CHAPTER 1
Financial Accounting and Accounting Standards
ASSIGNMENT CLASSIFICATION TABLE (By Topic)
Topics
Questions
Cases
1.
Subject matter of accounting.
1
4
2.
Environment of accounting.
2, 3, 28
6, 7
3.
Role of principles, objectives, standards,
and accounting theory.
4, 5, 6, 7
1, 2, 3, 5
4.
Historical development of GAAP.
8, 9, 10, 11
8
5.
Authoritative pronouncements and rulemaking bodies.
12, 13, 14, 15,
16, 17, 18, 19,
20, 21
3, 9, 11, 12, 14
6.
Role of pressure groups.
22, 23, 24, 25,
26, 27
10, 16, 17
7.
Ethical issues.
29
13, 15
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-1
ASSIGNMENT CLASSIFICATION TABLE (By Learning Objective)
Learning Objectives
1. Identify the major financial statements and other
means of financial reporting.
2. Explain how accounting assists in the efficient
use of scarce resources.
3. Identify the objective of financial reporting.
Questions
1, 2
4.
5.
Explain the need for accounting standards.
Identify the major policy-setting bodies and their
role in the standard-setting process.
6
8, 9, 10, 11,13, 14, 15,
16, 19
6.
Explain the meaning of generally accepted
accounting principles (GAAP) and the role of the
codification for GAAP.
Describe the impact of user groups on the rulemaking process.
Describe some of the challenges facing financial
reporting.
Understand issues related to ethics and
financial accounting.
12, 14, 18, 19, 20, 21
7.
8.
9.
1-2Copyright © 2013 John Wiley & Sons, Inc.
Cases
CA1-4, CA1-5
3, 5
4, 7
CA1-2, CA1-3, CA1-4,
CA1-5, CA1-6
CA1-3, CA1-7, CA1-9
CA1-1, CA1-2, CA1-3,
CA1-7, CA1-8, CA1-9,
CA1-11, CA1-14
CA1-2, CA1-3, CA1-7,
CA1-8, CA1-12
17, 22, 23, 24, 25, 26,
27
28
CA1-10, CA1-11, CA113, CA1-16, CA1-17
16, 17, 29
CA1-6, CA1-13, CA1-15
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
CA1-1
CA1-2
CA1-3
CA1-4
CA1-5
CA1-6
CA1-7
CA1-8
CA1-9
CA1-10
CA1-11
CA1-12
CA1-13
CA1-14
CA1-15
CA1-16
CA1-17
FASB and standard-setting.
GAAP and standard-setting.
Financial reporting and accounting standards.
Financial accounting.
Objective of financial reporting.
Accounting numbers and the environment.
Need for GAAP.
AICPA’s role in rule-making.
FASB role in rule-making.
Politicalization of GAAP.
Models for setting GAAP.
GAAP terminology.
Rule-making Issues.
Securities and Exchange Commission.
Financial reporting pressures.
Economic consequences.
GAAP and economic consequences.
Simple
Simple
Simple
Simple
Moderate
Simple
Simple
Simple
Simple
Complex
Simple
Moderate
Complex
Moderate
Moderate
Moderate
Moderate
15–20
15–20
15–20
15–20
20–25
10–15
15–20
20–25
20–25
30–40
15–20
30–40
20–25
30–40
25–35
25–35
25–35
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-3
SOLUTIONS TO CODIFICATION EXERCISES
CE1-1
The information at this link describes the elements offered in The FASB Accounting Standards
Codification. As indicated, the website offers several resources to enhance your working knowledge of
the Codification and the Codification Research System. This page includes links to help pages which
describe specific functions and features of the Codification. Links to frequently asked questions, the
FASB Learning Guide, and the Notice to Constituents are also available on this page.
Help pages
FAQ
Learning Guide
About the Codification—Notice of Constituents
CE1-2
The following information is provided at the Providing Feedback link:
The Codification includes a feature which can be used to submit content-related feedback or general,
system-related comments. The feedback system is not designed for comments on proposed
Accounting Standards Updates.
Content-related feedback
As a registered user of the FASB Accounting Standards Codification Research System website, you
are able and are encouraged to provide feedback, at the paragraph level, to the FASB about any
content-related matters. For specific information about the Codification and the feedback process,
please read the Notice to Constituents.
To provide content-related feedback:
Click the Submit feedback button beneath the paragraph for which you want to provide feedback. Enter
or copy/paste your comments in the text box. Note that formatting (lists, bold, etc.) is not retained and
there is a 4,000 character limit on feedback submissions.
Click SUBMIT. Your comments are sent to the FASB and reviewed by FASB staff. You can also
submit multiple comments for any given paragraph, if, for example, you determine that more
information would be useful to the FASB staff.
General feedback
Click here to provide general feedback on the Codification in general, the Codification Research
System website, and other system-related items that are not content specific.
CE1-3
The “What’s New” page provides links to Codification content that has been recently issued. During the
verification phase, updates may result from either the issuance of Codification update instructions that
1-4Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
accompany new Standards or from changes to the Codification due to incorporation of constituent
feedback.
ANSWERS TO QUESTIONS
1. Financial accounting measures, classifies, and summarizes in report form those activities and that
information which relate to the enterprise as a whole for use by parties both internal and external to a
business enterprise. Managerial accounting also measures, classifies, and summarizes in report
form enterprise activities, but the communication is for the use of internal, managerial parties, and
relates more to subsystems of the entity. Managerial accounting is management decision oriented
and directed more toward product line, division, and profit center reporting.
2. Financial statements generally refer to the four basic financial statements: balance sheet, income
statement, statement of cash flows, and statement of changes in owners’ or stockholders’ equity.
Financial reporting is a broader concept; it includes the basic financial statements and any other
means of communicating financial and economic data to interested external parties. Examples of
financial reporting other than financial statements are annual reports, prospectuses, reports filed with
the government, news releases, management forecasts or plans, and descriptions of an enterprise’s
social or environmental impact.
3. If a company’s financial performance is measured accurately, fairly, and on a timely basis, the right
managers and companies are able to attract investment capital. To provide unreliable and irrelevant
information leads to poor capital allocation which adversely affects the securities market.
4. The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to present and potential equity investors, lenders, and other creditors
in decisions about providing resources to the entity through equity investments and loans or other
forms of credit. Information that is decision-useful to capital providers (investors) may also be useful
to other users of financial reporting who are not investors.
5. Investors are interested in financial reporting because it provides information that is useful for
making decisions (referred to as the decision-usefulness approach). When making these
decisions, investors are interested in assessing the company’s (1) ability to generate net cash
inflows and (2) management’s ability to protect and enhance the capital providers’ investments.
Financial reporting should therefore help investors assess the amounts, timing, and uncertainty of
prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption,
or maturity of securities or loans. In order for investors to make these assessments, the economic
resources of an enterprise, the claims to those resources, and the changes in them must be
understood.
6. A common set of standards applied by all businesses and entities provides financial statements
which are reasonably comparable. Without a common set of standards, each enterprise could, and
would, develop its own theory structure and set of practices, resulting in noncomparability among
enterprises.
7. General-purpose financial statements are not likely to satisfy the specific needs of all interested
parties. Since the needs of interested parties such as creditors, managers, owners, governmental
agencies, and financial analysts vary considerably, it is unlikely that one set of financial statements
is equally appropriate for these varied uses.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-5
Questions Chapter 1 (Continued)
8. The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and
principles to be employed by the companies that fall within its jurisdiction. Because the SEC receives
audited financial statements from nearly all companies that issue securities to the public or are listed
on the stock exchanges, it is greatly interested in the content, accuracy, and credibility of the
statements. For many years the SEC relied on the AICPA to regulate the profession and develop
and enforce accounting principles. Lately, the SEC has assumed a more active role in the development of accounting standards, especially in the area of disclosure requirements. In December 1973,
in ASR No. 150, the SEC said the FASB’s statements would be presumed to carry substantial
authoritative support and anything contrary to them to lack such support. It thereby supports the
development of accounting principles in the private sector.
9. The Committee on Accounting Procedure was a special committee of the American Institute of CPAs
that, between the years of 1939 and 1959, issued 51 Accounting Research Bulletins dealing with
a wide variety of timely accounting problems. These bulletins provided solutions to immediate
problems and narrowed the range of alternative practices. But, the Committee’s problem-by-problem
approach failed to provide a well-defined and well-structured body of accounting theory that was so
badly needed. The Committee on Accounting Procedure was replaced in 1959 by the Accounting
Principles Board.
10. The creation of the Accounting Principles Board was intended to advance the written expression
of accounting principles, to determine appropriate practices, and to narrow the differences and
inconsistencies in practice. To achieve its basic objectives, its mission was to develop an overall
conceptual framework to assist in the resolution of problems as they became evident and to do
substantive research on individual issues before pronouncements were issued.
11. Accounting Research Bulletins were pronouncements on accounting practice issued by the
Committee on Accounting Procedure between 1939 and 1959; since 1964 they have been
recognized as accepted accounting practice unless superseded in part or in whole by an opinion of
the APB or an FASB standard. APB Opinions were issued by the Accounting Principles Board
during the years 1959 through 1973 and, unless superseded by FASB Statements, are recognized
as accepted practice and constitute the requirements to be followed by all business enterprises.
FASB Statements are pronouncements of the Financial Accounting Standards Board and currently
represent the accounting profession’s authoritative pronouncements on financial accounting and
reporting practices.
12. The explanation should note that generally accepted accounting principles or standards have
“substantial authoritative support.” They consist of accounting practices, procedures, theories,
concepts, and methods which are recognized by a large majority of practicing accountants as well
as other members of the business and financial community. Bulletins issued by the Committee on
Accounting Procedure, opinions rendered by the Accounting Principles Board, and statements
issued by the Financial Accounting Standards Board constitute “substantial authoritative support.”
13. It was believed that FASB Pronouncements would carry greater weight than APB Opinions because
of significant differences between the FASB and the APB, namely: (1) The FASB has a smaller
membership, (2) full-time compensated members; (3) the FASB has greater autonomy, (4) increased
independence; (5) the FASB has broader representation than the APB.
14. The technical staff of the FASB conducts research on an identified accounting topic and prepares
a “preliminary views” that is released by the Board for public reaction. The Board analyzes and
evaluates the public response to the preliminary views, deliberates on the issues, and issues an
“exposure draft” for public comment. The preliminary views merely present all facts and alternatives
related to a specific topic or problem, whereas the exposure draft is a tentative “statement.” After
1-6Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
studying the public’s reaction to the exposure draft, the Board may reevaluate its position, revise
the draft, and vote on the issuance of a final statement.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-7
Questions Chapter 1 (Continued)
15. Statements of financial accounting standards contained in Accounting Standards updates
constitute generally accepted accounting principles and dictate acceptable financial accounting
and reporting practices as promulgated by the FASB. The first standards statement was issued by
the FASB in 1973.
Statements of financial accounting concepts do not establish generally accepted accounting
principles. Rather, the concepts statements set forth fundamental objectives and concepts that the
FASB intends to use as a basis for developing future standards. The concepts serve as guidelines
in solving existing and emerging accounting problems in a consistent, sound manner. Both the
standards statements and the concepts statements may develop through the same process from
discussion memorandum, to exposure draft, to a final approved statement.
16. Rule 203 of the Code of Professional Conduct prohibits a member of the AICPA from expressing
an opinion that financial statements conform with GAAP if those statements contain a material
departure from an accounting principle promulgated by the FASB, or its predecessors, the APB
and the CAP, unless the member can demonstrate that because of unusual circumstances the
financial statements would otherwise have been misleading. Failure to follow Rule 203 can lead to
a loss of a CPA’s license to practice. This rule is extremely important because it requires auditors
to follow FASB standards.
17. The chairman of the FASB was indicating that too much attention is put on the bottom line and not
enough on the development of quality products. Managers should be less concerned with shortterm results and be more concerned with the long-term results. In addition, short-term tax benefits
often lead to long-term problems.
The second part of his comment relates to accountants being overly concerned with following a set
of rules, so that if litigation ensues, they will be able to argue that they followed the rules exactly.
The problem with this approach is that accountants want more and more rules with less reliance
on professional judgment. Less professional judgment leads to inappropriate use of accounting
procedures in difficult situations.
In the accountants’ defense, recent legal decisions have imposed vast new liability on accountants.
The concept of accountant’s liability that has emerged in these cases is broad and expansive; the
number of classes of people to whom the accountant is held responsible are almost limitless.
18. FASB Staff Positions (FSP) are used to provide interpretive guidance and to make minor amendments to existing standards. The due process used to issue a FSP is the same used to issue a
new standard.
19. The Emerging Issues Task Force often arrives at consensus conclusions on certain financial reporting issues. These consensus conclusions are then looked upon as GAAP by practitioners because
the SEC has indicated that it will view consensus solutions as preferred accounting and will require
persuasive justification for departing from them. Thus, at least for public companies which are subject to SEC oversight, consensus solutions developed by the Emerging Issues Task Force are
followed unless subsequently overturned by the FASB. It should be noted that the FASB took
greater direct ownership of GAAP established by the EITF by requiring that consensus positions be
ratified by the FASB.
1-8Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 1 (Continued)
20. The Financial Accounting Standards Board Accounting Standards Codification (Codifications) is a
compilation of all GAAP in one place. Its purpose is to integrate and synthesize existing GAAP and
not to create new GAAP. It creates one level of GAAP which is considered authoritative. The FASB
Codification Research Systems (CRS) is an-on-line real time data base which provides easy access
to the Codification. The Codification and the related CRS provide a topically organized structure
which is subdivided into topic, subtopics, sections, and paragraphs.
21. Hopefully, the codification will help users to better understand what GAAP is. If this occurs,
companies will be more likely to comply with GAAP and the time to research accounting issues will
be substantially reduced. In addition, through the electronic web-based format, GAAP can be easily
updated which will help users stay current.
22. The sources of pressure are innumerable, but the most intense and continuous pressure to
change or influence accounting principles or standards come from individual companies, industry
associations, governmental agencies, practicing accountants, academicians, professional accounting organizations, and public opinion.
23. Economic consequences means the impact of accounting reports on the wealth positions of issuers
and users of financial information and the decision-making behavior resulting from that impact. In
other words, accounting information impacts various users in many different ways which leads to
wealth transfers among these various groups.
If politics plays an important role in the development of accounting rules, the rules will be subject
to manipulation for the purpose of furthering whatever policy prevails at the moment. No matter
how well intentioned the rule maker may be, if information is designed to indicate that investing in
a particular enterprise involves less risk than it actually does, or is designed to encourage investment in a particular segment of the economy, financial reporting will suffer an irreplaceable loss of
credibility.
24. No one particular proposal is expected in answer to this question. The students’ proposals, however,
should be defensible relative to the following criteria:
(1) The method must be efficient, responsive, and expeditious.
(2) The method must be free of bias and be above or insulated from pressure groups.
(3) The method must command widespread support if it does not have legislative authority.
(4) The method must produce sound yet practical accounting principles or standards.
The students’ proposals might take the form of alterations of the existing methodology, an accounting court (as proposed by Leonard Spacek), or governmental device.
25. Concern exists about fraudulent financial reporting because it can undermine the entire financial
reporting process. Failure to provide information to users that is accurate can lead to inappropriate
allocations of resources in our economy. In addition, failure to detect massive fraud can lead to
additional governmental oversight of the accounting profession.
26. The expectations gap is the difference between what people think accountants should be doing and
what accountants think they can do. It is a difficult gap to close. The accounting profession recognizes
it must play an important role in narrowing this gap. To meet the needs of society, the profession is
continuing its efforts in developing accounting standards, such as numerous pronouncements issued
by the FASB, to serve as guidelines for recording and processing business transactions in the
changing economic environment.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-9
Questions Chapter 1 (Continued)
27. The following are some of the key provisions of the Sarbanes-Oxley Act:
 Establishes an oversight board for accounting practices. The Public Company Accounting Oversight Board (PCAOB) has oversight and enforcement authority and establishes auditing, quality
control, and independence standards and rules.
 Implements stronger independence rules for auditors. Audit partners, for example, are required
to rotate every five years and auditors are prohibited from offering certain types of consulting
services to corporate clients.
 Requires CEOs and CFOs to personally certify that financial statements and disclosures are
accurate and complete and requires CEOs and CFOs to forfeit bonuses and profits when there
is an accounting restatement.
 Requires audit committees to be comprised of independent members and members with financial expertise.
 Requires codes of ethics for senior financial officers.
In addition, Section 404 of the Sarbanes-Oxley Act requires public companies to attest to the
effectiveness of their internal controls over financial reporting.
28. Some major challenges facing the accounting profession relate to the following items:
Nonfinancial measurement—how to report significant key performance measurements such as
customer satisfaction indexes, backlog information and reject rates on goods purchased.
Forward-looking information—how to report more future oriented information.
Soft assets—how to report on intangible assets, such as market know-how, market dominance,
and well-trained employees.
Timeliness—how to report more real-time information.
29. Accountants must perceive the moral dimensions of some situations because GAAP does not
define or cover all specific features that are to be reported in financial statements. In these instances
accountants must choose among alternatives. These accounting choices influence whether particular stakeholders may be harmed or benefited. Moral decision-making involves awareness of
potential harm or benefit and taking responsibility for the choices.
1-10Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 1-1 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to answer questions about FASB and standard
setting.
CA 1-2 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to answer questions about FASB and standard
setting.
CA 1-3 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to answer questions about financial reporting and
accounting standards topics.
CA 1-4 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to distinguish between financial accounting and
managerial accounting, identify major financial statements, and differentiate financial statements and
financial reporting.
CA 1-5 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to explain the basic objective of financial reporting.
CA 1-6 (Time 10–15 minutes)
Purpose—to provide the student with an opportunity to describe how reported accounting numbers
might affect an individual’s perceptions and actions.
CA 1-7 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to evaluate the viewpoint of removing mandatory
accounting rules and allowing each company to voluntarily disclose the information it desired.
CA 1-8 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to explain the evolution of accounting rule-making
organizations and the role of the AICPA in the rule making environment.
CA 1-9 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to identify the sponsoring organization of the
FASB, the method by which the FASB arrives at a decision, and the types and the purposes of documents issued by the FASB.
CA 1-10 (Time 30–40 minutes)
Purpose—to provide the student with an opportunity to focus on the types of organizations involved in the
rule making process, what impact accounting has on the environment, and the environment’s influence
on accounting.
CA 1-11 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to focus on what type of rule-making environment
exists in the United States. In addition, this CA explores why user groups are interested in the nature of
GAAP and why some groups wish to issue their own rules.
CA 1-12 (Time 30–40 minutes)
Purpose—to provide the student with an opportunity to identify and define acronyms appearing in the
first chapter. Some are self-evident, others are not so.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-11
1-12Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Time and Purpose of Concepts for Analysis (Continued)
CA 1-13 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to consider the ethical dimensions of implementation
of a new accounting pronouncement.
CA 1-14 (Time 30–40 minutes)
Purpose—to provide the student with an assignment that explores the role and function of the
Securities and Exchange Commission.
CA 1-15 (Time 25–35 minutes)
Purpose—to provide the student with a writing assignment concerning the ethical issues related to
meeting earnings targets.
CA 1-16 (Time 25–35 minutes)
Purpose—to provide the student with the opportunity to discuss the role of Congress in accounting rulemaking.
CA 1-17 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to comment on a letter sent by business executives to the FASB and Congress on the accounting for derivatives.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-13
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 1-1
1.
2.
3.
4.
True
False. Any company claiming compliance with GAAP must comply with all standards and
interpretations, including disclosure requirements.
True
False. In establishing financial accounting standards, the FASB relies on two basic premises:
(1) the FASB should be responsive to the needs and viewpoints of the entire economic
community, not just the public accounting profession, and (2) it should operate in full view of the
public through a “due process” system that gives interested people ample opportunities to make
their view known.
CA 1-2
1.
2.
3.
4.
False. In addition to providing decision-useful information about future cash flows, management
also is accountable to investors for the custody and safekeeping of the company’s economic
resources and for their efficient and profitable use; however, this is not considered an objective.
False. The objective of financial reporting is to provide financial information about the reporting
entity that is useful to present and potential equity investors, lenders, and other creditors in making
decisions in their capacity as capital providers.
False. The FASB follows the same due process procedures for interpretations and standards.
True
CA 1-3
1.
2.
3.
4.
5.
6.
7.
8.
(d)
(d)
(d)
(a)
(a)
(b)
(d)
(b)
CA 1-4
(a) Financial accounting is the process that culminates in the preparation of financial reports relative to
the enterprise as a whole for use by parties both internal and external to the enterprise. In contrast,
managerial accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information used by the management to plan,
evaluate, and control within an organization and to assure appropriate use of, and accountability for,
its resources.
(b) The financial statements most frequently provided are the balance sheet, the income statement,
the statement of cash flows, and the statement of changes in owners’ or stockholders’ equity.
1-14Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 1-4 (Continued)
(c) Financial statements are the principal means through which financial information is communicated to
those outside an enterprise. As indicated in (b), there are four major financial statements. However,
some financial information is better provided, or can be provided only, by means of financial
reporting other than formal financial statements. Financial reporting (other than financial statements
and related notes) may take various forms. Examples include the company president’s letter or
supplementary schedules in the corporate annual reports, prospectuses, reports filed with government agencies, news releases, management’s forecasts, and descriptions of an enterprise’s social
or environmental impact.
CA 1-5
(a) In accordance with Statement of Financial Accounting Concepts No. 1, “Objectives of Financial
Reporting by Business Enterprises,” the objectives of financial reporting are to provide information to
investors, creditors, and others
1. that is useful to present and potential investors and creditors and other users in making rational
investment, credit, and similar decisions. The information should be comprehensible to those
who have a reasonable understanding of business and economic activities and are willing to
study the information with reasonable diligence.
2. to help present and potential investors and creditors and other users in assessing the amounts,
timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds
from the sale, redemption, or maturity of securities or loans. Since investors’ and creditors’ cash
flows are related to enterprise cash flows, financial reporting should provide information to help
investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net
cash inflows to the related enterprise.
3. about the economic resources of an enterprise, the claims to those resources (obligations of the
enterprise to transfer resources to other entities and owners’ equity), and the effects of transactions, events, and circumstances that change its resources and claims to those resources.
(b) Statement of Financial Accounting Concepts No. 1 established standards to meet the information
needs of large groups of external users such as investors, creditors, and their representatives.
Although the level of sophistication related to business and financial accounting matters varies both
within and between these user groups, users are expected to possess a reasonable understanding
of accounting concepts, financial statements, and business and economic activities and are expected
to be willing to study and interpret the information with reasonable diligence.
CA 1-6
Accounting numbers affect investing decisions. Investors, for example, use the financial statements of
different companies to enhance their understanding of each company’s financial strength and operating
results. Because these statements follow generally accepted accounting principles, investors can make
meaningful comparisons of different financial statements to assist their investment decisions.
Accounting numbers also influence creditors’ decisions. A commercial bank usually looks into a
company’s financial statements and past credit history before deciding whether to grant a loan and in
what amount. The financial statements provide a fair picture of the company’s financial strength (for
example, short-term liquidity and long-term solvency) and operating performance for the current period
and over a period of time. The information is essential for the bank to ensure that the loan is safe and
sound.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-15
CA 1-7
It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily
disclose the type of information it considered important. Without a coherent body of accounting theory
and standards, each accountant or enterprise would have to develop its own theory structure and set of
practices, and readers of financial statements would have to familiarize themselves with every company’s
peculiar accounting and reporting practices. As a result, it would be almost impossible to prepare statements that could be compared.
In addition, voluntary disclosure may not be an efficient way of disseminating information. A company is
likely to disclose less information if it has the discretion to do so. Thus, the company can reduce its cost
of assembling and disseminating information. However, an investor wishing additional information has
to pay to receive additional information desired. Different investors may be interested in different types
of information. Since the company may not be equipped to provide the requested information, it would
have to spend additional resources to fulfill such needs; or the company may refuse to furnish such
information if it’s too costly to do so. As a result, investors may not get the desired information or they
may have to pay a significant amount of money for it. Furthermore, redundancy in gathering and
distributing information occurs when different investors ask for the same information at different points
in time. To the society as a whole, this would not be an efficient way of utilizing resources.
CA 1-8
(a) One of the committees that the AICPA established prior to the establishment of the FASB was the
Committee on Accounting Procedures (CAP). The CAP, during its existence from 1939 to 1959,
issued 51 Accounting Research Bulletins (ARB). In 1959, the AICPA created the Accounting Principles Board (APB) to replace the CAP. Before being replaced by the FASB, the APB released
31 official pronouncements, called APB Opinions.
(b) Although the ARBs issued by the CAP helped to narrow the range of alternative practices to some
extent, the CAP’s problem-by-problem approach failed to provide the well-defined, structured body
of accounting principles that was both needed and desired. As a result, the CAP was replaced by
the APB.
The APB had more authority and responsibility than did the CAP. Unfortunately, the APB was
beleaguered throughout its 14-year existence. It came under fire early, charged with lack of productivity and failing to act promptly to correct alleged accounting abuses. The APB also met a lot of
industry and CPA firm opposition and occasional governmental interference when tackling numerous
thorny accounting issues. In fear of governmental rule making, the accounting profession investigated
the ineffectiveness of the APB and replaced it with the FASB.
Learning from prior experiences, the FASB has several significant differences from the APB. The
FASB has: (1) smaller membership, (2) full-time, compensated membership, (3) greater autonomy,
(4) increased independence, and (5) broader representation. In addition, the FASB has its own
research staff and relies on the expertise of various task force groups formed for various projects.
These features form the bases for the expectations of success and support from the public. In
addition, the due process taken by the FASB in establishing financial accounting standards gives
interested persons ample opportunity to make their views known. Thus, the FASB is responsive to
the needs and viewpoints of the entire economic community, not just the public accounting profession.
1-16Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 1-8 (Continued)
(c) The AICPA has supplemented the FASB’s efforts in the present standard-setting environment. The
issue papers, which are prepared by the Accounting Standards Executive Committee (AcSEC),
identify current financial reporting problems for specific industries and present alternative treatments of the issue. These papers provide the FASB with an early warning device to insure timely
issuance of FASB standards, Interpretations, and Staff Positions. In situations where the FASB
avoids the subject of an issue paper, AcSEC may issue a Statement of Position to provide guidance
for the reporting issue. AcSEC also issues Practice Bulletins which indicate how the AICPA
believes a given transaction should be reported.
Recently, the role of the AICPA in standard-setting has diminished. The FASB and the AICPA
agreed, that after a transition period, the AICPA and AcSEC no longer will issue authoritative
accounting guidance for public companies.
CA 1-9
(a) The Financial Accounting Foundation (FAF) is the sponsoring organization of the FASB. The FAF
selects the members of the FASB and its Advisory Council, funds their activities, and generally
oversees the FASB’s activities.
The FASB follows a due process in establishing a typical FASB Statement of Financial Accounting
Standards. The following steps are usually taken: (1) A topic or project is identified and placed on
the Board’s agenda. (2) A task force of experts from various sectors is assembled to define
problems, issues, and alternatives related to the topic. (3) Research and analysis are conducted by
the FASB technical staff. (4) A preliminary views document is drafted and released. (5) A public
hearing is often held, usually 60 days after the release of the preliminary views. (6) The Board
analyzes and evaluates the public response. (7) The Board deliberates on the issues and prepares
an exposure draft for release. (8) After a 30-day (minimum) exposure period for public comment, the
Board evaluates all of the responses received. (9) A committee studies the exposure draft in relation
to the public responses, reevaluates its position, and revises the draft if necessary. (10) The full
Board gives the revised draft final consideration and votes on issuance of a Standards Statement.
The passage of a new accounting standard in the form of an FASB Statement requires the support
of five of the seven Board members.
(b) The FASB issues three major types of pronouncements: Standards and Interpretations, Financial
Accounting Concepts, and Technical Bulletins. Financial accounting standards issued by the FASB
are considered GAAP. In addition, the FASB also issues interpretations that represent modifications
or extensions of existing standards and APB Opinions. These interpretations have the same authority
as standards and APB Opinions in guiding current accounting practices.
The Statements of Financial Accounting Concepts (SFAC) help the FASB to avoid the “problemby-problem approach.” These statements set forth fundamental objectives and concepts that the
Board will use in developing future standards of financial accounting and reporting. They
are intended to form a cohesive set of interrelated concepts, a body of theory or a conceptual
framework, that will serve as tools for solving existing and emerging problems in a consistent,
sound manner.
The FASB may issue a technical bulletin when there is a need for guidelines on implementing or
applying FASB Standards or Interpretations, APB Opinions, Accounting Research Bulletins, or emerging
issues. A technical bulletin is issued only when (1) it is not expected to cause a major change in
accounting practice for a number of enterprises, (2) its cost of implementation is low, and (3) the
guidance provided by the bulletin does not conflict with any broad fundamental accounting principle.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-17
CA 1-9 (Continued)
In addition, the FASB’s Emerging Issues Task Force (EITF) issues statements to provide guidance
on how to account for new and unusual financial transactions that have the potential for creating
diversity in reporting practices. The EITF identifies controversial accounting problems as they arise
and determines whether they can be quickly resolved or whether the FASB should become involved
in solving them. In essence, it becomes a “problem filter” for the FASB. Thus, it is hoped that the
FASB will be able to work on more pervasive long-term problems, while the EITF deals with shortterm emerging issues.
CA 1-10
(a) CAP. The Committee on Accounting Procedure, CAP, which was in existence from 1939 to 1959,
was a natural outgrowth of AICPA committees which were in existence during the period 1933 to
1938. The committee was formed in direct response to the criticism received by the accounting
profession during the financial crisis of 1929 and the years thereafter. The authorization to issue
pronouncements on matters of accounting principles and procedures was based on the belief that
the AICPA had the responsibility to establish practices that would become generally accepted by the
profession and by corporate management.
As a general rule, the CAP directed its attention, almost entirely, to resolving specific accounting
problems and topics rather than to the development of generally accepted accounting principles.
The committee voted on the acceptance of specific Accounting Research Bulletins published by
the committee. A two-thirds majority was required to issue a particular research bulletin. The CAP
did not have the authority to require acceptance of the issued bulletins by the general membership
of the AICPA, but rather received its authority only upon general acceptance of the pronouncement
by the members. That is, the bulletins set forth normative accounting procedures that “should be”
followed by the accounting profession, but were not “required” to be followed.
It was not until well after the demise of the CAP, in 1964, that the Council of the AICPA adopted
recommendations that departures from effective CAP Bulletins should be disclosed in financial
statements or in audit reports of members of the AICPA. The demise of the CAP could probably be
traced to four distinct factors: (1) the narrow nature of the subjects covered by the bulletins issued by
the CAP, (2) the lack of any theoretical groundwork in establishing the procedures presented in the
bulletins, (3) the lack of any real authority by the CAP in prescribing adherence to the procedures
described by the bulletins, and (4) the lack of any formal representation on the CAP of interest
groups such as corporate managers, governmental agencies, and security analysts.
APB. The objectives of the APB were formulated mainly to correct the deficiencies of the CAP as
described above. The APB was thus charged with the responsibility of developing written expression
of generally accepted accounting principles through consideration of the research done by other
members of the AICPA in preparing Accounting Research Studies. The committee was in turn
given substantial authoritative standing in that all opinions of the APB were to constitute substantial
authoritative support for generally accepted accounting principles. If an individual member of the
AICPA decided that a principle or procedure outside of the official pronouncements of the APB had
substantial authoritative support, the member had to disclose the departure from the official APB
opinion in the financial statements of the firm in question.
The membership of the committee comprising the APB was also extended to include representation
from industry, government, and academe. The opinions were also designed to include minority
dissents by members of the board. Exposure drafts of the proposed opinions were readily distributed.
1-18Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 1-10 (Continued)
The demise of the APB occurred primarily because the purposes for which it was created were not
being accomplished. Broad generally accepted accounting principles were not being developed.
The research studies supposedly being undertaken in support of subsequent opinions to be
expressed by the APB were often ignored. The committee in essence became a simple extension
of the original CAP in that only very specific problem areas were being addressed. Interest groups
outside of the accounting profession questioned the appropriateness and desirability of having the
AICPA directly responsible for the establishment of GAAP. Politicization of the establishment of
GAAP had become a reality because of the far-reaching effects involved in the questions being
resolved.
FASB. The formal organization of the FASB represents an attempt to vest the responsibility of
establishing GAAP in an organization representing the diverse interest groups affected by the use of
GAAP. The FASB is independent of the AICPA. It is independent, in fact, of any private or governmental organization. Individual CPAs, firms of CPAs, accounting educators, and representatives of
private industry will now have an opportunity to make known their views to the FASB through their
membership on the Board. Independence is facilitated through the funding of the organization and
payment of the members of the Board. Full-time members are paid by the organization and the
organization itself is funded solely through contributions. Thus, no one interest group has a vested
interest in the FASB.
Conclusion. The evolution of the current FASB certainly does represent “increasing politicization
of accounting standards setting.” Many of the efforts extended by the AICPA can be directly
attributed to the desire to satisfy the interests of many groups within our society. The FASB
represents, perhaps, just another step in this evolutionary process.
(b) Arguments for politicalization of the accounting rule-making process:
1. Accounting depends in large part on public confidence for its success. Consequently, the
critical issues are not solely technical, so all those having a bona fide interest in the output of
accounting should have some influence on that output.
2. There are numerous conflicts between the various interest groups. In the face of this, compromise is necessary, particularly since the critical issues in accounting are value judgments, not
the type which are solvable, as we have traditionally assumed, using deterministic models.
Only in this way (reasonable compromise) will the financial community have confidence in the
fairness and objectivity of accounting rule-making.
3. Over the years, accountants have been unable to establish, on the basis of technical accounting elements, rules which would bring about the desired uniformity and acceptability. This
inability itself indicates rule-setting is primarily consensual in nature.
4. The public accounting profession, through bodies such as the Accounting Principles Board,
made rules which business enterprises and individuals “had” to follow. For many years, these
businesses and individuals had little say as to what the rules would be, in spite of the fact that
their economic well-being was influenced to a substantial degree by those rules. It is only
natural that they would try to influence or control the factors that determine their economic
well-being.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-19
CA 1-10 (Continued)
(c) Arguments against the politicalization of the accounting rule-making process:
1. Many accountants feel that accounting is primarily technical in nature. Consequently, they feel
that substantive, basic research by objective, independent and fair-minded researchers ultimately
will result in the best solutions to critical issues, such as the concepts of income and capital,
even if it is accepted that there isn’t necessarily a single “right” solution.
2. Even if it is accepted that there are no “absolute truths” as far as critical issues are concerned,
many feel that professional accountants, taking into account the diverse interests of the various
groups using accounting information, are in the best position, because of their independence,
education, training, and objectivity, to decide what generally accepted accounting principles
ought to be.
3. The complex situations that arise in the business world require that trained accountants develop
the appropriate accounting principles.
4. The use of consensus to develop accounting principles would decrease the professional status
of the accountant.
5. This approach would lead to “lobbying” by various parties to influence the establishment of accounting principles.
CA 1-11
(a) The public/private mixed approach appears to be the way rules are established in the United States. In
many respects, the FASB is a quasi-governmental agency in that its pronouncements are required to
be followed because the SEC has provided support for this approach. The SEC has the ultimate
power to establish GAAP but has chosen to permit the private sector to develop these rules. By
accepting the standards established by the FASB as authoritative, it has granted much power to the
FASB. (It might be useful to inform the students that not all countries follow this model. For example,
the purely political approach is used in France and West Germany. The private, professional approach
is employed in Australia, Canada, and the United Kingdom).
(b) Publicly reported accounting numbers influence the distribution of scarce resources. Resources are
channeled where needed at returns commensurate with perceived risk. Thus, reported accounting
numbers have economic effects in that resources are transferred among entities and individuals as a
consequence of these numbers. It is not surprising then that individuals affected by these numbers
will be extremely interested in any proposed changes in the financial reporting environment.
(c) The Accounting Standards Executive Committee (AcSEC of the AICPA), among other groups, has
presented a potential challenge to the exclusive right of the FASB to establish accounting principles.
Also, Congress has been attempting to legislate certain accounting practices, particularly to help
struggling industries.
Some possible reasons why other groups might wish to establish GAAP are:
1. As indicated in the previous answer, these rules have economic effects and therefore certain
groups would prefer to make their own rules to ensure that they receive just treatment.
2. Some believe the FASB does not act quickly to resolve accounting matters, either because it
is not that interested in the subject area or because it lacks the resources to do so.
3. Some argue that the FASB does not have the competence to legislate GAAP in certain areas.
For example, many have argued that the FASB should not legislate GAAP for not-for-profit
enterprises because the problems are unique and not well known by the FASB.
1-20Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 1-12
(a) AICPA. American Institute of Certified Public Accountants. The national organization of practicing
certified public accountants.
(b) CAP. Committee on Accounting Procedure. A committee of practicing CPAs which issued
51 Accounting Research Bulletins between 1939 and 1959 and is a predecessor of the FASB.
(c) ARB. Accounting Research Bulletins. Official pronouncements of the Committee on Accounting
Procedure which, unless superseded, remain a primary source of GAAP.
(d) APB. Accounting Principles Board. A committee of public accountants, industry accountants and
academicians which issued 31 Opinions between 1959 and 1973. The APB replaced the CAP
and was itself replaced by the FASB. Its opinions, unless superseded, remain a primary source
of GAAP.
(e) FAF. Financial Accounting Foundation. An organization whose purpose is to select members of
the FASB and its Advisory Councils, fund their activities, and exercise general oversight.
(f)
FASAC. Financial Accounting Standards Advisory Council. An organization whose purpose is to
consult with the FASB on issues, project priorities, and select task forces.
(g) SOP. Statements of Position. Statements issued by the AICPA (through the Accounting Standards
Executive Committee of its Accounting Standards Division) which are generally devoted to emerging
problems not addressed by the FASB or the SEC.
(h) GAAP. Generally accepted accounting principles. A common set of standards, principles, and
procedures which have substantial authoritative support and have been accepted as appropriate
because of universal application.
(i)
CPA. Certified public accountant. An accountant who has fulfilled certain education and experience
requirements and passed a rigorous examination. Most CPAs offer auditing, tax, and management
consulting services to the general public.
(j)
FASB. Financial Accounting Standards Board. The primary body which currently establishes and
improves financial accounting and reporting standards for the guidance of issuers, auditors, users,
and others.
(k) SEC. Securities and Exchange Commission. An independent regulatory agency of the United
States government which administers the Securities Acts of 1933 and 1934 and other acts.
(l)
IASB. International Accounting Standards Board. An international group, formed in 1973, that is
actively developing and issuing accounting standards that will have international appeal and hopefully
support.
CA 1-13
(a) Inclusion or omission of information that materially affects net income harms particular stakeholders.
Accountants must recognize that their decision to implement (or delay) reporting requirements will
have immediate consequences for some stakeholders.
(b) Yes. Because the FASB rule results in a fairer representation, it should be implemented as soon as
possible—regardless of its impact on net income. SEC Staff Bulletin No. 74 (December 30, 1987)
requires a statement as to what the expected impact of the standard will be.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-21
CA 1-13 (Continued)
(c) The accountant’s responsibility is to provide financial statements that present fairly the financial
condition of the company. By advocating early implementation, Weller fulfills this task.
(d) Potential lenders and investors, who read the financial statements and rely on their fair representation of the financial condition of the company, have the most to gain by early implementation. A
stockholder who is considering the sale of stock may be harmed by early implementation that
lowers net income (and may lower the value of the stock).
CA 1-14
(a) The Securities and Exchange Commission (SEC) is an independent federal agency that receives
its authority from federal legislation enacted by Congress. The Securities and Exchange Act of
1934 created the SEC.
(b) As a result of the Securities and Exchange Act of 1934, the SEC has legal authority relative to
accounting practices. The U.S. Congress has given the SEC broad regulatory power to control
accounting principles and procedures in order to fulfill its goal of full and fair disclosure.
(c) There is no direct relationship as the SEC was created by Congress and the Financial Accounting
Standards Board (FASB) was created by the private sector. However, the SEC historically has
followed a policy of relying on the private sector to establish financial accounting and reporting standards known as generally accepted accounting principles (GAAP). The SEC does not necessarily
agree with all of the pronouncements of the FASB. In cases of unresolved differences, the SEC rules
take precedence over FASB rules for companies within SEC jurisdiction.
CA 1-15
(a) The ethical issue in this case relates to making questionable entries to meet expected earnings
forecasts. As indicated in this chapter, businesses’ concentration on “maximizing the bottom line,”
“facing the challenges of competition,” and “stressing short-term results” places accountants in an
environment of conflict and pressure.
(b) Given that Normand has pleaded guilty, he certainly acted improperly. Doing the right thing, making
the right decision, is not always easy. Right is not always obvious, and the pressures to “bend the
rules,” “to play the game,” “to just ignore it” can be considerable.
(c) No doubt, Normand was in a difficult position. I am sure that he was concerned that if he failed to
go along, it would affect his job performance negatively or that he might be terminated. These job
pressures, time pressures, peer pressures often lead individuals astray. Can it happen to you?
One individual noted that at a seminar on ethics sponsored by the CMA Society of Southern
California, attendees were asked if they had ever been pressured to make questionable entries.
This individual noted that to the best of his recollection, everybody raised a hand, and more than
one had eventually chosen to resign.
(d) Major stakeholders are: (1) Troy Normand, (2) present and potential stockholders and creditors of
WorldCom, (3) employees, and (4) family. Recognize that WorldCom is the largest bankruptcy in
United States history, so many individuals are affected.
1-22Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 1-16
(a) Considering the economic consequences of GAAP, it is not surprising that special interest groups
become vocal and critical (some supporting, some opposing) when rules are being formulated. The
FASB’s derivative accounting pronouncement is no exception. Many from the banking industry, for
example, criticized the rule as too complex and leading to unnecessary earnings volatility. They also
indicated that the proposal may discourage prudent risk management activities and in some cases
could present misleading financial information.
As a result, Congress is often approached to put pressure on the FASB to change its rulings. In the
stock option controversy, industry was quite effective in going to Congress to force the FASB to
change its conclusions. In the derivative controversy, Rep. Richard Baker introduced a bill which
would force the SEC to formally approve each standard issued by the FASB. Not only would this
process delay adoption, but could lead to additional politicalization of the rule-making process.
Dingell commented that Congress should stay out of the rule-making process and defended the
FASB’s approach to establishing GAAP.
(b) Attempting to set GAAP by a political process will probably lead to the following consequences:
(a) Too many alternatives.
(b) Lack of clarity that will lead to inconsistent application.
(c) Lack of disclosure that reduces transparency.
(d) Not comprehensive in scope.
Without an independent process, GAAP will be based on political compromise. A classic illustration is
what happened in the savings and loan industry. Applying generally accepted accounting
principles to the S&L industry would have forced regulators to restrict activities of many S&Ls.
Unfortunately, accounting principles were overridden by regulatory rules and the resulting lack of
transparency masked the problems. William Siedman, former FDIC Chairman noted later that it
was “the worst mistake in the history of government.”
Another indication of the problem of government intervention is shown in the accounting standards
used by some countries around the world. Completeness and transparency of information needed
by investors and creditors is not available in order to meet or achieve other objectives.
CA 1-17
(a) The “due process” system involves the following:
1. Identifying topics and placing them on the Board’s agenda.
2. Research and analysis is conducted and preliminary views of pros and cons issued.
3. A public hearing is often held.
4. Board evaluates research and public responses and issues exposure draft.
5. Board evaluates responses and changes exposure draft, if necessary. Final statement is then
issued.
(b) Economic consequences mean the impact of accounting reports on the wealth positions of issuers
and users of financial information and the decision-making behavior resulting from that impact.
(c) Economic consequences indicated in the letter are: (1) concerns related to the potential impact on
the capital markets, (2) the weakening of companies’ ability to manage risk, and (3) the adverse
control implications of implementing costly and complex new rules imposed at the same time as
other major initiatives, including the Year 2000 issues and a single European currency.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-23
(d) The principal point of this letter is to delay the finalization of the derivatives standard. As indicated in
the letter, the authors of this letter urge the FASB to expose its new proposal for public comment,
following the established due process procedures that are essential to acceptance of its standards
CA 1-17 (Continued)
and providing sufficient time for affected parties to understand and assess the new approach.
(Authors note: The FASB indicated in a follow-up letter that all due process procedures had been
followed and all affected parties had more than ample time to comment. In addition, the FASB issued
a follow-up standard, which delayed the effective date of the standard, in part to give companies more
time to develop the information systems needed for implementation of the standard).
(e) The reason why the letter was sent to Congress was to put additional pressure on the FASB to delay
or drop the issuance of a rule on derivatives. Unfortunately, in too many cases, when the business
community does not like the answer proposed by the FASB, it resorts to lobbying members of
Congress. The lobbying efforts usually involve developing some type of legislation that will negate
the rule. In some cases, efforts involve challenging the FASB’s authority to develop rules in certain
areas with additional Congressional oversight.
1-24Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL REPORTING PROBLEM
(a) The key organizations involved in rule making in the U.S. are the AICPA,
FASB, and SEC. See also (c).
(b) Different authoritative literature pertaining to methods recording accounting transactions exists today. Some authoritative literature has received
more support from the profession than other literature. The literature
that has substantial authoritative support is the one most supported
by the profession and should be followed when recording accounting
transactions. These standards and procedures are called generally
accepted accounting principles (GAAP).
With implementation of the Codification, what qualifies as authoritative is
any literature contained in the Codification. The Codification changes
the way GAAP is documented, presented, and updated. It creates one
level of GAAP which is considered authoritative. All other accounting
literature is considered non-authoritative.
What happens if the Codification does not cover a certain type of transaction or event? In this case, other accounting literature should be
considered which includes FASB Concepts Statements, international
financial reporting standards and other professional literature.
(c) Rule-making in the U.S. has evolved through the work of the following
organizations:
1. American Institute of Certified Public Accountants (AICPA)—it is
the national professional organization of practicing Certified Public
Accountants (CPAs). Outgrowths of the AICPA have been the Committee on Accounting Procedure (CAP) which issued Accounting
Research Bulletins and the Accounting Principles Board (APB) whose
major purposes were to advance written expression of accounting
principles, determine appropriate practices, and narrow the areas
of difference and inconsistency in practice.
2. Financial Accounting Standards Board (FASB)—the mission of the
FASB is to establish and improve standards of financial accounting
and reporting for the guidance and education of the public, which
includes issuers, auditors, and users of the financial information.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-25
FINANCIAL REPORTING PROBLEM (Continued)
3. Securities and Exchange Commission (SEC)—the SEC is an independent regulatory agency of the United States government which
administers the Securities Act of 1933, the Securities Exchange Act
of 1934, and several other acts. The SEC has broad power to prescribe the accounting practices and standards to be employed by
companies that fall within its jurisdiction.
(d) The SEC and the AICPA have been the authority for compliance with
GAAP. The SEC has indicated that financial statements conforming to
standards set by the FASB will be presumed to have authoritative support.
The AICPA, in Rule 203 of the Code of Professional Ethics, requires that
members prepare financial statements in accordance with GAAP. Failure
to follow Rule 203 can lead to the loss of a CPA’s license to practice.
1-26Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL RESEARCH
(a) CON 1, Par. 32. The objectives begin with a broad focus on information
that is useful in investment and credit decisions; then narrow that focus
to investors’ and creditors’ primary interest in the prospects of receiving
cash from their investments in or loans to business enterprises and the
relation of those prospects to the enterprise’s prospects; and finally
focus on information about an enterprise’s economic resources, the
claims to those resources, and changes in them, including measures of
the enterprise’s performance, that is useful in assessing the enterprise’s
cash flow prospects.
(b) CON 1, Par. 7. Financial reporting includes not only financial statements
but also other means of communicating information that relates,
directly or indirectly, to the information provided by the accounting
system—that is, information about an enterprise’s resources, obligations,
earnings, etc. Management may communicate information to those
outside an enterprise by means of financial reporting other than formal
financial statements either because the information is required to be
disclosed by authoritative pronouncement, regulatory rule, or custom or
because management considers it useful to those outside the enterprise
and discloses it voluntarily. Information communicated by means of
financial reporting other than financial statements may take various forms
and relate to various matters. Corporate annual reports, prospectuses,
and annual reports filed with the Securities and Exchange Commission
are common examples of reports that include financial statements,
other financial information, and nonfinancial information. News releases,
management’s forecasts or other descriptions of its plans or expectations, and descriptions of an enterprise’s social or environmental impact
are examples of reports giving financial information other than financial
statements or giving only nonfinancial information.
(c) CON 1, Par, 24 and 25: 24. Many people base economic decisions on
their relationships to and knowledge about business enterprises and
thus are potentially interested in the information provided by financial
reporting. Among the potential users are owners, lenders, suppliers,
potential investors and creditors, employees, management, directors,
customers, financial analysts and advisors, brokers, underwriters, stock
exchanges, lawyers, economists, taxing authorities, regulatory authorities,
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-27
PROFESSIONAL RESEARCH (Continued)
legislators, financial press and reporting agencies, labor unions, trade
associations, business researchers, teachers and students, and the
public. Members and potential members of some groups—such as
owners, creditors, and employees—have or contemplate having direct
economic interests in particular business enterprises. Managers and
directors, who are charged with managing the enterprise in the interest
of owners (paragraph 12), also have a direct interest. Members of other
groups—such as financial analysts and advisors, regulatory authorities,
and labor unions—have derived or indirect interests because they advise
or represent those who have or contemplate having direct interests.
Potential users of financial information most directly concerned with a
particular business enterprise are generally interested in its ability to
generate favorable cash flows because their decisions relate to amounts,
timing, and uncertainties of expected cash flows. To investors, lenders,
suppliers, and employees, a business enterprise is a source of cash in
the form of dividends or interest and perhaps appreciated market prices,
repayment of borrowing, payment for goods or services, or salaries or
wages. They invest cash, goods, or services in an enterprise and expect
to obtain sufficient cash in return to make the investment worthwhile.
They are directly concerned with the ability of the enterprise to generate
favorable cash flows and may also be concerned with how the market’s
perception of that ability affects the relative prices of its securities. To
customers, a business enterprise is a source of goods or services, but
only by obtaining sufficient cash to pay for the resources it uses and to
meet its other obligations can the enterprise provide those goods or
services. To managers, the cash flows of a business enterprise are a
significant part of their management responsibilities, including their
accountability to directors and owners. Many, if not most, of their
decisions have cash flow consequences for the enterprise. Thus,
investors, creditors, employees, customers, and managers significantly
share a common interest in an enterprise’s ability to generate favorable
cash flows. Other potential users of financial information share the
same interest, derived from investors, creditors, employees, customers,
or managers whom they advise or represent or derived from an interest
in how those groups (and especially stockholders) are faring.
1-28Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL SIMULATION
(a)
The term “accounting principles” in the auditor’s report includes not
only accounting principles but also the practices and the methods of
applying them. Although the term quite naturally emphasizes the primary or fundamental character of some principles, it includes general
rules adopted or professed as guides to action in practice. The term
does not connote, however, rules from which there can be no deviation.
In some cases the question is which of several partially relevant principles are applicable. Neither is the term “accounting principles” necessarily synonymous with accounting theory. Accounting theory is the
broad area of inquiry devoted to the definition of objectives to be served
by accounting, the development and elaboration of relevant concepts,
the promotion of consistency through logic, the elimination of faulty
reasoning, and the evaluation of accounting practice.
(b)
Generally accepted accounting principles are those principles (whether
or not they have only limited usage) that have substantial authoritative
support. Whether a given principle has authoritative support is a
question of fact and a matter of judgment. The CPA is responsible for
collecting the available evidence of authoritative support and judging
whether it is sufficient to bring the practice within the bounds of
generally accepted accounting principles.
With implementation of the Codification, what qualifies as authoritative is
any literature contained in the Codification. The Codification changes
the way GAAP is documented, presented, and updated. It creates one
level of GAAP which is considered authoritative. All other accounting
literature is considered non-authoritative.
What happens if the Codification does not cover a certain type of transaction or event? In this case, other accounting literature should be
considered which includes FASB Concepts Statements, international
financial reporting standards and other professional literature.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-29
PROFESSIONAL SIMULATION (Continued)
For example, other evidence of authoritative support may be found in the
published opinions of the committees of the American Accounting Association and the affirmative opinions of practitioners and academicians
in articles, textbooks, and expert testimony. Similarly, the views of stock
exchanges, commercial and investment bankers, and regulatory commissions influence the general acceptance of accounting principles and,
hence, are considered in determining whether an accounting principle
has substantial authoritative support. Business practice also is a
source of evidence. Finally, because they influence business practice,
the tax code and state laws are sources of evidence too.
1-30Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS CONCEPTS AND APPLICATION
IFRS 1-1
The two organizations involved in international standard-setting are IOSCO
(International Organization of Securities Commissions) and the IASB
(International Accounting Standards Board.) The IOSCO does not set
accounting standards, but ensures that the global markets can operate in
an efficient and effective manner. Conversely, the IASB’s mission is to
develop a single set of high quality, understandable and international financial reporting standards (IFRSs) for general purpose financial statements.
IFRS 1-2
The standards issued by these organizations are sometimes principlesbased, rules-based, tax-oriented, or business-based. In other words, they
often differ in concept and objective.
IFRS 1-3
A single set of high quality accounting standards ensures adequate
comparability. Investors are able to make better investment decisions if
they receive financial information from a U.S. company that is comparable
to an international competitor.
IFRS 1-4
The international standards must be of high quality and sufficiently
comprehensive. To achieve this goal, the IASB and the FASB have set up
an extensive work plan to achieve the objective of developing one set of
world-class international standards. This work plan actually started in 2002,
when an agreement was forged between the two Boards, where each
acknowledged their commitment to the development of high-quality,
compatible accounting standards that could be used for both domestic and
cross-border financial reporting (referred to as the Norwalk Agreement).
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-31
IFRS 1-4 (Continued)
At that meeting, the FASB and the IASB pledged to use their best efforts to
(1) make their existing financial reporting standards fully compatible as
soon as is practicable, and (2) coordinate their future work programs to
ensure that once achieved, compatibility is maintained. This document was
reinforced in 2006 when the parties issued a memorandum of understanding
(MOU) which highlighted three principles:
 Convergence of accounting standards can best be achieved
through the development of high-quality common standards over
time.
 Trying to eliminate differences between two standards that are in
need of significant improvement is not the best use of the FASB’s
and the IASB’s resources—instead, a new common standard should
be developed that improves the financial information reported to
investors.
 Serving the needs of investors means that the Boards should seek
convergence by replacing standards in need of improvement with
jointly developed new standards.
Subsequently, in 2009 the Boards agreed on a process to complete a
number of major projects by 2011, including monthly joint meetings. As
part of achieving this goal, it is critical that the process by which the
standards are established be independent. And, it is necessary that the
standards are maintained, and emerging accounting issues are dealt with
efficiently.
The SEC has directed its staff to develop and execute a plan (“Work Plan”)
to enhance both the understanding of the SEC’s purpose and public
transparency in this area. Execution of the Work Plan (which addresses
such areas as independence of standard-setting, investor understanding of
IFRS, and auditor readiness), combined with the completion of the
convergence projects of the FASB and the IASB according to their current
work plan, will position the SEC in 2011 to make a decision on required use
of IFRS in the U.S. issuers. After reviewing the progress related to the Work
Plan studies, the SEC will decide, sometime in 2011, whether to mandate
the use of IFRS. It is likely that not all companies would be required
immediately to change to IFRS, but there would be a transition period in
which this would be accomplished.
1-32Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS 1-5
(a) The International Accounting Standards Board is an independent, privately funded accounting standards setter based in London, UK. The
Board is committed to developing, in the public interest, a single set of
high quality, understandable and enforceable global accounting standards
that require transparent and comparable information in general purpose
financial statements. In addition, the Board cooperates with national
accounting standards setters to achieve convergence in accounting
standards around the world.
(b) In summary, the following groups might gain most from convergence
of financial reporting:
 Investors, investment analysts and stockbrokers: to facilitate international comparisons for investment decisions.
 Credit grantors: for similar reasons to bullet point above.
 Multinational companies: as preparers, investors, appraisers of products or staff, and as movers of staff around the globe; also, as
raisers of finance on international markets (this also applies to some
companies that are not multinationals).
 Governments: as tax collectors and hosts of multinationals; also
interested are securities markets regulators and governmental and
nongovernmental rule makers.
(c) The fundamental argument against convergence is that, to the extent
that international differences in accounting practices result from underlying economic, legal, social, and other environmental factors, harmonization may not be justified. Different accounting has grown up to serve the
different needs of different users; this might suggest that the existing accounting practice is “correct” for a given nation and should not be changed
merely to simplify the work of multinational companies or auditors.
There does seem to be strength in this point particularly for smaller companies with no significant multinational activities or connections. To foist
upon a small private family company in Luxembourg lavish disclosure
requirements and the need to report a “true and fair” view may be an
expensive and unnecessary piece of convergence.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-33
IFRS1-5 (Continued)
The most obvious obstacle to harmonization is the sheer size and deep
rootedness of the differences in accounting. These differences have
grown up over the previous century because of differences in users,
legal systems, and so on. Thus, the differences are structural rather
than cosmetic, and require revolutionary action to remove them.
IFRS 1-6
(a) As indicated in paragraph 12 of the Framework, “The objective of
financial statements is to provide information about the financial
position, performance and changes in financial position of an entity
that is useful to a wide range of users in making economic decisions.”
(b) According to paragraph 21 of the Framework, notes and supplementary
schedules serve in this role. For example, they may contain additional
information that is relevant to the needs of users about the items in the
statement of financial position and income statement. They may
include disclosures about the risks and uncertainties affecting the
entity and any resources and obligations not recognised in the
statement of financial position (such as mineral reserves). Information
about geographical and industry segments and the effect on the entity
of changing prices may also be provided in the form of supplementary
information.
(c) As indicated in paragraphs 13 and 14, financial statements prepared to
meet the objective of financial reporting meet the common needs of
most users. However, financial statements do not provide all the
information that users may need to make economic decisions since they
largely portray the financial effects of past events and do not necessarily
provide non-financial information. In addition, financial statements also
show the results of the stewardship of management, or the accountability
of management for the resources entrusted to it. Those users who wish
to assess the stewardship or accountability of management do so in
order that they may make economic decisions; these decisions may
include, for example, whether to hold or sell their investment in the
entity or whether to reappoint or replace the management.
1-34Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS1-7
(a) Operating retail stores (clothing, home, and food).
(b) Operations are primarily in the UK, China, Czech Republic, Greece,
Hungary, India, Indonesia, Jersey, Kuwait, Latvia, Lithuania, Malaysia,
Malta, Oman, Philippines, Poland, Qatar, Republic of Ireland, Romania,
Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South
Korea, Spain, Switzerland, Taiwan, Thailand, Turkey, UAE, and Ukraine.
(c) Waterside House, 35 North Wharf Road, London W2 1NW.
(d) Pound.
Ahmed NawfalCopyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 1-35
CHAPTER 2
Conceptual Framework for
Financial Reporting
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
1.
Conceptual framework–
general.
1, 7
2.
Objective of financial
reporting.
2
3.
Qualitative characteristics
of accounting.
3, 4, 5, 6, 8
4.
Elements of financial
statements.
5.
6.
Brief
Exercises
Exercises
Concepts
for Analysis
1, 2
1, 2
3
1, 2, 3, 4
2, 3, 4
4, 9
9, 10, 11
6, 10, 12
5
Basic assumptions.
12, 13, 14
5, 7
6, 7
Basic principles:
a. Measurement.
b. Revenue recognition.
c. Expense recognition.
d. Full disclosure.
15, 16, 17, 18
19, 20, 21, 22, 23
24
25, 26, 27
8, 9, 11
8
8, 11
8, 11
6, 7
7
6, 7
6, 7, 8
7.
Accounting principles–
comprehensive.
8.
Cost constraint.
9.
Assumptions, principles,
and constraints.
5
5
5, 6, 7, 8, 10
10
9, 10
28, 29, 30
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
3, 6, 7
10
11
6, 7
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
2-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
1.
Describe the usefulness of a
conceptual framework.
1
2.
Describe the FASB’s efforts to
construct a conceptual framework.
3.
Understand the objectives of
financial reporting.
2
4.
Identify the qualitative
characteristics of accounting
information.
3, 4, 5, 6, 8
5.
Define the basic elements of
financial statements.
6.
Brief
Exercises
Exercises
1, 2
Concepts for
Analysis
CA2-1
CA2-1, CA22, CA2-3
1, 2
CA2-2, CA23
1, 2, 3, 4, 5
2, 3, 4
CA2-4, CA25
7, 10, 11,
26, 27
6, 12
5
Describe the basic assumptions of
accounting.
9, 12, 13,
14, 25
7, 10, 11
6, 7
7.
Explain the application of the basic
principles of accounting.
15, 16, 17,
18, 19, 20,
21, 22, 23,
24, 26, 27,
28, 29, 30
8, 9, 11
6, 7, 8, 9,
10
CA2-5, CA26, CA2-7,
CA2-8, CA29, CA2-10,
CA2-11
8.
Describe the impact that the cost
constraint has on reporting
accounting information.
28, 29, 30
11
3, 6, 7
CA2-11
2-2Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE
Level of
Difficulty
Time
(minutes)
Simple
Simple
15–20
15–20
Moderate
Simple
Simple
Simple
Moderate
Complex
Moderate
Moderate
25–30
15–20
15–20
15–20
20–25
20–25
20–25
20–25
Conceptual framework–general.
Conceptual framework–general.
Objective of financial reporting.
Qualitative characteristics.
Revenue recognition principle.
Simple
Simple
Moderate
Moderate
Complex
20–25
25–35
25–35
30–35
25–30
Expense recognition principle.
Expense recognition principle.
Expense recognition principle.
Qualitative characteristics.
Expense recognition principle.
Cost Constraint.
Complex
Moderate
Moderate
Moderate
Moderate
Moderate
20–25
20–25
20–30
20–30
20–25
30–35
Item
Description
E2-1
E2-2
E2-3
E2-4
E2-5
E2-6
E2-7
E2-8
E2-9
E2-10
Usefulness, objective of financial reporting.
Usefulness, objective of financial reporting, qualitative
characteristics.
Qualitative characteristics.
Qualitative characteristics.
Elements of financial statements.
Assumptions, principles, and constraint.
Assumptions, principles, and constraint.
Full disclosure principle.
Accounting principles–comprehensive.
Accounting principles–comprehensive.
CA2-1
CA2-2
CA2-3
CA2-4
CA2-5
CA2-6
CA2-7
CA2-8
CA2-9
CA2-10
CA2-11
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
2-3
SOLUTION TO CODIFICATION EXERCISES
CE2-1
(a)
The master glossary provides three definitions of fair value that are found in GAAP:
Fair Value—The amount at which an asset (or liability) could be bought (or incurred) or settled in a
current transaction between willing parties, that is, other than in a forced or liquidation sale.
Fair Value—The fair value of an investment is the amount that the plan could reasonably expect to
receive for it in a current sale between a willing buyer and a willing seller, that is, other than in a
forced or liquidation sale. Fair value shall be measured by the market price if there is an active
market for the investment. If there is no active market for the investment but there is a market for
similar investments, selling prices in that market may be helpful in estimating fair value. If a market
price is not available, a forecast of expected cash flows, discounted at a rate commensurate with
the risk involved, may be used to estimate fair value. The fair value of an investment shall be
reported net of the brokerage commissions and other costs normally incurred in a sale.
Fair Value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
(b)
Revenue—Revenue earned by an entity from its direct distribution, exploitation, or licensing of a
film, before deduction for any of the entity’s direct costs of distribution. For markets and territories
in which an entity’s fully or jointly-owned films are distributed by third parties, revenue is the net
amounts payable to the entity by third party distributors. Revenue is reduced by appropriate
allowances, estimated returns, price concessions, or similar adjustments, as applicable.
The glossary references a revenue definition for the SEC: (Revenue (SEC))—See paragraph
942-235-S599-1, Regulation S-X Rule 9-05(c)(2), for the definition of revenue for purposes of
Regulation S-X Rule 9-05.
This definition relates to segment reporting requirements for public companies.
(c)
Comprehensive Income is defined as the change in equity (net assets) of a business entity during
a period from transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from investments by owners
and distributions to owners.
CE2-2
The FASB Codification’s organization is closely aligned with the elements of financial statements, as
articulated in the Conceptual Framework. This is apparent in the lay-out of the “Browse” section, which
has primary links for Assets, Liabilities, Equity, Revenues, and Expenses.
2-4Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ANSWERS TO QUESTIONS
1. A conceptual framework is a coherent system of interrelated objectives and fundamentals that can
lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. A conceptual framework is necessary in financial accounting for the
following reasons:
(1) It enables the FASB to issue more useful and consistent standards in the future.
(2) New issues will be more quickly solvable by reference to an existing framework of basic theory.
(3) It increases financial statement users’ understanding of and confidence in financial reporting.
(4) It enhances comparability among companies’ financial statements.
2. The basic objective is to provide financial information about the reporting entity that is useful to
present and potential equity investors, lenders, and other creditors in making decisions about
providing resources to the entity.
3. “Qualitative characteristics of accounting information” are those characteristics which contribute to
the quality or value of the information. The overriding qualitative characteristic of accounting information is usefulness for decision making.
4. Relevance and faithful representation are the two primary qualities of useful accounting information.
For information to be relevant, it should should be capable of making a difference in a decision by
helping users to form predictions about the outcomes of past, present, and future events or to
confirm or correct expectations. Faithful representation of a measure rests on whether the
numbers and descriptions match what really existed or happened.
5. The concept of materiality refers to the relative significance of an amount, activity, or item to
informative disclosure, proper presentation of financial position, and the results of operations.
Materiality has qualitative and quantitative aspects; both the nature of the item and its relative size
enter into its evaluation.
An accounting misstatement is said to be material if knowledge of the misstatement will affect the
decisions of the average informed reader of the financial statements. Financial statements are
misleading if they omit a material fact or include so many immaterial matters as to be confusing. In
the examination, the auditor concentrates efforts in proportion to degrees of materiality and relative
risk and disregards immaterial items.
The relevant criteria for assessing materiality will depend upon the circumstances and the nature
of the item and will vary greatly among companies. For example, an error in current assets or
current liabilities will be more important for a company with a flow of funds problem than for one
with adequate working capital.
The effect upon net income (or earnings per share) is the most commonly used measure of
materiality. This reflects the prime importance attached to net income by investors and other users
of the statements. The effects upon assets and equities are also important as are misstatements
of individual accounts and subtotals included in the financial statements. The auditor will note the
effects of misstatements on key ratios such as gross profit, the current ratio, or the debt/equity
ratio and will consider such special circumstances as the effects on debt agreement covenants
and the legality of dividend payments.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
2-5
Questions Chapter 2 (Continued)
There are no rigid standards or guidelines for assessing materiality. The lower bound of materiality
has been variously estimated at 5% to 20% of net income, but the determination will vary based
upon the individual case and might not fall within these limits. Certain items, such as a questionable
loan to a company officer, may be considered material even when minor amounts are involved. In
contrast a large misclassification among expense accounts may not be deemed material if there is
no misstatement of net income.
6. Enhancing qualities are qualitative characteristics that are complementary to the fundamental
qualitative characteristics. These characteristics distinguish more-useful information from lessuseful information. Enhancing characteristics are comparability, verifiability, timeliness, and
understandability.
7. In providing information to users of financial statements, the Board relies on general-purpose
financial statements. The intent of such statements is to provide the most useful information
possible at minimal cost to various user groups. Underlying these objectives is the notion that
users need reasonable knowledge of business and financial accounting matters to understand
the information contained in financial statements. This point is important. It means that in the
preparation of financial statements a level of reasonable competence can be assumed; this has an
impact on the way and the extent to which information is reported.
8. Comparability facilitates comparisons between information about two different enterprises at a
particular point in time. Consistency, a type of comparability, facilitates comparisons between
information about the same enterprise at two different points in time.
9. At present, the accounting literature contains many terms that have peculiar and specific meanings.
Some of these terms have been in use for a long period of time, and their meanings have changed
over time. Since the elements of financial statements are the building blocks with which the
statements are constructed, it is necessary to develop a basic definitional framework for them.
10. Distributions to owners differ from expenses and losses in that they represent transfers to owners,
and they do not arise from activities intended to produce income. Expenses differ from losses in
that they arise from the entity’s ongoing major or central operations. Losses arise from peripheral
or incidental transactions.
11. Investments by owners differ from revenues and gains in that they represent transfers by owners
to the entity, and they do not arise from activities intended to produce income. Revenues differ
from gains in that they arise from the entity’s ongoing major or central operations. Gains arise from
peripheral or incidental transactions.
12. The four basic assumptions that underlie the financial accounting structure are:
(1) An economic entity assumption.
(2) A going concern assumption.
(3) A monetary unit assumption.
(4) A periodicity assumption.
13. (a) In accounting it is generally agreed that any measures of the success of an enterprise for
periods less than its total life are at best provisional in nature and subject to correction.
Measurement of progress and status for arbitrary time periods is a practical necessity to serve
those who must make decisions. It is not the result of postulating specific time periods as
measurable segments of total life.
2-6Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 2 (Continued)
(b) The practice of periodic measurement has led to many of the most difficult accounting problems such as inventory pricing, depreciation of long-term assets, and the necessity for
revenue recognition tests. The accrual system calls for associating related revenues and
expenses. This becomes very difficult for an arbitrary time period with incomplete transactions
in process at both the beginning and the end of the period. A number of accounting practices
such as adjusting entries or the reporting of corrections of prior periods result directly from
efforts to make each period’s calculations as accurate as possible and yet recognizing that
they are only provisional in nature.
14. The monetary unit assumption assumes that the unit of measure (the dollar) remains reasonably
stable so that dollars of different years can be added without any adjustment. When the value of
the dollar fluctuates greatly over time, the monetary unit assumption loses its validity.
The FASB in Concept No. 5 indicated that it expects the dollar unadjusted for inflation or deflation
to be used to measure items recognized in financial statements. Only if circumstances change
dramatically will the Board consider a more stable measurement unit.
15. Some of the arguments which might be used are outlined below:
(1) Cost is definite and reliable; other values would have to be determined somewhat arbitrarily
and there would be considerable disagreement as to the amounts to be used.
(2) Amounts determined by other bases would have to be revised frequently.
(3) Comparison with other companies is aided if cost is employed.
(4) The costs of obtaining replacement values could outweigh the benefits derived.
16. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.” Fair value
is therefore a market-based measure.
17. The fair value option gives companies the option to use fair value (referred to as the fair value
option as the basis for measurement of financial assets and financial liabilities.) The Board believes
that fair value measurement for financial instruments provides more relevant and understandable
information than historical cost. It considers fair value to be more relevant because it reflects the
current cash equivalent value of financial instruments. As a result companies now have the option
to record fair value in their accounts for most financial instruments, including such items as
receivables, investments, and debt securities.
18. The fair value hierarchy provides insight into the priority of valuation techniques that are used to
determine fair value. The fair value hierarchy is divided into three broad levels.
Fair Value Hierarchy
Level 1: Observable inputs that reflect quoted prices for
identical assets or liabilities in active markets.
Least Subjective
Level 2: Inputs other than quoted prices included in Level 1 that
are observable for the asset or liability either directly or
through corroboration with observable data.
Level 3: Unobservable inputs (for example, a company’s own
data or assumptions).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Most Subjective
(For Instructor Use Only)
2-7
Questions Chapter 2 (Continued)
As indicated, Level 1 is the most reliable because it is based on quoted prices, like a closing stock
price in the Wall Street Journal. Level 2 is the next most reliable and would rely on evaluating
similar assets or liabilities in active markets. At the least-reliable level, Level 3, much judgment
is needed based on the best information available to arrive at a relevant and reliable fair value
measurement.
19. The revenue recognition principle requires that companies recognize revenue in the accounting
period in which the performance obligation is satisfied. In the case of services, revenue is
recognized when the services are performed. In the case a selling a product, the performance
obligation is met when the product is delivered. Companies follow a five-step process to analyze
revenue arrangements to determine when revenue should be recognized: (1) Identify the
contract(s) with the customer; (2) Identify the separate performance obligations in the contract; (3)
Determine the transaction price; (4) Allocate the transaction price to separate performance
obligations; and (5) Recognize revenue when each performance obligation is satisfied.
20. A performance obligation is a promise to deliver a product or provide a service to a customer. The
revenue recognition principle requires that companies recognize revenue in the accounting period
in which the performance obligation is satisfied. In the case of services, revenue is recognized
when the services are performed. In the case of selling a product, the performance obligation is
met when the product is delivered.
21. The five steps in the revenue recognition process are:
Step 1
Identify the contract(s) with the customer. A contract is an agreement between two
parties that creates enforceable rights or obligations.
Step 2
Identify the separate performance obligations in the contract. A performance
obligation is ether a promise to provide a service or deliver a product, or both.
Step 3. Determine the transaction price. Transaction price is the amount of consideration that
a company expects to receive from a customer in exchange for transferring a good or
service.
Step 4. Allocate the transaction price to separate performance obligations. This is usually
done by estimating the value of consideration attributable to each product or service.
Step 5. Recognize revenue when each performance obligation is satisfied. This occurs
when the service is provided or the product is delivered.
Note that many revenue transactions pose few problems because the transaction is initiated and
completed at the same time.
22. Revenues are recognized when a performance obligation is met. The most common time at which
these two conditions are met is when the product or merchandise is delivered or services are
rendered to customers. Therefore, revenue for Selane Eatery should be recognized at the time the
luncheon is served.
23. The president means that the “gain” should be recorded in the books. This item should not be
entered in the accounts, however, because it has not been realized.
24. The cause and effect relationship can seldom be conclusively demonstrated, but many costs
appear to be related to particular revenues and recognizing them as expenses accompanies
2-8Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
recognition of the revenue. Examples of expenses that are recognized by associating cause and
effect are sales commissions and cost of products sold or services provided.
Questions Chapter 2 (Continued)
Systematic and rational allocation means that in the absence of a direct means of associating
cause and effect, and where the asset provides benefits for several periods, its cost should be
allocated to the periods in a systematic and rational manner. Examples of expenses that are
recognized in a systematic and rational manner are depreciation of plant assets, amortization of
intangible assets, and allocation of rent and insurance.
Some costs are immediately expensed because the costs have no discernible future benefits or
the allocation among several accounting periods is not considered to serve any useful purpose.
Examples include officers’ salaries, most selling costs, amounts paid to settle lawsuits, and costs
of resources used in unsuccessful efforts.
25. The four characteristics are:
(1) Definitions—The item meets the definition of an element of financial statements.
(2) Measurability—It has a relevant attribute measurable with sufficient reliability.
(3) Relevance—The information is capable of making a difference in user decisions.
(4) Reliability—The information is representationally faithful, verifiable, and neutral.
26. (a) To be recognized in the main body of financial statements, an item must meet the definition of
an element. In addition the item must have been measured, recorded in the books, and passed
through the double-entry system of accounting.
(b) Information provided in the notes to the financial statements amplifies or explains the items
presented in the main body of the statements and is essential to an understanding of the performance and position of the enterprise. Information in the notes does not have to be quantifiable, nor does it need to qualify as an element.
(c) Supplementary information includes information that presents a different perspective from that
adopted in the financial statements. It also includes management’s explanation of the financial
information and a discussion of the significance of that information.
27. The general guide followed with regard to the full disclosure principle is to disclose in the financial
statements any facts of sufficient importance to influence the judgment of an informed reader.
The fact that the amount of outstanding common stock doubled in January of the subsequent
reporting period probably should be disclosed because such a situation is of importance to present
stockholders. Even though the event occurred after December 31, 2014, it should be disclosed on
the balance sheet as of December 31, 2014, in order to make adequate disclosure. (The major
point that should be emphasized throughout the entire discussion on full disclosure is that there is
normally no “black” or “white” but varying shades of grey and it takes experience and good
judgment to arrive at an appropriate answer).
28. Accounting information is subject to the cost constraint. Information is not worth providing unless
the benefits exceed the costs of preparing it.
29. The costs of providing accounting information are paid primarily to highly trained accountants who
design and implement information systems, retrieve and analyze large amounts of data, prepare
financial statements in accordance with authoritative pronouncements, and audit the information
presented. These activities are time-consuming and costly. The benefits of providing accounting
information are experienced by society in general, since informed financial decisions help allocate
scarce resources to the most effective enterprises. Occasionally new accounting standards require
presentation of information that is not readily assembled by the accounting systems of most
companies. A determination should be made as to whether the incremental or additional costs of
providing the proposed information exceed the incremental benefits to be obtained. This deter-
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
2-9
mination requires careful judgment since the benefits of the proposed information may not be
readily apparent.
2-10Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 2 (Continued)
30. In general, conservatism should not be the basis for determining the accounting for transactions.
(a) Acceptable if reasonably accurate estimation is possible. To the extent that warranty costs can
be estimated accurately, they should be matched against the related sales revenue.
(b) Not acceptable. Most accounts are collectible or the company will be out of business very soon.
Hence sales can be recorded when made. Also, other companies record sales when made
rather than when collected, so if accounts for Landowska Co. are to be compared with other
companies, they must be kept on a comparable basis. However, estimates for uncollectible
accounts should be recorded if there is a reasonably accurate basis for estimating bad debts.
