. 2 Luxe Auto of Abu Dhabi, Inc. Balance Sheet December 31, 20X6 ASSETS Current: Cash Accounts receivable (992,000 × .20) Inventory (1 × $90,000) Total current assets

LIABILITIES Current: 440,600* Accounts payable 198,400 ($180,000 − $112,000) 90,000 Salary payable 364,500 Total current liabilities

$ 68,000 16,000 84,000

Property, plant, and equipment: Equipment $380,000 Less Accumulated depreciation (76,000)

304,000

SHAREHOLDERS’ EQUITY Ordinary shares 880,000 Retained earnings 69,000 949,000 ($95,000 − $26,000) Total equity

Total assets

$1,033,000

Total liabilities and shareholders' equity

_____ *$880,000 − $380,000 − $420,000 − $36,000 − $112,000 + $793,600 − $234,000 − $25,000 − $26,000 = $440,600 Financial Accounting: IFRS 12/e Solutions Manual

$1,033,000

(continued) P 11-60A Req. 3 Luxe Auto of Abu Dhabi, Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income……………………………………….

Adjustments to reconcile net income to net cash used for operating activities: Depreciation………………………………….. $ 76,000 Increase in accounts receivable………….. (198,400) Increase in inventory……………………….. (90,000) Increase in accounts payable…………….. 68,000 16,000 Increase in salary payable…………………

Net cash used for operating activities..

(128,400) (33,400)

Cash flows from investing activities: Purchase of equipment……………………….. (380,000) Net cash used for investing activities……

(380,000)

Cash flows from financing activities: Issuance of shares…………………………….. 880,000 Payment of dividend…………………………… (26,000) Net cash provided by financing activities Net increase in cash……………………………….

Cash balance, January 1, 20X6………………….

Cash balance, December 31, 20X6……………...

854,000 $ 440,600 0 $ 440,600

$ 95,000

Chapter 11 The Statement of Cash Flows

(40 min.) P 11-61A Req. 1 Luxe Auto of Abu Dhabi, Inc. Income Statement Year Ended December 31, 20X6 Sales revenue…………………………...........................

Cost of goods sold [$420,000 + (1 × $90,000)]……...

Salary expense……………………………………………

Depreciation expense ($380,000 / 5)………………….

Rent expense……………………………………………...

Income tax expense……………………………………...

Net income………………………………………………...

$992,000 510,000 250,000 76,000 36,000 25,000 $ 95,000

Req. 2 Luxe Auto of Abu Dhabi, Inc. Balance Sheet December 31, 20X6 ASSETS Current: Cash Accounts receivable (992,000 × .20) Inventory (1 × $90,000) Total current assets Property, plant, and equipment: Equipment $380,000 Less Accumulated depreciation (76,000) Total assets

LIABILITIES 440,600* 198,400 90,000 364,500

Current: Accounts payable ($180,000 − $112,000) Salary payable Total current liabilities

304,000

SHAREHOLDERS’ EQUITY Ordinary shares 880,000 Retained earnings 69,000 949,000 ($95,000 − $26,000) Total equity

$ 68,000 16,000 84,000

_____

Total liabilities and $1,033,000 shareholders' *$880,000 − $380,000 − $420,000 − $36,000 − $112,000 + $793,600 −equity $234,000 − $25,000 − $26,000 = $440,600

Financial Accounting: IFRS 12/e Solutions Manual

$1,033,000

(continued) P 11-61A Req. 3 Luxe Auto of Abu Dhabi, Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Receipts: Collections from customers ($992,000- $198,400)………………………… $ 793,600 Total cash receipts……………………………

793,600 Payments: To suppliers ($-510,000 - $90,000 + $68,000) $(532,000) To employees ($-250,000 + $16,000)…………

(234,000) For income tax…………………………………….

(25,000) For rent………………………………………..……

(36,000) Total cash payments …………………………

(827,000) (33,400) Net cash used by operating activities…………

Cash flows from investing activities: Purchase of equipment……………………….....(380,000) (380,000) Net cash used for investing activities…..…

Cash flows from financing activities: Issuance of shares……………….………………

Payment of dividend………………………….…

Net cash provided by financing activities Net increase in cash…………………………….….

Cash balance, January 1, 20X6……………….….

Cash balance, December 31, 20X6……………....

880,000 (26,000) 854,000 $ 440,600 0 $ 440,600

Chapter 11 The Statement of Cash Flows

(35-45 min.) P 11-62A Unitech Software Corp.

Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income…………………………………………...

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation …………………………………….. $ 34,000 Amortization……………………………………..

10,000 Loss on sale of equipment……………………

10,000 Increase in accounts receivable……………..

(15,000) Decrease in inventories……………………

146,800 Increase in prepaid expenses…………………

(3,600) Increase in accounts payable………………

3,800 Increase in income tax payable………………

5,000 Decrease in accrued liabilities………………..

(24,600) Net cash provided by operating activities….

$ 13,000

166,400 179,400

Cash flows from investing activities: Purchase of building………………………………. $(194,000) Purchase of long-term investment……………… (89,200) Proceeds from sale of equipment………………. 162,000 Collection of loan…………………………………... 21,200 Net cash used for investing activities……….

(100,000)

Cash flows from financing activities: Issuance of ordinary shares……………………... $ 73,000 Issuance of long-term note payable…………….

69,000 Payment of cash dividends……………………….

(18,600) Purchase of treasury shares……………………..

(21,400) Net cash provided by financing activities…..

Net increase in cash……………………………………

Cash balance, December 31, 20X5…………………..

102,000 $ 181,400 80,000

Financial Accounting: IFRS 12/e Solutions Manual

Cash balance, December 31, 20X6…………………..

$ 261,400

Chapter 11 The Statement of Cash Flows

(continued) P 11-62A

Noncash investing and financing activities: Acquisition of land by issuing long-term note payable…

Retirement of bonds payable by issuing ordinary shares Total noncash investing and financing activities……………

`

Financial Accounting: IFRS 12/e Solutions Manual

$ 402,000 128,000 $530,000

(35-45 min.) P 11-63A Req. 1 Memphis Movie Theater Company Statement of Cash Flows Year Ended June 30, 20X6 Cash flows from operating activities: Net income……………………………………………

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………… $ 15,700 9,000 Amortization………………………………………

Decrease in accounts receivable…………….. 10,700 Increase in inventories…………………………. (1,600) Decrease in prepaid expenses………………..

4,900 Increase in accounts payable…………………

700 Increase in accrued liabilities……………….... 20,500 Decrease in income tax payable……………… (1,300) Net cash provided by operating activities…..

$ 54,000

58,600 112,600

Cash flows from investing activities: Purchase of equipment…………………………….. $(79,000) Purchase of building……………………………….. (44,000) Sale of long-term investment……………………... 12,700 Net cash used for investing activities………..

(110,300)

Cash flows from financing activities: Issuance of long-term note payable……………... $ 42,000 Issuance of ordinary shares……………………… 24,000 Payment of cash dividend…………………………. (29,000) Net cash provided by financing activities…...

Net increase in cash……………………………………

Cash balance, June 30, 20X5………………….……....

Cash balance, June 30, 20X6………………….………

37,000 $ 39,300 28,000 $ 67,300

Noncash investing and financing activities: Acquisition of land by issuing note payable……

$100,000 Chapter 11

The Statement of Cash Flows

(continued) P 11-63A Req. 2 Evaluation: Free Cash Flow = net cash provided by operating activities – cash payments for investments in PPE = $112,600 - $79,000 $44,000 = ($10,400) Cash realization ratio = Ratio of CFO/Net Profit = $112,600/ 54,000 = 2.09 Memphis’ cash flows look strong. Operations are the main source of cash. The company is investing in new PPE, and borrowings — a financing cash flow — appear reasonable. Its cash realization ratio is 2.09, which is very strong. Memphis’ free cash flow is negative as it invested in new PPE. All of these signs are favorable.

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.) P 11-64A Req. 1 Affordable Supply Corp.

Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income………………………………………………. $65,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………………. $ 17,900 Increase in accounts receivable…………………

(1,200) Increase in inventories…………………………….

(14,400) Decrease in prepaid expenses……………………

2,100 Increase in accounts payable……………………..

8,300 Increase in salary payable………………………..

10,900 Decrease in other accrued liabilities…………….

(1,600) 22,000 87,600 Net cash provided by operating activities…..

Cash flows from investing activities: Purchase of land……………………………………...... $(46,500) Purchase of equipment ($3,600+$17,900)………….

(21,500) Net cash used for investing activities……….

(68,000) Cash flows from financing activities: Payment of dividends ($65,600-$19,600)…………… $(46,000) Issuance of note payable……………………………… 17,000 Issuance of ordinary shares…………………………..

22,700 Net cash used for financing activities……….

Net increase in cash………………………………………..

(6,300) $13,300

Cash balance, December 31, 20X5………………………

Cash balance, December 31, 20X6………………………

4,000 $17,300

Chapter 11 The Statement of Cash Flows

(continued) P 11-64A Req. 2 This problem will help students learn how operating activities, investing activities, and financing activities generate cash receipts and cash payments. By solving this problem, students will learn how companies prepare the statement of cash flows and will thus be able to understand the meaning of cash flows from the three basic categories of business activities. This knowledge will aid their analysis of investments. For example, students should know that net cash provided by operating activities conveys a more positive signal about a company than net cash used for operations.

Student responses will vary.

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.)

P 11-65A

Req. 1 Affordable Supply Corp.

Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Receipts: Collections from customers ($450,000 - $1,200)………………………. $ 448,800 Total cash receipts………………………….... $ 448,800 Payments: To suppliers ($-186,900 - $14,400 + $8,300) $(193,000) To employees ($-76,300 + $10,900)……………

(65,400) For income tax…………………………………….

(29,200) For Other operating expenses ($-49,900 + $2,100 – 1,600)……………………………………..

(49,400) For interest………………………………………… (24,200) Total cash payments …………………………

(361,200) Net cash provided by operating activities……

87,600 Cash flows from investing activities: Purchase of land…………………………………….. $(46,500) Purchase of equipment ($49,500 − depreciation expense of $17,900 = $31,600; $53,100 − $31,600)…………………………………………

(21,500) Net cash used for investing activities…

Cash flows from financing activities: Payment of dividends ($7,900 + $65,600 − $27,500) $(46,000) Issuance of note payable………………………….

17,000 Issuance of ordinary shares………………………

22,700 Net cash used for financing activities……

Net increase in cash……………………………………

Cash balance, December 31, 20X5…………………..

Chapter 11 The Statement of Cash Flows

(68,000)

(6,300) $13,300 4,000

Cash balance, December 31, 20X6…………………..

$17,300

(continued) P 11-65A Req. 2 This problem will help students learn how operating activities, investing activities, and financing activities generate cash receipts and cash payments. By solving this problem, students will learn how companies prepare the statement of cash flows and will thus be able to understand the meaning of cash flows from the three basic categories of business activities. This knowledge will aid their analysis of investments. For example, students should know that net cash provided by operating activities conveys a more positive signal about a company than net cash used for operations.

Student responses will vary.

Financial Accounting: IFRS 12/e Solutions Manual

(35-45 min.) P 11-66A Req. 1 Ramirez Furniture Gallery, Inc. Statement of Cash Flows Year Ended May 31, 20X6 Cash flows from operating activities: Receipts: Collections from customers ($2,14,300 + $95,700)…………………….. $ 310,000 2,350 Interest received……………………………….

4,400 Dividends received……………………………

Total cash receipts………………………... $ 316,750 Payments: To suppliers……………………………………. $(184,500) To employees…………………………………..