(c) Not acceptable. A provision for the possible loss can be made through an appropriation of
retained earnings but until judgment has been rendered on the suit or it is otherwise settled,
entry of the loss usually represents anticipation. Recording it earlier is probably unwise legal
strategy as well. For the loss to be recognized at this point, the loss would have to be probable
and reasonably estimable. (See FASB ASC 450-10-05 for additional discussion if desired.)
Note disclosure is required if the loss is not recorded; however, conservatism is not part of the
conceptual framework.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-11
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 2-1
(a)
(b)
(c)
(d)
(e)
5. Comparability
8. Timeliness
3. Predictive value
1. Relevance
7. Neutrality
BRIEF EXERCISE 2-2
(a)
(b)
(c)
(d)
(e)
5. Faithful representation
8. Confirmatory value
3. Free from error
2. Completeness
4. Understandability
BRIEF EXERCISE 2-3
(a)
If the company changed its method for inventory valuation, the consistency, and therefore the comparability, of the financial statements have
been affected by a change in the method of applying the accounting
principles employed. The change would require comment in the auditor’s
report in an explanatory paragraph.
(b)
If the company disposed of one of its two subsidiaries that had been
included in its consolidated statements for prior years, no comment as
to consistency needs to be made in the CPA’s audit report. The comparability of the financial statements has been affected by a business transaction, but there has been no change in any accounting principle
employed or in the method of its application. (The transaction would
probably require informative disclosure in the financial statements).
2-12Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 2-3 (continued)
(c)
If the company reduced the estimated remaining useful life of plant
property because of obsolescence, the comparability of the financial
statements has been affected. The change is not a matter of consistency;
it is a change in accounting estimate required by altered conditions
and involves no change in accounting principles employed or in their
method of application. The change would probably be disclosed by a
note in the financial statements. If commented upon in the CPA’s
report, it would be as a matter of disclosure rather than consistency.
BRIEF EXERCISE 2-4
(a)
(b)
(c)
(d)
Verifiability
Comparability
Comparability (consistency)
Timeliness
BRIEF EXERCISE 2-5
Companies and their auditors for the most part have adopted the general
rule of thumb that anything under 5% of net income is considered not material.
Recently, the SEC has indicated that it is okay to use this percentage for
the initial assessment of materiality, but other factors must be considered.
For example, companies can no longer fail to record items in order to meet
consensus analyst’s earnings numbers, preserve a positive earnings trend,
convert a loss to a profit or vice versa, increase management compensation,
or hide an illegal transaction like a bribe. In other words, both quantitative
and qualitative factors must be considered in determining when an item is
material.
(a)
Because the change was used to create a positive trend in earnings,
the change is considered material.
(b)
Each item must be considered separately and not netted. Therefore
each transaction is considered material.
(c)
In general, companies that follow an “expense all capital items below
a certain amount” policy are not in violation of the materiality concept.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-13
Because the same practice has been followed from year to year,
Damon’s actions are acceptable.
BRIEF EXERCISE 2-6
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Equity
Revenues
Equity
Assets
Expenses
Losses
Liabilities
Distributions to owners
Gains
Investments by owners
BRIEF EXERCISE 2-7
(a)
(b)
(c)
(d)
Periodicity
Monetary unit
Going concern
Economic entity
BRIEF EXERCISE 2-8
(a)
(b)
(c)
(d)
Revenue recognition
Expense recognition
Full disclosure
Measurement (historical cost)
BRIEF EXERCISE 2-9
Investment 1—Level 3
Investment 2—Level 1
Investment 3—Level 2
BRIEF EXERCISE 2-10
(a)
Net realizable value.
2-14Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
(b)
Would not be disclosed. Liabilities would be disclosed in the order to
be paid.
BRIEF EXERCISE 2-10 (continued)
(c)
Would not be disclosed. Depreciation would be inappropriate if the
going concern assumption no longer applies.
(d)
Net realizable value.
(e)
Net realizable value (i.e., redeemable value).
BRIEF EXERCISE 2-11
(a)
(b)
(c)
Full disclosure
Expense recognition
Historical cost
BRIEF EXERCISE 2-12
(a)
Should be debited to the Land account, as it is a cost incurred in acquiring land.
(b)
As an asset, preferably to a Land Improvements account. The driveway
will last for many years, and therefore it should be capitalized and
depreciated.
(c)
Probably an asset, as it will last for a number of years and therefore
will contribute to operations of those years.
(d)
If the fiscal year ends December 31, this will all be an expense of the
current year that can be charged to an expense account. If statements
are to be prepared on some date before December 31, part of this cost
would be expense and part asset. Depending upon the circumstances,
the original entry as well as the adjusting entry for statement purposes
should take the statement date into account.
(e)
Should be debited to the Building account, as it is a part of the cost of
that plant asset which will contribute to operations for many years.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-15
(f)
As an expense, as the service has already been received; the contribution to operations occurred in this period.
2-16Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO EXERCISES
EXERCISE 2-1 (15–20 minutes)
(a)
(b)
(c)
(d)
(e)
(f)
True.
False – General-purpose financial reports helps users who lack the
ability to demand all the financial information they need from an entity
and therefore must rely, at least partly, on the information in financial
reports.
False – Standard-setting that is based on personal conceptual frameworks will lead to different conclusions about identical or similar
issues. As a result, standards will not be consistent with one another,
and past decisions may not be indicative of future ones.
False – Information that is decision-useful to capital providers may
also be useful to users of financial reporting who are not capital
providers.
False – An implicit assumption is that users need reasonable knowledge of business and financial accounting matters to understand the
information contained in the financial statements.
True.
EXERCISE 2-2 (15–20 minutes)
(a)
(b)
(c)
(d)
(e)
(f)
False – The fundamental qualitative characteristics that make accounting information useful are relevance and faithful representation.
False – Relevant information must also be material.
False – Information that is relevant is characterized as having predictive
or confirmatory value.
False – Comparability also refers to comparisons of a firm over time
(consistency).
False – Enhancing characteristics relate to both relevance and faithful
representation.
True.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-17
EXERCISE 2-3 (20–30 minutes)
(a)
(b)
(c)
(d)
(e)
(f)
Confirmatory Value.
Cost/Benefit.
Neutrality.
Comparability (Consistency.)
Neutrality.
Relevance and Faithful
representation.
(g)
(h)
(i)
(j)
Timeliness.
Relevance.
Comparability.
Verifiability.
EXERCISE 2-4 (15–20 minutes)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Comparability.
Confirmatory Value.
Comparability (Consistency.)
Neutrality.
Verifiability.
Relevance.
Comparability, Verifiability,
Timeliness, and
Understandability.
(h) Materiality.
(i) Relevance and Faithful
representation.
(j) Relevance and Faithful
representation.
(k) Timeliness
EXERCISE 2-5 (15–20 minutes)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Gains, losses.
Liabilities.
Investments by owners, comprehensive income.
(also possible would be revenues and gains).
Distributions to owners.
(Note to instructor: net effect is to reduce equity and assets).
Comprehensive income
(also possible would be revenues and gains).
Assets.
Comprehensive income.
Revenues, expenses.
Equity.
Revenues.
Distributions to owners.
Comprehensive income.
2-18Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-19
EXERCISE 2-6 (15–20 minutes)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
7.
5.
8.
2.
1.
4.
3.
Expense recognition principle.
Measurement (historical cost principle.)
Full disclosure principle.
Going concern assumption.
Economic entity assumption.
Periodicity assumption.
Monetary unit assumption.
EXERCISE 2-7 (20–25 minutes)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Measurement (historical cost)
(i) Full disclosure principle.
principle.
(j) Expense recognition and
Full disclosure principle.
revenue recognition principles.
Expense recognition principle. (k) Economic entity assumption.
Materiality.
(l) Periodicity assumption.
Measurement (fair value)
(m) Measurement (fair value)
principle.
principle.
Economic entity assumption.
(n) Measurement (historical cost)
Full disclosure principle.
principle.
Revenue recognition principle. (o) Expense recognition principle.
EXERCISE 2-8
(a)
It is well established in accounting that revenues and cost of goods
sold must be disclosed in an income statement. It might be noted to
students that such was not always the case. At one time, only net
income was reported but over time we have evolved to the present
reporting format.
(b)
The proper accounting for this situation is to report the equipment as
an asset and the notes payable as a liability on the balance sheet.
Offsetting is permitted in only limited situations where certain assets
are contractually committed to pay off liabilities.
2-20Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 2-8 (Continued)
(c)
According to GAAP, the basis upon which inventory amounts are
stated (lower of cost or market) and the method used in determining
cost (LIFO, FIFO, average cost, etc.) should also be reported. The disclosure requirement related to the method used in determining cost
should be emphasized, indicating that where possible alternatives
exist in financial reporting, disclosure in some format is required.
(d)
Consistency requires that disclosure of changes in accounting principles be made in the financial statements. To do otherwise would result
in financial statements that are misleading. Financial statements are
more useful if they can be compared with similar reports for prior years.
EXERCISE 2-9
(a)
This entry violates the economic entity assumption. This assumption
in accounting indicates that economic activity can be identified with a
particular unit of accountability. In this situation, the company erred
by charging this cost to the wrong economic entity.
(b)
The historical cost principle indicates that assets and liabilities are
accounted for on the basis of cost. If we were to select sales value,
for example, we would have an extremely difficult time in attempting
to establish a sales value for a given item without selling it. It should
further be noted that the revenue recognition principle provides the
answer to when revenue should be recognized. Revenue should be
recognized when (1) realized or realizable and (2) earned. In this
situation, an earnings process has definitely not taken place.
(c)
The expense recognition principle indicates that expenses should be
allocated to the appropriate periods involved. In this case, there
appears to be a high uncertainty that the company will have to pay.
FASB Statement No. 5 requires that a loss should be accrued only
(1) when it is probable that the company would lose the suit and
(2) the amount of the loss can be reasonably estimated. (Note to
instructor: The student will probably be unfamiliar with FASB Statement
No. 5. The purpose of this question is to develop some decision
framework when the probability of a future event must be assumed.)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-21
EXERCISE 2-9 (Continued)
(d)
At the present time, accountants do not recognize price-level adjustments in the accounts. Hence, it is misleading to deviate from the
measurement principle (historical cost) principle because conjecture
or opinion can take place. It should also be noted that depreciation is
not so much a matter of valuation as it is a means of cost allocation.
Assets are not depreciated on the basis of a decline in their fair market
value, but are depreciated on the basis of systematic charges of
expired costs against revenues. (Note to instructor: It might be called
to the students’ attention that the FASB does encourage supplemental
disclosure of price-level information.)
(e)
Most accounting methods are based on the assumption that the business enterprise will have a long life. Acceptance of this assumption
provides credibility to the measurement principle (historical cost)
principle, which would be of limited usefulness if liquidation were
assumed. Only if we assume some permanence to the enterprise is the
use of depreciation and amortization policies justifiable and
appropriate. Therefore, it is incorrect to assume liquidation as
Gonzales, Inc. has done in this situation. It should be noted that only
where liquidation appears imminent is the going concern assumption
inapplicable.
(f)
The answer to this situation is the same as (b).
EXERCISE 2-10
(a)
Depreciation is an allocation of cost, not an attempt to value assets.
As a consequence, even if the value of the building is increasing,
costs related to this building should be matched with revenues on the
income statement, not as a charge against retained earnings.
(b)
A gain should not be recognized until the inventory is sold. Accountants follow the measurement principle (historical cost) approach and
write-ups of assets are not permitted. It should also be noted that the
revenue recognition principle states that revenue should not be
recognized until it is realized or realizable and is earned.
2-22Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 2-10 (Continued)
(c)
Assets should be recorded at the fair value of what is given up or the
fair market value of what is received, whichever is more clearly
evident. It should be emphasized that it is not a violation of the
measurement principle (historical cost) principle to use the fair value
of the stock. Recording the asset at the par value of the stock has no
conceptual validity. Par value is merely an arbitrary amount usually
set at the date of incorporation.
(d)
The gain should be recognized at the point of sale. Deferral of the gain
should not be permitted, as it is realized and is earned. To explore this
question at greater length, one might ask what justification other than
the controller’s might be used to justify the deferral of the gain. For
example, the rationale provided in APB Opinion No. 29, noncompletion
of the earnings process, might be discussed.
(e)
It appears from the information that the sale should be recorded in
2015 instead of 2014. Regardless of whether the terms are f.o.b.
shipping point or f.o.b. destination, the point is that the inventory was
sold in 2015. It should be noted that if the company is employing a
perpetual inventory system in dollars and quantities, a debit to Cost
of Goods Sold and a credit to Inventory is also necessary in 2015.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-23
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 2-1 (Time 20–25 minutes)
Purpose—to provide the student with the opportunity to comment on the purpose of the conceptual
framework. In addition, a discussion of the Concepts Statements issued by the FASB is required.
CA 2-2 (Time 25–35 minutes)
Purpose—to provide the student with the opportunity to identify and discuss the benefits of the conceptual framework. In addition, the most important quality of information must be discussed, as well as
other key characteristics of accounting information.
CA 2-3 (Time 25–35 minutes)
Purpose—to provide the student with some familiarity with the Conceptual Framework. The student is
asked to indicate the broad objective of accounting, and to discuss how this statement might help to
establish accounting standards.
CA 2-4 (Time 30–35 minutes)
Purpose—to provide the student with some familiarity with the Conceptual Framework. The student is
asked to describe various characteristics of useful accounting information and to identify possible tradeoffs among these characteristics.
CA 2-5 (Time 25–30 minutes)
Purpose—to provide the student with the opportunity to indicate and discuss different points at which
revenues can be recognized. The student is asked to discuss the “crucial event” that triggers revenue
recognition.
CA 2-6 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to assess different points to report costs as
expenses. Direct cause and effect, indirect cause and effect, and rational and systematic approaches
are developed.
CA 2-7 (Time 20–25 minutes)
Purpose—to provide the student with familiarity with the expense recognition principle in accounting.
Specific items are then presented to indicate how these items might be reported using the expense
recognition principle.
CA 2-8 (Time 20–30 minutes)
Purpose—to provide the student with a realistic case involving association of costs with revenues. The
advantages of expensing costs as incurred versus spreading costs are examined. Specific guidance is
asked on how allocation over time should be reported.
CA 2-9 (Time 20–30 minutes)
Purpose—to provide the student with the opportunity to discuss the relevance and faithful
representation of financial statement information. The student must write a letter on this matter so the
case does provide a good writing exercise for the students.
CA 2-10 (Time 20–25 minutes)
Purpose—to provide the student with the opportunity to discuss the ethical issues related to expense
recognition.
CA 2-11 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to discuss the cost constraint.
2-24Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 2-1
(a) A conceptual framework is like a constitution. Its objective is to provide a coherent system of
interrelated objectives and fundamentals that can lead to consistent standards and that prescribes
the nature, function, and limits of financial accounting and financial statements.
A conceptual framework is necessary so that standard setting is useful, i.e., standard setting
should build on and relate to an established body of concepts and objectives. A well-developed
conceptual framework should enable the FASB to issue more useful and consistent standards in
the future.
Specific benefits that may arise are:
(1) A coherent set of standards and rules should result.
(2) New and emerging practical problems should be more quickly soluble by reference to an
existing framework.
(3) It should increase financial statement users’ understanding of and confidence in financial reporting.
(4) It should enhance comparability among companies’ financial statements.
(5) It should help determine the bounds for judgment in preparing financial statements.
(6) It should provide guidance to the body responsible for establishing accounting standards.
(b) The FASB has issued eight Statements of Financial Accounting Concepts (SFAC) that relate to
business enterprises. Their titles and brief description of the focus of each Statement are as follows:
(1) SFAC No. 1, “Objectives of Financial Reporting by Business Enterprises,” presents the goals
and purposes of accounting.
(2) SFAC No. 2, “Qualitative Characteristics of Accounting Information,” examines the characteristics that make accounting information useful.
(3) SFAC No. 3, “Elements of Financial Statements of Business Enterprises,” provides definitions
of the broad classifications of items in financial statements.
(4) SFAC No. 5, “Recognition and Measurement in Financial Statements,” sets forth fundamental
recognition and measurement criteria and guidance on what information should be formally
incorporated into financial statements and when.
(5) SFAC No. 6, “Elements of Financial Statements,” replaces SFAC No. 3, “Elements of Financial
Statements of Business Enterprises,” and expands its scope to include not-for-profit organizations.
(6) SFAC No. 7, “Using Cash Flow Information and Present Value in Accounting Measurements,”
provides a framework for using expected future cash flows and present values as a basis for
measurement.
(7) SFAC No. 8, Chapter 1, “The Objective of General Purpose Financial Reporting,” and Chapter 3,
“Qualitative Characteristics of Useful Financial Information,” replaces SFAC No. 1 and No. 2.
CA 2-2
(a) FASB’s Conceptual Framework should provide benefits to the accounting community such as:
(1) guiding the FASB in establishing accounting standards on a consistent basis.
(2) determining bounds for judgment in preparing financial statements by prescribing the nature,
functions and limits of financial accounting and reporting.
(3) increasing users’ understanding of and confidence in financial reporting.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-25
CA 2-2 (Continued)
(b) The most important quality for accounting information is usefulness for decision making. Relevance
and faithful representation are the primary qualities leading to this decision usefulness. Usefulness is
the most important quality because, without usefulness, there would be no benefits from information
to set against its costs.
(c) There are a number of key characteristics or qualities that make accounting information desirable.
The importance of three of these characteristics or qualities is discussed below.
(1) Understandability—information provided by financial reporting should be comprehensible to
those who have a reasonable understanding of business and economic activities and are
willing to study the information with reasonable diligence. Financial information is a tool and,
like most tools, cannot be of much direct help to those who are unable or unwilling to use it, or
who misuse it.
(2) Relevance—the accounting information is capable of making a difference in a decision by
helping users to form predictions about the outcomes of past, present, and future events or to
confirm or correct expectations (including is material).
(3) Faithful representation—the faithful representation of a measure rests on whether the
numbers and descriptions matched what really existed or happened, including completeness,
neutrality, and free from error.
(Note to instructor: Other qualities might be discussed by the student, such as enhancing qualities. All
of these qualities are defined in the textbook).
CA 2-3
(a) The basic objective is to provide financial information about the reporting entity that is useful to
present and potential equity investors, lenders, and other creditors in making decisions about
providing resources to the entity.
(b) The purpose of this statement is to set forth fundamentals on which financial accounting and
reporting standards may be based. Without some basic set of objectives that everyone can agree
to, inconsistent standards will be developed. For example, some believe that accountability should
be the primary objective of financial reporting. Others argue that prediction of future cash flows is
more important. It follows that individuals who believe that accountability is the primary objective
may arrive at different financial reporting standards than others who argue for prediction of cash
flow. Only by establishing some consistent starting point can accounting ever achieve some
underlying consistency in establishing accounting principles.
It should be emphasized to the students that the Board itself is likely to be the major user and thus
the most direct beneficiary of the guidance provided by this pronouncement. However, knowledge
of the objectives and concepts the Board uses should enable all who are affected by or interested
in financial accounting standards to better understand the content and limitations of information
provided by financial accounting and reporting, thereby furthering their ability to use that
information effectively and enhancing confidence in financial accounting and reporting. That
knowledge, if used with care, may also provide guidance in resolving new or emerging problems of
financial accounting and reporting in the absence of applicable authoritative pronouncements.
2-26Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 2-4
(a) (1) Relevance is one of the two primary decision-specific characteristics of useful accounting
information. Relevant information is capable of making a difference in a decision. Relevant
information helps users to make predictions about the outcomes of past, present, and future
events, or to confirm or correct prior expectations. Information must also be timely in order to
be considered relevant.
(2) Faithful representation is one of the two primary decision-specific characteristics of useful
accounting information. Reliable information can be depended upon to represent the conditions
and events that it is intended to represent. Representational faithfulness is correspondence or
agreement between accounting information and the economic phenomena it is intended to
represent stemming from completeness, neutrality, and free from error.
(3)
Understandability is a user-specific characteristic of information. Information is understandable
when it permits reasonably informed users to perceive its significance. Understandability is a
link between users, who vary widely in their capacity to comprehend or utilize the information,
and the decision-specific qualities of information.
(4) Comparability means that information about enterprises has been prepared and presented in a
similar manner. Comparability enhances comparisons between information about two different
enterprises at a particular point in time.
(5) Consistency means that unchanging policies and procedures have been used by an enterprise
from one period to another. Consistency enhances comparisons between information about the
same enterprise at two different points in time.
(b) (Note to instructor: There are a multitude of answers possible here. The suggestions below are
intended to serve as examples).
(1) Forecasts of future operating results and projections of future cash flows may be highly relevant
to some decision makers. However, they would not be as free from error as historical cost
information about past transactions.
(2) Proposed new accounting methods may be more relevant to many decision makers than existing methods. However, if adopted, they would impair consistency and make trend comparisons
of an enterprise’s results over time difficult or impossible.
(3) There presently exists much diversity among acceptable accounting methods and procedures.
In order to facilitate comparability between enterprises, the use of only one accepted accounting method for a particular type of transaction could be required. However, consistency would
be impaired for those firms changing to the new required methods.
(4) Occasionally, relevant information is exceedingly complex. Judgment is required in determining
the optimum trade-off between relevance and understandability. Information about the impact of
general and specific price changes may be highly relevant but not understandable by all users.
(c) Although trade-offs result in the sacrifice of some desirable quality of information, the overall result
should be information that is more useful for decision making.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-27
CA 2-5
(a)
The “crucial event” in determining when revenue is recognized is when a performance obligation
is satisfied. In the case of subscriptions, the performance obligation is met when the magazines
are delivered (including ads contained therein). The new director suggests that this principle does
not apply in the magazine business and that revenue from subscription sales and advertising
should be recognized in the accounts when the difficult task of selling is accomplished and not
when the magazines are published and delivered to fill the subscriptions or to carry the
advertising.
The director’s view that there is a single crucial event in the process of earning revenue in the
magazine business is questionable even though the amount of revenue is determinable when the
subscription is sold. Although the firm cannot prosper without good advertising contracts and while
advertising rates depend substantially on magazine sales, it also is true that readers will not renew
their subscriptions unless the content of the magazine pleases them. Unless subscriptions are
obtained at prices that provide for the recovery in the first subscription period of all costs of selling
and filling those subscriptions, the editorial and publishing activities are as crucial as the sale in the
earning of the revenue. Even if the subscription rate does provide for the recovery of all associated
costs within the first period, however, the editorial and publishing activities still would be important
since the firm has an obligation (in the amount of the present value of the costs expected to be
incurred in connection with the editorial and publication activities) to produce and deliver the
magazine. Not until this obligation is fulfilled should the revenue associated with it be recognized in
the accounts since the revenue is the result of delivering on a promise (selling and filling
subscriptions) and not just the first one. The director’s view also presumes that the cost of
publishing the magazines can be computed accurately at or close to the time of the subscription
sale despite uncertainty about possible changes in the prices of the factors of production and
variations in efficiency. Hence, only a portion–not most–of the revenue should be recognized in the
accounts at the time the subscription is sold.
(b)
Recognizing in the accounts all the revenue in equal portions with the publication of the magazine
every month is subject to some of the same criticism from the standpoint of theory as the
suggestion that all or most of the revenue be recognized in the accounts at the time the
subscription is sold. Although the journalistic efforts of the magazine are important in the process
of earning revenue, the firm could not prosper without magazine sales and the advertising that
results from paid circulation. Hence, some revenue could be recognized in the accounts at the
time of the subscription sale, to the extent that part of the performance obligation to the subscriber
and advertisers has been met. That is, the ads are in the public domain.
This approach requires the magazine to allocate the proportion of the revenue related to
advertising from that related to subscriptions. For this reason, and because the task of estimating
the amount of revenue associated with the subscription sale often has been considered
subjective, recognizing revenue in the accounts with the monthly publication of the magazine has
received support even though it does not meet the tests of revenue recognition as well as the next
alternative.
(c)
Recognizing in the accounts a portion of the revenue at the time a cash subscription is obtained
and a portion each time an issue is published meets the tests of revenue recognition better than
the other two alternatives. A portion of the net income is recognized in the accounts at the time of
each major or crucial event – that is, when a performance obligation has been met. Each crucial
event is clearly discernible and is a time of interaction between the publisher and subscriber. A
legal sale is transacted before any revenue is recognized in the accounts. Prior to the time the
revenue is recognized in the accounts, it already has been received in distributable form. Finally,
the total revenue is measurable with more than the usual certainty, and the revenue attributable to
each crucial event is determinable using reasonable (although sometimes conceptually
unsatisfactory) assumptions about the relationship between revenue and costs when the costs
are indirect.
(Note to instructor: CA 2-5 might also be assigned in conjunction with Chapter 18.)
2-28Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 2-6
(a) Some costs are recognized as expenses on the basis of a presumed direct association with
specific revenue. This presumed direct association has been identified both as “associating cause
and effect” and as “matching (expense recognition principle).”
Direct cause-and-effect relationships can seldom be conclusively demonstrated, but many costs
appear to be related to particular revenue, and recognizing them as expenses accompanies
recognition of the revenue. Generally, the expense recognition principle requires that the revenue
recognized and the expenses incurred to produce the revenue be given concurrent periodic recognition in the accounting records. Only if effort is properly related to accomplishment will the results,
called earnings, have useful significance concerning the efficient utilization of business resources.
Thus, applying the expense recognition principle is a recognition of the cause-and-effect relationship
that exists between expense and revenue.
Examples of expenses that are usually recognized by associating cause and effect are sales
commissions, freight-out on merchandise sold, and cost of goods sold or services provided.
(b) Some costs are assigned as expenses to the current accounting period because
(1) their incurrence during the period provides no discernible future benefits;
(2) they are measures of assets recorded in previous periods from which no future benefits are
expected or can be discerned;
(3) they must be incurred each accounting year, and no build-up of expected future benefits occurs;
(4) by their nature they relate to current revenues even though they cannot be directly associated
with any specific revenues;
(5) the amount of cost to be deferred can be measured only in an arbitrary manner or great
uncertainty exists regarding the realization of future benefits, or both;
(6) and uncertainty exists regarding whether allocating them to current and future periods will
serve any useful purpose.
Thus, many costs are called “period costs” and are treated as expenses in the period incurred
because they have neither a direct relationship with revenue earned nor can their occurrence be
directly shown to give rise to an asset. The application of this principle of expense recognition results
in charging many costs to expense in the period in which they are paid or accrued for payment.
Examples of costs treated as period expenses would include officers’ salaries, advertising, research
and development, and auditors’ fees.
(c) A cost should be capitalized, that is, treated as a measure of an asset when it is expected that the
asset will produce benefits in future periods. The important concept here is that the incurrence of
the cost has resulted in the acquisition of an asset, a future service potential. If a cost is incurred
that resulted in the acquisition of an asset from which benefits are not expected beyond the current
period, the cost may be expensed as a measure of the service potential that expired in producing
the current period’s revenues. Not only should the incurrence of the cost result in the acquisition of
an asset from which future benefits are expected, but also the cost should be measurable with a
reasonable degree of objectivity, and there should be reasonable grounds for associating it with
the asset acquired. Examples of costs that should be treated as measures of assets are the costs
of merchandise on hand at the end of an accounting period, costs of insurance coverage relating
to future periods, and the cost of self-constructed plant or equipment.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-29
CA 2-6 (Continued)
(d) In the absence of a direct basis for associating asset cost with revenue and if the asset provides
benefits for two or more accounting periods, its cost should be allocated to these periods (as an
expense) in a systematic and rational manner. Thus, when it is impractical, or impossible, to find a
close cause-and-effect relationship between revenue and cost, this relationship is often assumed
to exist. Therefore, the asset cost is allocated to the accounting periods by some method. The
allocation method used should appear reasonable to an unbiased observer and should be followed
consistently from period to period. Examples of systematic and rational allocation of asset cost
would include depreciation of fixed assets, amortization of intangibles, and allocation of rent and
insurance.
(e) A cost should be treated as a loss when no revenue results. The matching of losses to specific
revenue should not be attempted because, by definition, they are expired service potentials not
related to revenue produced. That is, losses result from events that are not anticipated as
necessary in the process of producing revenue.
There is no simple way of identifying a loss because ascertaining whether a cost should be a loss
is often a matter of judgment. The accounting distinction between an asset, expense, loss, and
prior period adjustment is not clear-cut. For example, an expense is usually voluntary, planned,
and expected as necessary in the generation of revenue. But a loss is a measure of the service
potential expired that is considered abnormal, unnecessary, unanticipated, and possibly nonrecurring and is usually not taken into direct consideration in planning the size of the revenue stream.
CA 2-7
(a) Costs should be recognized as expiring in a given period if they are not chargeable to a prior
period and are not applicable to future periods. Recognition in the current period is required when
any of the following conditions or criteria are present:
(1) A direct identification of association of charges with revenue of the period, such as goods
shipped to customers.
(2) An indirect association with the revenue of the period, such as fire insurance or rent.
(3) A period charge where no association with revenue in the future can be made so the expense
is charged this period, such as officers’ salaries.
(4) A measurable expiration of asset costs during the period, even though not associated with the
production of revenue for the current period, such as a fire or casualty loss.
(b) (1) Although it is generally agreed that inventory costs should include all costs attributable to placing
the goods in a salable state, receiving and handling costs are often treated as cost expirations in
the period incurred because they are irregular or are not in uniform proportion to sales.
The portion of the receiving and handling costs attributable to the unsold goods processed
during the period should be inventoried. These costs might be more readily apportioned if they
are assigned by some device such as an applied rate. Abnormally high receiving and handling
costs should be charged off as a period cost.
(2) Cash discounts on purchases are treated as “other revenues” in some financial statements in
violation of the expense recognition principles (or matching). Revenue is not recognized when
goods are purchased or cash disbursed. Furthermore, inventories valued at gross invoice price
are recorded at an amount greater than their cash outlay resulting in misstatement of inventory
cost in the current period and inventory cost expirations in future periods.
Close adherence to the expense recognition principle (or matching) requires that cash discounts be recorded as a reduction of the cost of purchases and that inventories be priced at
net invoice prices. Where inventories are priced at gross invoice prices for expediency,
2-30Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
however, there is a slight distortion of the financial statements if the beginning and ending
inventories vary little in amount.
CA 2-8
(a) The preferable treatment of the costs of the sample display houses is expensing them over more
than one period. These sample display houses are assets because they represent rights to future
service potentials or economic benefits.
According to the expense recognition principle, the costs of service potentials should be amortized
as the benefits are received. Thus, costs of the sample display houses should be matched with the
revenue from the sale of the houses which is receivable over a period of more than one year. As
the sample houses are left on display for three to seven years, Daniel Barenboim apparently
expects to benefit from the displays for at least that length of time.
The alternative of expensing the costs of sample display houses in the period in which the
expenditure is made is based primarily upon the expense recognition principle. These costs are of
a promotional nature. Promotional costs often are considered expenses of the period in which the
expenditures occur due to the uncertainty in determining the time periods benefited (do they meet
the definition of an asset?). It is likely that no decision is made concerning the life of a sample
display house at the time it is erected. Past experience may provide some guidance in determining
the probable life. A decision to tear down or alter a house probably is made when sales begin to
lag or when a new model with greater potential becomes available.
There is uncertainty not only as to the life of a sample display house but also as to whether a
sample display house will be torn down or altered. If it is altered rather than torn down, a portion of
the cost of the original house may be attributable to the new model.
(b) If all of the shell houses are to be sold at the same price, it may be appropriate to allocate the
costs of the display houses on the basis of the number of shell houses sold. This allocation would
be similar to the units-of-production method of depreciation and would result in a good matching of
costs with revenues. On the other hand, if the shell houses are to be sold at different prices, it may
be preferable to allocate costs on the basis of the revenue contribution of the shell houses sold.
There is uncertainty regarding the number of homes of a particular model which will be sold as a
result of the display sample. The success of this amortization method is dependent upon accurate
estimates of the number and selling price of shell houses to be sold. The estimate of the number
of units of a particular model which will be sold as a result of a display model should include
not only units sold while the model is on display but also units sold after the display house is torn
down or altered.
Cost amortization solely on the basis of time may be preferable when the life of the models can be
estimated with a great deal more accuracy than can the number of units which will be sold. If unit
sales and selling prices are uniform over the life of the sample, a satisfactory matching of costs
and revenues may be achieved if the straight-line amortization procedure is used.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-31
CA 2-9
Date
Dear Uncle Carlos,
I received the information on Neville Corp. and appreciate your interest in sharing this venture with me.
However, I think that basing an investment decision on these financial statements would be unwise
because they are neither relevant nor representationally faithful.
One of the most important characteristics of accounting information is that it is relevant, i.e., it will make
a difference in my decision. To be relevant, this information must be timely. Because Neville’s financial
statements are a year old, they have lost their ability to influence my decision: a lot could have changed
in that one year.
Another element of relevance is predictive value. Once again, Neville’s accounting information proves
irrelevant. Shown without reference to other years’ profitability, it cannot help me predict future profitability because I cannot see any trends developing. Closely related to predictive value is confirmatory
value. These financial statements do not provide feedback on any strategies which the company may
have used to increase profits.
These financial statements are also not representationally faithful. In order to be representationally
faithful, their assertions must be verifiable by several independent parties. Because no independent
auditor has verified these amounts, there is no way of knowing whether or not they are represented
faithfully. For instance, I would like to believe that this company earned $2,424,240, and that it had a
very favorable debt-to-equity ratio. However, unaudited financial statements do not give me any
reasonable assurance about these claims.
Finally, the fact that Mrs. Neville herself prepared these statements indicates a lack of neutrality.
Because she is not a disinterested third party, I cannot be sure that she did not prepare the financial
statements in favor of her husband’s business.
I do appreciate the trouble you went through to get me this information. Under the circumstances,
however, I do not wish to invest in the Neville bonds and would caution you against doing so. Before
you make a decision in this matter, please call me.
Sincerely,
Your Nephew/Niece
CA 2-10
(a) The stakeholders are investors, creditors, etc.; i.e., users of financial statements, current and future.
(b) Honesty and integrity of financial reporting, job protection, profit.
(c) Applying the expense recognition principle and recording expense during the plant’s life, or not
applying it. That is, record the mothball costs in the future.
2-32Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 2-10 (Continued)
(d) The major question may be whether or not the expense of mothballing can be estimated properly
so that the integrity of financial reporting is maintained. Applying the expense recognition principle
will result in lower profits and possibly higher rates for consumers. Could this cost anyone his or
her job? Will investors and creditors have more useful information? On the other hand, failure to
apply the matching principle means higher profits, lower rates, and greater potential job security.
(e) Students’ recommendations will vary.
Note: Other stakeholders possibly affected are present and future consumers of electric power.
Delay in allocating the expense will benefit today’s consumers of electric power at the expense of
future consumers.
CA 2-11
1.
Information about competitors might be useful for benchmarking the company’s results but if
management does not have expertise in providing the information, it could be highly subjective. In
addition, it is likely very costly for management to gather sufficiently verifiable information of this
nature.
2.
While users of financial statements might benefit from receiving internal information, such as
company plans and budgets, competitors might also be able to use this information to gain a
competitive advantage relative to the disclosing company.
3.
In order to produce forecasted financial statements, management would have to make numerous
assumptions and estimates, which would be costly in terms of time and data collection. Because of
the subjectivity involved, the forecasted statements would not be faithful presentations, thereby
detracting from any potential benefits. In addition, while management’s forecasts of future
profitability or balance sheet amounts could be of benefit, companies could be subject to
shareholder lawsuits, if the amounts in the forecasted statements are not realized.
4.
It would be excessively costly for companies to gather and report information that is not used in
managing the business.
5.
Flexible reporting allows companies to “fine-tune” their financial reporting to meet the information
needs of its varied users. In this way, they can avoid the cost of providing information that is not
demanded by its users.
6.
Similar to number 3, concerning forecasted financial statements, if managers report forwardlooking information, the company could be exposed to liability if investors unduly rely on the
information in making investment decisions. Thus, if companies get protection from unwarranted
lawsuits (called a safe harbor), then they might be willing to provide potentially beneficial forwardlooking information.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-33
FINANCIAL REPORTING PROBLEM
From note 1:
(a)
Revenue Recognition
Sales are recognized when revenue is realized or realizable and has
been earned. Most revenue transactions represent sales of inventory.
The revenue recorded is presented net of sales and other taxes we
collect on behalf of governmental authorities. The revenue includes
shipping and handling costs, which generally are included in the list
price to the customer. Our policy is to recognize revenue when title to
the product, ownership and risk of loss transfer to the customer,
which can be on the date of shipment or the date of receipt by the
customer. A provision for payment discounts and product return
allowances is recorded as a reduction of sales in the same period that
the revenue is recognized.
Trade promotions, consisting primarily of customer pricing
allowances, merchandising funds and consumer coupons, are offered
through various programs to customers and consumers. Sales are
recorded net of trade promotion spending, which is recognized as
incurred, generally at the time of the sale. Most of these arrangements
have terms of approximately one year. Accruals for expected payouts
under these programs are included as accrued marketing and
promotion in the accrued and other liabilities line item in the
Consolidated Balance Sheets.
(b)
Historical Cost
Buildings, Machinery and equipment.
Fair Value
On July 1, 2009, we adopted the provisions of the fair value
measurement accounting and disclosure guidance related to nonfinancial assets and liabilities recognized or disclosed at fair value on
a non-recurring basis. Assets and liabilities subject to this new
guidance primarily include goodwill, indefinite-lived intangible assets
2-34Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
and other long-lived assets measured at fair value for impairment
assessments and non-financial assets and liabilities measured at fair
FINANCIAL REPORTING PROBLEM (Continued)
value in business combinations. There were no significant assets or
liabilities that were re-measured at fair value on a non-recurring basis
during the fiscal year ended June 30, 2010.
(c)
P&G has the following sub-section:
Principles prepared on a consistent basis
New Accounting Pronouncements and Policies
Other than as described below, no new accounting pronouncement
issued or effective during the fiscal year has had or is expected to
have a material impact on the Consolidated Financial Statements.
(d)
Accounting Policy Related to Advertising
Selling, general and administrative expense (SG&A)
Advertising costs, charged to expense as incurred, include worldwide
television, print, radio, internet and in-store advertising expenses and
were $8,576 in 2010, $7,519 in 2009 and $8,520 in 2008.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-35
COMPARATIVE ANALYSIS CASE
(a)
Primary Lines of Business
Coke
Description of Business
The Coca-Cola Company is the world's largest beverage company. We
own or license and market more than 500 nonalcoholic beverage
brands, primarily sparkling beverages but also a variety of still
beverages such as waters, enhanced waters, juices and juice drinks,
ready-to-drink teas and coffees, and energy and sports drinks. We
own and market four of the world's top five nonalcoholic sparkling
beverage brands: Coca-Cola, Diet Coke, Fanta and Sprite. Finished
beverage products bearing our trademarks, sold in the United States
since 1886, are now sold in more than 200 countries.
Operating Segments
The business of our Company is nonalcoholic beverages. Our
geographic operating segments (Eurasia and Africa; Europe; Latin
America; North America; and Pacific) derive a majority of their
revenues from the manufacture and sale of beverage concentrates
and syrups and, in some cases, the sale of finished beverages.
PepsiCo
Our Divisions
We manufacture or use contract manufacturers, market and sell a
variety of salty, convenient, sweet and grain-based snacks,
carbonated and non-carbonated beverages, dairy products and other
foods in over 200 countries and territories with our largest operations
in North America (United States and Canada), Russia, Mexico and the
United Kingdom.
2-36Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
COMPARATIVE ANALYSIS CASE (Continued)
Our Operations
We are organized into four business units, as follows:
1)
2)
3)
4)
PepsiCo Americas Foods (PAF), which includes Frito- Lay North
America (FLNA), Quaker Foods North America (QFNA) and all of
our Latin American food and snack businesses (LAF);
PepsiCo Americas Beverages (PAB), which includes all of our
North American and Latin American beverage businesses;
PepsiCo Europe, which includes all beverage, food and snack
businesses in Europe; and
PepsiCo Asia, Middle East and Africa (AMEA), which includes all
beverage, food and snack businesses in AMEA.
Our four business units are comprised of six reportable segments
(referred to as divisions), as follows: FLNA, QFNA; LAF; PAB; Europe;
AMEA.
(b)
Dominant Position - Beverage Sales: Coke or Pepsi
Coca-Cola: Net operating revenues for 2011 were $46,542 million,
comprised primarily of beverage sales.
Pepsi: Net revenue for 2011 was $66,504 million, of which soft drinks
are estimated at $22,418 million (PepsiCo Americas Beverages) and
food and beverage sales of $13,560 million for Europe and $7,392
million for AMEA.
Thus, Coca-Cola has the dominant position for beverage sales.
(c)
Inventories, cost allocation method, affect on comparability
Coke
Inventories
Inventories consist primarily of raw materials and packaging (which
includes ingredients and supplies) and finished goods (which include
concentrates and syrups in our concentrate operations, and finished
beverages in our finished products operations). Inventories are
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-37
valued at the lower of cost or market. We determine cost on the basis
of the average cost or first-in, first-out methods. Refer to Note 4.
COMPARATIVE ANALYSIS CASE (Continued)
Pepsi
Inventory
In the first quarter of 2011, Quaker Foods North America (QFNA)
changed its method of accounting for certain U.S. inventories from
the last-in, first-out (LIFO) method to the average cost method. This
change is considered preferable by management as we believe that
the average cost method of accounting for all U.S. foods inventories
will improve our financial reporting by better matching revenues and
expenses and better reflecting the current value of inventory. In
addition, the change from the LIFO method to the average cost
method will enhance the comparability of QFNA's financial results
with our other food businesses, as well as with peer companies where
the average cost method is widely used. The impact of this change on
consolidated net income in the first quarter of 2011 was
approximately $9 million (or less than a penny per share). Prior
periods were not restated as the impact of the change on previously
issued financial statements was not considered material.
(d)
Change in accounting policy (2009)
Coke
Recently Issued Accounting Guidance
Principles of Consolidation
The information presented above reflects the impact of the
Company's adoption of accounting guidance issued by the Financial
Accounting Standards Board (“FASB”) related to VIEs in June 2009.
This accounting guidance resulted in a change in our accounting
policy effective January 1, 2010. Among other things, the guidance
requires more qualitative than quantitative analyses to determine the
primary beneficiary of a VIE, requires continuous assessments of
whether an enterprise is the primary beneficiary of a VIE, enhances
disclosures about an enterprise's involvement with a VIE, and amends
certain guidance for determining whether an entity is a VIE.
2-38Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
COMPARATIVE ANALYSIS CASE (Continued)
Pepsi
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB)
amended its accounting guidance on the consolidation of variable
interest entities (VIE). Among other things, the new guidance requires
a qualitative rather than a quantitative assessment to determine the
primary beneficiary of a VIE based on whether the entity (1) has the
power to direct matters that most significantly impact the activities of
the VIE and (2) has the obligation to absorb losses or the right to
receive benefits of the VIE that could potentially be significant to the
VIE. In addition, the amended guidance requires an ongoing
reconsideration of the primary beneficiary. The provisions of
this guidance were effective as of the beginning of our 2010 fiscal
year, and the adoption did not have a material impact on our financial
statements.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-39
FINANCIAL STATEMENT ANALYSIS CASE—WAL-MART
(a)
(1) In the year of the change, Wal-Mart will reverse the revenue recognized in prior periods for layaway sales that are not complete.
This will reduce income in the year of the change.
(2) In subsequent years, after the adjustment in the year of the change,
as long as Wal-Mart continues to make layaway sales at the same
levels, income levels should return to prior levels (except for growth).
That is, the accounting change only changes the timing of the recognition, not the overall amount recognized.
(b)
By recognizing the revenue before delivery, Wal-Mart was recognizing
revenue before the earnings process was complete. In addition, if customers did not pay the remaining balance owed, the realizability criterion
is not met either. While Wal-Mart likely could estimate expected deliveries and payments, it is not apparent that this was done.
(c)
Even if all retailers used the same policy, it still might be difficult to
compare the results for layaway transactions. For example what if
retailers have different policies as to how much customers have to
put down in order for the retailer to set aside the merchandise. Note
that the higher (lower) the amount put down, the more (less) likely the
customer will complete the transaction. The concern under the prior
rules is that retailers might give very generous layaway terms in order
to accelerate revenue recognition. Investors would be in for a surprise
if customers do not complete the transactions and the revenue recorded earlier must be reversed, thereby lowering reported income.
Note to instructor: The requirements for this case relate to Walmart
accounting policies for revenue recognition prior to implementation of the
new revenue standard. The new standard and its provisions are addressed
are addressed in more detail in Chapter 18.
2-40Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
Caddie Shack Company
Statement of Financial Position
May 31, 2014
Assets
Cash
Building
Equipment
Total Assets
$15,100
6,000
800
$21,900
Liabilities
Advertising payable
Utilities payable
Owners’ Equity
Contributed capital
Retained Earnings
Total Liabilities &
Equity
$
150
100
20,000
1,650
$21,900
Accrual income = $4,700 – $1,000 – $750 – $400 – $100 = $2,450
Earned capital balance = $0 + $2,450 - $800 = $1,650
Murray might conclude that his business earned a profit of $1,650 because
that is his earned capital at the end of the month. The conclusion that his
business lost $4,900 might come from the change in the business’s cash
balance, which started at $20,000 and ended the month at $15,100.
Analysis
The income measure of $2,450 is most relevant for assessing the future
profitability and hence the payoffs to the owners. For example, charging
the cost of the building and equipment to expense in the first month of
operations understates income in the first month. These costs should be
allocated to future periods of benefit through depreciation expense.
Similarly, although not paid, the utilities were used to generate revenues so
they should be recognized when incurred, not when paid.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-41
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Principles
GAAP income is the accrual income computed above as $2,450. The key
concept illustrated in the difference between the loss of $4,900 and profit of
$1,650 is the expense recognition principle, which calls for recognition of
expenses when incurred, not when paid. Excluding the cash withdrawal
from the measurement of income (the difference between income measures
in parts c and d) is an application of the definition of basic elements. Cash
withdrawals are distributions to owners, not an element of income
(expenses or losses).
2-42Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL RESEARCH
Search Strings: concept statement, “materiality”, “articulation”
(a)
According to Concepts Statement 2 (CON 2): Qualitative Characteristics
of Accounting Information, “Glossary”:
“Materiality is defined as the magnitude of an omission or misstatement
of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person
relying on the information would have been changed or influenced by
the omission or misstatement.”
(b)
CON 2, Appendix C—See Table 1—refers to several SEC cases which
apply materiality. Students might also research SEC literature (e.g. Staff
Accounting Bulletin No. 99), although SEC literature is not in the FARS
database.
SFAC No. 2, 128. provides the following examples of screens that might
be used to determine materiality:
“ a. An accounting change in circumstances that puts an enterprise
in danger of being in breach of covenant regarding its financial
condition may justify a lower materiality threshold than if its
position were stronger.
b. A failure to disclose separately a nonrecurrent item of revenue
may be material at a lower threshold than would otherwise be
the case if the revenue turns a loss into a profit or reverses the
trend of earnings from a downward to an upward trend.
c. A misclassification of assets that would not be material in
amount if it affected two categories of plant or equipment might
be material if it changed the classification between a noncurrent
and a current asset category.
d. Amounts too small to warrant disclosure or correction in normal
circumstances may be considered material if they arise from
abnormal or unusual transactions or events.”
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-43
PROFESSIONAL RESEARCH (Continued)
However, according to CON 2, Pars. 129, 131 the FASB notes that
more than magnitude must be considered in evaluating materiality:
Almost always, the relative rather than the absolute size of a
judgment item determines whether it should be considered material in
a given situation. Losses from bad debts or pilferage that could be
shrugged off as routine by a large business may threaten the
continued existence of a small one. An error in inventory valuation
may be material in a small enterprise for which it cut earnings in half
but immaterial in an enterprise for which it might make a barely
perceptible ripple in the earnings. Some of the empirical investigations
referred to in Appendix C throw light on the considerations that enter
into materiality judgments.
SFAC No. 2, Par. 131. Some hold the view that the Board should
promulgate a set of quantitative materiality guides or criteria covering
a wide variety of situations that preparers could look to for authoritative
support. That appears to be a minority view, however, on the basis of
representations made to the Board in response to the Discussion
Memorandum, Criteria for Determining Materiality. The predominant
view is that materiality judgments can properly be made only by those
who have all the facts. The Board’s present position is that no general
standards of materiality could be formulated to take into account all
the considerations that enter into an experienced human judgment.
(c)
SFAC No. 3, Par. 15. The two classes of elements are related in such
a way that (a) assets, liabilities, and equity are changed by elements
of the other class and at any time are their cumulative result and (b)
an increase (decrease) in an asset cannot occur without a corresponding decrease (increase) in another asset or a corresponding increase
(decrease) in a liability or equity. Those relationships are sometimes
collectively referred to as “articulation.” They result in financial
statements that are fundamentally interrelated so that statements that
show elements of the second class depend on statements that show
elements of the first class and vice versa.
2-44Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL SIMULATION
Explanation
1.
Most accounting methods are based on the assumption that the business
enterprise will have a long life. Acceptance of this assumption
provides credibility to the historical cost principle, which would be of
limited usefulness if liquidation were assumed. Only if we assume
some permanence to the enterprise is the use of depreciation and
amortization policies justifiable and appropriate. Therefore, it is incorrect
to assume liquidation as the company has done in this situation. It
should be noted that only where liquidation appears imminent is the
going concern assumption inapplicable.
2.
The company is too conservative in its accounting for this transaction.
The expense recognition principle indicates that expenses should be
allocated to the appropriate periods involved. In this case, there appears
to be a high uncertainty that the company will have to pay. FASB
Codification, Section 450-20, requires that a loss should be accrued
only (1) when it is probable that the company would lose the suit and
(2) the amount of the loss can be reasonably estimated. (Note to
instructor: The student will probably be unfamiliar with these requirements. The purpose of this question is to develop some decision
framework when the probability of a future event must be assumed).
3.
This entry violates the economic entity assumption. This assumption
in accounting indicates that economic activity can be identified with a
particular unit of accountability. In this situation, the company erred by
charging this cost to the wrong economic entity.
Research
According to Concepts Statement 8 (CON 8) par. QCII:
Information is material if omitting it or misstating it could influence decisions
that users make on the basis of the financial information of a specific
reporting entity. In other words, materiality is an entity-specific aspect of
relevance based on the nature or magnitude or both of the items to which
the information relates in the context of an individual entity’s financial report.
Consequently, the Board cannot specify a uniform quantitative threshold for
materiality or predetermine what could be material in a particular situation.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-45
IFRS CONCEPTS AND APPLICATION
IFRS2-1
The IASB framework makes two assumptions. One assumption is that
financial statements are prepared on an accrual basis; the other is that the
reporting entity is a going concern. The FASB discuss accrual accounting
extensively but does not identify it as an assumption. The going concern
concept is only briefly discussed. The going concern concept will
undoubtedly be debated as to its place in the conceptual framework.
IFRS2-2
While there is some agreement that the role of financial reporting is to assist
users in decision-making, the IASB framework has had more of a focus on
the objective of providing information on management’s performance—often
referred to as stewardship. It is likely that there will be much debate
regarding the role of stewardship in the conceptual framework.
IFRS2-3
The FASB differentiates gains and losses from revenue and expenses where
gains and losses are incidental transactions of the entity. Further, the FASB
includes changes in equity as elements: investment by owners, distributions
to owners, and comprehensive income.
IFRS2-4
As indicated, the measurement project relates to both initial measurement
and subsequent measurement. Thus, the continuing controversy related to
historical cost and fair value accounting suggests that this issue will be
controversial. The reporting entity project that addresses which entities
should be included in consolidated statements and how to implement such
consolidations will be a difficult project. Other difficult issues relate to the
trade off between highly relevant information that is difficult to verify? Or
how do we define control when we are developing a definition of an asset?
Or is a liability the future sacrifice itself or the obligation to make the
sacrifice?
2-46Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS2-5
The IASB and FASB frameworks are strikingly similar. This is not surprising,
given that the IASB framework was adopted after the FASB developed its
framework (the IASB framework was approved in April 1989). In addition, the
IASC, the predecessor to the IASB, was formed to facilitate harmonization of
accounting standards across countries. This objective could be aided by
adopting a similar conceptual framework.
Specific similarities include that both frameworks adopt similar definitions
for assets and liabilities and define equity as the residual of assets minus
liabilities.
Some differences with regard to the elements are that the IASB defines just
five elements without specific definitions for Investments by and Distributions to Owners or Comprehensive Income. There is also no distinction in
the IASB framework between gains and revenues and losses and expenses.
Note to Instructors—These differences may be resolved as the FASB and
IASB work on their performance reporting projects.
IFRS2-6
Search Strings: “materiality”, “completeness”
(a)
According to the Framework (para. 30): Information is defined to be
material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
(b)
(1)
According to the Framework, (para. 29–30):
29 The relevance of information is affected by its nature and materiality.
In some cases, the nature of information alone is sufficient to determine
its relevance. For example, the reporting of a new segment may affect
the assessment of the risks and opportunities facing the entity
irrespective of the materiality of the results achieved by the new
segment in the reporting period. In other cases, both the nature and
materiality are important, for example, the amounts of inventories
held in each of the main categories that are appropriate to the business.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-47
IFRS2-6 (Continued)
30 Information is material if its omission or misstatement could
influence the economic decisions of users taken on the basis of the
financial statements. Materiality depends on the size of the item or
error judged in the particular circumstances of its omission or
misstatement. Thus, materiality provides a threshold or cut-off point
rather than being a primary qualitative characteristic which information
must have if it is to be useful.
(2)
With respect to Completeness (para. 30):
To be reliable, the information in financial statements must be
complete within the bounds of materiality and cost. An omission
can cause information to be false or misleading and thus
unreliable and deficient in terms of its relevance.
This statement indicates that excluding immaterial items will not
affect the completeness of the financial statements.
(c)
According to the Framework (para. 22):
Accrual basis
In order to meet their objectives, financial statements are prepared on
the accrual basis of accounting. Under this basis, the effects of
transactions and other events are recognized when they occur (and
not as cash or its equivalent is received or paid) and they are
recorded in the accounting records and reported in the financial
statements of the periods to which they relate. Financial statements
prepared on the accrual basis inform users not only of past
transactions involving the payment and receipt of cash but also of
obligations to pay cash in the future and of resources that represent
cash to be received in the future. Hence, they provide the type of
information about past transactions and other events that is most
useful to users in making economic decisions.
2-48Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS2-7
Marks and Spencer plc
(a)
Revenue Recognition
Revenue
Revenue comprises sales of goods to customers outside the Group
less an appropriate deduction for actual and expected returns,
discounts and loyalty scheme vouchers, and is stated net of value
added tax and other sales taxes. Revenue is recognised when goods
are delivered and the significant risks and rewards of ownership have
been transferred to the buyer.
(b)
Historical Cost
-Property, plant, and equipment
The Group’s policy is to state property, plant and equipment at cost
less accumulated depreciation and any recognised impairment loss.
Property is not revalued for accounting purposes.
Intangible Assets
-B. Brands
Acquired brand values are held on the statement of financial position
initially at cost. Defined life intangibles are amortised on a straightline basis over their estimated useful lives. Indefinite life intangibles
are tested for impairment at least annually. Any impairment in value is
recognised immediately in the income statement.
Fair Value
Trade receivables, trade payables, investments and other financial
assests, loan notes
A. Goodwill
Goodwill arising on consolidation represents the excess of the
consideration transferred and the amount of any non-controlling
interest in the acquiree over the fair value of the identifiable assets
and liabilities (including intangible assets) of the acquired entity at
the date of the acquisition. Goodwill is recognised as an asset and
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 2-49
assessed for impairment at least annually. Any impairment is
recognised immediately in the income statement.
IFRS2-7 (Continued)
(c)
New Accounting Pronoucements and Policies
None listed under Accounting Policies.
(d)
Accounting policy related to refunds and loyalty schemes
E. Refunds and loyalty scheme accruals
Accruals for sales returns and loyalty scheme redemptions are
estimated on the basis of historical returns and redemptions and
these are recorded so as to allocate them to the same period as the
original revenue is recorded. These accruals are reviewed regularly
and updated to reflect management’s latest best estimates, however,
actual returns and redemptions could vary from these estimates.
2-50Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CHAPTER 3
The Accounting Information System
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Brief
Exercises
Exercises
Problems
1, 2
1, 2, 3, 4, 17
1
2, 3, 4
1, 2
5, 6, 7, 8,
9, 10, 20
1, 2, 3, 4,
5, 6, 7, 8,
9, 10, 12
11, 12, 15,
22, 23
1, 2, 4, 6
13, 14, 16
1, 4, 9,
10, 12
Topics
Questions
1.
Transaction identification.
1, 2, 3, 5,
6, 7, 8
2.
Nominal accounts.
4, 7
3.
Trial balance.
6, 10
4.
Adjusting entries.
8, 11, 13, 14
5.
Financial statements.
6.
Closing.
12
7.
Inventory and cost
of goods sold.
9
8.
Comprehensive
accounting cycle.
*9.
Cash vs. accrual Basis.
15, 16, 17
12
18, 19
*10.
Reversing entries.
18
13
20
*11.
Worksheet.
19
3, 4, 5, 6, 7,
8, 9, 10
11
14, 15
1, 2, 6, 12
11
21, 22, 23
12
*These topics are dealt with in an Appendix to the Chapter.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
3-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Questions
Learning Objectives
Brief
Exercises
Exercises
Problems
1.
Understand basic accounting
terminology.
1, 2, 4,
7
2.
Explain double-entry rules.
1, 2, 3,
4, 5, 7
3.
Identify steps in accounting cycle.
2, 3
4.
Record transactions in journals, post
to ledger accounts, and prepare a trial
balance.
6, 10
1, 2, 3, 4,
5, 6, 7
1, 2, 3,
4, 17
1, 4, 9, 10
5.
Explain the reasons for preparing
adjusting entries and identify major
types of adjusting entries.
11, 16
3, 4, 5, 6,
7,
8, 9, 10
5, 6, 7, 8,
9, 10, 20
2, 3, 4, 5,
6, 7, 8, 9,
10, 12
6.
Prepare financial statements from the
adjusted trail balance.
10
11, 12
1, 2, 4, 6,
7, 8, 9,
10, 12
7.
Prepare closing entries.
8, 12,
13, 14
13, 14, 16
1, 4, 9,
10, 12
8.
Prepare financial statements for a
merchandising company.
9
13, 14, 15
4, 10
*9.
Differentiate the cash basis of
accounting from the accrual basis of
accounting.
15, 17
12
18, 19
11
*10.
Identify adjusting entries that may be
reversed.
18
13
20
*11.
Prepare a 10-column worksheet.
19
11
21, 22, 23
12
*These topics are dealt with in an Appendix to the Chapter.
3-2Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE
Level of
Difficulty
Time
(minutes)
Simple
Simple
Simple
Simple
Moderate
Moderate
Complex
Moderate
Moderate
Complex
Moderate
Moderate
Simple
Moderate
Simple
Moderate
Moderate
15–20
10–15
15–20
10–15
10–15
10–15
15–20
10–15
15–20
25–30
20–25
20–25
10–15
10–15
10–15
10–15
10–15
*E3-18
*E3-19
*E3-20
*E3-21
*E3-22
*E3-23
Transaction analysis–service company.
Corrected trial balance.
Corrected trial balance.
Corrected trial balance.
Adjusting entries.
Adjusting entries.
Analyze adjusted data.
Adjusting entries.
Adjusting entries.
Adjusting entries.
Prepare financial statements.
Prepare financial statements.
Closing entries.
Closing entries.
Missing amounts.
Closing entries for a corporation.
Transactions of a corporation, including investment
and dividend.
Cash to accrual basis.
Cash and accrual basis.
Adjusting and reversing entries.
Worksheet.
Worksheet and balance sheet presentation.
Partial worksheet preparation.
Moderate
Moderate
Complex
Simple
Moderate
Moderate
15–20
10–15
20–25
10–15
20–25
10–15
P3-1
P3-2
P3-3
P3-4
P3-5
P3-6
P3-7
P3-8
P3-9
P3-10
*P3-11
*P3-12
Transactions, financial statements–service company.
Adjusting entries and financial statements.
Adjusting entries.
Financial statements, adjusting and closing entries.
Adjusting entries.
Adjusting entries and financial statements.
Adjusting entries and financial statements.
Adjusting entries and financial statements.
Adjusting and closing.
Adjusting and closing.
Cash and accrual basis.
Worksheet, balance sheet, adjusting and closing entries.
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Complex
25–35
35–40
25–30
40–50
15–20
25–35
25–35
25–35
30–40
30–35
35–40
40–50
Item
Description
E3-1
E3-2
E3-3
E3-4
E3-5
E3-6
E3-7
E3-8
E3-9
E3-10
E3-11
E3-12
E3-13
E3-14
E3-15
E3-16
E3-17
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
3-3
ANSWERS TO QUESTIONS
1. Examples are:
(a) Payment of an accounts payable.
(b) Collection of an accounts receivable from a customer.
(c) Transfer of an accounts payable to a note payable.
2. Transactions (a), (b), (d) are considered business transactions and are recorded in the accounting
records because a change in assets, liabilities, or owners’/stockholders’ equity has been effected
as a result of a transfer of values from one party to another. Transactions (c) and (e) are not
business transactions because a transfer of values has not resulted, nor can the event be
considered financial in nature and capable of being expressed in terms of money.
3. Transaction (a): Accounts Receivable (debit), Service Revenue (credit).
Transaction (b): Cash (debit), Accounts Receivable (credit).
Transaction (c): Supplies (debit), Accounts Payable (credit).
Transaction (d): Delivery Expense (debit), Cash (credit).
4. Revenue and expense accounts are referred to as temporary or nominal accounts because each
period they are closed out to Income Summary in the closing process. Their balances are reduced
to zero at the end of the accounting period; therefore, the term temporary or nominal is given to
these accounts.
5. Andrea is not correct. The double-entry system means that for every debit amount there must be a
credit amount and vice-versa. At least two accounts are affected and debits must equal credits. It
does not mean that each transaction must be recorded twice.
6. Although it is not absolutely necessary that a trial balance be taken periodically, it is customary
and desirable. The trial balance accomplishes two principal purposes:
(1) It tests the accuracy of the entries in that it proves that debits and credits of an equal amount
are in the ledger.
(2) It provides a list of ledger accounts and their balances which may be used in preparing the
financial statements and in supplying financial data about the concern.
7. (a) Real account; balance sheet.
(b) Real account; balance sheet.
(c) Inventory is generally considered a real account appearing on the balance sheet. (Note:
Inventory has the elements of a nominal account when the periodic inventory system is used. It
may appear on the income statement when the multiple-step format is used under a periodic
inventory system.)
(d) Real account; balance sheet.
(e) Real account; balance sheet.
(f) Nominal account; income statement.
(g) Nominal account; income statement.
(h) Real account; balance sheet.
8. At December 31, the three days’ wages due to the employees represent a current liability. The
related expense must be recorded in this period to properly reflect the expense incurred.
9. (a) In a service company, revenues are service revenues and expenses are operating expenses.
In a merchandising company, revenues are sales revenues and expenses consist of cost of
goods sold plus operating expenses.
(b) The measurement process in a merchandising company consists of comparing the sales price
of the merchandise inventory to the cost of goods sold and operating expenses.
3-4Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 3 (Continued)
10. (a) No change.
(b) Before closing, balances exist in these accounts; after closing, no balances exist.
(c) Before closing, balances exist in these accounts; after closing, no balances exist.
(d) Before closing, a balance exists in this account exclusive of any dividends or the net income or
net loss for the period; after closing, the balance is increased or decreased by the amount of net
income or net loss, and decreased by dividends declared.
(e) No change.
11. Adjusting entries are prepared prior to the preparation of financial statements in order to bring the
accounts up to date and are necessary (1) to achieve a proper recognition of revenues and
expenses in measuring income and (2) to achieve an accurate presentation of assets, liabilities
and stockholders’ equity.
12. Closing entries are prepared to transfer the balances of nominal accounts to capital (retained
earnings) after the adjusting entries have been recorded and the financial statements prepared.
Closing entries are necessary to reduce the balances in nominal accounts to zero in order to
prepare the accounts for the next period’s transactions.
13. Cost – Salvage Value = Depreciable Cost: $4,000 – $0 = $4,000. Depreciable Cost ÷ Useful Life =
Depreciation Expense For One Year $4,000 ÷ 5 years = $800 per year. The asset was used for
6 months (7/1 – 12/31), therefore 1/2-year of depreciation expense should be reported. Annual
depreciation X 6/12 = amount to be reported on 2014 income statement: $800 X 6/12 = $400.
14.
December 31
Interest Receivable .............................................................................................................
10,000
Interest Revenue ......................................................................................................... 10,000
(To record accrued interest revenue on loan)
Accrued expenses result from the same causes as accrued revenues. In fact, an accrued expense
on the books of one company is an accrued revenue to another company.
*15. Under the cash basis of accounting, revenue is recorded only when cash is received and
expenses are recorded only when paid. Under the accrual basis of accounting, revenue is
recognized when a performance obligation is met expenses are recognized when incurred, without
regard to the time of the receipt or payment of cash.
A cash-basis balance sheet and income statement are incomplete and inaccurate in comparison to
accrual-basis financial statements. The accrual basis matches effort (expenses) with
accomplishment (revenues) in the income statement while the cash basis only presents cash
receipts and cash disbursements. The accrual basis balance sheet contains receivables, payables,
accruals, prepayments, and deferrals while a cash-basis balance sheet shows none of these.
*16. Salaries and wages paid during the year will include the payment of any wages attributable to the
prior year but unpaid at the end of the prior year. This amount is an expense of the prior year and
not of the current year, and thus should be subtracted in determining salaries and wages expense.
Similarly, salaries and wages paid during the year will not include any salaries and wages
attributable to hours worked during the current year but not actually paid until the following year.
This should be added in determining salaries and wages expense.
*17. Although similar to the strict cash basis, the modified cash basis of accounting requires that
expenditures for capital items be charged against income over all the periods to be benefited. This
is done through conventional accounting methods, such as depreciation and amortization. Under
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
3-5
the strict cash basis, expenditures would be recognized as expenses in the period in which the
corresponding cash disbursements are made.
3-6Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 3 (Continued)
*18. Reversing entries are made at the beginning of the period to reverse accruals and some deferrals.
Reversing entries are not required. They are made to simplify the recording of certain transactions
that will occur later in the period. The same results will be attained whether or not reversing entries
are recorded.
*19. Disagree. A worksheet is not a permanent accounting record and its use is not required in the accounting cycle. The worksheet is an informal device for accumulating and sorting information
needed for the financial statements. Its use is optional in helping to prepare financial statements.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
3-7
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
May
1
Cash....................................................................................................
4,000
Common Stock ...........................................................................
4,000
3
Equipment ..........................................................................................
1,100
Accounts Payable.......................................................................
1,100
13
Rent Expense .....................................................................................
400
Cash ............................................................................................
400
21
Accounts Receivable .........................................................................
500
Service Revenue .........................................................................
500
BRIEF EXERCISE 3-2
Aug.
2
Cash ....................................................................................................
12,000
Equipment ..........................................................................................
2,500
Owner’s Capital ..........................................................................
14,500
7
Supplies ..............................................................................................
500
Accounts Payable .......................................................................
500
12
Cash ....................................................................................................
1,300
Accounts Receivable .........................................................................
670
Service Revenue .........................................................................
1,970
15
Rent Expense .....................................................................................
600
Cash.............................................................................................
600
19
Supplies Expense ..............................................................................
230
Supplies ($500 – $270) ...............................................................
230
3-8Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 3-3
July
1
Prepaid Insurance..............................................................................
15,000
Cash ............................................................................................
15,000
Dec.
31
Insurance Expense ............................................................................
2,500
Prepaid Insurance
($15,000 X 1/2 X 1/3) ...............................................................
2,500
BRIEF EXERCISE 3-4
July
1
Cash....................................................................................................
15,000
Unearned Service Revenue .......................................................
15,000
Dec.
31
Unearned Service Revenue ......................................................
2,500
3,000
Service Revenue
($15,000 X 1/2 X 1/3) ...............................................................
2,500
BRIEF EXERCISE 3-5
Feb.
1
Prepaid Insurance..............................................................................
720,000
Cash ............................................................................................
720,000
June 30
Insurance Expense ............................................................................
150,000
Prepaid Insurance
($720,000 X 5/24) .....................................................................
150,000
BRIEF EXERCISE 3-6
Nov.
1
Cash....................................................................................................
2,400
Unearned Rent Revenue ............................................................
2,400
Dec.
31
Unearned Rent Revenue ...................................................................
1,600
Rent Revenue
($2,400 X 2/3) ...........................................................................
1,600
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
3-9
BRIEF EXERCISE 3-7
Dec.
31
Salaries and Wages Expense ............................................................
4,800
Salaries and Wages Payable
($8,000 X 3/5) ...........................................................................
4,800
Jan.
2
Salaries and Wages Payable .............................................................
4,800
Salaries and Wages Expense ............................................................
3,200
Cash.............................................................................................
8,000
BRIEF EXERCISE 3-8
Dec.
31
Interest Receivable ............................................................................
300
Interest Revenue .........................................................................
300
Feb.
1
Cash ....................................................................................................
12,400
Notes Receivable ........................................................................
12,000
Interest Receivable .....................................................................
300
Interest Revenue .........................................................................
100
BRIEF EXERCISE 3-9
Aug.
31
Interest Expense ................................................................................
300
Interest Payable ..........................................................................
300
31
Accounts Receivable .........................................................................
1,400
Service Revenue .........................................................................
1,400
31
Salaries and Wages Expense ............................................................
700
Salaries and Wages Payable ......................................................
700
31
Bad Debt Expense .............................................................................
900
Allowance for Doubtful Accounts .............................................
900
3-10Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 3-10
Depreciation Expense .......................................................................
2,000
Accumulated Depreciation—Equipment ..................................
2,000
Equipment..........................................................................................
$30,000
Less: Accumulated Depreciation—Equipment ..............................
2,000
$28,000
BRIEF EXERCISE 3-11
Sales Revenue ...................................................................................
808,900
Interest Revenue ...............................................................................
13,500
Income Summary ....................................................................... 822,400
Income Summary ..............................................................................
780,300
Cost of Goods Sold.................................................................... 556,200
Administrative Expenses .......................................................... 189,000
Income Tax Expense.................................................................. 35,100
Income Summary ..............................................................................
42,100
Retained Earnings .....................................................................
42,100
Retained Earnings .............................................................................
18,900
Dividends ....................................................................................
18,900
*BRIEF EXERCISE 3-12
(a)
Cash receipts.....................................................................................
$142,000
+ Increase in accounts receivable
($18,600 – $13,000).....................................................................
5,600
Service revenue.................................................................................
$147,600
(b)
Payments for operating expenses ...................................................
$ 97,000
– Increase in prepaid expenses
($23,200 – $17,500).....................................................................
(5,700)
Operating expenses ..........................................................................
$ 91,300
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-11
*BRIEF EXERCISE 3-13
(a)
Salaries and Wages Payable ............................................................
4,200
Salaries and Wages Expense ....................................................
4,200
(b)
Salaries and Wages Expense ...........................................................
7,000
Cash ............................................................................................
7,000
(c)
Salaries and Wages Payable ............................................................
4,200
Salaries and Wages Expense ...........................................................
2,800
Cash ............................................................................................
7,000
3-12Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO EXERCISES
EXERCISE 3-1 (15–20 minutes)
Apr.
2
Cash....................................................................................................
32,000
Equipment ..........................................................................................
14,000
Owner’s Capital ..........................................................................
46,000
2
No entry—not a transaction.
3
Supplies..............................................................................................
700
Accounts Payable.......................................................................
700
7
Rent Expense .....................................................................................
600
Cash ............................................................................................
600
11
Accounts Receivable .........................................................................
1,100
Service Revenue .........................................................................
1,100
12
Cash....................................................................................................
3,200
Unearned Service Revenue .......................................................
3,200
17
Cash....................................................................................................
2,300
Service Revenue .........................................................................
2,300
21
Insurance Expense ............................................................................
110
Cash ............................................................................................
110
30
Salaries and Wages Expense............................................................
1,160
Cash ............................................................................................
1,160
30
Supplies Expense ..............................................................................
120
Supplies ......................................................................................
120
30
Equipment ..........................................................................................
6,100
Owner’s Capital ..........................................................................
6,100
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-13
EXERCISE 3-2 (10–15 minutes)
Wanda Landowska Company
Trial Balance
April 30, 2014
Debit
Cash ........................................................................ $ 4,800
Accounts Receivable .............................................
2,750
Prepaid Insurance ($700 + $100) ...........................
800
Equipment ...............................................................
8,000
Accounts Payable ($4,500 – $100) .........................
Property Taxes Payable .........................................
Owner’s Capital ($11,200 + $1,500) .............................
Owner’s Drawing .....................................................
1,500
Service Revenue .....................................................
Salaries and Wages Expense ................................
4,200
Advertising Expense ($1,100 + $300) ....................
1,400
Property Tax Expense ($800 + $100) .....................
900
$24,350
Credit
$ 4,400
560
12,700
6,690
$24,350
EXERCISE 3-3 (15–20 minutes)
The ledger accounts are reproduced below, and corrections are shown in
the accounts.
190
Accounts Payable
Bal.
7,044
Accounts Receivable
Bal.
5,240 (1)
450
Common Stock
Bal.
8,000
Supplies
2,967
Retained Earnings
Bal.
2,000
Bal.
(1)
Bal.
Cash
5,912 (4)
450
3-14Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 3-3 (Continued)
Bal.
(2)
Equipment
6,100
3,200
Bal.
Service Revenue
Bal.
(3)
(5)
5,200
2,025
80
Office Expense
4,320 (2)
3,200
Blues Traveler Corporation
Trial Balance (corrected)
April 30, 2014
Debit
Cash .........................................................................$ 6,172
Accounts Receivable .............................................. 4,790
Supplies ................................................................... 2,967
Equipment................................................................ 9,300
Accounts Payable ...................................................
Common Stock ........................................................
Retained Earnings ...................................................
Service Revenue .....................................................
Office Expense ........................................................ 1,120
$24,349
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Credit
$ 7,044
8,000
2,000
7,305
$24,349
(For Instructor Use Only) 3-15
EXERCISE 3-4 (10–15 minutes)
Watteau Co.
Trial Balance
June 30, 2014
Debit
Cash ($2,870 + $180 – $65 – $65)............................................
$ 2,920
Accounts Receivable ($3,231 – $180) .................................... 3,051
Supplies ($800 – $500) ............................................................ 300
Equipment ($3,800 + $500) ...................................................... 4,300
Accounts Payable ($2,666 – $206 – $260) ..............................
Unearned Service Revenue ($1,200 – $325) ..........................
Common Stock ........................................................................
Dividends ................................................................................. 575
Retained Earnings ...................................................................
Service Revenue ($2,380 + $801 + $325) ................................
Salaries and Wages Expense ($3,400 + $670 – $575) ........... 3,495
Office Expense ........................................................................ 940
$15,581
Credit
$ 2,200
875
6,000
3,000
3,506
$15,581
EXERCISE 3-5 (10–15 minutes)
1.
Depreciation Expense ($250 X 3)......................................................
750
Accumulated Depreciation—Equipment ..................................
750
2.
Unearned Rent Revenue ($9,300 X 1/3) ............................................
3,100
Rent Revenue ............................................................................. 3,100
3.
Interest Expense ................................................................................
500
Interest Payable ..........................................................................
500
4.
Supplies Expense ..............................................................................
1,950
Supplies ($2,800 – $850) ............................................................ 1,950
5.
Insurance Expense ($300 X 3) ..........................................................
900
Prepaid Insurance ......................................................................
3-16Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
900
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 3-6 (10–15 minutes)
1.
2.
3.
Accounts Receivable ........................................................................
750
Service Revenue ........................................................................
750
Utilities Expenses..............................................................................
520
Accounts Payable ......................................................................
520
Depreciation Expense .......................................................................
400
Accumulated Depreciation – Equipment ..................................
400
Interest Expense................................................................................
500
Interest Payable .........................................................................
500
4.
Insurance Expense ($12,000 X 1/12) ................................................
1,000
Prepaid Insurance ...................................................................... 1,000
5.
Supplies Expense ($1,600 – $500)....................................................
1,100
Supplies ...................................................................................... 1,100
EXERCISE 3-7 (15–20 minutes)
(a)
Ending balance of supplies
Add: Adjusting entry
Deduct: Purchases
Beginning balance of supplies
(b)
Total prepaid insurance
Amount used (6 X $400)
Present balance
$700
950
850
$800
$4,800
2,400
$2,400
($400 X 12)
The policy was purchased six months ago (August 1, 2013)
(c)
The entry in January to record salary and wages expense was
Salaries and Wages Expense ................................
Salaries and Wages Payable .................................
Cash ..................................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
1,800
700
Kieso, Intermediate Accounting, 15/e, Solutions Manual
2,500
(For Instructor Use Only) 3-17
EXERCISE 3-7 (Continued)
The “T” account for salaries payable is
Salaries and Wages Payable
Paid
700 Beg. Bal.
?
January
End Bal.
800
The beginning balance is therefore
(d)
Ending balance of salaries and wages payable
Plus: Reduction of salaries and wages payable
Beginning balance of salaries and wages payable
$ 800
700
$1,500
Service revenue
Cash received
Unearned revenue reduced
$2,000
1,600
$ 400
Ending unearned revenue January 31, 2014
Plus: Unearned revenue reduced
Beginning unearned revenue December 31, 2013
$ 750
400
$1,150
EXERCISE 3-8 (10–15 minutes)
1.
Salaries and Wages Expense ...........................................................
1,900
Salaries and Wages Payable ..................................................... 1,900
2.
Utilities Expense ................................................................................
600
Accounts Payable ......................................................................
600
Interest Expense ($30,000 X 8% X 1/12) ...........................................
200
Interest Payable ..........................................................................
200
Telephone and Internet Expense......................................................
117
Accounts Payable ......................................................................
117
3.
4.
3-18Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 3-9 (15–20 minutes)
(a)
(b)
10/15
Salaries and Wages Expense ...........................................................
800
Cash ............................................................................................
800
(To record payment of October 15
payroll)
10/17
Accounts Receivable.........................................................................
2,400
Service Revenue.........................................................................
2,400
(To record revenue for services
performed for which payment has
not yet been received)
10/20
Cash ...................................................................................................
650
Unearned Service Revenue .......................................................
650
(To record receipt of cash for
services not yet performed)
10/31
Supplies Expense ..............................................................................
470
Supplies ......................................................................................
470
(To record the use of supplies during
October)
10/31
Accounts Receivable.........................................................................
1,650
Service Revenue.........................................................................
1,650
(To record revenue for services
performed for which payment has
not yet been received)
10/31
Salaries and Wages Expense ...........................................................
600
Salaries and Wages Payable .....................................................
600
(To record liability for accrued payroll)
10/31
Unearned Service Revenue...............................................................
400
Service Revenue.........................................................................
400
(To reduce the Unearned Service
Revenue account for service that
has been performed)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-19
EXERCISE 3-10 (25–30 minutes)
(a)
1. Aug. 31 Insurance Expense ($4,500 X 3/12) ..................................................
1,125
Prepaid Insurance ......................................................................
1,125
2. Aug. 31 Supplies Expense ($2,600 – $450)....................................................
2,150
Supplies ......................................................................................
2,150
3. Aug. 31 Depreciation Expense .......................................................................
1,080
Accumulated Depreciation—
Buildings .................................................................................
1,080
($120,000 – $12,000 = $108,000;
$108,000 X 4% = $4,320 per year;
$4,320 X 1/4 = $1,080)
Aug. 31 Depreciation Expense .......................................................................
360
Accumulated Depreciation—
Equipment ...............................................................................
360
($16,000 – $1,600 = $14,400;
$14,400 X 10% = $1,440;
$1,440 X 1/4 = $360)
4. Aug. 31 Unearned Rent Revenue ...................................................................
3,800
Rent Revenue .............................................................................
3,800
5. Aug. 31 Salaries and Wages Expense ...........................................................
375
Salaries and Wages Payable .....................................................
375
6. Aug. 31 Accounts Receivable ........................................................................
800
Rent Revenue .............................................................................
800
7. Aug. 31 Interest Expense ...............................................................................
1,200
Interest Payable .........................................................................
1,200
[($60,000 X 8%) X 1/4]
3-20Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 3-10 (Continued)
(b)
Greco Resort
Adjusted Trial Balance
August 31, 2014
Debit
Cash .........................................................................
Accounts Receivable ..............................................
Prepaid Insurance ($4,500 – $1,125) ......................
Supplies ($2,600 – $2,150) ......................................
Land .........................................................................
Buildings ..................................................................
Accumulated Depreciation—Buildings..................
Equipment................................................................
Accumulated Depreciation—Equipment ...............
Accounts Payable ...................................................
Unearned Rent Revenue ($4,600 – $3,800) ............
Salaries and Wages Payable ..................................
Interest Payable .......................................................
Mortgage Payable....................................................
Common Stock ........................................................
Retained Earnings ...................................................
Dividends .................................................................
Rent Revenue ($76,200 + $3,800 + $800) ...............
Salaries and Wages Expense ($44,800 + $375) .....
Utilities Expenses....................................................
Maintenance and Repair Expense..........................
Insurance Expense..................................................
Supplies Expense....................................................
Depreciation Expense—Buildings .........................
Depreciation Expense—Equipment .......................
Interest Expense .....................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Credit
$ 19,600
800
3,375
450
20,000
120,000
$
1,080
16,000
360
4,500
800
375
1,200
60,000
91,000
9,000
5,000
80,800
45,175
9,200
3,600
1,125
2,150
1,080
360
1,200
$249,115
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$249,115
(For Instructor Use Only) 3-21
EXERCISE 3-11 (20–25 minutes)
(a)
ANDERSON COOPER CO.
Income Statement
For the Year Ended December 31, 2014
Revenues
Service revenue .....................................................
Expenses
Salaries and wages expense .................................
Rent expense..........................................................
Depreciation expense ............................................
Interest expense.....................................................
Net Income ........................................................................
(b)
$11,590
$6,840
2,260
145
83
9,328
$ 2,262
ANDERSON COOPER CO.
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained earnings, January 1 ............................................................. $11,310
Add: Net income ..................................................................................
2,262
13,572
Less: Dividends ...................................................................................
3,000
Retained earnings, December 31 ....................................................... $10,572
(c)
ANDERSON COOPER CO.
Balance Sheet
December 31, 2014
Assets
Current Assets
Cash ..................................................................
Accounts receivable .........................................
Prepaid rent ......................................................
Total current assets ....................................
Property, plant, and equipment
Equipment ......................................................... $18,050
Accumulated depreciation –
equipment .......................................................
(4,895)
Total assets .....................................................................
3-22Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$19,472
6,920
2,280
28,672
13,155
$41,827
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 3-11 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ..............................................
Interest payable .................................................
Notes payable ....................................................
Total current liabilities ................................
Stockholders’ equity
Common stock .................................................. $20,000
Retained earnings ............................................. 10,572*
Total liabilities and stockholders’ equity .......................
$ 5,472
83
5,700
11,255
30,572
$41,827
*Beg. Balance + Net Income – Dividends = Ending Balance
$11,310
+ $2,262 – $3,000 =
$10,572
EXERCISE 3-12 (20–25 Minutes)
(a)
SANTO DESIGN AGENCY
Income Statement
For the Year Ended December 31, 2014
Revenues
Service revenue ......................................................
Expenses
Salaries and wages expense.................................. $11,300
Depreciation expense .............................................
7,000
Rent expense ..........................................................
4,000
Supplies expense ...................................................
3,400
Insurance expense .................................................
850
Interest expense .....................................................
500
Total expenses .................................................
Net income .........................................................................
$61,500
27,050
$34,450
SANTO DESIGN AGENCY
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained earnings, January 1 .............................................................
Add: Net income ..................................................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 3,500
34,450
(For Instructor Use Only) 3-23
Retained earnings, December 31 .......................................................
$37,950
EXERCISE 3-12 (Continued)
(a) Continued
SANTO DESIGN AGENCY
Balance Sheet
December 31, 2014
Assets
Cash ..................................................................................
Accounts receivable.........................................................
Supplies ............................................................................
Prepaid insurance ............................................................
Equipment .........................................................................
Less: Accumulated depreciation – equipment ....................
Total assets .............................................................
$11,000
21,500
5,000
2,500
$60,000
35,000
25,000
$65,000
Liabilities and Stockholders’ Equity
Liabilities
Notes payable .........................................................
Accounts payable ...................................................
Interest payable ......................................................
Unearned service revenue .....................................
Salaries and wages payable ..................................
Total liabilities ..................................................
Stockholders’ equity
Common stock........................................................
Retained earnings...................................................
Total liabilities and stockholders’ equity .......
$ 5,000
5,000
150
5,600
1,300
$17,050
$10,000
37,950
47,950
$65,000
(b) (1) Based on interest payable at December 31, 2014, interest is $25 per
month or 0.5% of the note payable. 0.5% X 12 = 6% interest per year.
(2) Salaries and Wages Expense, $11,300 less Salaries and Wages
Payable 12/31/14, $1,300 = $10,000. Total payments, $17,500 –
$10,000 = $7,500 Salaries and Wages Payable 12/31/13.
3-24Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 3-13 (10–15 minutes)
(a)
Sales revenue ....................................................................................
$800,000
Less: Sales returns and allowances ................................................
$24,000
Sales discounts .......................................................................
15,000
39,000
Net sales ............................................................................................
$761,000
(b) Sales...................................................................................................
800,000
Income Summary .......................................................................
800,000
Income Summary ..............................................................................
39,000
Sales Returns and Allowances ................................................. 24,000
Sales Discounts ......................................................................... 15,000
EXERCISE 3-14 (10–15 minutes)
Sales Revenue ...................................................................................
350,000
Sales Returns and Allowances ................................................. 13,000
Sales Discounts ......................................................................... 8,000
Income Summary .......................................................................
329,000
Income Summary ..............................................................................
308,000
Cost of Goods Sold....................................................................
208,000
Delivery Expense ....................................................................... 7,000
Insurance Expense .................................................................... 12,000
Rent Expense ............................................................................. 20,000
Salaries and Wages Expense .................................................... 61,000
Income Summary ..............................................................................
21,000
Retained Earnings...................................................................... 21,000
EXERCISE 3-15 (10–15 minutes)
(a) $9,000
(b) $25,000
(c) $10,000
(d) $100,000
(e) $57,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-25
EXERCISE 3-16 (10–15 minutes)
Sales Revenue ...................................................................................
410,000
Cost of Goods Sold ....................................................................
225,700
Sales Returns and Allowances .................................................12,000
Sales Discounts .........................................................................15,000
Selling Expenses........................................................................16,000
Administrative Expenses ...........................................................38,000
Income Tax Expense ..................................................................30,000
Income Summary .......................................................................73,300
(or)
Sales Revenue ...................................................................................
410,000
Income Summary .......................................................................
410,000
Income Summary...............................................................................
336,700
Cost of Goods Sold ....................................................................
225,700
Sales Returns and Allowances .................................................12,000
Sales Discounts .........................................................................15,000
Selling Expenses........................................................................16,000
Administrative Expenses ...........................................................38,000
Income Tax Expense ..................................................................30,000
Income Summary...............................................................................
73,300
Retained Earnings ......................................................................73,300
Retained Earnings .............................................................................
18,000
Dividends ....................................................................................18,000
3-26Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 3-17 (10–15 minutes)
Date
Mar.
Account Titles and Explanation
Ref.
1 Cash
Debit
J1
Credit
50,000
Common Stock
(Investment of cash in business)
50,000
3 Land
Buildings
Equipment
Cash
(Purchased Michelle Wie’s Golf Land)
10,000
22,000
6,000
5 Advertising Expense
Cash
(Paid for advertising)
1,600
6 Prepaid Insurance
Cash
(Paid for one-year insurance policy)
1,480
10 Equipment
Accounts Payable
(Purchased equipment on account)
2,500
18 Cash
1,200
38,000
1,600
1,480
2,500
Service Revenue
(Received cash for services performed)
1,200
25 Dividends
Cash
(Declared and paid a $500 cash dividend)
500
30 Salaries and Wages Expense
Cash
(Paid wages expense)
900
30 Accounts Payable
Cash
(Paid creditor on account)
31 Cash
500
900
2,500
2,500
750
Service Revenue
(Received cash for services performed)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
750
(For Instructor Use Only) 3-27
*EXERCISE 3-18 (15–20 minutes)
Jill Accardo, M.D.
Conversion of Cash Basis to Accrual Basis
For the Year 2014
Excess of cash collected over cash disbursed ($142,600 –
$55,470)
Add increase in accounts receivable ($9,250 – $15, 927)
Deduct increase in unearned service revenue ($2,840 – $4,111)
Add decrease in accrued liabilities ($3,435 – $2,108)
Add increase in prepaid expenses ($1,917 – $3,232)
Net income on an accrual basis
$87,130
6,677
(1,271)
1,327
1,315
$95,178
Alternate solution:
Jill Accardo, M.D.
Conversion of Income Statement Data
from Cash Basis to Accrual Basis
For the Year 2014
Cash
Adjustments
Basis
Add
Deduct
Collections from customers:
–Accounts receivable, Jan. 1
+Accounts receivable, Dec. 31
+Unearned service revenue, Jan. 1
–Unearned service revenue, Dec. 31
Service revenue
Disbursements for expenses:
–Accrued liabilities, Jan. 1
+Accrued liabilities, Dec. 31
+Prepaid expenses, Jan. 1
–Prepaid expenses, Dec. 31
Operating expenses
Net income—cash basis
Net income—accrual basis
3-28Copyright © 2013 John Wiley & Sons, Inc.
Accrual
Basis
$142,600
$9,250
$15,927
2,840
4,111
$148,006
55,470
3,435
2,108
1,917
3,232
$ 87,130
Kieso, Intermediate Accounting, 15/e, Solutions Manual
52,828
$ 95,178
(For Instructor Use Only)
Ahmed Nawfal
*EXERCISE 3-19 (10–15 minutes)
(a)
Wayne Rogers Corp.
Income Statement (Cash Basis)
For the Year Ended December 31,
2013
$295,000
225,000
$ 70,000
Sales revenue
Expenses
Net income
(b)
2014
$515,000
272,000
$243,000
Wayne Rogers Corp.
Income Statement (Accrual Basis)
For the Year Ended December 31,
2013
$485,000
277,000
$208,000
Sales* revenue
Expenses**
Net income
*2013:
2014:
**2013:
2014:
2014
$445,000
255,000
$190,000
$295,000 + $160,000 + $30,000 = $485,000
$355,000 + $90,000 = $445,000
$185,000 + $67,000 + $25,000 = $277,000
$40,000 + $160,000 + $55,000 = $255,000
*EXERCISE 3-20 (20–25 minutes)
(a)
Adjusting Entries:
1. Insurance Expense ($5,280 X 5/24) ..................................................
1,100
Prepaid Insurance ......................................................................
1,100
2.
Rent Revenue ($1,800 X 1/3) .............................................................
600
Unearned Rent Revenue............................................................
600
3.
Supplies .............................................................................................
290
Advertising Expense .................................................................
290
4.
Interest Expense ...............................................................................
770
Interest Payable .........................................................................
770
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-29
*EXERCISE 3-20 (Continued)
(b)
Reversing Entries:
1. No reversing entry required.
2.
Unearned Rent Revenue ...................................................................
600
Rental Revenue ..........................................................................
600
3.
Advertising Expense .........................................................................
290
Supplies ......................................................................................
290
4.
Interest Payable .................................................................................
770
Interest Expense ........................................................................
770
*EXERCISE 3-21 (10–15 minutes)
Accounts
Cash
Inventory
Sales Revenue
Sales Returns and
Allowances
Sales Discounts
Cost of Goods Sold
Adjusted Trial
Balance
Income
Statement
Dr.
9,000
80,000
Dr.
Cr.
450,000
10,000
5,000
250,000
3-30Copyright © 2013 John Wiley & Sons, Inc.
Cr.
Balance Sheet
Dr.
9,000
80,000
Cr.
450,000
10,000
5,000
250,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
*EXERCISE 3-22 (20–25 minutes)
Ed Bradley Co.
Worksheet (partial)
For the Month Ended April 30, 2014
Account Titles
Cash
Accounts Receivable
Prepaid Rent
Equipment
Accum. Depreciation –
Equipment
Notes Payable
Accounts Payable
Common Stock
Retained Earnings
Dividends
Service Revenue
Salaries and Wages
Expense
Rent Expense
Depreciation Expense
Interest Expense
Interest Payable
Totals
Net income
Totals
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Adjusted Trial
Balance
Income
Statement
Dr.
18,972
6,920
2,280
18,050
Dr.
Cr.
Cr.
Balance Sheet
Dr.
18,972
6,920
2,280
18,050
4,895
5,700
4,472
34,960
1,000
4,895
5,700
4,472
34,960
1,000
6,650
6,650
12,590
6,840
3,760
145
83
63,700
Cr.
12,590
6,840
3,760
145
83
83
83
63,700 10,828 12,590 52,872 50,110
1,762
1,762
12,590 12,590 52,872 52,872
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-31
EXERCISE 3-22 (Continued)
Ed Bradley Co.
Balance Sheet
April 30, 2014
Assets
Current Assets
Cash ................................................................
Accounts receivable ......................................
Prepaid rent ....................................................
Total current assets ..............................
Property, plant, and equipment
Equipment ......................................................
Accumulated depreciation –
equipment.....................................................
Total assets ......................................................................
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ................................................
Accounts payable ..........................................
Interest payable..............................................
Total current liabilities ..........................
Stockholders’ equity
Common Stock ..............................................
Retained earnings ..........................................
Total liabilities and Stockholders’ equity .......................
$18,972
6,920
2,280
28,172
$18,050
(4,895)
13,155
$41,327
$ 5,700
4,472
83
10,255
34,960
(3,888)
31,072*
$41,327
*Beg. Balance – Dividends + Net Income = Ending Balance
$1,000
– $6,650 + $1,762 =
($3,888)
3-32Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
*EXERCISE 3-23 (10–15 minutes)
Jurassic Park Co.
Worksheet (partial)
For Month Ended February 28, 2014
Trial
Balance
Account Titles
Supplies
Dr.
Adjustments
Cr.
Dr.
Cr.
1,756
Adjusted
Income
Balance
Trial Balance
Statement
Sheet
Dr.
Dr.
Dr.
Cr.
715
Cr.
Cr.
(a)
1,041
715
6,939
(b)
257
7,196
7,196
150
(c)
50
200
200
Accumulated
depreciation –
equipment
Interest
payable
Supplies
expense
(a) 1,041
1,041
1,041
Depreciation
expense
(b)
257
257
257
(c)
50
50
50
Interest
expense
The following accounts and amounts would be shown in the February
income statement:
Supplies expense
Depreciation expense
Interest expense
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$1,041
257
50
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-33
TIME AND PURPOSE OF PROBLEMS
Problem 3-1 (Time 25–35 minutes)
Purpose—to provide an opportunity for the student to post daily transactions to a “T” account ledger,
take a trial balance, prepare an income statement, a balance sheet and a statement of owners’ equity,
close the ledger, and take a post-closing trial balance. The problem deals with routine transactions of a
professional service firm and provides a good integration of the accounting process.
Problem 3-2 (Time 35–40 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting entries, and prepare financial
statements (income statement, balance sheet, and statement of retained earnings). The student also is
asked to analyze two transactions to find missing amounts.
Problem 3-3 (Time 25–30 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting entries. The adjusting entries
are fairly complex in nature.
Problem 3-4 (Time 40–50 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting entries and an adjusted trial
balance and then prepare an income statement, a retained earnings statement, and a balance sheet. In
addition, closing entries must be made and a post-closing trial balance prepared.
Problem 3-5 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to determine what adjusting entries need to be
made to specific accounts listed in a partial trial balance. The student is also required to determine the
amounts of certain revenue and expense items to be reported in the income statement.
Problem 3-6 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to prepare year-end adjusting entries from a trial
balance and related information presented. The problem also requires the student to prepare an
income statement, a balance sheet, and a statement of owners’ equity. The problem covers the basics
of the end-of-period adjusting process.
Problem 3-7 (Time 25–35 minutes)
Purpose—to provide an opportunity for the student to figure out the year-end adjusting entries that were
made from a trial balance and an adjusted trial balance. The student is also required to prepare an
income statement, a statement of retained earnings, and a balance sheet. In addition, the student
needs to answer a number of questions related to specific accounts.
Problem 3-8 (Time 25–35 minutes)
Purpose—to provide an opportunity for the student to figure out the year-end adjusting entries that were
made from a trial balance and an adjusted trial balance. The student is also required to prepare an
income statement, a statement of retained earnings, and a balance sheet. In addition, the student
needs to answer a number of questions related to specific accounts.
Problem 3-9 (Time 30–40 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting, and closing entries. This
problem presents basic adjustments including a number of accruals and deferrals. It provides the
student with an integrated flow of the year-end accounting process.
Problem 3-10 (Time 30–35 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting and closing entries from a trial
balance and related information. The student is also required to post the entries to “T” accounts.
3-34Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Time and Purpose of Problems (Continued)
*Problem 3-11 (Time 35–40 minutes)
Purpose—to provide an opportunity for the student to prepare and compare (a) cash basis and accrualbasis income statements, (b) cash-basis and accrual-basis balance sheets, and (c) to discuss the
weaknesses of cash basis accounting.
*Problem 3-12 (Time 40–50 minutes)
Purpose—to provide an opportunity for the student to complete a worksheet and then prepare a
classified balance sheet. In addition, adjusting and closing entries must be made and a post-closing
trial balance prepared.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-35
SOLUTIONS TO PROBLEMS
PROBLEM 3-1
(a)
(Explanations are omitted.) and (d)
Cash
Sept. 1
20,000 Sept. 4
8
1,690
5
20
980
10
18
19
30
30
30 Bal 12,133
Sept. 14
25
Bal. 30
Accounts Receivable
5,820 Sept. 20
2,110
6,950
4
Rent Expense
680 Sept. 30
Sept. 5
Bal. 30
Supplies
942 Sept. 30
612
Sept.
680
942
430
3,600
3,000
1,800
85
Sept.
Sept.
2
19
Equipment
17,280
Owner’s Capital
3,000 Sept.
1
30
30
20,000
6,007
23,007
Accounts Payable
3,600 Sept.
2
Bal.
30
17,280
13,680
Bal.
980
Sept.
18
680
330
Sept.
30
Service Revenue
9,620 Sept.
9,620
Sept. 10
30
Office Expense
430 Sept. 30
85
515
515
8
14
25
1,690
5,820
2,110
9,620
Accumulated Depreciation—Equipment
Sept. 30
288
515
Salaries and Wages Expense
Sept.
Sept.
30
30
1,800 Sept.
30
Supplies Expense
330 Sept. 30
3-36Copyright © 2013 John Wiley & Sons, Inc.
1,800
330
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-37
PROBLEM 3-1 (Continued)
Sept.
Depreciation Expense
30
288 Sept. 30
(b)
288
Sept.
Income Summary
30
680 Sept. 30
30
515
30
1,800
30
330
30
288
30 Inc. 6,007
9,620
9,620
9,620
YASUNARI KAWABATA, D.D.S.
Trial Balance
September 30
Debit
Cash ........................................................................................
$12,133
Accounts Receivable .............................................................
6,950
Supplies ..................................................................................
612
Equipment ..............................................................................
17,280
Accumulated Depreciation—Equipment ..............................
Accounts Payable ..................................................................
Owner’s Capital ......................................................................
Service Revenue ....................................................................
Rent Expense .........................................................................
680
Office Expense .......................................................................
515
Salaries and Wages Expense ................................................
1,800
Supplies Expense ..................................................................
330
Depreciation Expense ............................................................
288
Totals ............................................................................
$40,588
3-38Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Credit
$ 288
13,680
17,000
9,620
$40,588
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-1 (Continued)
(c)
YASUNARI KAWABATA, D.D.S.
Income Statement
For the Month of September
Service revenue .................................................................
Expenses:
Salaries and wages expense..............................
$1,800
Rent expense ...................................................... 680
Supplies expense ............................................... 330
Depreciation expense ......................................... 288
Office expense .................................................... 515
Total expenses................................................
Net income .........................................................................
$9,620
3,613
$6,007
YASUNARI KAWABATA, D.D.S.
Statement of Owners’ Equity
For the Month of September
Owner’s capital September 1 .....................................................$20,000
Add: Net income ....................................................................... 6,007
26,007
Less: Withdrawal by owner ....................................................... 3,000
Owner’s capital September 30 ...................................................$23,007
YASUNARI KAWABATA, D.D.S.
Balance Sheet
As of September 30
Assets
Cash ....................................
$12,133
Accounts receivable ..........6,950
Supplies .............................. 612
Equipment. .........................
17,280
Accum. depreciation—
equipment ....................... (288)
Total assets ................
$36,687
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Liabilities and Owners’ Equity
Accounts payable ....................
$13,680
Owner’s capital ...........................
23,007
Total liabilities and
owners’ equity ......................
$36,687
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-39
PROBLEM 3-1 (Continued)
(d)
YASUNARI KAWABATA, D.D.S.
Post-Closing Trial Balance
September 30
Debit
Credit
Cash ........................................................................
$12,133
Accounts Receivable .............................................6,950
Supplies .................................................................. 612
Equipment...............................................................
17,280
Accumulated Depreciation—Equipment ..............
Accounts Payable ..................................................
Owner’s Capital ......................................................
Totals ............................................................
$36,975
$ 288
13,680
23,007
$36,975
3-40Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-2
(a)
Dec. 31 Accounts Receivable ........................................................................
3,500
Service Revenue ........................................................................
3,500
31 Unearned Service Revenue ..............................................................
1,400
Service Revenue ........................................................................
1,400
31 Supplies Expense .............................................................................
5,400
Supplies ......................................................................................
5,400
31 Depreciation Expense .......................................................................
5,000
Accumulated Depreciation—
Equipment ...............................................................................
5,000
31 Interest Expense ...............................................................................
150
Interest Payable .........................................................................
150
31 Insurance Expense ...........................................................................
850
Prepaid Insurance ......................................................................
850
31 Salaries and Wages Expense ...........................................................
1,300
Salaries and Wages Payable .....................................................
1,300
(b)
MASON ADVERTISING AGENCY
Income Statement
For the Year Ended December 31, 2014
Revenues
Service revenue ......................................................
Expenses
Salaries and wages expense .................................
$11,300
Supplies expense ...................................................
5,400
Depreciation expense ............................................
5,000
Rent expense ..........................................................
4,000
Insurance expense .................................................
850
Interest expense .....................................................
500
Total expenses.................................................
Net income ........................................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$63,500
27,050
$36,450
(For Instructor Use Only) 3-41
PROBLEM 3-2 (Continued)
MASON ADVERTISING AGENCY
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained earnings, January 1 ............................................................
$ 3,500
Add: Net income.................................................................................
36,450
Retained earnings, December 31 .......................................................
$39,950
MASON ADVERTISING AGENCY
Balance Sheet
December 31, 2014
Assets
Cash ...................................................................................
$11,000
Accounts receivable .........................................................
23,500
Supplies.............................................................................
3,000
Prepaid insurance .............................................................
2,500
Equipment .........................................................................
$60,000
Less: Accumulated depreciation—equipment ..............33,000
27,000
Total assets ........................................................
$67,000
Liabilities and Stockholders’ Equity
Liabilities
Notes payable..........................................................
$ 5,000
Accounts payable ................................................... 5,000
Unearned service revenue ..................................... 5,600
Salaries and wages payable ................................... 1,300
Interest payable....................................................... 150
Total liabilities ..................................................
$17,050
Stockholders’ equity
Common stock ........................................................
$10,000
Retained earnings ...................................................39,950
49,950
Total liabilities and stockholders’
equity ............................................................
$67,000
(c) 1. Interest is $50 per month or 1% of the note payable. 1% X 12 = 12%
interest per year.
2. Salaries and Wages Expense, $11,300 less Salaries and Wages
Payable 12/31/14, $1,300 = $10,000. Total Payments, $12,500 –
$10,000 = $2,500 Salaries and Wages Payable 12/31/13.
3-42Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-3
1.
Dec. 31 Salaries and Wages Expense ...........................................................
2,120
Salaries and Wages Payable .....................................................
2,120
(5 X $700 X 2/5) = $1,400
(3 X $600 X 2/5) =
720
Total accrued salaries $2,120
2.
31 Unearned Rent Revenue ...................................................................
94,000
Rent Revenue .............................................................................
94,000
(5 X $6,000 X 2) =
$60,000
(4 X $8,500 X 1) =
34,000
Total rent recognized $94,000
3.
31 Advertising Expense .........................................................................
4,900
Prepaid Advertising ...................................................................
4,900
(A650 – $500 per month
for 8 months) = $4,000
(B974 – $300 per month
for 3 months) =
900
Total advertising expense $4,900
4.
31 Interest Expense ...............................................................................
4,200
Interest Payable
($60,000 X 12% X 7/12) ...........................................................
4,200
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-43
PROBLEM 3-4
(a) Nov. 30 Supplies Expense..............................................................................
4,000
Supplies ......................................................................................
4,000
30 Depreciation Expense .......................................................................
15,000
Accumulated Depreciation—
Equipment ..............................................................................
15,000
30 Interest Expense................................................................................
11,000
Interest Payable .........................................................................
11,000
3-44Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-4 (Continued)
(b)
BELLEMY FASHION CENTER
Adjusted Trial Balance
November 30, 2014
Dr.
Cash..............................................................................
$ 28,700
Accounts Receivable...................................................
33,700
Inventory ......................................................................
45,000
Supplies .......................................................................
1,500
Equipment ....................................................................
133,000
Accumulated Depr.— Equipment ..............................
Notes Payable ..............................................................
Accounts Payable ........................................................
Common Stock ............................................................
Retained Earnings .......................................................
Sales Revenue .............................................................
Sales Returns and Allowances ...................................
4,200
Cost of Goods Sold .....................................................
495,400
Salaries and Wages Expense .....................................
140,000
Advertising Expense ...................................................
26,400
Utilities Expenses ........................................................
14,000
Maintenance and Repairs Expense ............................
12,100
Delivery Expense .........................................................
16,700
Rent Expense ...............................................................
24,000
Supplies Expense ........................................................
4,000
Depreciation Expense .................................................
15,000
Interest Expense ..........................................................
11,000
Interest Payable ...........................................................
Totals ......................................................................
$1,004,700
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Cr.
$
39,000
51,000
48,500
90,000
8,000
757,200
11,000
$1,004,700
(For Instructor Use Only) 3-45
PROBLEM 3-4 (Continued)
(c)
BELLEMY FASHION CENTER
Income Statement
For the Year Ended November 30, 2014
Sales revenue
Sales .......................................................................
$757,200
Less: Sales returns and
allowances ..................................................
4,200
Net sales .................................................................
753,000
Cost of goods sold ...........................................................
495,400
Gross profit .......................................................................
257,600
Operating expenses
Selling expenses
Salaries and wages expense
($140,000 X 70%) .......................................
$98,000
Advertising expense .....................................
26,400
Rent expense
($24,000 X 80%) .........................................
19,200
Delivery expense ...........................................
16,700
Utilities expenses
($14,000 X 80%) ....................... 11,200
Depreciation Expense ...................................
15,000
Supplies expense ..........................................
4,000
Total selling expenses ...........................
$190,500
Administrative expenses
Salaries and wages expense
($140,000 X 30%) .......................................
42,000
Maintenance and Repairs
Expense ......................................................
12,100
Rent expense
($24,000 X 20%) .........................................
4,800
Utilities expenses
($14,000 X 20%) .........................................
2,800
Total admin. expenses ........................... 61,700
Total oper. expenses ........................
252,200
Income from operations..................................................
5,400
Other expenses and losses
Interest expense .....................................................
11,000
Net loss ............................................................................
($ 5,600)
3-46Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-4 (Continued)
BELLEMY FASHION CENTER
Retained Earnings Statement
For the Year Ended November 30, 2014
Retained earnings, December 1, 2013 ...............................................
$8,000
Less: Net loss .....................................................................................
5,600
Retained earnings, November 30, 2014 .............................................
$2,400
BELLEMY FASHION CENTER
Balance Sheet
November 30, 2014
Assets
Current assets
Cash ........................................................................
$28,700
Accounts receivable ..............................................
33,700
Inventory ................................................................
45,000
Supplies ..................................................................1,500
Total current assets ......................................
Property, plant, and equipment
Equipment ..............................................................
133,000
Accumulated depreciation—
equipment .....................................................
39,000
Total assets ...................................................
$108,900
94,000
$202,900
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable due next year .................................
$30,000
Accounts payable ..................................................
48,500
Interest payable .....................................................
11,000
Total current liabilities..................................
Long-term liabilities
Notes payable ........................................................
Total liabilities ...............................................
Stockholders’ equity
Common stock .......................................................
90,000
Retained earnings ..................................................2,400
Total liabilities and stockholders’
equity .........................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 89,500
21,000
110,500
92,400
$202,900
(For Instructor Use Only) 3-47
PROBLEM 3-4 (Continued)
(d) Nov. 30 Sales Revenue ...................................................................................
757,200
Income Summary .......................................................................
757,200
30 Income Summary ..............................................................................
762,800
Sales Returns and Allowances .................................................
4,200
Cost of Goods Sold....................................................................
495,400
Salaries and Wages Expense ....................................................
140,000
Advertising Expense ..................................................................
26,400
Utilities Expense ........................................................................
14,000
Maintenance and Repair Expense ............................................
12,100
Delivery Expense .......................................................................
16,700
Rent Expense .............................................................................
24,000
Supplies Expense ......................................................................
4,000
Depreciation Expense ................................................................
15,000
Interest Expense ........................................................................
11,000
30 Retained Earnings .............................................................................
5,600
Income Summary .......................................................................
5,600
(e)
BELLEMY FASHION CENTER
Post-Closing Trial Balance
November 30, 2014
Debit
Cash ..................................................................................
$ 28,700
Accounts Receivable .......................................................
33,700
Inventory ...........................................................................
45,000
Supplies ............................................................................
1,500
Equipment .........................................................................
133,000
Accumulated Depreciation—Equipment .........................
Notes Payable ...................................................................
Accounts Payable.............................................................
Interest Payable ................................................................
Common Stock .................................................................
Retained Earnings ............................................................
$241,900
3-48Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Credit
$ 39,000
51,000
48,500
11,000
90,000
2,400
$241,900
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-5
(a)
-1Depreciation Expense ..............................................
Accumulated Depreciation—Equipment
(1/16 X $168,000) ...........................................
-2Interest Expense........................................................
Interest Payable
($90,000 X 8% X 72/360) .................................
-3Admissions Revenue ................................................
Unearned Admissions Revenue
(2,000 X $30) ...................................................
10,500
10,500
1,440*
1,440*
60,000
60,000
-4Prepaid Advertising ..................................................
Advertising Expense..........................................
1,100
-5Salaries and Wages Expense ...................................
Salaries and Wages Payable .............................
4,700
(b) 1.
2.
3.
4.
1,100
4,700
Interest expense, $2,840 ($1,400 + $1,440).
Admissions revenue, $320,000 ($380,000 – $60,000).
Advertising expense, $12,580 ($13,680 – $1,100).
Salaries and wages expense, $62,300 ($57,600 + $4,700).
*Note to instructor: If 30-day months are assumed, interest expense =
$1,400 ($90,000 X 8% X 70/360).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-49
PROBLEM 3-6
(a)
-1Service Revenue ................................................................................
6,000
Unearned Service Revenue ....................................................... 6,000
-2Accounts Receivable .........................................................................
4,900
Service Revenue ......................................................................... 4,900
-3Bad Debt Expense .............................................................................
1,430
Allowance for Doubtful Accounts ............................................. 1,430
-4Insurance Expense ............................................................................
480
Prepaid Insurance ...................................................................... 480
-5Depreciation Expense .......................................................................
2,500
Accumulated Depreciation—Equipment
($25,000 X 0.10) ....................................................................... 2,500
-6Interest Expense ................................................................................
60
Interest Payable
($7,200 X 0.10 X 30/360)..........................................................
60
-7Prepaid Rent ......................................................................................
750
Rent Expense.............................................................................. 750
-8Salaries and Wages Expense............................................................
2,510
Salaries and Wages Payable ..................................................... 2,510
3-50Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-6 (Continued)
(b)
YORKIS PEREZ, CONSULTING ENGINEER
Income Statement
For the Year Ended December 31, 2014
Service revenue ($100,000 – $6,000 + $4,900) ...................
$98,900
Expenses
Salaries and wages expense
($30,500+$2,510) ......................................................
$33,010
Rent expense ($9,750 – $750) ..................................... 9,000
Depreciation expense.................................................. 2,500
Bad debt expense ........................................................ 1,430
Utilities expenses ........................................................ 1,080
Office expense ............................................................. 720
Insurance expense ...................................................... 480
Interest expense ..........................................................
60
Total expenses........................................................
48,280
Net income ...........................................................................
$50,620
YORKIS PEREZ, CONSULTING ENGINEER
Statement of Owners’ Capital
For the Year Ended December 31, 2014
Onwer’s Capital, January 1 ................................................................
$ 52,010a
Add: Net income .................................................................................
50,620
Less: Withdrawals ..............................................................................
(17,000)
Owner’s capital, December 31 ...........................................................
$ 85,630
Owner’s capital—trial balance ..............................
Withdrawals during the year .................................
Owner’s capital, as of January 1, 2014 ..................
(a)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 35,010
17,000
$ 52,010
(For Instructor Use Only) 3-51
PROBLEM 3-6 (Continued)
YORKIS PEREZ, CONSULTING ENGINEER
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ....................................................................
$29,500
Accounts receivable
($49,600 + $4,900) ...........................................
$54,500
Less: Allowance for
doubtful accounts ...................................
2,180* 52,320
Supplies ..............................................................
1,960
Prepaid insurance
($1,100 – $480) ................................................620
Prepaid rent ........................................................750
Total current assets .....................................
$ 85,150
Equipment..................................................................
25,000
Less: Accumulated depreciation ............................
8,750**
16,250
Total assets ..................................................
$101,400
Liabilities and owners’ equity
Current liabilities
Notes payable ....................................................
$7,200
Unearned service revenue ................................
6,000
Salaries and wages payable .............................
2,510
Interest payable ................................................. 60
Owner’s Capital
($35,010 + $50,620) ...............................................
Total liabilities and
owners’ equity .........................................
$ 15,770
85,630
$101,400
*($750 + $1,430)
**($6,250 + $2,500)
3-52Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-7
(a)
Sep. 30 Accounts Receivable .........................................................................
600
Service Revenue .........................................................................
600
30 Rent Expense .....................................................................................
900
Prepaid Rent ...............................................................................
900
30 Supplies Expense ..............................................................................
1,020
Supplies ......................................................................................
1,020
30 Depreciation Expense .......................................................................
350
Accumulated Depreciation—Equipment ...................................
350
30 Interest Expense ................................................................................
50
Interest Payable ..........................................................................
50
30 Unearned Rent Revenue ...................................................................
200
Rent Revenue .............................................................................
200
30 Salaries and Wages Expense............................................................
600
Salaries and Wages Payable .....................................................
600
(b)
ROLLING HILLS GOLF INC.
Income Statement
For the Quarter Ended September 30, 2014
Revenues
Service revenue ............................................................
$14,700
Rent revenue ................................................................ 900
Total revenue .........................................................
Expenses
Salaries and wages expense .......................................
$9,400
Rent expense ................................................................1,800
Supplies expense .........................................................1,020
Utilities expenses ......................................................... 470
Depreciation expense .................................................. 350
Interest expense ........................................................... 50
Total expenses ........................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$15,600
13,090
(For Instructor Use Only) 3-53
Net income ............................................................................
3-54Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 2,510
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-7 (Continued)
ROLLING HILLS GOLF INC.
Retained Earnings Statement
For the Quarter Ended September 30, 2014
Retained earnings, July 1, 2014 .........................................................
$
0
Add: Net income ..................................................................................2,510
Less: Dividends ................................................................................... 600
Retained earnings, September 30, 2014 ............................................
$1,910
ROLLING HILLS GOLF INC.
Balance Sheet
September 30, 2014
Assets
Current assets
Cash ....................................................................
$ 6,700
Accounts receivable ..........................................
1,000
Supplies.............................................................. 180
Prepaid rent expense......................................... 900
Total current assets ....................................
Equipment .................................................................
15,000
Less: Accumulated depreciation ............................ 350
Total assets .................................................
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ....................................................
$ 5,000
Accounts payable ..............................................
1,070
Unearned rent revenue...................................... 800
Salaries and wages payable ............................. 600
Interest payable ................................................. 50
Stockholders’ Equity
Common stock .........................................................
14,000
Retained earnings ....................................................
1,910
Total stockholders’ equity
Total liabilities and
stockholders’ equity .................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 8,780
14,650
$23,430
$ 7,520
15,910
$23,430
(For Instructor Use Only) 3-55
PROBLEM 3-7 (Continued)
(c) The following accounts would be closed: Service Revenue, Rent Revenue,
Salaries and Wages Expense, Rent Expense, Utilities Expenses,
Depreciation Expense, Supplies Expense, Interest Expense, Dividends.
(d) Interest of 12% per year equals a monthly rate of 1%; monthly interest
is $50 ($5,000 X 1%). Since total interest expense is $50, the note has
been outstanding one month.
3-56Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-8
(a)
Dec. 31 Accounts Receivable .........................................................................
3,500
Service Revenue .........................................................................
3,500
31 Supplies Expense ..............................................................................
2,900
Supplies ......................................................................................
2,900
31 Insurance Expense ............................................................................
1,560
Prepaid Insurance ......................................................................
1,560
31 Depreciation Expense .......................................................................
5,000
Accumulated Depreciation—Equipment ...................................
5,000
31 Interest Expense ................................................................................
560
Interest Payable ..........................................................................
560
31 Unearned Service Revenue ...............................................................
1,900
Service Revenue .........................................................................
1,900
31 Salaries and Wages Expense............................................................
820
Salaries and Wages Payable .....................................................
820
(b)
VEDULA ADVERTISING AGENCY
Income Statement
For the Year Ended December 31, 2014
Revenues
Service revenue ............................................................
$63,000
Expenses
Salaries and wages expense .......................................
$9,820
Depreciation expense ..................................................
5,000
Rent expense ................................................................
4,350
Supplies expense .........................................................
2,900
Insurance expense .......................................................
1,560
Interest expense ........................................................... 560
Total expenses ........................................................
24,190
Net income ............................................................................
$38,810
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-57
PROBLEM 3-8 (Continued)
VEDULA ADVERTISING AGENCY
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1...........................................................
$ 5,500
Add: Net income................................................................................
38,810
Less: Dividends.................................................................................
10,000
Retained earnings, December 31 .....................................................
$34,310
VEDULA ADVERTISING AGENCY
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ....................................................................
$11,000
Accounts receivable ..........................................
19,500
Supplies ..............................................................
6,500
Prepaid insurance ..............................................
1,790
Total current assets ....................................
Equipment .................................................................
60,000
Less: Accumulated depreciation .............................
30,000
Total assets .................................................
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ...........................................................
$ 8,000
Accounts payable .....................................................
2,000
Unearned service revenue .......................................
3,100
Salaries and wages payable ....................................820
Interest payable ........................................................560
Stockholders’ Equity
Common stock .........................................................
20,000
Retained earnings ....................................................
34,310
Total stockholders’ equity .................................
Total liabilities and
stockholders’ equity ................................
3-58Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$38,790
30,000
$68,790
$ 14,480
54,310
$68,790
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-8 (Continued)
(c) Service Revenue, Salaries and Wages Expense, Depreciation Expense,
Rent Expense, Supplies Expense, Insurance Expense, Interest Expense,
Dividends.
(d) Interest is $56 per month or 0.7% of the note payable ($56 ÷ $8,000).
0.7% X 12 = 8.4% interest per year.
(e) Salaries and Wages Expense, $9,820, less Salaries and Wages Payable
12/31/14, $820 = $9,000. Total payments, $10,500 – $9,000 = $1,500
Salaries and Wages Payable 12/31/13.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-59
PROBLEM 3-9
(a), (b), (d)
Bal.
Cash
15,000
Prepaid Insurance
9,000 Adj.
3,500
5,500
Bal.
Salaries and Wages Expense
Bal.
80,000 Close 83,600
Adj.
3,600
83,600
83,600
Common Stock
Bal.
400,000
Accounts Receivable
Bal.
13,000
Retained Earnings
Bal.
82,000
Inc.
31,640
113,640
Allow. for Doubtful Accts.
Bal. 1,100
Adj.
460
1,560
Dues Revenue
8,900 Bal.
200,000
191,100
200,000
200,000
Adj.
Cls.
Bal.
Land
350,000
Green Fees Revenue
Close
5,900 Bal.
5,900
Bal.
Buildings
120,000
Rent Revenue
19,200 Bal.
Adj.
19,200
Accum. Depr.—Buildings
Bal. 38,400
Adj. 4,000
42,400
Rent Receivable
Adj.
$1,600
Maintenance and Repairs
Expense
Bal.
24,000 Close 24,000
Depr. Expense
4,000 Close 19,000
15,000
19,000
Adj.
Adj.
Bal.
Equipment
150,000
17,600
1,600
19,200
Accum. Depr.—Equipment
Bal.
70,000
Adj.
15,000
85,000
Bal.
Utilities Expenses
54,000 Close 54,000
Insurance Expense
Adj.
3,500 Close
3,500
Adj.
Bad Debt Expense
460 Close
Close
3-60Copyright © 2013 John Wiley & Sons, Inc.
460
Exp.
Inc.
Income Summary
184,560
216,200
31,640
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
216,200
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
216,200
(For Instructor Use Only) 3-61
PROBLEM 3-9 (Continued)
Salaries and Wages
Payable
Adj. 3,600
(b)
Unearned Dues Revenue
Adj.
8,900
-1Depreciation Expense .......................................................................
4,000
Accumulated Depreciation—Buildings
(1/30 X $120,000) .................................................................... 4,000
-2Depreciation Expense .......................................................................
15,000
Accumulated Depreciation—Equipment
(10% X $150,000) ....................................................................15,000
-3Insurance Expense............................................................................
3,500
Prepaid Insurance ...................................................................... 3,500
-4Rent Receivable ................................................................................
1,600
Rent Revenue
(1/11 X $17,600) ...................................................................... 1,600
-5Bad Debt Expense .............................................................................
460
Allowance for Doubtful Accounts
[($13,000 X 12%) – $1,100] .....................................................
460
-6Salaries and Wages Expense ...........................................................
3,600
Salaries and Wages Payable ..................................................... 3,600
-7Dues Revenue ...................................................................................
8,900
Unearned Dues Revenue ........................................................... 8,900
3-62Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-9 (Continued)
(c)
CRESTWOOD GOLF CLUB, INC.
Adjusted Trial Balance
December 31, XXXX
Dr.
Cash ..............................................................................
$ 15,000
Accounts Receivable ...................................................
13,000
Allowance for Doubtful Accounts...............................
Prepaid Insurance ........................................................
5,500
Land ..............................................................................
350,000
Buildings ......................................................................
120,000
Accum. Depreciation—Buildings................................
Equipment ....................................................................
150,000
Accum. Depreciation—Equipment .............................
Salaries and Wages Payable .......................................
Common Stock ............................................................
Retained Earnings .......................................................
Dues Revenue ..............................................................
Green Fees Revenue ...................................................
Rent Revenue ...............................................................
Utilities Expenses ........................................................
54,000
Salaries and Wages Expense......................................
83,600
Maintenance and Repairs Expense ............................
24,000
Bad Debt Expense .......................................................460
Unearned Dues Revenue .............................................
Rent Receivable ...........................................................
1,600
Depreciation Expense .................................................
19,000
Insurance Expense ......................................................
3,500
Totals ..................................................................
$839,660
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Cr.
$
1,560
42,400
85,000
3,600
400,000
82,000
191,100
5,900
19,200
8,900
$839,660
(For Instructor Use Only) 3-63
PROBLEM 3-9 (Continued)
(d)
-Dec. 31Dues Revenue ...................................................................................
191,100
Green Fees Revenue .........................................................................
5,900
Rent Revenue ....................................................................................
19,200
Income Summary .......................................................................
216,200
-31Income Summary ..............................................................................
184,560
Utilities Expenses ......................................................................54,000
Bad Debt Expense ..................................................................... 460
Salaries and Wages Expense ....................................................83,600
Maintenance and Repairs Expense ..........................................24,000
Depreciation Expense................................................................19,000
Insurance Expense .................................................................... 3,500
-31Income Summary ..............................................................................
31,640
Retained Earnings .....................................................................31,640
3-64Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-10
(a), (b), (c)
Bal.
Cash
18,500
Bal.
Inventory
80,000
Accounts Receivable
Bal.
32,000
Bal.
Equipment
84,000
Allow. for Doubtful Accts.
Bal.
700
Adj.
1,400
2,100
Accum. Depr.—Equipment
Bal.
35,000
Adj.
12,000
47,000
Prepaid Insurance
Bal.
5,100 Adj. 2,550
2,550
Notes Payable
Bal.
28,000
Adj.
Common Stock
Bal. 80,600
Sales Revenue
600,000 Bal.
600,000
Insurance Expense
Adj.
2,550 Cls.
2,550
Salaries and Wages
Expense (Sales)
Bal.
50,000 Cls. 52,400
Adj.
2,400
52,400
52,400
Cls.
Advertising Expense
Bal.
6,700 Adj.
700
Cls.
6,000
6,700
6,700
Bad Debt Expense
Adj.
1,400 Cls. 1,400
Bal.
Interest Payable
Adj. 3,360
Adj.
Adj.
Supplies
1,500
Retained Earnings
Bal. 10,000
Inc. 45,790
Bal. 55,790
Supplies Expense
5,000 Adj.
1,500
Cls.
3,500
5,000
5,000
Depr. Exp.
12,000 Cls.
12,000
Interest Expense
3,360 Cls.
3,360
Salaries and Wages Expense
(Administrative)
Adj.
65,000 Cls.
65,000
Prepaid Advertising
Adj.
700
Exp.
Inc.
Income Summary
554,210 Sales 600,000
45,790
600,000
600,000
Salaries and Wages Payable
Adj.
2,400
Cost of Goods Sold
Bal.
408,000 Cls.
408,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-65
PROBLEM 3-10 (Continued)
(b)
-1Bad Debt Expense .............................................................................
1,400
Allowance for Doubtful Accounts ............................................. 1,400
-2Depreciation Expense ($84,000 ÷ 7) .................................................
12,000
Accumulated Depreciation—Equipment ..................................12,000
-3Insurance Expense............................................................................
2,550
Prepaid Insurance ...................................................................... 2,550
-4Interest Expense ...............................................................................
3,360
Interest Payable ......................................................................... 3,360
-5Salaries and Wages Expense (Sales) ..............................................
2,400
Salaries and Wages Payable ..................................................... 2,400
-6Prepaid Advertising ..........................................................................
700
Advertising Expense.................................................................. 700
-7Supplies .............................................................................................
1,500
Supplies Expense ...................................................................... 1,500
3-66Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 3-10 (Continued)
(c)
Dec. 31
Sales Revenue ...................................................................................
600,000
Income Summary .......................................................................
600,000
Dec. 31
Income Summary ..............................................................................
554,210
Cost of Goods Sold....................................................................
408,000
Advertising Expense .................................................................. 6,000
Salaries and Wages Expense (Admin.).....................................65,000
Salaries and Wages Expense (Sales) .......................................52,400
Supplies Expense ...................................................................... 3,500
Insurance Expense .................................................................... 2,550
Bad Debt Expense...................................................................... 1,400
Depreciation Expense ................................................................12,000
Interest Expense ........................................................................ 3,360
Dec. 31
Income Summary ..............................................................................
45,790
Retained Earnings......................................................................45,790
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-67
*PROBLEM 3-11
(a)
ARKANSAS SALES AND SERVICE
Income Statement
For the Month Ended January 31, 2014
(1)
(2)
Cash Basis
Accrual Basis
Revenues..................................................................
$ 75,000
$98,400*
Expenses
Cost of computers & printers:
Purchased and paid ................................
82,500**
Cost of goods sold ..................................
Salaries and wages .......................................
9,600
Rent ................................................................
6,000
Other operating expenses ............................
8,400
Total expenses ......................................
106,500
Net income (loss) .....................................................
$(31,500)
59,500***
12,600
2,000
10,400
84,500
$13,900
*($2,550 X 30) + ($3,600 X 4) + ($500 X 15)
**($1,500 X 40) + ($2,500 X 6) + ($300 X 25)
***($1,500 X 30) + ($2,500 X 4) + ($300 X 15)
3-68Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
*PROBLEM 3-11 (Continued)
(b)
ARKANSAS SALES AND SERVICE
Balance Sheet
As of January 31, 2014
(1)
Cash Basis
Assets
Cash ...............................................................
$58,500a
Accounts receivable ......................................
Inventory ........................................................
Prepaid rent ...................................................
Total assets ..............................................
$58,500
Liabilities and owners’ Equity
Salaries and wages payable .........................
Accounts payable ..........................................
Owner’s capital ..............................................
$58,500c
Total liabilities and owner’s
equity .....................................................
$58,500
a
Original investment
Cash sales
Cash purchases
Rent paid
Salaries paid
Other operating expenses
Cash balance Jan. 31
b
c
(2)
Accrual
Basis
$ 58,500a
23,400
23,000b
4,000
$108,900
$
3,000
2,000
103,900d
$108,900
$ 90,000
75,000
(82,500)
(6,000)
(9,600)
(8,400)
$ 58,500
(10 @ $1,500) + (2 @ $2,500) + (10 @ $300).
Initial investment minus net loss: $90,000 – $31,500.
d
Initial investment plus net income: $90,000 + $13,900.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-69
*PROBLEM 3-11 (Continued)
(c)
1.
The $23,400 in receivables from customers is an asset and a future
cash flow resulting from sales that is ignored. The cash basis
understates the amount of revenues and inflow of assets in
January from the sale of computers and printers by $23,400.
2.
The cost of computers and printers sold in January is overstated
by $23,000. The unsold computers and printers are an asset of
$23,000 in the form of inventory.
3.
The cash basis ignores $3,000 of the salaries that have been
earned by the employees in January and will be paid in February.
4.
Rent expense on the cash basis is overstated by $4,000. This
prepayment is an asset in the form of two months’ future right to
the use of office, showroom, and repair space and should appear
on the balance sheet.
5.
Other operating expenses on a cash basis are understated by
$2,000 as is the liability for the unpaid portion of these expenses
incurred in January.
3-70Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
(d)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(f)
6,000
(e)
59,200
3,000
506,500
5,800
14,400
28,000
506,500
3,000
6,000
2,000
280,500
14,600
700
50,000
107,700
42,000
Cr.
226,000
3,000
6,000
2,000
14,600
700
50,000
107,700
42,000
33,500
259,500
259,500
14,000
80,000
120,000
3,900
4,200
Cr.
259,500
280,500
Dr.
37,400
33,500
280,500
280,500
Cr.
Balance Sheet
280,500
247,000
5,800
14,400
28,000
12,000
21,000
16,900
30,500
9,400
109,000
Dr.
Income Statement
Key: (a) Expired Insurance; (b) Supplies Used; (c) Depreciation Expensed; (d) Service Revenue Recognized; (e)
Accrued Property
Taxes; (f) Accrued Interest Payable.
59,200
5,800
14,400
(c)
28,000
(a)
(b)
12,000
(f)
6,000
6,000
21,000
18,000
491,700
16,900
(e)
16,900
491,700
2,000
14,000
30,500
9,400
(d)
5,800
30,500
9,400
3,000
2,000
(c)
109,000
2,000
278,500
14,600
2,700
50,000
107,700
80,000
120,000
109,000
14,000
80,000
120,000
3,900
4,200
28,000
(a)
14,400
(b)
31,900
Dr.
18,600
Cr.
Adjusted Trial Balance
37,400
36,200
Adjustments
Dr.
Worksheet
COOKE COMPANY
For the Year Ended September 30, 2014
37,400
Cr.
Trial Balance
Dr.
(a)
*PROBLEM 3-12
(For Instructor Use Only) 3-71
3-72Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Totals
Net Income
Totals
Prop. Taxes Payable
Depreciation Expense
Interest Payable
Supplies Expense
Insurance Expense
Totals
Interest Expense
Prop. Tax Expense
Utilities Expenses
Accounts Payable
Unearned Service Rev.
Mortgage Payable
Common Stock
Dividends
Retained Earnings
Service Revenue
Sal. and Wages Exp.
Maintenance and
Repairs Expense
Advertising Expense
Accum. Depr.-Equip.
Land
Equipment
Prepaid Insurance
Supplies
Cash
Account Titles
*PROBLEM 3-12 (Continued)
(b)
COOKE COMPANY
Balance Sheet
September 30, 2014
Assets
Current assets
Cash ........................................................................
$37,400
Supplies .................................................................. 4,200
Prepaid insurance .................................................. 3,900
Total current assets ......................................
$ 45,500
Property, plant, and equipment
Land ........................................................................80,000
Equipment ..............................................................
$120,000
Less: Accum. depreciation –
equipment .............................................................
42,000
78,000 158,000
Total assets ...................................................
$203,500
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ..................................................
$14,600
Current maturity of long-term debt .......................10,000
Interest payable .................................................
6,000
Property taxes payable .......................................... 3,000
Unearned service revenue ..................................... 700
Total current liabilities ..................................
$ 34,300
Long-term liabilities
Mortgage payable ...................................................
40,000
Total liabilities ...............................................
74,300
Stockholders’ equity
Common stock
107,700
Retained earnings
($2,000 + $33,500 – $14,000) ................................21,500
129,200
Total liabilities and owners’ equity ..............
$203,500
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-73
*PROBLEM 3-12 (Continued)
(c) Sep. 30 Insurance Expense............................................................................
28,000
Prepaid Insurance ......................................................................
28,000
30 Supplies Expense..............................................................................
14,400
Supplies ......................................................................................
14,400
30 Depreciation Expense .......................................................................
5,800
Accum. Depreciation—
Equipment ...............................................................................
5,800
30 Unearned Service Revenue ..............................................................
2,000
Service Revenue ........................................................................
2,000
30 Property Tax Expense .......................................................................
3,000
Property Taxes Payable .............................................................
3,000
30 Interest Expense ...............................................................................
6,000
Interest Payable .........................................................................
6,000
(d) Sep. 30 Service Revenue ...............................................................................
280,500
Income Summary .......................................................................
280,500
30 Income Summary ..............................................................................
247,000
Salaries and Wages Expense ....................................................
109,000
Maintenance and Repairs
Expense ...................................................................................
30,500
Insurance Expense ....................................................................
28,000
Property Tax Expense ...............................................................
21,000
Supplies Expense ......................................................................
14,400
Utilities Expenses ......................................................................
16,900
Interest Expense ........................................................................
12,000
Advertising Expense..................................................................
9,400
Depreciation Expense................................................................
5,800
30 Income Summary ..............................................................................
33,500
Retained Earnings......................................................................
33,500
30 Retained Earnings .............................................................................
14,000
Dividends ....................................................................................
14,000
3-74Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-75
*PROBLEM 3-12 (Continued)
(e)
COOKE COMPANY
Post-Closing Trial Balance
September 30, 2014
Debit
Cash ..................................................................................
$ 37,400
Supplies ............................................................................
4,200
Prepaid Insurance ............................................................
3,900
Land...................................................................................
80,000
Equipment .........................................................................
120,000
Accumulated Depreciation – Equipment ........................
Accounts Payable.............................................................
Unearned Service Revenue .............................................
Interest Payable ................................................................
Property Tax Payable .......................................................
Mortgage Payable .............................................................
Common Stock .................................................................
Retained Earnings ............................................................
$245,500
3-76Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Credit
$ 42,000
14,600
700
6,000
3,000
50,000
107,700
21,500
$245,500
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL REPORTING PROBLEM
(a)
June 30, 2011 total assets: $138,354 million.
June 30, 2010 total assets: $128,172 million.
(b)
June 30, 2011 cash and cash equivalents: $2,768 million.
(c)
2011 research and development costs: $2,001 million.
2010 research and development costs: $1,950 million.
(d)
2011 net sales: $82,559 million.
2010 net sales: $78,938 million.
(e)
An adjusting entry for deferrals is necessary when the receipt/disbursement precedes the recognition in the financial statements. Accounts
such as prepaid insurance and prepaid rent may be included in the
Prepaid Expenses and Other Current Assets ($4,408 million at June 30,
2011). Both of these accounts would require an adjusting entry to
recognize the proper amount of expense incurred during the period.
In addition, depreciation expense is an adjusting entry related to a
deferral.
An adjusting entry for an accrual is necessary when recognition in the
financial statements precedes the cash receipt/disbursement, such as
interest or taxes payable. Other adjusting entries probably made by
P&G include interest revenue and expense and interest receivable and
interest payable. P&G reports $9,290 million of Accrued and Other
Liabilities at June 30, 2011.
(f)
2011 Depreciation and amortization expense: $2,838 million
2010 Depreciation and amortization expense: $3,108 million
2009 Depreciation and amortization expense: $3,082 million
(From the Statement of Cash Flows)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-77
COMPARATIVE ANALYSIS CASE
(a)
The Coca-Cola Company percentage increase is computed as follows:
Total assets (December 31, 2011) ....................................................
$79,974
Total assets (December 31, 2010) ....................................................
72,921
Difference ..........................................................................................
$ 7,053
$7,053 ÷ $72,921 = 9.7%
PepsiCo, Inc.’s percentage increase is computed as follows:
Total assets (December 29, 2011) ....................................................
$72,882
Total assets (December 30, 2010) ....................................................
68,153
Difference ..........................................................................................
$ 4,729
$4,729 ÷ $68,153 = $6.9%
Coca-Cola Company had the larger increase.
(b)
5-Year Growth Rate
Net sales
Income from continuing
operations
(c)
The Coca-Cola Company
12.69%
PepsiCo, Inc.
13.92%
9.41%
3.30%
The Coca-Cola Company had depreciation and amortization expense
of $1,954 million; PepsiCo, Inc. had depreciation and amortization
expense of $2,737 million.
3-78Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
COMPARATIVE ANALYSIS CASE (Continued)
PepsiCo has substantially more property, plant, and equipment than
does Coca-Cola. PepsiCo is engaged in three different types of
businesses: soft drinks, snack-food, and juices. As a result, it has more
tangible fixed assets. PepsiCo also has substantially more amortizable
intangible assets. Amortizable intangible assets for Coke and Pepsi
increase the amount of amortization expense recorded in income. The
amount of property, plant, and equipment and amortizable intangible
assets reported for these two companies is as follows: (000,000)
The Coca-Cola Company
Property, plant, and
equipment (net)
Amortizable intangible
assets (net)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
PepsiCo, Inc.
$ 14,939
$19,698
1,250
$16,189
1,888
$21,586
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-79
FINANCIAL STATEMENT ANALYSIS
2011
2010
2009
%
Change
2011
$13,198
$12,397
$12,575
6.46%
-1.42%
(a)
Sales
(b)
%
Change
2010
Gross Profit %
41.28%
42.66%
42.87%
-3.23%
-0.49%
Operating Profit
1,976
1,990
2,001
-0.70%
-0.55%
Net Cash Flow less
Capital Expenditures
1,001
534
1,266
87.45%
-57.82%
Net Earnings
1,231
1,247
1,212
-1.28%
2.89%
Kellogg experienced an improvement in sales in the current year
which followed a decline in the previous year. The gross-profit
percentage decreased slightly after a flat change in the prior year.
This coincides with a flat operating profit but a solid increase in cash
flows, compared to prior years, suggest it faces a challenging period
and might be starting to recover. This may bode well for the strength
and flexibility of its business model.
3-80Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
Depreciation Expense .......................................................................
9,500
Accumulated Depreciation—Equipment .................................. 9,500
($9,500 = ($192,000 – $40,000) ÷ 16)
Interest Expense................................................................................
8,250
Interest Payable ......................................................................... 8,250
$8,250 = ($90,000 X 0.10) X 11/12)
Unearned Service Revenue ..............................................................
10,000
Service Revenue ........................................................................10,000
($10,000 = ($50 X 200))
Advertising Expense .........................................................................
2,500
Prepaid Advertising ................................................................... 2,500
Salaries and Wages Expense ...........................................................
3,500
Salaries and Wages Payable ..................................................... 3,500
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-81
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Analysis
Service revenue
Less:
Depreciation expense
Advertising expense
Salaries and wages
expense
Interest expense
Net income
Income before
Adjustments
$360,000
Adjustments
$10,000
Income after
Adjustments
$370,000
(18,680)
(9,500)
(2,500)
(9,500)
(21,180)
(3,500)
(8,250)
(71,100)
(9,650)
$258,570
(67,600)
(1,400)
$272,320
Without recording the adjusting entries, Amato’s income is overstated.
In addition, without the adjustments, Amato’s current liabilities and
current assets are misstated, which could affect evaluation of Amato's
liquidity.
Principles
The tradeoffs are between the timeliness of the reports, which
contributes to relevance, and verifiability, the lack of which detracts
from faithful representation. That is, by preparing reports more
frequently, the company provides more timely information, which can
make a difference to a statement reader who needs to make a decision.
However, preparing statements more frequently requires more subjective
estimates, which reduces faithful representation.
3-82Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL RESEARCH
(a) The three essential characteristics of assets.
Search String: asset and characteristics.
CON6, Par26. An asset has three essential characteristics: (a) it
embodies a probable future benefit that involves a capacity, singly or in
combination with other assets, to contribute directly or indirectly to
future net cash inflows, (b) a particular entity can obtain the benefit and
control others’ access to it, and (c) the transaction or other event giving
rise to the entity’s right to or control of the benefit has already occurred.
(b) Three essential characteristics of liabilities.
Search String: liability and characteristic.
CON6, Par36. A liability has three essential characteristics: (a) it
embodies a present duty or responsibility to one or more other entities
that entails settlement by probable future transfer or use of assets at a
specified or determinable date, on occurrence of a specified event, or
on demand, (b) the duty or responsibility obligates a particular entity,
leaving it little or no discretion to avoid the future sacrifice, and (c) the
transaction or other event obligating the entity has already happened.
(c) Uncertainty, and its effects on financial statements.
Search Strings: “uncertainty”, effect of uncertainty.
CON6, Par44. Uncertainty about economic and business activities and
results is pervasive, and it often clouds whether a particular item
qualifies as an asset or a liability of a particular entity at the time the
definitions are applied. The presence or absence of future economic
benefit that can be obtained and controlled by the entity or of the
entity’s legal, equitable, or constructive obligation to sacrifice assets in
the future can often be discerned reliably only with hindsight. As a
result, some items that with hindsight actually qualified as assets or
liabilities of the entity under the definitions may, as a practical matter,
have been recognized as expenses, losses, revenues, or gains or
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-83
PROFESSIONAL RESEARCH (Continued)
remained unrecognized in its financial statements because of uncertainty
about whether they qualified as assets or liabilities of the entity or
because of recognition and measurement considerations stemming
from uncertainty at the time of assessment. Conversely, some items that
with hindsight did not qualify under the definitions may have been
included as assets or liabilities because of judgments made in the face
of uncertainty at the time of assessment.
CON6, Par45. An effect of uncertainty is to increase the costs of financial reporting in general and the costs of recognition and measurement
in particular. Some items that qualify as assets or liabilities under the
definitions may therefore be recognized as expenses, losses, revenues,
or gains or remain unrecognized as a result of cost and benefit analyses
indicating that their formal incorporation in financial statements is not
useful enough to justify the time and effort needed to do it. It may be
possible, for example, to make the information more reliable in the face
of uncertainty by exerting greater effort or by spending more money,
but it also may not be worth the added cost.
Note to instructors: The FASB codification does not contain the
Concepts Statements. However, the Concepts Statements can be
accessed at another link on the FASB website.
(d) The difference between realization and recognition
Search String: realization, recognition.
CON6, Par143. Realization in the most precise sense means the
process of converting noncash resources and rights into money and is
most precisely used in accounting and financial reporting to refer to
sales of assets for cash or claims to cash. The related terms realized
and unrealized therefore identify revenues or gains or losses on assets
sold and unsold, respectively. Those are the meanings of realization
and related terms in the Board’s conceptual framework. Recognition is
the process of formally recording or incorporating an item in the
financial statements of an entity. Thus, an asset, liability, revenue,
expense, gain, or loss may be recognized (recorded) or unrecognized
(unrecorded). Realization and recognition are not used as synonyms,
as they sometimes are in accounting and financial literature.
3-84Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL SIMULATION
Journal Entries
Depreciation Expense ........................................................................
7,000
Accumulated Depreciation—Equipment ...................................7,000
Unearned Advertising Revenue ........................................................
1,400
Advertising Revenue ..................................................................1,400
Accounts Receivable .........................................................................
1,500
Advertising Revenue ..................................................................1,500
Supplies Expense (Art) ......................................................................
3,400
Supplies.......................................................................................3,400
Salaries and Wages Expense ............................................................
1,300
Salaries and Wages Payable ......................................................1,300
Financial Statements
BUTLER ADVERTISING AGENCY
Income Statement
For the Year Ended December 31, 2014
Revenues
Advertising revenue .....................................................
$61,500
Expenses
Salaries and wages expense .......................................
$11,300
Depreciation expense ..................................................7,000
Rent expense ................................................................4,000
Supplies expense .........................................................3,400
Total expenses ........................................................
25,700
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-85
Net income ............................................................................
3-86Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$35,800
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL SIMULATION (Continued)
BUTLER ADVERTISING AGENCY
Balance Sheet
December 31, 2014
Assets
Cash ...........................................................................
Accounts receivable .................................................
Supplies .....................................................................
Equipment .................................................................
60,000
Less: Accumulated depreciation ............................
(35,000)
Total assets ........................................................
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable .....................................................
$5,000
Unearned advertising revenue ................................
5,600
Salaries and wages payable ....................................
1,300
Stockholders’ Equity
Common stock .........................................................
10,000
Retained earnings ....................................................
40,600
Total stockholders’ equity
Total liabilities and
stockholders’ equity .................................
$11,000
21,500
5,000
25,000
$62,500
$11,900
50,600
$62,500
Explanation
After the financial statements are prepared, Butler must prepare the closing
entries and post the journal entries to the general ledger. Then, a postclosing trial balance is prepared. Some companies may also prepare and
post reversing entries.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-87
IFRS CONCEPTS AND APPLICATION
IFRS3-1
The date of transition is the beginning of the earliest period for which full
comparative IFRS information is provided. The date of reporting is the closing
balance sheet date for the first IFRS financial statements.
IFRS3-2
When countries accept IFRS for use as accepted accounting policies,
companies need guidance to ensure that their first IFRS financial statements
contain high quality information. Specifically, IFRS 1 requires that information
in a company’s first IFRS statements (1) be transparent, (2) provide a suitable
starting point, and (3) have a cost that does not exceed the benefits.
IFRS3-3
A company follows these steps:
1. Identify the timing of its first IFRS statements.
2. Prepare an opening balance sheet at the date of transition to IFRS.
3. Select accounting principles that comply with IFRS, and apply these
principles retrospectively.
4. Make extensive disclosures to explain the transition to IFRS
IFRS3-4
The date of the opening balance sheet is January 1, 2014. The IFRS financial
statements will include years ended December 31, 2015 and 2014.
IFRS3-5
(a)
Assets
53
The future economic benefit embodied in an asset is the potential
to contribute, directly or indirectly, to the flow of cash and cash
equivalents to the entity. The potential may be a productive one
that is part of the operating activities of the entity. It may also
take the form of convertibility into cash or cash equivalents or a
capability to reduce cash outflows, such as when an alternative
manufacturing process lowers the costs of production.
3-88Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS3-5 (Continued)
54
An entity usually employs its assets to produce goods or services
capable of satisfying the wants or needs of customers; because
these goods or services can satisfy these wants or needs,
customers are prepared to pay for them and hence contribute to
the cash flow of the entity. Cash itself renders a service to the
entity because of its command over other resources.
55
The future economic benefits embodied in an asset may flow to
the entity in a number of ways. For example, an asset may be:
a. used singly or in combination with other assets in the
production of goods or services to be sold by the entity;
b. exchanged for other assets;
c. used to settle a liability; or
d. distributed to the owners of the entity.
(b)
Liabilities
60
An essential characteristic of a liability is that the entity has a
present obligation. An obligation is a duty or responsibility to act
or perform in a certain way. Obligations may be legally enforceable as a consequence of a binding contract or statutory requirement. This is normally the case, for example, with amounts
payable for goods and services received. Obligations also arise,
however, from normal business practice, custom and a desire to
maintain good business relations or act in an equitable manner.
If, for example, an entity decides as a matter of policy to rectify
faults in its products even when these become apparent after
the warranty period has expired, the amounts that are expected
to be expended in respect of goods already sold are liabilities.
61
A distinction needs to be drawn between a present obligation
and a future commitment. A decision by the management of an
entity to acquire assets in the future does not, of itself, give rise
to a present obligation. An obligation normally arises only when
the asset is delivered or the entity enters into an irrevocable
agreement to acquire the asset. In the latter case, the irrevocable
nature of the agreement means that the economic consequences
of failing to honour the obligation, for example, because of the
existence of a substantial penalty, leave the entity with little, if any,
discretion to avoid the outflow of resources to another party.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-89
IFRS3-5 (continued)
62
The settlement of a present obligation usually involves the entity
giving up resources embodying economic benefits in order to
satisfy the claim of the other party. Settlement of a present
obligation may occur in a number of ways, for example, by:
a.
b.
c.
d.
e.
(c)
payment of cash;
transfer of other assets;
provision of services;
replacement of that obligation with another obligation; or
conversion of the obligation to equity.
Accrual basis
22
In order to meet their objectives, financial statements are prepared
on the accrual basis of accounting. Under this basis, the effects of
transactions and other events are recognised when they occur
(and not as cash or its equivalent is received or paid) and they
are recorded in the accounting records and reported in the
financial statements of the periods to which they relate. Financial
statements prepared on the accrual basis inform users not only
of past transactions involving the payment and receipt of cash
but also of obligations to pay cash in the future and of resources
that represent cash to be received in the future. Hence, they
provide the type of information about past transactions and
other events that is most useful to users in making economic
decisions.
IFRS3-6
(a)
March 31, 2012 total assets: £7,273.3 million.
April 2, 2011 total assets: £7,344.1 million.
(b)
March 31, 2012 cash and cash equivalents: £196.10 million.
(c)
2012 selling and marketing expense: £3,021.9 million.
2011 selling and marketing expense: £2,959.7 million.
(d)
2012 revenue: £9,934.3 million.
3-90Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
2011 revenue: £9,740.3 million.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 3-91
IFRS3-6 (Continued)
(e)
An adjusting entry for deferrals is necessary when the receipt/disbursement precedes the recognition in the financial statements. Accounts
such as prepaid pension contributions and prepaid leasehold premiums
are included in the Trade and other receivables section. Both of these
accounts would require an adjusting entry to recognize the proper
amount of expense incurred during the period. In addition,
depreciation expense is an adjusting entry related to a deferral.
An adjusting entry for an accrual is necessary when recognition in the
financial statements precedes the cash receipt/disbursement, such as
interest or taxes payable. Other adjusting entries probably made by
M&S include finance income and finance costs and bank and other
interest receivable and interest payable.
(f)
2012 Depreciation and amortization expense: £479.70 million
2011 Depreciation and amortization expense: £467.50 million
3-92Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CHAPTER 4
Income Statement and Related Information
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
1.
Income measurement
concepts.
1, 2, 3, 4, 5,
6, 7, 8, 9, 10,
18, 22, 23, 30,
33, 34, 35
2.
Computation of net
income from balance
sheets and selected
accounts.
3.
Single-step income
statements; earnings
per share.
4.
Brief
Exercises
Exercises
Problems
2, 3, 4, 6
1
1, 2, 3, 8
11, 19,
25, 26
1, 2, 8
4, 5, 7, 8,
10, 11, 13,
17
2, 3, 4, 5
Multiple-step income
statements.
12, 17,
19, 20
3, 4
5, 6, 7, 9
1, 4
5.
Extraordinary items;
accounting changes;
discontinued
operations; prior
period adjustments;
errors.
13, 14, 15,
16, 22, 29,
31, 37
4, 5, 6, 7
6, 8, 10, 11,
13, 14
3, 5, 6, 7
6.
Retained earnings
statement.
32
9, 10, 11
9, 12,
16, 17
1, 2, 4, 5, 6
7.
Intraperiod tax
allocation.
21, 24, 27,
28, 29
9, 11, 13,
14, 17
3, 5, 7
8.
Comprehensive
income.
36
9.
Disposal of a
component (discontinued operations).
31, 37
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Concepts
for Analysis
11
15, 16, 17
1, 5
1, 2, 4, 5, 6
7
1, 3, 6, 7
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
4-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1.
Understand the uses and
limitations
of an income statement.
1, 2, 6, 7,
9
2.
Describe the content and
format of the income
statement.
5, 8, 10
4, 5
1, 2, 3, 4, 5,
6, 7
3.
Prepare an income
statement.
8, 11, 12,
19, 20, 17
1, 2, 3, 4, 5
4, 5, 6, 7, 8,
9, 11, 15,
17
1, 2, 3, 4, 5,
7
CA4-6
4.
Explain how to report
various income items.
3, 4, 13,
21, 22, 23,
24, 27, 28,
29, 30, 31,
33, 17
4, 5
2, 3, 6, 8, 9,
11, 17
1, 3, 4,
5, 6, 7
CA4-4
5.
Identify where to report
earnings per share
information.
25, 26
8
6, 7, 8, 9,
10, 11, 13,
14, 17
1, 2, 3, 4,
5, 7
CA4-4
6.
Understand the reporting of
accounting changes, and
errors.
14, 15, 16,
18
6, 7, 10
14
4, 5, 6, 7
CA4-2
7.
Prepare a retained earnings
statement.
32
9, 10
9, 12, 16,
17
1, 2, 4, 5, 6
CA4-6
8.
Explain how to report other
comprehensive income.
34, 35, 36,
37
11
15, 16, 17
4-2Copyright © 2013 John Wiley & Sons, Inc.
CA4-1,
CA4-2,
CA4-3
Kieso, Intermediate Accounting, 15/e, Solutions Manual
CA4-5,
CA4-6
CA4-7
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE
Level of
Difficulty
Time
(minutes)
Simple
Simple
Simple
Moderate
Simple
Moderate
Moderate
Simple
Simple
Simple
Moderate
18–20
10–15
25–35
20–25
30–35
30–35
30–40
15–20
30–35
20–25
20–25
E4-12
E4-13
E4-14
E4-15
E4-16
E4-17
Computation of net income.