(39,500) For interest……………………………………...

(6,750) For income tax…………………………………

(19,200) Total cash payments……………………...

(249,950) Net cash provided by operating activities...

66,800 Cash flows from investing activities: Purchase of PPE…………………….................... $ (36,100) Sale of PPE………………………………...............

11,350 Collection of loans………………………………..

5,900 Loan to another company……………………….

(6,200) Sale of investments……………………………….

4,800 Net cash used for investing activities……..

(20,250) Cash flows from financing activities: Payments of long-term notes payable………... $ (41,500) Payment of dividends…………………………….

(24,200) Issuance of note payable………………………...

12,300 Issuance of ordinary shares…………………….

3,600 Net cash used for financing activities……..

(49,800) Net (decrease) in cash………………………………. $ (3,250) Cash balance, May 31, 20X5………………………..

9,600 Cash Balance, May 31, 20X6…………………….. $ 6,350 Chapter 11 The Statement of Cash Flows

(continued) P 11-66A

Noncash investing and financing transactions: Payment of short-term note payable by issuing long-term note payable……………………

Acquisition of equipment by issuing short-term note payable…………………………….. Total noncash investing and financing transactions….

$ 47,000 8,000 $ 55,000

Req. 2 Evaluation of 20X6: Year 20X6 was a strong year from a cashflow standpoint. Operations generated the bulk of the company’s cash. Said cash was used to acquire additional PPE to lay a foundation for future operations, to pay dividends to shareholders and to reduce its debt position.

Financial Accounting: IFRS 12/e Solutions Manual

(45-60 min.) P 11-67A Req. 1 Daisy Electric Company Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Receipts: Collections from customers………………………… $ 661,800 Dividends received …………………………………..

16,900 Total cash receipts………………………………… $ 678,700 Payments: To suppliers ($402,000+ $34,500)………………….. $(436,500) To employees………………………………………….. (143,600) For interest……………………………………………... (26,600) For income tax…………………………………………. (17,000) Total cash payments………………………………

(623,700) Net cash provided by operating activities………...

55,000 Cash flows from investing activities: Purchase of equipment…………………………………... $ (31,000) Sale of long-term investments…………………………..

14,600 Net cash used for investing activities……………...

(16,400)

Cash flows from financing activities: Issuance of share capital………………………………… $ 61,000 Payment of long-term note payable……………………

(41,500) Payment of dividends…………………………………….

(47,900) Purchase of treasury shares……………………………

(22,400) Net cash used for financing activities……………..

(50,800) Net (decrease) in cash………………………………………. $ (12,200) Cash balance, December 31, 20X5…………………………

49,600

Cash balance, December 31, 20X6…………………………

$ 37,400

Noncash investing and financing activities: Acquisition of land by issuing shares…………………

Retirement of note payable by issuing shares……….

Total noncash investing and financing activities……….

$ 80,800 20,000 $ 100,800 Chapter 11

The Statement of Cash Flows

(continued) P 11-67A Req. 2 Daisy Electric Company Cash Flows from Operating Activities Year Ended December 31, 20X6 Cash flows from operating activities: Net income…………………………………… $127,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………… $ 19,000 Loss on sale of investments…………..

22,100 Increase in accounts receivable……… (27,400) Increase in inventories…………………. (59,700) Increase in prepaid expenses…………

(600) Decrease in accounts payable………... (8,300) Increase in interest payable…………… 2,500 Decrease in salary payable……………. (7,800) Decrease in other accrued liabilities… (10,200) Decrease in income tax payable………

(2,500) (72,900) $ 55,000 Net cash provided by operating activities.

Financial Accounting: IFRS 12/e Solutions Manual

(45-60 min.) P 11-68A Req. 1 Ibrahim Design Studio, Inc. Statement of Cash Flows Year Ended June 30, 20X6 Cash flows from operating activities: Net income…………………………………………...

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ 14,900 Loss on sale of land…………………………….

6,500 Increase in accounts receivable……………... (17,100) Decrease in inventories……………………..…

2,300 Increase in prepaid expenses…………………

(900) Decrease in accounts payable……………..… (11,000) Decrease in income tax payable……………...

(1,200) Decrease in accrued liabilities………………..

(5,700) Increase in interest payable…………………...

1,000 Decrease in salary payable……………………

(3,400) Net cash provided by operating activities….

( 14,600) 67,100

Cash flows from investing activities: Sale of land………………………………………….. $ 54,900 Purchase of long-term investment……………… (5,700) Net cash provided by investing activities…..

49,200

Cash flows from financing activities: Payment of long-term note payable…………….. $(62,400) Payment of cash dividends………………………. (49,400) Issuance of share capital………………………….

3,400 Net cash used for financing activities……….

Net increase in cash……………………………………

(108,400) $ 7,900

Cash balance, June 30, 20X5…………………………

Cash balance, June 30, 20X6…………………………

21,000 $ 28,900

$ 81,700

Chapter 11 The Statement of Cash Flows

(continued) P 11-68A

Req. 1 Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable…………………………..

Payment of short-term note payable by issuing ordinary shares…………………………

Total noncash investing and financing activities…..

$15,600 6,000 $21,600

Req. 2 Ibrahim Design Studio, Inc. Statement of Cash Flows Year Ended June 30, 20X6

Cash flows from operating activities: Receipts: Collections from customers…………….. $ 246,700 Interest received……………………………

1,700 Total cash receipts…………………….. $ 248,400 Payments: To suppliers………………………………… $(119,600) To employees………………………………. (42,900) For income tax……………………………... (13,900) For interest………………………………….. (4,900) Total cash payments…………………..

(181,300) Net cash provided by operating activities… $ 67,100

Financial Accounting: IFRS 12/e Solutions Manual

Problems Group B ( (40 min.) P 11-69B Req. 1 Allstar Automobiles of Dubai, Inc. Income Statement Year Ended December 31, 20X6 Sales revenue……………………………………………..

Cost of goods sold [360,000 + (1 × 96,000)]…..

Salary expense……………………………………………

Rent expense……………………………………………...

Depreciation expense (300,000 / 5)…………………

Income tax expense……………………………………...

Net income………………………………………………...

876,000 456,000 180,000 32,000 60,000 30,000 €118,000

Req. 2 Slick Automobiles of Dubai, Inc. Balance Sheet December 31, 20X6 ASSETS Current: Cash Accounts receivable (876,000 × .10) Inventory Total current assets Property, plant, and equipment: Equipment 300,000 Less Accumulated (60,000) depreciation

Total assets

LIABILITIES 167,600* 87,600 480,000 735,200

240,000

€975,200

Current: Accounts payable (576,000 – 396,800) Salary payable Total current liabilities

SHAREHOLDERS’ EQUITY Ordinary shares 700,000 Retained earnings 84,000 784,000 (118,000 − 34,000) Total equity Total liabilities and shareholders' equity

_____ *700,000 − 300,000 − 360,000 − 32,000 – 396,800 + 788,400 − 168,000 − 30,000 − 34,000 = 83,800.

Chapter 11 The Statement of Cash Flows

179,200 12,000 191,200

€975,200

(continued) P 11-69B Req. 3 Allstar Automobiles of Dubai, Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income……………………………………….… €118,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………….

60,000 Increase in accounts receivable…………….

(87,600) Increase in inventory…………………………. (480,000) Increase in accounts payable…………….…. 179,200 Increase in salary payable…………………...

12,000 (316,400) (198,400) Net cash used by operating activities…..

Cash flows from investing activities: Purchase of equipment……………………….….. (300,000) Net cash used for investing activities………

(300,000)

Cash flows from financing activities: Issuance of shares……………………………….. 700,000 Payment of dividend……………………………… (34,000) Net cash provided by financing activities….

Net increase in cash………………………………….

Cash balance, January 1, 20X5……………………..

Cash balance, December 31, 20X6…………………

666,000 €167,600 0 €167,600

Financial Accounting: IFRS 12/e Solutions Manual

(40 min.) P 11-70B Req. 1 Allstar Automobiles of Dubai, Inc. Income Statement Year Ended December 31, 20X6 Sales revenue……………………………………………..

Cost of goods sold [360,000 + (1 × 96,000)]…..

Salary expense……………………………………………

Rent expense……………………………………………...

Depreciation expense (300,000 / 5)…………………

Income tax expense……………………………………...

Net income………………………………………………...

876,000 456,000 180,000 32,000 60,000 30,000 €118,000

Req. 2 Slick Automobiles of Dubai, Inc. Balance Sheet Year Ended December 31, 20X6

ASSETS Current: Cash Accounts receivable (876,000 × .10)

Property, plant, and equipment: Equipment 300,000 Less Accumulated (60,000) depreciation

LIABILITIES Current: 167,600* Accounts payable (576,000 – 396,800) 179,200 12,000 87,600 Salary payable 191,200 480,000 Total current liabilities 735,200 SHAREHOLDERS’ EQUITY Ordinary shares 700,000 Retained earnings 84,000 784,000 (118,000 − 34,000) Total equity 240,000

Total assets

Total liabilities and €975,200 shareholders' equity

Inventory Total current assets

€975,200

_____ *700,000 − 300,000 − 360,000 − 32,000 – 396,800 + 788,400 − 168,000 − 30,000 − 34,000 = 83,800.

Chapter 11 The Statement of Cash Flows

(continued) P 11-70B Req. 3 Allstar Automobiles of Dubai, Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Receipts: Collections from customers (876,000 x .90) ………………………… ....... € 788,400 Total cash receipts…………………………

788,400 Payments: To suppliers (360,000 + 396,800) ……….. To (756,800) employees (180,000 - 12,000) ………….. For (168,000) income tax…………………………………. For (30,000) rent…………………………………………..

(32,000) Total cash payments……………………….

(986,800) Net cash used by operating activities ..........

(198,400)

Cash flows from investing activities: Purchase of equipment……………………….. (300,000) Net cash used for investing activities……

(300,000)

Cash flows from financing activities: Issuance of shares…………………………….. 700,000 Payment of dividend…………………………… (34,000) Net cash provided by financing activities Net increase in cash……………………………… Cash balance, January 1, 20X5………………… Cash balance, December 31, 20X6………………

666,000 €167,600 0 €167,600

Financial Accounting: IFRS 12/e Solutions Manual

(35-45 min.) P 11-71B Newton Software Corp.

Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income…………………………………………….

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ……………………………………….

34,000 Amortization……………………………………….

12,000 Loss on sale of equipment………………………

6,000 Decrease in accounts receivable………………

82,400 Increase in inventories………………………….. (11,000) Increase in prepaid expenses…………………..

(2,000) Increase in accounts payable…………………..

3,200 Increase in income tax payable………………...

23,400 Increase in accrued liabilities…………………..

16,800 Net cash provided by operating activities……

116,000

164,800 280,800

Cash flows from investing activities: Purchase of building…………………………........... (318,000) Purchase of long-term investment………………..

(99,800) Sale of equipment……………………………………

25,800 Collection of loan…………………………………….

22,000 Net cash used for investing activities………...

(370,000) Cash flows from financing activities: Issuance of long-term note payable………………

68,000 Payment of cash dividends………………………… (37,600) Purchase of treasury shares………………………. (28,800) Issuance of ordinary shares……………………….. 148,400 Net cash provided by financing activities……

150,000 € 60,800 Net increase in cash…………………………………….

72,000 Cash balance, December 31, 20X5……………………

Cash balance, December 31, 20X6…………………… € 132,800 Chapter 11 The Statement of Cash Flows

(continued) P 11-71B

Noncash investing and financing activities: Acquisition of land by issuing long-term note payable…….. €396,000 Retirement of bonds payable by issuing ordinary shares….