Compute income measures.
Income statement items.
Single-step income statement.
Multiple-step and single-step.
Multiple-step and extraordinary items.
Multiple-step and single-step.
Income statement, EPS.
Multiple-step statement with retained earnings.
Earnings per share.
Condensed income statement—periodic inventory
method.
Retained earnings statement.
Earnings per share.
Change in accounting principle.
Comprehensive income.
Comprehensive income.
Various reporting formats.
Simple
Moderate
Moderate
Simple
Moderate
Moderate
20–25
15–20
15–20
15–20
15–20
30–35
P4-1
P4-2
P4-3
P4-4
P4-5
P4-6
P4-7
Multiple-step income, retained earnings.
Single-step income, retained earnings, periodic inventory.
Irregular items.
Multiple- and single-step income, retained earnings.
Irregular items.
Retained earnings statement, prior period adjustment.
Income statement, irregular items.
Moderate
Simple
Moderate
Moderate
Moderate
Moderate
Moderate
30–35
25–30
30–40
45–55
20–25
25–35
25–35
CA4-1
CA4-2
CA4-3
CA4-4
CA4-5
CA4-6
CA4-7
Identification of income statement deficiencies.
Earnings management.
Earnings management.
Income reporting items.
Identification of income statement weaknesses.
Classification of income statement items.
Comprehensive income.
Simple
Moderate
Simple
Moderate
Moderate
Moderate
Simple
20–25
20–25
15–20
30–35
30–40
20–25
10–15
Item
Description
E4-1
E4-2
E4-3
E4-4
E4-5
E4-6
E4-7
E4-8
E4-9
E4-10
E4-11
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
4-3
SOLUTIONS TO CODIFICATION EXERCISES
CE4-1
According to the Glossary:
(a) A change in accounting estimate is a change that has the effect of adjusting the carrying amount
of an existing asset or liability or altering the subsequent accounting for existing or future assets or
liabilities. Changes in accounting estimates result from new information. Examples of items for
which estimates are necessary are uncollectible receivables, inventory obsolescence, service lives
and salvage value of depreciable assets, and warranty obligations. A change in accounting estimate
is a necessary consequence of the assessment, in conjunction with the periodic presentation of
financial statements, of the present status and expected future benefits and obligations associated
with assets and liabilities.
(b) A change in accounting principle reflects a change from one generally accepted accounting
principle to another generally accepted accounting principle when there are two or more generally
accepted accounting principles that apply or when the accounting principle formerly used is no
longer generally accepted. A change in the method of applying an accounting principle also is
considered a change in accounting principle. A “Change in Accounting Estimate Effected by a
Change in Accounting Principle” is a change in accounting estimate that is inseparable from the
effect of a related change in accounting principle. An example of a change in estimate effected by
a change in principle is a change in the method of depreciation, amortization, or depletion for longlived, nonfinancial assets.
(c) Comprehensive Income is defined as the change in equity (net assets) of a business during a
period from transactions and other events and circumstances from nonowner sources. It includes
all changes in equity during a period except those resulting from investments by owners and
distributions to owners.
CE4-2
The master glossary provides the term “Unusual Nature”, a link from which yields the following:
Glossary Term Usage
The glossary term is used in the following locations.
Unusual Nature
•
225 Income Statement > 20 Extraordinary and Unusual Items > 45 Other Presentation
– 225 Income Statement > 20 Extraordinary and Unusual Items > 45 Other Presentation >
General, paragraph 45-2.
Following this link yields the following paragraph:
45-2 Extraordinary items are events and transactions that are distinguished by their unusual nature
and by the infrequency of their occurrence. Thus, both of the following criteria shall be met to
classify an event or transaction as an extraordinary item:
a.
Unusual nature. The underlying event or transaction should possess a high degree of
abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary
4-4Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
and typical activities of the entity, taking into account the environment in which the entity
operates (see paragraph 225-20-55-1).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
4-5
CE4-2 (Continued)
b.
Infrequency of occurrence. The underlying event or transaction should be of a type that
would not reasonably be expected to recur in the foreseeable future, taking into account the
environment in which the entity operates (see paragraph 225-20-55-2).
Thus, “unusual nature” is one of the criterion that determines whether an item meets the
definition of an extraordinary item.
CE4-3
Entering “extraordinary item” and “interim” into the search window, yields the following guidance (FASB
ASC 225-20-50-4):
Interim Reporting
50-4 As indicated in paragraph FASB ASC 270-10-50-5, extraordinary items shall be disclosed
separately and included in the determination of net income for the interim period in which they
occur. In determining materiality, extraordinary items shall be related to the estimated income for
the full fiscal year. Effects of disposals of a component of an entity and unusual and infrequently
occurring transactions and events that are material with respect to the operating results of the
interim period but that are not designated as extraordinary items in the interim statements shall
be reported separately. In addition, matters such as unusual seasonal results and business
combinations shall be disclosed to provide information needed for a proper understanding of
interim financial reports. Extraordinary items, gains or losses from disposal of a component of an
entity, and unusual or infrequently occurring items shall not be pro-rated over the balance of the
fiscal year.
CE4-4
Entering “effect of preferred stock” in the search window yields the following link (FASB ASC 260-10S55): 260 Earnings per Share > 10 Overall > S55 Implementation Guidance and Illustrations.
General
Effect of Preferred Stock Dividends and Accretion of Carrying Amount of Preferred Stock on Earnings
Per Share S55-1 See paragraph 225-10-S99-5, SAB . . . views on this topic.
Following that link yields the following guidance:
Income or Loss Applicable to Common Stock
S99-5 The following is the text of SAB Topic 6.B, Accounting Series Release 280—General Revision Of
Regulation S-X: Income Or Loss Applicable To Common Stock.
Facts: A registrant has various classes of preferred stock. Dividends on those preferred stocks
and accretions of their carrying amounts cause income applicable to common stock to be less
than reported net income.
Question: In ASR 280, the Commission stated that although it had determined not to mandate
presentation of income or loss applicable to common stock in all cases, it believes that disclo-
4-6Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
sure of that amount is of value in certain situations. In what situations should the amount be
reported, where should it be reported, and how should it be computed?
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
4-7
CE4-4 (Continued)
Interpretive Response: Income or loss applicable to common stock should be reported on the
face of the income statement (FN1) when it is materially different in quantitative terms from
reported net income or loss (FN2) or when it is indicative of significant trends or other qualitative
considerations. The amount to be reported should be computed for each period as net income
or loss less: (a) dividends on preferred stock, including undeclared or unpaid dividends if
cumulative; and (b) periodic increases in the carrying amounts of instruments reported as
redeemable preferred stock (as discussed in Topic 3.C) or increasing rate preferred stock (as
discussed in Topic 5.Q).
(FN1) If a registrant elects to follow the encouraged disclosure discussed in paragraph 23 of
Statement 130, and displays the components of other comprehensive income and the total for
comprehensive income using a one-statement approach, the registrant must continue to follow
the guidance set forth in the SAB Topic. One approach may be to provide a separate
reconciliation of net income to income available to common stock below comprehensive income
reported on a statement of income and comprehensive income.
(FN2) The assessment of materiality is the responsibility of each registrant. However, absent
concerns about trends or other qualitative considerations, the staff generally will not insist on the
reporting of income or loss applicable to common stock if the amount differs from net income or
loss by less than ten percent.
4-8Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ANSWERS TO QUESTIONS
1. The income statement is important because it provides investors and creditors with information
that helps them predict the amount, timing, and uncertainty of future cash flows. It helps investors
and creditors predict future cash flows in a number of different ways. First, investors and creditors can
use the information on the income statement to evaluate the past performance of the company.
Second, the income statement helps users of the financial statements to determine the risk (level of
uncertainty) of income—revenues, expenses, gains, and losses—and highlights the relationship
among these various components.
It should be emphasized that the income statement is used by parties other than investors and
creditors. For example, customers can use the income statement to determine a company’s ability
to provide needed goods or services, unions examine earnings closely as a basis for salary discussions, and the government uses the income statements of companies as a basis for formulating
tax and economic policy.
2. Information on past transactions can be used to identify important trends that, if continued, provide
information about future performance. If a reasonable correlation exists between past and future
performance, predictions about future earnings and cash flows can be made. For example, a loan
analyst can develop a prediction of future performance by estimating the rate of growth of past
income over the past several periods and project this into the next period. Additional information
about current economic and industry factors can be used to adjust the trend rate based on
historical information.
3. Some situations in which changes in value are not recorded in income are:
(a) Unrealized gains or losses on available-for-sale investments,
(b) Changes in the fair values of long-term liabilities, such as bonds payable,
(c) Changes (increases) in value of property, plant and equipment, such as land, natural resources,
or equipment,
(d) Changes (increases) in the values of intangible assets such as customer goodwill, brand value,
or intellectual capital.
Note that some of these omissions arise because the items (e.g., brand value) are not recognized
in financial statements, while others (value of land) are recorded in financial statements but measurement is at historical cost.
4. Some situations in which application of different accounting methods or estimates lead to comparison
problems include:
(a) Inventory methods—LIFO vs. FIFO,
(b) Depreciation Methods—straight-line vs. accelerated,
(c) Accounting for long-term contracts—percentage-of-completion vs. completed-contract,
(d) Estimates of useful lives or salvage values for depreciable assets,
(e) Estimates of bad debts,
(f) Estimates of warranty costs.
5. The transaction approach focuses on the activities that have occurred during a given period and
instead of presenting only a net change, a description of the components that comprise the change
is included. In the capital maintenance approach, only the net change (income) is reflected whereas
the transaction approach not only provides the net change (income) but the components of income
(revenues and expenses). The final net income figure should be the same under either approach
given the same valuation base.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
4-9
Questions Chapter 4 (Continued)
6. Earnings management is often defined as the planned timing of revenues, expenses, gains and
losses to smooth out bumps in earnings. In most cases, earnings management is used to increase
income in the current year at the expense of income in future years. For example, companies
prematurely recognize sales in order to boost earnings. Earnings management can also be used
to decrease current earnings in order to increase income in the future. The classic case is the use
of “cookie jar” reserves, which are established by using unrealistic assumptions to estimate liabilities
for such items as loan losses, restructuring charges and warranty returns.
7. Earnings management has a negative effect on the quality of earnings if it distorts the information
in a way that is less useful for predicting future cash flows. Within the Conceptual Framework,
useful information is both relevant and representationally faithful. However, earnings management
reduces the reliability of income, because the income measure is biased (up or down) and/or the
reported income is not representationally faithful to that which it is supposed to report (e.g., volatile
earnings are made to look more smooth).
8. Caution should be exercised because many assumptions and estimates are made in accounting
and the net income figure is a reflection of these assumptions. If for any reason the assumptions are
not well-founded, distortions will appear in the income reported. The objectives of the application
of generally accepted accounting principles to the income statement are to measure and report the
results of operations as they occur for a specified period without recognizing any artificial exclusions
or modifications.
9. The term “quality of earnings” refers to the credibility of the earnings number reported. Companies
that use aggressive accounting policies report higher income numbers in the short-run. In such
cases, we say that the quality of earnings is low. Similarly, if higher expenses are recorded in the
current period, in order to report higher income in the future, then the quality of earnings is also
considered low.
10. The major distinction between revenues and gains (or expenses and losses) depends on the
typical activities of the company. Revenues can occur from a variety of different sources, but these
sources constitute the entity’s ongoing major or central operations. Gains also can arise from
many different sources, but these sources occur from peripheral or incidental transactions of an
entity. The same type of distinction is made between expenses and losses.
11. The advantages of the single-step income statement are: (1) simplicity and conciseness, (2) probably
better understood by the layperson, (3) emphasis on total costs and expenses, and net income,
and (4) does not imply priority of one revenue or expense over another. The disadvantages are that
it does not show the relationship between sales revenue and cost of goods sold and it does not
show other important relationships and information, such as income from operations, income before
income tax, etc.
12. Operating items are the expenses and revenues which relate directly to the principal activity of the
concern; they are revenues realized from, or expenses which contribute to, the sale of goods or
services for which the company was organized. The nonoperating items result from secondary
activities of the company. They are not directly related to the principal activity of the company but
arise from incidental activities.
13. The current operating performance income statement contains only the revenues and usual
expenses of the current year, with all unusual gains or losses or material corrections of prior periods’
revenues and expenses appearing in the retained earnings statement. The modified all-inclusive
income statement includes most items including irregular ones, as part of net income. The retained
earnings statement then would include only the beginning balance (adjusted for the effects of errors
4-10Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
and changes in accounting principle), the net amount transferred from income summary, dividends,
and transfers to and from appropriated retained earnings.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-11
Questions Chapter 4 (Continued)
GAAP recommends a modified all-inclusive income statement, excluding from the income statement
only those items, few in number, which meet the criteria for prior period adjustments and which
would thus appear as adjustments to the beginning balance in the retained earnings statement. Subsequently a number of pronouncements have reinforced this position. Recently, changes in accounting
principle are also adjusted through the beginning retained earnings balance.
14. Items considered corrections of errors should be charged or credited to the opening balance of
retained earnings.
15. (a) This might be shown in the income statement as an extraordinary item if it is a material,
unusual, and infrequent gain realized during the year. However, in general and in accordance
with FASB ASC 225-20 this transaction would normally not be considered extraordinary, but
would be shown in the nonoperating section of a multiple-step income statement. If unusual or
infrequent but not both, it should be separately disclosed in the income statement.
(b) The bonus should be shown as an operating expense in the income statement. Although the
basis of computation is a percentage of net income, it is an ordinary operating expense to the
company and represents a cost of the service received from employees.
(c) If the amount is immaterial, it may be combined with the depreciation expense for the year
and included as a part of the depreciation expense appearing in the income statement. If the
amount is material, it should be shown in the retained earnings statement as an adjustment to
the beginning balance of retained earnings.
(d) This should be shown in the income statement. One treatment would be to show it in the
statement as a deduction from the rent expense, as it reduces an operating expense and
therefore is directly related to operations. Another treatment is to show it in the other
revenues and gains section of the income statement.
(e) Assuming that a provision for the loss had not been made at the time the patent infringement
suit was instituted, the loss should be recognized in the current period in computing net
income. It may be reported as an unusual loss.
(f) This should be reported in the income statement, but not as an extraordinary item because it
relates to usual business operations of the firm.
16. (a) The remaining book value of the equipment should be depreciated over the remainder of the
five-year period. The additional depreciation ($425,000) is not a correction of an error and is not
shown as an adjustment to retained earnings. The change is considered a change in estimate.
(b) The loss should be shown as an extraordinary item, assuming that it is unusual and infrequent.
(c) The write-off should be shown either as other expenses and losses or in a separate section,
appropriately labeled as an unusual item, if unusual or infrequent but not both. It should not
be shown as an extraordinary item.
(d) Assuming that a receivable had not been recorded in the previous period, the gain should be
recognized in the current period in computing net income, but not as an extraordinary item.
(e) A correction of an error should be considered a prior period adjustment and the beginning
balance of Retained Earnings should be restated, if material.
(f) The cumulative effect of the change is reported as an adjustment to beginning retained
earnings. Prior years’ statements are recast on a basis consistent with the new standard.
17. (a) Other expenses and losses section or in a separate section, appropriately labeled as an
unusual item, if unusual or infrequent but not both.
(b) Operating expense section or other expenses and losses section or in a separate section,
appropriately labeled as an unusual item, if unusual or infrequent but not both. FASB ASC
225-20 specifically states that the effect of a strike does not constitute an extraordinary item.
(c) Operating expense section, as a selling expense, but sometimes reflected as an administrative
expense.
(d) Separate section after income from continuing operations, entitled discontinued operations.
4-12Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 4 (Continued)
(e) Other revenues and gains section or in a separate section, appropriately labeled as an
unusual item, if unusual or infrequent but not both.
(f) Other revenues and gains section.
(g) Operating expense section, normally administrative. If a manufacturing concern, may be included
in cost of goods sold.
(h) Other expenses and losses section or in separate section, appropriately labeled as an
unusual item, if unusual or infrequent but not both.
18. Perlman and Sheehan should not report the sales in a similar manner. This type of transaction
appears to be typical of Perlman’s central operations. Therefore, Perlman should report revenues of
$160,000 and expenses of $100,000 ($70,000 + $30,000). However, Sheehan’s transaction appears
to be a peripheral or incidental activity not related to its central operations. Thus, Sheehan should
report a gain of $60,000 ($160,000 – $100,000). Note that although the classification is different, the
effect on net income is the same ($60,000 increase).
19. You should tell Greg that a company’s reported net income is the same whether the single-step or
multiple-step format is used. Either way, the company has the same revenues, gains, expenses,
and losses; they are simply organized in a different format.
20. Both formats are acceptable. The amount of detail reported in the income statement is left to the
judgment of the company, whose goal in making this decision should be to present financial
statements which are most useful to decision makers. We want to present a simple, understandable statement so that a reader can easily discover the facts of importance; therefore, a single
amount for selling expenses might be preferable. However, we also want to fully disclose the
results of all activities; thus, a separate listing of expenses may be preferred. Note that if the
condensed version is used, it should be accompanied by a supporting schedule of the eight
components in the notes to the financial statements.
21. Intraperiod tax allocation should not affect the reporting of an unusual gain. The FASB specifically
prohibits a “net-of-tax” treatment for such items to insure that users of financial statements can
easily differentiate extraordinary items from material items that are unusual or infrequent, but not
both. “Net-of-tax” treatment is reserved for discontinued operations, extraordinary items, and prior
period adjustments.
22. (a) A loss on discontinued operations is reported net of tax in the income statement between
income from continuing operations and net income.
(b) Noncontrolling interest allocation is reported in the income statement after the net income,
(c) Earnings per share are shown in the income statement after the noncontrolling interest
allocation.
(d) A gain on sale of equipment in shown under other revenues and gains in the income
statement.
23. Lebron presents the income information as follows:
Net income
Less: Net income attributed to
the noncontrolling interest
Net income attributable to Lebron
Company
$ 124,700
30,000
$ 94,700
24. Intraperiod tax allocation has no effect on reported net income, although it does affect the amounts
reported for various components of income. The effects on these components offset each other so
net income remains the same. Intraperiod tax allocation merely takes the total income tax expense
and allocates it to the various items which affect the tax amount.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-13
Questions Chapter 4 (Continued)
25. If Neumann has preferred stock outstanding, the numerator in its computation may be incorrect.
A better description of “earnings per share” is “earnings per common share.” The numerator should
include only the earnings available to common shareholders. Therefore, the numerator should be:
net income less preferred dividends.
The denominator is also incorrect if Neumann had any common stock transactions during the year.
Since the numerator represents the results for the entire year, the denominator should reflect the
weighted-average number of common shares outstanding during the year, not the shares
outstanding at one point in time (year-end).
26. The earnings per share trend is not favorable. Extraordinary items are one-time occurrences which
are not expected to be reported in the future. Therefore, earnings per share on income before
extraordinary items is more useful because it represents the results of ordinary business activity.
Considering this EPS amount, EPS has decreased from $7.21 to $6.40.
27. Tax allocation within a period is the practice of allocating the income tax for a period to such items
as income before extraordinary items, extraordinary items, and prior period adjustments.
The justification for tax allocation within a period is to produce financial statements which disclose
an appropriate relationship, for example, between income tax expense and (a) income before
extraordinary items, (b) extraordinary items, and (c) prior period adjustments (or of the opening
balance of retained earnings).
28. Tax allocation within a period (intraperiod) becomes necessary when a firm encounters such items
as discontinued operations, extraordinary items, or corrections of errors. Such allocation is necessary to bring about an appropriate relationship between income tax expense and income from
continuing operations, discontinued operations, income before extraordinary items, extraordinary
items, etc.
Tax allocation within a period is handled by first computing the tax expense attributable to income
before extraordinary items, assuming no discontinued operations. This is simply computed by
ascertaining the income tax expense related to revenue and expense transactions entering into the
determination of such income. Next, the remaining income tax expense attributable to other items is
determined by the tax consequences of transactions involving these items. The applicable tax effect
of these items (extraordinary, prior period adjustments) should be disclosed separately because of
their materiality.
29.
LISELOTTE COMPANY
Partial Income Statement
For the Year Ended December 31, 2014
Income before tax and extraordinary item ....................................
Income tax ...................................................................................
Income before extraordinary item ................................................
Extraordinary item—gain on sale of plant (condemnation) ...........
Less: Applicable income tax ................................................
Net income ..................................................................................
$1,500,000
510,000
990,000
$450,000
135,000
315,000
$1,305,000
30. The damages would probably be reported in Frazier Corporation’s financial statements in the other
expenses and losses section. If the damages are unusual in nature, the damage settlement might be
reported as an unusual item. The damages would not be reported as a correction of an error (prior
period adjustment).
4-14Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 4 (Continued)
31. The assets, cash flows, results of operations, and activities of the plants closed would not appear to
be clearly distinguishable, operationally or for financial reporting purposes, from the assets, results of
operations, or activities of the Linus Paper Company. Therefore, disposal of these assets is not
considered to be a disposal of a component of a business that would receive special reporting.
32. The major items reported in the retained earnings statement are: (1) adjustments of the beginning
balance for corrections of errors or changes in accounting principle, (2) the net income or loss for
the period, (3) dividends for the year, and (4) restrictions (appropriations) of retained earnings. It
should be noted that the retained earnings statement is sometimes composed of two parts,
unappropriated and appropriated.
33. Generally accepted accounting principles are ordinarily concerned only with a “fair presentation” of
business income. In contrast, taxable income is a statutory concept which defines the base for
raising tax revenues by the government, and any method of accounting which meets the statutory
definition will “clearly reflect” taxable income as defined by the Internal Revenue Code. It should
be noted that the Code prohibits use of the cash receipts and disbursements method as a method
which will clearly reflect income in accounting for purchases and sales if inventories are involved.
The cash receipts and disbursements method will not usually fairly present income because:
(1) The completed transaction, not receipt or disbursement of cash, increases or diminishes
income. Thus, a sale on account produces revenue and increases income, and the incurrence
of expense reduces income without regard to the time of payment of cash.
(2) The expense recognition principle generally results in costs being matched against related
revenues produced. In most situations the cash receipts and disbursements method will violate
this principle.
(3) Consistency requires that accountable events receive the same accounting treatment from
accounting period to accounting period. The cash receipts and disbursements method permits
manipulation of the timing of revenues and expenses and may result in treatments which are
not consistent, detracting from the usefulness of comparative statements.
34. Problems arise both from the revenue side and from the expense side. There sometimes may be
doubt as to the amount of revenue under our common rules of revenue recognition. However, the
more difficult problem is the determination of costs expired in the production of revenue. During
a single fiscal period it often is difficult to determine the expiration of certain costs which may
benefit several periods. Business is continuous and estimates have to be made of the future if we
are to systematically apportion costs to fiscal periods. Examples of items which present serious
obstacles include such items as institutional advertising costs.
Accountants have established certain rules for handling revenues and costs which are applied consistently and in a systematic manner. From period to period, application of these rules generally
results in a satisfactory matching of costs and revenues unless there are large changes from one
period to another. These rules, influenced by conservatism in the face of the uncertainties involved,
tend to charge costs to expense earlier than might be ideally desirable if we had more knowledge
of the future.
Costs or expenses of the types mentioned above, by their very nature, defy any attempt to relate
them to revenues of a specific period or periods. Although it is known that institutional advertising
will yield benefits beyond the present, both the amount of such benefits and when they will be
enjoyed are shrouded in uncertainty. The degree of certainty with which their time distribution can
be forecast is so small and the results, therefore, so unreliable that the accountant writes them off
as applicable to the period or periods in which the expense was incurred.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-15
Questions Chapter 4 (Continued)
35. Elements are the basic ingredients which comprise the income statement; that is, revenues, gains,
expenses, and losses. Items are descriptions of the elements such as rent revenue, rent expense, etc.
In order to predict the future, the amounts of individual items may have to be reported. For example,
if “income from continuing operations” is significantly lower this year and is reported as a single
amount, users would not know whether to attribute the decrease to a temporary increase in an
expense item (for example, an unusually large bad debt), a structural change (for example, a
change in the relationship between variable and fixed expenses), or some other factor. Another
example is income data that are distorted because of large discretionary expenses.
36. Other comprehensive income must be displayed (reported) in one of two ways: (1) a single
continuous income statement or (2) two separate but consecutive statements of net income and
other comprehensive income (two statement approach).
37. The results of continuing operations should be reported separately from discontinued operations,
and any gain or loss from disposal of a component of a business should be reported with the
related results of discontinued operations and not as an extraordinary item. The following format
illustrates the proper disclosure:
Income from continuing operations before income tax ...............................
Income tax.................................................................................................
Income from continuing operations ............................................................
Discontinued operations
Gain (loss) on disposal of Division X
less applicable income taxes of $– ......................................................
Net income ................................................................................................
4-16Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$XXX
XXX
XXX
XXX
$XXX
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 4-1
STARR CO.
Income Statement
For the Year 2014
Revenues
Sales revenue..........................................................
$540,000
Expenses
Cost of goods sold ................................................. $330,000
Salaries and wages expense.................................. 120,000
Other operating expenses ...................................... 10,000
Income tax expense ................................................ 25,000
Total expenses ...............................................
485,000
Net income .........................................................................
$ 55,000
Earnings per share ............................................................
$0.55*
*$55,000 ÷ 100,000 shares.
Note: The increase in value of the company reputation and the unrealized
gain on the value of patents are not reported.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-17
BRIEF EXERCISE 4-2
BRISKY CORPORATION
Income Statement
For the Year Ended December 31, 2014
Revenues
Net sales .................................................................
Interest revenue .....................................................
Total revenues ................................................
$2,400,000
31,000
2,431,000
Expenses
Cost of goods sold.................................................
$1,450,000
Selling expenses ....................................................280,000
Administrative expenses .......................................212,000
Interest expense..................................................... 45,000
Income tax expense*..............................................133,200
Total expenses ..............................................
2,120,200
Net income .......................................................................
$ 310,800
Earnings per share** ........................................................
$4.44
*($2,431,000 – $1,450,000 – $280,000 – $212,000 – $45,000) X 30% = $133,200.
**$310,800 ÷ 70,000 shares.
4-18Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 4-3
BRISKY CORPORATION
Income Statement
For the Year Ended December 31, 2014
Net sales .................................................................
Cost of goods sold .................................................
Gross profit ..................................................
Selling expenses ....................................................
Administrative expenses .......................................
Income from operations.........................................
Other revenue and gains
Interest revenue ...........................................
Other expenses and losses
Interest expense ..........................................
Income before income tax .....................................
Income tax expense ...............................................
Net income ..............................................................
$2,400,000
1,450,000
950,000
$280,000
212,000
492,000
458,000
31,000
45,000
Earnings per share .................................................
14,000
444,000
133,200
$ 310,800
$4.44*
*$310,800 ÷ 70,000 shares.
BRIEF EXERCISE 4-4
Income from continuing operations ..........................
Discontinued operations
Loss from operation of discontinued
restaurant division (net of tax) ......................$315,000
Loss from disposal of restaurant
division (net of tax) ........................................ 189,000
Net income ...................................................................
Earnings per share ......................................................
Income from continuing operations .................
Discontinued operations, net of tax .................
Net income..........................................................
$10,600,000
504,000
$10,096,000
$1.06
(0.05)*
$1.01
*Rounded
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-19
BRIEF EXERCISE 4-5
Income before income tax and extraordinary
item ..........................................................................
Income tax expense ...................................................
Income before extraordinary item .............................
Extraordinary item—loss from casualty ...................
Less: Applicable income tax ............................
Net income ..................................................................
Earnings per share
Income before extraordinary item ....................
Extraordinary loss, net of tax ...........................
Net income .........................................................
$6,300,000
1,890,000
4,410,000
$770,000
231,000
539,000
$3,871,000
$0.88*
(0.11)*
$0.77
*Rounded
BRIEF EXERCISE 4-6
Income before income tax
Income tax (30%)
Net Income
2014
$180,000
54,000
$126,000
2013
$145,000
43,500
$101,500
2012
$170,000
51,000
$119,000
BRIEF EXERCISE 4-7
Vandross would not report any cumulative effect because a change in estimate
is not handled retrospectively. Vandross would report bad debt expense of
$120,000 in 2014.
BRIEF EXERCISE 4-8
$1,000,000 – $250,000
190,000
= $3.95 per share
4-20Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 4-9
PORTMAN CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ...........................................
Add: Net income..............................................................
Less: Cash dividends ......................................................
Retained earnings, December 31 .....................................
$ 675,000
1,400,000
2,075,000
75,000
$2,000,000
BRIEF EXERCISE 4-10
PORTMAN CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1, as reported ........................
Correction for overstatement of expenses in
prior period (net of tax) .............................................
Retained earnings, January 1, as adjusted ........................
Add: Net income.................................................................
Less: Cash dividends .........................................................
Retained earnings, December 31 ........................................
$ 675,000
80,000
755,000
1,400,000
2,155,000
75,000
$2,080,000
BRIEF EXERCISE 4-11
(a)
Net income (Dividend revenue) .............................
$3,000
(b)
Net income..............................................................
Unrealized holding gain (net of tax) ......................
Comprehensive income .........................................
$3,000
4,000
$7,000
(c)
Unrealized holding gain (net of tax)
(Other comprehensive income) .............................
$4,000
(d)
Accumulated other comprehensive income,
January 1, 2014 ..................................................
Unrealized holding gain (net of tax) ......................
Accumulated other comprehensive income,
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$
0
4,000
(For Instructor Use Only) 4-21
December 31, 2014 .............................................
4-22Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$4,000
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO EXERCISES
EXERCISE 4-1 (18–20 minutes)
Computation of net income
Change in assets:
$79,000 + $45,000 + $127,000 – $47,000 = $204,000 Increase
Change in liabilities:
$ 82,000 – $51,000 = 31,000 Increase
Change in stockholders’ equity:
Change in stockholders’ equity accounted
for as follows:
Net increase
Increase in common stock
Increase in paid-in capital in excess
of par
Decrease in retained earnings due to
dividend declaration
Net increase accounted for
Increase in retained earnings due to net
income
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$173,000 Increase
$ 173,000
$125,000
13,000
(19,000)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(119,000)
$ 54,000
(For Instructor Use Only) 4-23
EXERCISE 4-2 (10–15 minutes)
Sales revenue .........................................................................
Cost of goods sold .................................................................
Gross profit .............................................................................
Selling administrative expenses ...........................................
$310,000
140,000
170,000
50,000
120,000
Other revenues and gains
Gain on sale of plant assets .........................................
Income from operations .........................................................
Interest expense .....................................................................
Income from continuing operations ......................................
Loss on discontinued operations .........................................
Net Income ..............................................................................
Allocation to noncontrolling interest ....................................
30,000
150,000(a)
6,000
144,000
(12,000)
132,000(b)
(40,000)
Net income attributable to controlling shareholders ...........
$ 92,000(c)
Net income ..............................................................................
$132,000
Unrealized gain on available-for-sale investments ..............
10,000
Comprehensive income .........................................................
$142,000(d)
Net income ..............................................................................
$132,000
Dividends ................................................................................
(5,000)
12/31/14 Retained earnings ...................................................
$127,000(e)
4-24Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 4-3 (25–35 minutes)
(a) Total net revenue:
Sales revenue
Less: Sales discounts
Sales returns
Net sales
Dividend revenue
Rent revenue
Total net revenue
$390,000
$ 7,800
12,400
(b) Net income:
Total net revenue (from a)
Expenses:
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
Income before income tax
Income tax
Net income
(c) Dividends declared:
Ending retained earnings
Beginning retained earnings
Net increase
Less: Net income
Dividends declared
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
20,200
369,800
71,000
6,500
$447,300
$447,300
184,400
99,400
82,500
12,700
379,000
68,300
31,000
$ 37,300
$134,000
114,400
19,600
37,300
$ 17,700
(For Instructor Use Only) 4-25
EXERCISE 4-3 (Continued)
ALTERNATE SOLUTION
Beginning retained earnings
Add: Net income
$114,400
37,300
151,700
?
$134,000
Less: Dividends declared
Ending retained earnings
Dividends declared must be $17,700
($151,700 – $134,000)
(d) Income attributed to controlling stockholders = (Net income –
Allocation to noncontrolling interest)
$37,300 - $ $17,000 = $ 20,300
EXERCISE 4-4 (20–25 minutes)
LEROI JONES INC.
Income Statement
For Year Ended December 31, 2014
Revenues
Net sales ($1,250,000(b) – $17,000) ........................
Expenses
Cost of goods sold.................................................
500,000
Selling expenses ....................................................
400,000(c)
Administrative expenses .......................................
100,000(a)
Interest expense.....................................................
20,000
Total expenses ..............................................
Income before income tax ...............................................
4-26Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$1,233,000
1,020,000
213,000
(For Instructor Use Only)
Ahmed Nawfal
Income tax ..............................................................
Net income .......................................................................
63,900
$ 149,100
Earnings per share ...........................................................
$
7.46*
*Rounded
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-27
EXERCISE 4-4 (Continued)
Determination of amounts
(a)
Administrative expenses
= 20% of cost of good sold
= 20% of $500,000
= $100,000
(b)
Gross sales X 8%
= administrative expenses
= $100,000 ÷ 8%
= $1,250,000
(c)
Selling expenses
= four times administrative expenses.
(operating expenses consist of selling
and administrative expenses; since
selling expenses are 4/5 of operating
expenses, selling expenses are 4
times administrative expenses.)
= 4 X $100,000
= $400,000
Earnings per share $7.46 ($149,100 ÷ 20,000)
Note: An alternative income statement format is to show income tax part of
expenses, and not as a separate item. In this case, total expenses are
$1,083,900.
4-28Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 4-5 (30–35 minutes)
(a)
Multiple-Step Form
P. BRIDE COMPANY
Income Statement
For the Year Ended December 31, 2014
(In thousands, except earnings per share)
Sales revenue .....................................................
Cost of goods sold .............................................
Gross profit.........................................................
$96,500
60,570
35,930
Operating Expenses
Selling expenses
Sales commissions ................................ $7,980
Depr. of sales equipment ....................... 6,480
Delivery expense .................................... 2,690
Administrative expenses
Officers’ salaries .................................... 4,900
Depr. of office furn. and equip. .............. 3,960
$17,150
Income from operations ...................
Other Revenues and Gains
Rent revenue ................................................
8,860
26,010
9,920
17,230
27,150
Other Expenses and Losses
Interest expense ...........................................
1,860
Income before income tax .................................
Income tax ....................................................
Net income ..........................................................
25,290
9,070
$16,220
Earnings per share ($16,220 ÷ 40,550) ..............
$.40
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-29
EXERCISE 4-5 (Continued)
(b)
Single-Step Form
P. BRIDE COMPANY
Income Statement
For the Year Ended December 31, 2014
(In thousands, except earnings per share)
Revenues
Net sales............................................................................
Rental revenue ..................................................................
Total revenues ............................................................
$ 96,500
17,230
113,730
Expenses
Cost of goods sold ...........................................................
Selling expenses ..............................................................
Administrative expenses..................................................
Interest expense ...............................................................
Total expenses ............................................................
60,570
17,150
8,860
1,860
88,440
Income before income tax .....................................................
Income tax...............................................................................
Net income ........................................................................
25,290
9,070
$ 16,220
Earnings per share .................................................................
$.40
Note: An alternative income statement format for the single-step form is to
show income tax a part of expenses, and not as a separate item.
(c)
Single-step:
1.
Simplicity and conciseness.
2.
Probably better understood by users.
3.
Emphasis on total costs and expenses and net income.
4.
Does not imply priority of one revenue or expense over another.
4-30Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 4-5 (Continued)
Multiple-step:
1.
Provides more information through segregation of operating and
nonoperating items.
2.
Expenses are matched with related revenue.
Note to instructor: Students’ answers will vary due to the nature of the
question; i.e., it asks for an opinion. However, the discussion supporting
the answer should include the previous points.
EXERCISE 4-6 (30–35 minutes)
MARIA CONCHITA ALONZO CORP.
Income Statement
For the Year Ended December 31, 2014
Sales Revenue
Sales revenue ...........................................................
$1,380,000
Less: Sales returns and allowances ....................... $150,000
Sales discounts .............................................
45,000
195,000
Net sales ...................................................................
1,185,000
Cost of goods sold ...................................................
621,000
Gross profit on sales .....................................................
564,000
Operating Expenses
Selling expenses ...................................................
Administrative and general expenses .................
Income from operations.................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
194,000
97,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
291,000
273,000
(For Instructor Use Only) 4-31
EXERCISE 4-6 (Continued)
Other Revenues and Gains
Interest revenue .......................................................
86,000
359,000
Other Expenses and Losses
Interest expense ......................................................
60,000
Income before income tax and extraordinary item .......
Income tax ($299,000 X .34) ....................................
Income before extraordinary item ..................................
Extraordinary item—loss from earthquake damage .......... $150,000
Less: Applicable income tax reduction
($150,000 X .34) ...........................................................
51,000
Net income .......................................................................
Per share of common stock:
Income before extraordinary item
($197,340 ÷ 100,000) ...............................................
Extraordinary item (net of tax) ..................................
Net income ($98,340 ÷ 100,000) ................................
299,000
101,660
197,340
99,000
$ 98,340
$1.97*
(.99)
$ .98
*Rounded
4-32Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 4-7 (30–40 minutes)
(a)
Multiple-Step Form
LATIFA SHOE CO.
Income Statement
For the Year Ended December 31, 2014
Net sales .......................................................
Cost of goods sold .......................................
Gross profit on sales ...................................
$980,000
496,000
484,000
Operating Expenses
Selling expenses
Salaries and Wages ..........................
Depr. exp. (70% X $65,000) ..............
Supplies ............................................
Administrative expenses
Wages and salaries ..........................
Other admin. expenses ....................
Depr. exp. (30% X $65,000) ..............
Income from operations...............................
$114,800
45,500
17,600 $177,900
135,900
51,700
19,500
207,100
Other Revenues and Gains
Rent revenue ..........................................
385,000
99,000
29,000
128,000
Other Expenses and Losses
Interest expense .....................................
18,000
Income before income tax ...........................
Income tax ..............................................
Net income ....................................................
110,000
37,400
$ 72,600
Earnings per share ($72,600 ÷ 20,000) ........
$3.63
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-33
EXERCISE 4-7 (Continued)
(b)
Single-Step Form
LATIFA SHOE CO.
Income Statement
For the Year Ended December 31, 2014
Revenues
Net sales........................................................................
Rent revenue .................................................................
Total revenues ........................................................
$ 980,000
29,000
1,009,000
Expenses
Cost of goods sold .......................................................
Selling expenses ..........................................................
Administrative expenses .............................................
Interest expense ...........................................................
Total expenses ........................................................
496,000
177,900
207,100
18,000
899,000
Income before income tax .................................................
Income tax.....................................................................
Net income ..........................................................................
110,000
37,400
$ 72,600
Earnings per share ($72,600 ÷ 20,000) ..............................
$3.63
Note: An alternative income statement format for the single-step form is to
show income tax as part of expenses, and not as a separate item.
(c)
Single-step:
1. Simplicity and conciseness.
2. Probably better understood by users.
3. Emphasis on total costs and expenses and net income.
4. Does not imply priority of one revenue or expense over another.
4-34Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 4-7 (Continued)
Multiple-step:
1. Provides more information through segregation of operating and
nonoperating items.
2. Expenses are matched with related revenue.
Note to instructor: Students’ answers will vary due to the nature of the
question, i.e., it asks for an opinion. However, the discussion supporting
the answer should include the above points.
EXERCISE 4-8 (15–20 minutes)
(a) Net sales
Cost of goods sold
Administrative expenses
Selling expenses
Discontinued operations-loss
Income before income tax
Income tax ($110,000 X .30)
Net income
$ 540,000
(210,000)
(100,000)
(80,000)
(40,000)
110,000
33,000
$ 77,000
(b) Income from continuing operations before income tax
Income tax ($150,000 X .30)
Income from continuing operations
Discontinued operations, less applicable income tax of
$12,000
Net income
$150,000*
45,000
105,000
(28,000)
$ 77,000
*$110,000 + $40,000
Earnings per share:
Income from continuing operations ($105,000 ÷ 10,000)
Loss on discontinued operations, net of tax
Net Income ($77,000 ÷ 10,000)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$10.50
(2.80)
$ 7.70
(For Instructor Use Only) 4-35
4-36Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 4-9 (30–35 minutes)
(a)
IVAN CALDERON CORP.
Income Statement
For the Year Ended December 31, 2014
Sales Revenue
Net sales .....................................................................
Cost of goods sold .....................................................
Gross profit ......................................................
$1,300,000
780,000
520,000
Operating Expenses
Selling expenses....................................................$65,000
Administrative expenses ....................................... 48,000
Income from operations...................................................
Other Revenues and Gains
Dividend revenue ................................................... 20,000
Interest revenue ..................................................... 7,000
Other Expenses and Losses
Write-off of inventory due to obsolescence..............
Income before income tax and extraordinary item .............
Income tax ..............................................................
Income before extraordinary item ...................................
Extraordinary item
Casualty loss ................................................. 50,000
Less: Applicable income tax
($50,000  .34) ........................................... 17,000
Net income ........................................................................
$
Per share of common stock:
Income before extraordinary item
($233,640 ÷ 60,000) .............................................
Extraordinary item, net of tax ...............................
Net income ($200,640 ÷ 60,000) ............................
113,000
407,000
27,000
434,000
80,000
354,000
120,360
233,640
(33,000)
200,640
$3.89*
(.55)
$3.34
*Rounded
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-37
EXERCISE 4-9 (Continued)
(b)
IVAN CALDERON CORP.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, Jan. 1, as reported ..............................................
$ 980,000
Correction for overstatement of net income in prior period
(depreciation error) (net of $18,700 tax) .................................. (36,300)
Retained earnings, Jan. 1, as adjusted .............................................. 943,700
Add: Net income .................................................................................. 200,640
1,144,340
Less: Dividends declared ................................................................... 45,000
Retained earnings, Dec. 31 .................................................................
$1,099,340
EXERCISE 4-10 (20–25 minutes)
Computation of net income:
2014 net income after tax ............................................................
$33,000,000
2014 net income before tax
[$33,000,000 ÷ (1 – .34)] ...........................................................50,000,000
Add back major casualty loss ....................................................18,000,000
Income from operations ........................................................68,000,000
Income tax (34% X $68,000,000) .................................................23,120,000
Income before extraordinary item ..............................................44,880,000
Extraordinary item:
Casualty loss .........................................................................
$18,000,000
Less: Applicable income tax reduction ...................................
6,120,000 (11,880,000)
Net income ...................................................................................
$33,000,000
4-38Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 4-10 (Continued)
Net income .........................................................................................
$33,000,000
Less: Provision for preferred dividends
(8% of $4,500,000) ......................................................................... 360,000
Income available to common stockholders ....................................32,640,000
Common stock shares ......................................................................
÷10,000,000
Earnings per share ............................................................................
$3.26*
Income statement presentation
Per share of common stock:
Income before extraordinary item ........................................
Extraordinary item, net of tax ...............................................
Net income .............................................................................
a
$44,880,000 – $360,000
10,000,000
b
= $4.45*
$11,880,000
10,000,000
$4.45a
(1.19)b
$3.26
= $1.19*
*Rounded
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-39
EXERCISE 4-11 (20–25 minutes)
SPOCK CORPORATION
Income Statement
For the Year Ended December 31, 2014
Net sales(a) ................................................................
Cost of goods sold(b) ...............................................
Gross profit ........................................................
Selling expenses(c)...................................................
Administrative expenses(d) .....................................
Income from operations ....................................
Rent revenue............................................................
Interest expense ......................................................
Income before income tax ......................................
Income tax ($434,000 X .34) ..............................
Income before extraordinary item ..........................
Extraordinary loss ...................................................
Less: Applicable income tax.............................
Net income ...............................................................
$4,162,000
2,665,000
1,497,000
$636,000
491,000
240,000
(176,000)
70,000
23,800
Earnings per share ($900,000 ÷ $10 par value = 90,000 shares)
Income before extraordinary item ($286,440 ÷ 90,000) .........
Extraordinary item, net of tax .................................................
Net income ...............................................................................
1,127,000
370,000
64,000
434,000
147,560
286,440
46,200
$ 240,240
$3.18*
(.51)*
$2.67
*Rounded
Supporting computations
(a) Net sales:
$4,275,000 – $34,000 – $79,000 = $4,162,000
(b) Cost of goods sold:
$535,000 + ($2,786,000 + $72,000 – $27,000 – $15,000) – $686,000 =
$2,665,000
(c) Selling expenses:
$284,000 + $83,000 + $69,000 + $54,000 + $93,000 + $36,000 + $17,000 =
$636,000
(d) Administrative expenses:
4-40Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
$346,000 + $33,000 + $24,000 + $48,000 + $32,000 + $8,000 = $491,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-41
EXERCISE 4-12 (20–25 minutes)
(a)
EDDIE ZAMBRANO CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Balance, January 1, as reported ..............................................
Correction for depreciation error (net of $10,000 tax) ...........
Cumulative decrease in income from change in
inventory methods (net of $14,000 tax) ........................
Balance, January 1, as adjusted..............................................
Add: Net income .......................................................................
Less: Dividends declared ........................................................
Balance, December 31 .............................................................
$225,000*
(15,000)
(21,000)
189,000
144,000**
333,000
100,000
$233,000
*($40,000 + $125,000 + $160,000) – ($50,000 + $50,000)
**[$240,000 – (40% X $240,000)]
(b) Total retained earnings would still be reported as $233,000. A restriction
does not affect total retained earnings; it merely labels part of the retained
earnings as being unavailable for dividend distribution. Retained earnings
would be reported as follows:
Retained earnings:
Appropriated
Unappropriated
Total
4-42Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 70,000
163,000
$233,000
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 4-13 (15–20 minutes)
Net income:
Income from continuing operations
before income tax ....................................................................
$23,650,000
Income tax (35% X $23,650,000) .................................................8,277,500
Income from continuing operations...........................................
15,372,500
Discontinued operations
Loss before income tax.........................................................
$3,225,000
Less: Applicable income tax (35%) ......................................
1,128,750 (2,096,250)
Net income ...................................................................................
$13,276,250
Preferred dividends declared: ..........................................................
$ 1,075,000
Weighted average common shares outstanding....................................4,000,000
Earnings per share
Income from continuing operations...........................................
Discontinued operations, net of tax ...........................................
Net income ...................................................................................
$3.57*
(.52)**
$3.05***
*($15,372,500 – $1,075,000) ÷ 4,000,000. (Rounded)
**$2,096,250 ÷ 4,000,000. (Rounded)
***($13,276,250 – $1,075,000) ÷ 4,000,000.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-43
EXERCISE 4-14 (15–20 minutes)
(a)
2014
$450,000
157,500
$292,500
Income before income tax
Income tax (35%)
Net Income
(b)
Year
2012
2013
Cumulative effect for years prior to 2014.
WeightedAverage
$370,000
390,000
Tax Rate
FIFO
Difference
(35%) Net Effect
$395,000
$25,000
430,000
40,000
Total
$65,000
$22,750
$42,250
(c)
Income before income tax
Income tax (35%)
Net income
2014
2013
2012
$450,000 $430,000 $395,000
157,500 150,500 138,250
$292,500 $279,500 $256,750
EXERCISE 4-15 (15–20 minutes)
(a)
ROXANNE CARTER CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2014
Sales revenue ...........................................................................
Cost of goods sold ...................................................................
Gross profit ...............................................................................
Selling and administrative expenses ......................................
Net income ................................................................................
Unrealized holding gain, net of tax .........................................
Comprehensive income ...........................................................
4-44Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$1,200,000
750,000
450,000
320,000
130,000
18,000
$ 148,000
(For Instructor Use Only)
Ahmed Nawfal
(b)
ROXANNE CARTER CORPORATION
Income Statement and Comprehensive Income Statement
For the Year Ended December 31, 2014
Sales..........................................................................................
Cost of goods sold ...................................................................
Gross profit...............................................................................
Selling and administrative expenses ......................................
Net income ................................................................................
Comprehensive Income
Net income ................................................................................
Unrealized holding gain ...........................................................
Comprehensive income ...........................................................
$1,200,000
750,000
450,000
320,000
$ 130,000
$ 130,000
18,000
$ 148,000
EXERCISE 4-16 (15–20 minutes)
C. REITHER CO.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2014
Accumulated
Other
Beginning balance
Retained
Comprehensive
Common
Total
Earnings
Income
Stock
$520,000
$ 90,000
$80,000
$350,000
120,000
120,000
Comprehensive income
Net income*
Other comprehensive income
Unrealized holding loss
(60,000)
(60,000)
Comprehensive income
Dividends
Ending balance
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
(10,000)
(10,000)
$570,000
$200,000
$20,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$350,000
(For Instructor Use Only) 4-45
*($700,000 – $500,000 – $80,000).
EXERCISE 4-17 (30–35 minutes)
(a)
ROLAND CARLSON INC.
Income Statement
For the Year Ended December 31, 2014
Revenues
Sales revenue .............................................................................
Rent revenue...............................................................................
Total revenues..................................................................
Expenses
Cost of goods sold...........................................................
Selling expenses ..............................................................
Administrative expenses .................................................
Total expenses ........................................................
Income from continuing operations before
income tax...................................................................
Income tax .............................................................
Income from continuing operations ..............................
Discontinued operations
Loss on discontinued operations ........................ $75,000
Less: Applicable income tax reduction ............... 25,500
Income before extraordinary items ...............................
Extraordinary items:
Extraordinary gain ................................................. 95,000
Less: Applicable income tax ................................ 32,300
Extraordinary loss .................................................
Less: Applicable income tax reduction ...............
Net income ......................................................................
60,000
20,400
Per share of common stock:
Income from continuing operations ($363,000 ÷ 100,000).........
Loss on discontinued operations, net of tax .........................
Income before extraordinary items ($313,500 ÷ 100,000) ..........
Extraordinary gain, net of tax .................................................
4-46Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$1,900,000
40,000
1,940,000
850,000
300,000
240,000
1,390,000
550,000
187,000
363,000
(49,500)
313,500
62,700
376,200
(39,600)
$ 336,600
$3.63
(.49)
3.14
.63
(For Instructor Use Only)
Ahmed Nawfal
Extraordinary loss, net of tax .................................................
Net income ($336,600 ÷ 100,000) ...........................................
(.40)
$3.37
EXERCISE 4-17 (Continued)
(b)
ROLAND CARLSON INC.
Comprehensive Income Statement
For the Year Ended December 31, 2014
Net income .................................................................................
Other comprehensive income
Unrealized holding gain, net of tax ....................................
Comprehensive income ............................................................
(c)
$336,600
15,000
$351,600
ROLAND CARLSON INC.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ..........................................................
Add: Net income ...............................................................................
Less: Dividends declared ................................................................
Retained earnings, December 31 ....................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$600,000
336,600
936,600
150,000
$786,600
(For Instructor Use Only) 4-47
TIME AND PURPOSE OF PROBLEMS
Problem 4-1 (Time 30–35 minutes)
Purpose—to provide the student with an opportunity to prepare a multi-step income statement and a
retained earnings statement. A number of special items such as loss from discontinued operations,
unusual items, and ordinary gains and losses are presented in the problem for analysis purposes.
Problem 4-2 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to prepare a single-step income statement and a
retained earnings statement. The student must determine through analysis the ending balance in retained
earnings.
Problem 4-3 (Time 30–40 minutes)
Purpose—to provide the student with an opportunity to analyze a number of transactions and to prepare a
partial income statement. The problem includes discontinued operations, an extraordinary item, and the
cumulative effect of a change in accounting principle.
Problem 4-4 (Time 45–55 minutes)
Purpose—to provide the student with the opportunity to prepare multiple-step and single-step income
statements and a retained earnings statement from the same underlying information. A substantial
number of operating expenses must be reported in this problem unlike Problem 4-1. As a consequence,
the problem is time-consuming and emphasizes the differences between the multiple-step and singlestep income statement.
Problem 4-5 (Time 20–25 minutes)
Purpose—to provide the student with a problem on the income statement treatment of (1) a change that
is usual but infrequently occurring, (2) an extraordinary item and its related tax effect, (3) a correction of
an error, and (4) earnings per share. The student is required not only to identify the proper income
statement treatment but also to provide the rationale for such treatment.
Problem 4-6 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to prepare a retained earnings statement. A number
of special items must be reclassified and reported in the income statement. This problem illustrates the
fact that ending retained earnings is unaffected by the choice of disclosing items in the income
statement or the retained earnings statement, although the income reported would be different.
Problem 4-7 (Time 25–35 minutes)
Purpose—to provide the student with a problem to determine the reporting of several items, which may
get special treatment as irregular items. This is a good problem for a group assignment.
4-48Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO PROBLEMS
PROBLEM 4-1
DICKINSON COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales revenue ..................................................................
$25,000,000
Cost of goods sold ..........................................................
16,000,000
Gross profit......................................................................
9,000,000
Selling and administrative expenses .............................
4,700,000
Income from operations..................................................
4,300,000
Other revenues and gains
Interest revenue ....................................................$ 70,000
Gain on the sale of investments .......................... 110,000
180,000
Other expenses and losses
Write-off of goodwill .............................................
820,000
Income from continuing operations before
income tax .............................................................................
3,660,000
Income tax .......................................................................
1,244,000
Income from continuing operations ..............................
2,416,000
Discontinued operations
Loss on operations, net of applicable tax ........... 90,000
Loss on disposal, net of applicable tax .............. 440,000
(530,000)
Income before extraordinary item ..................................
1,886,000
Extraordinary item—loss from flood
damage, net of applicable tax.....................................
390,000
Net income .......................................................................
$ 1,496,000
Earnings per share:
Income from continuing operations .....................
Discontinued operations
Loss on operations, net of tax .....................
Loss on disposal, net of tax .........................
Income before extraordinary item .........................
Extraordinary loss, net of tax ................................
Net income..............................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$ 4.67a
$(0.18)
(0.88)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(1.06)
3.61b
(0.78)
$ 2.83c
(For Instructor Use Only) 4-49
PROBLEM 4-1 (Continued)
DICKINSON COMPANY
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ................................
Add: Net income ..................................................
Less Dividends declared on:
Preferred stock ............................................
Common stock ............................................
Retained earnings, December 31 ..........................
a
$2,416,000 – $80,000
500,000 shares
=
$4.67
$1,886,000 – $80,000
500,000 shares
=
$3.61
=
$2.83
b
c
$1,496,000 – $80,000
500,000 shares
4-50Copyright © 2013 John Wiley & Sons, Inc.
$
$ 80,000
250,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
980,000
1,496,000
2,476,000
330,000
$ 2,146,000
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 4-2
THOMPSON CORPORATION
Income Statement
For the Year Ended December 31, 2014
Revenues
Net sales ($1,100,000 – $14,500 – $17,500) ..... $1,068,000
Gain on disposal of land .................................
30,000
Rent revenue ....................................................
18,000
Total revenues ........................................
Expenses
Cost of goods sold* .........................................
Selling expenses..............................................
Administrative expenses .................................
Total expenses ........................................
645,000
232,000
99,000
976,000
Income before income tax .........................................
Income tax ........................................................
Net income ..................................................................
Earnings per share ($86,100 ÷ 30,000) ......................
*Cost of goods sold: Can be verified as follows:
Inventory, Jan. 1 ......................................................
Purchases ................................................................
Less: Purchase discounts .....................................
Net purchases..........................................................
Add: Freight-in.......................................................
Inventory available for sale ....................................
Less: Inventory, Dec. 31 ........................................
Cost of goods sold ...............................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$1,116,000
140,000
53,900
$ 86,100
$2.87
$
$610,000
10,000
600,000
20,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
89,000
620,000
709,000
64,000
$ 645,000
(For Instructor Use Only) 4-51
PROBLEM 4-2 (Continued)
THOMPSON CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 ................................................
Add: Net income ..................................................................
Less: Cash dividends ............................................................
Retained earnings, December 31 ..........................................
4-52Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$160,000
86,100
246,100
45,000
$201,100
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 4-3
MAHER INC.
Income Statement (Partial)
For the Year Ended December 31, 2014
Income from continuing operations
before income tax.......................................................
$838,500(a)
Income tax ...........................................................
220,350(b)
Income from continuing operations ............................
618,150
Discontinued operations
Loss from disposal of recreational
division ............................................................
$115,000
(1)
Less: Applicable income tax reduction ............ 34,500
(80,500)
Income before extraordinary item ................................
537,650
Extraordinary item:
Major casualty loss ............................................. 90,000
(2)
Less: Applicable income tax reduction ............ 41,400
(48,600)
Net income .....................................................................
$489,050
(1) $115,000  30%
(2) $90,000  46%
Per share of common stock:
Income from continuing operations ..................
Discontinued operations, net of tax ..................
Income before extraordinary items ...................
Extraordinary item, net of tax ............................
Net income ($489,050 ÷ 120,000)........................
$5.15*
(0.67)*
4.48
(0.40)
$4.08
*Rounded
(a)
Computation of income from cont. operations before taxes:
As previously stated ................................................
Loss on sale of securities .......................................
Gain on proceeds of life insurance
policy ($150,000 – $46,000) .................................
Error in computation of depreciation
As computed ($54,000 ÷ 6) .........................................
$9,000
Corrected ($54,000 – $9,000) ÷ 6 ................................
(7,500)
As restated...................................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$790,000
(57,000)
104,000
1,500
$838,500
(For Instructor Use Only) 4-53
4-54Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 4-3 (Continued)
(b)
Computation of income tax:
Income from continuing operations before taxes ..........
Nontaxable income (gain on life insurance) ...................
Taxable income ................................................................
Tax rate .............................................................................
Income tax ........................................................................
$838,500
(104,000)
734,500
X
.30
$220,350
Note: No adjustment is needed for the inventory method change, since the
new method is reported in 2014 income. The cumulative effect on prior years
of retroactive application of the new inventory method will be recorded in
retained earnings.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-55
PROBLEM 4-4
(a)
TWAIN CORPORATION
Income Statement
For the Year Ended June 30, 2014
Sales
Sales revenue ..............................................................
Less: Sales discounts ................................................
$31,150
Sales returns and allowances .........................
62,300
Net sales ......................................................................
Cost of goods sold ............................................................
Gross profit........................................................................
$1,578,500
93,450
1,485,050
896,770
588,280
Operating Expenses
Selling expenses
Sales commissions .................................................
97,600
Salaries and wages expense ..................................
56,260
Travel expense ........................................................
28,930
Delivery expense .....................................................
21,400
Entertainment expense ...........................................
14,820
Telephone and Internet expense ............................
9,030
Maintenance and repairs expense .........................
6,200
Depreciation expense .............................................
4,980
Bad debt expense ....................................................
4,850
Miscellaneous selling expenses ............................
4,715
248,785
Administrative Expenses
Maintenance and repairs expense .................
Property tax expense..........................................
Depreciation expense .....................................
Supplies expense ............................................
Telephone and Internet expense ....................
Office expenses ...............................................
Income from operations .....................................
35,970
303,525
4-56Copyright © 2013 John Wiley & Sons, Inc.
9,130
7,320
7,250
3,450
2,820
6,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 4-4 (Continued)
Other Revenues and Gains
Dividend revenue ............................................
38,000
Other Expenses and Losses
Interest expense ..............................................
18,000
Income before income tax ..................................
Income tax .......................................................
Net income ..........................................................
Earnings per common share
[($221,525 – $9,000) ÷ 80,000] .........................
323,525
102,000
$221,525
$2.66*
*Rounded
TWAIN CORPORATION
Retained Earnings Statement
For the Year Ended June 30, 2014
Retained earnings, July 1, 2013, as reported..............
Correction of depreciation understatement,
net of tax....................................................................
Retained earnings, July 1, 2013, as adjusted .............
Add: Net income ..........................................................
$337,000
(17,700)
319,300
221,525
540,825
Less:
Dividends declared on preferred stock .............$ 9,000
Dividends declared on common stock .............. 37,000
46,000
Retained earnings, June 30, 2014................................
$494,825
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-57
PROBLEM 4-4 (Continued)
(b)
TWAIN CORPORATION
Income Statement
For the Year Ended June 30, 2014
Revenues
Net sales ......................................................................
Dividend revenue.........................................................
Total revenues ....................................................
Expenses
Cost of goods sold ......................................................
Selling expenses .........................................................
Administrative expenses ............................................
Interest expense ..........................................................
Total expenses....................................................
Income before income tax .....................................................
Income tax....................................................................
Net income .............................................................................
Earnings per common share .................................................
$1,485,050
38,000
1,523,050
896,770
248,785
35,970
18,000
1,199,525
323,525
102,000
$ 221,525
$2.66
TWAIN CORPORATION
Retained Earnings Statement
For the Year Ended June 30, 2014
Retained earnings, July 1, 2013, as reported ...............
Correction of depreciation understatement,
net of tax .....................................................................
Retained earnings, July 1, 2013 as adjusted................
Add: Net income ...........................................................
$337,000
(17,700)
319,300
221,525
540,825
Less:
Dividends declared on preferred stock..............
$ 9,000
Dividends declared on common stock ..............
37,000
Retained earnings, June 30, 2014 .................................
4-58Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
46,000
$494,825
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 4-5
1.
The usual but infrequently occurring charge of $8,500,000 should be
disclosed separately, assuming it is material. This charge is shown
above income before extraordinary items and would not be reported net
of tax. This item should be separately disclosed to inform the users of
the financial statements that this item is nonrecurring and therefore
may not impact next year’s results. Furthermore, trend comparisons may
be misleading if such an item is not highlighted and adjustments made.
The item should not be considered extraordinary because it is usual in
nature.
2.
The extraordinary item of $6,000,000 should be reported net of tax in a
separate section for extraordinary items. An adjustment should be made
to income taxes to report this amount at $21,400,000. The $2,000,000 tax
effect of this extraordinary item should be reported with the extraordinary
item. The reason for the separate disclosure is much the same as that
given above for the separate disclosure of the usual, but infrequently
occurring item. Readers must be informed that certain revenue and
expense items may be unusual and infrequent, and that their likelihood
for affecting operations again in the future is unlikely.
3.
The adjustment required for correction of an error is inappropriately
labeled and also should not be reported in the retained earnings
statement. Changes in estimate should be handled in current and future
periods through the income statement. Catch-up adjustments are not
permitted. To restate financial statements every time a change in estimate occurred would be extremely costly. In addition, adjusting the beginning balance of retained earnings is inappropriate as the increased
charge in this case affects current and future income statements.
4.
Earnings per share should be reported on the face of the income
statement and not in the notes to the financial statements. Because
such importance is ascribed to this statistic, the profession believes it
necessary to highlight the earnings per share figure. In this case the
company should report both income before extraordinary item and
net income on a per share basis.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-59
PROBLEM 4-6
(a)
ACADIAN CORP.
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1, as reported .......................................
$257,600
Correction of error from prior period (net of tax)..............................
25,400
Adjustment for change in accounting principle
(net of tax).........................................................................................
(23,200)
Retained earnings, January 1, as adjusted .......................................
259,800
Add: Net income ...............................................................................
52,300*
Less: Cash dividends declared .........................................................
32,000
Retained earnings, December 31 .......................................................
$280,100
*$52,300 = ($84,500 + $41,200 + $21,600 – $35,000 – $60,000)
(b)
1. Gain on sale of investments—body of income statement. This gain
should not be shown net of tax on the income statement.
2. Refund on litigation with government—body of income statement,
possibly unusual item. This refund should not be shown net of tax
on the income statement.
3. Loss on discontinued operations—body of the income statement,
following the caption, “Income from continuing operations.”
4. Write-off of goodwill—body of income statement, possibly unusual item. The write-off should not be shown net of tax on the
income statement.
4-60Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 4-7
WADE CORP.
Income Statement (Partial)
For the Year Ended December 31, 2014
Income from continuing operations
before income tax ....................................
$1,200,000*
Income tax ..........................................
456,000**
Income from continuing operations ..........
744,000
Discontinued operations
Loss from operations of
discontinued subsidiary ................ $ 90,000
Less: Applicable income tax
reduction ($90,000  .38).... 34,200 $ 55,800
Loss from disposal of subsidiary ........ 100,000
Less: Applicable income tax
reduction ($100,000  .38).. 38,000
62,000
(117,800)
Income before extraordinary item ..............
626,200
Extraordinary item:
Gain on condemnation ......................
125,000
Less: Applicable income tax ............
50,000*
75,000
Net income ...................................................
$ 701,200
* $125,000  40%
Per share of common stock:
Income from continuing operations ..................................
Discontinued operations, net of tax...................................
Income before extraordinary item ......................................
Extraordinary item, net of tax .............................................
Net income ($701,200 ÷ 150,000) ........................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$4.96
(0.79)
4.17
0.50
$4.67
(For Instructor Use Only) 4-61
PROBLEM 4-7 (Continued)
*Computation of income from continuing operations
before income tax:
As previously stated
Loss on sale of equipment [$40,000 – ($80,000 – $30,000)]
Restated
$1,210,000
(10,000)
$1,200,000
**Computation of income tax:
$1,200,000 X .38 = $456,000
Note: The error related to the intangible asset was correctly charged to
retained earnings.
4-62Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 4-1 (Time 20–25 minutes)
Purpose—to provide the student with the opportunity to comment on deficiencies in an income
statement format. The student is required to comment on such items as inappropriate heading,
incorrect classification of special items, proper net of tax treatment, and presentation of per share data.
CA 4-2 (Time 20–25 minutes)
Purpose—to provide the student an illustration of how earnings can be managed. The case allows
students to see the effects of warranty expense timing on the trend of income and illustrates the potential
use of accruals to smooth earnings.
CA 4-3 (Time 15–20 minutes)
Purpose—to provide the student an illustration of how earnings can be managed by how losses are
reported, including ethical issues.
CA 4-4 (Time 30–35 minutes)
Purpose—to provide the student with an unstructured case to comment on the reporting of discontinued
operations and extraordinary items. In addition, the student is asked to comment on materiality considerations and earnings per share implications.
CA 4-5 (Time 30–40 minutes)
Purpose—to provide the student with the opportunity to comment on deficiencies in an income
statement. This case includes discussion of extraordinary items, discontinued items, and ordinary gains
and losses. The case is complete and therefore provides a broad overview to a number of items
discussed in the textbook.
CA 4-6 (Time 20–25 minutes)
Purpose—to provide the student with a variety of situations involving classification of special items. This
case is different from CA 4-5 in that an income statement is not presented. Instead, short factual
situations are described. A good comprehensive case for discussing the presentation of special items.
CA 4-7 (Time 10–15 minutes)
Purpose—to provide the student with an opportunity to show how comprehensive income should be
reported.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-63
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 4-1
The deficiencies of O’Malley Corporation’s income statement are as follows:
1.
The heading is inappropriate. The heading should include the name of the company and the period
of time for which the income statement is presented.
2.
Gain on recovery of insurance proceeds should be classified as an extraordinary item in a separate
section of the income statement.
3.
Cost of goods sold is usually listed as the first expense, followed by selling, administrative, and other
expenses.
4.
Advertising expense is a selling expense and should usually be classified as such, unless this
expense is unusually different from previous periods.
5.
Loss on obsolescence of inventories might be classified as an unusual item and separately
disclosed if it is unusual or infrequent but not both.
6.
Loss on discontinued operations requires a separate classification after income from continuing
operations and before presentation of income before extraordinary item.
7.
Intraperiod income tax allocation is required to relate income tax expense to income from continuing operations, loss on discontinued operations, and the extraordinary item.
8.
Per share data is a required presentation for income from continuing operations, discontinued
operations, income before extraordinary item, extraordinary item, and net income.
CA 4-2
(a) Earnings management is often defined as the planned timing of revenues, expenses, gains and
losses to smooth out bumps in earnings. In most cases, earnings management is used to increase
income in the current year at the expense of income in future years. For example, companies
prematurely recognize sales in order to boost earnings. Earnings management can also be used
to decrease current earnings in order to increase income in the future. The classic case is the use
of “cookie jar” reserves, which are established, by using unrealistic assumptions to estimate
liabilities for such items as loan losses, restructuring charges and warranty returns.
(b) Proposed Accounting
Income before warranty expense
Warranty expense
Income
2011
2012
2013
$20,000
$25,000
$30,000
2014
$43,000
7,000
$36,000
2015
$43,000
3,000
$40,000
Assuming the same income before warranty expense for both 2014 and 2015 and total warranty
expense over the 2-year period of $10,000, this proposed accounting results in steadily increasing
income over the two-year period.
4-64Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 4-2 (Continued)
(c) Appropriate Accounting
Income before warranty expense
Warranty expense
Income
2011
2012
2013
$20,000
$25,000
$30,000
2014
$43,000
5,000
$38,000
2015
$43,000
5,000
$38,000
The appropriate accounting would be to record $5,000 of warranty expense in 2014, resulting in
income of $38,000. However, with the same amount of warranty expense in 2015, Bobek no
longer shows an increasing trend in income. Thus, by taking more expense in 2014, Bobek can
save some income (a classic case of “cookie-jar” reserves) and maintain growth in income.
CA 4-3
(a) The ethical issues involved are integrity and honesty in financial reporting, full disclosure,
accountant’s professionalism, and job security for Charlie.
(b) If Charlie believes the losses are relevant information important to users of the income statement,
he should disclose the losses separately. If they are considered incidental to the company’s
normal activities—i.e., the major activities of the Kelly Corporation do not include selling
equipment—the transactions should be reported among any gains and losses that occurred during
the year.
CA 4-4
(a) It appears that the sale of the Casino Knights Division would qualify as a discontinued operation.
The operation of gambling facilities appears to meet the criteria for discontinued operations for
Simpson Corp. and, therefore, the accounting requirements related to discontinued operations should
be followed. Although the financial vice-president might be correct theoretically, professional pronouncements require that such segregation be made. The controller is incorrect in stating that the
disposal of the Casino Knights Division should be reported as an extraordinary item. A separate
classification is required for disposals meeting the requirements of discontinued operations. If this
disposal did not meet the requirements for disposal of a component of a business, extraordinary
item treatment might be considered appropriate.
(b) The “walkout” or strike should not be reported as an extraordinary item. Events of this nature are a
general risk that any business enterprise takes and should not warrant extraordinary item
treatment. FASB ASC 225-20-45 specifically indicates that the effects of a strike should not be
reported as an extraordinary item.
(c) The financial vice-president is incorrect in his/her observations concerning the materiality of
extraordinary items. The materiality of each extraordinary item must be considered individually. It
is not appropriate to consider only the materiality of the net effect. Each extraordinary item must be
reported separately on the income statement.
(d) Earnings per share for income from continuing operations, discontinued operations, income before
extraordinary items, extraordinary items, and net income must be reported on the face of the
income statement.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-65
CA 4-5
The income statement of Walters Corporation contains the following weaknesses in classification and
disclosure:
1.
Sales taxes. Sales taxes have been erroneously included in both gross sales and cost of goods
sold on the income statement of Walters Corporation. Failure to deduct these taxes directly from
customer billings results in a deceptive inflation of the amount of sales. These taxes should be
deducted from gross sales because the corporation acts as an agent in collecting and remitting
such taxes to the state government.
2.
Purchase discounts. Purchase discounts should not be treated as revenue by being lumped with
other revenues such as dividends and interest. A purchase discount is more logically a reduction
of the cost of purchases because revenue is not created by purchasing goods and paying for
them. In a cash transaction, cost is measured by the amount of the cash consideration. In a credit
transaction, however, cost is measured by the amount of cash required to settle immediately the
obligation incurred. The discount should reduce the cost of goods sold to the amount of cash that
would be required to settle the obligation immediately.
3.
Recoveries of accounts written off in prior years. These collections should be credited to the
allowance for doubtful accounts unless the direct write-off method was used in accounting for bad
debt expense. Generally, the direct write-off method is not allowed.
4.
Delivery expense. Although delivery expense (sometimes referred to as freight-out) is an
expense of selling and is therefore reported properly in the statement, freight-in is an inventoriable
cost and should have been included in the computation of cost of goods sold. The value assigned
to inventory should represent the value of the economic resources given up in obtaining goods and
readying them for sale.
5.
Loss on discontinued styles. This type of loss, though often substantial, should not be treated
as an extraordinary item because it is apparently typical of the customary business activity of the
corporation. It should be reported in “Costs and expenses” as an operating expense.
6.
Loss on sale of marketable securities. This item should be reported as a separate component
of income from continuing operations and not as an extraordinary item. The conditions of unusual
in nature and infrequent in occurrence are not met.
7.
Loss on sale of warehouse. This type of item is specifically excluded by FASB ASC 225-20-45
from treatment as an extraordinary item unless such a loss is the direct result of a major casualty,
an expropriation, or a prohibition under a newly enacted law or regulation. This item should be
separately disclosed as an unusual item, if either unusual in nature or infrequent in occurrence.
8.
Federal Income taxes. The provision for federal income taxes and intraperiod tax allocation are
not presented in the income statement. This omission implies that the federal income tax is a
distribution of net income instead of an operating expense and a determinant of net income. This
assumption is not as relevant to the majority of financial statement users as the concept of net
income to investors, stockholders, or residual equity holders. Also, by law the corporation must
pay federal income taxes whether the benefits it receives from the government are direct or
indirect. Finally, those who base their decisions upon financial statements are thought to look to
net income as being a more relevant measure of income than income before taxes.
4-66Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 4-6
Classification
Rationale
Error has “washed out”; that is, subsequent
income statement compensated for the error.
However, prior year income statements should
be restated.
1.
No disclosure.
2.
Extraordinary item section.
Material, unusual in nature, and infrequent in
occurrence.
3.
Depreciation expense in body of income
statement, based on new useful life.
Material item, but change in estimated useful life
is considered part of normal business activity.
4.
No separate disclosure unless material.
Change in estimate, considered part of normal
business activity.
5.
Reported in body of the income statement,
possibly as an unusual item.
Sale does not meet criteria for either the disposal
of a component of the business or an
extraordinary item.
6.
Adjustment to the beginning balance of
retained earnings.
A change in inventory methods is a change in
accounting principle and prior periods are
adjusted.
7.
Reported in body of the income statement,
possibly as an unusual item.
Loss on preparation of such proposals is not
considered extraordinary in nature.
8.
Reported in body of the income statement,
possibly as an unusual item.
Strikes are not considered extraordinary in
nature.
9.
Prior period adjustment, adjust beginning
retained earnings.
Corrections of errors are shown as prior period
adjustments.
10.
Extraordinary item section.
Material, unusual in nature, and infrequent in
occurrence.
11.
Discontinued operations section.
Division’s assets, results of operations, and
activities are clearly distinguishable physically,
operationally, and for financial reporting
purposes.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-67
CA 4-7
(a) Separate Statement
Current Year
. . . income components . . .
$400,000
Net income ............................................................................
Comprehensive Income Statement
Net income ............................................................................
Unrealized gains ....................................................................
Comprehensive income .........................................................
(b) Combined Format
. . . income components . . .
Net income .............................................................................
Other comprehensive income
Unrealized gains .....................................................................
Comprehensive income ..........................................................
Prior Year
$410,000
$400,000
15,000
$415,000
$410,000
$400,000
$410,000
15,000
$415,000
$410,000
$410,000
(c) Nelson can choose either approach, according to FASB ASC 220-10-45. The method chosen
should be based on which one provides the most useful information. For example, Nelson should
not choose the combined format because the gains result in an increasing trend in comprehensive
income, while net income is declining.
4-68Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL REPORTING PROBLEM
(a) P&G uses the multiple-step income statement because it separates
operating from nonoperating activities. A multiple-step income statement
is used to recognize additional relationships related to revenues and
expenses. P&G recognizes a separation of operating transactions from
nonoperating transactions. As a result, trends in income from continuing
operations should be easier to understand and analyze. Disclosure of
operating income may assist in comparing different companies and
assessing operating efficiencies.
(b) P&G operates in the consumer products market. The company separates
its operations into six global segments: (sales by segment)
Fabric and Home Care, 30%
Beauty,
24%
Baby and Family Care, 19%
Health Care,
14%
Snacks and Pet Care,
4%
Grooming,
9%
(c) P&G’s gross profit (Net Sales – Cost of Products Sold) was $41,791 million
in 2011, $41,019 million in 2010, and $38,004 million in 2009. P&G’s
gross profit increased by 2% in 2011 compared to 2010. The gross profit
percentage declined slightly from 2010 to 2011 due primarily to higher
commodity and energy costs. (see MD&A).
(d) P&G probably makes a distinction between operating and nonoperating
revenue for the reasons mentioned in the solution to Part (a). By
separating out these revenue and expense items, the statement reader
can see the separate impacts of operating and financing activities.
(e) P&G reports the following ratios in its 11-year “Financial Summary”
section: Net earnings margin and Earnings and Dividends per share.
The Financial Summary also reports income statement items, such as
advertising and research and development expenses and operating
income.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-69
COMPARATIVE ANALYSIS CASE
(a)
Both companies are using the multiple-step format in presenting
income statement information. Companies use the multiple-step income statement to recognize additional relationships related to revenues
and expenses. Both companies distinguish between operating and
nonoperating transactions. As a result, trends in income from continuing
operations should be easier to understand and analyze. Disclosure of
operating income may assist in comparing different companies and
assessing operating efficiencies.
The Coca-Cola Company shows an additional intermediate component
of income—gross profit. PepsiCo does not report this information on
its income statement.
(b)
The gross profit, operating profit, and net income for these two companies
are as follows:
PepsiCo
2011
Net revenue ....................