142,000 Total noncash investing and financing activities……………….. €538,000

Financial Accounting: IFRS 12/e Solutions Manual

(35-45 min.) P 11-72B Req. 1 Marmaduke Movie Theater Company.

Statement of Cash Flows Year Ended June 30, 20X6 Cash flows from operating activities: Net income…………………………………………….

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………………. € 15,600 Amortization………………………………………

6,000 Decrease in accounts receivable……………...

6,700 Increase in inventories………………………… (2,600) Increase in prepaid expenses…………………. (8,100) Increase in accounts payable………………….

2,700 Increase in accrued liabilities………………… 10,500 Decrease in income tax payable……………… (3,900) Net cash provided by operating activities…...

Cash flows from investing activities: Purchase of building……………………………......

Purchase of equipment……………………………..

Sale of long-term investment………………………

Net cash used for investing activities………..

Cash flows from financing activities: Issuance of ordinary shares………………………

Issuance of long-term note payable……………...

Payment of cash dividends………………………...

Net cash provided by financing activities…...

Net decrease cash………………………………………

Cash balance, June 30, 20X5………………………….

Cash balance, June 30, 20X6………………………….

Noncash investing and financing activities: Acquisition of land by issuing note payable.

€ 50,000

26,900 76,900

(59,000) (45,600) 13,400 (91,200)

13,000 26,000 (34,000) 5,000_ € (9,300) 18,000 € 8,700

€ 30,000

Chapter 11 The Statement of Cash Flows

(continued) P 11-72B Req. 2 Evaluation: Free Cash Flow = net cash provided by operating activities – cash payments for investments in PPE = 76,900 - 59,000 – 45,600 = (27,700) Cash realization ratio = Ratio of CFO/Net Profit = 76,900/ 50,000 = 1.54 Marmaduke’s cash flows look strong. Operations are a significant source of cash. The company is investing heavily in new PPE. Its cash realization ratio is 1.54, which is strong.

Marmaduke’s free cash flow is negative as it invested in new PPE. The company is financing the new investments more by borrowing than issuing shares.

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.) P 11-73B Req. 1 King Supply Corp.

Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Net income……………………………………………… € 64,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation …………………………………………

17,500 Increase in accounts receivable …………………

(1,000) Increase in inventories……………………………. (11,600) Decrease in prepaid expenses…………………...

3,900 Increase in accounts payable…………………...

10,200 Increase in salary payable………………………...

6,400 Decrease in other accrued liabilities……………

(1,300) 24,100 Net cash provided by operating activities….

88,100 Cash flows from investing activities: Purchase of land……………………………………….. (47,200) Purchase of equipment (3,900+17,500)…………

(21,400) Net cash used for investing activities ………

Cash flows from financing activities: Payment (44,200) of dividends (64,000-19,800)…………

13,000 of note payable……………………………

Issuance Issuance of ordinary shares…………………………. 24,300 Net cash used for financing activities….. ..

Net increase in cash………………………………………

Cash balance, December 31, 20X5……………………...

Cash balance, December 31, 20X6……………………...

(68,600)

(6,900) € 12,600 5,000 € 17,600

Chapter 11 The Statement of Cash Flows

(continued) P 11-73B Req. 2 This problem will help students learn how operating activities, investing activities, and financing activities generate cash receipts and cash payments. By solving this problem, students will learn how companies prepare the statement of cash flows and will thus be able to understand the meaning of cash flows from the three basic categories of business activities. This knowledge will aid their analysis of investments. For example, students should know that net cash provided by operating activities conveys a more positive signal about a company than net cash used for operations.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.) P 11-74B King Supply Corp.

Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Receipts: Collections from customers (448,000 – 1,000) ………………………… € 447,000 Total cash receipts…………………………

Payments: To suppliers (185,300 + 11,600 - 10,200) (186,700) To employees (76,800 - 6,400)……………

(70,400) For operating expenses (49,700 - 3,900 + 1,300………………………………………..……

(47,100) For income tax…………………………………..

(29,800) For interest………………………………………

(24,900) Total cash payments………………………

Net cash provided by operating activities…

(358,900) 88,100

Cash flows from investing activities: Purchase of land…………………………………… (47,200) Purchase of equipment (49,200 − depreciation expense of 17,500 = 31,700; 53,100 − 31,700)………………………………

(21,400) Net cash used for investing activities …

(68,600)

Cash flows from financing activities: Payment of dividends (27,400 + 64,000 − 47,200)………………… €(44,200) Issuance of note payable…………………………

13,000 Issuance of ordinary shares……………………..

24,300 Net cash used for financing activities Net increase in cash……………………………………

(6,900) € 12,600

Cash balance, December 31, 20X5………………….

Cash balance, December 31, 20X6………………….

447,000

5,000 € 17,600 Chapter 11

The Statement of Cash Flows

(continued) P 11-74B Req. 2 This problem will help students learn how operating activities, investing activities, and financing activities generate cash receipts and cash payments. By solving this problem, students will learn how companies prepare the statement of cash flows and will thus be able to understand the meaning of cash flows from the three basic categories of business activities. This knowledge will aid their analysis of investments. For example, students should know that net cash provided by operating activities conveys a more positive signal about a company than net cash used for operations.

Student responses may vary.

Financial Accounting: IFRS 12/e Solutions Manual

(35-45 min.) P 11-75B Req. 1 Elegant Furniture Gallery, Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Receipts: Collections from customers (203,500 + 101,000) .................................... € 304,500 2,600 Interest received ............................................

2,500 Dividends received ........................................

Total cash receipts ...................................

Payments: To suppliers ................................................... (194,100) To employees .................................................

(47,350) For income tax ...............................................

(18,900) For interest .....................................................

(7,350) Total cash payments .................................

Net cash provided by operating activities ...

(267,700) 41,900

Cash flows from investing activities: Purchase of PPE .................................................

Collection of loans ..............................................

Proceeds from sale of PPE. ...............................

Loan to another company ..................................

Proceeds from sale of investments ...................

Net cash used for investing activities ..........

(13,050)

Cash flows from financing activities: Proceeds from issuance of ordinary shares .....

Payments of long-term note payable ................

Payment of dividends .........................................

Proceeds from issuance of note payable ..........

Net cash provided by financing activities ....

Net decrease in cash ...............................................

Cash balance, December 31, 20X5 .........................

Cash balance, December 31, 20X6 .........................

309,600

(30,450) 6,550 11,650 (6,900) 6,100

4,000 (35,000) (24,500) 10,150 (45,350) € (16,500) 25,000 € 8,500 Chapter 11

The Statement of Cash Flows

(continued) P 11-75B

Noncash investing and financing activities: Payment of short-term note payable by issuing long-term note payable……………………………

Acquisition of equipment by issuing short-term note payable……………………………

Total noncash investing and financing activities…….

€34,500 8,750 €43,250

Req. 2 Evaluation of 20X6: Year 20X6 was a satisfactory year from a cash-flow standpoint. Operations provided cash of €41,900. The company was able to pay off a long-term note payable in the amount of €35,000 as well as converting a sort-term note in the amount of €34,500 to a long-term note. The business invested almost They paid €30,450 a in PPE. dividend of €24,500 and cash decreased during the year by €16,500.

Financial Accounting: IFRS 12/e Solutions Manual

(45-60 min.) P 11-76B Req. 1 Spencer Electric Company Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: Receipts: Collections from customers…………...................... € 661,600 Dividends received…………………………………….

16,800 Total cash receipts…………………………….…..

678,400 Payments: To suppliers…………………………………………….. (434,400)* To employees…………………………………………... (143,300) For interest……………………………………………… (27,100) For income tax…………………………………………. (18,600) Total cash payments………………………………

(623,400) Net cash provided by operating activities…….…..

55,000 Cash flows from investing activities: Purchase of equipment…………………………………...

(31,700) Sale of long-term investments…………………………..

Net cash used for investing activities……………...

Cash flows from financing activities: Payment of long-term note payable……………………

Issuance of share capital………………………….……..

Purchase of treasury shares………………………….…

Payment of dividends…………………………………….

Net cash used for financing activities……………..

Net (decrease) in cash…………….……………………….…

20,000 (11,700) (41,300) 22,200 (26,300) (27,600) (73,000) € (29,700)

Cash balance, December 31, 20X5…………………………

Cash balance, December 31, 20X6…………………………

71,500 € 41,800

Noncash investing and financing activities: Acquisition of land by issuing shares…………………………

Retirement of long-term note payable by issuing shares….

Total noncash investing and financing activities……………….

€ 61,700 17,000 € 78,700

Chapter 11 The Statement of Cash Flows

(continued) P 11-76B Req. 2 Spencer Electric Company Statement of Cash Flows Year Ended December 31, 20X6

Cash flows from operating activities: Net income……………………………………..

Adjustments to reconcile net income to net cash flow provided by operating activities: Depreciation……………………………….

16,400 Loss on sale of investments……………

16,700 Decrease in accounts receivable………

14,400 Decrease in inventories…………………

12,900 Decrease in prepaid expenses…………

6,000 Decrease in accounts payable………….

(7,800) Decrease in interest payable……………

(2,200) Increase in salary payable………………

7,200 Decrease in other accrued liabilities…. (10,400) Decrease in income tax payable………. (2,500) Net cash provided by operating activities..

Financial Accounting: IFRS 12/e Solutions Manual

€4,300

50,700 €55,000

(45-60 min.) P 11-77B Req. 1 Salim Design Studio, Inc. Statement of Cash Flows Year Ended June 30, 20X6 Cash flows from operating activities: Net income……………………………………………

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ………………………………………

Loss on sale of land……………………………..

Increase in accounts receivable…………..…..

Increase in inventories ………………………..

Increase in prepaid expenses……………..…..

Increase in accounts payable……………..…..

Increase in accrued liabilities………………....

Decrease in taxes payable………………….….

Increase in interest payable…………………...

Decrease in salary payable …………………

Net cash provided by operating activities…..

Cash flows from investing activities: Sale of land……………………………………………

Purchase of long-term investments………….......

Net cash provided by investing activities…...

Cash flows from financing activities: Payment of cash dividends………………………..

Issuance of ordinary shares……………………….

Payment of long-term note payable……………...

Net cash used for financing activities………..

Net increase in cash………………………………….…

€ 73,500

14,000 7,000 (36,700) (57,800) (1,000) 1,000 88,100 (1,100) 1,000 (2,700)

33,700 (5,000) 28,700

(47,900) 21,200 (60,800) (87,500) € 26,500 2,400

Cash balance, June 30, 20X5…………………………..

Cash balance, June 30, 20X6………………………….

€ 28,900 Chapter 11

The Statement of Cash Flows

11,800 85,300

(continued) P 11-77B

Req. 1 Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable…………………………….. € 15,300 7,000 Paid off short-term note by issuing shares…………

Total noncash investing and financing activities…….. € 22,300

Financial Accounting: IFRS 12/e Solutions Manual

(continued) P 11-77B Req. 2 Salim Design Studio, Inc. Statement of Cash Flows Year Ended June 30, 20X6

Cash flows from operating activities: Receipts:

Collections from customers………….. € 272,700 Interest received………………………...

Total cash receipts………………….

Payments: To suppliers……………………………....

To employees…………………………….

For income tax…………………………...

For interest………………………………..

Total cash payments…………………

Net cash provided by operating activities

1,400 274,100 (130,900) (40,000) (12,600) (5,300) (188,800)

€ 85,300

Chapter 11 The Statement of Cash Flows

Decision Cases (45-60 min.) Decision Case 1 Req. 1 (indirect method for operating activities) T-Bar-M Camp, Inc. Statement of Cash Flows Year Ended December 31, 20X7 (Thousands) Cash flows from operating activities: Net income………………………………………………….

Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………….…...

Amortization of patents……………………………....

Increase in accounts receivable ($72 − $61)………

Increase in inventories ($194 − $181)………….…..

Increase in accounts payable ($63 − $56)………....

Decrease in accrued liabilities ($17 − $12)………...

Net cash provided by operating activities…………….

$ 97

$ 46 11 (11) (13) 7 (5)

Cash flows from investing activities: Purchase of PPE ($369 − $259)………………………… $(110) Purchase of long-term investments ($31 − $0)……… (31) Net cash used for investing activities………….….

Cash flows from financing activities: Issuance of ordinary shares ($149 − $61)…………….. $ 88 Payment of cash dividends ($156 + $97 − $213)…….. (40) Payment of long-term notes payable ($264 − $179)… (85) Net cash used for financing activities………..…….

Net (decrease) in cash………………………….…………….

Cash balance, December 31, 20X6…………………………

Cash balance, December 31, 20X7…………………………

Financial Accounting: IFRS 12/e Solutions Manual

35 132

(141)

(37) $ (46) 63 $ 17

(continued) Decision Case 1

Req. 2 The cash balance at the end of 20X7 is low because: • The camp paid $110,000 to buy new property, plant, and equipment.

• The camp paid off $85,000 of notes payable.

Req. 3 Year 20X7 was a good year. Net income was $97,000, and operations were the largest source of cash. Also, the company increased its property, plant, and equipment by $110,000 and paid off $85,000 of debt. On this basis, business appears to have been successful.

Chapter 11 The Statement of Cash Flows

(15-25 min.) Decision Case 2 Four-Star Catering looks like the better investment because: 1. Operations provide far more cash for Four-Star than for Applied Technology. Operations should be the main source of cash for a healthy company.

2. Four-Star is investing more in long-term PPE than Applied is.

Four-Star is laying a more solid foundation in revenueproducing assets than Applied is and hence is expected to earn more operating cash flows in the future.

3. Applied Technology’s main source of cash is the sale of PPE. This trend cannot continue indefinitely without hurting the company’s ability to produce revenue.

4. Four-Star is raising more cash by selling shares than Applied is. This gives Four-Star more cash to invest in research and development of new products and other innovations to enhance the company’s competitiveness. Applied, on the other hand, is paying off debt. That is not necessarily bad for Applied, but Four-Star appears to be a step ahead in terms of financing its operations with owners’ equity and investing the cash in income-producing assets.

Financial Accounting: IFRS 12/e Solutions Manual

Ethical Issue Req. 1 Cash flows from operating activities:

Net income…………………………

Increase in accounts receivable Net cash (used for) provided by operating activities….

Without With Reclassification Reclassification $ 37,000 $37,000 (80,000) ____--_ $(43,000) $37,000

Copenhagen Motors looks better with the reclassification because net cash flow from operations is positive.

Req. 2 The issue is whether or not it is ethical to reclassify accounts receivable from current assets to long-term assets.

Req. 3 and Req. 4 The stakeholders are Copenhagen Motors, its officers, directors and employees, as well as their present and future creditors.

Economic analysis: The plan to reclassify accounts receivable would have an immediate positive impact on Copenhagen Motors and its employees because it might enable the company to obtain the loan it desperately needs. However, this might be to the detriment of present and future creditors, because if Copenhagen Motors can’t collect the reclassified receivables, it may not be able to pay off its loans to creditors.

Chapter 11 The Statement of Cash Flows

(continued) Ethical Issue

Legal analysis: To reclassify receivables when, in fact, they are not truly collectible, even in the long run, might leave the company open later to a lawsuit for damages suffered by creditors who loan Copenhagen Motors money based on false information.

Ethical analysis: To reclassify receivables when, in fact, they are not truly collectible in the long run, deprives the banks of accurate information they need to make sound financial Reclassification would be unethical if Columbia expects to collect decisions. within the current period. In that case, the reclassification would appear to be designed to create a false picture of cash flow from operations. It is not truthful and not ethical. In the long run, no one benefits from this short-sighted decision.

Req. 5

The receivables should be classified in the way that best describes their collectability. In reality, most bank loan officers who know financial accounting (and most do) will closely examine these receivables classify them as long-term or shortterm accordingly for their own lender analysis.

Financial Accounting: IFRS 12/e Solutions Manual

(continued) Ethical Issue Req. 6

The reclassification would be ethical if Copenhagen Motors expects to collect the receivables beyond the current operating cycle, or one year if longer.

Chapter 11 The Statement of Cash Flows

Focus on Financials: Nestlé (30-40 min.)

1. Nestlé reports cash flows using the indirect method as the consolidated cash flow statements begin with net income. Also, Nestlé does not report collections from customers, payments to suppliers, and so on, which are reported under the direct method.

2. Direct method: a. Collections = CHF 89,310 million

Beg Bal Sales

Trade Receivables Dr Cr 10,746 87,088 86,679 Collections

End Bal

11,155

b. Payments to suppliers Payments = Cost of Sales + Increase in inventory – Increase in Accounts Payables = 45,468 + (11,982 – 10,101) – (20,907 – 18,515) = CHF 44,957 million 3. Nestlé’s main source of cash are from inflows from bonds and other non-current financial debt. For creditors, this would be something that they would not like, as their risk on investment would have increased without a corresponding increase in returns since the coupon payments are fixed. For managers and shareholders, taking on more debt is prima facie a favourable event, as leveraging would allow them to increase their returns on equity, and consequently, manager’s compensation.

The main use of cash is dividend payments to shareholders. Stockholders who are holding the shares for dividend yields will like this, but those holding for capital appreciation will prefer the dividends be reinvested into further growth. The relatively high dividend yield suggests a mature company, which very much aligns with the low-growth nature of Nestlé. Creditors generally dislike dividend payments because they are not mandatory, and every dollar paid as dividends is a dollar less to pay interest (although in the event of winding up capital is returned to creditors first and shareholders second).

4.

2021 2020 Free Cash Flow (Operating Cash Flow- 13,864 – 4,880 =8,984 m 14,377 – 4,076 = 10,301 m Capital Expenditures) 14,377/84,343 =0.17 Cash Flow Margin (Operating cash flow/13,864/87,088 =0.16 Net sales) Cash Flow Interest Coverage (Cash flow13,864/953=14.5 times 14,377/983=14.6 times from operations/financing costs) 13,864/16,905=0.82 14,377/12,232=1.44 Cash Realisation Ratio

Financial Accounting: IFRS 12/e Solutions Manual

Group Projects (2-3 hours) Student responses will vary on this assignment.

Chapter 11 The Statement of Cash Flows

Chapter 12 Financial Statement Analysis Short Exercises (5-10 min.) S 12-1

Revenues Expenses Net income

(Dollars in thousands) 20X6 20X5 20X4 $10,727 $9,832 $9,411 6,325 6,099 5,772 $ 4,402 $ 3,733 $3,639

Increase (Decrease) 20X6 20X5 Amount Percent Amount Percent 4.5 % $895 9.1% $421 2.6% $669

17.9%

$ 94

(5-10 min.) S 12-2 Trend percentages:

Sales……………

Net income…….

20X6 146% 205%

Financial Accounting: IFRS 12/e Solutions Manual

20X5 117% 166%

20X4 103% 126%

20X3 100% 100%

(10-15 min.) S 12-3 20X6 Amount Percent Cash $ 7,800 1.5% Receivables, net 36,400 7.0 Inventory 270,400 52.0 Prepaid expenses 2.0 10,400 195,000 37.5 Property, plant, and equipment, net Total assets $520,000 100.0%

20X5

20X4

Amount Percent $ 2,250 0.5% 22,500 5.0 198,000 44.0 18,000 4.0

Amount Percent $ 2,000 0.5% 24,000 6.0 148,000 37.0 3.0 12,000

209,250

46.5

$450,000 100.0%

214,000 53.5 $400,000 100.0%

Inventory, as a percent of total assets, has grown dramatically; Craft appears to be having difficulty turning over its inventory.

Property, plant and equipment, as a percentage of total assets, appears to be wearing out and is not being replaced due to the growth in inventory which has led to a tight cash position.

Chapter 12

Financial Statement Analysis

(10 min.) S 12-4 AMOS (Amounts in millions) Amount Percent Net sales $21,700 100.0% Cost of goods sold 12,998 59.9 Selling and administrative expenses 6,250 28.8 108 0.5 Interest expense 66 0.3 Other expense 868 4.0 Income tax expense $ 1,410 6.5% Net income

PLC Amount Percent $17,400 100.0% 12,058 69.3

3,376 70 86 418 $ 1,392

19.4 0.4 0.5 2.4 8.0%

AMOS earned slightly more net income. Students can argue that AMOS is more profitable because it earns slightly more net income than PLC.

PLC’s net income was a higher percentage of net sales. The students can argue that PLC is more profitable because it earns a higher percentage of profit on each dollar of sales than AMOS does.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 12-5 (Dollar amounts in millions) 20X6 20X5 20X4 Total current assets

=

Total current liabilities Current ratio

$560

$455

$445

$360

$333

$356

1.56

1.37

1.25

=

=

=

The company’s ability to pay its current liabilities is improving.

(5-10 min.) S 12-6 1.

(Dollar amounts in millions) 20X6 20X5 Cash + Short-term investments + Receivables, net Total current assets Total current liabilities

=

=

$2,406 + $ 14 + $ 492 $2,912 $2,414 1.21

$1,806 + $ 168 + $ 512 $2,486 $2,282 =

1.09

2. Sagittarius’s acid-test ratio looks fairly good both because it is slightly above 1.0 and it is higher than the ratios of the other three companies.

Chapter 12

Financial Statement Analysis

(10-15 min.) S 12-7 (Dollar amounts in millions) a. Inventory turnover =

Cost of goods sold

$4,460

=

Average inventory

($182 + $162) / 2 =

$4,460 $172

= 25.9 times

b. Days’ sales in receivables: One day’s = sales Days’ sales in = receivables

$19,100 365 Average net receivables One day’s sales

= $52.32

$502* = $52.32 = 9.59 days

_____ *($492 + $512) / 2 = $502

These measures look strong. Turning over inventory 26 times per year is fast, and collecting average receivables within ten days is also very fast.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 12-8 (Dollar amounts in millions) 1. Debt ratio =

Total liabilities Total assets

=

$11,856

=

0.814

$14,564

Sagittarius’s debt ratio is 81.4%.

2. Times-interest- Income before = interest and taxes earned ratio Interest expense

$2,138 + $308 = 7.9 $308

3. The debt ratio is high which indicates excessive leverage.

However the times-interest-earned ratio is high. Overall, the company’s ability to pay its liabilities and interest expense looks mixed.

Chapter 12

Financial Statement Analysis

(10 min.) S 12-9 (Dollar amounts in millions)

a. Gross profit margin

Operating profit margin

Net profit margin

b. Return on total assets

=

Revenue – Cost of goods sold Revenue

=

Income before income = = taxes Revenue

=

Net income Revenue

=

$19,100$4,460 = 76.6% $19,100

$2,138 $19,100

$1,562 $19,100

= 11.2%

= 8.2%

Net $1,562 income = Average total assets = ($14,564 + $13,244) / 2 =

11.2%

c. Rate of return Net Preference income – dividends on ordinary $1,562 − $0 shareholders' = Average ordinary = ($2,708 + $2,906) / 2 = 55.6% equity shareholders' equity

These rates of return are very strong.