$66,504
Cost of sales ..................31,593
Gross profit ....................34,911
2010
$57,838
26,575
31,263
2009
$43,232
20,099
23,133
% Change
53.83%
57.19%
50.91%
Operating profit ............. 9,633
8,332
8,004
20.35%
Net income ..................... 6,443
6,320
5,946
8.36%
Coca-Cola
2011
Sales............................$46,542
Cost of sales ............... 18,216
Gross profit ................. 28,326
2010
$35,119
12,693
22,426
2009
$30,990
11,088
19,902
% Change
50.18%
64.29%
42.33%
Operating income ....... 10,154
8,449
8,231
23.36%
Net income .................. $8,572
$11,809
$6,824
25.62%
As shown in the table above, however, Coca-Cola had greater growth
in net income from 2009 to 2011. PepsiCo reported stronger growth in
net sales over the three-year period. Both companies are doing well.
4-70Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
COMPARATIVE ANALYSIS CASE (Continued)
(c)
Coca-Cola has reported gains on the equity transactions related to
bottling operations. PepsiCo reported gains on its equity investments.
PepsiCo provided the following disclosure for Items Affecting
Comparability:
ITEMS AFFECTING COMPARABILITY
The year-over-year comparisons of our financial results are affected
by the following items:
53rd Week
In 2011, we had an additional week of results (53rd week), Our fiscal year ends
on the last Saturday of each December, resulting in an additional week of
results every five or six years. The 53rd week increased 2011 net
revenue by $623 million and operating profit by $109 million ($64
million after-tax or $0.04 per share).
Inventory Fair Value Adjustments
In 2011, we recorded $46 million ($28 million after-tax or $0.02 per share) of
incremental costs in cost of sales related to fair value adjustments to the
acquired Inventory included in WBD’s balance sheet at the acquisition date
and hedging contracts included in PBG’s and PAS’s balance sheets at the
acquisition date. In 2010, we recorded $398 million ($333 million after-tax or
$0.21 per share) of incremental costs related to fair value adjustments to the
acquired inventory and other related hedging contracts included in PBG’s
and PAS’s balance sheets at the acquisition date. Substantially all of these
costs were recorded in cost of sales.
Venezuela Currency Devaluation
As of the beginning of our 2010 fiscal year, we recorded a one- time $120 million
net charge related to our change to hyperinflationary accounting for our
Venezuelan businesses and the related devaluation of the bolivar. $129 million
of this net charge was recorded in corporate unallocated expenses, with the
balance (income of $9 million) recorded in our PAB segment. In total, this net
charge had an after-tax impact of $120 million or $0.07 per share.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-71
COMPARATIVE ANALYSIS CASE (Continued)
Asset Write- Off
In 2010, we recorded a $145 million charge ($92 million after- tax or
$0.06 per share) related to a change in scope of one release in our
ongoing migration to SAP software. This change was driven, in part, by a
review of our North America systems strategy following our acquisitions of
PBG and PAS. This change does not impact our overall commitment to
continue our Implementation of SAP across our global operations over the
next few years.
Foundation Contribution
In 2010, we made a $100 million ($64 million after- tax or $0.04 per share)
contribution to The PepsiCo Foundation, Inc., in order to fund charitable
and social programs over the next several years. This contribution
was recorded in corporate unallocated expenses.
Debt Repurchase
In 2010, we paid $672 million in a cash tender offer to repurchase $500 million
(aggregate principal amount) of our 7.90% senior unsecured notes maturing in
2018. As a result of this debt repurchase, we recorded a $178 million charge to
interest expense ($114 million after- tax or $0.07 per share), primarily
representing the premium paid in the tender offer.
Non-GAAP Measures
Certain measures contained in this Annual Report are financial measures that
are adjusted for items affecting comparability (see “Items Affecting
Comparability” for a detailed list and description of each of these items), as
well as, in certain instances, adjusted for foreign currency. These measures
are not in accordance with Generally Accepted Accounting Principles
(GAAP). Items adjusted for currency assume foreign currency exchange
rates used for translation based on the rates in effect for the comparable prioryear period. In order to compute our constant currency results, we
multiply or divide, as appropriate, our current year U.S. dollar results
by the current year average foreign exchange rates and then multiply or
divide, as appropriate, those amounts by the prior year average foreign
4-72Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
exchange rates. We believe investors should consider these nonGAAP measures in evaluating our results as they are more indicative of
COMPARATIVE ANALYSIS CASE (Continued)
our ongoing performance and with how management evaluates our
operational results and trends. These measures are not, and should
not be viewed as, a substitute for U.S. GAAP reporting measures.
In the discussions of net revenue and operating profit below, effective
net pricing reflects the year-over-year impact of discrete pricing
actions, sales incentive activities and mix resulting from selling varying
products in different package sizes and in different countries. Additionally,
acquisitions and divestitures reflect all mergers and acquisitions activity,
including the impact of acquisitions, divestitures and changes in ownership or
control in consolidated subsidiaries and nonconsolidated equity investees.
Servings
Since our divisions each use different measures of physical unit volume
(i.e., kilos, gallons, pounds and case sales), a common servings metric is
necessary to reflect our consolidated physical unit volume. Our
divisions' physical volume measures are converted into servings based
on U.S. Food and Drug Administration guidelines for single- serving sizes of
our products.
In 2011, total servings increased 6% compared to 2010. Excluding the
impact of the 53rd week, total servings increased 5% compared to
2010. In 2010, total servings increased 7% compared to 2009. 2011
servings growth reflects an adjustment to the base year (2010) for
divestitures that occurred in 2011, as applicable.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-73
FINANCIAL STATEMENT ANALYSIS CASE 1
(a)
Depending on the company chosen, student answers will vary. Given
the ready availability, the analysis for Walgreens is provided below:
Z-Score Analysis
Z=
Working Capital
Total Assets
X 1.2 +
Retained Earnings
X 1.4 +
Total Assets
EBIT
Sales
X 3.3 +
Total Assets
Total Assets
X .99 +
MV Equity
X 0.6
Total Liabilities
Walgreens ($ 000,000)
2011
2010
Total Assets
$27,454
$26,275
Current Assets
$12,322
$11,922
Current Liabilities
$ 8,083
$ 7,433
$ 4,239
$4,489
Multiple
0.154
0.171
$18,877
$16,848
0.688
0.641
$ 4,365
$ 3,458
0.159
0.132
$72,184
$67,420
2.629
2.566
MV Equity
$31,880
$26,159
Total Liabilities
$12,607
$11,875
Liabilities
2.529
Market Price (8/31/11)
Z-Score
Z-Score
2011
2010
1.2
0.1853
0.2050
1.4
0.9626
0.8977
3.3
0.525
0.434
0.99
2.603
2.540
2.203
0.6
1.517
1.323
35.21
26.88
Z-Score
5.793
5.400
(8/31/10) ycharts.com
905.42
973.18
Total Equity
$14,847
$14,400
Working Capital
Working Capital/Assets
Retained Earnings
Retained Earnings/Assets
EBIT
EBIT/Assets
Sales
Sales/Assets
MV Equity/Total
4-74Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL STATEMENT ANALYSIS CASE 1 (Continued)
Deere & Co. ($ 000,000)
Oct. 31,
Oct. 31,
2011
2010
Total Assets
48,207.4
43,266.8
Current Assets
38,816.7
33,366.8
Current Liabilities
17,720.5
14,364.0
21,096.20
19,002.80
Weights
0.438
0.439
14,519.4
12,353.1
0.301
0.286
$6,904.80
$5,661.90
0.143
0.131
29,466.1
23,573.2
0.611
0.545
MV Equity
$30,505.90
$32,552.45
Total Liabilities
41,392.50
36,963.40
0.737
0.881
Working Capital
Working Capital/Assets
Retained Earnings
Z-Score
Z-Score
2011
2010
1.2
0.526
0.527
1.4
0.421
0.400
3.3
0.472
0.432
0.99
0.605
0.540
0.6
0.442
0.529
2.466
2.426
Retained Earnings/
Assets
EBIT
EBIT/Assets
Sales
Sales/Assets
MV Equity*/Total
Liabilities
Total
*Market price X Shares
Outstanding
Market Price (10/31/11 and 10)
$73.70
$76.80
Share Outstanding
413.92
423.86
Total Equity
6,814.9
6,303.4
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-75
FINANCIAL STATEMENT ANALYSIS CASE 1 (Continued)
(b)
Walgreens’ Z-score in 2011 has increased but is still well above the
cutoff score for companies that are unlikely to fail. The company has
improved on just about all components of the Z-score.
Deere’s Z-score analysis indicates its likelihood of bankruptcy is
more tenuous. Its value in 2011 is below the likely cutoff but above
the very likely cutoff. The Z-score has increased slightly in 2011.
Note to instructors—as an extension, students could be asked to
conduct the analysis on companies which are in financial distress
(e.g., Xerox) to examine whether their financial distress could have been
predicted in advance.
(c)
EBIT is an operating income measure. By adding back items less
relevant to predicting future operating results (interest, taxes), it is
viewed as a better indicator of future profitability.
4-76Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL STATEMENT ANALYSIS CASE 2
Earnings (loss) per common share
Earnings from continuing operations
($97,700,000 ÷ 177,636,000) .............................................
Discontinued operations .........................................................
Earnings before extraordinary item ........................................
Extraordinary items..................................................................
Net earnings ($56,100,000 ÷ 177,636,000) .......................
$0.55
(0.20)
0.35
(0.03)*
$0.32
*$.01 rounding difference.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-77
FINANCIAL STATEMENT ANALYSIS CASE 3
(a)
Assumptions and estimates related to items such as bad debt expense,
warranties, or the useful lives or residual values for fixed assets could
result in income being overstated.
(b)
See the table below.
December 31, 2011
Tootsie Roll
Hershey
(c)
Price
$23.67
61.78
EPS
$0.76
2.85
Sales per
Share
$ 9.13
$36.95
P/E
31.1
21.7
PSR
2.59
1.67
Tootsie Roll has a higher P/E relative to Hershey by 43%. Tootsie Roll’s
PSR is also higher than Hershey’s but by much more than 30%. Thus,
Tootsie Roll’s stock may be overpriced.
4-78Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
COUNTING CROWS, INC.
Income Statement
For the Year Ending December 31, 2014
Revenues
Sales revenue
Rent revenue
Total revenues
$1,900,000
40,000
1,940,000
Expenses
Cost of goods sold
Selling expenses
Administrative expenses
Income tax expense
Total expenses
Income from continuing operations
Discontinued operations
Loss on discontinued operations
Less: Applicable income tax reduction
Income before extraordinary items
Extraordinary items:
Extraordinary gain
Less: Applicable income tax
Net income
850,000
300,000
240,000
187,000
1,577,000
363,000
$75,000
25,500
95,000
32,300
Per share of common stock:
Income from continuing operations ($363,000 ÷
100,000)
Loss on discontinued operations, net of tax
Income before extraordinary items ($313,500 ÷
100,000)
Extraordinary gain, net of tax
Net income ($376,200 ÷ 100,000)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(49,500)
313,500
62,700
$ 376,200
$3.63
(0.50)
3.13
0.63
$3.76
(For Instructor Use Only) 4-79
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
COUNTING CROWS, INC.
Retained Earnings Statement
For the Year ended December 31, 2014
Retained earnings, January 1
$600,000
Net income
376,200
Dividends declared
(80,000)
Retained earnings, December 31 $896,200
COUNTING CROWS, INC.
Statement of Comprehensive Income
For the Year ended December 31, 2014
Net income
$376,200
Other comprehensive income:
Unrealized holding gain, net of tax
15,000
Comprehensive income
$391,200
Analysis
The multiple-step income statement recognizes important relationships
between income statement elements. For example, by separating operating
transactions from nonoperating transactions, the statement user can
distinguish between elements with differing implications for future operating
results. In addition, the multiple-step format generally groups costs and
expenses with related revenues (e.g., cost of goods sold with sales
revenue to yield a gross profit measure). Finally, the multiple-step format
highlights certain intermediate components of income that analysts use to
compute ratios for assessing the performance of the company.
Principles
Pro forma reporting is inconsistent with the conceptual framework’s qualitative characteristic of comparability. For example, similar to the discussion
in the opening story, if Counting Crows Inc. classifies some items in a pro
forma manner but other companies do not, investors and creditors will not
be able to compare the reported incomes. This is the reason the SEC
issued Regulation G, which requires companies that issue pro forma
income reports to provide a reconciliation to net income measured under
GAAP, which interested parties can then compare across companies.
4-80Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL RESEARCH
(a)
FASB ASC 220 – Presentation, Comprehensive Income. The predecessor
standard for this topic is FAS No. 130 Reporting Comprehensive Income
(Issued June, 1997). By following this Codification String: Presentation
> 220 Comprehensive Income > 10 Overall > 5 Background and then
click on Printer-Friendly with sources, FAS 130 is identified; you can
then go to www.fasb.org/st/ to find the issue date.
(b)
The definition of comprehensive income (Master Glossary of ASC):
The change in equity (net assets) of a business entity during a period
from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
(c)
Classifications within net income and examples (FASB ASC 220-10-45-7):
45-7
(d)
[Items included in net income are displayed in various
classifications. Those classifications can include income from
continuing operations, discontinued operations and extraordinary
items. This Subtopic does not change those classifications or
other requirements for reporting results of operations.]
The classifications within other comprehensive income (220-10-45-13):
45-13 [Items included in other comprehensive income shall be classified
based on their nature. For example, other comprehensive income
shall be classified separately into foreign currency items, gains
or losses associated with pension or other postretirement benefits, prior service costs or credits associated with pension or
other postretirement benefits, transition assets or obligations
associated with pension or other postretirement benefits, and
unrealized gains and losses on certain investments in debt and
equity securities. Additional classifications or additional items
within current classifications may result from future accounting
standards.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-81
PROFESSIONAL RESEARCH (Continued)
(e)
Reclassification adjustments (FASB ASC 220-10-45-15)
45-15 Reclassification adjustments shall be made to avoid double
counting in comprehensive income items that are displayed as
part of net income for a period that also had been displayed
as part of other comprehensive income in that period or earlier
periods. For example, gains on investment securities that were
realized and included in net income of the current period that
also had been included in other comprehensive income as unrealized holding gains in the period in which they arose must be
deducted through other comprehensive income of the period in
which they are included in net income to avoid including them in
comprehensive income twice (see paragraph 320-10-40-2).
4-82Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL SIMULATION
Explanation
As indicated in the income statement below, the loss on abandonment is
reported as an “other expense and loss.” The gain on disposal of a business
component is reported as part of discontinued operations, net of tax. The
change in inventory costing from FIFO to average cost is a change in accounting principle. The cumulative effect of a change in accounting principle is
adjusted through the beginning balance of retained earnings.
Measurement
Answers are revealed in the income statement below.
JUDE LAW CORPORATION
Income Statement
For the Year Ended December 31, xxxx
Sales............................................................................
$3,200,000
Cost of goods sold .....................................................
1,920,000
Gross profit.................................................................
1,280,000 (a)
Selling expenses ........................................................ $340,000
Administrative expenses ........................................... 280,000
620,000
Income from operations.............................................
660,000
Other revenues and gains
Interest revenue...................................................
10,000
Other expenses and losses
Loss from plant abandonment ...........................
40,000
(30,000)
Income from continuing operations
before income tax ...............................................
630,000 (b)
Income tax (30% X $630,000) .....................................
189,000
Income from continuing operations .........................
441,000 (c)
Discontinued operations
Gain on disposal of component of business ....
90,000
Less: Applicable income tax .............................
27,000
63,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-83
PROFESSIONAL SIMULATION (Continued)
Income before extraordinary item ...................................
Extraordinary item
Loss from earthquake .............................................40,000
Less: Applicable income tax ..................................12,000
Net income ........................................................................
Per share of common stock
Income from continuing operations ............................
Discontinued operations, net of tax ............................
Income before extraordinary item ...............................
Extraordinary item, loss from earthquake, net of tax .....
Net income ................................................................
504,000
28,000
$476,000 (d)
$4.41
.63
5.04
(0.28)
$4.76 (e)
Note to instructor: The change for inventory costing is reflected in the
current year’s cost of goods sold. If comparative statements are presented,
prior year’s income statements would be recast as under the new method.
The cumulative effect of the change in accounting principle is shown as an
adjustment to beginning retained earnings.
4-84Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS CONCEPTS AND APPLICATION
IFRS4-1
Companies are required to present an analysis of expenses classified
either by their nature (such as cost of materials used, direct labor incurred,
delivery expense, advertising expense, employee benefits, depreciation
expense, and amortization expense) or their function (such as cost of
goods sold, selling expenses, and administrative expenses).
IFRS4-2
(a)
A loss on discontinued operations is reported, net of tax in a separate
section between income from continuing operations and net income.
(b)
Noncontrolling interest is reported as a separate item below net
income or loss as an allocation of the net income or loss (not as an
item of income or expense).
IFRS4-3
Bradshaw should report this item similar to other unusual gains and losses.
While under U.S. GAAP, companies are required to report an item as
extraordinary if it is unusual in nature and infrequent in occurrence,
extraordinary item reporting is prohibited under IFRS.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-85
IFRS4-4
Sales revenue ...........................................................................
Cost of goods sold ...................................................................
Selling and administrative expenses ....................................
Gain on sale of plant assets ...................................................
Income from operations ..........................................................
Interest expense .......................................................................
Income from continuing operations ......................................
Discontinued operations .........................................................
Net income ................................................................................
$310,000
140,000
50,000
30,000
150,000
6,000
144,000
(12,000)
$132,000
(b)
Attributable to:
Non-controlling interest ........................................................
Controlling shareholders ......................................................
(40,000)
92,000
(c)
Retained earnings, beginning of year ..................................
Net income ...............................................................................
$132,000
Unrealized gain on non-trading equity
securities................................................................................
10,000
Comprehensive income .........................................................
Dividends declared and paid.................................................
Retained earnings, end of year .............................................
$
(a)
0
142,000
142,000
(5,000)
$137,000
(d)
(e)
IFRS4-5
(a)
Some of the differences are:
1. Units of currency—Avon reports in pounds sterling and Earnings
per share in pence.
2. Terminology—Interest revenue and expense are referred to as
“Finance Income” and “Finance costs”, and Avon uses the term
“exceptional for unusual items. This should not be confused with
the term “extraordinary” in U.S. GAAP. IFRS does not allow
extraordinary item reporting.
3. Avon provides a breakout of operating profit into before exceptional
items and exceptional items in 2010. The details for these items
are explained in the footnotes (see http://www.avon-rubber.com/
corporate/reports/Avon_Rubber_Report_Account_11.pdf). They are
comprised of such items as profit on disposal of fixed assets and
fixed asset impairments.
4-86Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-87
IFRS4-5 (Continued)
(b)
Both the “Exceptional items” and the “Discontinued operations” are
example of irregular items. As in the U.S., these items are included in
the measurement of income but they are separate from “Operating
Profit”, likely due to their non-recurring nature. IFRS companies also
report interest revenue and expense under a separate heading in the
income statement. This distinguishes income from the operating and
financing activities of the company.
IFRS4-6
(a)
International Accounting Standard 1, Presentation of Financial
Statements addresses the statement of comprehensive income
reporting. This standard was issued in September 2007 and includes
subsequent amendments resulting from IFRSs issued up to 30
November 2008. Its effective date is 1 January 2009.
(b)
Total comprehensive income is the change in equity during a period
resulting from transactions and other events, other than those
changes resulting from transactions with owners in their capacity as
owners. Total comprehensive income comprises all components of
‘profit or loss’ and of ‘other comprehensive income’ (Paragraph 7).
(c)
Paragraphs 85 and 86 provide the rationale for presenting additional
information: An entity shall present additional line items, headings
and subtotals in the statement of comprehensive income and the
separate income statement (if presented), when such presentation is
relevant to an understanding of the entity’s financial performance
(Para. 85).
4-88Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS4-6 (Continued)
Because the effects of an entity’s various activities, transactions and
other events differ in frequency, potential for gain or loss and
predictability, disclosing the components of financial performance
assists users in understanding the financial performance achieved
and in making projections of future financial performance. An entity
includes additional line items in the statement of comprehensive
income and in the separate income statement (if presented), and it
amends the descriptions used and the ordering of items when this is
necessary to explain the elements of financial performance. An entity
considers factors including materiality and the nature and function of
the items of income and expense. For example, a financial institution
may amend the descriptions to provide information that is relevant to
the operations of a financial institution. An entity does not offset
income and expense items unless the criteria in paragraph 32 are met
(Para. 86).
(d)
When items of income or expense are material, an entity shall disclose
their nature and amount separately (Para. 97). Circumstances that
would give rise to the separate disclosure of items of income and
expense include:
a.
write-downs of inventories to net realisable value or of property,
plant and equipment to recoverable amount, as well as reversals
of such write-downs;
b.
restructurings of the activities of an entity and reversals of any
provisions for the costs of restructuring;
c.
disposals of items of property, plant and equipment;
d.
disposals of investments;
e.
discontinued operations;
f.
litigation settlements; and
g.
other reversals of provisions.
(Para. 98).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-89
IFRS4-7
(a)
M&S uses a condensed format income statement. This format provides
highlights of a company’s performance without presenting unnecessary
detailed computations.
(b)
M&S’s primary revenue sources are from General merchandise
(£4,195.1m) and from Food (£4,673.1m).
(c)
M&S’s gross profit was £3,724.7m in 2011 and increased to £3,755.2m
in 2012. Gross profit increased in 2012 because Revenue increased
£194m while cost of sales increased only £163.5m.
(d)
M&S reports operating profit separately from nonoperating profit
because nonoperating profit is non-recurring and not expected to
arise in the future. In order to make valid comparisons between
companies and years, nonoperating must be reported separately from
operating profit.
(e)
M&S did report Non-GAAP measures. The adjusted profit and earnings
per share measures provide additional useful information for shareholders on the underlying performance of the business.
M&S provided the following disclosure:
Non-GAAP performance measures
The directors believe that the underlying profit and earnings per share
measures provide additional useful information for shareholders on
the underlying performance of the business. These measures are
consistent with how underlying business performance is measured
internally. The underlying profit before tax measure is not a recognised
profit measure under IFRS and may not be directly comparable with
adjustment profit measures used by other companies. The adjustments
made to reported profit before tax are to exclude the following:
—profits and losses on the disposal of properties;
—significant and one-off impairment charges that distort underlying
trading;
—costs relating to strategy changes that are not considered normal
operating costs of the underlying business;
—one-off pension credits arising on changes of the defined benefit
pension scheme rules; and
4-90Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
—non-cash fair value movements in financial instruments.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 4-91
CHAPTER 5
Balance Sheet and Statement of Cash Flows
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
1.
Disclosure principles,
uses of the balance
sheet, financial
flexibility.
1, 2, 3, 4, 5,
6, 7, 10, 18,
21, 30, 31
2.
Classification of items
in the balance sheet
and other financial
statements.
11, 12, 13,
14, 15, 16,
18, 19
3.
Preparation of balance 4, 7, 8, 9,
sheet; issues of
16, 17, 20,
format, terminology,
29, 32
and valuation.
4.
Statement of cash
flows.
21, 22, 23,
24, 25, 26,
27, 28
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
3, 4
1, 2, 3, 4, 5,
6, 7, 8, 9,
10, 11
12, 13, 14,
15, 16
1, 2, 3, 8,
9, 10
1, 2
4, 5, 6, 7,
11, 12, 17
1, 2, 3, 4,
5, 6, 7
2, 3, 4
13, 14, 15,
16, 17, 18
6, 7
5
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
5-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Brief
Exercises
Learning Objectives
Questions
1.
Explain the uses and
limitations of a
balance sheet.
1, 2, 3, 4, 5,
6, 7, 18
2.
Identify the major
classifications of the
balance sheet.
6, 8, 9,11,
12, 13, 14,
15, 16, 17,
18, 19
1, 2, 3, 4,
6,
8, 9, 10
3.
Prepare a classified balance
sheet using
the report and account
formats.
9, 10, 14, 20 1, 2, 3, 4, 5,
6, 7, 8, 9,
10, 11
1, 2, 3, 4,
5,
6, 7, 9, 10,
11, 12, 17
4.
Indicate the purpose of the
statement
of cash flows.
21
5.
Identify the content of the
statement
of cash flows.
22, 23, 24,
26
6.
Prepare a basic statement of
cash flows.
25
12, 13, 14,
15
14, 15, 16,
17, 18
6, 7
7.
Understand the usefulness of
the statement
of cash flows.
26, 27, 28
12, 16
15, 16, 18
6, 7
8.
Determine which balance
sheet information requires
supplemental disclosure.
30, 31, 32
9.
Describe the major disclosure
techniques
for the balance sheet.
29
5-2Copyright © 2013 John Wiley & Sons, Inc.
Exercises
Concepts
Problems for
Analysis
7
CA5-2,
CA5-3
CA5-2,
CA5-3
1, 2, 3, 4,
5, 6, 7
CA5-1
CA5-4
13
Kieso, Intermediate Accounting, 15/e, Solutions Manual
CA5-4,
CA5-5
4
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE
Level of
Difficulty
Time
(minutes)
Balance sheet classifications.
Classification of balance sheet accounts.
Classification of balance sheet accounts.
Preparation of a classified balance sheet.
Preparation of a corrected balance sheet.
Corrections of a balance sheet.
Current assets section of the balance sheet.
Current vs. long-term liabilities.
Current assets and current liabilities.
Current liabilities.
Balance sheet preparation.
Preparation of a balance sheet.
Statement of cash flows—classifications.
Preparation of a statement of cash flows.
Preparation of a statement of cash flows.
Preparation of a statement of cash flows.
Preparation of a statement of cash flows and a
balance sheet.
Preparation of a statement of cash flows, analysis.
Simple
Simple
Simple
Simple
Simple
Complex
Moderate
Moderate
Complex
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
15–20
15–20
15–20
30–35
30–35
30–35
15–20
10–15
30–35
15–20
25–30
30–35
15–20
25–35
25–35
25–35
30–35
Moderate
25–35
Preparation of a classified balance sheet, periodic
inventory.
Balance sheet preparation.
Balance sheet adjustment and preparation.
Preparation of a corrected balance sheet.
Balance sheet adjustment and preparation.
Preparation of a statement of cash flows and
a balance sheet.
Preparation of a statement of cash flows and
balance sheet.
Moderate
30–35
Moderate
Moderate
Complex
Complex
Complex
35–40
40–45
40–45
40–45
35–45
Complex
40–50
Reporting for financial effects of varied transactions.
Identifying balance sheet deficiencies.
Critique of balance sheet format and content.
Presentation of property, plant, and equipment.
Cash flow analysis.
Moderate
Moderate
Simple
Simple
Complex
20–25
20–25
20–25
20–25
40–50
Item
Description
E5-1
E5-2
E5-3
E5-4
E5-5
E5-6
E5-7
E5-8
E5-9
E5-10
E5-11
E5-12
E5-13
E5-14
E5-15
E5-16
E5-17
E5-18
P5-1
P5-2
P5-3
P5-4
P5-5
P5-6
P5-7
CA5-1
CA5-2
CA5-3
CA5-4
CA5-5
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
5-3
SOLUTIONS TO CODIFICATION EXERCISES
CE5-1
(a) Current assets is used to designate cash and other assets or resources commonly identified as
those that are reasonably expected to be realized in cash or sold or consumed during the normal
operating cycle of the business.
(b) Intangible assets are assets (not including financial assets) that lack physical substance. (The
term intangible assets is used to refer to intangible assets other than goodwill.) Clicking on the first
link yields the following FASB ASC string: 350 Intangibles—Goodwill and Other > 10 Overall.
(c) Cash equivalents are short-term, highly liquid investments that have both of the following
characteristics:
a.
Readily convertible to known amounts of cash
b.
So near their maturity that they present insignificant risk of changes in value because of
changes in interest rates.
Generally, only investments with original maturities of three months or less qualify under that
definition. Original maturity means original maturity to the entity holding the investment. For
example, both a three-month U.S. Treasury bill and a three-year Treasury note purchased three
months from maturity qualify as cash equivalents. However, a Treasury note purchased three years
ago does not become a cash equivalent when its remaining maturity is three moths. Examples of
items commonly considered to be cash equivalents are Treasury bills, commercial paper, money
market funds, and federal funds sold (for an entity with banking operations).
(d) Financing activities include obtaining resources from owners and providing them with a return on,
and a return of, their investment; receiving restricted resources that by donor stipulation must be
used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise
settling the obligation; and obtaining and paying for other resources obtained from creditors on
long-term credit.
CE5-2
See FASC ASC 210-10-45 (Other Presentation Matters)
Classification of Current Liabilities
45-5A
Total of current liabilities shall be presented in classified balance sheets.
45-6
The concept of current liabilities shall include estimated or accrued amounts that are expected
to be required to cover expenditures within the year for known obligations the amount of which
can be determined only approximately (as in the case of provisions for accruing bonus
payments) or where the specific person or persons to whom payment will be made cannot as
yet be designated (as in the case of estimated costs to be incurred in connection with
guaranteed servicing or repair of products already sold).
5-4Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CE5-2 (Continued)
45-7
Section 470-10-45 includes guidance on various debt transactions that may result in current
liability classification. These transactions are the following:
a.
b.
c.
Due on demand loan agreements
Callable debt agreements
Short-term obligations expected to be refinanced.
CE5-3
The following discussion is provided at 235-10-50 Disclosure
> Accounting Policies Disclosure
50-1
Information about the accounting policies adopted by an entity is essential for financial
statement users. When financial statements are issued purporting to present fairly financial
position, cash flows, and results of operations in accordance with generally accepted
accounting principles (GAAP), a description of all significant accounting policies of the entity
shall be included as an integral part of the financial statements. In circumstances where it may
be appropriate to issue one or more of the basic financial statements without the others,
purporting to present fairly the information given in accordance with GAAP, statements so
presented also shall include disclosure of the pertinent accounting policies.
> Accounting Policies Disclosure in Interim Periods
50-2
The provisions of the preceding paragraph are not intended to apply to unaudited financial
statements issued as of a date between annual reporting dates (for example, each quarter) if
the reporting entity has not changed its accounting policies since the end of its preceding
fiscal year.
> What to Disclose
50-3
Disclosure of accounting policies shall identify and describe the accounting principles followed
by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. In general, the disclosure shall
encompass important judgments as to appropriateness of principles relating to recognition of
revenue and allocation of asset costs to current and future periods; in particular, it shall
encompass those accounting principles and methods that involve any of the following:
a.
b.
c.
A selection from existing acceptable alternatives
Principles and methods peculiar to the industry in which the entity operations, even if
such principles and methods are predominantly followed in that industry
Unusual or innovative applications of GAAP.
> Examples of Disclosures
50-4
Examples of disclosures by an entity commonly required with respect to accounting policies
would include, among others, those relating to the following:
a.
b.
Basis of consolidation
Depreciation methods
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
5-5
CE5-3 (Continued)
c.
d.
e.
f.
Amortization of intangibles
Inventory pricing
Accounting for recognition of profit on long-term construction-type contracts
Recognition of revenue from franchising and leasing operations.
> Avoid Duplicate Details of Disclosures
50-5
Financial statement disclosure of accounting policies shall not duplicate details (for example,
composition of inventories or of plant assets) presented elsewhere as part of the financial
statements. In some cases, the disclosure of accounting policies shall refer to related details
presented elsewhere as part of the financial statements; for example, changes in accounting
policies during the period shall be described with cross-reference to the disclosure required by
Topic 250.
> Format
50-6
This Subtopic recognizes the need for flexibility in matters of format (including the location) of
disclosure of accounting policies provided that the entity identifies and describes its significant
accounting policies as an integral part of its financial statements in accordance with the provisions of this Subtopic. Disclosure is preferred in a separate summary of significant accounting
policies preceding the notes to financial statements, or as the initial note, under the same or a
similar title.
CE5-4
The following section: 230-10-05 Overview and Background provides a discussion of the objectives for
the Statement of Cash Flows.
05-1
The Statement of Cash Flows Topic presents standards for reporting cash flows in generalpurpose financial statements.
05-2
Specific guidance is provided on all of the following:
a.
b.
c.
d.
Classifying in the statement of cash flows of cash receipts and payments as either
operating, investing, or financing activities
Applying the direct method and the indirect method of reporting cash flows
Presenting the required information about noncash investing and financing activity and
other events
Classifying cash receipts and payments related to hedging activities.
230-10-10 Objectives
10-1
The primary objective of a statement of cash flows is to provide relevant information about the
cash receipts and cash payments of an entity during a period.
5-6Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CE5-4 (Continued)
10-2
The information provided in a statement of cash flows, if used with related disclosures and
information in the other financial statements, should help investors, creditors, and others (including
donors) to do all of the following:
a.
b.
c.
d.
Assess the entity’s ability to generate positive future net cash flows
Assess the entity’s ability to meet its obligations, its ability to pay dividends, and its
needs for external financing
Assess the reasons for differences between net income and associated cash receipts
and payments
Assess the effects on an entity’s financial position of both its cash and noncash investing
and financing transactions during the period.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
5-7
ANSWERS TO QUESTIONS
1. The balance sheet provides information about the nature and amounts of investments in enterprise
resources, obligations to enterprise creditors, and the owners’ equity in net enterprise resources.
That information not only complements information about the components of income, but also
contributes to financial reporting by providing a basis for (1) computing rates of return, (2) evaluating
the capital structure of the enterprise, and (3) assessing the liquidity and financial flexibility of the
enterprise.
2. Solvency refers to the ability of an enterprise to pay its debts as they mature. For example, when a
company carries a high level of long-term debt relative to assets, it has lower solvency. Information
on long-term obligations, such as long-term debt and notes payable, in comparison to total assets
can be used to assess resources that will be needed to meet these fixed obligations (such as
interest and principal payments).
3. Financial flexibility is the ability of an enterprise to take effective actions to alter the amounts and
timing of cash flows so it can respond to unexpected needs and opportunities. An enterprise with a
high degree of financial flexibility is better able to survive bad times, to recover from unexpected
setbacks, and to take advantage of profitable and unexpected investment opportunities. Generally,
the greater the financial flexibility, the lower the risk of enterprise failure.
4. Some situations in which estimates affect amounts reported in the balance sheet include:
(a)
allowance for doubtful accounts.
(b)
depreciable lives and estimated salvage values for plant and equipment.
(c)
warranty returns.
(d)
determining the amount of revenues that should be recorded as unearned.
When estimates are required, there is subjectivity in determining the amounts. Such subjectivity
can impact the usefulness of the information by reducing the faithful representation of the
measures, either because of bias or lack of verifiability.
5. An increase in inventories increases current assets, which is in the numerator of the current ratio.
Therefore, inventory increases will increase the current ratio. In general, an increase in the current
ratio indicates a company has better liquidity, since there are more current assets relative to
current liabilities.
Note to instructors—When inventories increase faster than sales, this may not be a good signal
about liquidity. That is, inventory can only be used to meet current obligations when it is sold (and
converted to cash). That is why some analysts use a liquidity ratio—the acid-test ratio—that
excludes inventories from current assets in the numerator.
6. Liquidity describes the amount of time that is expected to elapse until an asset is converted into
cash or until a liability has to be paid. The ranking of the assets given in order of liquidity is:
(1) (d) Short-term investments.
(2) (e) Accounts receivable.
(3) (b) Inventory.
(4) (c) Buildings.
(5) (a) Goodwill.
7. The major limitations of the balance sheet are:
(a)
The values stated are generally historical and not at fair value.
(b)
Estimates have to be used in many instances, such as in the determination of collectibility of
receivables or finding the approximate useful life of long-term tangible and intangible assets.
(c)
Many items, even though they have financial value to the business, presently are not
recorded. One example is the value of a company’s human resources.
5-8Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 5 (Continued)
8. Some items of value to technology companies such as Intel or IBM are the value of research and
development (new products that are being developed but which are not yet marketable), the value
of the “intellectual capital” of its workforce (the ability of the companies’ employees to come up
with new ideas and products in the fast changing technology industry), and the value of the
company reputation or name brand (e.g., the “Intel Inside” logo). In most cases, the reasons why
the value of these items are not recorded in the balance sheet concern the lack of faithful
representation of the estimates of the future cash flows that will be generated by these “assets”
(for all three types) and the ability to control the use of the asset (in the case of employees). Being
able to reliably measure the expected future benefits and to control the use of an item are
essential elements of the definition of an asset, according to the Conceptual Framework.
9. Classification in financial statements helps users by grouping items with similar characteristics and
separating items with different characteristics. Current assets are expected to be converted to
cash within one year or the operating cycle, whichever is longer—property, plant and equipment
will provide cash inflows over a longer period of time. Thus, separating long-term assets from
current assets facilitates computation of useful ratios such as the current ratio.
10. Separate amounts should be reported for accounts receivable and notes receivable. The amounts
should be reported gross, and an amount for the allowance for doubtful accounts should be
deducted. The amount and nature of any nontrade receivables, and any amounts designated or
pledged as collateral, should be clearly identified.
11. No. Available-for-sale securities should be reported as a current asset only if management expects
to convert them into cash as needed within one year or the operating cycle, whichever is longer. If
available-for-sale securities are not held with this expectation, they should be reported as longterm investments.
12. The relationship between current assets and current liabilities is that current liabilities are those
obligations that are reasonably expected to be liquidated either through the use of current assets
or the creation of other current liabilities.
13. The total selling price of the season tickets is $20,000,000 (10,000 X $2,000). Of this amount,
$8,000,000 has been earned by 12/31/14 (16/40 X $20,000,000). The remaining $12,000,000
should be reported as unearned revenue, a current liability in the 12/31/14 balance sheet (24/40 X
$20,000,000).
14. Working capital is the excess of total current assets over total current liabilities. This excess is
sometimes called net working capital. Working capital represents the net amount of a company’s
relatively liquid resources. That is, it is the liquidity buffer available to meet the financial demands of
the operating cycle.
15. (a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Stockholders’ Equity. “Treasury stock (at cost).”
Note: This is a reduction of total stockholders’ equity (reported as contra-equity).
Current Assets. Included in “Cash.”
Long-Term Investments. “Land held as an investment.”
Long-Term Investments. “Sinking fund.”
Long-term debt (adjunct account to bonds payable). “Unamortized premium on bonds payable.”
Intangible Assets. “Copyrights.”
Investments. “Employees’ pension fund,” with subcaptions of “Cash” and “Securities” if desired.
(Assumes that the company still owns these assets.)
Stockholders’ Equity. “Additional paid-in capital.”
Investments. Nature of investments should be given together with parenthetical information
as follows: “pledged to secure loans payable to banks.”
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
5-9
Questions Chapter 5 (Continued)
16. (a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
17. (a)
(b)
(c)
(d)
(e)
Allowance for doubtful accounts should be deducted from accounts receivable in current
assets.
Merchandise held on consignment should not appear on the consignee’s balance sheet
except possibly as a note to the financial statements.
Advances received on sales contract are normally a current liability and should be shown as
such in the balance sheet.
Cash surrender value of life insurance should be shown as a long-term investment.
Land should be reported in property, plant, and equipment unless held for investment.
Merchandise out on consignment should be shown among current assets under the heading
of inventory.
Franchises should be itemized in a section for intangible assets.
Accumulated depreciation of plant and equipment should be deducted from the equipment
account.
Materials in transit should not be shown on the balance sheet of the buyer, if purchased
f.o.b. destination.
Trade accounts receivable should be stated at their estimated amount collectible, often
referred to as net realizable value. The method most generally followed is to deduct from the
total accounts receivable the amount of the allowance for doubtful accounts.
Land is generally stated in the balance sheet at cost.
Inventories are generally stated at the lower of cost or market.
Trading securities (consisting of common stock of other companies) are stated at fair value.
Prepaid expenses should be stated at cost less the amount apportioned to and written off
over the previous accounting periods.
18. Assets are defined as probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events. If a building is leased under a capital lease, the
future economic benefits of using the building are controlled by the lessee (tenant) as the result of
a past event (the signing of a lease agreement).
19. Battle is incorrect. Retained earnings is a source of assets, but is not an asset itself. For example,
even though the funds obtained from issuing a note payable are invested in the business, the note
payable is not reported as an asset. It is a source of assets, but it is reported as a liability because
the company has an obligation to repay the note in the future. Similarly, even though the earnings
are invested in the business, retained earnings is not reported as an asset. It is reported as part of
shareholders’ equity because it is, in effect, an investment by owners which increases the ownership
interest in the assets of an entity.
20. The notes should appear as long-term liabilities with full disclosure as to their terms. Each year, as
the profit is determined, notes of an amount equal to two-thirds of the year’s profits should be
transferred from the long-term liabilities to current liabilities until all of the notes have been
liquidated.
21. The purpose of a statement of cash flows is to provide relevant information about the cash receipts
and cash payments of an enterprise during a period. It differs from the balance sheet and the
income statement in that it reports the sources and uses of cash by operating, investing, and
financing activity classifications. While the income statement and the balance sheet are accrual
basis statements, the statement of cash flows is a cash basis statement—noncash items are
omitted.
22. The difference between these two amounts may be due to increases in current assets (e.g., an
increase in accounts receivable from a sale on account would result in an increase in revenue and
net income but have no effect yet on cash). Similarly a cash payment that results in a decrease in
an existing current liability (e.g., accounts payable would decrease cash provided by operations
without affecting net income).
5-10Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 5 (Continued)
23. The difference between these two amounts could be due to noncash charges that appear in the
income statement. Examples of noncash charges are depreciation, depletion, and amortization of
intangibles. Expenses recorded but unpaid (e.g., increase in accounts payable) and collection of
previously recorded sales on credit (i.e., now decreasing accounts receivable) also would cause
cash provided by operating activities to exceed net income.
24. Operating activities involve the cash effects of transactions that enter into the determination of
net income. Investing activities include making and collecting loans and acquiring and disposing
of debt and equity instruments; property, plant, and equipment and intangibles. Financing activities
involve long-term liability and stockholders’ equity items and include obtaining capital from owners
and providing them with a return on (dividends) and a return of their investment and borrowing
money from creditors and repaying the amounts borrowed.
25. (a)
Net income is adjusted downward by deducting $5,000 from $90,000 and reporting cash
provided by operating activities as $85,000.
(b)
The issuance of the preferred stock is a financing activity. The issuance is reported as
follows:
Cash flows from financing activities
Issuance of preferred stock ............................................................
$1,150,000
(c)
Net income is adjusted as follows:
Cash flows from operating activities
Net income ..........................................................................................
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense .....................................................................
Bond premium amortization ............................................................
Net cash provided by operating activities .............................................
(d)
$90,000
14,000
(5,000)
$99,000
The increase of $20,000 reflects an investing activity. The increase in Land is reported as
follows:
Cash flows from investing activities:
Purchase Land ...............................................................................
$(20,000)
26. The company appears to have good liquidity and reasonable financial flexibility. Its current cash
 $1,200,000 
debt coverage is 1.20 
 , which indicates that it can pay off its current liabilities in a
 $1,000,000 
given year from its operations. In addition, its cash debt coverage is also good at
 $1,200,000
0.80 
 , which indicates that it can pay off approximately 80% of its debt out of current
 $1,500,000
operations.
27. Free cash flow = $860,000 – $75,000 – $30,000 = $755,000.
28. Free cash flow is net cash provided by operating activities less capital expenditures and dividends.
The purpose of free cash flow analysis is to determine the amount of discretionary cash flow a
company has for purchasing additional investments, retiring its debt, purchasing treasury stock, or
simply adding to its liquidity and financial flexibility.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-11
Questions Chapter 5 (Continued)
29. Some of the techniques of disclosure for the balance sheet are:
(a) Parenthetical explanations.
(b) Notes to the financial statements.
(c)
Cross references and contra items.
(d) Supporting schedules.
30. A note entitled “Summary of Significant Accounting Policies” would indicate the basic accounting
principles used by that enterprise. This note should be very useful from a comparative standpoint,
since it should be easy to determine whether the company uses the same accounting policies as
other companies in the same industry.
31. General debt obligations, lease contracts, pension arrangements and stock option plans are four
items for which disclosure is mandatory in the financial statements. The reason for disclosing
these contractual situations is that these commitments are of a long-term nature, are often
significant in amount, and are very important to the company’s well-being.
32. The profession has recommended that the use of the term “surplus” be discontinued in balance
sheet presentations of stockholders’ equity. This term has a connotation outside accounting that is
quite different from its meaning in the accounts or in the balance sheet. The use of the terms
capital surplus, paid-in surplus, and earned surplus is confusing to the nonaccountant and leads to
misinterpretation.
5-12Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-1
Current assets
Cash ...................................................................
Accounts receivable .........................................
Less: Allowance for doubtful accounts.....
Inventory............................................................
Prepaid insurance .............................................
Total current assets ..............................
$ 30,000
$110,000
8,000
102,000
290,000
9,500
$431,500
BRIEF EXERCISE 5-2
Current assets
Cash ...................................................................
Equity Investments (Trading) ...........................
Accounts receivable .........................................
Less: Allowance for doubtful accounts.....
Inventory............................................................
Prepaid insurance .............................................
Total current assets ..............................
$
$90,000
4,000
7,000
11,000
86,000
30,000
5,200
$139,200
BRIEF EXERCISE 5-3
Long-term investments
Debt investments ..............................................
Land held for investment .................................
Note receivables (long-term) ............................
Total investments........................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 56,000
39,000
42,000
$137,000
(For Instructor Use Only) 5-13
BRIEF EXERCISE 5-4
Property, plant, and equipment
Land ...................................................................
Buildings............................................................
Less: Accumulated depreciation ...............
Equipment .........................................................
Less: Accumulated depreciation ..............
Timberland.........................................................
Total property, plant, and equipment.....
$ 71,000
$207,000
45,000
$190,000
19,000
162,000
171,000
70,000
$474,000
BRIEF EXERCISE 5-5
Intangible assets
Goodwill .............................................................
Patents ...............................................................
Franchises .........................................................
Total intangible assets ................................
$150,000
220,000
130,000
$500,000
BRIEF EXERCISE 5-6
Intangible assets
Goodwill .............................................................
Franchises .........................................................
Patents ...............................................................
Trademarks ........................................................
Total intangible assets ................................
$ 50,000
47,000
33,000
10,000
$140,000
BRIEF EXERCISE 5-7
Current liabilities
Notes payable ....................................................
Accounts payable .............................................
Salaries and wages payable .............................
Income taxes payable .......................................
Total current liabilities ..........................
5-14Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 22,500
72,000
4,000
7,000
$105,500
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 5-8
Current liabilities
Accounts payable .............................................
Unearned rent revenue .....................................
Salaries and wages payable .............................
Interest payable.................................................
Income tax payable ...........................................
Total current liabilities ..........................
$220,000
41,000
27,000
12,000
29,000
$329,000
BRIEF EXERCISE 5-9
Long-term liabilities
Bonds payable ..................................................
Less: Discount on bonds payable .............
Pension liability.................................................
Total long-term liabilities ......................
$400,000
29,000
$371,000
375,000
$746,000
BRIEF EXERCISE 5-10
Stockholders’ equity
Common stock ..................................................
Paid-in capital in excess of par ........................
Retained earnings .............................................
Accumulated other comprehensive loss.........
Stockholders’ equity – Hawthorn
Corporation .....................................................
Noncontrolling interest.....................................
Total stockholders’ equity ..........................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$750,000
200,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$950,000
120,000
(150,000)
920,000
35,000
$955,000
(For Instructor Use Only) 5-15
BRIEF EXERCISE 5-11
Stockholders’ equity
Preferred stock ..................................................
Common stock ..................................................
Additional paid-in capital ..................................
Retained earnings .............................................
Stockholders’ equity – Stowe Company..........
Noncontrolling interest .....................................
Total stockholders’ equity ..........................
$152,000
55,000
174,000
114,000
495,000
63,000
$558,000
BRIEF EXERCISE 5-12
Cash Flow Statement
Operating Activities
Net income ..........................................................
Depreciation expense.........................................
Increase in accounts receivable ........................
Increase in accounts payable ............................
Net cash provided by operating activities ......
$40,000
$ 4,000
(10,000)
7,000
Investing Activities
Purchase of equipment ......................................
Financing Activities
Issue notes payable ...........................................
Property dividends .............................................
Net cash flow from financing activities .......
Net increase in cash ($41,000 – $8,000 + $15,000) .....
1,000
41,000
(8,000)
$20,000
(5,000)
15,000
$48,000
Free Cash Flow = $41,000 (Net cash provided by operating activities) –
$8,000 (Purchase of equipment) – $5,000 (Dividends) = $28,000.
5-16Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 5-13
Cash flows from operating activities
Net income ..........................................................
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense ..................................
Increase in accounts payable ......................
Increase in accounts receivable ..................
Net cash provided by operating activities ........
$151,000
$44,000
9,500
(13,000)
40,500
$191,500
BRIEF EXERCISE 5-14
Sale of land and building .........................................
Purchase of land ......................................................
Purchase of equipment ............................................
Net cash provided by investing activities ........
$191,000
(37,000)
(53,000)
$101,000
BRIEF EXERCISE 5-15
Issuance of common stock .....................................
Purchase of treasury stock .....................................
Payment of cash dividend .......................................
Retirement of bonds ................................................
Net cash used by financing activities ...............
$147,000
(40,000)
(95,000)
(100,000)
$ (88,000)
BRIEF EXERCISE 5-16
Free Cash Flow Analysis
Net cash provided by operating activities ..............
Purchase of equipment ...............................
Purchase of land*.........................................
Dividends ......................................................
Free cash flow ..........................................................
$400,000
(53,000)
(37,000)
(95,000)
$215,000
*If the land were purchased as an investment, it would be excluded in the
computation of free cash flow.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-17
5-18Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO EXERCISES
EXERCISE 5-1 (15–20 minutes)
(a)
If the equity investment (preferred stock) is readily marketable and
held primarily for sale in the near term to generate income on shortterm price differences, then the account should appear as a current
asset and be included with trading securities. If, on the other hand,
the preferred stock is not a trading security, it should be classified as
available-for-sale. Available-for-sale securities are classified as
current or noncurrent depending upon the circumstances.
(b)
If the company accounts for the treasury stock on the cost basis, the
account should properly be shown as a reduction of total
stockholders’ equity.
(c)
Stockholders’ equity.
(d)
Current liability.
(e)
Property, plant, and equipment (as a deduction).
(f)
If the warehouse in process of construction is being constructed for
another party, it is properly classified as an inventory account in the
current assets section. This account will be shown net of any billings
on the contract. On the other hand, if the warehouse is being
constructed for the use of this particular company, it should be
classified as a separate item in the property, plant, and equipment
section.
(g)
Current asset.
(h)
Current liability.
(i)
Retained earnings.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-19
EXERCISE 5-1 (Continued)
(j)
Current asset.
(k)
Current liability.
(l)
Current liability.
(m)
Current asset (inventory).
(n)
Current liability.
EXERCISE 5-2 (15–20 minutes)
1.
2.
3.
4.
5
6.
7.
8.
9.
10.
h.
d.
f.
f.
c.
a.
f.
g.
a.
a.
5-20Copyright © 2013 John Wiley & Sons, Inc.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
b.
f.
a.
h.
c.
b.
a.
a.
g.
f.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-3 (15–20 minutes)
1.
2.
3.
4.
5
6.
7.
8.
9.
a.
b.
f.
a.
f.
h.
i.
d.
a.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
10.
11.
12.
13.
14.
15.
16.
17.
18.
f.
a.
f.
a. or e. (preferably a.)
c. and N.
f.
X.
f.
c.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-21
EXERCISE 5-4 (30–35 minutes)
Denis Savard Inc.
Balance Sheet
December 31, 20–
Assets
Current assets
Cash ............................................................
Less: Cash restricted for plant
expansion ...........................................
Accounts receivable ...................................
Less: Allowance for doubtful
accounts .............................................
Notes receivable .........................................
Receivables—officers ................................
Inventories
Finished goods .....................................
Work in process ....................................
Raw materials .......................................
Total current assets ........................
$XXX
XXX
XXX
$XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Long-term investments
Preferred stock investments......................
Land held for future plant site ...................
Restricted cash (plant expansion).............
Total long-term investments ..........
Property, plant, and equipment
Buildings .....................................................
Less: Accum. depreciation—
buildings.............................................
Intangible assets
Copyrights ..................................................
Total assets ..........................................
5-22Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
XXX
$XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
$XXX
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-4 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Salaries and wages payable ...........................
Notes payable, short-term ..............................
Unearned subscriptions revenue ...................
Unearned rent revenue ...................................
Total current liabilities ..............................
$XXX
XXX
XXX
XXX
$XXX
Long-term debt
Bonds payable, due in four years ..................
Less: Discount on bonds payable..................
Total liabilities ...........................................
Stockholders’ equity
Capital stock:
Common stock ..........................................
Additional paid-in capital:
Paid-in capital in excess of par
(common stock) .......................................
Total paid-in capital .............................
Retained earnings ...........................................
Total paid-in capital and
retained earnings ..............................
Less: Treasury stock, at cost ..................
Equity attributable to Denis Savard, Inc. .......
Equity attributed to noncontrolling interest ..
Total stockholders’ equity ..................
Total liabilities and
stockholders’ equity .........................
$XXX
(XXX)
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(XXX)
XXX
XXX
XXX
$XXX
Note to instructor: An assumption made here is that cash included the
restricted cash for plant expansion. If it did not, then a subtraction from
cash would not be necessary or the cash balance would be “grossed up”
and then the restricted cash for plant expansion deducted.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-23
EXERCISE 5-5 (30–35 minutes)
Uhura Company
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ........................................................
Equity investments (trading) .................
Accounts receivable ...............................
Less: Allowance for doubtful
accounts .........................................
Inventory, at lower-of-average
cost-or-market .....................................
Prepaid expenses ...................................
Total current assets..........................
$230,000
120,000
$357,000
17,000
401,000
12,000
$1,103,000
Long-term investments
Land held for future use.........................
Cash surrender value of life
insurance .............................................
Property, plant, and equipment
Buildings .................................................
Less: Accum. depr.—buildings .......
Equipment ...............................................
Less: Accum. depr.—equipment .....
340,000
175,000
90,000
$730,000
160,000
265,000
105,000
570,000
160,000
Intangible assets
Goodwill ..................................................
Total assets ......................................
5-24Copyright © 2013 John Wiley & Sons, Inc.
265,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
730,000
80,000
$2,178,000
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-5 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable..................................
Notes payable (due next year) ..............
Rent payable ..........................................
Total current liabilities ....................
$ 135,000
125,000
49,000
$309,000
Long-term liabilities
Bonds payable ....................................... $500,000
Add: Premium on bonds payable .........
53,000 $ 553,000
Pension obligation ................................
82,000
Total liabilities .................................
Stockholders’ equity
Common stock, $1 par, authorized
400,000 shares, issued 290,000
shares..................................................
Additional paid-in capital ......................
Retained earnings .................................
Total stockholders’ equity ..............
Total liabilities and
stockholders’ equity.....................
290,000
160,000
635,000
944,000
450,000
784,000*
1,234,000
$2,178,000
*$2,178,000 – $944,000 – $450,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-25
EXERCISE 5-6 (30–35 minutes)
Geronimo Company
Balance Sheet
July 31, 2014
Assets
Current assets
Cash .......................................................
Accounts receivable ..............................
Less: Allowance for doubtful
accounts ........................................
Inventory ................................................
Total current assets.........................
$60,000*
$38,700**
3,500
35,200
65,300***
$160,500
Long-term investments
Bond sinking fund .................................
Property, plant, and equipment
Equipment ..............................................
Less: Accumulated depreciation—
equipment ..............................
15,000
112,000
28,000
Intangible assets
Patents ...................................................
Total assets .....................................
84,000
21,000
$280,500
*($69,000 – $15,000 + $6,000)
**($44,000 – $5,300)
***($60,000 + $5,300)
5-26Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-6 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes and accounts payable ..........................
Income taxes payable .....................................
Total current liabilities ..............................
$ 44,000
6,000
$ 50,000
Long-term liabilities ..............................................
Total liabilities ...........................................
75,000
125,000
Stockholders’ equity .............................................
Total liabilities and stockholders’ equity ........................................
155,500
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$280,500
(For Instructor Use Only) 5-27
EXERCISE 5-7 (15–20 minutes)
Current assets
Cash ...................................................................
Less: Restricted cash (plant expansion) .........
Trading securities at fair value (cost,
$31,000) ...........................................................
Accounts receivable (of which $50,000 is
pledged as collateral on a bank loan) ...........
Less: Allowance for doubtful accounts ...........
Interest receivable [($40,000 X 6%) X 8/12] ......
Inventories at lower of cost (determined
using LIFO) or market
Finished goods ............................................
Work in process ...........................................
Raw materials ..............................................
Total current assets ...............................
$ 87,000*
50,000
$ 37,000
29,000
161,000
12,000
52,000
34,000
207,000
149,000
1,600
293,000
$509,600
*An acceptable alternative is to report cash at $37,000 and simply report
the restricted cash (plant expansion) in the investments section.
5-28Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-8 (10–15 minutes)
1.
Dividends payable of $2,375,000 will be reported as a current liability
[(1,000,000 – 50,000) X $2.50].
2.
Bonds payable of $25,000,000 and interest payable of $3,000,000
($100,000,000 X 12% X 3/12) will be reported as a current liability.
Bonds payable of $75,000,000 will be reported as a long-term liability.
3.
Customer advances of $17,000,000 will be reported as a current
liability ($12,000,000 + $30,000,000 – $25,000,000).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-29
EXERCISE 5-9 (30–35 minutes)
(a)
Allessandro Scarlatti Company
Balance Sheet (Partial)
December 31, 2014
Current assets
Cash.........................................................
Accounts receivable ...............................
Less: Allowance for doubtful
accounts ..................................
Inventory .................................................
Prepaid expenses ...................................
Total current assets ..........................
$ 34,396*
$ 91,300**
7,000
*Cash balance
Add: Cash disbursement after discount
($39,000 X 98%)
Less: Cash sales in January ($30,000 – $21,500)
Cash collected on account
Bank loan proceeds ($35,324 – $23,324)
Adjusted cash
**Accounts receivable balance
Add: Accounts reduced from January collection
($23,324 ÷ 98%)
84,300
159,000***
9,000
$286,696
$ 40,000
38,220
78,220
(8,500)
(23,324)
(12,000)
$ 34,396
$ 89,000
Deduct: Accounts receivable in January
Adjusted accounts receivable
23,800
112,800
(21,500)
$ 91,300
***Inventory
Less: Inventory received on consignment
Adjusted inventory
$171,000
12,000
$159,000
5-30Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-9 (Continued)
Current liabilities
Accounts payable ...........................................
Notes payable .................................................
Total current liabilities .............................
a
b
(b)
Accounts payable balance
Add: Cash disbursements
Purchase invoice omitted
($27,000 – $12,000)
Adjusted accounts payable
$115,000a
55,000b
$170,000
$ 61,000
$39,000
15,000
Notes payable balance
Less: Proceeds of bank loan
Adjusted notes payable
Adjustment to retained earnings balance:
Add: January sales discounts
[($23,324 ÷ 98%) X .02] ..........................
Deduct: January sales .......................................
January purchase discounts
($39,000 X 2%) ..................................
December purchases ..........................
Consignment inventory ......................
Change (decrease) to retained earnings ...........
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
54,000
$115,000
$ 67,000
12,000
$ 55,000
$
476
$30,000
780
15,000
12,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(57,780)
$(57,304)
(For Instructor Use Only) 5-31
EXERCISE 5-10 (15–20 minutes)
(a)
In order for a liability to be reported for threatened litigation, the
amount must be probable and payment reasonably estimable. Since
these conditions are not met an accrual is not required.
(b)
A current liability of $150,000 should be recorded.
(c)
A current liability for accrued interest of $4,000 ($600,000 X 8% X 1/12)
should be reported. Also, the $600,000 note payable should be a current
liability if payable in one year. Otherwise, the $600,000 notes payable
would be a long-term liability.
(d)
Although Bad Debt Expense of $300,000 should be debited and the
Allowance for Doubtful Accounts credited for $300,000, this does not
result in a liability. The allowance for doubtful accounts is a valuation
account (contra asset) and is deducted from accounts receivable on
the balance sheet.
(e)
A current liability of $80,000 should be reported. The liability is recorded
on the date of declaration.
(f)
Customer advances of $110,000 ($160,000 – $50,000) will be reported
as a current liability.
5-32Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-11 (25–30 minutes)
Kelly Corporation
Balance Sheet
December 31, 2014
Assets
Current assets
Cash .....................................................................
Supplies ...............................................................
Prepaid insurance ...............................................
Total current assets .....................................
Equipment..................................................................
Less: Accumulated depreciation—equipment ........
Trademark ..................................................................
Total assets...................................................
$ 6,850
1,200
1,000
$ 9,050
48,000
4,000
44,000
950
$54,000
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable................................................
Salaries and wages payable ...............................
Unearned service revenue ..................................
Total current liabilities ................................
Long-term liabilities
Bonds payable .....................................................
Total liabilities .....................................................
Stockholders’ equity
Common stock ....................................................
Retained earnings ($25,000 – $2,500*) ...............
Total stockholders’ equity ............................
Total liabilities and stockholders’ equity .........
$10,000
500
2,000
$12,500
9,000
21,500
10,000
22,500
32,500
$54,000
*[$10,000 – ($9,000 + $1,400 + $1,200 + $900)]
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-33
EXERCISE 5-12 (30–35 minutes)
Scott Butler Corporation
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ......................................................
$197,000
Debt investments (Trading) .................
153,000
Accounts receivable ............................. $435,000
Less: Allowance for doubtful
accounts ..................................... (25,000)
410,000
Inventory ...............................................
597,000
Total current assets.......................
Long-term investments
Debt investments..................................
Equity investments ...............................
Total long-term investments ........
Property, plant, and equipment
Land.......................................................
Buildings ............................................... 1,040,000
Less: Accum. depreciation—
building........................................ (152,000)
Equipment ............................................ 600,000
Less: Accum. depreciation—
equipment ................................... (60,000)
Total property, plant, and
equipment ...................................
Intangible assets
Franchises ....................................................
Patents ..................................................
Total intangible assets ...................
Total assets .....................................
5-34Copyright © 2013 John Wiley & Sons, Inc.
1,357,000
299,000
277,000
576,000
260,000
888,000
540,000
1,688,000
160,000
195,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
355,000
$3,976,000
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-12 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable.............................
Notes payable (short-term) ..............
Dividends payable ............................
Accrued liabilities.............................
Total current liabilities .............
Long-term debt
Notes payable (long-term) ...............
Bonds payable ..................................
Total long-term liabilities ............
Total liabilities ............................
Stockholder’s equity
Paid-in capital
Common stock ($5 par) .............. $1,000,000
Additional paid-in capital ...........
80,000
Retained earnings* ...........................
Total paid-in capital and
retained earnings...................
Less: Treasury stock........................
Total stockholders’ equity .......
Total liabilities and
stockholders’ equity ..............
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$ 455,000
90,000
136,000
96,000
$ 777,000
900,000
1,000,000
1,900,000
2,677,000
1,080,000
410,000
1,490,000
191,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
1,299,000
$3,976,000
(For Instructor Use Only) 5-35
EXERCISE 5-12 (Continued)
*Computation of Retained Earnings:
Sales revenue
Investment revenue
Extraordinary gain
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Net income
$8,100,000
63,000
80,000
(4,800,000)
(2,000,000)
(900,000)
(211,000)
$ 332,000
Beginning retained earnings
Net income
Ending retained earnings
$ 78,000
332,000
$410,000
Or ending retained earnings can be computed as follows:
Total stockholders’ equity
Add: Treasury stock
Less: Paid-in capital in excess of par
Ending retained earnings
$1,299,000
191,000
1,080,000
$ 410,000
Note to instructor: There is no dividends account. Thus, the 12/31/14 retained
earnings balance already reflects any dividends declared.
EXERCISE 5-13 (15–20 minutes)
(a)
(b)
(c)
(d)
(e)
4.
3.
4.
3.
1.
(f)
(g)
(h)
(i)
(j)
5-36Copyright © 2013 John Wiley & Sons, Inc.
1.
5.
4.
5.
4.
(k) 1.
(l) 2.
(m) 2.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-14 (25–35 minutes)
Constantine Cavamanlis Inc.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income ...........................................................
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ...................................
Increase in accounts receivable ...................
Increase in accounts payable .......................
Net cash provided by operating activities .........
Cash flows from investing activities
Purchase of equipment .......................................
Cash flows from financing activities
Issuance of common stock.................................
Payment of cash dividends ................................
Net cash used by financing activities ................
Net increase in cash..................................................
Cash at beginning of year.........................................
Cash at end of year ...................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$44,000
$ 6,000
(3,000)
5,000
8,000
52,000
(17,000)
20,000
(23,000)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(3,000)
32,000
13,000
$45,000
(For Instructor Use Only) 5-37
EXERCISE 5-15 (25–35 minutes)
(a)
Zubin Mehta Corporation
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income ...........................................................
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ....................................
Loss on sale of investments .........................
Decrease in accounts receivable..................
Decrease in current liabilities .......................
Net cash provided by operating activities .........
Cash flows from investing activities
Sale of investments .............................................
[($74,000 – $52,000) – $10,000]
Purchase of equipment .......................................
Net cash used by investing activities ................
$160,000
$17,000
10,000
5,000
(17,000)
12,000
(58,000)
Cash flows from financing activities
Payment of cash dividends ................................
Net increase in cash ..................................................
Cash at beginning of year .........................................
Cash at end of year ...................................................
(b)
15,000
175,000
(46,000)
(30,000)
99,000
78,000
$177,000
Free Cash Flow Analysis
Net cash provided by operating activities ...............
Less: Purchase of equipment ..................................
Dividends ........................................................
Free cash flow ...........................................................
5-38Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$175,000
(58,000)
(30,000)
$ 87,000
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-16 (20–25 minutes)
(a)
Shabbona Corporation
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income ............................................................
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ....................................
Increase in accounts receivable ....................
Decrease in inventory ....................................
Decrease in accounts payable ......................
Net cash provided by operating activities ..........
Cash flows from investing activities
Sale of land ...........................................................
Purchase of equipment ........................................
Net cash used by investing activities .................
Cash flows from financing activities
Payment of cash dividends .................................
Net increase in cash...................................................
Cash at beginning of year..........................................
Cash at end of year ....................................................
$125,000
$27,000
(16,000)
9,000
(13,000)
7,000
132,000
39,000
(60,000)
(21,000)
(60,000)
51,000
22,000
$ 73,000
Noncash investing and financing activities
Issued common stock to retire $50,000 of bonds outstanding
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-39
EXERCISE 5-16 (Continued)
(b) Current cash debt coverage =
Net cash provided by operating activities
=
Average current liabilities
$132,000
=
($34,000 + $47,000) / 2
=
3.26 to 1
Cash debt coverage =
Net cash provided by operating activities
Average total liabilities
$132,000 ÷
$184,000 + $247,000
2
=
=
.61 to 1
Free Cash Flow Analysis
Net cash provided by operating activities .........................
Less: Purchase of equipment ............................................
Dividends ..................................................................
Free cash flow .....................................................................
$132,000
(60,000)
(60,000)
$ 12,000
Shabbona has excellent liquidity. Its financial flexibility is good. It might be
noted that it substantially reduced its long-term debt in 2014 which will
help its financial flexibility.
5-40Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 5-17 (30–35 minutes)
(a)
Grant Wood Corporation
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income ...............................................................
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss on sale of equipment ............................... $ 2,000*
Depreciation expense ....................................... 13,000
Patent amortization ........................................... 2,500
Increase in current assets (other than cash)....... (29,000)
Increase in current liabilities ............................ 13,000
Net cash provided by operating activities .............
$55,000
1,500
56,500
Cash flows from investing activities
Sale of equipment ................................................... 10,000
Addition to building................................................. (27,000)
Investment in stock ................................................. (16,000)
Net cash used by investing activities ....................
(33,000)
Cash flows from financing activities
Issuance of bonds ................................................... 50,000
Payment of dividends ............................................. (30,000)
Purchase of treasury stock..................................... (11,000)
Net cash provided by financing activities .............
Net increase in cash......................................................
9,000
$32,500a
*[$10,000 – ($20,000 – $8,000)]
a
An additional proof to arrive at the increase in cash is provided as follows:
Total current assets—end of period
Total current assets—beginning of period
Increase in current assets during the period
Increase in current assets other than cash
Increase in cash during year
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$296,500 [from part (b)]
235,000
61,500
29,000
$ 32,500
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-41
EXERCISE 5-17 (Continued)
(b)
Grant Wood Corporation
Balance Sheet
December 31, 2014
Assets
Current assets ................................................
$296,500b
Equity investments (Long-term) ....................
16,000
Property, plant, and equipment
Land...........................................................
$ 30,000
Building ($120,000 + $27,000) .................. $147,000
Less: Accum. depreciation—building
($30,000 + $4,000) ..................................
(34,000) 113,000
Equipment ($90,000 – $20,000) ................
70,000
Less: Accum. depreciation—equipment
($11,000 – $8,000 + $9,000) ...................
(12,000) 58,000
Total property, plant, and equipment .....
201,000
Intangible assets—patents
($40,000 – $2,500) ..................................
37,500
Total assets ........................................
$551,000
Liabilities and Stockholders’ Equity
Current liabilities ($150,000 + $13,000) ......................
Long-term liabilities
Bonds payable ($100,000 + $50,000) ....................
Total liabilities..................................................
Stockholders’ equity
Common stock.......................................................
Retained earnings ($44,000 + $55,000 – $30,000) .......
Total paid-in capital and retained earnings ......
Less: Cost of treasury stock.................................
Total stockholders’ equity ..............................
Total liabilities and stockholders’ equity .......
$163,000
150,000
313,000
$180,000
69,000
249,000
11,000
238,000
$551,000
b The
amount determined for current assets could be computed last and then is a
“plug” figure. That is, total liabilities and stockholders’ equity is computed because
information is available to determine this amount. Because the total assets amount is
the same as total liabilities and stockholders’ equity amount, the amount of total
assets is determined. Information is available to compute all the asset amounts except
current assets and therefore current assets can be determined by deducting the total
of all the other asset balances from the total asset balance (i.e., $551,000 – $37,500 –
$201,000 – $16,000). Another way to compute this amount, given the information, is
that beginning current assets plus the $29,000 increase in current assets other than
5-42Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
cash plus the $32,500 increase in cash equals $296,500.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-43
EXERCISE 5-18 (25–35 minutes)
(a)
Madrasah Corporation
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income ...........................................................
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation.........................................................
Increase in accounts payable .............................
Increase in accounts receivable .........................
Net cash provided by operating activities .........
$44,000
$ 6,000
5,000
(18,000)
Cash flows from Investing activities
Purchase of equipment .......................................
Cash flows from financing activities
Issuance of stock ................................................
Payment of dividends..........................................
Net cash used by financing activities ................
Net increase in cash ..................................................
Cash at beginning of year .........................................
Cash at end of year ...................................................
(17,000)
20,000
(33,000)
(13,000)
7,000
13,000
$20,000
2014
6.3
$126,000
$ 20,000
(b) Current ratio
(7,000)
37,000
2013
6.73
$101,000
$ 15,000
Free Cash Flow Analysis
Net cash provided by operating activities ...........................
Less: Purchase of equipment ..............................................
Pay dividends .............................................................
Free cash flow .......................................................................
$ 37,000
(17,000)
(33,000)
$ (13,000)
(c) Although, Madrasah’s current ratio has declined from 2013 to 2014, it is
still in excess of 6. It appears the company has good liquidity and
financial flexibility.
5-44Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
TIME AND PURPOSE OF PROBLEMS
Problem 5-1 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to prepare a balance sheet, given a set of accounts.
No monetary amounts are to be reported.
Problem 5-2 (Time 35–40 minutes)
Purpose—to provide the student with the opportunity to prepare a complete balance sheet, involving
dollar amounts. A unique feature of this problem is that the student must solve for the retained earnings
balance.
Problem 5-3 (Time 40–45 minutes)
Purpose—to provide an opportunity for the student to prepare a balance sheet in good form. Emphasis
is given in this problem to additional important information that should be disclosed. For example, an
inventory valuation method, bank loans secured by long-term investments, and information related to
the capital stock accounts must be disclosed.
Problem 5-4 (Time 40–45 minutes)
Purpose—to provide the student with the opportunity to analyze a balance sheet and correct it where
appropriate. The balance sheet as reported is incomplete, uses poor terminology, and is in error. A
challenging problem.
Problem 5-5 (Time 40–45 minutes)
Purpose—to provide the student with the opportunity to prepare a balance sheet in good form. Additional
information is provided on each asset and liability category for purposes of preparing the balance sheet.
A challenging problem.
Problem 5-6 (Time 35–45 minutes)
Purpose—to provide the student with an opportunity to prepare a complete statement of cash flows. A
condensed balance sheet is also required. The student is also required to explain the usefulness of the
statement of cash flows. Because the textbook does not explain in Chapter 5 all of the steps involved in
preparing the statement of cash flows, assignment of this problem is dependent upon additional
instruction by the instructor or knowledge gained in elementary financial accounting.
Problem 5-7 (Time 40–50 minutes)
Purpose—to provide the student with an opportunity to prepare a balance sheet in good form and a
more complex cash flow statement.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-45
SOLUTIONS TO PROBLEMS
PROBLEM 5-1
COMPANY NAME
Balance Sheet
December 31, 20XX
Assets
Current assets
Cash on hand (including petty cash) .............
Cash in bank ....................................................
Debt investments (trading) .............................
Accounts receivable ........................................
Less: Allowance for doubtful
accounts .........................................
Interest receivable ...........................................
Advances to employees ..................................
Inventory (ending) ...........................................
Prepaid rent .....................................................
Total current assets...................................
$XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Intangible assets
Copyrights .......................................................
Patents .............................................................
Total intangible assets ..............................
Total assets......................................................
5-46Copyright © 2013 John Wiley & Sons, Inc.
XXX
XXX
XXX
XXX
XXX
$XXX
Long-term investments
Bond sinking fund ...........................................
Cash surrender value of life insurance ..........
Land for future plant site ................................
Total long-term investments .....................
Property, plant, and equipment
Land..................................................................
Buildings ..........................................................
Less: Accum. depreciation—buildings......
Equipment ........................................................
Less: Accum. depreciation—equipment ....
Total property, plant, and equipment .......
$XXX
XXX
Kieso, Intermediate Accounting, 15/e, Solutions Manual
XXX
XXX
XXX
XXX
XXX
XXX
$XXX
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 5-1 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable .................................................
Payroll taxes payable .....................................
Salaries and wages payable ..........................
Dividends payable ..........................................
Unearned subscriptions revenue ..................
Total current liabilities .............................
Long-term debt
Bonds payable ................................................
Add: Premium on bonds payable ...........
Pension liability ..............................................
Total long-term liabilities .........................
Total liabilities ..........................................
Stockholders’ equity
Capital stock
Preferred stock (description) ...................
Common stock (description) ...................
Paid-in capital in excess of par –
Preferred stock
Total paid-in capital ..................................
Retained earnings ..........................................
Total paid-in capital and
retained earnings..................................
Accumulated other comprehensive
income.......................................................
Less: Treasury stock.....................................
Equity attributable to Stockholders’
equity – Company......................................
Equity attributable to Noncontrolling
interest .......................................................
Total stockholders’ equity .......................
Total liabilities and
stockholders’ equity..............................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$XXX
XXX
XXX
XXX
XXX
$XXX
$XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Kieso, Intermediate Accounting, 15/e, Solutions Manual
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
$XXX
(For Instructor Use Only) 5-47
PROBLEM 5-2
MONTOYA, INC.
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ...................................................
Equity investments (trading) ............
Notes receivable ................................
Income taxes receivable ...................
Inventory ............................................
Prepaid expenses ..............................
Total current assets.....................
Property, plant, and equipment
Land....................................................
Buildings ............................................ $1,640,000
Less: Accum. depreciation—
buildings ...........................
270,200
Equipment .......................................... 1,470,000
Less: Accum. depreciation—
equipment .........................
292,000
$ 360,000
121,000
445,700
97,630
239,800
87,920
$1,352,050
480,000
1,369,800
1,178,000
Intangible assets
Goodwill .............................................
Total assets ..................................
5-48Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
3,027,800
125,000
$4,504,850
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 5-2 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable...............................
Notes payable (to banks) ...................
Payroll taxes payable .........................
Income taxes payable ........................
Rent payable .......................................
Total current liabilities .................
$ 490,000
265,000
177,591
98,362
45,000
$1,075,953
Long-term liabilities
Notes payable
(long-term) ......................................
Bonds payable .................................... $300,000
Less: Discount on bonds
payable................................
15,000
Rent payable (long-term) ..................
Total liabilities ..............................
Stockholders’ equity
Capital stock
Preferred stock, $10 par; 20,000
shares authorized, 15,000
shares issued ............................
Common stock, $1 par;
400,000 shares authorized,
200,000 issued ...........................
Retained earnings
($1,063,897 – $350,000) ...................
Total stockholders’ equity
($4,504,850 – $3,440,953) ..........
Total liabilities and
stockholders’ equity..................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
1,600,000
285,000
480,000
2,365,000
3,440,953
150,000
200,000
350,000
713,897
Kieso, Intermediate Accounting, 15/e, Solutions Manual
1,063,897
$4,504,850
(For Instructor Use Only) 5-49
PROBLEM 5-3
EASTWOOD COMPANY
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ......................................................
$ 41,000
Accounts receivable ............................. $163,500
Less: Allowance for doubtful
accounts ..............................
8,700 154,800
Inventory (LIFO cost)............................
208,500
Prepaid insurance ................................
5,900
Total current assets........................
Long-term investments
Equity investments
($120,000 have been pledged as
security for notes payable)—
at fair value ........................................
Property, plant, and equipment
Cost of uncompleted plant facilities
Land .................................................
Construction in process
(building) .....................................
Equipment .............................................
Less: Accum. depreciation—
equipt. ...................................
339,000
85,000
124,000
400,000
209,000
240,000
160,000
Intangible assets
Patents (less $4,000 amortization) ......
Total assets .....................................
5-50Copyright © 2013 John Wiley & Sons, Inc.
$ 410,200
Kieso, Intermediate Accounting, 15/e, Solutions Manual
369,000
36,000
$1,154,200
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 5-3 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable (secured by
investments of $120,000) ....................
Accounts payable.................................
Accrued liabilities.................................
Total current liabilities ...................
Long-term liabilities
8% bonds payable, due
January 1, 2025..................................
Less: Discount on bonds payable......
Total liabilities ................................
Stockholders’ equity
Common stock
Authorized 600,000 shares of $1
par value; issued and
outstanding, 500,000 shares ......... $500,000
Paid in capital in excess of
par—common stock .........................
45,000
Retained earnings ................................
Total liabilities and
stockholders’ equity....................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$ 94,000
148,000
49,200
$ 291,200
200,000
20,000
545,000
138,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
180,000
471,200
683,000
$1,154,200
(For Instructor Use Only) 5-51
PROBLEM 5-4
KISHWAUKEE CORPORATION
Balance Sheet
December 31, 2014
Assets
Current assets
Cash .....................................................
Accounts receivable ............................
Inventory ..............................................
Total current assets.......................
Long-term investments
Assets allocated to trustee for
expansion:
Cash in bank .................................
Debt investments
(held-to-maturity) ......................
Property, plant, and equipment
Land......................................................
Buildings .............................................. $1,070,000a
Less: Accum. depreciation—
buildings .............................
410,000
Total assets ....................................
$175,900
170,000
312,100
$ 658,000
70,000
138,000
208,000
950,000
660,000
1,610,000
$2,476,000
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable—current installment ....
Income taxes payable..........................
Total current liabilities ..................
5-52Copyright © 2013 John Wiley & Sons, Inc.
$100,000
75,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 175,000
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 5-4 (Continued)
Long-term liabilities
Notes payable .......................................
Total liabilities .................................
Stockholders’ equity
Common stock, no par; 1,000,000
shares authorized and issued;
950,000 shares outstanding...............
Retained earnings .................................
Less: Treasury stock, at cost
(50,000 shares) ............................
Kishwankee stockholders’ ...................
Equity attributable to Noncontrolling
interest ...............................................
Total stockholders’ equity ..............
Total liabilities and
stockholders’ equity.....................
500,000b
675,000
1,150,000
683,000c
1,833,000
87,000
1,746,000
55,000
1,801,000
$2,476,000
a
$1,640,000 – $570,000 (to eliminate the excess of appraisal value over cost
from the Buildings account. Note that the appreciation capital account is
also deleted).
b
$600,000 – $100,000 (to reclassify the currently maturing portion of the
notes payable as a current liability).
c
$803,000 – $120,000 (to remove the value of goodwill from retained earnings.
Note 2 indicates that retained earnings was credited. Note that the goodwill
account is also deleted).
Note: As an alternate presentation, the cash restricted for plant expansion
would be added to the general cash account and then subtracted. The
amount reported in the investments section would not change.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-53
PROBLEM 5-5
SARGENT CORPORATION
Balance Sheet
December 31, 2014
Assets
Current assets
Cash .....................................................
Equity investments (Trading) .............
Accounts receivable ............................ $ 170,000
Less: Allowance for doubtful
accounts .............................
10,000
Inventory (lower-of-FIFOcost-or-market) ................................
Total current assets.......................
Long-term investments
Equity investments
(available-for-sale) (at fair value) .....
Bond sinking fund ...............................
Cash surrender value of life
insurance ..........................................
Land held for future use......................
Property, plant, and equipment
Land......................................................
Buildings .............................................. 1,040,000
Less: Accum. depreciation—
buildings .............................
360,000
Equipment ............................................
450,000
Less: Accum. depreciation—
equipment ...........................
180,000
Intangible assets
Franchise .............................................
Goodwill ...............................................
Total assets ....................................
5-54Copyright © 2013 John Wiley & Sons, Inc.
$150,000
80,000
160,000
180,000
$ 570,000
270,000
250,000
40,000
270,000
830,000
500,000
680,000
270,000
165,000
100,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
1,450,000
265,000
$3,115,000
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 5-5 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable................................
Notes payable ......................................
Income taxes payable .........................
Unearned rent revenue .......................
Total current liabilities ...................
$ 140,000
80,000
40,000
5,000
$ 265,000
Long-term liabilities
Notes payable ......................................
7% bonds payable, due 2022 ............. $1,000,000
Less: Discount on bonds payable.....
40,000
Total liabilities ................................
Stockholders’ equity
Capital stock
Preferred stock, no par value;
200,000 shares authorized,
70,000 issued and outstanding ......
Common stock, $1 par value;
400,000 shares authorized,
100,000 issued and outstanding ....
Paid-in capital in excess of par—
common stock [100,000 X
($10.00 – $1.00)] ............................
Retained earnings ...............................
Total stockholders’ equity .............
Total liabilities and
stockholders’ equity....................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
120,000
960,000
1,080,000
1,345,000
450,000
100,000
900,000
1,450,000
320,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
1,770,000
$3,115,000
(For Instructor Use Only) 5-55
PROBLEM 5-6
(a)
LANSBURY INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income ...........................................................
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense ....................................
Gain on sale of investments .........................
Increase in account receivable
($41,600 – $21,200) .....................................
Net cash provided by operating activities .........
$32,000
$ 11,000
(3,400)
(20,400)
Cash flows from investing activities
Sale of investments .............................................
Purchase of land..................................................
Net cash used by investing activities ................
15,000
(18,000)
Cash flows from financing activities
Issuance of common stock .................................
Retirement of notes payable ...............................
Payment of cash dividends ................................
Net cash used by financing activities ................
20,000
(16,000)
(8,200)
(3,000)
Net increase in cash ..................................................
Cash at beginning of year .........................................
Cash at end of year ...................................................
Noncash investing and financing activities
Land purchased through issuance of $30,000 of bonds
5-56Copyright © 2013 John Wiley & Sons, Inc.
(12,800)
19,200
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(4,200)
12,000
20,000
$32,000
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 5-6 (Continued)
(b)
LANSBURY INC.
Balance Sheet
December 31, 2014
Assets
Cash
Accounts
receivable
Equity
investments
Plant assets (net)
Land
$32,000
41,600
20,400 (1)
70,000 (2)
88,000 (3)
$252,000
Liabilities and Stockholders’ Equity
Accounts payable
$30,000
Notes payable
(long-term)
25,000 (4)
Bonds payable
30,000 (5)
Common stock
120,000 (6)
Retained earnings
47,000 (7)
$252,000
(1) $32,000 – ($15,000 – $3,400)
(2) $81,000 – $11,000
(3) $40,000 + $18,000 + $30,000
(4) $41,000 – $16,000
(5) $0 + $30,000
(6) $100,000 + $20,000
(7) $23,200 + $32,000 – $8,200
(c)
Cash flow information is useful for assessing the amount, timing, and
uncertainty of future cash flows. For example, by showing the specific
inflows and outflows from operating activities, investing activities,
and financing activities, the user has a better understanding of the
liquidity and financial flexibility of the enterprise. Similarly, these
reports are useful in providing feedback about the flow of enterprise
resources. This information should help users make more accurate
predictions of future cash flow. In addition, some individuals have
expressed concern about the quality of the earnings because the
measurement of the income depends on a number of accruals and
estimates which may be somewhat subjective. As a result, the higher
the ratio of cash provided by operating activities to net income, the
more comfort some users have in the reliability of the earnings. In this
problem the ratio of cash provided by operating activities to net
income is 60% ($19,200 ÷ $32,000).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-57
PROBLEM 5-6 (Continued)
An analysis of Lansbury’s free cash flow indicates it is negative as shown
below:
Free Cash Flow Analysis
Net cash provided by operating activities ...........................
Less: Purchase of land .......................................................
Dividends ...................................................................
Free cash flow .......................................................................
$19,200
18,000
8,200
$ (7,000)
 $19,200 
and its cash debt
Its current cash debt coverage is 0.64 to 1 
 $30,000 
$71,000 + $85,000 

coverage is 0.25 to 1  $19,200 ÷
 , which are reasonable.

2
Overall, it appears that its liquidity position is average and overall financial
flexibility and solvency should be improved.
5-58Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 5-7
(a)
AERO INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income ...........................................................
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense ...................................
Loss on sale of investments .........................
Increase in accounts payable
($40,000 – $30,000) ..................................
Increase in accounts receivable
($42,000 – $21,200) ..................................
Net cash provided by operating activities .........
$35,000
$12,000
5,000
10,000
(20,800)
Cash flows from investing activities
Sale of investments .............................................
Purchase of land .................................................
Net cash used by investing activities ................
27,000
(38,000)
Cash flows from financing activities
Issuance of common stock.................................
Payment of cash dividends ................................
Net cash provided by financing activities .........
30,000
(10,000)
(11,000)
Net increase in cash..................................................
Cash at beginning of year.........................................
Cash at end of year ...................................................
Noncash investing and financing activities
Land purchased through issuance of $30,000 of bonds
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
6,200
41,200
Kieso, Intermediate Accounting, 15/e, Solutions Manual
20,000
50,200
20,000
$70,200
(For Instructor Use Only) 5-59
PROBLEM 5-7 (Continued)
(b)
AERO INC.
Balance Sheet
December 31, 2014
Assets
Cash
Accounts
receivable
Plant assets (net)
Land
$ 70,200
42,000
69,000 (1)
108,000 (2)
$289,200
Liabilities and Stockholders’ Equity
Accounts payable
$ 40,000
Bonds payable
71,000 (3)
Common stock
130,000 (4)
Retained earnings
48,200 (5)
$289,200
(1) $81,000 – $12,000
(2) $40,000 + $38,000 + $30,000
(3) $41,000 + $30,000
(4) $100,000 + $30,000
(5) $23,200 + $35,000 – $10,000
(c)
An analysis of Aero’s free cash flow indicates it is negative as shown
below:
Free Cash Flow Analysis
Net cash provided by operating activities .............................
Less: Purchase of land ...........................................................
Dividends ......................................................................
Free cash flow .........................................................................
5-60Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$41,200
38,000
10,000
$ (6,800)
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 5-7 (Continued)
 $41,200 
Its current cash debt coverage is 1.18 to 1 
 . Overall, it appears
 $35,000*
that its liquidity position is average and overall financial flexibility should
be improved.
*($30,000 + $40,000) ÷ 2
(d)
This type of information is useful for assessing the amount, timing,
and uncertainty of future cash flows. For example, by showing the
specific inflows and outflows from operating activities, investing
activities, and financing activities, the user has a better understanding
of the liquidity and financial flexibility of the enterprise. Similarly, these
reports are useful in providing feedback about the flow of enterprise
resources. This information should help users make more accurate
predictions of future cash flow. In addition, some individuals have
expressed concern about the quality of the earnings because the
measurement of the income depends on a number of accruals and
estimates which may be somewhat subjective. As a result, the higher
the ratio of cash provided by operating activities to net income, the
more comfort some users have in the reliability of the earnings.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-61
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 5-1 (Time 20–25 minutes)
Purpose—to provide a varied number of financial transactions and then determine how each of these
items should be reported in the financial statements. Accounting changes, additional assessments of
income taxes, prior period adjustments, and changes in estimates are some of the financial transactions presented.
CA 5-2 (Time 30–35 minutes)
Purpose—to present the asset section of a partial balance sheet that must be analyzed to assess its
deficiencies. Items such as improper classifications, terminology, and disclosure must be considered.
CA 5-3 (Time 20–25 minutes)
Purpose—to present a balance sheet that must be analyzed to assess its deficiencies. Items such as
improper classification, terminology, and disclosure must be considered.
CA 5-4 (Time 20–25 minutes)
Purpose—to present the student an ethical issue related to the presentation of balance sheet
information. The reporting involves “net presentation” of property, plant and equipment.
CA 5-5 (Time 40–50 minutes)
Purpose—to present a cash flow statement that must be analyzed to explain differences in cash flow
and net income, and sources and uses of cash flow and ways to improve cash flow.
5-62Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 5-1
1.
The new estimate would be used in computing depreciation expense for 2014. No adjustment of
the balance in accumulated depreciation at the beginning of the year would be made. Instead, the
remaining depreciable cost would be divided by the estimated remaining life. This is a change in
an estimate and is accounted for prospectively (in the current and future years). Disclosure in the
notes to the financial statements is appropriate, if material.
2.
The additional assessment should be shown on the current period’s income statement. If material
it should be shown separately; if immaterial it could be included with the current year’s tax
expense. This transaction does not represent a prior period adjustment.
3.
The effect of the error at December 31, 2013, should be shown as an adjustment of the beginning
balance of retained earnings on the retained earnings statement. The current year’s expense
should be adjusted (if necessary) for the possible carryforward of the error into the 2014 expense
computation.
4.
Generally, an entry is made for a cash dividend on the date of declaration. The appropriate
entry would be a debit to Retained Earnings (or Dividends) for the amount to be paid, with a
corresponding credit to Dividends Payable. Dividends payable is reported as a current liability.
CA 5-2
1. Unclaimed payroll checks should be shown as a current liability if these are claims by employees.
2. Debt investments (trading) should be reported at fair value, not cost.
3. Bad Debt Reserve is an improper terminology; Allowance for Doubtful Accounts is considered
more appropriate. The amount of estimated uncollectibles should be disclosed.
4. Next-in, First-out (NIFO) is not an acceptable inventory valuation method.
5. Heading “Tangible assets” should be changed to “Property, Plant and Equipment”; also label for
corresponding $630,000 should be changed to “net property, plant, and equipment.”
6. Land should not be depreciated.
7. Buildings and equipment and their related accumulated depreciation balances should be separately
disclosed.
8. The valuation basis for stocks should be disclosed (fair value or equity) and the description should
be Equity investment (Available-for-Sale) or Equity investment in X Company.
9. Treasury stock is not an asset and should be shown in the stockholders’ equity section as a deduction.
10. Discount on bonds payable is not an asset and should be shown as a deduction from bonds payable.
11. Sinking fund should be reported in the long-term investments section.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-63
CA 5-3
Criticisms of the balance sheet of the Sameed Brothers Corporation:
1. The basis for the valuation of marketable securities should be shown. Marketable securities are
valued at fair value. In addition, they should be classified as either trading securities, available-forsale securities, or held-to-maturity securities.
2. An allowance for doubtful accounts receivable is not indicated.
3. The basis for the valuation and the method of pricing for Inventory are not indicated.
4. A stock investment in a subsidiary company is not ordinarily held to be sold within one year or the
operating cycle, whichever is longer. As such, this account should not be classified as a current
asset, but rather should be included under the heading “Investments.” The basis of valuation of the
investment should be shown.
5. Treasury stock is not an asset. It should be presented as a deduction in the shareholders’ equity
section of the balance sheet. The class of stock, number of shares, and basis of valuation should
be indicated.
6. Buildings and land should be segregated. The Reserve for Depreciation should be shown as a
subtraction from the Buildings account only. Also, the term “reserve for” should be replaced by
“accumulated.”
7. Cash Surrender Value of Life Insurance would be more appropriately shown under the heading of
“Investments.”
8. Reserve for Income Taxes should appropriately be entitled Income Tax Payable.
9. Customers’ Accounts with Credit Balances is an immaterial amount. As such, this account need
not be shown separately. The $1,000 credit could readily be netted against Accounts Receivable
without any material misstatement.
10. Unamortized Premium on Bonds Payable should be appropriately shown as an addition to the
related Bonds Payable in the long-term liability section. The use of the term deferred credits is
inappropriate.
11. Bonds Payable is inadequately disclosed. The interest rate, interest payment dates, and maturity
date should be indicated.
12. Additional disclosure relative to the Common Stock account is needed. This disclosure should
include the number of shares authorized, issued, and outstanding.
13. Earned Surplus should appropriately be entitled Retained Earnings. Also, a separate heading
should be shown for this account; it should not be shown under the heading “Common Stock.” A
more appropriate heading would be “Shareholders’ Equity.”
14. Cash Dividends Declared should be disclosed on the retained earnings statement as a reduction
of retained earnings. Dividends Payable, in the amount of $8,000, should be shown on the balance
sheet among the current liabilities, assuming payment has not occurred.
5-64Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 5-4
(a). The ethical issues involved are integrity and honesty in financial reporting, full disclosure, and the
accountant’s professionalism.
(b). While presenting property, plant, and equipment net of depreciation on the balance sheet may be
acceptable under GAAP, it is inappropriate to attempt to hide information from financial statement
users. Information must be useful, and the presentation Keene is considering would not be. Users
would not grasp the age of plant assets and the company’s need to concentrate its future cash
outflows on replacement of these assets. This information could be provided in a note disclosure.
Because of the significant impact on the financial statements of the depreciation method(s) used,
the following disclosures should be made.
a.
b.
c.
d.
Depreciation expense for the period.
Balances of major classes of depreciable assets, by nature and function.
Accumulated depreciation, either by major classes of depreciable assets or in total.
A general description of the method or methods used in computing depreciation with respect
to major classes of depreciable assets.
CA 5-5
Date
President Kappeler, CEO
Kappeler Corporation
125 Wall Street
Middleton, Kansas 67458
Dear Mr. Kappeler:
I have good news and bad news about the financial statements for the year ended December 31, 2014.
The good news is that net income of $100,000 is close to what we predicted in the strategic plan last
year, indicating strong performance this year. The bad news is that the cash balance is seriously low.
Enclosed is the Statement of Cash Flows, which best illustrates how these situations occurred
simultaneously.
If you look at the operating activities, you can see that no cash was generated by operations due to the
increase in accounts receivable and inventory and reduction in accounts payable. In effect, these
events caused net cash flow provided by operating activities to be lower than net income; they reduced
your cash balance by $116,000.
The corporation made significant investments in equipment and land. These were paid from cash
reserves. These purchases used 75% of the company’s cash. In addition, the redemption of the bonds
improved the equity of the corporation and reduced interest expense. However, it also used 25% of the
corporation’s cash. It is normal to use cash for investing and financing activities. But when cash is used,
it must also be replenished.
Operations normally provide the cash for investing and financing activities. Since there is a finite
amount of assets to sell and funds to borrow or raise from the sale of capital stock, operating activities
are the only renewable source of cash. That is why it is important to keep the operating cash flows
positive. Cash management requires careful and continuous planning.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-65
CA 5-5 (Continued)
There are several possible remedies for the current cash problem. First, prepare a detailed analysis of
monthly cash requirements for the next year. Second, investigate the changes in accounts receivable
and inventory and work to return them to more normal levels. Third, look for more favorable terms with
suppliers to allow the accounts payable to increase without loss of discounts or other costs. Finally,
since the land represents a long-term commitment without immediate plans for use, consider shopping
for a low interest loan to finance the acquisition for a few years and return the cash balance to a more
normal level.
If you have additional questions or need one of our staff to address this problem, please contact me at
your convenience.
Sincerely yours,
Partner in Charge
5-66Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL REPORTING PROBLEM
(a)
P&G could use the account form or report form. P&G uses the account
form.
(b)
The techniques of disclosing pertinent information include (1) parenthetical explanations, (2) notes, (3) cross-reference and contra items,
and (4) supporting schedules. P&G uses parenthetical explanations
and notes (see notes to financial statements section) and supporting
schedules.
(c)
While there are no Investments reported on P&G’s balance sheet, Note 1
(Significant Accounting Policies) states that Investments are readily
marketable debt and equity securities. These securities are reported at
fair value. Unrealized gains and losses on trading securities are
recognized in income. Unrealized gains and losses relating to
investments classified as available-for-sale are recorded as a component
of accumulated other comprehensive income in shareholders’ equity.
As of June 30, 2011, P&G had negative working capital (current assets
less than current liabilities) of $5,323 million. At June 30, 2010, P&G’s
negative working capital was $5,500 million.
(d)
The following table summarizes P&G’s cash flows from operating,
investing, and financing activities in the 2009–2011 time period
(in millions).
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
2011
$ 13,231
(3,482)
(10,023)
2010
$16,072
(597)
(17,255)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
2009
$ 14,919
(2,353)
(10,814)
(For Instructor Use Only) 5-67
FINANCIAL REPORTING PROBLEM (Continued)
P&G’s net cash provided by operating activities increased slightly from
2009 to 2010, and increased by 18% from 2010 to 2011. When accounts
payable, accrued and other liabilities increase, cost of goods sold and
operating expenses are higher on an accrued basis than they are on a
cash basis. To convert to net cash provided by operating activities, the
increase in accounts payable, and accrued and other liabilities must be
added to net income.
(e)
1.
Net Cash Provided by Operating Activities ÷ Average Current
Liabilities = Current Cash Debt Coverage
$13,231 ÷
2.
= .51:1
Net Cash Provided by Operating Activities ÷ Average Total
Liabilities = Cash Debt Coverage
$13,231÷
3.
($27,293 + $24,282)
2
($70,353 + $66,733)
2
= 0.19:1
Net cash provided by operating activities less capital expenditures
and dividends
Net cash provided by operating activities .......
Less: Capital expenditures ..............................
Dividends ................................................
Free cash flow ...................................................
$13,231
$3,306
5,767
9,073
$ 4,158
Note that P&G also used cash ($7,039 million) to repurchase
common stock, which reduces its free cash flow to negative
$2,881 million. P&G’s financial position appears adequate. 19% of
its total liabilities can be covered by the current year’s operating
cash flow and its free cash flow position indicates it is easily
meeting its capital investment and financing demands from
current free cash flow.
5-68Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
COMPARATIVE ANALYSIS CASE
(a)
Both the Coca-Cola Company and PepsiCo, Inc. use the report form.
(b) The Coca-Cola Company has working capital of $1,214 million
($25,497 million – $24,283 million): PepsiCo, Inc. has working capital of
$(713) million ($17,441 million – $18,154 million). The Coca-Cola
Company indicates in its management discussion and analysis
section that its ability to generate cash from operating activities is one
of its fundamental financial strengths. This posture, coupled with use
debt financing lowers the overall cost of capital and increases the
return on shareowners’ equity. PepsiCo has a similar strategy (see
discussion in “Liquidity and Capital Resources.”)
(c)
The most significant difference relates to intangible assets. The CocaCola Company has Trademarks, Goodwill, and Other Intangible Assets
of $27,669 million (35% of assets); PepsiCo, Inc. has Intangible Assets,
net of amortization of $31,357 million (or 43% of assets). PepsiCo carries
higher levels of property, plant, and equipment (27% of assets), while
Coca-Cola’s property, plant, and equipment is just 18.7% of assets.
Coca-Cola has higher investments in unconsolidated subsidiaries
(10.5% > 2% of assets).
(d)
Total assets
Annual
Five-Year
The Coca-Cola Company
PepsiCo, Inc.
49.81%
10.7%
84.8%
25.6%
177.54%
170.26%
316.7
389.4%
Long-term debt
The Coca-Cola Company
PepsiCo, Inc.
(e)
The Coca-Cola Company has increased net cash provided by operating activities from 2009 to 2011 by $1,288 million or 15.73%. PepsiCo,
Inc. has increased net cash provided by operating activities by $2,148
million or 31.6%. Coca-Cola has a favorable trend in the generation of
internal funds from operations. PepsiCo is more level.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-69
COMPARATIVE ANALYSIS CASE (Continued)
(f)
The Coca-Cola Company
Current Cash Debt Ratio
$9,474 ÷
$24,283 + $18,508 = 0.44:1
2
Cash Debt Coverage Ratio
$9,474 ÷
$48,053 + $41,604
2
= 0.21:1
($ millions)
Free cash flow
Net cash provided by operating activities ................
Less: Capital expenditures .......................................
Dividends .........................................................
Free cash flow ............................................................
$9,474
2,920
4,300
$2,254
Coca-Cola Company’s free cash flow is $2,254. Note that Coca-Cola is
also using cash to repurchase shares ($4,513 million in 2011).
PepsiCo, Inc.
Current Cash Debt Coverage
$8,944 ÷
$18,154 + $15,892 = 0.53:1
2
Cash Debt Coverage
$8,944 ÷
$51,983 + $46,667 = 0.18:1
2
5-70Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
COMPARATIVE ANALYSIS CASE (Continued)
Free cash flow
Net cash provided by operating activities ...................
Less: Capital spending ................................................
Dividends............................................................
Free cash flow ...............................................................
$8,944
3,339
3,157
$2,448
PepsiCo also used cash to repurchase shares (only $2.5 million in
2011).
Both companies have strong liquidity and financial flexibility.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-71
FINANCIAL STATEMENT ANALYSIS CASE 1
(a)
The raw materials price increase is not a required disclosure. However,
the company might well want to inform shareholders in the management
discussion and analysis section, especially as a means for company
management to point out an area of success. If the company had not
been able to successfully meet the challenge, then the reporting in the
discussion and analysis section would be for the purpose of explaining
poorer than expected operating results.
(b) The information in item (2) should be reported as follows: The $4,000,000
outstanding should, of course, be included in the balance sheet as a
part of liabilities (current- or long-term, depending on the terms of the
loan). The fact that an additional $11,000,000 or so is available for
borrowing should be disclosed in the notes to the financial
statements, as also should the fact that the loan is based on the
accounts receivable.
5-72Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL STATEMENT ANALYSIS CASE 2
(a)
These accounts are shown in the order in which Sherwin-Williams
actually presented the accounts. The order shown may be modified
somewhat; however, cash should certainly be listed first and other
current assets last within the current assets category; common stock
should be listed first and retained earnings last in the stockholders’
equity category. For the remaining items, the order may be different
than that shown.
CURRENT ASSETS
Cash and cash equivalents
Short-term investments
Accounts receivable, less allowance
Finished goods inventories
Work in process and raw materials inventories
Other current assets
LONG-TERM ASSETS
Land
Buildings
Machinery and equipment
Intangibles and other assets
CURRENT LIABILITIES
Accounts payable
Employee compensation payable
Taxes payable
Other accruals
Accrued taxes
LONG-TERM LIABILITIES
Long-term debt
Postretirement obligations other than pensions
Other long-term liabilities
STOCKHOLDERS’ EQUITY
Common stock
Other capital
Retained earnings
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-73
FINANCIAL STATEMENT ANALYSIS CASE 2 (Continued)
(b)
There is some latitude for judgment in this question. The general
answer is that the assets and liabilities specific to the automotive
division will decrease and that cash will increase. Some students may
be aware that retained earnings will increase or decrease, depending
upon whether the assets were sold above or below historical cost.
♦ Cash and cash equivalents—increase from the sale of the assets
♦ Accounts receivable, less allowance—decrease from the sale of the
Automotive Division’s receivables
♦ Finished goods inventories—decrease
♦ Work in process and raw materials inventories—decrease
♦ Land—decrease
♦ Buildings—decrease
♦ Machinery and equipment—decrease
♦ Long-term debt—decrease
♦ Retained earnings—increase or decrease, depending on whether
the assets were sold above or below cost
5-74Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL STATEMENT ANALYSIS CASE 3
(a)
Working Capital, Current Ratio
Without Contractual Obligations
Working Capital
Current Ratio
$27,208 – $15,922 = $11,286
$27,208 ÷ $15,922 = 1.71
With Contractual Obligations
Off-balance sheet current obligations = $3,275 ($3,172 + $100 + $3)
Working Capital
Current Ratio
$27,208 – ($15,922 + $3,275)
= $8,011
$27,208 ÷ ($15,922 + $3,275)
= 1.42
Without information on contractual obligations, an analyst would
overstate Deere’s liquidity, as measured by working capital and the
current ratio.
(b)
1.
Based on the analysis in Part (a), Deere has a pretty good liquidity cushion. It would be able to pay a loan of up $8,011 billion, if
due in one year.
2.
Additional contractual obligations of $8,600 in years 2 and 3 and
$3,631 in years 4 and 5 are relevant to assessing whether Deere
can repay a loan maturing in 5 years. In evaluating a longer term
loan, an analyst would need to develop a prediction of Deere’s
cash flows over the next 5 years that would be used to repay a
longer term loan.
In summary, the schedule of contractual obligations provides
information about off-balance sheet obligations—both the amounts
and when due. This helps the analyst assess both liquidity and
solvency of a company.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-75
FINANCIAL STATEMENT ANALYSIS CASE 4
(a)
($ in millions)
Current assets ....................................
Total assets ........................................
Current liabilities ................................
Total liabilities ....................................
(1) Cash provided by operations .......
(2) Capital expenditures .....................
(3) Dividends paid ..............................
Net Income (loss) ...............................
Sales....................................................
Free Cash Flow ...................................
(1) – (2) – (3)
Current
Year
$3,373
4,363
2,532
3,932
702
216
0
190
10,711
Prior
Year
$2,929
3,696
1,899
3,450
733
204
0
359
8,490
486
529
As indicated above, Amazon’s free cash flow in the current and prior
year was $486 million and $529 million respectively. Amazon shows a
declining trend in profitability and cash provided by operations.
Depending on the investment required to build the warehouses, it
appears they might not be able to finance the warehouses with
internal funds.
(b)
Cash provided by operations has decreased in current year relative to
the prior year by $31 million. This is due to lower profitability
combined with a net increase in working capital and other non-cash
income adjustments.
5-76Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
Hopkins Company
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ($75,000 – $15,000)
Accounts receivable ($52,000 – $9,000)
Less: Allowance for doubtful accounts
($13,500 – $9,000)
Inventory
Total current assets
Long-term investments
Bond sinking fund
Property, plant, and equipment
Equipment
Less: Accumulated depreciation—equipment
Intangible assets
Patents
Total assets
$ 60,000
$ 43,000
4,500
15,000
112,000
28,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
84,000
15,000
$277,800
Liabilities and Stockholders’ Equity
Current liabilities
Notes and accounts payable
Long-term liabilities
Notes payable (due 2016)
Total liabilities
Stockholders’ equity
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
38,500
65,300
163,800
$ 52,000
75,000
127,000
$100,000
50,800
Kieso, Intermediate Accounting, 15/e, Solutions Manual
150,800
$277,800
(For Instructor Use Only) 5-77
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Analysis
The classified balance sheet provides subtotals for current assets and
current liabilities, which are assets expected to be converted to cash (or
liabilities expected to be paid from cash) in the next year or operating cycle
(also referred to as liquidity). Thus, an analysis of current assets relative to
current liabilities provides information relevant to assessing Hopkins’
ability to repay a loan within the next year. Specifically, current assets in
excess of current liabilities (working capital) is $111,800 ($163,800 –
$52,000.) This seems to be a safe liquidity cushion relative to an additional
loan of $45,000. Of course, the loan officer also would evaluate Hopkins’
earnings and cash flows in the analysis.
Principles
The primary objection that the bank is likely to raise about this supplemental information is the subjectivity (which reduces faithful representation)
of the estimates of fair values for the long-lived assets and the internally
generated intangibles. In addition, the loan officer might not consider
information about these long-term assets to be that relevant to the loan
decision, because the loan is short-term.
5-78Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL RESEARCH
(a)
Codification String: FASB ASC 235-10-05—Presentation > 235 Notes
to Financial Statements > 10 Overall > 05 Background (Predecessor
Standard – [APB 22])
(b)
Codification String: Presentation > 235 Notes to Financial Statements
> 10 Overall > 05 Background
05-3 The accounting policies of an entity are the specific accounting
principles and the methods of applying those principles that are
judged by the management of the entity to be the most appropriate in the circumstances to present fairly financial position, cash
flows, and results of operations in accordance with generally
accepted accounting principles (GAAP) and that, accordingly,
have been adopted for preparing the financial statements.
(c)
Codification String: Presentation > 235 Notes to Financial Statements
> 10 Overall > 50 Disclosure
50-3 Disclosure of accounting policies shall identify and describe the
accounting principles followed by the entity and the methods of
applying those principles that materially affect the determination
of financial position, cash flows, or results of operations. In
general, the disclosure shall encompass important judgments as
to appropriateness of principles relating to recognition of revenue
and allocation of asset costs to current and future periods; in
particular, it shall encompass those accounting principles and
methods that involve any of the following:
a.
b.
c.
A selection from existing acceptable alternatives.
Principles and methods peculiar to the industry in which the
entity operates, even if such principles and methods are
predominantly followed in that industry.
Unusual or innovative applications of GAAP.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-79
PROFESSIONAL RESEARCH (Continued)
(d)
50-4 Codification String: Presentation > 235 Notes to Financial
Statements > 10 Overall > 05 Background
Examples of disclosures by an entity commonly required with
respect to accounting policies would include, among others,
those relating to the following:
a.
b.
c.
d.
e.
g.
Basis of consolidation
Depreciation methods
Amortization of intangibles
Inventory pricing
Accounting for recognition of profit on long-term
construction-type contracts
Recognition of revenue from franchising and leasing
operations.
5-80Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL SIMULATION
FINANCIAL STATEMENT
SOLO HOPE COMPANY
Balance Sheet
December 31, 2014
Assets
Current assets
Cash ($50,000 – $20,000).....................................
Accounts receivable ($38,500 + $13,500) ...........
Less: Allowance for doubtful accounts........
Inventory ..............................................................
Total current assets ........................................
$ 30,000
$ 52,000
13,500
Long-term investments
Plant expansion fund ..........................................
Property, plant, and equipment
Equipment ............................................................
Less: Accumulated depreciation—
equipment ............................................
38,500
65,300
133,800
20,000
132,000
28,000
Intangible assets
Patents .................................................................
Total assets .....................................................
104,000
25,000
$282,800
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ......................................................
Accounts payable ................................................
Income taxes payable..........................................
Total current liabilities ....................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
17,000
$ 32,000
8,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 57,000
(For Instructor Use Only) 5-81
PROFESSIONAL SIMULATION (Continued)
Long-term liabilities
Bonds payable (9%, due June 30, 2022) ............
Total liabilities .................................................
Stockholders’ equity
Common stock ($1 par) .......................................
Additional paid-in capital ....................................
Retained earnings................................................
Total liabilities and stockholders’ equity ...........
100,000
157,000
50,000
55,000
20,800
125,800
$282,800
ANALYSIS
Z=
Working capital
Retained earnings
X 1.2 +
X 1.4 +
Total assets
Total assets
+
=
Sales
Total assets
X 0.99 +
($133,800 – $57,000)
$20,800
X 1.2 +
X 1.4
$282,800
$282,800
+
+
EBIT
Total assets
X 3.3
MV equity
X 0.6
Total liabilities
$14,000
X 3.3
$282,800
$210,000
$225,000
X 0.99 +
X 0.6
$282,800
$157,000
= .3259 + .1030 + .1634 + .7351 + .8599 = 2.1873
5-82Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL SIMULATION (Continued)
Hope’s Z-Score is above the “likely-to-fail” level of 1.81 but also below the
unlikely-to-fail value of 3.0. Hope should be concerned about his
company’s situation.
RESEARCH
Search string: “accounting policies” and disclosure
APB 22: Disclosure of Accounting Policies
12. Disclosure of accounting policies should identify and describe the
accounting principles followed by the reporting entity and the methods of
applying those principles that materially affect the determination of financial
position, changes in financial position, or results of operations. In general,
the disclosure should encompass important judgments as to appropriateness
of principles relating to recognition of revenue and allocation of asset costs
to current and future periods; in particular, it should encompass those
accounting principles and methods that involve any of the following:
a.
A selection from existing acceptable alternatives;
b.
Principles and methods peculiar to the industry in which the reporting
entity operates, even if such principles and methods are predominantly
followed in that industry;
c.
Unusual or innovative applications of generally accepted accounting
principles (and, as applicable, of principles and methods peculiar to the
industry in which the reporting entity operates).
Examples of disclosures by a business entity commonly required with respect
to accounting policies would include, among others, those relating to basis
of consolidation, depreciation methods, amortization of intangibles, inventory
pricing, accounting for research and development costs (including basis
for amortization), translation of foreign currencies, recognition of profit on
long-term construction-type contracts, and recognition of revenue from
franchising and leasing operations. This list of examples is not all-inclusive.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-83
IFRS CONCEPTS AND APPLICATION
IFRS5-1
In general, the disclosure requirements related to the statement of financial
position (balance sheet) and the statement of cash flows are much more
extensive and detailed in the U.S. IAS 1, “Presentation of Financial
Statements,” provides the overall IFRS requirements for balance sheet
information. IAS 7, “Cash Flow Statements,” provides the overall IFRS
requirements for cash flow information.
IFRS5-2
Among the similarities between IFRS and U.S. GAAP related to statement of
financial position presentation are as follows:
• IAS 1 specifies minimum note disclosures. These must include
information about (1) accounting policies followed, (2) judgments that
management has made in the process of applying the entity’s
accounting policies, (3) and the key assumptions and estimation
uncertainty that could result in a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
• Comparative prior-period information must be presented and financial
statements must be prepared annually.
• Current/non-current classification for assets and liabilities is normally
required. In general, post-financial statement events are not considered
in classifying items as current or non-current.
Differences include (1) IFRS statements may report property, plant, and
equipment first in the statement of financial position. Some companies
report the sub-total “net assets”, which equals total assets minus total
liabilities; (2) While the use of the term “reserve” is discouraged in U.S.
GAAP, there is no such prohibition in IFRS.
5-84Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS5-3
The IASB and the FASB are working on a project to converge their
standards related to financial statement presentation. This joint project will
establish a common, high-quality standard for presentation of information in
the financial statements, including the classification and display of line
items. A key feature of the proposed framework for financial statement
presentation is that each of the statements will be organized in the same
format to separate an entity’s financing activities from its operating and
other activities (investing) and further separates financing activities into
transactions with owners and creditors. Thus, the same classifications used
in the statement of financial position would also be used in the income
statement and the statement of cash flows.
IFRS5-4
Rainmaker Company will report a net revaluation gain of $165,000 ($200,000 –
$35,000), which will be recoded as an adjustment to these assets with the
net gain recorded in equity. Each reporting period the property and
equipment are revalued to approximate fair value. The use of revaluations is
prohibited in GAAP.
IFRS5-5
(a)
Some of the differences are:
1.
2.
3.
4.
Report form and subtotals—Tomkins uses a modified report form
with current liabilities deducted from current assets to determine
net current assets and remaining liabilities deducted from total
assets less current liabilities to arrive at “net assets”. This amount
balances with total “Capital and Reserves”.
Classifications—the classifications are not arranged according
to decreasing liquidity. For example, “Fixed assets” are listed first,
then “Current assets”. Cash is not listed as the first current asset.
Terminology—For example, Contributed capital is referred to as
“Ordinary share capital” and “Share premium” account, rather
than Common Stock and Additional paid-in capital. “Accumulated
deficit” is used instead of Retained Earnings.
Units of currency—Tomkins reports in pounds sterling.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-85
IFRS5-5 (Continued)
(b)
Although there are differences in terminology and some groupings and
subtotals are different, the British balance sheet does group assets and
liabilities with similar characteristics together (Fixed assets, Current
assets and Current liabilities). For the most part, the classifications
are similar in that they are related to the liquidity of the balance sheet
items. By netting liabilities against assets, a measure of solvency is
provided.
Note to instructors: A final difference not mentioned above is the “Capital
redemption reserve” account in the Capital and reserves section of
Tomkins’ Balance sheet. This account in the U.K. corresponds to “Additional
Paid-in Capital—Treasury Stock in the U.S. setting.
IFRS5-6
(a)
International Accounting Standard 8 covers the disclosure of
accounting policies.
(b)
Accounting policies are the specific principles, bases, conventions,
rules and practices applied by an entity in preparing and presenting
financial statements (para. 5).
(c)
An entity shall select and apply its accounting policies consistently
for similar transactions, other events and conditions, unless an IFRS
specifically requires or permits categorisation of items for which
different policies may be appropriate. If an IFRS requires or permits
such categorisation, an appropriate accounting policy shall be
selected and applied consistently to each category. (para. 13)
An entity shall change an accounting policy only if the change:
a. is required by an IFRS; or
b. results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events
or conditions on the entity’s financial position, financial performance
or cash flows. (para. 14)
5-86Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS5-6 (Continued)
(d)
Disclosure
When initial application of an IFRS has an effect on the current period
or any prior period, or would have such an effect except that it is
impracticable to determine the amount of the adjustment, or might
have an effect on future periods, an entity shall disclose:
a. the title of the IFRS;
b. when applicable, that the change in accounting policy is made in
accordance with its transitional provisions;
c. the nature of the change in accounting policy;
d. when applicable, a description of the transitional provisions;
e. when applicable, the transitional provisions that might have an
effect on future periods;
f. for the current period and each prior period presented, to the
extent practicable, the amount of the adjustment:
(i) for each financial statement line item affected; and
(ii) if IAS 33 Earnings per Share applies to the entity, for basic and
diluted earnings per share;
g. the amount of the adjustment relating to periods before those
presented, to the extent practicable; and
h. if retrospective application required by paragraph 19(a) or (b) is
impracticable for a particular prior period, or for periods before
those presented, the circumstances that led to the existence of that
condition and a description of how and from when the change in
accounting policy has been applied.
Financial statements of subsequent periods need not repeat these
disclosures. (para. 28)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-87
IFRS5-6 (Continued)
When a voluntary change in accounting policy has an effect on the
current period or any prior period, would have an effect on that period
except that it is impracticable to determine the amount of the
adjustment, or might have an effect on future periods, an entity shall
disclose:
a. the nature of the change in accounting policy;
b. the reasons why applying the new accounting policy provides
reliable and more relevant information;
c. for the current period and each prior period presented, to the
extent practicable, the amount of the adjustment:
(i) for each financial statement line item affected; and
(ii) if IAS 33 applies to the entity, for basic and diluted earnings per
share;
d. the amount of the adjustment relating to periods before those
presented, to the extent practicable; and
e. if retrospective application is impracticable for a particular prior
period, or for periods before those presented, the circumstances
that led to the existence of that condition and a description of how
and from when the change in accounting policy has been applied.
Financial statements of subsequent periods need not repeat these
disclosures (para. 29).
IFRS5-7
(a)
M&S could have adopted the account form or report form. M&S uses
the report form.
(b)
The techniques of disclosing pertinent information include
(1) parenthetical explanations, (2) cross-reference and contra items,
and (3) notes to the financial statements. M&S uses notes.
(c)
Investments are reported on M&S’s statement of financial position as
non-current assets. Note 1 (Accounting Policies) states that Investments are classified as either available-for-sale, or fair value through
profit or loss. These securities are valued at fair value. On March 31,
2012, M&S had negative working capital (current assets less than
current liabilities) of £545.3 million. On April 2, 2011, M&S’s negative
working capital was £568.5 million.
5-88Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS5-7 (Continued)
(d)
The following table summarizes M&S’s cash flows from operating,
investing, and financing activities in 2012 and 2011 (in millions).
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
2012
£1.203.0
757.8
511.0
2011
£1,199.9
490.5
647.4
M&S’s net cash provided by operating activities increased by 3% from 2011
to 2012. Changes in accounts payable and in accrued and other liabilities is
added to net income because these changes reduce income but not cash
flow.
(e)
Current Cash Debt
£1,203 ÷
£2,005.4 + £2,210.2 = 0.57:1
2
Cash Debt Coverage
£1,203 ÷
£4,494.5 + £4,666.7
= 0.26:1
2
Free cash flow
Net cash provided by operating activities .................
Less: Capital expenditures ........................................
Dividends..........................................................
Free cash flow .............................................................
£1,203.0
564.3
267.8
£ 370.9
M&S’s financial position appears adequate. Over 26% of its total liabilities
can be covered by the current year’s operating cash flow and its free cash
flow position indicates it is easily meeting its capital investment demands
and the current level of dividends from current free cash flow.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 5-89
CHAPTER 6
Accounting and the Time Value of Money
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Brief
Exercises
Exercises
13, 14
8
1
a. Unknown future amount.
7, 19
1, 5, 13
2, 3, 4, 7
b. Unknown payments.
10, 11, 12
6, 12,
15, 17
8, 16, 17
2, 6
4, 9
10, 15
2
Topics
Questions
1.
Present value concepts.
1, 2, 3, 4,
5, 9, 17
2.
Use of tables.
3.
Present and future value
problems:
c. Unknown number of
periods.
Problems
d. Unknown interest rate.
15, 18
3, 11, 16
9, 10, 11, 14
2, 7
e. Unknown present value.
8, 19
2, 7, 8,
10, 14
3, 4, 5, 6,
8, 12, 17,
18, 19
1, 4, 7, 9,
13, 14
4.
Value of a series of irregular
deposits; changing interest
rates.
5.
Valuation of leases,
pensions, bonds; choice
between projects.
6
6.
Deferred annuity.
16
7.
Expected Cash Flows.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
3, 5, 8
15
7, 12, 13,
14, 15
3, 5, 6, 8, 9,
10, 11, 12,
13, 14, 15
20, 21, 22
13, 14, 15
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Questions
Learning Objectives
Brief
Exercises
Exercises
Problems
1.
Identify accounting topics where the
time value of money is relevant.
1, 3, 17
2.
Distinguish between simple and
compound interest.
1, 3, 4, 17,
18
2
3.
Use appropriate compound interest
tables.
4, 5, 13, 14
1
4.
Identify variables fundamental to
solving interest problems.
6, 7, 10,
11, 12
5.
Solve future and present value of 1
problems.
2, 7, 8, 10,
11, 12
1, 2, 3,
4, 7, 8
2, 3, 6, 9,
10, 15
1, 2, 3, 5,
7, 9, 10
6.
Solve future value of ordinary and
annuity due problems.
8, 9, 10,
11, 13
5, 6, 9, 13
3, 4, 6,
15, 16
2, 7
7.
Solve present value of ordinary and
annuity due problems.
12, 14
10, 11, 12,
14, 16, 17
3, 4, 5, 6,
11, 12, 17,
18, 19
1, 2, 3, 4,
5, 7, 8, 9,
10, 13, 14
8.
Solve present value problems related
to deferred annuities and bonds.
2, 12, 15,
16
15
7, 8, 13, 14
6, 11, 12,
15
9.
Apply expected cash flows to present
value measurement.
19
20, 21, 22
13, 14, 15
6-2Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E6-1
E6-2
E6-3
E6-4
E6-5
E6-6
E6-7
E6-8
E6-9
E6-10
E6-11
E6-12
E6-13
E6-14
E6-15
E6-16
E6-17
E6-18
E6-19
E6-20
E6-21
E6-22
Using interest tables.
Simple and compound interest computations.
Computation of future values and present values.
Computation of future values and present values.
Computation of present value.
Future value and present value problems.
Computation of bond prices.
Computations for a retirement fund.
Unknown rate.
Unknown periods and unknown interest rate.
Evaluation of purchase options.
Analysis of alternatives.
Computation of bond liability.
Computation of pension liability.
Investment decision.
Retirement of debt.
Computation of amount of rentals.
Least costly payoff.
Least costly payoff.
Expected cash flows.
Expected cash flows and present value.
Fair value estimate.
Simple
Simple
Simple
Moderate
Simple
Moderate
Moderate
Simple
Moderate
Simple
Moderate
Simple
Moderate
Moderate
Moderate
Simple
Simple
Simple
Simple
Simple
Moderate
Moderate
5–10
5–10
10–15
15–20
10–15
15–20
12–17
10–15
5–10
10–15
10–15
10–15
15–20
15–20
15–20
10–15
10–15
10–15
10–15
5–10
15–20
15–20
P6-1
P6-2
P6-3
P6-4
P6-5
P6-6
P6-7
P6-8
P6-9
P6-10
P6-11
P6-12
P6-13
P6-14
P6-15
Various time value situations.
Various time value situations.
Analysis of alternatives.
Evaluating payment alternatives.
Analysis of alternatives.
Purchase price of a business.
Time value concepts applied to solve business problems.
Analysis of alternatives.
Analysis of business problems.
Analysis of lease vs. purchase.
Pension funding.
Pension funding.
Expected cash flows and present value.
Expected cash flows and present value.
Fair value estimate.
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Complex
Moderate
Complex
Complex
Complex
Moderate
Moderate
Moderate
Complex
15–20
15–20
20–30
20–30
20–25
25–30
30–35
20–30
30–35
30–35
25–30
20–25
20–25
20–25
20–25
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-3
SOLUTIONS TO CODIFICATION EXERCISES
CE6-1
(a) According to the Master Glossary, present value is a tool used to link uncertain future amounts
(cash flows or values) to a present amount using a discount rate (an application of the income
approach) that is consistent with value maximizing behavior and capital market equilibrium.
Present value techniques differ in how they adjust for risk and in the type of cash flows they use.
(b) The discount rate adjustment technique is a present value technique that uses a risk-adjusted
discount rate and contractual, promised, or most likely cash flows.
(c) Other codification references to present value are at (1) FASB ASC 820-10-35-33 and (2) FASB
ASC 820-10-55-55-4. Details for these references follow.
1.
820 Fair Value Measurements and Disclosures > 10 Overall > 35 Subsequent Measurement
35-33 Those valuation techniques include the following:
a. Present value techniques
b. Option-pricing models (which incorporate present value techniques), such as the
Black-Scholes-Merton formula (a closed-form model) and a binomial model (a
lattice model)
c. The multiperiod excess earnings method, which is used to measure the fair value of
certain intangible assets.
2.
820 Fair Value Measurements and Disclosures > 10 Overall > 55 Implementation General,
paragraph 55-4 >>> Present Value Techniques
55-4 FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in
Accounting Measurements, provides guidance for using present value techniques to
measure fair value. That guidance focuses on a traditional or discount rate adjustment
technique and an expected cash flow (expected present value) technique. This Section
clarifies that guidance. (That guidance is included or otherwise referred to principally in
paragraphs 39–46, 51, 62–71, 114, and 115 of Concepts Statement 7.) This Section
neither prescribes the use of one specific present value technique nor limits the use of
present value techniques to measure fair value to the techniques discussed herein. The
present value technique used to measure fair value will depend on facts and circumstances specific to the asset or liability being measured (for example, whether
comparable assets or liabilities can be observed in the market) and the availability of
sufficient data.
CE6-2
Answers will vary. By entering the phrase “present value” in the search window, a list of references to
the term is provided. The site allows you to narrow the search to assets, liabilities, revenues, and
expenses.
6-4Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
(a) Asset reference: 350 Intangibles—Goodwill and Other > 20 Goodwill > 50 Disclosure > Goodwill
Impairment Loss > Information for Each Period for Which a Statement of Financial Position Is
Presented
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-5
CE6-2 (Continued)
50-1 The changes in the carrying amount of goodwill during the period shall be disclosed, including
the following (see Example 3 [paragraph 350-20-55-24]):
a. The aggregate amount of goodwill acquired.
b. The aggregate amount of impairment losses recognized.
c. The amount of goodwill included in the gain or loss on disposal of all or a portion of a
reporting unit.
Entities that report segment information in accordance with Topic 280 shall provide the
above information about goodwill in total and for each reportable segment and shall disclose
any significant changes in the allocation of goodwill by reportable segment. If any portion of
goodwill has not yet been allocated to a reporting unit at the date the financial statements
are issued, that unallocated amount and the reasons for not allocating that amount shall be
disclosed.
> Goodwill Impairment Loss
50-2 For each goodwill impairment loss recognized, all of the following information shall be disclosed in the notes to the financial statements that include the period in which the impairment loss is recognized:
a. A description of the facts and circumstances leading to the impairment.
b. The amount of the impairment loss and the method of determining the fair value of the
associated reporting unit (whether based on quoted market prices, prices of comparable
businesses, a present value or other valuation technique, or a combination thereof).
c. If a recognized impairment loss is an estimate that has not yet been finalized (see
paragraphs 350-20-35-18 through 19), that fact and the reasons therefore and, in subsequent periods, the nature and amount of any significant adjustments made to the initial
estimate of the impairment loss.
(b) Liability reference: 410 Asset Retirement and Environmental Obligations > 20 Asset Retirement
Obligations > 30 Initial Measurement
Determination of a Reasonable Estimate of Fair Value
30-1 An expected present value technique will usually be the only appropriate technique with which
to estimate the fair value of a liability for an asset retirement obligation. An entity, when
using that technique, shall discount the expected cash flows using a credit-adjusted risk-free
rate. Thus, the effect of an entity’s credit standing is reflected in the discount rate rather
than in the expected cash flows. Proper application of a discount rate adjustment technique
entails analysis of at least two liabilities—the liability that exists in the marketplace and has
an observable interest rate and the liability being measured. The appropriate rate of interest
for the cash flows being measured must be inferred from the observable rate of interest of
some other liability, and to draw that inference the characteristics of the cash flows must be
similar to those of the liability being measured. Rarely, if ever, would there be an observable
rate of interest for a liability that has cash flows similar to an asset retirement obligation being
measured. In addition, an asset retirement obligation usually will have uncertainties in both
timing and amount. In that circumstance, employing a discount rate adjustment technique,
where uncertainty is incorporated into the rate, will be difficult, if not impossible. See
paragraphs 410-20-55-13 through 55-17 and Example 2 (paragraph 410-20-55-35).
6-6Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CE6-2 (Continued)
(c) Revenue or Expense reference: 720 Other Expenses> 25 Contributions Made> 30 Initial Measurement
30-1 Contributions made shall be measured at the fair values of the assets given or, if made in
the form of a settlement or cancellation of a donee’s liabilities, at the fair value of the liabilities cancelled.
30-2 Unconditional promises to give that are expected to be paid in less than one year may
be measured at net settlement value because that amount, although not equivalent to the
present value of estimated future cash flows, results in a reasonable estimate of fair value.
CE6-3
Interest cost includes interest recognized on obligations having explicit interest rates, interest imputed
on certain types of payables in accordance with Subtopic 835-30, and interest related to a capital lease
determined in accordance with Subtopic 840-30. With respect to obligations having explicit interest
rates, interest cost includes amounts resulting from periodic amortization of discount or premium and
issue costs on debt.
According to the discussion at: 835 Interest> 30 Imputation of Interest
05-1
This Subtopic addresses the imputation of interest.
05-2
Business transactions often involve the exchange of cash or property, goods, or services for a
note or similar instrument. When a note is exchanged for property, goods, or services in a
bargained transaction entered into at arm’s length, there should be a general presumption that
the rate of interest stipulated by the parties to the transaction represents fair and adequate
compensation to the supplier for the use of the related funds. That presumption, however, must
not permit the form of the transaction to prevail over its economic substance and thus would not
apply if interest is not stated, the stated interest rate is unreasonable, or the stated face amount
of the note is materially different from the current cash sales price for the same or similar items
or from the market value of the note at the date of the transaction. The use of an interest rate
that varies from prevailing interest rates warrants evaluation of whether the face amount and
the stated interest rate of a note or obligation provide reliable evidence for properly recording the
exchange and subsequent related interest.
05-3
This Subtopic provides guidance for the appropriate accounting when the face amount of a note
does not reasonably represent the present value of the consideration given or received in the
exchange. This circumstance may arise if the note is non-interest-bearing or has a stated
interest rate that is different from the rate of interest appropriate for the debt at the date of the
transaction. Unless the note is recorded at its present value in this circumstance, the sales price
and profit to a seller in the year of the transaction and the purchase price and cost to the buyer
are misstated, and interest income and interest expense in subsequent periods are also
misstated.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-7
ANSWERS TO QUESTIONS
1. Money has value because with it one can acquire assets and services and discharge obligations.
The holding, borrowing or lending of money can result in costs or earnings. And the longer the
time period involved, the greater the costs or the earnings. The cost or earning of money as a
function of time is the time value of money.
Accountants must have a working knowledge of compound interest, annuities, and present value
concepts because of their application to numerous types of business events and transactions
which require proper valuation and presentation. These concepts are applied in the following
areas: (1) sinking funds, (2) installment contracts, (3) pensions, (4) long-term assets, (5) leases,
(6) notes receivable and payable, (7) business combinations, (8) amortization of premiums and
discounts, and (9) estimation of fair value.
2. Some situations in which present value measures are used in accounting include:
(a) Notes receivable and payable—these involve single sums (the face amounts) and may
involve annuities, if there are periodic interest payments.
(b) Leases—involve measurement of assets and obligations, which are based on the present value
of annuities (lease payments) and single sums (if there are residual values to be paid at the
conclusion of the lease).
(c) Pensions and other deferred compensation arrangements—involve discounted future
annuity payments that are estimated to be paid to employees upon retirement.
(d) Bond pricing—the price of bonds payable is comprised of the present value of the principal
or face value of the bond plus the present value of the annuity of interest payments.
(e) Long-term assets—evaluating various long-term investments or assessing whether an asset
is impaired requires determining the present value of the estimated cash flows (may be single
sums and/or an annuity).
3. Interest is the payment for the use of money. It may represent a cost or earnings depending upon
whether the money is being borrowed or loaned. The earning or incurring of interest is a function
of the time, the amount of money, and the risk involved (reflected in the interest rate).
Simple interest is computed on the amount of the principal only, while compound interest is computed on the amount of the principal plus any accumulated interest. Compound interest involves
interest on interest while simple interest does not.
4. The interest rate generally has three components:
(a) Pure rate of interest—This would be the amount a lender would charge if there were no
possibilities of default and no expectation of inflation.
(b) Expected inflation rate of interest—Lenders recognize that in an inflationary economy, they
are being paid back with less valuable dollars. As a result, they increase their interest rate to
compensate for this loss in purchasing power. When inflationary expectations are high,
interest rates are high.
(c) Credit risk rate of interest—The government has little or no credit risk (i.e., risk of
nonpayment) when it issues bonds. A business enterprise, however, depending upon its
financial stability, profitability, etc. can have a low or a high credit risk.
Accountants must have knowledge about these components because these components are
essential in identifying an appropriate interest rate for a given company or investor at any given
moment.
5. (a) Present value of an ordinary annuity at 8% for 10 periods (Table 6-4).
(b) Future value of 1 at 8% for 10 periods (Table 6-1).
(c) Present value of 1 at 8% for 10 periods (Table 6-2).
6-8Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
(d) Future value of an ordinary annuity at 8% for 10 periods (Table 6-3).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-9
Questions Chapter 6 (Continued)
6. He should choose quarterly compounding, because the balance in the account on which interest
will be earned will be increased more frequently, thereby resulting in more interest earned on the
investment. This is shown in the following calculation:
Semiannual compounding, assuming the amount is invested for 2 years:
n=4
$1,500 X 1.16986 = $1,755
i=4
Quarterly compounding, assuming the amount is invested for 2 years:
n=8
$1,500 X 1.17166 = $1,758
i=2
Thus, with quarterly compounding, Jose could earn $3 more.
7. $26,898 = $20,000 X 1.34489 (future value of 1 at 21/2% for 12 periods).
8. $44,671 = $80,000 X .55839 (present value of 1 at 6%% for 10 periods).
9. An annuity involves (1) periodic payments or receipts, called rents, (2) of the same amount,
(3) spread over equal intervals, (4) with interest compounded once each interval.
Rents occur at the end of the intervals for ordinary annuities while the rents occur at the beginning
of each of the intervals for annuities due.
10. Amount paid each year = $40,000 (present value of an ordinary annuity at 12% for 4 years).
3.03735
Amount paid each year = $13,169.
11. Amount deposited each year = $200,000 (future value of an ordinary annuity at 10% for
4.64100 4 years).
Amount deposited each year = $43,094.
12. Amount deposited each year = $200,000 [future value of an annuity due at 10% for 4 years
5.10510 (4.64100 X 1.10)].
Amount deposited each year = $39,177.
13. The process for computing the future value of an annuity due using the future value of an ordinary
annuity interest table is to multiply the corresponding future value of the ordinary annuity by one
plus the interest rate. For example, the factor for the future value of an annuity due for 4 years at
12% is equal to the factor for the future value of an ordinary annuity times 1.12.
14. The basis for converting the present value of an ordinary annuity table to the present value of an
annuity due table involves multiplying the present value of an ordinary annuity factor by one plus
the interest rate.
6-10Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 6 (Continued)
15. Present value = present value of an ordinary annuity of $25,000 for 20 periods at? percent.
$245,000
= present value of an ordinary annuity of $25,000 for 20 periods at? percent.
Present value of an ordinary annuity for 20 periods at? percent =
$245,000 = 9.8.
$25,000
The factor 9.8 is closest to 9.81815 in the 8% column (Table 6-4).
16.
4.96764 Present value of ordinary annuity at 12% for eight periods.
(2.40183) Present value of ordinary annuity at 12% for three periods.
2.56581 Present value of ordinary annuity at 12% for eight periods, deferred three periods.
The present value of the five rents is computed as follows:
2.56581 X $20,000 = $51,316..
17. (a)
(b)
(c)
(d)
Present value of an annuity due.
Present value of 1.
Future value of an annuity due.
Future value of 1.
18. $27,600 = PV of an ordinary annuity of $6,900 for five periods at? percent.
$27,600 = PV of an ordinary annuity for five periods at? percent.
$6,900
4.0 = PV of an ordinary annuity for five periods at?
4.0 = approximately 8%.
19. The IRS argues that the future reserves should be discounted to present value. The result would
be smaller reserves and therefore less of a charge to income. As a result, income would be higher
and income taxes may therefore be higher as well.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-11
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 6-1
8% annual interest
i = 8%
PV = $15,000
FV = ?
0
1
2
3
n=3
FV = $15,000 (FVF3, 8%)
FV = $15,000 (1.25971)
FV = $18,896
8% annual interest, compounded semiannually
i = 4%
PV = $15,000
0
FV = ?
1
2
3
4
5
6
n=6
FV = $15,000 (FVF6, 4%)
FV = $15,000 (1.26532)
FV = $18,980
6-12Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 6-2
12% annual interest
i = 12%
PV = ?
FV = $25,000
0
1
2
n=4
3
4
PV = $25,000 (PVF4, 12%)
PV = $25,000 (.63552)
PV = $15,888
12% annual interest, compounded quarterly
i = 3%
PV = ?
0
FV = $25,000
1
2
14
15
16
n = 16
PV = $25,000 (PVF16, 3%)
PV = $25,000 (.62317)
PV = $15,579
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-13
BRIEF EXERCISE 6-3
i=?
PV = $30,000
0
1
FV = $150,000
2
19
20
21
n = 21
FV = PV (FVF21, i)
PV = FV (PVF21, i)
OR
$150,000 = $30,000 (FVF21, i)
$30,000 = $150,000 (PVF21, i)
FVF21, i = 5.0000
PVF21, i = .20000
i = 8%
i = 8%
BRIEF EXERCISE 6-4
i = 5%
PV = $10,000
FV = $17,100
0
?
n=?
FV = PV (FVFn, 5%)
PV = FV (PVFn, 5%)
OR
$17,100 = $10,000 (FVFn, 5%)
$10,000 = $17,100 (PVFn, 5%)
FVFn, 5% = 1.71000
PVFn, 5% = .58480
n = 11 years
n = 11 years
6-14Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 6-5
First payment today (Annuity Due)
i = 12%
FV – AD =
R=
$8,000 $8,000 $8,000
0
1
$8,000 $8,000
2
18
19
?
20
n = 20
FV – AD = $8,000 (FVF – OA20, 12%) 1.12
FV – AD = $8,000 (72.05244) 1.12
FV – AD = $645,590
First payment at year-end (Ordinary Annuity)
i = 12%
FV – OA =
?
$8,000 $8,000 $8,000
$8,000 $8,000
0
1
2
18
19
20
n = 20
FV – OA = $8,000 (FVF – OA20, 12%)
FV – OA = $8,000 (72.05244)
FV – OA = $576,420
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-15
BRIEF EXERCISE 6-6
i = 11%
0
R=?
?
?
FV – OA =
? $250,000
1
2
8
9
10
n = 10
$250,000 = R (FVF – OA10, 11%)
$250,000 = R (16.72201)
$250,000
=R
16.72201
R = $14,950
BRIEF EXERCISE 6-7
12% annual interest
i = 12%
PV = ?
0
FV = $300,000
1
2
3
4
5
n=5
PV = $300,000 (PVF5, 12%)
PV = $300,000 (.56743)
PV = $170,229
6-16Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 6-8
With quarterly compounding, there will be 20 quarterly compounding periods,
at 1/4 the interest rate:
PV = $300,000 (PVF20, 3%)
PV = $300,000 (.55368)
PV = $166,104
BRIEF EXERCISE 6-9
i = 10%
FV – OA =
R=
$100,000
$16,380 $16,380
0
1
$16,380
2
n
n=?
$100,000 = $16,380 (FVF – OAn, 10%)
$100,000
FVF – OAn, 10% =
= 6.10501
16,380
Therefore, n = 5 years
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-17
BRIEF EXERCISE 6-10
First withdrawal at year-end
i = 8%
PV – OA = R =
? $30,000 $30,000
0
1
$30,000 $30,000 $30,000
2
8
9
10
n = 10
PV – OA = $30,000 (PVF – OA10, 8%)
PV – OA = $30,000 (6.71008)
PV – OA = $201,302
First withdrawal immediately
i = 8%
PV – AD =
?
R=
$30,000 $30,000 $30,000
0
1
$30,000 $30,000
2
8
9
10
n = 10
PV – AD = $30,000 (PVF – AD10, 8%)
PV – AD = $30,000 (7.24689)
PV – AD = $217,407
6-18Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 6-11
i=?
PV =
$793.15
R=
$75
$75
$75
$75
$75
0
1
2
10
11
12
n = 12
$793.15 = $75 (PVF – OA12, i)
$793.15
PVF12, i =
= 10.57533
$75
Therefore, i = 2% per month or 24% per year.
BRIEF EXERCISE 6-12
i = 8%
PV =
$300,000 R = ?
0
1
?
?
?
?
2
18
19
20
n = 20
$300,000 = R (PVF – OA20, 8%)
$300,000 = R (9.81815)
R = $30,556
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-19
BRIEF EXERCISE 6-13
i = 12%
R=
$30,000 $30,000
$30,000 $30,000 $30,000
12/31/11 12/31/12 12/31/13
12/31/17 12/31/18 12/31/19
n=8
FV – OA = $30,000 (FVF – OA8, 12%)
FV – OA = $30,000 (12.29969)
FV – OA = $368,991
BRIEF EXERCISE 6-14
i = 8%
PV – OA =
R=
?
0
$25,000 $25,000
1
2
3
4
5
n=4
$25,000 $25,000
6
11
12
n=8
PV – OA = $25,000 (PVF – OA12–4, 8%)
PV – OA = $25,000 (PVF – OA8, 8%)(PVF4, 8%)
OR
PV – OA = $25,000 (7.53608 – 3.31213)
PV – OA = $25,000 (5.74664)(.73503)
PV – OA = $105,599
PV – OA = $105,599
6-20Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 6-15
i = 8%
PV = ?
PV – OA = R =
? $140,000 $140,000
0
1
$2,000,000
$140,000 $140,000 $140,000
2
8
9
10
n = 10
$2,000,000 (PVF10, 8%) = $2,000,000 (.46319) = $ 926,380
$140,000 (PVF – OA10, 8%) = $140,000 (6.71008) =
939,411
$1,865,791
BRIEF EXERCISE 6-16
PV – OA = $20,000
$4,727.53 $4,727.53
0
1
$20,000
(PV – OA6, i%)
(PV – OA6, i%)
Therefore, i%
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
2
$4,727.53 $4,727.53
5
6
= $4,727.53 (PV – OA6, i%)
= $20,000 ÷ $4,727.53
= 4.23054
= 11
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-21
BRIEF EXERCISE 6-17
PV – AD = $20,000
$?
$?
$?
$?
0
2
5
1
6
$20,000 = Payment (PV – AD6, 11%)
$20,000 ÷ (PV – AD6, 11%) = Payment
$20,000 ÷ 4.6959 = $4,259
6-22Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO EXERCISES
EXERCISE 6-1 (5–10 minutes)
1. a.
b.
c.
(a)
Rate of Interest
9%
3%
5%
(b)
Number of Periods
9
20
30
2. a.
b.
c.
9%
5%
3%
25
30
28
EXERCISE 6-2 (5–10 minutes)
(a)
Simple interest of $1,600 per year X 8
Principal
Total withdrawn
(b)
Interest compounded annually—Future value of
1 @ 8% for 8 periods
Total withdrawn
(c)
Interest compounded semiannually—Future
value of 1 @ 4% for 16 periods
Total withdrawn
$12,800
20,000
$32,800
1.85093
X $20,000
$37,018.60
1.87298
X $20,000
$37,459.60
EXERCISE 6-3 (10–15 minutes)
(a)
$7,000 X 1.46933 = $10,285.
(b)
$7,000 X .43393 = $3,038.
(c)
$7,000 X 31.77248 = $222,407.
(d)
$7,000 X 12.46221 = $87,235.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-23
EXERCISE 6-4 (15–20 minutes)
(a)
Future value of an ordinary
annuity of $4,000 a period
for 20 periods at 8%
$183,047.84 ($4,000 X 45.76196)
Factor (1 + .08)
X
1.08
Future value of an annuity
due of $4,000 a period at 8% $197,692
(b)
Present value of an ordinary
annuity of $2,500 for 30
periods at 10%
Factor (1 + .10)
Present value of annuity
due of $2,500 for 30 periods
at 10%
(c)
(d)
Future value of an ordinary
annuity of $2,000 a period
for 15 periods at 10%
Factor (1 + 10)
Future value of an annuity
due of $2,000 a period
for 15 periods at 10%
Present value of an ordinary
annuity of $1,000 for 6
periods at 9%
Factor (1 + .09)
Present value of an annuity
date of $1,000 for 6 periods
at 9%
$23,567 ($2,500 X 9.42691)
X 1.10
$25,924 (Or see Table 6-5 which
gives $25,924.03)
$63,544.96 ($2,000 X 31.77248)
X
1.10
$69,899
$4,485.92 ($1,000 X 4.48592)
X
1.09
$4,890
(Or see Table 6-5)
EXERCISE 6-5 (10–15 minutes)
(a)
$30,000 X 4.96764 = $149,029.
(b)
$30,000 X 8.31256 = $249,377.
(c)
($30,000 X 3.03735 X .50663) = $46,164.
or (5.65022 – 4.11141) X $30,000 = $46,164.
6-24Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 6-6 (15–20 minutes)
(a)
(b)
(c)
Future value of $12,000 @ 10% for 10 years
($12,000 X 2.59374) =
Future value of an ordinary annuity of $600,000
at 10% for 15 years ($600,000 X 31.77248)
Deficiency ($20,000,000 – $19,063,488)
$70,000 discounted at 8% for 10 years:
$70,000 X .46319 =
Accept the bonus of $40,000 now.
$31,125
$19,063,488
$936,512
$32,423
EXERCISE 6-7 (12–17 minutes)
(a)
$50,000 X .31524
+ $5,000 X 8.55948
=
=
$15,762
42,797
$58,559
(b)
$50,000 X .23939
+ $5,000 X 7.60608
=
=
$11,970
38,030
$50,000
(c)
$50,000 X .18270
+ $5,000 X 6.81086
=
=
$ 9,135
34,054
$43,189
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-25
EXERCISE 6-8 (10–15 minutes)
(a)
(b)
Present value of an ordinary annuity of 1
for 4 periods @ 8%
Annual withdrawal
Required fund balance on June 30, 2017
Fund balance at June 30, 2017
Future value of an ordinary annuity at 8%
for 4 years
3.31213
X $20,000
$66,243
$66,243
4.50611
= $14,701
Amount of each of four contributions is $14,701
EXERCISE 6-9 (10 minutes)
The rate of interest is determined by dividing the future value by the
present value and then finding the factor in the FVF table with n = 2 that
approximates that number:
$123,210 = $100,000 (FVF2, i%)
$123,210 ÷ $100,000 = (FVF2, i%)
1.2321 = (FVF2, i%)—reading across the n = 2 row reveals that i = 11%.
EXERCISE 6-10 (10–15 minutes)
(a)
The number of interest periods is calculated by first dividing the
future value of $1,000,000 by $92,296, which is 10.83471—the value
$1.00 would accumulate to at 10% for the unknown number of interest
periods. The factor 10.83471 or its approximate is then located in the
Future Value of 1 Table by reading down the 10% column to the
25-period line; thus, 25 is the unknown number of years Mike must
wait to become a millionaire.
(b)
The unknown interest rate is calculated by first dividing the future
value of $1,000,000 by the present investment of $182,696, which is
5.47357—the amount $1.00 would accumulate to in 15 years at an
unknown interest rate. The factor or its approximate is then located in
the Future Value of 1 Table by reading across the 15-period line to the
6-26Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
12% column; thus, 12% is the interest rate Sally must earn on her
investment to become a millionaire.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-27
EXERCISE 6-11 (10–15 minutes)
(a)
Total interest = Total payments—Amount owed today
$162,745 (10 X $16,274.53) – $100,000 = $62,745.
(b)
Sosa should borrow from the bank, since the 9% rate is lower than the
manufacturer’s 10% rate determined below.
PV–OA10, i% = $100,000 ÷ $16,274.53
= 6.14457—Inspection of the 10 period row reveals a rate
of 10%.
EXERCISE 6-12 (10–15 minutes)
Building A—PV = $600,000.
Building B—
Rent X (PV of annuity due of 25 periods at 12%) = PV
$69,000 X 8.78432 = PV
$606,118 = PV
Building C—
Rent X (PV of ordinary annuity of 25 periods at 12%) = PV
$7,000 X 7.84314 = PV
$54,902 = PV
Cash purchase price
PV of rental income
Net present value
$650,000
– 54,902
$595,098
Answer: Lease Building C since the present value of its net cost is the
smallest.
6-28Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 6-13 (15–20 minutes)
Time diagram:
George Hincapie, Inc.
i = 5%
PV = ?
PV–OA = ?
$110,000
0
Principal
$2,000,000
interest
$110,000 $110,000 $110,000
$110,000 $110,000
1
2
3
28
29
30
n = 30
Formula for the interest payments:
PV–OA = R (PVF–OAn, i)
PV–OA = $110,000 (PVF–OA30, 5%)
PV–OA = $110,000 (15.37245)
PV–OA = $1,690,970
Formula for the principal:
PV = FV (PVFn, i)
PV = $2,000,000 (PVF30, 5%)
PV = $2,000,000 (0.23138)
PV = $462,760
The selling price of the bonds = $1,690,970 + $462,760 = $2,153,730.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-29
EXERCISE 6-14 (15–20 minutes)
Time diagram:
i = 8%
R=
PV–OA = ?
0
1
$700,000
2
n = 15
15
$700,000 $700,000
16
n = 10
24
25
Formula: PV–OA = R (PVF–OAn, i)
PV–OA = $700,000 (PVF–OA25–15, 8%)
PV–OA = $700,000 (10.67478 – 8.55948)
PV–OA = $700,000 (2.11530)
PV–OA = $1,480,710
OR
Time diagram:
i = 8%
R=
PV–OA = ?
0
1
FV(PVn, i)
$700,000
2
6-30Copyright © 2013 John Wiley & Sons, Inc.
$700,000 $700,000
15
16
(PV–OAn, i)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
24
25
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 6-14 (Continued)
(i)
Present value of the expected annual pension payments at the end of
the 10th year:
PV–OA = R (PVF–OAn, i)
PV–OA = $700,000 (PVF–OA10, 8%)
PV–OA = $700,000 (6.71008)
PV–OA = $4,697,056
(ii)
Present value of the expected annual pension payments at the
beginning of the current year:
PV = FV (PVFn, i)
PV = $4,697,056 (PVF15,8%)
PV = $4,697,056 (0.31524)
PV = $1,480,700*
*$10 difference due to rounding.
The company’s pension obligation (liability) is $1,480,700.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-31
EXERCISE 6-15 (15–20 minutes)
(a)
i = 8%
PV = $1,000,000
0
FV = $1,999,000
1
2
n=?
FVF(n, 8%) = $1,999,000 ÷ $1,000,000
= 1.999
reading down the 8% column, 1.999 corresponds to 9 periods.
(b)
By setting aside $300,000 now, Andrew can gradually build the fund
to an amount to establish the foundation.
PV = $300,000
0
FV
FV = ?
1
2
8
9
= $300,000 (FVF9, 8%)
= $300,000 (1.999)
= $599,700—Thus, the amount needed from the annuity:
$1,999,000 – $599,700 = $1,399,300.
0
$?
$?
$? FV = $1,399,300
1
2
8
9
Payments = FV ÷ (FV–OA9, 8%)
= $1,399,300 ÷ 12.48756
= $112,056.
6-32Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 6-16 (10–15 minutes)
Amount to be repaid on March 1, 2022.
Time diagram:
i = 6% per six months
PV = $70,000
3/1/12
FV = ?
3/1/13
3/1/14
3/1/20
3/1/21
3/1/22
n = 20 six-month periods
Formula: FV = PV (FVFn, i)
FV = $70,000 (FVF20, 6%)
FV = $70,000 (3.20714)
FV = $224,500
Amount of annual contribution to retirement fund.
Time diagram:
R
R=?
i = 10%
R
R
?
?
R
?
3/1/17 3/1/18
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
3/1/19
R
?
3/1/20 3/1/21
FV–AD =
$224,500
3/1/22
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-33
EXERCISE 6-16 (Continued)
1.
2.
3.
4.