Financial Accounting: IFRS 12/e Solutions Manual

(5-10 min.) S 12-10 (Amounts, except per-share amounts, in millions) Net income − Preference 1. EPS = dividends Number of ordinary shares outstanding

=

$510 − $25.50* 100

=

$4.85

_____ *Preference dividend = $25.50 ($425 × .06)

Market price per share Price/earnings ratio =

of ordinary shares EPS

=

$57.12 $4.85 = 11.78

2. The stock market says that $1 of Tri-State Cars’ net income is worth $11.78 million.

Chapter 12

Financial Statement Analysis

(10 min.) S 12-11 Income Statement Thousands $15,000 Net sales Cost of goods sold 5,896 (a) Selling expenses 3,022 Administrative expenses 656 Interest expense 3,026 (b) Other expenses 308 Income before taxes 2,092 Income tax expense 292 (c) Net income $ 1,800 (d)

$1,496 + $1,452 2 × 4 = $5,896

(a)

=

(b)

= $15,000 − $5,896 − $3,022 − $656 − $308 − $2,092 = $3,026

(d)

= $15,000 × 0.12 = $1,800

(c)

= $2,092 − $1,800 = $292

Financial Accounting: IFRS 12/e Solutions Manual

(15-20 min.) S 12-12 Balance Sheet (Dollars in thousands) Cash $ 170 Receivables 1,540(a) Total current liabilities Inventories 1,524 Long-term debt Prepaid expenses 2,086 (b) Other long-term Total current assets 2,660 (c) Liabilities Plant assets, net Other assets Total assets

5,280 (d) 4,200 $14,800

Share capital Retained earnings Total liabilities and Equity

$3,800 2,160 (e) 1,440 370 7,030 $14,800 (f)

(f) = $14,800 (same as total assets) (e) = $14,800 × 0.50 = $7,400 $7,400 − $3,800 − $1,440 = $2,160 Or $14,800 − $3,800 − $1,440 − $370 − $7,030 = $2,160 (c) = $3,800 × 1.40 = $5,320 (a) = $3,800 × 0.45 = $1,710; $1,710 − $170 = $1,540 (b) = $5,320 − $170 − $1,540 − $1,524 = $2,086 (d) = $14,800 − $5,320 − $4,200 = $5,280

Chapter 12

Financial Statement Analysis

(15-20 min.) P 12-13 TO:

Standard Chartered Investment Committee

FROM:

[Student Name]

SUBJECT: Investment Recommendation I recommend that we invest in Graphit.net for the following reasons: 1. Graphit.net’s. return on equity (ROE) is 8% higher than Data Doctors. An investment in Graphit.net should therefore produce a higher return than an investment in Data Doctors’ shares.

2. Graphit.net’s ROE exceeds its return on assets by a far wider margin than does Data Doctors. This means that Graphit.net is earning more with its borrowed funds than Data Doctors is earning.

3. Graphit.net can cover its interest expense with operating income 17 times compared to 11 times for Data Doctors.

4. Graphit.net collects receivables faster than Data Doctors does. This suggests that cash flow is stronger at Graphit.net 5. Graphit.net’s gross profit percentage is higher than Data Doctors’.

6. Data Doctors is better than Graphit.net on inventory turnover and net income as a percentage of sales. These ratios provide insight about companies’ operations, but ROE and interest coverage are more “bottom-line” oriented. And days’ sales in receivables give an indication about cash flow. For these reasons, more importance is placed on ROE, interestcoverage, and days’ sales in receivables, and Graphit.net outstrips Data Doctors on these measures.

Financial Accounting: IFRS 12/e Solutions Manual

(10 min.) S 12-14 (All dollar amounts in millions.)

a. Inventory turnover =

Cost of goods sold 4, 423 = = 3.74 times Average inventory (1,242+1,121)/2

b. Accounts Receivable turnover =

c. Accounts Payable turnover =

8, 622 Sales revenue = = 10.34 times (856+812)/2 Average accounts receivable

Cost of goods sold 4, 423 = = 3.13 times Average accounts payable (1,524+1,302)/2

Note: While calculating accounts payable turnover ratio, cost of goods sold has been used as information relating to net credit purchase is not available.

Chapter 12

Financial Statement Analysis

Exercises Group A

(5-15 min.) E 12-15A 20X6

20X5

20X4

Total current assets

$280,000

$330,000

$350,000

Total current liabilities

125,000

160,000

170,000

Working capital

$155,000

$170,000

$180,000

Decrease $15,000 8.8%

Decrease $10,000 5.6%

The continued decrease in 20X6 working capital is unfavorable.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 12-16A Sensible Music Co. Horizontal Analysis of Comparative Income Statement Years Ended December 31, 20X6 and 20X5 INCREASE (DECREASE) 20X6 Total revenue

20X5

AMOUNT PERCENT

$855,000

$915,000 $(60,000)

(6.6)%

Cost of goods sold

$403,000

$409,000

$(6,000)

(1.5)

Selling and general expenses

233,000

262,000

(29,000)

(11.1)

Interest expense

9,300

10,600

(1,300)

(12.3)

Income tax expense

84,000

85,000

(1,000)

(1.2)

Total expenses

729,300

766,600

(37,300)

(4.9)

$ 125,700 $ 148,400 $ (22,700)

(15.3)

Expenses:

Net income

Chapter 12

Financial Statement Analysis

(5-10 min.) E 12-17A Trend percentages: Year 4

Year 3

Year 2

Year 1

Year 0

Total revenue..

138.6%

117.9%

107.9%

97.9%

100.0%

Net income…...

117.8

112.2

97.8

83.3

100.0

Total revenue, growing 39% over the five year period, grew faster than net income which only grew by 18%.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 12-18A Eighteen Hole Golf Company Vertical Analysis of Balance Sheet December 31, 20X6 AMOUNT PERCENT ASSETS Total current assets……………………….. $ 82,460

21.7%

Property, plant, and equipment, net.…… 224,580

59.1

Other assets…………………………………

72,960

19.2

Total assets…………………………………. $380,000

100.0

LIABILITIES Total current liabilities……………………. $ 93,860

24.7

Long-term debt……………………………..

55.1

209,380

Total liabilities……………………………… 303,240

79.8

SHAREHOLDERS’ EQUITY Total shareholders’ equity………………..

76,760 Total liabilities and shareholders’ equity $380,000

Chapter 12

20.2 100.0

Financial Statement Analysis

(10-15 min.) E 12-19A Sensible Music Co. Comparative Common-Size Income Statement Years Ended December 31, 20X6 and 20X5 20X6 20X5 Total revenue………………………………….… 100.00%100.00% Expenses: Cost of goods sold…………………………..

47.13

44.70

Selling and general expenses……………..

27.25

28.63

Interest expense……………………………..

1.09

1.16

Income tax expense…………………………

9.83

9.29

Total expenses……………………………….

85.30

83.78

Net income………………………………………..

14.70

16.22

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 12-20A Sensible Music Co enjoys a lower cost of sales (47.13%) as compared to Nestlé (49.40%). Thus, it has a higher gross margin. It also has a higher operating profit margin of 25.6% as compared to Nestlé’s 14.71%. However, these do not translate into a higher net profit margin due to a higher percentage of income tax expense and lack of other sources of non-operating income.

Chapter 12

Financial Statement Analysis

(10-15 min.) E 12-21A a. Current ratio

=

$386,000 $258,000

= 1.50

=

$52,000 + $28,000 + $100,000 $258,000

= 0.70

b Acid-test (quick) ratio

=

$548,000 = 3.2 times ($188,000 + $152,000) / 2

=

$980,000 = 8.0 times ($100,000 + $146,000) / 2

e. Days’ sales in = average receivables

($100,000 + $146,000) / 2 = 46 days $980,000 / 365

f. Cash conversion cycle

($100,000 + $146,000) / 2 + $980,000 / 365

c. Inventory turnover d. Accounts receivable turnover

=

($188,000 + $152,000) / 2 $548,000 / 365 ($258,000 + $192,000) / 2 $548,000 / 365 45.8 + 113.2 – 149.9 =

Financial Accounting: IFRS 12/e Solutions Manual

=

9 days

(15-20 min.) E 12-22A a. Current ratio: 20X6:

20X5:

$42,000 + $64,000 + $234,000 + $486,000 + $36,000 $494,000 = 1.74 $106,000 + $30,000 + $254,000 + $544,000 + $8,000

$624,000

= 1.51

b. Acid-test ratio: $42,000 + $64,000 + $234,000

20X6:

=

0.69

=

0.63

$494,000 20X5:

$106,000 + $30,000 + $254,000 $624,000

c. Debt ratio: 20X6:

$548,000* = 0.55 $1,000,000

_____

$892,000** = 0.84 $1,062,000

20X5: _____

*$494,000 + $54,000 = $548,000.

**$624,000 + $268,000 = $892,000

d. Times-interest-earned ratio: 20X6:

$382,000 = 4.90 $78,000

20X5:

$320,000 = 3.56 $90,000

Summary: The company’s ability to pay current liabilities, longterm debt, and interest expense improved during 20X6, as shown by the improvement in all four ratios.

Chapter 12

Financial Statement Analysis

(10-15 min.) E 12-23A (Dollars in thousands) a. Rate of return on net sales: 20X6:

$21,000 = 0.175 $120,000

20X5:

$20,000 = 0.200 $100,000

b. Rate of return on total assets: $21,000 $102,000*

20X6:

= 0.206

20X5:

$20,000 $91,500**

= 0.219

_____ _____ *($104,000 + $100,000) / 2 = $102,000.

**($100,000 + $83,000) / 2 = $91,500.

c. Rate of return on ordinary shareholders’ equity: 20X6:

$21,000 − $3,000 $71,000*** = 0.254

20X5:

$20,000 − $2,000 $69,500**** = 0.259

_____

_____

***($72,000 + $70,000) / 2 = $71,000.

****($70,000 + $69,000) / 2 = $69,500.

d. Earnings per share of ordinary share: 20X6

$21,000 − $3,000 10,000 = $1.80

20X5:

$20,000 − $2,000 9,000 = $2.0

The company’s operating performance declined during 20X6. All four profitability measures decreased.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 12-24A 20X6

20X5

a. Price/earnings ratio: $24.50 = ($42,000 − $2,000*) / 45,000

27.6

$17.50 ($29,500 − $2,000*) / 45,000

=

28.6

_____ *$40,000 × .05 = $2,000

b. Dividend yield: $11,000 / 45,000 $24.50

= 1.00%

$11,500 / 45,000 $17.50

= 1.46%

c. Book value per share of ordinary share: $160,000 − $40,000 45,000

= $2.67

$260,000 − $40,000 45,000

= $4.89

The share’s attractiveness decreased during 20X6, as shown by the decreases in the price/earnings ratio, dividend yield and in book value per share. Overall, the ordinary share looks less attractive than it did a year ago.