Future value of ordinary annuity of 1 for 5 periods
at 10%
Factor (1 + .10)
Future value of an annuity due of 1 for 5 periods
at 10%
Periodic rent ($224,500 ÷ 6.71561)
6.10510
X 1.10000
6.71561
$33,430
EXERCISE 6-17 (10–15 minutes)
Time diagram:
i = 11%
R
PV–OA = $365,755 ?
R
?
R
?
0
24
25
1
n = 25
Formula:
PV–OA = R (PV–OAn, i)
$365,755 = R (PVF–OA25, 11%)
$365,755 = R (8.42174)
R = $365,755 ÷ 8.42174
R = $43,430
6-34Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 6-18 (10–15 minutes)
Time diagram:
i = 8%
PV–OA = ? $300,000
0
$300,000
1
2
$300,000 $300,000 $300,000
13
14
15
n = 15
Formula:
PV–OA = R (PVF–OAn, i)
PV–OA = $300,000 (PVF–OA15, 8%)
PV–OA = $300,000 (8.55948)
R = $2,567,844
The recommended method of payment would be the 15 annual payments of
$300,000, since the present value of those payments ($2,567,844) is less
than the alternative immediate cash payment of $2,600,000.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-35
EXERCISE 6-19 (10–15 minutes)
Time diagram:
i = 8%
PV–AD = ?
R=
$300,000 $300,000 $300,000
0
1
$300,000 $300,000
2
13
14
15
n = 15
Formula:
Using Table 6-4
Using Table 6-5
PV–AD = R (PVF–OAn, i)
PV–AD = R (PVF–ADn, i)
PV–AD = $300,000 (8.55948 X 1.08)
PV–AD = $300,000 (PVF–AD15, 8%)
PV–AD = $300,000 (9.24424)
PV–AD = $300,000 (9.24424)
PV–AD = $2,773,272
PV–AD = $2,773,272
The recommended method of payment would be the immediate cash
payment of $2,600,000, since that amount is less than the present value of
the 15 annual payments of $300,000 ($2,773,272).
6-36Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 6-20 (15–20 minutes)
Expected
Cash Flow
Probability
Cash
Estimate X Assessment = Flow
(a) $ 4,800
20%
$ 960
6,300
50%
3,150
7,500
30%
2,250
Total Expected
Value
$ 6,360
(b) $ 5,400
7,200
8,400
(c) $(1,000)
3,000
5,000
30%
50%
20%
Total Expected
Value
$ 1,620
3,600
1,680
10%
80%
10%
Total Expected
Value
$ (100)
2,400
500
$ 6,900
$ 2,800
EXERCISE 6-21 (10–15 minutes)
Estimated
Cash
Probability
Expected
Outflow X Assessment = Cash Flow
$200
10%
$ 20
450
30%
135
600
50%
300
750
10%
75
X PV
Factor,
n = 2, i = 6%
$ 530 X 0.89
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Present Value
$472
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-37
EXERCISE 6-22 (15–20 minutes)
(a)
This exercise determines the present value of an ordinary annuity or
expected cash flows as a fair value estimate.
Cash flow
Probability
Expected
Estimate X Assessment = Cash Flow
$ 380,000
20%
$ 76,000
630,000
50%
315,000
750,000
30%
225,000 X PV
Factor,
n = 8, I = 8% Present Value
$ 616,000 X 5.74664 = $3,539,930
The fair value estimate of the trade name exceeds the carrying value;
thus, no impairment is recorded.
(b)
This fair value is based on unobservable inputs—Killroy’s own data on
the expected future cash flows associated with the trade name. This
fair value estimate is considered Level 3, as discussed in Chapter 2.
6-38Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
TIME AND PURPOSE OF PROBLEMS
Problem 6-1 (Time 15–20 minutes)
Purpose—to present an opportunity for the student to determine how to use the present value tables in
various situations. Each of the situations presented emphasizes either a present value of 1 or a present
value of an ordinary annuity situation. Two of the situations will be more difficult for the student because
a noninterest-bearing note and bonds are involved.
Problem 6-2 (Time 15–20 minutes)
Purpose—to present an opportunity for the student to determine solutions to four present and future
value situations. The student is required to determine the number of years over which certain amounts
will accumulate, the rate of interest required to accumulate a given amount, and the unknown amount
of periodic payments. The problem develops the student’s ability to set up present and future value
equations and solve for unknown quantities.
Problem 6-3 (Time 20–30 minutes)
Purpose—to present the student with an opportunity to determine the present value of the costs of
competing contracts. The student is required to decide which contract to accept.
Problem 6-4 (Time 20–30 minutes)
Purpose—to present the student with an opportunity to determine the present value of two lottery
payout alternatives. The student is required to decide which payout option to choose.
Problem 6-5 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to determine which of four insurance options results
in the largest present value. The student is required to determine the present value of options which
include the immediate receipt of cash, an ordinary annuity, an annuity due, and an annuity of changing
amounts. The student must also deal with interest compounded quarterly. This problem is a good
summary of the application of present value techniques.
Problem 6-6 (Time 25–30 minutes)
Purpose—to present an opportunity for the student to determine the present value of a series of
deferred annuities. The student must deal with both cash inflows and outflows to arrive at a present
value of net cash inflows. A good problem to develop the student’s ability to manipulate the present
value table factors to efficiently solve the problem.
Problem 6-7 (Time 30–35 minutes)
Purpose—to present the student an opportunity to use time value concepts in business situations.
Some of the situations are fairly complex and will require the student to think a great deal before
answering the question. For example, in one situation a student must discount a note and in another
must find the proper interest rate to use in a purchase transaction.
Problem 6-8 (Time 20–30 minutes)
Purpose—to present the student with an opportunity to determine the present value of an ordinary
annuity and annuity due for three different cash payment situations. The student must then decide
which cash payment plan should be undertaken.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-39
Time and Purpose of Problems (Continued)
Problem 6-9 (Time 30–35 minutes)
Purpose—to present the student with the opportunity to work three different problems related to time
value concepts: purchase versus lease, determination of fair value of a note, and appropriateness of
taking a cash discount.
Problem 6-10 (Time 30–35 minutes)
Purpose—to present the student with the opportunity to assess whether a company should purchase or
lease. The computations for this problem are relatively complicated.
Problem 6-11 (Time 25–30 minutes)
Purpose—to present the student an opportunity to apply present value to retirement funding problems,
including deferred annuities.
Problem 6-12 (Time 20–25 minutes)
Purpose—to provide the student an opportunity to explore the ethical issues inherent in applying time
value of money concepts to retirement plan decisions.
Problem 6-13 (Time 20–25 minutes)
Purpose—to present the student an opportunity to compute expected cash flows and then apply
present value techniques to determine a warranty liability.
Problem 6-14 (Time 20–25 minutes)
Purpose—to present the student an opportunity to compute expected cash flows and then apply
present value techniques to determine the fair value of an asset.
Problems 6-15 (Time 20–25 minutes)
Purpose—to present the student an opportunity to estimate fair value by computing expected cash
flows and then applying present value techniques to value an asset retirement obligation.
6-40Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO PROBLEMS
PROBLEM 6-1
(a)
Given no established value for the building, the fair market value of
the note would be estimated to value the building.
Time diagram:
i = 9%
PV = ?
1/1/12
FV = $240,000
1/1/13
1/1/14
1/1/15
n=3
Formula: PV = FV (PVFn, i)
PV = $240,000 (PVF3, 9%)
PV = $240,000 (.77218)
PV = $185,323
Cash equivalent price of building ..................................
Less: Book value ($250,000 – $100,000) .......................
Gain on disposal of the building ...............................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$185,323
150,000
$ 35,323
(For Instructor Use Only)
6-41
PROBLEM 6-1 (Continued)
(b)
Time diagram:
i = 11%
PV – OA = ? $27,000
$27,000
$27,000
Principal
$300,000
Interest
$27,000
1/1/14
1/1/16
1/1/23
1/1/24
1/1/15
n = 10
Present value of the principal
FV (PVF10, 11%) = $300,000 (.35218) ....................
= $105,654
Present value of the interest payments
(c)
R (PVF – OA10, 11%) = $27,000 (5.88923) .............
= 159,009
Combined present value (purchase price) ................
$264,663
Time diagram:
i = 8%
PV – OA = ? $4,000
0
1
$4,000
$4,000
$4,000
$4,000
2
8
9
10
n = 10
Formula: PV – OA = R (PVF – OAn,i)
PV – OA = $4,000 (PVF – OA10, 8%)
PV – OA = $4,000 (6.71008)
PV – OA = $26,840 (cost of machine)
6-42Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 6-1 (Continued)
(d)
Time diagram:
i = 12%
PV – OA = ?
$20,000 $5,000
0
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
$5,000
2
3
4
n=8
5
6
7
8
1
Formula: PV – OA = R (PVF – OAn,i)
PV – OA = $5,000 (PVF – OA8, 12%)
PV – OA = $5,000 (4.96764)
PV – OA = $24,838
Cost of tractor = $20,000 + $24,838.20 = $44,838
(e)
Time diagram:
i = 11%
PV – OA = ? $120,000 $120,000
0
1
$120,000 $120,000
2
8
9
n=9
Formula: PV – OA = R (PVF – OAn, i)
PV – OA = $120,000 (PVF – OA9, 11%)
PV – OA = $120,000 (5.53705)
PV – OA = $664,446
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-43
PROBLEM 6-2
(a)
Time diagram:
FV – OA = $90,000
i = 8%
0
R
R=?
R
?
R
?
R
?
R
?
R
?
R
?
R
?
1
2
3
4
n=8
5
6
7
8
Formula:
FV – OA = R (FVF – OAn,i)
$90,000 = R (FVF – OA8, 8%)
$90,000 = R (10.63663)
R = $90,000 ÷ 10.63663
R = $8,461
(b)
Time diagram:
i = 12%
R
R=?
R
?
R
?
R
?
40
41
42
64
FV – AD =
500,000
65
n = 25
6-44Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 6-2 (Continued)
1.
Future value of an ordinary annuity of 1 for
25 periods at 12% ..............................................
Factor (1 + .12)......................................................
Future value of an annuity due of 1 for 25
periods at 12% ...................................................
2.
3.
4.
(c)
133.33387
X 1.1200
149.33393
Periodic rent ($500,000 ÷ 149.33393) ..................
$3,348
Time diagram:
i = 9%
PV = $20,000
0
FV = $47,347
1
2
3
n
Future value approach
Present value approach
FV = PV (FVFn, i)
PV = FV (PVFn, i)
or
$47,347 = $20,000 (FVFn, 9%)
FVFn,
9%
= $47,347 ÷ $20,000
= 2.36735
2.36735 is approximately the
value of $1 invested at 9%
for 10 years.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$20,000 = $47,347 (PVFn, 9%)
PVFn, 9%
= $20,000 ÷ $47,347
= .42241
.42241 is approximately the
present value of $1 discounted
at 9% for 10 years.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-45
PROBLEM 6-2 (Continued)
(d)
Time diagram:
i=?
PV =
$19,553
0
FV =
$27,600
1
2
n=4
3
4
Future value approach
Present value approach
FV = PV (FVFn, i)
PV = FV (PVFn, i)
or
$27,600 = $19,553 (FVF4, i)
FVF4, i
= $27,600 ÷ $19,553
= 1.41155
1.41155 is the value of $1
invested at 9% for 4 years.
6-46Copyright © 2013 John Wiley & Sons, Inc.
$19,553 = $27,600 (PVF4, i)
PVF4, i
= $19,553 ÷ $27,600
= .70844
.70844 is the present value of $1
discounted at 9% for 4 years.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 6-3
Time diagram (Bid A):
i = 9%
$69,000
PV – OA = R =
?
3,000
3,000
3,000
3,000
69,000
3,000
3,000
3,000
3,000
0
0
1
2
3
4
5
n=9
6
7
8
9
10
Present value of initial cost
12,000 X $5.75 = $69,000 (incurred today) ..................
$ 69,000
Present value of maintenance cost (years 1–4)
12,000 X $.25 = $3,000
R (PVF – OA4, 9%) = $3,000 (3.23972) ............................
9,719
Present value of resurfacing
FV (PVF5, 9%) = $69,000 (.64993) ...................................
44,845
Present value of maintenance cost (years 6–9)
R (PVF – OA9–5, 9%) = $3,000 (5.99525 – 3.88965) .........
6,317
Present value of outflows for Bid A ...............................
$129,881
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-47
PROBLEM 6-3 (Continued)
Time diagram (Bid B):
i = 9%
$126,000
PV – OA = R =
?
1,080
1,080
1,080
1,080
1,080
1,080
1,080
1,080
1,080
0
0
1
2
3
4
5
6
7
8
9
10
n=9
Present value of initial cost
12,000 X $10.50 = $126,000 (incurred today) .........
$126,000
Present value of maintenance cost
12,000 X $.09 = $1,080
R (PV – OA9, 9%) = $1,080 (5.99525) .........................
6,475
Present value of outflows for Bid B ..........................
$132,475
Bid A should be accepted since its present value is lower.
6-48Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 6-4
Lump sum alternative: Present Value = $500,000 X (1 – .46) = $270,000.
Annuity alternative: Payments = $36,000 X (1 – .25) = $27,000.
Present Value = Payments (PV – AD20, 8%)
= $27,000 (10.60360)
= $286,297.
Long should choose the annuity payout; its present value is $16,297 greater.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-49
PROBLEM 6-5
(a)
The present value of $55,000 cash paid today is $55,000.
(b)
Time diagram:
i = 21/2% per quarter
PV – OA =
R=
?
$4,000
$4,000
$4,000
$4,000
$4,000
0
1
2
18
19
20
n = 20 quarters
Formula: PV – OA = R (PVF – OAn, i)
PV – OA = $4,000 (PVF – OA20, 21/2%)
PV – OA = $4,000 (15.58916)
PV – OA = $62,357
(c)
Time diagram:
i = 21/2% per quarter
$18,000
PV – AD =
R = $1,800
$1,800
$1,800
$1,800
$1,800
0
1
2
38
39
40
n = 40 quarters
Formula: PV – AD = R (PVF – ADn, i)
PV – AD = $1,800 (PVF – AD40, 21/2%)
PV – AD = $1,800 (25.73034)
PV – AD = $46,315
The present value of option (c) is $18,000 + $46,315, or
$64,315.
6-50Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 6-5 (Continued)
(d)
Time diagram:
i = 21/2% per quarter
PV – OA =
?
PV – OA = R =
?
$4,000
0
R=
$1,500
$4,000
1
11
n = 12 quarters
$1,500
$1,500 $1,500
$4,000
12
13
14
n = 25 quarters
36
37
Formulas:
PV – OA = R (PVF – OAn,i)
PV – OA = $4,000 (PVF – OA12, 21/2%)
PV – OA = R (PVF – OAn,i)
PV – OA = $1,500 (PVF – OA37–12, 21/2%)
PV – OA = $4,000 (10.25776)
PV – OA = $1,500 (23.95732 – 10.25776)
PV – OA = $41,031
PV – OA = $20,549
The present value of option (d) is $41,031 + $20,549, or
$61,580.
Present values:
(a)
$55,000.
(b)
$62,357.
(c)
$64,315.
(d)
$61,580.
Option (c) is the best option, based upon present values alone.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-51
Copyright © 2013 John Wiley & Sons, Inc.
Time diagram:
i = 12%
PV – OA = ? R =
($39,000)
0
($39,000) $18,000 $18,000 $68,000 $68,000 $68,000 $68,000 $38,000 $38,000 $38,000
1
5
6
10 11
12
29 30 31
39 40
n=5
n = 20
n = 10
($60,000 – $30,000 –
$12,000)
($110,000 – $30,000 –
$12,000)
($80,000 – $30,000 –
$12,000)
Formulas:
PV – OA = R (PVF – OAn, i)
PV – OA = R (PVF – OAn, i)
PV – OA = R (PVF – OAn, i)
PV – OA =R (PVF – OAn, i)
PV – OA = ($39,000)(PVF – OA5, 12%)PV – OA = $18,000 (PVF – OA10-5, 12%) PV – OA = $68,000 (PVF – OA30–10, 12%) PV – OA = $38,000 (PVF – OA40–30, 12%)
PV – OA = ($39,000)(3.60478)
PV – OA = $18,000 (5.65022 – 3.60478) PV – OA = $68,000 (8.05518 – 5.65022) PV – OA = $38,000 (8.24378 – 8.05518)
PV – OA = ($140,586)
PV – OA = $18,000 (2.04544)
PV – OA = $68,000 (2.40496)
PV – OA = $38,000 (.18860)
PV – OA = $36,818
PV – OA = $163,537
PV – OA = $7,167
Present value of future net cash inflows:
(For Instructor Use Only)
$(140,586)
36,818
163,537
7,167
$ 66,936
Stacy McGill should accept no less than $66,936 for her vineyard business.
6-52Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 6-6
Kieso, Intermediate Accounting, 15/e, Solutions Manual
n=5
(0 – $30,000 – $9,000)
6-49
PROBLEM 6-7
(a)
Time diagram (alternative one):
i=?
PV – OA =
$600,000
R=
$80,000
$80,000
$80,000
$80,000
$80,000
1
2
10
11
12
0
n = 12
Formulas: PV – OA = R (PVF – OAn, i)
$600,000 = $80,000 (PVF – OA12, i)
PVF – OA12, i = $600,000 ÷ $80,000
PVF – OA12, i = 7.50
7.50 is present value of an annuity of $1 for 12 years discounted at
approximately 8%.
Time diagram (alternative two):
i=?
PV = $600,000
0
FV = $1,900,000
1
2
11
12
n = 12
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-53
PROBLEM 6-7 (Continued)
Future value approach
Present value approach
FV = PV (FVFn, i)
PV = FV (PVFn, i)
or
$1,900,000 = $600,000 (FVF12, i)
$600,000 = $1,900,000 (PVF12, i)
FVF12, I
= $1,900,000 ÷ $600,000
PVF12, i = $600,000 ÷ $1,900,000
FVF12, I
= 3.16667
PVF12, i = .31579
3.16667 is the approximate future
value of $1 invested at 10%
for 12 years.
.31579 is the approximate present
value of $1 discounted at 10%
for 12 years.
Dubois should choose alternative two since it provides a higher rate
of return.
(b)
Time diagram:
i=?
($824,150 – $200,000)
PV – OA = R =
$624,150
$76,952
0
6-54
1
$76,952
$76,952
8
9
n = 10 six-month periods
Copyright © 2013 John Wiley & Sons, Inc.
$76,952
10
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-7 (Continued)
Formulas: PV – OA = R (PVF – OAn, i)
$624,150 = $76,952 (PVF – OA10, i)
PV – OA10, i = $624,150 ÷ $76,952
PV – OA10, i = 8.11090
8.11090 is the present value of a 10-period annuity of $1 discounted at
4%. The interest rate is 4% semiannually, or 8% annually.
(c)
Time diagram:
i = 5% per six months
PV = ?
PV – OA =
R=
?
$32,000
0
1
$32,000
$32,000
$32,000 $32,000 ($800,000 X 8% X 6/12)
2
8
9
10
n = 10 six-month periods [(7 – 2) X 2]
Formulas:
PV – OA = R (PVF – OAn, i)
PV = FV (PVFn, i)
PV – OA = $32,000 (PVF – OA10, 5%)
PV = $800,000 (PVF10, 5%)
PV – OA = $32,000 (7.72173)
PV = $800,000 (.61391)
PV – OA = $247,095
PV = $491,128
Combined present value (amount received on sale of note):
$247,095 + $491,128 = $738,223
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-55
PROBLEM 6-7 (Continued)
(d)
Time diagram (future value of $200,000 deposit)
i = 21/2% per quarter
PV =
$200,000
FV = ?
12/31/14
12/31/15
12/31/23
12/31/22
n = 40 quarters
Formula: FV = PV (FVFn, i)
FV = $200,000 (FVF40, 2 1/2%)
FV = $200,000 (2.68506)
FV = $537,012
Amount to which quarterly deposits must grow:
$1,300,000 – $537,012 = $762,988.
Time diagram (future value of quarterly deposits)
i = 21/2% per quarter
R
R=?
12/31/14
R
?
R
?
R
?
R
?
12/31/15
12/31/23
R
?
R
?
R
?
R
?
12/31/22
n = 40 quarters
6-56
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-7 (Continued)
Formulas:
FV – OA = R (FVF – OAn, i)
$762,988 = R (FVF – OA40, 2 1/2%)
$762,988 = R (67.40255)
R = $762,988 ÷ 67.40255
R = $11,320
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-57
PROBLEM 6-8
Vendor A:
$ 18,000 payment
X 6.14457 (PV of ordinary annuity 10%, 10 periods)
$ 110,602
+ 55,000 down payment
+ 10,000 maintenance contract
$ 175,602 total cost from Vendor A
Vendor B:
$
9,500 semiannual payment
X 18.01704 (PV of annuity due 5%, 40 periods)
$ 171,162
Vendor C:
$
1,000
X 3.79079 (PV of ordinary annuity of 5 periods, 10%)
$
3,791 PV of first 5 years of maintenance
$
2,000 [PV of ordinary annuity 15 per., 10% (7.60608) –
X 3.81529
PV of ordinary annuity 5 per., 10% (3.79079)]
$
7,631 PV of next 10 years of maintenance
$
X
$
3,000 [(PV of ordinary annuity 20 per., 10% (8.51356) –
.90748
PV of ordinary annuity 15 per., 10% (7.60608)]
2,722 PV of last 5 years of maintenance
Total cost of press and maintenance Vendor C:
$ 150,000 cash purchase price
3,791 maintenance years 1–5
7,631 maintenance years 6–15
2,722 maintenance years 16–20
$ 164,144
The press should be purchased from Vendor C, since the present value of
the cash outflows for this option is the lowest of the three options.
6-58
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-9
(a)
Time diagram for the first ten payments:
i = 10%
PV–AD = ?
R=
$800,000 $800,000 $800,000 $800,000
0
1
2
$800,000 $800,000 $800,000
3
7
8
9
10
n = 10
Formula for the first ten payments:
PV – AD = R (PVF – ADn, i)
PV – AD = $800,000 (PVF – AD10, 10%)
PV – AD = $800,000 (6.75902)
PV – AD = $5,407,216
Formula for the last ten payments:
PV – OA = R (PVF – OAn, i)
PV – OA = $400,000 (PVF – OA19 – 9, 10%)
PV – OA = $400,000 (8.36492 – 5.75902)
PV – OA = $400,000 (2.6059)
PV – OA = $1,042,360
Note: The present value of an ordinary annuity is used here, not the
present value of an annuity due.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-59
PROBLEM 6-9 (Continued)
The total cost for leasing the facilities is:
$5,407,216 + $1,042,360 = $6,449,576.
OR
Time diagram for the last ten payments:
i = 10%
PV = ?
0
R=
1
2
$400,000
9
10
$400,000 $400,000 $400,000
17
18
19
R (PVF – OAn, i)
FVF (PVFn, i)
Formulas for the last ten payments:
(i)
Present value of the last ten payments:
PV – OA = R (PVF – OAn, i)
PV – OA = $400,000 (PVF – OA10, 10%)
PV – OA = $400,000 (6.14457)
PV – OA = $2,457,828
6-60
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-9 (Continued)
(ii) Present value of the last ten payments at the beginning of current
year:
PV = FV (PVFn, i)
PV = $2,457,828 (PVF9, 10%)
PV = $2,457,828 (.42410)
PV = $1,042,365*
*$5 difference due to rounding.
Cost for leasing the facilities $5,407,216 + $1,042,365 = $6,449,581
Since the present value of the cost for leasing the facilities,
$6,449,581, is less than the cost for purchasing the facilities,
$7,200,000, McDowell Enterprises should lease the facilities.
(b)
Time diagram:
i = 11%
PV – OA = ?
R=
$15,000 $15,000 $15,000
0
1
2
3
$15,000 $15,000 $15,000 $15,000
6
7
8
9
n=9
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-61
PROBLEM 6-9 (Continued)
Formula: PV – OA = R (PVF – OAn, i)
PV – OA = $15,000 (PVF – OA9, 11%)
PV – OA = $15,000 (5.53705)
PV – OA = $83,056
The fair value of the note is $83,056.
(c)
Time diagram:
Amount paid =
$792,000
0
10
30
Amount paid =
$800,000
Cash discount = $800,000 (1%) = $8,000
Net payment = $800,000 – $8,000 = $792,000
If the company decides not to take the cash discount, then the company
can use the $792,000 for an additional 20 days. The implied interest
rate for postponing the payment can be calculated as follows:
(i)
Implied interest for the period from the end of discount period to
the due date:
Cash discount lost if not paid within the discount period
Net payment being postponed
= $8,000/$792,000
= 0.010101
6-62
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-9 (Continued)
(ii) Convert the implied interest rate to annual basis:
Daily interest = 0.010101/20 = 0.00051
Annual interest = 0.000505 X 365 = 18.43%
Since McDowell’s cost of funds, 10%, is less than the implied
interest rate for cash discount, 18.43%, it should continue the
policy of taking the cash discount.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-63
PROBLEM 6-10
1.
Purchase.
Time diagrams:
Installments
i = 10%
PV – OA = ?
R=
$350,000
$350,000
$350,000
$350,000
$350,000
1
2
3
n=5
4
5
0
Property taxes and other costs
i = 10%
PV – OA = ?
R=
$56,000 $56,000
0
1
2
$56,000
9
$56,000 $56,000 $56,000
10
11
12
n = 12
6-64
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-10 (Continued)
Insurance
i = 10%
PV – AD = ?
R=
$27,000 $27,000 $27,000
0
1
$27,000 $27,000 $27,000
2
9
10
11
12
n = 12
Salvage Value
i = 10%
PV = ?
0
FV = $500,000
1
2
9
10
11
12
n = 12
Formula for installments:
PV – OA = R (PVF – OAn, i)
PV – OA = $350,000 (PVF – OA5, 10%)
PV – OA = $350,000 (3.79079)
PV – OA = $1,326,777
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-65
PROBLEM 6-10 (Continued)
Formula for property taxes and other costs:
PV – OA = R (PVF – OAn, i)
PV – OA = $56,000 (PVF – OA12, 10%)
PV – OA = $56,000 (6.81369)
PV – OA = $381,567
Formula for insurance:
PV – AD = R (PVF – ADn, i)
PV – AD = $27,000 (PVF – AD12, 10%)
PV – AD = $27,000 (7.49506)
PV – AD = $202,367
Formula for salvage value:
PV = FV (PVFn, i)
PV = $500,000 (PVF12, 10%)
PV = $500,000 (0.31863)
PV = $159,315
6-66
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-10 (Continued)
Present value of net purchase costs:
Down payment .......................................................
Installments ............................................................
Property taxes and other costs.............................
Insurance ................................................................
Total costs ..............................................................
Less: Salvage value ..............................................
Net costs.................................................................
2.
$ 400,000
1,326,777
381,567
202,367
$2,310,711
159,315
$2,151,396
Lease.
Time diagrams:
Lease payments
i = 10%
PV – AD = ?
R=
$270,000 $270,000 $270,000
0
1
2
$270,000 $270,000
10
11
12
n = 12
Interest lost on the deposit
i = 10%
PV – OA = ?
R=
$10,000 $10,000
0
1
2
$10,000 $10,000 $10,000
10
11
12
n = 12
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-67
PROBLEM 6-10 (Continued)
Formula for lease payments:
PV – AD = R (PVF – ADn, i)
PV – AD = $270,000 (PVF – AD12, 10%)
PV – AD = $270,000 (7.49506)
PV – AD = $2,023,666
Formula for interest lost on the deposit:
Interest lost on the deposit per year = $100,000 (10%) = $10,000
PV – OA = R (PVF – OAn, i)
PV – OA = $10,000 (PVF – OA12, 10%)
PV – OA = $10,000 (6.81369)
PV – OA = $68,137*
Cost for leasing the facilities = $2,023,666 + $68,137 = $2,091,803
Dunn Inc. should lease the facilities because the present value of the
costs for leasing the facilities, $2,091,803, is less than the present
value of the costs for purchasing the facilities, $2,151,396.
*OR: $100,000 – ($100,000 X .31863 [PV12, 10%]) = $68,137
6-68
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-11
(a)
Annual retirement benefits.
Jean–current salary
$ 48,000
X 2.56330 (future value of 1, 24 periods, 4%)
123,038 annual salary during last year of
work
X
.50 retirement benefit %
$ 61,519 annual retirement benefit
Colin–current salary
$ 36,000
X 3.11865 (future value of 1, 29 periods, 4%)
112,271 annual salary during last year of
work
X
.40 retirement benefit %
$ 44,909 annual retirement benefit
Anita–current salary
$ 18,000
X 2.10685 (future value of 1, 19 periods, 4%)
37,923 annual salary during last year of
work
X
.40 retirement benefit %
$ 15,169 annual retirement benefit
Gavin–current salary
$ 15,000
X 1.73168 (future value of 1, 14 periods, 4%)
25,975 annual salary during last year of
work
X
.40 retirement benefit %
$ 10,390 annual retirement benefit
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-69
PROBLEM 6-11 (Continued)
(b)
Fund requirements after 15 years of deposits at 12%.
Jean will retire 10 years after deposits stop.
$ 61,519 annual plan benefit
[PV of an annuity due for 30 periods – PV of an
X 2.69356 annuity due for 10 periods (9.02181 – 6.32825)]
$ 165,705
Colin will retire 15 years after deposits stop.
$ 44,909 annual plan benefit
X 1.52839 [PV of an annuity due for 35 periods – PV of an annuity
due for 15 periods (9.15656 – 7.62817)]
$ 68,638
Anita will retire 5 years after deposits stop.
$ 15,169 annual plan benefit
X 4.74697 [PV of an annuity due for 25 periods – PV of an annuity
due for 5 periods (8.78432 – 4.03735)]
$ 72,007
Gavin will retire the beginning of the year after deposits stop.
$ 10,390 annual plan benefit
X 8.36578 (PV of an annuity due for 20 periods)
$ 86,920
6-70
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-11 (Continued)
$165,705 Jean
68,638 Colin
72,007 Anita
86,920 Gavin
$393,270 Required fund balance at the end of the 15 years of
deposits.
(c)
Required annual beginning-of-the-year deposits at 12%:
Deposit X (future value of an annuity due for 15 periods at 12%) = FV
Deposit X (37.27972 X 1.12) = $393,270
Deposit = $393,270 ÷ 41.75329
Deposit = $9,419.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-71
PROBLEM 6-12
(a)
The time value of money would suggest that NET Life’s discount rate
was substantially higher than First Security’s. The actuaries at NET Life
are making different assumptions about inflation, employee turnover,
life expectancy of the work force, future salary and wage levels, return
on pension fund assets, etc. NET Life may operate at lower gross and
net margins and it may provide fewer services.
(b)
As the controller of STL, Brokaw assumes a fiduciary role to the
present and future retirees of the corporation. As a result, he is
responsible for ensuring that the pension assets are adequately
funded and are adequately protected from most controllable risks. At
the same time, Brokaw is responsible for the financial condition of
STL. In other words, he is obligated to find ethical ways of increasing
the profits of STL, even if it means switching pension funds to a less
costly plan. At times, Brokaw’s responsibility to retirees and his
responsibility to the corporation can be in conflict, especially if
Brokaw is a member of a professional group such as CPAs or CMAs.
(c)
If STL switched to NET Life
The primary beneficiaries of Brokaw’s decision would be the corporation
and its many stockholders by virtue of reducing 8 million dollars of
annual pension costs.
The present and future retirees of STL may be negatively affected by
Brokaw’s decision because the chance of losing a future benefit may
be increased by virtue of higher risks (as reflected in the discount rate
and NET Life’s weaker reputation).
If STL stayed with First Security
In the short run, the primary beneficiaries of Brokaw’s decision would
be the employees and retirees of STL given the lower risk pension
asset plan.
STL and its many stakeholders could be negatively affected by Brokaw’s
decision to stay with First Security because of the company’s inability
to trim 8 million dollars from its operating expenses.
6-72
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-13
Cash Flow Probability
Estimate X Assessment = Expected Cash Flow
2015 $2,500
20%
$ 500
4,000
60%
2,400
5,000
20%
1,000
X PV
Factor,
n = 1, I = 5% Present Value
$3,900 X 0.95238 =
$ 3,714
2016
2017
$3,000
5,000
6,000
30%
50%
20%
$ 900
2,500
1,200
$4,000
6,000
7,000
30%
40%
30%
$1,200
2,400
2,100
Copyright © 2013 John Wiley & Sons, Inc.
X PV
Factor,
n = 2, I = 5% Present Value
$4,600 X 0.90703 =
$ 4,172
X PV
Factor,
n = 3, I = 5% Present Value
$5,700 X 0.86384 =
$ 4,924
Total Estimated Liability
$12,810
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-73
PROBLEM 6-14
Cash Flow Probability
Estimate X Assessment = Expected Cash Flow
2015 $6,000
40%
$2,400
9,000
60%
5,400
X PV
Factor,
n = 1, I = 6% Present Value
$7,800 X 0.9434 =
$ 7,359
2016
$ (500)
2,000
4,000
20%
60%
20%
$ (100)
1,200
800
$1,900
Scrap
Value
Received
at the End
of 2016
$
6-74
500
900
50%
50%
Copyright © 2013 John Wiley & Sons, Inc.
X PV
Factor,
n = 2, I = 6% Present Value
X 0.89
=
$ 1,691
$ 250
450
X PV
Factor,
n = 2, I = 6% Present Value
$ 700 X 0.89
=
$ 623
Estimated Fair Value
$9,673
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 6-15
(a)
The expected cash flows to meet the asset retirement obligation represent a deferred annuity. Developing a fair value estimate requires
determining the present value of the annuity of expected cash flows
to be paid in three years and then determine the present value of that
amount today.
Cash Flow
Probability
Estimate X Assessment = Expected Cash Flow
$15,000
10%
$ 1,500
22,000
30%
6,600
25,000
50%
12,500
30,000
10%
3,000 X PV
Factor,
n = 3, I = 5% Present Value
(deferred 10 yrs)
$23,600 X 2.72325 = $64,269
The value today of the annuity payments to commence in ten years is:
$ 64,269 Present value of annuity
X .61391 PV of a lump sum to be paid in 10 periods.
$ 39,455
Alternatively, the present value of the deferred annuity can be computed
as follows:
$ 23,600 Expected cash outflows
X 1.67184 [PV of an ordinary annuity for 13 periods – PV of an
annuity due for 10 periods (9.39357 – 7.72173)]
$ 39,455
(b)
This fair value estimate is based on unobservable inputs—Murphy’s
own data on the expected future cash flows associated with the
obligation to restore the site. This fair value estimate is considered
Level 3, as discussed in Chapter 2.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-75
FINANCIAL REPORTING PROBLEM
(a)
1.
Long-lived assets, goodwill
For impairment of goodwill and long-lived assets, fair value is determined using a discounted cash flow analysis.
(b)
2.
Short-term and long-term debt
3.
Postretirement benefit plans
4.
Employee stock ownership plans
(1) The following rates are disclosed in the accompanying notes:
Debt
Weighted-Average Effective Interest Rate
At December 31
Short-Term
Long-Term
6-76
Copyright © 2013 John Wiley & Sons, Inc.
2011
.09%
3.4%
2010
.04%
3.6%
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
FINANCIAL REPORTING PROBLEM (Continued)
Benefit Plans
Pension Benefits
United States
2011
2010
Assumptions used to
determine net periodic
benefit cost.
Discount rate
Expected return on assets
5.3%
7.0%
6.0%
7.1%
Stock-Based Compensation
Assumptions
Weighted average interest rate
used in Stock Option Valuation
2011
3.4%
Other Retiree
Benefits
2011
2010
5.4%
9.2%
2010
3.7%
6.4%
9.1%
2009
3.6%
(2) There are different rates for various reasons:
1. The maturity dates—short-term vs. long-term.
2. The security or lack of security for debts—mortgages and collateral vs. unsecured loans.
3. Fixed rates and variable rates.
4. Issuances of securities at different dates when differing market
rates were in effect.
5. Different risks involved or assumed.
6. Foreign currency differences—some investments and
payables are denominated in different currencies.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-77
FINANCIAL STATEMENT ANALYSIS CASE
(a)
Cash inflows of $375,000 less cash outflows of $125,000 = Net cash
flows of $250,000.
$250,000 X 2.48685 (PVF – OA3, 10%) = $621,713
(b)
Cash inflows of $275,000 less cash outflows of $155,000 = Net cash
flows of $120,000.
$120,000 X 2.48685 (PVF – OA3,10%) = $298,422
(c)
6-78
The estimate of future cash flows is very useful. It provides an understanding of whether the value of gas and oil properties is increasing
or decreasing from year to year. Although it is an estimate, it does
provide an understanding of the direction of change in value. Also, it
can provide useful information to record a write-down of the assets.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
(a)
The present value of the note is presumably equal to the fair-value of
the inventory. The note has 20 semi-annual periods to maturity.
$679,517 = $50,000 X PVF-OA20,i
PVF-OA20,i = $679,517 ÷ $50,000
PVF-OA20,i = 13.5903
Searching across the interest rate columns on the 20-period row
reveals that the interest rate is 4% semi-annually or 8 percent annually.
(b)
Johnson should initially record the note at its fair-value, $679,517.
Analysis
If interest rates increase, the fair-value of the note will decline. This is
because the remaining cash flows are being discounted at a higher rate.
That is, the present value of the future cash flows is less at a higher
discount rate.
Principles
Fair-value versus historical cost potentially involves a trade-off between
the primary qualities of relevance and faithful representation. The fairvalues of various assets (and liabilities) is potentially more relevant to
financial statement readers. However, it is often a more subjective measure
than historical cost. Thus, fair-value may not be less neutral and less free
from error as historical cost. Fair-value is more subjective because it often
must be estimated, requiring assumptions about discount rates and, as
later chapters illustrate, about the amounts and timing of future cash flows.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-79
PROFESSIONAL RESEARCH
Search strings: “present value”, present and value, Present value $, “best
estimate”, “estimated cash flow”, “expected cash flow”, “fresh-start
measurement”, “interest methods of allocation”
(a) Statement of Financial Accounting Concepts No. 7, “Using Cash Flow
Information and Present Value in Accounting Measurements (FASB
2000).
(b) See Appendix B: APPLICATIONS OF PRESENT VALUE IN FASB
STATEMENTS AND APB OPINIONS, CON7, Par. 119
119. . . . The accompanying table is presented to assist readers in
understanding the differences between the conclusions reached in this
Statement and those found in FASB Statements and APB Opinions that
employ present value techniques in recognition, measurement, or
amortization (period-to-period allocation) of assets and liabilities in the
statement of financial position.
Some examples are:
 Debt payable and related premium or discount
 Asset acquired by incurring liabilities in a business combination—“An
asset acquired by incurring liabilities is recorded at cost—that is, at
the present value of the amounts to be paid” (paragraph 67(b)).
 APB Opinion No. 21, Interest on Receivables and Payables—Note
exchanged for property, goods, or services.
 Capital lease or operating lease— . . . The lessee’s incremental
borrowing rate is used unless (a) the lessor’s implicit rate can be
determined and (b) the implicit rate is less than the incremental
borrowing rate.
 FASB Statement No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Lease . . . Origination fees and costs are reflected
over the life of the loan as an adjustment of the yield on the net
investment in the loan.
6-80
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROFESSIONAL RESEARCH (Continued)
 FASB Statement No. 106, Employers’ Accounting for Postretirement
Benefits Other Than Pensions . . . Effective settlement rate—“. . . as
opposed to ‘settling’ the obligation, which incorporates the insurer’s
risk factor, ‘effectively settling’ the obligation focuses only on the
time value of money and ignores the insurer’s cost for assuming the
risk of experience losses” (paragraph 188).
 FASB Statement No. 121, Accounting for the Impairment of LongLived Assets and for Long-Lived Assets to Be Disposed Of . . . The
objective is to estimate the fair value of the impaired asset. . . .
(c) 1. CON7, Glossary of terms: Best estimate: The single most-likely
amount in a range of possible estimated amounts; in statistics, the
estimated mode. In the past, accounting pronouncements have used
the term best estimate in a variety of contexts that range in meaning
from “unbiased” to “most likely.” This Statement uses best estimate
in the latter meaning, as distinguished from the expected amounts
described below.
2. CON7, Glossary of terms: Estimated Cash Flow and Expected Cash
Flow: In the past, accounting pronouncements have used the terms
estimated cash flow and expected cash flow interchangeably. In this
Statement: Estimated cash flow refers to a single amount to be
received or paid in the future. Expected cash flow refers to the sum
of probability-weighted amounts in a range of possible estimated
amounts; the estimated mean or average.
3. CON7, Glossary of terms: Fresh-Start Measurements: Measurements
in periods following initial recognition that establishes a new
carrying amount unrelated to previous amounts and accounting
conventions. Some fresh-start measurements are used every period,
as in the reporting of some marketable securities at fair value under
FASB Statement No.115, Accounting for Certain Investments in Debt
and Equity Securities. In other situations, fresh-start measurements
are prompted by an exception or “trigger,” as in a remeasurement of
assets under FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
6-81
PROFESSIONAL RESEARCH (Continued)
4. CON7, Glossary of terms: Interest Methods of Allocation: Reporting
conventions that use present value techniques in the absence of a
fresh-start measurement to compute changes in the carrying amount
of an asset or liability from one period to the next. Like depreciation
and amortization conventions, interest methods are grounded in
notions of historical cost. The term interest methods of allocation
refers both to the convention for periodic reporting and to the
several approaches to dealing with changes in estimated future cash
flows.
Note to instructor: The concepts statements are not in the codification.
Thus, the references to previous FASB standards
above do not have codification sections indicated.
A good extension of this research case would have
students track down codification references for the
items above.
6-82
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
PROFESSIONAL SIMULATION
Measurement
i = 12%
PV – OA = ?
$10,000
0
1
$10,000
2
$10,000
Principal
$100,000
Interest
$10,000
$10,000
3
n=5
4
5
Present value of the principal
FV (PVF5, 12%) = $100,000 (.56743)
= $56,743
Present value of the interest payments
R (PVF – OA5, 12%) = $10,000 (3.60478)
= 36,048
Combined present value (purchase price)
$92,791
i = 8%
PV – OA = ? $10,000
0
1
$10,000
2
$10,000
$10,000
Principal
$100,000
Interest
$10,000
4
5
3
n=5
Present value of the principal
FV (PVF5, 8%) = $100,000 (.68058)
= $ 68,058
Present value of the interest payments
R (PVF – OA5, 8%) = $10,000 (3.99271)
Combined present value (Proceeds)
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
=
39,927
$107,985
(For Instructor Use Only)
6-83
PROFESSIONAL SIMULATION (Continued)
12%
Inputs:
5
12
?
–10,000
–10,000
N
I
PV
PMT
FV
Answer:
8%
Inputs:
92,790.45
5
8
?
–10,000
–10,000
N
I
PV
PMT
FV
Answer:
107,985.42
Note: Calculators generally round to the nearest cent.
Valuation
A
B
C
D
E
F
G
1
2
Bond Amortization Schedule
3
Carrying
4
Date
Cash Interest
Interest
Bond Discount
Value of
Expense
Amortization
Bonds
5
Year 0
6
Year 1
10,000.00
$11,134.85
$1,134.85
93,925.30
7
Year 2
10,000.00
11,271.04
1,271.04
95,196.34
8
Year 3
10,000.00
11,423.56
1.423.56
96,619.90
9
Year 4
10,000.00
11,594.39
1,594.39
98,214.29
10
Year 5
10,000.00
11,785.71
1,785.71
100,000.00
The following formula is
entered in the cells in this
column: =+C6-B6.
$92,790.45
The following formula is
entered in the cells in this
column: =+E5+D6
11
12
13
The following formula is
entered in the cells in
this column: =+E5*0.12.
14
15
6-84
Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
CHAPTER 7
Cash and Receivables
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Brief
Exercises
Exercises
Problems
1, 2, 3,
4, 22
1
1, 2
1
Accounting for
accounts receivable,
bad debts, other
allowances.
5, 6, 7, 8, 9,
10, 11, 12,
13, 14, 15,
16, 20
2, 3, 4, 5
3, 4, 5, 6,
7, 8, 9, 10,
11, 12, 14
2, 3, 4,
5, 6
1, 2, 3, 4,
9, 10, 11
3.
Accounting for notes
receivable.
14, 15
6, 7
18, 19
8, 9, 10
5, 6, 7, 8
4.
Assignment and
factoring of accounts
receivable.
17, 18, 19
8, 9, 10,
11, 12
12, 13, 14,
15, 16, 17,
21
7, 11
4, 5, 7
5.
Analysis of
receivables.
21
13
20, 21
1
*6.
Petty cash and bank
reconciliations.
23
14, 15, 16
22, 23,
24, 25
12, 13, 14
*7.
Loan impairments
24, 25
17
26, 27
15
Topics
Questions
1.
Accounting for cash.
2.
Concepts
for Analysis
*This material is covered in an Appendix to the chapter.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
1
1, 2
1.
Identify items considered
cash.
1
2.
Indicate how to report cash
and related items.
2, 3, 4
3.
Define receivables and
identify the different types of
receivables.
4.
Explain accounting issues
related to recognition of
accounts receivable.
5, 6
5.
Explain accounting issues
related to valuation of
accounts receivable.
6.
Concepts
for
Problems Analysis
1
3, 4
6
2, 3
3, 4, 5, 6,
12
6
CA7-4,
CA7-9
7, 8, 9, 10,
11, 12, 13,
14
4, 5
7, 8, 9, 10,
11, 12, 14
2, 3, 4, 5,
6
CA7-1,
CA7-3,
CA7-10
Explain accounting issues
related to recognition and
valuation of notes
receivable.
15
6, 7
18, 19
8, 9, 10
CA7-2,
CA7-4,
CA7-6,
CA77,CA7-8,
7.
Explain the fair value option.
16
8.
Explain accounting issues
related to disposition of
accounts and notes
receivable.
17, 18, 19
8, 9, 10,
11, 12
12, 13, 14,
15, 16, 17,
21
7, 11
CA7-2,
CA7-5
9.
Describe how to report and
analyze receivables.
20, 21, 22
13
20
11
*10.
Explain common techniques
employed
to control cash.
23
14, 15, 16
22, 23, 24,
25
12, 13, 14
*11.
Describe the accounting for
a loan impairment.
24, 25
17
26, 27
15
7-2Copyright © 2013 John Wiley & Sons, Inc.
19
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-3
Item
Description
Level of
Difficulty
E7-1
E7-2
E7-3
E7-4
E7-5
E7-6
E7-7
E7-8
E7-9
E7-10
E7-11
E7-12
E7-13
E7-14
E7-15
E7-16
E7-17
E7-18
E7-19
E7-20
E7-21
*E7-22
*E7-23
*E7-24
*E7-25
*E7-26
*E7-27
Determining cash balance.
Determining cash balance.
Financial statement presentation of receivables.
Determining ending accounts receivable.
Recording sales gross and net.
Recording sales transactions.
Recording bad debts.
Recording bad debts.
Computing bad debts and preparing journal entries.
Bad-debt reporting.
Bad debts—aging.
Journalizing various receivable transactions.
Assigning accounts receivable.
Journalizing various receivable transactions.
Transfer of receivables with recourse.
Transfer of receivables with recourse.
Transfer of receivables without recourse.
Note transactions at unrealistic interest rates.
Notes receivable with unrealistic interest rate.
Analysis of receivables.
Transfer of receivables.
Petty cash.
Petty cash.
Bank reconciliation and adjusting entries.
Bank reconciliation and adjusting entries.
Impairments
Impairments
Moderate
Moderate
Simple
Simple
Simple
Moderate
Moderate
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Moderate
Simple
Simple
Moderate
Moderate
Moderate
Simple
Simple
Moderate
Simple
Moderate
Moderate
10–15
10–15
10–15
10–15
15–20
5–10
10–15
5–10
8–10
10–12
8–10
15–20
10–15
15–18
10–15
15–20
10–15
10–15
20–25
10–15
10–15
5–10
10–15
15–20
15–20
15–25
15–25
P7-1
P7-2
P7-3
P7-4
P7-5
P7-6
P7-7
P7-8
P7-9
P7-10
P7-11
*P7-12
*P7-13
*P7-14
*P7-15
Determine proper cash balance.
Bad-debt reporting.
Bad-debt reporting—aging.
Bad-debt reporting.
Bad-debt reporting.
Journalize various accounts receivable transactions.
Assigned accounts receivable—journal entries.
Notes receivable with realistic interest rate.
Notes receivable journal entries.
Comprehensive receivables problem.
Income effects of receivables transactions.
Petty cash, bank reconciliation.
Bank reconciliation and adjusting entries.
Bank reconciliation and adjusting entries.
Loan impairment entries
Simple
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Complex
Moderate
Moderate
Moderate
Moderate
Moderate
20–25
20–25
20–30
25–35
20–30
25–35
25–30
30–35
30–35
40–50
20–25
20–25
20–30
20–30
30–40
7-4Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Time
(minutes)
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
CA7-1
CA7-2
CA7-3
CA7-4
CA7-5
CA7-6
CA7-7
Bad-debt accounting.
Various receivable accounting issues.
Bad-debt reporting issues.
Basic note and accounts receivable transactions.
Sale of notes receivable.
Zero-interest-bearing note receivable.
Reporting of notes receivable, interest, and sale
of receivables.
Accounting for zero-interest-bearing note.
Receivables management.
Bad-debt reporting, ethics.
CA7-8
CA7-9
CA7-10
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Level of
Difficulty
Time
(minutes)
Simple
Simple
Moderate
Moderate
Moderate
Moderate
Moderate
10–15
15–20
25–30
25–30
20–25
20–30
25–30
Moderate
Moderate
Moderate
25–30
25–30
25–30
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-5
SOLUTIONS TO CODIFICATION EXERCISES
CE7-1
From the Master Glossary
(a) Consistent with common usage, cash includes not only currency on hand but demand deposits
with banks or other financial institutions. Cash also includes other kinds of accounts that have the
general characteristics of demand deposits in that the customer may deposit additional funds at
any time and also effectively may withdraw funds at any time without prior notice or penalty. All
charges and credits to those accounts are cash receipts or payments to both the entity owning the
account and the bank holding it. For example, a bank’s granting of a loan by crediting the proceeds to a customer’s demand deposit account is a cash payment by the bank and a cash receipt
of the customer when the entry is made.
(b) Securitization is the process by which financial assets are transformed into securities.
(c) Recourse is the right of a transferee of receivables to receive payment from the transferor of those
receivables for any of the following:
a. Failure of debtors to pay when due
b. The effects of prepayments
c. Adjustments resulting from defects in the eligibility of the transferred receivables.
CE7-2
According to FASB ASC 450-20-05 (Accruals of Loss Contingencies Do Not Provide Financial Protection)
05–8
Accrual of a loss related to a contingency does not create or set aside funds to lessen the
possible financial impact of a loss. Confusion exists between accounting accruals (sometimes
referred to as accounting reserves) and the reserving or setting aside of specific assets to be
used for a particular purpose or contingency. Accounting accruals are simply a method of allocating costs among accounting periods and have no effect on an entity’s cash flow. Those
accruals in no way protect the assets available to replace or repair uninsured property that may
be lost or damaged, or to satisfy claims that are not covered by insurance, or, in the case of
insurance entities, to satisfy the claims of insured parties. Accrual, in and of itself, provides no
financial protection that is not available in the absence of accrual.
05–9
An entity may choose to maintain or have access to sufficient liquid assets to replace or repair
lost or damaged property or to pay claims in case a loss occurs. Alternatively, it may transfer
the risk to others by purchasing insurance. The accounting standards set forth in this Subtopic
do not affect the fundamental business economics of that decision. That is a financial decision,
and if an entity’s management decides to do neither, the presence or absence of an accrued
credit balance on the balance sheet will have no effect on the consequences of that decision.
Insurance or reinsurance reduces or eliminates risks and the inherent earnings fluctuations that
accompany risks. Unlike insurance and reinsurance, the use of accounting reserves does not
reduce or eliminate risk. The use of accounting reserves is not an alternative to insurance and
reinsurance in protecting against risk. Earnings fluctuations are inherent in risk retention, and
they are reported as they occur.
7-6Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CE7-3
According to FASB ASC 860-10-05 (Overview and Background)
> Types of Transfers
05–6
Transfers of financial assets take many forms. This guidance provides an overview of the following types of transfers discussed in this Topic:
a.
Securitizations
b.
Factoring
c.
Transfers of receivables with recourse
d.
Securities lending transactions
e.
Repurchase agreements
f.
Loan participations
g.
Banker’s acceptances
>> Factoring
05–14 Factoring arrangements are a means of discounting accounts receivable on a nonrecourse,
notification basis. Accounts receivable are sold outright, usually to a transferee (the factor) that
assumes the full risk of collection, without recourse to the transferor in the event of a loss.
Debtors are directed to send payments to the transferee.
>> Transfers of Receivables with Recourse
05–15 In a transfer of receivables with recourse, the transferor provides the transferee with full or
limited recourse. The transferor is obligated under the terms of the recourse provision to make
payments to the transferee or to repurchase receivables sold under certain circumstances,
typically for defaults up to a specified percentage.
>> Securities Lending Transactions
05–16 Securities lending transactions are initiated by broker-dealers and other financial institutions
that need specific securities to cover a short sale or a customer’s failure to deliver securities
sold. Securities custodians or other agents commonly carry out securities lending activities on
behalf of clients.
>> Repurchase Agreements
05–19 Government securities dealers, banks, other financial institutions, and corporate investors commonly use repurchase agreements to obtain or use short-term funds. Under those agreements,
the transferor (repo party) transfers a security to a transferee (repo counterparty or reverse
party) in exchange for cash and concurrently agrees to reacquire that security at a future date
for an amount equal to the cash exchanged plus a stipulated interest factor. Instead of cash,
other securities or letters of credit sometimes are exchanged. Some repurchase agreements
call for repurchase of securities that need not be identical to the securities transferred.
>> Loan Participations
05–22 In certain industries, a typical customer’s borrowing needs often exceed its bank’s legal lending
limits. To accommodate the customer, the bank may participate the loan to other banks (that is,
transfer under a participation agreement a portion of the customer’s loan to one or more
participating banks).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-7
CE7-3 (Continued)
>> Banker’s Acceptances
05–24 Banker’s acceptances provide a way for a bank to finance a customer’s purchase of goods
from a vendor for periods usually not exceeding six months. Under an agreement between the
bank, the customer, and the vendor, the bank agrees to pay the customer’s liability to the
vendor upon presentation of specified documents that provide evidence of delivery and acceptance of the purchased goods. The principal document is a draft or bill of exchange drawn
by the customer that the bank stamps to signify its acceptance of the liability to make payment
on the draft on its due date.
CE7-4
According to FASB ASC 210-20-45
> Right of Setoff Criteria
45-1
A right of setoff exists when all of the following conditions are met:
a. Each of two parties owes the other determinable amounts.
b. The reporting party has the right to set off the amount owed with the amount owed by the
other party.
c. The reporting party intends to set off.
d. The right of setoff is enforceable at law.
45-2
A debtor having a valid right of setoff may offset the related asset and liability and report the
net amount.
45-3
If the parties meet the criteria specified in paragraph 210-20-45-1, specifying currency or interest
rate requirements is unnecessary. However, if maturities differ, only the party with the nearer
maturity could offset because the party with the longer term maturity must settle in the manner
that the other party selects at the earlier maturity date.
45-4
If a party does not intend to set off even though the ability to set off exists, an offsetting presentation in the statement of financial position is not representationally faithful.
45-5
Acknowledgment of the intent of set off by the reporting party and, if applicable, demonstration
of the execution of the setoff in similar situations meet the criterion of intent.
7-8Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ANSWERS TO QUESTIONS
1. Cash normally consists of coins and currency on hand, bank deposits, and various kinds of orders
for cash such as bank checks, money orders, travelers’ checks, demand bills of exchange, bank
drafts, and cashiers’ checks. Balances on deposit in banks which are subject to immediate withdrawal are properly included in cash. Money market funds that provide checking account privileges
may be classified as cash. There is some question as to whether deposits not subject to immediate
withdrawal are properly included in cash or whether they should be set out separately. Savings
accounts, time certificates of deposit, and time deposits fall in this latter category. Unless restrictions
on these kinds of deposits are such that they cannot be converted (withdrawn) within one year or
the operating cycle of the entity, whichever is longer, they are properly classified as current assets.
At the same time, they may well be presented separately from other cash and the restrictions as to
convertibility reported.
2. (a) Cash
(b) Trading securities.
(c) Temporary investments.
(d) Accounts receivable.
(e) Accounts receivable, a loss if uncollectible.
(f) Other assets if not expendable, cash if expendable for goods and services in the foreign country.
(g) Receivable if collection expected within one
year; otherwise, other asset.
(h) Investments, possibly other assets.
(i) Cash.
(j) Trading securities.
(k) Cash.
(l) Cash.
(m) Postage expense, or prepaid expense, or supplies inventory.
(n) Receivable from employee if the
company is to be reimbursed;
otherwise, prepaid expense.
3. A compensating balance is that portion of any demand deposit maintained by a corporation which
constitutes support for existing borrowing arrangements of a corporation with a lending institution.
A compensating balance representing a legally restricted deposit held against short-term borrowing
arrangements should be stated separately among the cash and cash equivalent items. A restricted
deposit held as a compensating balance against long-term borrowing arrangements should be
separately classified as a noncurrent asset in either the investments or other assets section.
4. Restricted cash for debt redemption would be reported in the long-term asset section, probably in
the investments section. Another alternative is the other assets section. Given that the debt is long
term, the restricted cash should also be reported as long term.
5. The seller normally uses trade discounts to avoid frequent changes in its catalogs, to quote different
prices for different quantities purchased, and to hide the true invoice price from competitors. Trade
discounts are not recorded in the accounts because the price finally quoted is generally an
accurate statement of the fair market value of the product on that date. In addition, no subsequent
changes can occur to affect this value from an accounting standpoint. With a cash discount, the
buyer receives a choice and events subsequent to the original transaction dictate that additional
entries may be needed.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-9
Questions Chapter 7 (Continued)
6. Two methods of recording accounts receivable are:
1. Record receivables and sales gross.
2. Record receivables and sales net.
The net method is desirable from a theoretical standpoint because it values the receivable at its
net realizable value. In addition, recording the sales at net provides a better assessment of the
revenue that was recognized from the sale of the product. If the purchasing company fails to take
the discount, then the company should reflect this amount as income. The gross method for
receivables and sales is used in practice normally because it is expedient and its use does not
generally have any significant effect on the presentation of the financial statements.
7. The basic problems that relate to the valuation of receivables are (1) the determination of the face
value of the receivable, (2) the probability of future collection of the receivable, and (3) the length
of time the receivable will be outstanding. The determination of the face value of the receivable is a
function of the trade discount, cash discount, and certain allowance accounts such as the Allowance
for Sales Returns and Allowances.
8. The theoretical superiority of the allowance method over the direct write-off method of accounting
for bad debts is two-fold. First, since revenue is considered to be recognized at the point of sale on
the assumption that the resulting receivables are valid liquid assets merely awaiting collection, periodic income will be overstated to the extent of any receivables that eventually become uncollectible.
The proper matching of revenue and expense requires that gross sales in the income statement be
partially offset by a charge to bad debt expense that is based on an estimate of the receivables
arising from gross sales that will not be converted into cash.
Second, accounts receivable on the balance sheet should be stated at their estimated net realizable value. The allowance method accomplishes this by deducting from gross receivables the
allowance for doubtful accounts. The latter is derived from the charges for bad debt expense on
the income statement.
9. The percentage-of-sales method. Under this method Bad Debt Expense is debited and Allowance
for Doubtful Accounts is credited with a percentage of the current year’s credit or total sales. The
rate is determined by reference to the relationship between prior years’ credit or total sales and
actual bad debts arising therefrom. Consideration should also be given to changes in credit policy
and current economic conditions. Although the rate should theoretically be based on and applied to
credit sales, the use of total sales is acceptable if the ratio of credit sales to total sales does not
vary significantly from year to year.
The percentage-of-sales method of providing for estimated uncollectible receivables is intended to
charge bad debt expense to the period in which the corresponding sales are recorded and is,
therefore, designed for the preparation of a fair income statement. Due to annually insignificant but
cumulatively significant errors in the experience rate which may result in either an excessive or
inadequate balance in the allowance account, however, this method may not accurately report
accounts receivable in the balance sheet at their estimated net realizable value. This can be
prevented by periodically reviewing and, if necessary, adjusting the balance in the allowance
account. The materiality of any such adjustment would govern its treatment for reporting purposes.
The necessity of such adjustments of the allowance account indicates that bad debt expenses
have not been accurately matched against related sales. Further, even when the experience rate
does not result in an excessive or inadequate balance in the allowance account, this method tends
to have a smoothing effect on reported periodic income due to year-to-year differences between
the amounts of bad debt write-offs and estimated bad debts.
7-10Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 7 (Continued)
The aging method. With this method each year’s debit to the expense account and credit to the
allowance account are determined by an evaluation of the collectibility of open accounts
receivable at the close of the year. An analysis of the accounts according to their due dates is the
usual procedure. For each of the age categories established in the analysis, average percentage
rates may be developed on the basis of past experience and applied to the accounts in the
respective age categories. This method may also utilize individual analysis for some accounts,
especially those that are considerably past due, in arriving at estimated uncollectible receivables.
On the basis of the foregoing analysis the balance in the valuation account is then adjusted to the
amount estimated to be uncollectible.
This method of providing for uncollectible accounts is quite accurate for purposes of reporting
accounts receivable at their estimated net realizable value in the balance sheet. From the standpoint of the income statement, however, the aging method may not match accurately bad debt
expenses with the sales which caused them because the charge to bad debt expense is not based
on sales. The accuracy of both the charge to bad debt expense and the reported value of receivables depends on the current estimate of uncollectible accounts. The accuracy of the expense
charge, however, is additionally dependent upon the timing of actual write-offs.
10. A major part of accounting is the measurement of financial data. Changes in values should be
recognized as soon as they are measurable in objective terms in order for accounting to provide
useful information on a periodic basis.
The very existence of accounts receivable is based on the decision that a credit sale is an objective indication that revenue should be recognized. The alternative is to wait until the debt is paid in
cash. If revenue is to be recognized and an asset recorded at the time of a credit sale, the need
for fairness in the statements requires that both expenses and the asset be adjusted for the
estimated amounts of the asset that experience indicates will not be collected.
The argument may be persuasive that the evidence supporting write-offs permits a more accurate
decision than that which supports the allowance method. The latter method, however, is “objective”
in the sense in which accountants use the term and is justified by the need for fair presentation of
receivables and income. The direct write-off method is not wholly objective; it requires the use of
judgment in determining when an account has become uncollectible.
11. Because estimation of the allowance account balance requires judgment, management could
either over-estimate or under-estimate the amount of uncollectible accounts depending on whether
a higher or lower earnings number is desired. For example, Sun Trust bank (referred to in the
chapter) was having a very profitable year. By over-estimating the amount of bad debts, Sun Trust
could record a higher allowance and expense, thereby reducing income in the current year. In a
subsequent year, when earnings are low, they could under-estimate the allowance, record less
expense and get a boost to earnings.
12. The receivable due from Bernstein Company should be written off to an appropriately named loss
account and reported in the income statement as part of income from operations. Note that the
profession specifically excludes write-offs of receivables from being extraordinary. In this case,
classification as an unusual item would seem appropriate. The loss may properly be reduced by
the portion of the allowance for doubtful accounts at the end of the preceding year that was
allocable to the Bernstein Company account.
Estimates for doubtful accounts are based on a firm’s prior bad debt experience with due consideration
given to changes in credit policy and forecasted general or industry business conditions.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-11
Questions Chapter 7 (Continued)
The purpose of the allowance method is to anticipate only that amount of bad debt expense which
can be reasonably forecasted in the normal course of events; it is not intended to anticipate bad
debt losses which are abnormal and nonrecurring in nature.
13. If the direct write-off method is used, the only alternative is to debit Cash and credit a revenue
account entitled Uncollectible Amounts Recovered. If the allowance method is used, then the
accountant would debit Accounts Receivable and credit the Allowance for Doubtful Accounts. An
entry is then made to credit the customer’s account and debit Cash upon receipt of the remittance.
14. The journal entry on Lombard’s books would be:
Notes Receivable .............................................................................
Discount on Notes Receivable ....................................................
Sales Revenue............................................................................
1,000,000
360,000
640,000*
*Assumes that seller is a dealer in this property. If not, the property might be credited, and a loss
on sale of $50,000 would be recognized.
15. Imputed interest is the interest ascribed or attributed to a situation or circumstance which is void of
a stated or otherwise appropriate interest factor. Imputed interest is the result of a process of interest
rate estimation called imputation.
An interest rate is imputed for notes receivable when (1) no interest rate is stated for the transaction,
or (2) the stated interest rate is unreasonable, or (3) the stated face amount of the note is
materially different from the current cash price for the same or similar items or from the current
market value of the debt instrument.
In imputing an appropriate interest rate, consideration should be given to the prevailing interest
rates for similar instruments of issuers with similar credit ratings, the collateral, and restrictive
covenants.
16. The fair value option gives companies the option of using fair value as the measurement basis for
financial instruments. The Board believes that fair value measurement for financial instruments
provides more relevant and understandable information than historical cost. If companies choose
the fair value option, the receivables are recorded at fair value, with unrealized gains or losses
reported as part of net income.
17. A company might sell receivables because money is tight and access to normal credit is not
available or prohibitively expensive. Also, a company may have to sell its receivables, instead of
borrowing, to avoid violating existing lending arrangements. In addition, billing and collection of
receivables are often time-consuming and costly.
18. The financial components approach is used when receivables are sold but there is continuing
involvement by the seller in the receivable. Examples of continuing involvement are recourse
provisions or continuing rights to service the receivable. A transfer of receivables should be
recorded as a sale when the following three conditions are met:
(a) The transferred asset has been isolated from the transferor (put beyond reach of the transferor and its creditors).
(b) The transferees have obtained the right to pledge or exchange either the transferred assets or
beneficial interests in the transferred assets.
(c) The transferor does not maintain effective control over the transferred assets through an
agreement to repurchase or redeem them before their maturity.
7-12Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 7 (Continued)
19. Recourse is a guarantee from Moon that if any of the sold receivables are uncollectible, Moon will
pay the factor for the amount of the uncollectible account. This recourse obligation represents
continuing involvement by Moon after the sale. Under the financial components model, the estimated fair value of the recourse obligation will be reported as a liability on Moon’s balance sheet.
20. Several acceptable solutions are possible depending upon assumptions made as to whether certain
items are collectible within the operating cycle or not. The following illustrates one possibility:
Current Assets
Accounts receivable—Trade (of which accounts in the amount
of $75,000 have been assigned as security for loans payable)
($523,000 + $75,000) ..........................................................................................
Federal income tax refund receivable ..................................................................
Advance payments on purchases ........................................................................
Investments
Advance to subsidiary .........................................................................................
Other Assets
Travel advance to employees ..............................................................................
Notes receivable past due plus accrued interest ..................................................
$598,000
15,500
61,000
45,500
22,000
47,000
21. The accounts receivable turnover ratio is computed by dividing net sales by average net receivables outstanding during the year. This ratio is used to assess the liquidity of the receivables. It
measures the number of times, on average, receivables are collected during the period. It provides
some indication of the quality of the receivables and how successful the company is in collecting
its outstanding receivables.
22. Because the restricted cash cannot be used by Woodlawn to meet current obligations, it should
not be reported as a current asset—it should be reported in investments or other assets. Thus,
although this item has cash in its label, it should not be reflected in liquidity measures, such as the
current or acid-test ratios.
*23. (1)
The general checking account is the principal bank account of most companies and frequently the only bank account of small companies. Most if not all transactions are cycled
through the general checking account, either directly or on an imprest basis.
(2)
Imprest bank accounts are used to disburse cash (checks) for a specific purpose, such as
dividends, payroll, commissions, or travel expenses. Money is deposited in the imprest fund
from the general fund in an amount necessary to cover a specific group of disbursements.
(3)
Lockbox accounts are local post office boxes to which a multi-location company instructs
its customers to mail remittances. A local bank is authorized to empty the box daily and
credit the company’s accounts for collections.
*24. A loan is considered impaired when it is probable that the creditor will be unable to collect all
amounts due (both principal and interest) according to the contractual terms of the loan. If a loan is
considered impaired, the loss due to impairment should be measured as the difference between
the investment in the loan and the expected future cash flows discounted at the loan’s historical
effective-interest rate. The loss is recorded on the books of the creditor. The debtor would not be
aware of the entry made by the creditor and would not make an entry until settlement or if a
modification of terms resulted.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-13
*25. A loan is impaired when there is a reduction in the likelihood of collecting the interest and principal
payments as originally scheduled. An impairment should be recorded by a creditor when it is
“probable” that the payment will not be collected as scheduled. Debtors do not record impairments.
7-14Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1
Cash in bank—savings account ................................
Cash on hand ..............................................................
Checking account balance .........................................
Cash to be reported ....................................................
$68,000
9,300
17,000
$94,300
BRIEF EXERCISE 7-2
June 1
June 12
Accounts Receivable ...........................
Sales Revenue .............................
50,000
Cash ......................................................
Sales Discounts ...................................
Accounts Receivable ..................
48,500*
1,500
50,000
50,000
*$50,000 – ($50,000 X .03) = $48,500
BRIEF EXERCISE 7-3
June 1
June 12
Accounts Receivable ...........................
Sales Revenue .............................
48,500*
Cash ......................................................
Accounts Receivable ..................
48,500
48,500
48,500
*$50,000 – ($50,000 X .03) = $48,500
BRIEF EXERCISE 7-4
Bad Debt Expense ........................................................... 28,000
Allowance for Doubtful Accounts
($1,400,000 X 2%) .................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
28,000
(For Instructor Use Only)
7-15
BRIEF EXERCISE 7-5
(a)
(b)
Bad Debt Expense ...........................................................
22,600
Allowance for Doubtful Accounts
[(10% X $250,000) – $2,400] .................................
22,600
Bad Debt Expense ...........................................................
22,200
Allowance for Doubtful Accounts
($24,600 – $2,400) ................................................
22,200
BRIEF EXERCISE 7-6
11/1/14
Notes Receivable .............................................................
30,000
Sales Revenue ........................................................
30,000
12/31/14 Interest Receivable ..........................................................
300
Interest Revenue
($30,000 X 6% X 2/12)...........................................
300
5/1/15
Cash ..................................................................................
30,900
Notes Receivable ....................................................
Interest Receivable .................................................
Interest Revenue
($30,000 X 6% X 4/12) ............................................
30,000
300
600
BRIEF EXERCISE 7-7
Notes Receivable ............................................................ 20,000
Discount on Notes Receivable ..............................
Cash ........................................................................
3,471
16,529
Discount on Notes Receivable .......................................
Interest Revenue
$16,529 X 10% .....................................................
1,653
1,653
Discount on Notes Receivable .......................................
Interest Revenue
($16,529 + $1,653) X 10% ....................................
1,818
1,818
Cash ................................................................................. 20,000
7-16Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Notes Receivable ....................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
20,000
(For Instructor Use Only)
7-17
BRIEF EXERCISE 7-8
Chung, Inc.
Cash .................................................................................730,000
Interest Expense ($1,000,000 X 2%) ............................... 20,000
Notes Payable ........................................................
750,000
Seneca National Bank
Notes Receivable ............................................................750,000
Cash ........................................................................
Interest Revenue ($1,000,000 X 2%)......................
730,000
20,000
BRIEF EXERCISE 7-9
Wood
Cash .................................................................................
138,000
Due from Factor .............................................................. 9,000*
Loss on Sale of Receivables .......................................... 3,000**
Accounts Receivable .............................................
150,000
*6% X $150,000 = $9,000
**2% X $150,000 = $3,000
Engram
Accounts Receivable ......................................................150,000
Due to Customer (Wood) .......................................
Interest Revenue ....................................................
Cash ........................................................................
9,000
3,000
138,000
BRIEF EXERCISE 7-10
Wood
Cash .................................................................................
138,000
Due from Factor .............................................................. 9,000*
Loss on Sale of Receivables ..........................................10,500**
Accounts Receivable .............................................
Recourse Liability ..................................................
150,000
7,500
*6% X $150,000 = $9,000
7-18Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
**2% X $150,000 = $3,000 + $7,500 = $10,500
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-19
BRIEF EXERCISE 7-11
Cash $250,000 – [$250,000 X (.05 + .04)] ........................227,500
Due from Factor ($250,000 X .04) ................................... 10,000
Loss on Sale of Receivables .......................................... 20,500*
Accounts Receivable .............................................
Recourse Liability ..................................................
250,000
8,000
*($250,000 X .05) + $8,000
BRIEF EXERCISE 7-12
The entry for the sale now would be:
Cash $250,000 – [($250,000 X (.05 + .04)] ......................227,500
Due from Factor ($250,000 X .04) ................................... 10,000
Loss on Sale of Receivables .......................................... 16,500*
Account Receivable ...............................................
Recourse Liability ..................................................
250,000
4,000
*($250,000 X .05) + $4,000
This lower estimate for the recourse liability reduces the amount of the
loss—this will result in higher income in the year of the sale. Arness’s
liabilities will be lower by $4,000.
BRIEF EXERCISE 7-13
The accounts receivable turnover ratio is computed as follows:
Net Sales
Average Trade Receivables (net)
=
$12,442,000,000
= 13.34 times
$912,000,000 + $953,000,000
2
The days outstanding (average collection period) for accounts receivable in
days is
365 days
Accounts Receivable Turnover
7-20Copyright © 2013 John Wiley & Sons, Inc.
=
365 = 27.36 days
13.34
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
As indicated from these ratios, General Mills’ accounts receivable turnover
ratio appears quite strong.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-21
*BRIEF EXERCISE 7-14
Petty Cash .......................................................................
Cash ........................................................................
200
Supplies ...........................................................................
Miscellaneous Expense ..................................................
Cash Over and Short ......................................................
Cash ($200 – $15) ...................................................
94
87
4
200
185
*BRIEF EXERCISE 7-15
(a)
(b)
(c)
(d)
(e)
Added to balance per bank statement (1)
Deducted from balance per books (4)
Added to balance per books (3)
Deducted from balance per bank statement (2)
Deducted from balance per books (4)
*BRIEF EXERCISE 7-16
(b)
(c)
(e)
Office Expense .................................................................
Cash .........................................................................
25
Cash ..................................................................................
Interest Revenue .....................................................
31
25
Accounts Receivable ....................................................... 377
Cash .........................................................................
31
377
Thus, all “Balance per books” adjustments in the reconciliation require a
journal entry.
*BRIEF EXERCISE 7-17
National American Bank (Creditor):
Bad Debt Expense .....................................................
Allowance for Doubtful Accounts ......................
7-22Copyright © 2013 John Wiley & Sons, Inc.
225,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
225,000
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO EXERCISES
EXERCISE 7-1 (10–15 minutes)
(a)
(b)
Cash includes the following:
1. Commercial savings account—
First National Bank of Yojimbo
1. Commercial checking account—
First National Bank of Yojimbo
2. Money market fund—Volonte
5. Petty cash
11. Commercial Paper (cash equivalent)
12. Currency and coin on hand
Cash reported on December 31, 2014, balance sheet
$ 600,000
900,000
5,000,000
1,000
2,100,000
7,700
$8,608,700
Other items classified as follows:
3. Travel advances (reimbursed by employee)* should be reported
as receivable—employee in the amount of $180,000.
4. Cash restricted in the amount of $1,500,000 for the retirement of
long-term debt should be reported as a noncurrent asset
identified as “Cash restricted for retirement of long-term debt.”
6. An IOU from Marianne Koch should be reported as an account
receivable in the amount of $190,000.
7. The bank overdraft of $110,000 should be reported as a current
liability.**
8. Certificates of deposits of $500,000 each should be classified as
temporary investments.
9. Postdated check of $125,000 should be reported as an accounts
receivable.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-23
10.
The compensating balance requirement does not affect the
balance in cash. A note disclosure indicating the arrangement
and the amounts involved should be described in the notes.
7-24Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 7-1 (Continued)
*If not reimbursed, charge to prepaid expense.
**If cash is present in another account in the same bank on which the
overdraft occurred, offsetting is required.
EXERCISE 7-2 (10–15 minutes)
1.
Cash balance of $925,000. Only the checking account balance should
be reported as cash. The certificates of deposit of $1,400,000 should
be reported as a temporary investment, the cash advance to subsidiary
of $980,000 should be reported as a receivable, and the utility deposit
of $180 should be identified as a receivable from the gas company.
2.
Cash balance is $584,650 computed as follows:
Checking account balance
Overdraft
Petty cash
Coins and currency
$600,000
(17,000)
300
1,350
$584,650
Cash held in a bond sinking fund is restricted. Assuming that the
bonds are noncurrent, the restricted cash is also reported as
noncurrent.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-25
EXERCISE 7-2 (Continued)
3.
Cash balance is $599,800 computed as follows:
Checking account balance
Certified check from customer
$590,000
9,800
$599,800
The postdated check of $11,000 should be reported as an account
receivable. Cash restricted due to compensating balance should be
described in a note indicating the type of arrangement and amount.
Postage stamps on hand are reported as part of supplies or prepaid
expenses.
4.
Cash balance is $85,000 computed as follows:
Checking account balance
Money market mutual fund
$37,000
48,000
$85,000
The NSF check received from customer should be reported as an
account receivable.
5.