Chapter 12

Financial Statement Analysis

(15-20 min.) E 12-25A (All dollar amounts in millions.)

a. Gross Profit = Net Sales × Gross Profit Ratio So, Net Sales = Gross profit ÷ Gross Profit ratio = $6,000 ÷ 20% = $ 30,000 millions b. Accounts Receivable turnover = 3 months = 12 ÷ 3 = 4 times Accounts Receivable turnover (times) =

Net Sales revenue Average accounts receivable

So, Average accounts receivable = Net sales ÷ Accounts Receivable turnover = $30,000 ÷ 4 = $7,500 million Average accounts receivable = (Opening Accounts receivable + Closing accounts receivable) ÷ 2 = (Closing Accounts receivable + 100 + Closing accounts receivable) ÷ 2 = Closing Accounts receivable + (100 ÷ 2) So, Closing Accounts receivable = Average accounts receivable – (100 ÷ 2) = $7,500 – 50 = $7,450 million c. Accounts Payable turnover = 2 months = 12 ÷ 2 = 6 times Cost of goods sold Accounts Payable turnover (times) = Average accounts payable

So, Average accounts payable = COGS ÷ Accounts payable turnover = ($30,000 x 0.80) ÷ 6 = $4,000 million So, Closing Accounts payable = Average accounts payable – (120 ÷ 2) = $4,000 – 60 = $3,940 million d. Inventory turnover = 6 months = 12 ÷ 6 = 2 times Cost of goods sold Inventory turnover (times) = Average inventory

So, average inventory = COGS ÷ Inventory turnover = ($30,000 × 0.80) ÷ 2 = $12,000 million

Financial Accounting: IFRS 12/e Solutions Manual

Closing inventory = Average inventory + (200 ÷ 2) = $12,000 + 100 = $12,100 million

Chapter 12

Financial Statement Analysis

Exercises Group B (5-15 min.) E 12-26B 20X6

20X5

20X4

Total current assets

€840,000

€640,000

€520,000

Total current liabilities

380,000

300,000

240,000

Working capital

€460,000

$340,000

$280,000

Increase €120,000 35.3%

Increase €60,000 21.4%

The increase in 20X6 working capital is favorable.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 12-27B Fashion Music Co. Horizontal Analysis of Comparative Income Statement Years Ended December 31, 20X6 and 20X5 INCREASE (DECREASE) 20X6 Total revenue

€1,104,000

20X5

AMOUNT PERCENT

€919,000 €185,000

20.1%

Expenses: Cost of goods sold

€489,000

$400,450

$88,550

22.1

Selling and general expenses

299,000

269,000

30,000

11.2

Interest expense

25,500

14,500

11,000

75.9

Income tax expense

107,500

86,850

20,650

23.8

Total expenses

921,000

770,800

150,500

19.5

€183,000€ 148,200 € 34,800

23.5

Net income

Chapter 12

Financial Statement Analysis

(5-10 min.) E 12-28B Trend percentages: Year 4

Year 3

Year 2

Year 1

Year 0

Total revenue..

140.2%

122.4%

104.4%

98.6%

100%

Net income…...

145.0

135.0

97.5

82.5

100

Net income grew faster, growing by 45% during the period, compared to 40% for total revenue.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 12-29B Omega Golf Company Vertical Analysis of Balance Sheet December 31, 20X6 AMOUNT PERCENT ASSETS Total current assets……………………….. € 92,000

15.49%

Property, plant, and equipment, net.…… 424,000

71.38

Other assets…………………………………

78,000

13.13

Total assets…………………………………. €594,000

100.00

LIABILITIES Total current liabilities……………………. € 108,000

18.18

Long-term debt……………………………..

220,000

37.04

Total liabilities………………………………

328,000

55.22

SHAREHOLDERS’ EQUITY Total shareholders’ equity……………….. 266,000

44.78

Total liabilities and shareholders’ equity €594,000

100.00

Chapter 12

Financial Statement Analysis

(10-15 min.) E 12-30B Fashion Music Co. Comparative Common-Size Income Statement Years Ended December 31, 20X6 and 20X5 20X6 20X5 Total revenue………………………………….… 100.00%100.00% Expenses: Cost of goods sold………………………….. 44.29

43.57

Selling and general expenses…………….. 27.08

29.27

Interest expense……………………………..

2.31

1.58

Income tax expense…………………………

9.74

9.45

Total expenses………………………………. 83.42 Net income……………………………………….. 16.58

83.87 16.13

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 12-31B Fashion Music Co enjoys a lower cost of sales (44.29%) as compared to Nestlé (49.40 %). Thus, it has a higher gross margin. It also has a higher operating profit margin of 28.6% as compared to Nestlé’s 14.71%. However, these do not translate into a higher net profit margin due to a higher percentage of income tax expense and lack of other sources of non-operating income.

Chapter 12

Financial Statement Analysis

(10-15 min.) E 12-32B =

€512,000 €266,000

= 1.92

=

€130,000 + €26,000 + €158,000 €266,000

= 1.18

=

€556,000 = 3.3 times (€186,000 + €150,000) / 2

=

€996,000 = 6.2 times (€158,000 + €164,000) / 2

e. Days’ sales in = average receivables

(€158,000 + €164,000) / 2 = 59 days €996,000 / 365

f. Cash conversion cycle

(€158,000 +€164,000) / 2 + €996,000 / 365

a. Current ratio

b Acid-test (quick) ratio

c. Inventory turnover d. Accounts receivable turnover

=

(€186,000 + €150,000) / 2 €556,000 / 365 (€266,000 + €194,000) / 2 €556,000 / 365 59.0 + 110.3 – 151.0 =

Financial Accounting: IFRS 12/e Solutions Manual

= 18 days

(15-20 min.) E 12-33B a. Current ratio: 20X6:

€54,000 + €66,000 + €240,000 + €476,000 + €44,000 €374,000 = 2.35 €94,000 +€8,000 + €270,000 + €542,000 +€16,000 €664,000

20X5:

= 1.40

b. Acid-test ratio: €54,000 + €66,000 + €240,000

20X6:

= 0.96

€374,000 €94,000 +€8,000 + €270,000 €664,000

20X5:

= 0.56

c. Debt ratio: 20X6:

€668,000* = 0.57 €1,180,000

20X5:

€832,000** = 0.82 €1,020,000

__________ *€374,000 + $294,000 = $668,000.

**€664,000 + €168,000 = $832,000

d. Times-interest-earned ratio: €382,000 €82,000 20X6:

= 4.66

20X5:

€338,000 = 3.93 €86,000

Summary: The company’s ability to pay current liabilities, longterm debt, and interest expense improved during 20X6, as shown by the improvement in all four ratios.

Chapter 12

Financial Statement Analysis

(10-15 min.) E 12-34B (Dollars in thousands) a. Rate of return on net sales: 20X6:

$52,000 = 0.190 $274,000

20X5:

$38,000 = 0.167 $227,000

b. Rate of return on total assets: 20X6:

$52,000 $244,000*

= 0.213

$38,000

20X5:

$233,000**

= 0.163

_____ _____ *($249,000 + $239,000) / 2 = $244,000. **($239,000 + $227,000) / 2 = $233,000.

c. Rate of return on ordinary shareholders’ equity: 20X6:

$52,000 − $17,000 = 0.333 $105,000***

_____

20X5:

$38,000 − $15,000 = 0.223 $103,000****

_____

***($106,000 + $104,000) / 2 = $105,000. ****($104,000 + $102,000) / 2 = 103,000.

d. Earnings per share of ordinary share: 20X6:

$52,000 − $17,000 19,000

= $1.84

20X5:

$38,000 − $15,000

= $1.35

17,000

The company’s operating performance improved during 20X6.

All four profitability measures increased.

Financial Accounting: IFRS 12/e Solutions Manual

(10-15 min.) E 12-35B 20X6

20X5

a. Price/earnings ratio: $24.00 = (€46,000 − €2,700*) / 40,000

22.2

$25.16 (€49,000 −€2,700*) / 40,000

=

21.7

_____ *$45,000 × .06 = $2,700

b. Dividend yield: €14,000 / 40,000 $24.00

= 1.46%

€6,500 / 40,000 €25.16

= 0.65%

c. Book value per share of ordinary share: €287,500 − €45,000 40,000

= $6.06

€262,500 − €45,000 40,000

= €5.44

The share’s attractiveness increased during 20X6, as shown by the increases in the price/earnings ratio and in book value per share. The dividend yield more than doubled. Overall, the ordinary share looks more attractive than it did a year ago.

Chapter 12

Financial Statement Analysis

(15-20 min.) E 12-36B a. Gross Profit = Net Sales × Gross Profit Ratio So, Net Sales = Gross profit ÷ Gross Profit ratio = 7,500 ÷ 20% = Є 37,500 million b. Accounts Receivable turnover = 4.5 months = 12 ÷ 4.5 = 2.667 times Net Sales revenue Accounts Receivable turnover (times) = Average accounts receivable So, Average accounts receivable = Net sales ÷ Accounts Receivable turnover = 37,500 ÷ 2.667 = Є 14,062.50 million Average accounts receivable = (Opening Accounts receivable + Closing accounts receivable) ÷ 2 = (Closing Accounts receivable + 150 + Closing accounts receivable) ÷ 2 = Closing Accounts receivable + (150 ÷ 2) So, Closing Accounts receivable = Average accounts receivable – (150 ÷ 2) = 14,062.50 – 75 = Є 13,987.50 million c. Accounts Payable turnover = 3 months = 12 ÷ 3 = 4 times Cost of goods sold Accounts Payable turnover (times) = Average accounts payable So, Average accounts payable = COGS ÷ Accounts payable turnover = (37,500 x 0.80) ÷ 4 = Є 7,500 million So, Closing Accounts payable = Average accounts payable – (180 ÷ 2) = 7,500 – 90 = Є 7,410 million d. Inventory turnover = 9 months = 12 ÷ 9 = 1.33 times Cost of goods sold Inventory turnover (times) = Average inventory So, average inventory = COGS ÷ Inventory turnover = (37,500 × 0.80) ÷ 1.33 = Є 22,500 million Closing inventory = Average inventory + (300 ÷ 2) = 22,500 + 150 = Є 22,650 million

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) E 12-37 ORDER OF COMPUTATION

Millions

Given Current assets……………………………………...

4 Property, plant, and equipment……. $7,800 Given Less Accumulated depreciation……

$11,900

(1,700)

6,100

3

Total assets ($12,600 ÷ 0.7)…………………….

$18,000

1

Current liabilities ($11,900 ÷ 1.40)………………

$ 8,500

2

Long-term liabilities ($12,600 − $8,500)………..

4,100

6

Shareholders’ equity ($18,000 − $12,600)……..

5,400

5

Total liabilities and shareholders’ equity……...

Chapter 12

$18,000

Financial Statement Analysis

(20-30 min.) E 12-38 ORDER OF COMPUTATION

Millions

6

Sales ($1,480 ÷ 0.25)…………………………….

$ 5,920

7

Operating expenses ($5,920 − $1,480)……….

4,440

5

Operating income………………………………..

1,480

4

Interest expense………………………………….

800

2

Pretax income [$408 ÷ (1 − 0.40)]……………..

680

3

Income tax expense ($680 × 0.40)…………..

272

1

Net income ($3,400 × .12)………………………

$ 408

Financial Accounting: IFRS 12/e Solutions Manual

Quiz Q12-39 Q12-40 Q12-41 Q12-42 Q12-43 Q12-44

a c a d d c

Q12-45

b

($19,029 − $15,073 = $3,956 increase; $3,956 / $15,073 = 0.262 = 26.2%) ($10,598 / $11,378 = 0.931 ≈ .9 [($4,301 + $830 + $3,402) / $11,378 = 0.75] ($42,810 / $30,968 = 1.382) ($34,010 / $42,810 = 0.794) ($3,402 + $2,401) / 2 $42,810 / 365 -

($427 + 410) / 2 $34,010 / 365

+

($7,702+$6,002) / 2 $34,010 / 365

= -44.3 days

Q12-46

b

($3,402 + $2,401) / 2 $42,810 / 365

Q12-47

c

($4,883 / (long-term debt of $301 × .11) = 147.5 ≈ 148 times)

Q12-48

d

20X6: $3,947 / $42,810 = 9.22% 20X5: $1,932 / $35,299 = 5.47% 20X4: $732 / $30,968 = 2.36%

Q12-49

a

EPS $1.34

=

= 25 days

Net income $3,947 Shares outstanding*

Shares outstanding = 2,946 Q12-50

B

$5,649 = $1.84 3,240 − 175 *usually calculated based on weighted average

Chapter 12

Financial Statement Analysis

Problems Group A (20-30 min.) P 12-51A Req. 1 Canberra Shipping, Inc. Trend Percentages 20X8

20X7

20X6

20X5

20X4

Net sales

210%

162%

118%

103%

100%

Net income

130

117

170

127

100

Total assets

150

132

126

109

100

Req. 2 Dollar amounts in thousands

20X8 Net income Net Sales

$39 $672

=5.80%

20X7

20X6

$35 =6.76% $518

$51 =13.49% $378

Req. 3 Evaluation:

Canberra Shipping’s rate of return on net sales compares favorably with the industry. Return on sales was better than 5%, the industry standard, in both 20X5 and 20X6 and was much higher than 7% in 20X4 which an outstanding return.

However, there is a definite trend of a declining rate of return on net sales over the past three years.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 12-52A Req. 1 McDonough Products, Inc. Common-Size Income Statement Compared to Industry Average Year Ended December 31, 20X6 McDonough INDUSTRY Products AVERAGE Net sales………………………………………

Cost of goods sold………………………….

100.0% 70.0

100.0% 57.3

Gross profit…………………………….……..

Operating expenses…………………………

30.0 25.0

42.7 29.4

Operating income……………………………

Other expenses………………………………

5.0 1.0

13.3 2.5

Net income……………………………………

4.0%

10.8%

McDonough Products, Inc. Common-Size Balance Sheet Compared to Industry Average December 31, 20X6 McDonough INDUSTRY PRODUCTS AVERAGE Current assets……………………………….

76.0%

72.1%

Fixed assets, net…………………………….

Intangible assets, net……………………….

18.5 3.4

19.0 0.8

Other assets………………………………….

Total assets…………………………………..

2.1

9.1

100.0%

100.0%

Current liabilities………………………….…

38.8%

47.2%

Long-term liabilities…………………………

Shareholders’ equity………………………..

21.8 39.4

21.0 31.8

Total liabilities and shareholders’ equity..

100.0%

100.0%

Chapter 12

Financial Statement Analysis

(continued) P 12-52A Req. 2 McDonough Products’ common-size income statement shows that its ratios of gross profit to net sales, operating income to net sales and net income to net sales are all worse than the industry

averages.

Overall,

McDonough

Products’ profit

performance is worse than average for the industry.

Req. 3 McDonough Current ratio = 76% / 38.8% = 1.96 Industry Current ratio = 72.1% / 47.2% = 1.53

McDonough Debt ratio = 21.8% Industry Debt ratio = 21.0% McDonough Products’ common-size balance sheet shows that its

ratios of current assets, current liabilities, and shareholders’ equity to total assets are better than the industry averages.

Overall, the company’s financial position is better than average for companies in its industry.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) P 12-53A Inventory Resident Period

= [($32,000 + $24,000)/2] / ($166,000/365) = 61.6 days

Receivables Collection = [($48,000 + $36,000)/2] / ($352,000/365) Period = 43.6 days Payables Collection Period

= [($40,000 + $32,000)/2] / ($166,000/365) = 79.2 days

Cash Conversion Cycle = Inventory Resident + Receivables Collection – Payables Collection = 61.6 + 43.6 – 79.2 = 26 days ACC’s cash conversion cycle is relatively good for a trading business. Though the inventory and receivables periods of about two months and 1.5 months meant a somewhat long operational cycle, ACC manages its cash flow by paying its suppliers just within three months.

Chapter 12

Financial Statement Analysis

(30-40 min.) P 12-54A Req. 1 (ratios before the transactions) (Dollar Amounts and Share Quantities in Thousands) Current Ratio

Debt Ratio

$600

$752

$50 + $76 + $164 + $298 + $12 = 1.68 $82 + $202 + $74

Earnings per share

$358 + $320 + $74 = 0.56 $1,348

$192 = $1.85* 104

$358

____ *Not in thousands.

Req. 2 (ratios after the transactions) (Dollar Amounts and Share Quantities in Thousands) Transaction

Current Ratio

a.

$600 + $260

b.

$358 $600 + $800

c.

$358 $600 − $50

= 2.40

= 3.91

Debt Ratio $752 + $260 $1,348 + $260 $752

= 0.63

$1,348 + $800 = 0.35 $752 − $50

Earnings per Share No effect*

$192 104 + 80 No effect

$358 − $50 = 1.79 $600 + $96

$1,358 − $50 = 0.54 $752 + $96

d.

$358 + $96 = 1.53

$1,348 + $96 = 0.59 No effect

e.

No effect

No effect

= $1.04**

No effect

_____ * EPS may go down if interest on the long term note payable is considered ** Not in thousands.

Financial Accounting: IFRS 12/e Solutions Manual

(40-50 min.) P 12-55A Req. 1 (Dollar Amounts and Share Quantities in Thousands) 20X6

a. Current ratio: b. Inventory turnover:

$1,124 $562 $752 ($596 + $570) / 2

c. Times-interest-

$384

earned ratio:

$74

d. Return on assets:

e. Return on Ordinary shareholders’ equity:

f. Earnings per share of ordinary shares:

g.

Price/earnings ratio:

20X5 = 2.00

= 1.29

= 5.19

$230 = 0.14 ($1,692 + $1,550) / 2 $230 − $7.0 ($508 + $404) / 2

$230 − $7.0 40

$82.20* $5.58*

= 0.49

$998 $534 $568 ($570 + $362) / 2 $338 $102

= 1.87

= 1.22

= 3.31

$130 = 0.09 ($1,550 + $1,420) / 2 $130 − $7.0 ($404+ $390) / 2

= 0.31

$130 − $7.0 = $5.58*

= 14.73

36

$52.96* $3.42*

= $3.42*

= 15.49

_____ *Not in thousands.

Chapter 12

Financial Statement Analysis

(continued) P 12-55A Req. 2 Decisions: a. The company’s financial position improved during 20X6 as shown by increases in the current ratio, the inventory turnover and in the times-interest-earned ratio. b. The ordinary share’s attractiveness increased during 20X6, as shown by the increase in the market price of the ordinary share. This increase is consistent with the increase in return on assets, return on ordinary shareholders’ equity, and earnings per share of ordinary share. The price/earnings ratio showed a slight decline.

Req. 3 This problem gives you practice in computing and evaluating several of the ratios used in investment analysis. By analyzing the two-year trends in the ratios, you can see whether the company’s abilities to pay its debts, sell its inventory, and generate profits have improved or deteriorated during this period. Improving ratio values generally indicate an attractive investment, and deteriorating ratio values usually signal an unattractive investment.

Financial Accounting: IFRS 12/e Solutions Manual

(45-60 min.) P 12-56A Req. 1 (Dollar Amounts and Share Quantities in Thousands)

a. Acid-test ratio:

DVR $22 + $10 + $182 $362 = 0.59 $450

Express $38 + $14 + $167 $333 = 0.66 $383

b. Inventory

($210 + $205) / 2

($181 + $199) / 2

turnover:

c. Days’ sales in

($182 + $144) / 2

average receivables:

$605 / 365

d. Debt ratio:

$673 $981

= 2.17

= 98

= 0.69

e. Times-interest- Ratio is not meaningful earned ratio:

f.

because DVR has no interest expense.

Return on ordinary $62 ($308 + $260) / 2 = 21.8% shareholders’ eqity :

($167 + $195) / 2 $520 / 365 $700 $935 $75 $17

= 2.02

=

127

= 0.75

= 4.41

$40 − ($30 × .05) [($235 − $30) + = 19.4% ($221 − $30)] / 2 $40 − ($30 × .05)

g. Earnings per share

$62

of ordinary share:

100 $6.10*

h. Price/earnings ratio:

$0.62*

= $0.62*

= 9.8

15

$55.00* $2.57*

= $2.57*

= 21.4

*Not in thousands.

Chapter 12

Financial Statement Analysis

(continued) P 12-56A Decision: The ordinary share of DVR seems to fit the investment strategy better. Its price/earnings ratio is less than half of that of Express, and DVR appears to be in slightly better shape financially than Express. On several of the ratios, the two companies are relatively close. The ratios that tip the decision in favor of DVR are days’ sales in receivables, the debt ratio, and the return on ordinary shareholders’ equity.

Req. 2

EVA®

DVR

Express

$62,000 − ($260,000 × .10)

$40,000 + $17,000 − [($299,000 + $221,000) × .10]

= $62,000 − $26,000

= $57,000 − $52,000

= +$36,000

= +$5,000

The EVA® analysis confirms the conclusion from the ratio analysis. DVR appears to be the better investment.

Financial Accounting: IFRS 12/e Solutions Manual

Problems Group B (20-30 min.) P 12-57B Req. 1 Salvador Shipping, Inc. Trend Percentages 20X8

20X7

20X6

20X5

20X4

Net sales

205%

168%

119%

103%

100%

Net income

123

110

167

127

100

Total assets

147

131

125

113

100

Req. 2 Dollar amounts in thousands 20X6 Net income $37 =5.64% Net Sales $656

20X5 $33

=

20X4

6.13%

$538

$50

=

13.12%

$381

Req. 3 Salvador Shipping’s rate of return on net sales compares favorably with the industry. Return on sales was better than 5%, the industry standard, in both 20X5 and 20X6 and was much higher than 7% in 20X4 which an outstanding return. However, there is a definite trend of a declining rate of return on net sales over the past three years.

Chapter 12

Financial Statement Analysis

(20-30 min.) P 12-58B Req. 1 Walsh Products, Inc. Common-Size Income Statement Compared to Industry Average Year Ended December 31, 20X6 Walsh INDUSTRY Products AVERAGE Net sales……………………………………… 100.0% 100.0% Cost of goods sold………………………….

57.3 72.0 Gross profit…………………………….…….

42.7 28.0 Operating expenses………………………...

29.4 24.0 Operating income……………………………

13.3 4.0 Other expenses……………………………...

2.5 1.5 Net income……………………………………

10.8% 2.5%

Walsh Products, Inc. Common-Size Balance Sheet Compared to Industry Average December 31, 20X6 Walsh INDUSTRY Products AVERAGE Current assets………………………………..

77.0% 72.1% Fixed assets, net……………………………..

18.8 19.0 Intangible assets, net………………………..

0.8 3.8 Other assets…………………………………..

8.1 0.4 Total assets…………………………………… 100.0% 100.0% Current liabilities……………………………..

Long-term liabilities………………………….

Shareholders’ equity………………………...

Total liabilities and shareholders’ equity..

Financial Accounting: IFRS 12/e Solutions Manual

38.8% 47.2% 21.2 21.0 40.0 31.8 100.0% 100.0%

(continued) P 12-58B Req. 2 Walsh Product’s common-size income statement shows that its ratios of (a) gross profit to net sales, (b) operating income to net sales, and (c) net income to net sales are worse than the industry averages. Overall, the company’s profit performance is worse than the average for the industry.

Req. 3 Walsh Product’s common-size balance sheet shows that its ratio of current assets to current liabilities exceeds that of the industry average. Walsh Product’s debt ratio is better than the industry average. Overall, the company’s financial position is better than the industry average.

Chapter 12

Financial Statement Analysis

(20-30 min.) P 12-59B Inventory Resident = [(€178,000 + €150,000)/2] / (€1,710,000/365) Period = 35.0 days Receivables Collection Period Payables Outstanding Period

= [(€208,000 + €214,000)/2] / ($3,090,000/365) = 25.9 days = [(€186,000 + €138,000)/2] / (€1,710,000/365) = 34.6 days

Cash Conversion = Inventory Resident + Receivables Cycle Collection – Payables Outstanding = 35.0 + 25.9 – 34.6 = 26.3 days For a trading operation, ACE’s cash conversion cycle is good.

On average, ACE turns over its inventory in just over a month and its receivables within a month. The faster selling of inventory and collection of receivables meant ACE manages to pay its suppliers within a month.

Financial Accounting: IFRS 12/e Solutions Manual

(30-40 min.) P 12-60B Req. 1 (ratios before the transactions) (Dollar Amounts and Share Quantities in Thousands) Current Ratio

Earnings per share

Debt Ratio

€600

€770

€52 + €68 + €174 + €290 + €16 = 1.60 €96 + €212 + €68

€376 + €330 + €64

= 0.57

€1,354

€196

= €2.09*

94

€376

Req. 2 (ratios after the transactions) (Dollar Amounts and Share Quantities in Thousands)

Transaction

Current Ratio

Debt Ratio

a.

€600 + €220 = 2.18 €376

€770 + €230 €1,354 + €230 = 0.63

€600 + €720 €376 = 3.51 €600 - €56 €376 - €56 = 1.70 €600 + €84 €376 + €84 = 1.49

€770 €1,354 + €720 = 0.37

No effect

No effect

b.

c.

d.

e.

€770 - €56 €1,354 - €56

= 0.55

€770 + €84 €1,354 + €84 = 0.59

Earnings per share No effect*

€98 47 +20 = €1.46** No effect No effect

No effect

* EPS may go down if interest on the long term note payable is considered **Not in thousands.

Chapter 12

Financial Statement Analysis

(40-50 min.) P 12-61B Req. 1 (Euro Amounts and Share Quantities in Thousands)

a. Current ratio:

b. Inventory turnover:

20X6 €1,080 €560 €748

20X5 = 1.93

= 1.29

(€582 + €576) / 2 €352 c. Times-interest= 5.87 €60 earned ratio: €212 − €3.9 d. Return on = 0.47 Ordinary share (€486 + €394) / 2 holders' equity: e. Earnings per share of ordinary share:

€212 − €3.9

f. Price/earnings

$€78.12*

ratio:

____

38

€5.48*

€1,016 €586 €562 (€576 + €376) / 2 €322 €98 €134 − €3.9

= 1.73

= 1.18

= 3.29

(€394 + €396) / 2 = 0.33

€134 − €3.9 = €5.48*

= 14.3

*Not in thousands.

Financial Accounting: IFRS 12/e Solutions Manual

34

€59.10*

€3.83*

= €3.83*

= 15.4

(continued) P 12-61B Req. 2 Decisions: a. The company’s financial position improved during 20X6, as shown by increases in the current ratio, inventory turnover, and times-interest-earned ratio. b. The ordinary share’s attractiveness improved a little during 20X6, as shown by the rise in the stock’s market price. This increase in market price is consistent with the increase in earnings per share of ordinary share. Return on ordinary shareholders’ equity is high.

Req. 3 This problem gives you practice in computing and evaluating several of the ratios used in investment analysis. By analyzing the two-year trends in the ratios, you can see whether the company’s abilities to pay its debts, sell its inventory, and generate profits have improved or deteriorated during this period. Improving ratio values generally indicate an attractive investment, and deteriorating ratio values usually signal an unattractive investment.

Chapter 12

Financial Statement Analysis

(45-60 min.) P 12-62B Req. 1 (Dollar Amounts and Share Quantities in Thousands) CDROM a. Acid-test ratio: €24 + €5 + €185 = 0.59 €363

E-shop Stores €41 +€15 + €165 €332 = 0.67 €386

b. Inventory turnover:

(€187 + €195) / 2 = 2.02 (€165 + €190) / 2

€453

= 2.15

(€219 + €202)/ 2

c. Days’ sales in average receivables: d. Debt ratio:

€514 / 365

(€185 + €143)/ 2

= 101

€595 / 365 €663 €978

= 0.68

e. Times-interest- Ratio is not meaningful earned ratio: because CDROM has no interest expense. f.

g.

Return on

€66

ordinary shareholders' equity:

(€315 + €259) / 2

Earnings per

€66 100

share of ordinary share:

h. Price/earnings ratio: _____ *Not in thousands.

€8.84* €0.66*

= 126

€693 €928 €69 €12

= 0.75 = 5.75

€37 − (€30 × .06) = 23.0%

= €0.66*

= 13.4

Financial Accounting: IFRS 12/e Solutions Manual

[(€235 − €30) + (€220 − €30)] / 2 €37 − (€30 × .06) 10

€70.68* €3.52*

= 17.8%

= €3.52*

= 20.1

(continued) P 12-62B Decision: CDROM’s ordinary share seems to fit the investment strategy better. Its price/earnings ratio is lower than that of E-shop Stores, and CDROM appears to be in better shape financially than E-shop Stores, as indicated by all the ratio values except for the Acid-Test Ratio and Earnings per Share of Ordinary Share.

Decision Cases (30 min.) Decision Case 1 Req. 1

Transaction 1 2 3 4 5 6

Current Ratio

Debt Ratio

TimesInterestReturn Earned on Equity Ratio

Book Value Per Share

Decrease No effect Increase Increase Increase Increase Increase No effect No effect No effect Decrease Increase No effect Increase Indeterminate No effect Increase Decrease Decrease Decrease Increase Decrease Increase Increase Increase Decrease Increase No effect No effect No effect

Req. 2 Transaction

Overall Effect on the Company Chapter 12

Financial Statement Analysis

1 2 3 4 5 6

Positive (due to gain) Unclear* Unclear** Negative (due to loss) Positive (due to gross profit) Unclear

____ *May be positive if money borrowed is used to invest in profits generating ventures **May be negative because of decreasing assets to shrink the company.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) Decision Case 2 Ratio

1. Current ratio 2. Acid-test ratio 3. Inventory turnover 4. Receivable turnover and Days’ sales in receivables

CNH (FIFO) Higher No effect Lower No effect

Caterpillar (LIFO) Lower No effect Higher No effect

5. Debt ratio

Lower

Higher

6. Times-interest-earned

Higher

Lower

7. Return on sales, total assets, and equity, and earnings per share

Higher

Lower

8. Price/earnings ratio

Lower*

Higher*

_____ *Assuming share price is unaffected by the accounting difference.

If share price is affected, the price/earnings ratio could be higher (or lower) for either company.

9. Dividend yield

No effect

No effect

10. Book value per share

Higher

Lower

Chapter 12

Financial Statement Analysis

(continued) Decision Case 2 CONCLUSION: Overall, CNH will look better than Caterpillar because of:

• Higher current ratio, times-interest-earned ratio, rate of return measures, and book value per share of ordinary share.

• Lower debt ratio.

Caterpillar may have the higher inventory turnover ratio and may have a higher price/earnings ratio. Overall, CNH will appear stronger — based solely on the ratios.

Financial Accounting: IFRS 12/e Solutions Manual

(20-30 min.) Decision Case 3 To reduce losses and establish profitable operations, Europe Vacations should take the following steps:

1. Make a dedicated effort to collect receivables and consider extending less credit to customers. Receivables make up 15.2% of assets, compared to 11.0% for the industry average.

The company’s inability to collect its receivables may explain the shortage of cash (3.0% of total assets compared to 6.8% for the industry).

2. Reduce the amount of the company’s interest-bearing debt.

The company’s short-term notes payable equal 17.1% of total assets, compared to 14.0% for the industry average. (Interestbearing) long-term debt equals 19.7% of total assets, compared to 16.4% for the industry. That brings Europe Vacations’ total interest-bearing debt to 36.8% of total assets, much higher than only 30.4% for the industry. This debt burden causes the company to pay more interest expense than the norm for the industry (5.8% of net sales, compared to only 1.3% for the average company in the industry). The high level of interest expense drags profits down.

Chapter 12

Financial Statement Analysis

3. Sell higher profit-margin products. Cost of sales is 68.2% of sales,

compared

to

64.8%

for

the

industry

average.

Consequently, gross profit is only 31.8% of net sales, which is less than the 35.2% industry average.

4. Cut operating expenses below their current level of 37.1% of sales by finding cheaper ways of doing business. The company should consider operating out of a less expensive building, spending less on advertising, laying off surplus employees, and other cost-cutting measures to trim operating expenses.

Financial Accounting: IFRS 12/e Solutions Manual

Ethical Issue Req. 1 The ethical issue is:

Should Turnberry reclassify its

investments from long-term to short-term?

Req. 2 and Req. 3

The stakeholders in the decision are Turnberry Corporation, its officers and directors, its shareholders and its current and future creditors.

Economic analysis: Reclassifying the long-term investments as short-term will increase current assets and, therefore, increase the current ratio. Turnberry’s financial position is not improved by this reclassification because the company’s asset position has not changed. However, its short-term debt paying ability will appear to be improved and thus might entice current or future creditors to loan money to the corporation that they would otherwise not lend, subjecting them to possible loan losses in the future, should Turnberry prove unable to service their debt.

Chapter 12

Financial Statement Analysis

Legal analysis: If Turnberry’s management truly believes that they intend to sell the investments within a year, thus justifying reclassification of the investments to current assets, nothing illegal has happened. However, intentionally falsifying financial statements is illegal, with criminal or civil penalties, or both.

Ethical analysis: Reclassifying a long-term investment as current to meet a debt agreement does not, in itself, brand Turnberry managers as unethical. The managers may have honestly intended to sell the investments in order to meet the company’s obligations. In that case, the managers took appropriate action.

Req. 4.

Reclassifying the investments from current back to long-term may suggest to some observers that managers are playing a shell game. However, the case states that sales subsequent to the first reclassification have improved the current ratio. Under these circumstances, Turnberry may not need to sell the investments. The managers may prefer to hold the investments beyond one year and, therefore, need to reclassify them as long-term. In that case, the managers’ action is appropriate.

Financial Accounting: IFRS 12/e Solutions Manual

This case illustrates how gray accounting can be. Here the debt agreement depends on the current ratio, which is affected by an asset classification that managers control simply by their intentions.

Because

the

managers’

intentions

cannot

be

observed, it would be hard to prove that the managers are acting unethically.

Chapter 12

Financial Statement Analysis

Focus on Financials: Nestlé (40-60 mins) Req. 1 Current Ratio (Current Assets/Current Liabilities) Inventory Turnover Ratio Receivables Turnover Ratio Total Debt/Equity Net Profit Margin (Net Profit/Revenue) Cash Flow Margin (Operating Cash Flow/Revenue)

2016 39,257/40,020 = 0.98

2015 34,068/39,722 = 0.86

45,468/((11,982+10,101)/2) 42,971/((10,101+9,343)/2) = 4.12 = 4.42 87,088/((11,155+10,746)/2) 84,343/((10,746+11,766)/2) = 7.95 = 7.49 85,415/53,727 = 1.59 77,514/46,514 = 1.67 16,905/87,088 = 0.19 12,232/84,343 = 0.145 13,864/87,088 = 0.16

14,377/84,343 = 0.17

Req. 2 Operationally, Nestlé has improved its merchandising effectiveness. On the other hand, liquidity and solvency have deteriorated slightly in 2016 compared to 2015. Profit remains stable.

The company’s potential as a long-term investment depends very much on the operating metrics of the company as well as the outlook of the various businesses of Nestlé.

Financial Accounting: IFRS 12/e Solutions Manual

Group Projects (2-3 hours) Student responses will vary on this assignment.

Chapter 12

Financial Statement Analysis