Cash balance is $700,900 computed as follows:
Checking account balance
Cash advance received from customer
$700,000
900
$700,900
Cash restricted for future plant expansion of $500,000 should be
reported as a noncurrent asset. Short-term Treasury bills of $180,000
should be reported as a temporary investment. Cash advance received
from customer of $900 should also be reported as a liability; cash
advance of $7,000 to company executive should be reported as a
receivable; refundable deposit of $26,000 paid to federal government
should be reported as a receivable.
7-26Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 7-3 (10–15 minutes)
Current assets
Accounts receivable
Customers
Accounts (of which accounts in
the amount of $40,000 have
been pledged as security for a
bank loan)
Installment accounts collectible
due in 2014
Installment accounts collectible
due after December 31, 2014*
Other** ($2,640 + $1,500)
$79,000
23,000
34,000
$136,000
4,140
$140,140
Investments
Advance to subsidiary company
81,000
*This classification assumes that these receivables are collectible within
the operating cycle of the business.
**These items could be separately classified, if considered material.
EXERCISE 7-4 (10–15 minutes)
Computation of cost of goods sold:
Merchandise purchased
Less: Ending inventory
Cost of goods sold
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$320,000
90,000
$230,000
(For Instructor Use Only)
7-27
EXERCISE 7-4 (Continued)
Selling price = 1.4 (Cost of good sold)
= 1.4 ($230,000)
= $322,000
Sales on account
Less: Collections
Uncollected balance
Balance per ledger
Apparent shortage
$322,000
198,000
124,000
82,000
$ 42,000 —Enough for a new car
EXERCISE 7-5 (15–20 minutes)
(a) (1) June 3 Accounts Receivable—Chester .....................................
3,000
Sales Revenue........................................................ 3,000
June 12 Cash .................................................................................
2,940
Sales Discounts ($3,000 X 2%) .......................................
60
Accounts Receivable—Chester ............................ 3,000
(2) June 3 Accounts Receivable—Chester .....................................
2,940
Sales Revenue ($3,000 X 98%) .............................. 2,940
June 12 Cash .................................................................................
2,940
Accounts Receivable—Chester ............................ 2,940
7-28Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 7-5 (Continued)
(b)
July 29 Cash ................................................................................
3,000
Accounts Receivable—Chester ............................ 2,940
Sales Discounts Forfeited .....................................
60
(Note to instructor: Sales discounts forfeited could have been recognized at the time the discount period lapsed. The company, however,
would probably not record this forfeiture until final cash settlement.)
EXERCISE 7-6 (5–10 minutes)
July 1
Accounts Receivable ......................................................
20,000
Sales Revenue ....................................................... 20,000
July 10
Cash .................................................................................
19,400*
Sales Discounts...............................................................
600
Accounts Receivable ............................................ 20,000
*$20,000 – (.03 X $20,000) = $19,400
July 17
Accounts Receivable ......................................................
200,000
Sales Revenue ....................................................... 200,000
July 30
Cash .................................................................................
200,000
Accounts Receivable ............................................ 200,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-29
EXERCISE 7-7 (10–15 minutes)
(a)
Bad Debt Expense ...........................................................
8,500
Allowance for Doubtful Accounts .........................
8,500*
*.01 X ($900,000 – $50,000) = $8,500
(b)
Bad Debt Expense ...........................................................
3,000
Allowance for Doubtful Accounts .........................
*Step 1:
Step 2:
3,000*
.05 X $100,000 = $5,000 (desired credit balance in allowance
account)
$5,000 – $2,000 = $3,000 (required credit entry to bring allowance
account to $5,000 credit balance)
EXERCISE 7-8 (15–20 minutes)
(a)
Allowance for Doubtful Accounts ..................................
6,000
Accounts Receivable .............................................
6,000
(b)
Accounts Receivable
Less: Allowance for Doubtful Accounts
Net realizable value
$800,000
40,000
$760,000
(c)
Accounts Receivable
Less: Allowance for Doubtful Accounts
Net realizable value
$794,000
34,000
$760,000
7-30Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 7-9 (8–10 minutes)
(a)
(b)
Bad Debt Expense...........................................................
5,350
Allowance for Doubtful Accounts .........................
($90,000 X 4%) + $1,750 = $5,350
5,350
Bad Debt Expense...........................................................
6,800
Allowance for Doubtful Accounts .........................
$680,000 X 1% = $6,800
6,800
EXERCISE 7-10 (10–12 minutes)
(a)
The direct write-off approach is not theoretically justifiable even
though required for income tax purposes. The direct write-off method
does not match expenses with revenues of the period, nor does it
result in receivables being stated at estimated realizable value on the
balance sheet.
(b)
Bad Debt Expense – 2% of Sales = $44,000 ($2,200,000 X 2%)
Bad Debt Expense – Direct Write-Off = $31,330 ($7,800 + $6,700 +
$7,000 + $9,830)
Net income would be $12,670 ($44,000 – $31,330) lower under the
percentage-of-sales approach.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-31
EXERCISE 7-11 (8–10 minutes)
Balance 1/1 ($700 – $155)
4/12 (#2412) ($1,710 – $1,000 – $300*)
11/18 (#5681) ($2,000 – $1,250)
$ 545 Over one year
410 Eight months and 19 days
750 One month and 13 days
$1,705
*($790 – $490)
Inasmuch as later invoices have been paid in full, all three of these
amounts should be investigated in order to determine why Hopkins Co. has
not paid them. The amounts in the beginning balance and #2412 should be
of particular concern.
EXERCISE 7-12 (15–20 minutes)
7/1 Accounts Receivable—Harding Co. ...............................
7,840
Sales Revenue ($8,000 X 98%) ..............................
7,840
7/5 Cash [$9,000 X (1 – .09)]..................................................
8,190
Loss on Sale of Receivables ..........................................810
Accounts Receivable ($9,000 X 98%) ....................
Sales Discounts Forfeited .....................................
8,820
180
(Note: It is possible that the company already recorded the Sales
Discounts Forfeited. In this case, the credit to Accounts Receivable
would be for $9,000. The same point applies to the next entry as well.)
7-32Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 7-12 (Continued)
7/9
7/11
Accounts Receivable .......................................................
180
Sales Discounts Forfeited
($9,000 X 2%).......................................................
180
Cash .................................................................................
5,640
Interest Expense ($6,000 X 6%) ......................................
360
Notes Payable .........................................................
6,000
Account Receivable—Harding Co. .................................
160
Sales Discounts Forfeited ......................................
($8,000 X 2%)
160
This entry may be made at the next time financial statements are
prepared. Also, it may occur on 12/29 when Harding Company’s
receivable is adjusted.
12/29 Allowance for Doubtful Accounts ..................................
7,200
Accounts Receivable—Harding Co. .........................
[$7,840 + $160 = $8,000;
$8,000 – (10% X $8,000) = $7,200]
7,200
EXERCISE 7-13 (10–15 minutes)
(a)
Cash .................................................................................
192,000
Interest Expense .............................................................
8,000*
Notes Payable ........................................................
200,000
*2% X $400,000 = $8,000
(b)
Cash .................................................................................
350,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-33
Accounts Receivable .............................................
EXERCISE 7-13 (Continued)
(c)
350,000
Notes Payable ..................................................................
200,000
Interest Expense .............................................................
5,000*
Cash ........................................................................
205,000
*10% X $200,000 X 3/12 = $5,000
EXERCISE 7-14 (15–18 minutes)
1.
2.
3.
4.
Cash .................................................................................
22,500
Loss on Sale of Receivables ..........................................2,500
($25,000 X 10%)
Accounts Receivable .............................................
25,000
Cash .................................................................................
50,600
Interest Expense ($55,000 X 8%) ....................................4,400
Notes Payable .........................................................
55,000
Bad Debt Expense ...........................................................6,220
Allowance for Doubtful Accounts .........................
[($82,000 X 5%) + $2,120]
6,220
Bad Debt Expense ...........................................................6,450
Allowance for Doubtful Accounts .........................
($430,000 X 1.5%)
6,450
EXERCISE 7-15 (10–15 minutes)
Computation of net proceeds:
Cash received
7-34Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$160,000
(For Instructor Use Only)
Ahmed Nawfal
Less: Recourse liability
Net proceeds
1,000
$159,000
EXERCISE 7-15 (Continued)
Computation of gain or loss:
Carrying value
Net proceeds
Loss on sale of receivables
$200,000
159,000
$ 41,000
The following journal entry would be made:
Cash ........................................................................ $160,000
Loss on Sale of Receivables ................................. 41,000
Recourse Liability ..........................................
Accounts Receivable .....................................
1,000
200,000
EXERCISE 7-16 (15–20 minutes)
(a) To be recorded as a sale, all of the following conditions would be met:
(1) The transferred asset has been isolated from the transferor (put
beyond reach of the transferor and its creditors).
(2) The transferees have obtained the right to pledge or to exchange
either the transferred assets or beneficial interests in the transferred assets.
(3) The transferor does not maintain effective control over the transferred assets through an agreement to repurchase or redeem them
before their maturity.
(b) Computation of net proceeds:
Cash received ($175,000 X 94%)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$164,500
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-35
Due from factor ($175,000 X 4%)
Less: Recourse liability
Net proceeds
7,000
$171,500
2,000
$169,500
EXERCISE 7-16 (Continued)
Computation of gain or loss:
Carrying value
Net proceeds
Loss on sale of receivables
$175,000
169,500
$ 5,500
The following journal entry would be made:
Cash ........................................................................
164,500
Due from Factor ......................................................7,000
Loss on Sale of Receivables .................................5,500
Recourse Liability ...........................................
Accounts Receivable......................................
2,000
175,000
EXERCISE 7-17 (10–15 minutes)
(a) July 1
Cash .................................................................................
283,500
Due from Factor ...............................................................
12,000*
Loss on Sale of Receivables ...........................................
4,500**
Accounts Receivable .............................................. 300,000
**(4% X $300,000) = $12,000
**(1 1/2% X $300,000) = $4,500
(b) July 1
Accounts Receivable .......................................................
300,000
Due to JFK Corp. ....................................................
Interest Revenue .....................................................
7-36Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
12,000
4,500
(For Instructor Use Only)
Ahmed Nawfal
Cash......................................................................... 283,500
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-37
EXERCISE 7-18 (10–15 minutes)
1.
7/1/14
Notes Receivable .............................................................
1,101,460.00
Discount on Notes Receivable ..............................
401,460.00
Land .........................................................................
590,000.00
Gain on Disposal of Land.......................................
110,000.00
($700,000 – $590,000)
Computation of the discount
$1,101,460 Face value of note
.63552 Present value of 1 for 4 periods at 12%
$ 700,000 Present value of note
1,101,460 Face value of note
$ 401,460 Discount on notes receivable
2.
7/1/14
Notes Receivable .............................................................
400,000.00
Discount on Notes Receivable ..............................
178,836.32
Service Revenue .....................................................
221,163.68
Computation of the present value of the note:
Maturity value
$400,000.00
Present value of $400,000 due
in 8 years at 12%—$400,000 X .40388
$161,552.00
Present value of $12,000
payable annually for 8 years
at 12% annually—$12,000 X 4.96764
59,611.68
Present value of the note
221,163.68
Discount on notes receivable
$178,836.32
7-38Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 7-19 (20–25 minutes)
(a)
Notes Receivable ...........................................................
200,000
Discount on Notes Receivable ..............................
Service Revenue ...................................................
34,710
165,290*
*Computation of present value of note:
PV of $200,000 due in 2 years at 10%
$200,000 X .82645 = $165,290
(b)
Discount on Notes Receivable .......................................
16,529
Interest Revenue ...................................................
16,529*
*$165,290 X 10% = $16,529
(c)
Discount on Notes Receivable .......................................
18,181*
Interest Revenue ....................................................
18,181
*$34,710 – $16,529 (or [$165,290 + $16,529] X 10%)
Cash .................................................................................
200,000
Notes Receivable ..................................................
200,000
EXERCISE 7-20 (10–15 minutes)
(a) Accounts Receivable ......................................................
100,000
Sales Revenue ........................................................
100,000
Cash .................................................................................
70,000
Accounts Receivable .............................................
70,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-39
EXERCISE 7-20 (Continued)
(b)
Accounts Receivable Turnover
=
Net Sales
Average Trade Receivables (net)
Net Sales
$100,000
= 3.33 times
=
Average Trade Receivables (net)
($15,000 + $45,000*)/2
*$15,000 + $100,000 – $70,000
Days to collect accounts
receivable
(c)
=
365
= 110 days
3.33
Jones Company’s turnover ratio has declined significantly. That is, it
is turning receivables 3.33 times a year and collections on receivables
took 110 days. In the prior year, the turnover ratio was almost double
(6.0) and collections took only 61 days. This is a bad trend in liquidity.
Jones should consider offering early payment discounts and/or
tightened credit and collection policies.
EXERCISE 7-21
(a) Cash [$25,000 X (1 – .09)] ................................................
22,750
Due from Factor ...............................................................
1,250
Loss on Sale of Accounts Receivable ...........................
2,200
Accounts Receivable .............................................
Recourse Liability...................................................
25,000
1,200
Computation of cash received
Accounts receivable...............................................
Less: Due from factor (5% X $25,000) ...................
Finance charge (4% X $25,000) ...................
Cash received ..................................................
$25,000
1,250
1,000
$22,750
Computation of net proceeds (cash and other
assets received, less any liabilities incurred)
Cash received .........................................................
$22,750
Due from factor .......................................................1,250
Less: Recourse liability .........................................
Net proceeds ....................................................
$24,000
1,200
$22,800
7-40Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 7-21 (Continued)
Computation of loss
Carrying (Book) value ............................................
Less: Net proceeds ................................................
Loss on sale of receivables ............................
(b)
Accounts Receivable Turnover
$25,000
22,800
$ 2,200
Net Sales
Average Trade Receivables (net)
=
Net Sales
$100,000
= 5.71 times
=
Average Trade Receivables (net)
($15,000 + $20,000*)/2
*($15,000 + $100,000 – $70,000 –
$25,000)
Days to collect accounts receivable =
365
= 63.92 days
5.71
With the factoring transaction, Jones Company’s turnover ratio still declines
but by less than in the earlier exercise. While Jones’ collections have
slowed, by factoring the receivables, Jones is able to convert them to cash.
The cost of this approach to converting receivables to cash is captured in
the Loss on Sale of Accounts Receivable account.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-41
*EXERCISE 7-22 (5–10 minutes)
1.
2.
3.
April 1 Petty Cash ........................................................................
200
Cash.........................................................................
200
April 10 Freight-In (or Invertory) ...................................................
60
Supplies Expense ............................................................
25
Postage Expense .............................................................
33
Accounts Receivable—Employees.................................
17
Miscellaneous Expense...................................................
36
Cash Over and Short .......................................................
2
Cash ($200 – $27)....................................................
173
April 20 Petty Cash ........................................................................
100
Cash.........................................................................
100
*EXERCISE 7-23 (10–15 minutes)
Accounts Receivable—Employees ................................ 74.00
($40.00 + $34.00)
Owner’s Drawings* ......................................................... 170.00
Maintenance and Repairs Expense ............................... 14.35
Postage Expense ($20.00 – $2.90) ................................. 17.10
Supplies Expense ...........................................................
2.90
Cash Over and Short ......................................................
6.45
Cash ($300.00 – $15.20) .........................................
284.80
*Note: This debit might also be made to the capital account.
7-42Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
*EXERCISE 7-24 (15–20 minutes)
(a)
Angela Lansbury Company
Bank Reconciliation
July 31
Balance per bank statement, July 31
Add: Deposits in transit
Deduct: Outstanding checks
Correct cash balance, July 31
$8,650
2,350a
(1,100)b
$9,900
Balance per books, July 31
Add: Collection of note
Less: Bank service charge
NSF check
Correct cash balance, July 31
$9,250
1,000
$ 15
335
(350)
$9,900
a
Computation of deposits in transit
Deposits per books
Deposits per bank in July
Less deposits in transit (June)
Deposits mailed and received in
July
Deposits in transit, July 31
$5,810
$5,000
(1,540)
(3,460)
$2,350
b
Computation of outstanding checks
Checks written per books
Checks cleared by bank in July
$4,000
Less outstanding checks
(June)*
(2,000)
Checks written and cleared in
July
Outstanding checks, July 31
$3,100
(2,000)
$1,100
*Assumed to clear bank in July
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-43
*EXERCISE 7-24 (Continued)
(b) Cash .................................................................................
Office Expenses—bank service charges .......................
Accounts Receivable ......................................................
Notes Receivable ....................................................
650
15
335
1,000
*EXERCISE 7-25 (15–20 minutes)
(a)
Logan Bruno Company
Bank Reconciliation, August 31, 2014
County National Bank
Balance per bank statement, August 31, 2014
Add: Cash on hand
Deposits in transit
$ 8,089
$ 310
3,800
4,110
Deduct: Outstanding checks
12,199
1,050
Correct cash balance
$11,149
Balance per books, August 31, 2014
($10,050 + $35,000 – $34,903)
Add: Note ($1,000) and interest ($40) collected
Deduct: Bank service charges
Understated check for supplies
Correct cash balance
$10,147
1,040
11,187
$
20
18
(b) Cash ................................................................................. 1,040
Notes Receivable ....................................................
Interest Revenue ....................................................
(To record collection of note and interest)
7-44Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
38
$11,149
1,000
40
(For Instructor Use Only)
Ahmed Nawfal
*EXERCISE 7-25 (Continued)
Office Expense—bank service charges .........................
Cash ........................................................................
(To record August bank charges)
20
Supplies Expense............................................................
Cash ........................................................................
(To record error in recording check for
supplies)
18
20
18
(c) The correct cash balance of $11,149 would be reported in the August
31, 2014, balance sheet.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-45
*EXERCISE 7-26 (15-25 minutes)
(a)
Journal entry to record issuance of loan by Paris Bank:
December 31, 2014
Notes Receivable ..............................................................
100,000
Discount on Notes Receivable ..............................
Cash ........................................................................
37,908
62,092
$100,000 X Present value of 1 for 5 periods at 10%
$100,000 X .62092 = $62,092
(b)
Note Amortization Schedule
(Before Impairment)
Date
12/31/14
12/31/15
12/31/16
Cash
Received
(0%)
$0
0
Interest
Revenue
(10%)
$6,209
6,830
Increase in
Carrying
Amount
Carrying
Amount of
Note
$6,209
6,830
$62,092
68,301
75,131
Computation of the impairment loss:
Carrying amount of investment (12/31/16) .................
Less: Present value of $75,000 due in 3 years
at 10% ($75,000 X .75132) ................................
Loss due to impairment ..............................................
$75,131
56,349
$18,782
The entry to record the loss by Paris Bank is as follows:
Bad Debt Expense ...........................................................18,782
Allowance for Doubtful Accounts .........................
18,782
Note: Iva Majoli Company, the debtor, makes no entry because it still
legally owes $100,000.
7-46Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
*EXERCISE 7-27 (15-25 minutes)
(a) Cash received by Conchita Martinez Company on December 31, 2014:
Present value of principal ($1,000,000 X .56743) .......
Present value of interest ($100,000 X 3.60478) ..........
Cash received ..............................................................
(b)
$567,430
360,478
$927,908
Note Amortization Schedule
(Before Impairment)
Date
12/31/14
12/31/15
12/31/16
Cash
Received
(10%)
$100,000
100,000
Interest
Revenue
(12%)
$111,349
112,711
Increase in
Carrying
Amount
Carrying
Amount of
Note
$11,349
12,711
$927,908
939,257
951,968
(c) Loss due to impairment:
Carrying amount of loan (12/31/16) .......................
Less: Present value of $600,000 due in
3 years ($600,000 X .71178) ........................
427,068
Present value of $100,000 payable annually
for 3 years ($100,000 X 2.40183) ........................
240,183
Loss due to impairment .........................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$951,968
667,251
$284,717
(For Instructor Use Only)
7-47
TIME AND PURPOSE OF PROBLEMS
Problem 7-1 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the balance sheet effect that occurs when
the cash book is left open. In addition, the student is asked to adjust the present balance sheet to an
adjusted balance sheet, reflecting the proper cash presentation.
Problem 7-2 (Time 20–25 minutes)
Purpose—to provide the student with the opportunity to determine various items related to accounts
receivable and the allowance for doubtful accounts. Five independent situations are provided.
Problem 7-3 (Time 20–30 minutes)
Purpose—to provide a short problem related to the aging of accounts receivable. The appropriate balance
for doubtful accounts must be determined. In addition, the manner of reporting accounts receivable on
the balance sheet must be shown.
Problem 7-4 (Time 25–35 minutes)
Purpose—the student prepares an analysis of the changes in the allowance for doubtful accounts and
supports it with an aging schedule.
Problem 7-5 (Time 20–30 minutes)
Purpose—a short problem that must be analyzed to make the necessary correcting entries. It is not a
pencil-pushing problem but requires a great deal of conceptualization. A good problem for indicating the
types of adjustments that might occur in the receivables area.
Problem 7-6 (Time 25–35 minutes)
Purpose—to provide the student with a number of business transactions related to notes and accounts
receivable that must be journalized. Recoveries of receivables, and write-offs are the types of transactions presented. The problem provides a good cross section of a number of accounting issues related
to receivables.
Problem 7-7 (Time 25–30 minutes)
Purpose—a short problem involving the reporting problems associated with the assignment of accounts
receivable. The student is required to make the journal entries necessary to record an assignment.
A straightforward problem.
Problem 7-8 (Time 30–35 minutes)
Purpose—to provide the student with a simple note receivable problem with no imputation of interest.
Problem 7-9 (Time 30–35 minutes)
Purpose—to provide the student with a problem requiring the imputation of interest. The student is
required to make journal entries on a series of dates when note installments are collected. A relatively
straightforward problem.
Problem 7-10 (Time 40–50 minutes)
Purpose—the student calculates the current portion of long-term receivables and interest receivable,
and prepares the long-term receivables section of the balance sheet. Then the student prepares a
schedule showing interest income. The problem includes interest-bearing and zero-interest-bearing
notes and an installment receivable.
Problem 7-11 (Time 20–25 minutes)
Purpose—to provide the student the opportunity to record the sales of receivables with and without
recourse and to determine the income effects.
7-48Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Time and Purpose of Problems (Continued)
*Problem 7-12 (Time 20–25 minutes)
Purpose—to provide the student the opportunity to do the accounting for petty cash and a bank
reconciliation.
*Problem 7-13 (Time 20–30 minutes)
Purpose—to provide the student with the opportunity to prepare a bank reconciliation which is reconciled
to a corrected balance. Traditional types of adjustments are presented. Journal entries are also required.
*Problem 7-14 (Time 20–30 minutes)
Purpose—to provide the student with the opportunity to prepare a bank reconciliation which goes from
balance per bank to corrected balance. Traditional types of adjustments are presented such as deposits
in transit, bank service charges, NSF checks, and so on. Journal entries are also required.
*Problem 7-15 (Time 30–40 minutes)
Purpose—to provide the student with a loan impairment situation that requires entries by both the
debtor and the creditor and an analysis of the loss on impairment.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-49
SOLUTIONS TO PROBLEMS
PROBLEM 7-1
(a)
December 31
Accounts Receivable ($17,640 + $360)....................
Sales Revenue ..........................................................
Cash .................................................................
Sales Discounts ...............................................
December 31
Cash...........................................................................
Purchase Discounts .................................................
Accounts Payable ............................................
(b)
18,000
28,000
45,640
360
22,200
250
22,450
Per Balance
After
Sheet
Adjustment
Current assets
Cash ($39,000 – $45,640 + $22,200) ..........................
$ 39,000
Accounts Receivable
($42,000 + $18,000) ...............................................
42,000
Inventory ....................................................................
67,000
Total ................................................
(1) 148,000
$ 15,560
60,000
67,000
142,560
Current liabilities
Accounts payable
($45,000 + $22,450) ..........................
45,000
Other current liabilities........................
14,200
Total ................................................
(2) 59,200
Working capital .................................... (1) – (2) $ 88,800
67,450
14,200
81,650
$ 60,910
Current ratio ............................................... (1) ÷ (2)
1.75 to 1
7-50Copyright © 2013 John Wiley & Sons, Inc.
2.5 to 1
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 7-2
1. Net sales ................................................................................
Percentage ............................................................................
Bad debt expense .................................................................
$1,200,000
1 1/2%
$ 18,000
2. Accounts receivable .............................................................
Amounts estimated to be uncollectible ...............................
Net realizable value ...............................................................
$1,750,000
(180,000)
$1,570,000
3. Allowance for doubtful accounts 1/1/14 ..............................
Establishment of accounts written off in prior years .........
Customer accounts written off in 2014 ...............................
Bad debt expense for 2014 ($2,400,000 X 3%) ....................
Allowance for doubtful accounts 12/31/14 ..........................
$
$
17,000
8,000
(30,000)
72,000
67,000
4. Bad debt expense for 2014 ...................................................
Customer accounts written off as uncollectible
during 2014 ........................................................................
Allowance for doubtful accounts balance 12/31/14 ............
$
84,000
$
(24,000)
60,000
Accounts receivable, net of allowance
for doubtful Accounts .......................................................
Allowance for doubtful accounts balance 12/31/14 ............
Accounts receivable, before deducting
allowance for doubtful accounts .....................................
5. Accounts receivable .............................................................
Percentage ............................................................................
Bad debt expense, before adjustment .................................
Allowance for doubtful accounts (debit balance) ...............
Bad debt expense, as adjusted ............................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 950,000
60,000
$1,010,000
$ 310,000
3%
9,300
14,000
$ 23,300
(For Instructor Use Only)
7-51
PROBLEM 7-3
(a)
The Allowance for Doubtful Accounts should have a balance of $45,000
at year-end. The supporting calculations are shown below:
Expected
Days Account
Percentage
Outstanding
Amount
Uncollectible
0–15 days
$300,000
.02
16–30 days
100,000
.10
31–45 days
80,000
.15
46–60 days
40,000
.20
61–75 days
20,000
.45
Balance for Allowance for Doubtful Accounts
Estimated
Uncollectible
$ 6,000
10,000
12,000
8,000
9,000
$45,000
The accounts which have been outstanding over 75 days ($15,000)
and have zero probability of collection would be written off immediately
by a debit to Allowance for Doubtful Accounts for $15,000 and a credit
to Accounts Receivable for $15,000. It is not considered when determining the proper amount for the Allowance for Doubtful Accounts.
(b)
Accounts receivable ($555,000 – $15,000) ........................
Less: Allowance for doubtful accounts ...........................
Accounts receivable (net) ..................................................
(c)
The year-end bad debt adjustment would decrease before-tax income
$20,000 as computed below:
Estimated amount required in the Allowance
for Doubtful Accounts .........................................................
Balance in the account after write-off of uncollectible
accounts but before adjustment ($40,000 – $15,000) ........
Required charge to expense ...................................................
7-52Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$540,000
45,000
$495,000
$45,000
25,000
$20,000
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 7-4
(a)
FORTNER CORPORATION
Analysis of Changes in the
Allowance for Doubtful Accounts
For the Year Ended December 31, 2014
Balance at January 1, 2014 ...............................................
Provision for doubtful accounts ($9,000,000 X 2%) ........
Recovery in 2014 of bad debts written off previously ....
$130,000
180,000
15,000
325,000
150,000
Deduct write-offs for 2014 ($90,000 + $60,000) ...............
Balance at December 31, 2014 before change
in accounting estimate..................................................
Increase due to change in accounting estimate
during 2014 ($263,600 – $175,000) ...............................
Balance at December 31, 2014 adjusted (Schedule 1) ....
175,000
88,600
$263,600
Schedule 1
Computation of Allowance for Doubtful Accounts
at December 31, 2014
Aging
Category
Nov.–Dec. 2014
July–Oct.
Jan.–June
Prior to 1/1/14
Balance
%
$1,080,000
650,000
420,000
90,000(a)
2
10
25
80
Doubtful
Accounts
$ 21,600
65,000
105,000
72,000
$263,600
(a) $150,000 – $60,000
(b) The journal entry to record this transaction is as follows:
Bad Debt Expense .........................................
Allowance for Doubtful Accounts.............
(To increase the allowance for
doubtful accounts at December 31,
2014, resulting from a change
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$88,600
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$88,600
(For Instructor Use Only)
7-53
in accounting estimate)
7-54Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 7-5
Bad Debt Expense ...................................................
Accounts Receivable ......................................
(To correct bad debt expense and
write off accounts receivable)
3,240
Accounts Receivable ...............................................
Unearned Sales Revenue ...............................
(To reclassify credit balance
in accounts receivable)
4,840
Allowance for Doubtful Accounts ...........................
Accounts Receivable ......................................
(To write off $3,700 of uncollectible
accounts)
3,700
3,240
4,840
3,700
(Note to instructor: Many students will not make this entry at this point.
Because $3,700 is totally uncollectible, a write-off immediately seems most
appropriate. The remainder of the solution therefore assumes that the student
made this entry.)
Allowance for Doubtful Accounts ...........................
Bad Debt Expense ..........................................
(To reduce allowance for doubtful
account balance)
7,279.64
Balance ($8,750 + $18,620 – $3,240 – $3,700) ........
Corrected balance (see below) ...............................
Adjustment ...............................................................
$20,430.00
13,150.36
$ 7,279.64
7,279.64
Age
Balance
Aging
Schedule
Under 60 days
60–90 days
91–120 days
Over 120 days
$172,342
141,330 ($136,490 + $4,840)
36,684 ($39,924 – $3,240)
19,944 ($23,644 – $3,700)
1%
3%
6%
25%
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 1,723.42
4,239.90
2,201.04
4,986.00
$13,150.36
(For Instructor Use Only)
7-55
PROBLEM 7-5 (Continued)
If the student did not make the entry to record the $3,700 write-off earlier, the
following would change in the problem. After the adjusting entry for $7,279.64,
an entry would have to be made to write off the $3,700.
Balance ($8,750 + $18,620 – $3,240) ................
Corrected balance (see below).........................
Adjustment ........................................................
$24,130.00
16,850.36
$ 7,279.64
Age
Balance
Aging
Schedule
Under 60 days
60–90 days
91–120 days
Over 120 days
$172,342
141,330
36,684
23,644
1%
3%
6%
—
$ 1,723.42
4,239.90
2,201.04
8,686.00*
$16,850.36
*$3,700 + (25% X $19,944)
7-56Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 7-6
–1–
Cash ..........................................................................
Sales Discounts ........................................................
Accounts Receivable ......................................
136,800*
1,200
138,000
*[$138,000 – ($60,000 X 2%)]
–2–
Accounts Receivable ...............................................
Allowance for Doubtful Accounts ..................
Cash ..........................................................................
Accounts Receivable ......................................
–3–
Allowance for Doubtful Accounts ...........................
Accounts Receivable ......................................
–4–
Bad Debt Expense ....................................................
Allowance for Doubtful Accounts ..................
*($17,300 + $5,300 – $17,500 = $5,100;
$20,000 – $5,100 = $14,900)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
5,300
5,300
5,300
5,300
17,500
17,500
14,900
14,900*
(For Instructor Use Only)
7-57
PROBLEM 7-7
July 1, 2014
Cash ..................................................................................
Interest Expense (.005 X $150,000) .................................
Notes Payable (80% X $150,000) ............................
119,250
750
July 31, 2014
Notes Payable ...................................................................
Accounts Receivable ..............................................
80,000
Interest Expense ...............................................................
Interest Payable (.005 X $70,000) ...........................
August 31, 2014
Notes Payable ...................................................................
Cash* .................................................................................
Interest Expense (.005 X [$150,000 –
$80,000 – $50,000]) ........................................................
Interest Payable ................................................................
Accounts Receivable ..............................................
*Total cash collection.......................................................
Less: Interest payable (from previous entry) ................
Interest expense (current month) [(.005 X
$150,000 – $80,000 – $50,000)] ...........................
Notes payable (balance) ($120,000 – $80,000) .....
Cash collected ..................................................................
7-58Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
120,000
80,000
350
350
40,000
9,550
100
350
50,000
$50,000
(350)
(100)
(40,000)
$ 9,550
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 7-8
10/1/14
Notes Receivable ............................................................
120,000
Sales Revenue........................................................ 120,000
12/31/14
Interest Receivable .........................................................
2,400*
Interest Revenue ....................................................
2,400
*$120,000 X .08 X 3/12 = $2,400
10/1/15
Cash .................................................................................
9,600*
Interest Receivable ................................................
Interest Revenue .................................
2,400
7,200**
*$120,000 X .08 = $9,600
**$120,000 X .08 X 9/12 = $7,200
12/31/15
10/1/16
Interest Receivable .........................................................
2,400
Interest Revenue ...............................
2,400
Cash .................................................................................
9,600
Interest Receivable ................................................
Interest Revenue ..............................
2,400
7,200
Cash .................................................................................
120,000
Notes Receivable ................................................... 120,000
Note: Entries at 10/1/15 and 10/1/16 assume reversing entries were not
made on January 1, 2015 and January 1, 2016.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-59
PROBLEM 7-9
(a)
December 31, 2014
Cash.........................................................................
Notes Receivable ....................................................
Discount on Notes Receivable .....................
Service Revenue ............................................
40,000
80,000
17,951
102,049
To record revenue at the present value of the
note plus the immediate cash payment:
PV of $20,000 annuity @ 11% for
4 years ($20,000 X 3.10245) ............ $ 62,049
Down payment ...................................
40,000
Capitalized value of services ............ $102,049
(b)
December 31, 2015
Cash............................................................................
Notes Receivable ..............................................
20,000
20,000
Discount on Notes Receivable .................................
Interest Revenue...............................................
6,825
6,825
Schedule of Note Discount Amortization
Date
Cash
Received
Interest
Revenue
Carrying
Amount of Note
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
—
$20,000
20,000
20,000
20,000
—
a
$6,825
5,376
3,768
1,982
$62,049
b
48,874
34,250
18,018
—
a
$6,825 = $62,049 X 11%
$48,874 = $62,049 + $6,825 – $20,000.00
b
7-60Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 7-9 (Continued)
(c)
December 31, 2016
Cash ...........................................................................
Notes Receivable..............................................
Discount on Notes Receivable .................................
Interest Revenue ..............................................
(d)
December 31, 2017
Cash ...........................................................................
Notes Receivable..............................................
Discount on Notes Receivable .................................
Interest Revenue ..............................................
(e)
December 31, 2018
Cash ...........................................................................
Notes Receivable..............................................
Discount on Notes Receivable .................................
Interest Revenue ..............................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
20,000
20,000
5,376
5,376
20,000
20,000
3,768
3,768
20,000
20,000
1,982
1,982
(For Instructor Use Only)
7-61
PROBLEM 7-10
(a)
BRADDOCK INC.
Long-Term Receivables Section of Balance Sheet
December 31, 2014
9% note receivable from sale of division, due
in annual installments of $500,000 to
May 1, 2016, less current installment .................
8% note receivable from officer, due Dec. 31,
2016, collateralized by 10,000 shares
of Braddock, Inc., common stock
with a fair value of $450,000 ...............................
Zero-interest-bearing note from sale of patent,
net of 12% imputed interest, due
April 1, 2016 .........................................................
Installment contract receivable, due in annual
installments of $45,125 to July 1, 2018,
less current installment ......................................
Total long-term receivables .............................
(b)
$ 500,000
(1)
400,000
86,873
(2)
110,275
$1,097,148
(3)
BRADDOCK INC.
Selected Balance Sheet Balances
December 31, 2014
Current portion of long-term receivables:
Note receivable from sale of division .............................$500,000
Installment contract receivable ....................................... 29,725
Total current portion of long-term
receivables ..............................................................$529,725
Accrued interest receivable:
Note receivable from sale of division ............................. 60,000
Installment contract receivable ....................................... 7,700
Total accrued interest receivable ..............................$ 67,700
7-62Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(1)
(3)
(4)
(5)
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 7-10 (Continued)
(c)
BRADDOCK INC.
Interest Revenue from Long-Term Receivables
For the Year Ended December 31, 2014
Interest revenue:
Note receivable from sale of division ..............................$105,000
Note receivable from sale of patent ................................. 7,173
Note receivable from officer ............................................. 32,000
Installment contract receivable from sale of land ........... 7,700
Total interest revenue for year ended 12/31/14 .........$151,873
(6)
(2)
(7)
(5)
Explanation of Amounts
(1) Long-term Portion of 9% Note Receivable at 12/31/14
Face amount, 5/1/13 ...............................................
Less: Installment received 5/1/14 .........................
Balance, 12/31/14 ....................................................
Less: Installment due 5/1/15 .................................
Long-term portion, 12/31/14 ...................................
(2) Zero-interest-bearing Note, Net of Imputed Interest
at 12/31/14
Face amount 4/1/14 ................................................
Less: Imputed interest
[$100,000 – ($100,000 X 0.797)] ..................
Balance, 4/1/14 ........................................................
Add: Interest earned to 12/31/14
($79,700 X 12% X 9/12) ................................
Balance, 12/31/14 ....................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$1,500,000
500,000
1,000,000
500,000
$ 500,000
$ 100,000
20,300
79,700
$
7,173
86,873
(For Instructor Use Only)
7-63
PROBLEM 7-10 (Continued)
(3)
(4)
(5)
(6)
(7)
Long-term Portion of Installment Contract
Receivable at 12/31/14
Contract selling price, 7/1/14.................................
Less: Down payment, 7/1/14 ................................
Balance, 12/31/14 ...................................................
Less: Installment due, 7/1/15
[$45,125 – ($140,000 X 11%)]......................
Long-term portion, 12/31/14 ..................................
$ 200,000
60,000
140,000
29,725
$ 110,275
Accrued Interest—Note Receivable, Sale of
Division at 12/31/14
Interest accrued from 5/1 to 12/31/14
($1,000,000 X 9% X 8/12) .....................................
$
60,000
Accrued Interest—Installment Contract at 12/31/14
Interest accrued from 7/1 to 12/31/14
($140,000 X 11% X 1/2) ........................................
$
7,700
$
45,000
Interest Revenue—Note Receivable, Sale of
Division, for 2014
Interest earned from 1/1 to 5/1/14
($1,500,000 X 9% X 4/12) .....................................
Interest earned from 5/1 to 12/31/14
($1,000,000 X 9% X 8/12) .....................................
Interest income ......................................................
Interest Revenue—Note Receivable, Officer, for 2014
Interest earned 1/1 to 12/31/14
($400,000 X 8%) ...................................................
7-64Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
60,000
$ 105,000
$
32,000
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 7-11
SANDBURG COMPANY
Income Statement Effects
For the Year Ended December 31, 2014
Expenses resulting from accounts receivable
assigned (Schedule 1) ...................................................
Loss resulting from accounts receivable
sold ($300,000 – $270,000) ............................................
Total expenses ............................................................
$22,320
30,000
$52,320
Schedule 1
Computation of Expense
for Accounts Receivable Assigned
Assignment expense:
Accounts receivable assigned ...................................$400,000
X 80%
Advance by Keller Finance Company ....................... 320,000
X
3%
Interest expense................................................................
Total expenses ............................................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 9,600
12,720
$22,320
(For Instructor Use Only)
7-65
*PROBLEM 7-12
(a)
(b)
Petty Cash ..................................................................
Cash ...................................................................
250.00
Postage Expense .......................................................
Supplies ......................................................................
Accounts Receivable (Employees) ...........................
Freight-Out .................................................................
Advertising Expense ..................................................
Miscellaneous Expense .............................................
Cash ($250.00 – $26.40) ....................................
33.00
65.00
30.00
57.45
22.80
15.35
Petty Cash ..................................................................
Cash ...................................................................
50.00
Balances per bank: ....................................................
Add:
Cash on hand ....................................................
Deposit in transit ...............................................
250.00
223.60
50.00
$6,522
$ 246
3,000
Deduct: Checks outstanding .....................................
Correct cash balance, May 31 ..........................
Balance per books: ....................................................
Add: Note receivable (collected with interest) ........
3,246
9,768
850
$8,918
$8,015*
930
8,945
27
$8,918
Deduct: Bank service charges .................................
Correct cash balance, May 31 ..........................
*($8,850 + $31,000 – $31,835)
Cash ............................................................................
Notes Receivable ..............................................
Interest Revenue ...............................................
930
Office Expense (bank charges) .................................
Cash ...................................................................
27
7-66Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
900
30
27
(For Instructor Use Only)
Ahmed Nawfal
(c)
$8,918 + $300 = $9,218.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-67
*PROBLEM 7-13
(a)
AGUILAR CO.
Bank Reconciliation
June 30, 2014
Balance per bank, June 30...............................................
Add: Deposits in transit ..................................................
Deduct: Outstanding checks ..........................................
Correct cash balance, June 30 ........................................
$4,150.00
3,390.00
(2,136.05)
$5,403.95
Balance per books, June 30 ............................................
Add: Error in recording deposit ($90 – $60) ..................
$ 30.00
Error on check no. 747
($582.00 – $58.20) ................................................ 523.80
Note collection ($1,200 + $36) ...............................1,236.00
$3,969.85
1,789.80
5,759.65
Deduct: NSF check .......................................................... 253.20
Error on check no. 742 ($491 – $419) ...........
72.00
Bank service charges ($25 + $5.50) ................. 30.50
(355.70)
Correct cash balance, June 30 ........................................
$5,403.95
(b) Cash ........................................................................ 1,789.80
Accounts Receivable........................................
Accounts Payable .............................................
Notes Receivable ..............................................
Interest Revenue ...............................................
30.00*
523.80**
1,200.00
36.00
Accounts Receivable .............................................
Accounts Payable...................................................
Office Expense (bank charges) .............................
Cash ..................................................................
253.20
72.00***
30.50
355.70
*Assumes sale was on account and not a cash sale.
**Assumes that the purchase of the equipment was recorded at its
proper price. If a straight cash purchase, then Equipment should be
credited instead of Accounts Payable.
7-68Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
***If a straight cash purchase, then Equipment should be debited instead
of Accounts Payable.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-69
*PROBLEM 7-14
(a)
HASELHOF INC.
Bank Reconciliation
November 30
Balance per bank statement, November 30 ..................
Add:
Cash on hand, not deposited ...................................
$56,274.20
1,915.40
58,189.60
Deduct:
Outstanding checks
#1224 ....................................................................
$ 1,635.29
#1230 ....................................................................
2,468.30
#1232 ....................................................................
2,125.15
#1233 ....................................................................
482.17
Correct cash balance, Nov. 30 .......................................
Balance per books, November 30 ..................................
Add:
Bond interest collected by bank ..............................
6,710.91
$51,478.69
$50,478.22*
1,400.00
51,878.22
Deduct:
Bank charges not recorded in books ......................
$
27.40
Customer’s check returned NSF ..............................
372.13
Correct cash balance, Nov. 30 .......................................
399.53
$51,478.69
*Computation of balance per books,
November 30
Balance per books, October 31 .................................
$ 41,847.85
Add receipts for November .......................................
173,523.91
215,371.76
Deduct disbursements for November .......................
164,893.54
Balance per books, November 30 ...........................
$ 50,478.22
0
7-70Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
*PROBLEM 7-14 (Continued)
(b)
November 30
Cash ...........................................................................
Interest Revenue ..............................................
1,400.00
November 30
Office Expense (bank charges) ................................
Cash ..................................................................
27.40
November 30
Accounts Receivable ................................................
Cash ..................................................................
372.13
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
1,400.00
27.40
372.13
(For Instructor Use Only)
7-71
*PROBLEM 7-15
(a)
The entries for the issuance of the note on January 1, 2014:
The present value of the note is: $1,200,000 X .68058 = $816,700
(Rounded by $4).
Botosan Company (Debtor):
Cash ........................................................................
816,700
Discount on Notes Payable ...................................
383,300
Notes Payable ...................................................
1,200,000
National Organization Bank (Creditor):
Notes Receivable....................................................
1,200,000
Discount on Notes Receivable .........................
Cash ...................................................................
383,300
816,700
(b) The amortization schedule for this note is:
SCHEDULE FOR INTEREST AND DISCOUNT AMORTIZATION—
EFFECTIVE-INTEREST METHOD
$1,200,000 Note Issued to Yield 8%
Date
1/1/14
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Total
Cash
Paid
$0
0
0
0
0
$0
Interest
Expense
$ 65,336*
70,563
76,208
82,305
88,888
$383,300
Discount
Amortized
$ 65,336
70,563
76,208
82,305
88,888
$383,300
Carrying
Amount of
Note
$ 816,700
882,036**
952,599
1,028,807
1,111,112
1,200,000
*$816,700 X 8% = $65,336.
**$816,700 + $65,336 = $882,036.
7-72Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
*PROBLEM 7-15 (Continued)
(c)
The note can be considered to be impaired only when it is probable
that, based on current information and events, National Organization
Bank will be unable to collect all amounts due (both principal and
interest) according to the contractual terms of the loan.
(d) The loss is computed as follows:
Carrying amount of loan (12/31/15) ................................
Less: Present value of $800,000 due
in 3 years at 8% ....................................................
Loss due to impairment ..................................................
a
$952,599a
635,064b
$317,535
See amortization schedule from answer (b) on page 7-62.
$800,000 X .79383 = $635,064.
b
December 31, 2015
National Organization Bank (Creditor):
Bad Debt Expense ...........................................
Allowance for Doubtful Accounts ............
317,535
317,535
Note: Botosan Company (Debtor) has no entry.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-73
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 7-1 (Time 10–15 minutes)
Purpose—to provide the student with the opportunity to discuss the deficiencies of the direct write-off
method, the justification for two allowance methods for estimating bad debts, and to explain the
accounting for the recoveries of accounts written off previously.
CA 7-2 (Time 15–20 minutes)
Purpose—to provide the student with the opportunity to discuss the accounting for cash discounts,
trade discounts, and the factoring of accounts receivable.
CA 7-3 (Time 25–30 minutes)
Purpose—to provide the student with the opportunity to discuss the advantages and disadvantages of
handling reporting problems related to the Allowance for Doubtful Accounts balance. Recommendations
must be made concerning whether some type of allowance approach should be employed, how collection
expenses should be handled, and finally, the appropriate accounting treatment for recoveries. A very
complete case which should elicit a good discussion of this issue.
CA 7-4 (Time 25–30 minutes)
Purpose—to provide the student the opportunity to discuss when interest revenue from a note receivable
is reported. In Part 2, the student is asked to contrast the estimation of bad debts based on credit sales
with that based on the balance in receivables, and to describe the reporting of the allowance account and
the bad debts expense.
CA 7-5 (Time 20–25 minutes)
Purpose—to provide the student with a discussion problem related to notes receivable sold without and
with recourse.
CA 7-6 (Time 20–30 minutes)
Purpose—to provide the student the opportunity to account for a zero-interest-bearing note is exchanged for a unique machine. The student must consider valuation, financial statement disclosure,
and factoring the note.
CA 7-7 (Time 25–30 minutes)
Purpose—to provide the student the opportunity to calculate interest revenue on an interest-bearing
note and a zero-interest-bearing note, and indicate how the notes should be reported on the balance
sheet. The student discusses how to account for collections on assigned accounts receivable and how
to account for factored accounts receivable.
CA 7-8 (Time 25–30 minutes)
Purpose—to provide the student with a case related to the imputation of interest. One company has
overstated its income by not imputing an interest element on the zero-interest-bearing note receivable
that it received in the transaction. We have presented a short analysis to indicate what the proper
solution should be. It is unlikely that the students will develop a journal entry with dollar amounts, but
they should be encouraged to do so.
CA 7-9 (Time 25–30 minutes)
Purpose—to provide the student with a case to analyze receivables irregularities, including a shortage.
This is a good writing assignment.
CA 7-10 (Time 25–30 minutes)
Purpose—to provide the student with a case to analyze ethical issues inherent in bad debt judgments.
7-74Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 7-1
(a) The direct write-off method overstates the trade accounts receivable on the balance sheet by
reporting them at more than their net realizable value. Furthermore, because the write-off often
occurs in a period after the revenues were generated, the direct write-off method does not match
bad debts expense with the revenues generated by sales in the same period.
(b) One allowance method estimates bad debts based on credit sales. The method focuses on the
income statement and attempts to match bad debts with the revenues generated by the sales in
the same period.
The other allowance method estimates bad debts based on the balance in the trade accounts
receivable account. The method focuses on the balance sheet and attempts to value the accounts
receivable at their net realizable value.
(c) The company should account for the collection of the specific accounts previously written off as
uncollectible as follows:


Reinstatement of accounts by debiting Accounts Receivable and crediting Allowance for
Doubtful Accounts.
Collection of accounts by debiting Cash and crediting Accounts Receivable.
CA 7-2
(a) 1. Kimmel should account for the sales discounts at the date of sale using the net method by
recording accounts receivable and sales revenue at the amount of sales less the sales
discounts available.
Revenues should be recorded at the cash-equivalent price at the date of sale. Under the net
method, the sale is recorded at an amount that represents the cash-equivalent price at the
date of exchange (sale).
2. There is no effect on Kimmel’s sales revenues when customers do not take the sales discounts.
Kimmel’s net income is increased by the amount of interest (discount) earned when customers
do not take the sales discounts.
(b) Trade discounts are neither recorded in the accounts nor reported in the financial statements.
Therefore, the amount recorded as sales revenues and accounts receivable is net of trade
discounts and represents the cash-equivalent price of the asset sold.
(c) To account for the accounts receivable factored on August 1, 2014, Kimmel should decrease
accounts receivable by the amount of accounts receivable factored, increase cash by the amount
received from the factor, and record a loss. Factoring of accounts receivable on a without recourse
basis is equivalent to a sale. The difference between the cash received and the carrying amount of
the receivables is a loss.
(d) Kimmel should report the face amount of the interest-bearing notes receivable and the related
interest receivable for the period from October 1 through December 31 on its balance sheet as
noncurrent assets. Both assets are due on September 30, 2016, which is more than one year from
the date of the balance sheet.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-75
CA 7-2 (Continued)
Kimmel should report interest revenue from the notes receivable on its income statement for the
year ended December 31, 2014. Interest revenue is equal to the amount accrued on the notes
receivable at the appropriate rate for three months.
Interest revenue is realized with the passage of time. Accordingly, interest revenue should be
accounted for as an element of income over the life of the notes receivable.
CA 7-3
(1) Allowances and charge-offs. Method (a) is recommended. In the case of this company which
has a large number of relatively small sales transactions, it is practicable to give effect currently to
the probable bad debt expense. Whenever practicable, it is advisable to accrue probable bad debt
charges and apply them in the accounting periods in which the related sales are credited. If the
percentage is based on actual long-run experience, the allowance balance is usually adequate to
bring the accounts receivable in the balance sheet to realizable values. However, the method does
not preclude a periodic review of the accounts receivable for the purpose of estimating probable
losses in relation to the allowance balance and adjustment for an inadequate or excessive
allowance. Therefore method (b) is technically not wrong, but perhaps could be used in conjunction
with method (a). Method (b) does not seem as appropriate here because of the probable large
number of accounts involved and therefore a percentage-of-sales basis should provide a better
“matching” of expenses with revenues.
(2) Collection expenses. Method (a) or (b) is recommended. In the case of this company, one strong
argument for method (a) is that it is advisable to have the Bad Debt Expense account show the full
amount of expense relating to efforts to collect and failure to collect balances receivable. On the
other hand, an argument can be made to debit the Allowance account on the theory that bad debts
(including related expenses) are established at the time the allowance is first established. As a
result, the allowance account already has anticipated these expenses and therefore as they occur
they should be charged against the allowance account. It should be noted that there is no “right
answer” to this question. It would seem that alternatives (c) and (d) are not good alternatives
because the expense is not identified with bad debts, which it should be.
(3) Recoveries. Method (c) is recommended. This method treats the recovery as a correction of a
previous write-off. It produces an allowance account that reflects the net experience with bad
debts. Method (a) might be acceptable if the provision for bad debts were based on experience
with losses without considering recoveries, but in this case it would be advisable to use one
account with a specific designation rather than the broad designation “other revenue.” As indicated
in the textbook, recoveries are usually handled by reestablishing the receivable and allowance
account and then payment recorded. Method (c) is basically that approach.
CA 7-4
Part 1
Since Wallace Company is a calendar-year company, six months of interest should be accrued on
12/31/14. The remaining interest revenue should be recognized on 6/30/15 when the note is collected.
The rationale for this treatment is: the accrual basis of accounting provides more useful information
than does the cash basis. Therefore, since interest accrues with the passage of time, interest earned
on Wallace’s note receivable should be recognized over the life of the note, regardless of when the
cash is received.
7-76Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 7-4 (Continued)
Part 2
(a) The use of the allowance method based on credit sales to estimate bad debts is consistent with the
expense recognition principle because bad debts arise from and are a function of making credit
sales. Therefore, bad debt expense for the current period should be matched with current credit
sales. This is an income statement approach because the balance in the allowance for doubtful
accounts is ignored when computing bad debt expense.
The allowance method based on the balance in accounts receivable is not consistent with the
expense recognition principle. This method attempts to value accounts receivable at the amount
expected to be collected. The method is facilitated by preparing an aging schedule of accounts
receivable and plugging bad debt expense with the adjustment necessary to bring the allowance
account to the required balance. Alternatively, the ending balance in accounts receivable can be
used to determine the required balance in the allowance account without preparing an aging
schedule by using a composite percentage. Bad debt expense is determined in the same manner
as when an aging schedule is used. However, neither of these approaches associates bad debt
expense with the period of sale, especially for sales made in the last month or two of the period.
(b) On Wallace’s balance sheet, the allowance for doubtful accounts is presented as a contra account
to accounts receivable with the resulting difference representing the net accounts receivable (i.e.,
their net realizable value). Bad debt expense would generally be included on Wallace’s income
statement with the other operating (selling/general and administrative) expenses for the period.
However, theoretical arguments can be made for (1) reducing sales revenue by the bad debts
adjustment in the same manner that sales returns and allowances and trade discounts are
considered reductions of the amount to be received from sales of products or (2) classifying the
bad debt expense as a financial expense.
CA 7-5
(a) The appropriate valuation basis of a note receivable at the date of sale is its discounted present
value of the future amounts receivable for principal and interest using the customer’s market rate
of interest, if known or determinable, at the date of the equipment’s sale.
(b) Corrs should increase the carrying amount of the note receivable by the effective-interest revenue
recognized for the period February 1 to May 1, 2014. Corrs should account for the sale of the note
receivable without recourse by increasing cash for the proceeds received, eliminating the carrying
amount of the note receivable, and recognizing a loss (gain) for the resulting difference.
This reporting is appropriate since the note’s carrying amount is correctly recorded at the date it
was sold and the sale of a note receivable without recourse has occurred. Thus the difference
between the cash received and the carrying amount of the note at the date it is sold is reported as
a loss (gain).
(c) 1. For notes receivable not sold, Corrs should recognize bad debt expense. The expense equals
the adjustment required to bring the balance of the allowance for doubtful accounts equal to
the estimated uncollectible amounts less the fair values of recoverable equipment.
2. For notes receivable sold with recourse, at the time of sale, Corrs would have recorded a
recourse liability. This liability measures the estimated bad debts at the time of the sale and
increases the loss on the sale.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-77
CA 7-6
(a) 1. It was not possible to determine the machine’s fair value directly, so the sales price of the
machine is reported at the note’s September 30, 2013 fair value. The note’s September 30,
2013 fair value equals the present value of the two installments discounted at the buyer’s
September 30, 2013 market rate of interest.
2. Rolen reports 2013 interest revenue determined by multiplying the note’s carrying amount at
September 30, 2013 times the buyer’s market rate of interest at the date of issue, times threetwelfths. Rolen should recognize that there is an interest factor implicit in the note, and this
interest is recognized with the passage of time. Therefore, interest revenue for 2013 should
include three months’ revenue. The rate used should be the market rate established by the
original present value, and this is applied to the carrying amount of the note.
(b) To report the sale of the note receivable with recourse, Rolen should decrease notes receivable by
the carrying amount of the note, increase cash by the amount received, record a recourse liability
for possible customer defaults (the recourse liability is reported on the balance sheet at 12/31/14)
and report the difference as a loss or gain as part of income from continuing operations.
(c) Rolen should decrease cash, increase notes (accounts) receivable past due for all payments
caused by the note’s dishonor and eliminate the recourse liability. The note (accounts) receivable
should be written down to its estimated recoverable amount (or an allowance for doubtful accounts
established), and a loss on uncollectible notes should be recorded for the excess of this difference
over the amount of the recourse liability previously recorded.
CA 7-7
(a) 1. For the interest-bearing note receivable, the interest revenue for 2014 should be determined by
multiplying the principal (face) amount of the note by the note’s rate of interest by one half (July 1,
2014 to December 31, 2014). Interest accrues with the passage of time, and it should be
accounted for as an element of revenue over the life of the note receivable.
2. For the zero-interest-bearing note receivable, the interest revenue for 2014 should be determined by multiplying the carrying value of the note by the prevailing rate of interest at the date
of the note by one third (September 1, 2014 to December 31, 2014). The carrying value of the
note at September 1, 2014 is the face amount discounted for two years at the prevailing interest
rate from the maturity date of August 31, 2016 back to the issuance date of September 1, 2014.
Interest, even if unstated, accrues with the passage of time, and it should be accounted for as an
element of revenue over the life of the note receivable.
(b) The interest-bearing note receivable should be reported at December 31, 2014 as a current asset
at its principal (face) amount.
The zero-interest-bearing note receivable should be reported at December 31, 2014 as a noncurrent asset at its face amount less the unamortized discount on the note at December 31, 2014.
(c) Because the trade accounts receivable are assigned, Moresan should account for the subsequent
collections on the assigned trade accounts receivable by debiting Cash and crediting Accounts
Receivable. The cash collected should then be remitted to Indigo Finance until the amount
advanced by Indigo is settled. The payments to Indigo Finance consist of both principal and interest
with interest computed at the rate of 8% on the balance outstanding.
7-78Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 7-7 (Continued)
(d) Because the trade accounts receivable were factored on a without recourse basis, the factor is
responsible for collection. On November 1, 2014, Moresan should credit Accounts Receivable for
the amount of trade accounts receivable factored, debit Cash for the amount received from the
factor, debit a Receivable from Factor for 5% of the trade accounts receivable factored, and debit
Loss on Sale of Receivables for 3% of the trade accounts receivable factored.
CA 7-8
The controller of Engone Company cannot justify the manner in which the company has accounted for
the transaction in terms of sound financial accounting principles.
Several problems are inherent in the sale of Henderson Enterprises stock to Bimini Inc. First, the issue
of whether an arm’s-length transaction has occurred may be raised. The controller stated that the stock
has not been marketable for the past six years. Thus, the recognition of revenue is highly questionable
in view of the limited market for the stock; i.e., has an exchange occurred?
Secondly, the collectibility of the note from Bimini is open to question. Bimini appears to have a liquidity
problem due to its current cash squeeze. The lack of assurance about collectibility raises the question
of whether revenue should be recognized.
Central to the transaction is the issue of imputed interest. If we assume that an arm’s-length exchange
has taken place, then the zero-interest-bearing feature masks the question of whether a gain, no gain
or loss, or a loss occurred.
For a gain to occur, the interest imputation must result in an interest rate of about 5% or less. To
illustrate:
Present value of an annuity of $1 at 5% for 10 years = 7.72173; thus the present value of ten
payments of $400,000 is $3,088,692. The cost of the investment is $3,000,000; thus, only an
$88,692 gain is recognized at 5%.
Selecting a more realistic interest rate (in spite of the controller’s ill-founded statements about “no cost”
money since he/she is ignoring the opportunity cost) of 8% finds the present value of the annuity of
$400,000 for ten periods equal to $2,684,032 ($400,000 X 6.71008). In this case a loss of $315,968
must be recognized as illustrated by the following journal entry:
Notes Receivable .................................................................................
Loss on Disposal of Investment ............................................................
Equity Investment (Henderson Stock) ....................................
Discount on Notes Receivable ...............................................
4,000,000
315,968
3,000,000
1,315,968
CA 7-9
To:
Mark Price, Branch Manager
From:
Accounting Major
Date:
October 3, 2014
Subject:
Discrepancy in the Accounts Receivable Account
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-79
CA 7-9 (Continued)
While performing a routine test on accounts receivable balances today, I discovered a $2,000
discrepancy. I believe that this matter deserves your immediate attention.
To compute the overage, I determined that the accounts receivable balance should have been based
on the amount of inventory which has been sold. When we opened for business this year, we
purchased $360,000 worth of merchandise inventory, and this morning, the balance in this account was
$90,000.
The $270,000 difference plus the 40% markup indicates that sales on account totaled $378,000
[$270,000 + ($270,000 X .40)] to date. I subtracted the payments of $188,000 made on account this
year and calculated the ending balance to be $190,000. However, the ledger shows a balance of
$192,000.
I realize that this situation is very sensitive and that we should not accuse any one individual without
further evidence. However, in order to protect the company’s assets, we must begin an immediate
investigation of this disparity.
Aside from me, the only other employee who has access to the accounts receivable ledger is Kelly
Collins, the receivables clerk. I will supervise Collins more closely in the future but suggest that we also
employ an auditor to check into this situation.
Note to Instructors: This situation could result from 1) Collins colluding with a customer, or 2) a
lack of segregation of duties where Collins is also involved with collections.
CA 7-10
(a)
(1) Steps to Improve
Accounts Receivable Situation
(2) Risks and Costs Involved
Establish more selective creditgranting policies, such as more
restrictive credit requirements or
more thorough credit investigations.
This policy could result in lost
sales and increased costs of credit
evaluation. The company may be
all but forced to adhere to the
prevailing credit-granting policies
of the industry.
Establish a more rigorous collection policy either through
external collection agencies or
by its own personnel.
This policy may offend current
customers and thus risk future
sales. Increased collection costs
could result from this policy.
Charge interest on overdue ac- This policy could result in lost
counts. Insist on cash on deliv- sales and increased administrative
ery (COD) or cash on order costs.
(COO) for new customers or
7-80Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
poor credit risks.
CA 7-10 (Continued)
(b) No, the controller should not be concerned with Marvin Company’s growth rate in estimating the
allowance. The accountant’s proper task is to make a reasonable estimate of bad debt expense. In
making the estimate, the controller should consider the previous year’s write-offs and also anticipate economic factors which might affect the company’s industry and influence Marvin’s current
write-off.
(c) Yes, the controller’s interest in disclosing financial information completely and fairly conflicts with
the president’s economic interest in manipulating income to avoid undesirable demands from the
parent company. Such a conflict of interest is an ethical dilemma. The controller must recognize
the dilemma, identify the alternatives, and decide what to do.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-81
FINANCIAL REPORTING PROBLEM
(a)
Under “Cash Equivalents” in its notes to the consolidated financial
statements, P&G indicates:
“Highly liquid investments with remaining stated maturities of
three months or less when purchased are considered cash
equivalents and recorded at cost.”
(b)
P&G has $2.768 billion in cash and cash equivalents. As disclosed in
the Consolidated Statement of Cash Flows, P&G indicates that in 2011
cash was used for capital expenditures ($3,306 million) and cash
dividends were paid ($5,767 million), and treasury stock was
purchased ($7,039).
(c)
As indicated in Note 1, the company’s products are sold primarily
through retail operations including mass merchandisers, grocery
stores, membership club stores, drug stores, department stores, salons
and high-frequency stores. In fact, in its segment note (Note 11), P&G
indicates that 15% of its sales in 2011 were to a single large
customer—Wal-Mart. Thus, to the extent that its customers have credit
profiles similar to Wal-Mart, it is reasonable that bad debt expense
might not be material.
7-82Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
COMPARATIVE ANALYSIS CASE
(a)
Cash and cash equivalents: ($ millions):
Coca-Cola, 12/31/11
$12,803
PepsiCo, 12/11/11
$4,067
Coca-Cola classifies cash equivalents as “marketable securities that
are highly liquid and have maturities of three months or less at the
date of purchase.”
PepsiCo classifies cash equivalents as “investments with original
maturities of three months or less which we do not intend to rollover
beyond three months.”
(b)
Accounts receivable (net):
Coca-Cola, 12/31/11
$4,920
PepsiCo, 12/31/11
$6,912
Allowance for doubtful accounts:
(c)
Coca-Cola, 12/31/11
PepsiCo, 12/25/11
Balance, $83
Percent of receivables, 1.69%
Balance, $157
Percent of receivables, 2.27%
Accounts Receivable turnover ratio and days outstanding for
receivables:
Coca-Cola
PepsiCo
$46,542
= 9.96 times
$4,920 + $4,430
2
365 ÷ 9.96 = 36.6 days
$66,504
$6,912 + $6,323
2
= 10.05 times
365 ÷ 10.05 = 36.3 days
PepsiCo’s turnover ratio is slightly higher, resulting in fewer days in
receivables. It is likely that these companies use similar receivables
management practices.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-83
FINANCIAL STATEMENT ANALYSIS CASE 1
(a)
Cash may consist of funds on deposit at the bank, negotiable instruments such as money orders, certified checks, cashier’s checks,
personal checks, bank drafts, and money market funds that provide
checking account privileges.
(b)
Cash equivalents are short-term, highly liquid investments that are
both (a) readily convertible to known amounts of cash, and (b) so near
their maturity that they present insignificant risk from changes in
interest rates. Generally, only investments with original maturities of
3 months or less qualify. Examples of cash equivalents are Treasury
bills, commercial paper, and money market funds.
(c)
A compensating balance is that portion of any cash deposit maintained by an enterprise which constitutes support for existing borrowing arrangements with a lending institution.
A compensating balance representing a legally restricted deposit held
against short-term borrowing arrangements should be stated separately
among cash and cash equivalent items. A restricted deposit held as a
compensating balance against long-term borrowing arrangements
should be separately classified as a noncurrent asset in either the
investments or other assets section.
(d)
Short-term investments are investments held temporarily in place of
cash which can be readily converted to cash when current financing
needs make such conversion desirable. Examples of short-term investments include stock, Treasury notes, and other short-term securities.
The major differences between cash equivalents and short-term
investments are (1) cash equivalents typically have shorter maturity
(less than three months) whereas short-term investments either have
a longer maturity (e.g., short-term bonds) or no maturity date (e.g.,
stock), and (2) cash equivalents are readily convertible to known
amounts of cash whereas a company may have a gain or loss when
selling its short-term investments.
7-84Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL STATEMENT ANALYSIS CASE 1 (Continued)
(e)
Occidental would record a loss of $30,000,000 as revealed in the
following entry to record the transaction:
Cash...................................................................................
345,000,000
Loss on Sale of Receivables............................................
30,000,000
Accounts Receivable .............................................360,000,000
Recourse Liability .................................................. 15,000,000
(f)
The transaction in (e) will decrease Occidental’s liquidity position.
Current assets decrease by $15,000,000 and current liabilities are
increased by the $15,000,000 (for the recourse liability).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-85
FINANCIAL STATEMENT ANALYSIS CASE 2
Part 1
(a)
Cash equivalents are short-term, highly liquid investments that can be
converted into specific amounts of cash. They include money market
funds, commercial paper, bank certificates of deposit, and Treasury
bills. Cash equivalents differ in that they are extremely liquid (that is,
easily turned into cash) and have very low risk of declining in value
while held.
(b)
(in millions)
(1) Current ratio
(2) Working capital
Microsoft
$74,918
$28,774
= 2.60
$74,918 – $28,774 = $46,144
Oracle
$39,174
$14,192
= 2.76
$39,174 – $14,192 = $24,982
While Oracle’s current ratio is slightly higher, Microsoft’s working
capital is significantly higher than Oracle’s. Based on these measures,
Microsoft is considered more liquid than Oracle.
(c)
Yes, a company can have too many liquid assets. Liquid assets earn
little or no return. Microsoft’s investors are accustomed to returns of
30% on their investment. Thus, Microsoft’s large amount of liquid assets
may eventually create a drag on its ability to meet investor expectations.
7-86Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL STATEMENT ANALYSIS CASE 2 (Continued)
Part 2
2011
(a)
Receivables Turnover
$69,943
= $69,943 = 5.0 times
($14,987 + $13,014)/2 $14,001
Or a collection period of 73 days (365 ÷ 5.0).
(b)
(c)
Bad Debt Expense ...................................................
Allowance for Doubtful Accounts .................
14
Allowance for Doubtful Accounts ..........................
Accounts Receivable .....................................
56
14
56
Accounts receivable is reduced by the amount of bad debts in the
allowance account. This makes the denominator of the turnover ratio
lower, resulting in a higher turnover ratio.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-87
ACCOUNTING, ANALYSIS, AND PRINCIPLES
ACCOUNTING
(a)
Accounts Receivable:
Beginning balance
$46,000
Credit sales during 2014
255,000
Collections during 2014
(228,000)
Charge-offs
(1,600)
Factored receivables
(10,000)
Ending balance
$61,400
Allowance for Doubtful Accounts:
Beginning balance
$550
Charge-offs
(1,600)
2014 Bad Debt Expense*
2,585
Ending balance
$1,535
*2014 Bad Debt Expense is the amount needed to make the ending
balance in the Allowance for Doubtful Accounts equal to $1,535
($61,400 X 2.5%). In other words, $550 – $1,600 + Bad Debt Expense =
$1,535. Therefore, Bad Debt Expense = $1,535 + $1,600 – $550 =
$2,585.
(b)
Current assets section of December 31, 2014 The Flatiron Pub’s
balance sheet:
Cash
Accounts receivable (net of $1,535
allowance for uncollectibles)
Interest receivable
Due from factor
Note receivable
Postage stamps
Other
7-88Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 5,575
59,865
50
200
5,000
110
3,925
(For Instructor Use Only)
Ahmed Nawfal
Total current assets
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$74,725
(For Instructor Use Only)
7-89
ACCOUNTING, ANALYSIS, AND PRINCIPLES (continued)
Calculations:
Cash = $1,575 + $4,000 = $5,575
Accounts receivable, net = $61,400 – $1,535 = $59,865
Interest receivable = ($5,000 X 0.12)(1/12) = $50
Due from factor = ($10,000 X 0.02) = $200
ANALYSIS
(a)
2013 current ratio = ($2,000 + $46,000 - $550 + $8,500) ÷ $37,000 = 1.51
2014 current ratio = $74,725 ÷ ($44,600 + $400) = 1.66
Accounts
Receivable
Turnover
$255,000
$255,000 = 4.84 times
=
[($46,000 – $550) + 59,865]
$52,658
2
Both the current ratio and the accounts receivable turnover ratio
suggest that Flatiron’s liquidity has improved relative to 2013.
(b)
With a secured borrowing, the receivables would stay on The Flatiron
Pub’s books and a note payable would be recorded. This would
reduce both the current ratio and accounts receivable turnover ratio.
PRINCIPLES
The expense recognition principle requires that bad debt expense be
recorded in the period of the sale. Otherwise, income will be overstated by
the amount of bad debt expense. In addition, reporting the receivables net
of the allowance provides a more representationally faithful reporting (at
net realizable value) of this asset.
7-90Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL RESEARCH: FASB CODIFICATION
(a) Transfer of receivables is addressed in FASB ASC 860-10: Codification
String: Broad Transactions > 860 Transfers and Servicing > 10 Overall >
05 Background >
The predecessor literature can be accessed by clicking on “PrinterFriendly with sources” and the retrieve the previous standard at
www.fasb.org/st/
The previous statement that addressed transfers of receivables:
Statement of Financial Accounting Standards No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (September 2000).
(b) The objectives associated with transfers: (FASB ASC 860-10-10)
10-1 An objective in accounting for transfers of financial assets is for
each entity that is a party to the transaction to recognize only
assets it controls and liabilities it has incurred, to derecognize
assets only when control has been surrendered, and to
derecognize liabilities only when they have been extinguished.
For example, if a transferor sells financial assets it owns and at
the same time writes an at-the-money put option (such as a
guarantee or recourse obligation) on those assets, it should
recognize the put obligation in the same manner as would another
unrelated entity that writes an identical put option on assets it
never owned. However, certain agreements to repurchase or
redeem transferred assets maintain effective control over those
assets and should therefore be accounted for differently than
agreements to acquire assets never owned.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-91
PROFESSIONAL RESEARCH: FASB CODIFICATION (Continued)
(c)
Definitions: (Codification String: Broad Transaction > 860 Transfers
and Servicing > 10 Overall > 20 Glossary)
Transfer
The conveyance of a noncash financial asset by and to someone other
than the issuer of that financial asset.
A transfer includes the following:
a. Selling a receivable
b. Putting a receivable into a securitization trust
c. Posting a receivable as collateral.
A transfer excludes the following:
a. The origination of a receivable
b. Settlement of a receivable
c. The restructuring of a receivable into a security in troubled debt
restructuring.
Recourse
The right of a transferee of receivables to receive payment from the
transferor of those receivables for any of the following:
a. Failure of debtors to pay when due
b. The effects of prepayments
c. Adjustments resulting from defects in the eligibility of the
transferred receivables.
Collateral
Personal or real property in which a security interest has been given.
7-92Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL RESEARCH: FASB CODIFICATION (Continued)
(d) Other examples (besides recourse and collateral) that qualify as
continuing involvement:
05-4 The following are examples of continuing involvement discussed
in this Topic: (Codification String: Broad Transactions > 860
Transfers and Servicing > 10 Overall > 05 Background)
a. Recourse
b. Servicing
c. Agreements to reacquire transferred assets
d. Options written or held
e. Pledges of collateral.
Transfers of financial assets with continuing involvement raise issues
about the circumstances under which the transfers should be
considered as sales of all or part of the assets or as secured
borrowings and about how transferors and transferees should account
for sales and secured borrowings. This Topic establishes standards
for resolving those issues.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-93
PROFESSIONAL SIMULATION
Measurement
Trade Accounts Receivable
Beginning balance
$ 40,000
Credit sales during 2014
550,000
Collections during 2014
(500,000)
Change-offs
(2,300)
Factored receivables
(47,700)
Ending balance
$ 40,000
Allowance for Doubtful Accounts
Beginning balance
$ 5,500
Charge-offs
(2,300)
2014 provision
(0.8% X $550,000)
4,400
Ending balance
$ 7,600
Financial Statements
Current assets
Cash* ....................................................................
Trade accounts receivable .................................
Allowance for doubtful accounts ...................
Customer receivable (post-dated checks).........
Interest receivable** ............................................
Due from factor*** ...............................................
Notes receivable ..................................................
Inventory ..............................................................
Prepaid postage ..................................................
Total current assets ........................................
$ 12,900
$40,000
(7,600)
32,400
2,000
2,750
2,862
50,000
80,000
100
$183,012
*($15,000 – $2,000 – $100)
**($50,000 X 11% X 1/2)
***($47,700 X 6%)
Analysis
2013
Current ratio = ($139,500* ÷ $80,000) = 1.74
Accounts Receivable turnover =
10.37 times
2014
($183,012 ÷ $86,000)
$550,000
= 2.13
= 16.4 times
($34,500 + $32,400)/2
*($20,000 + $40,000 – $5,500 + $85,000)
Both ratios indicate that Horn’s liquidity has improved relative to the prior year.
7-94Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL SIMULATION (Continued)
Explanation
With a secured borrowing, the receivables would stay on Horn’s books and
Horn would record a note payable. This would reduce both the current ratio
and the accounts receivable turnover ratio.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
7-95
IFRS CONCEPTS AND APPLICATION
IFRS7-1
A receivable is considered impaired when a loss event indicates a negative
impact on the estimated future cash flows to be received from the
customer. The IASB requires that the impairment assessment should be
performed as follows.
1. Receivables that are individually significant are considered for impairment separately. If impaired, the company recognizes then impairment.
Receivables that are not individually significant may also be assessed
individually, but it is not necessary to do so.
2. Any receivable individually assessed that is not considered impaired
is included with a group of assets with similar credit-risk characteristics
and collectively assessed for impairment.
3. Any receivables not individually assessed are collectively assessed
for impairment
IFRS7-2
Both the IASB and the FASB have indicated that they believe that financial
statements would be more transparent and understandable if companies
recorded and reported all financial instruments at fair value. That said, in
IFRS 9, which was issued in 2009, the IASB created a split model, where
some financial instruments are recorded at fair value but other financial
assets, such as loans and receivables, can be accounted for at amortized
cost if certain criteria are met. Critics say that this can result in two
companies with identical securities accounting for those securities in
different ways. A proposal by the FASB would require that nearly all
financial instruments, including loans and receivables, be accounted for at
fair value.
7-96Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
IFRS7-3
(a)
Date
12/31/14
12/31/15
12/31/16
Note Amortization Schedule
(Before Impairment)
Cash
Interest
Increase in
Received
Revenue
Carrying
(0%)
(10%)
Amount
$0
0
$6,209
6,830
$6,209
6,830
Computation of impairment loss:
Carrying amount of investment (12/31/16)
Less: Present value of $75,000 due in 3 years
At 10% ($75,000 X 0.75132)
Loss due impairment
(a)
$75,131
56,349
$18,782
December 31, 2016
Bad Debt Expense ....................................................
Allowance for Doubtful Accounts ..................
(b)
Carrying
Amount of
Note
$62,092
68,301
75,131
18,782
18,782
March 31, 2017
Allowance for Doubtful Accounts ...........................
Bad Debt Expense ...........................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
18,782
18,782
(For Instructor Use Only)
7-97
IFRS7-4
(a)
IAS 39, paragraphs 18-28 addresses derecognition of financial assets.
(b)
According to paragraph 19, “An entity transfers a financial asset if, and
only if, it either:
(c)
a.
transfers the contractual rights to receive the cash flows of the
financial asset; or
b.
retains the contractual rights to receive the cash flows of the
financial asset, but assumes a contractual obligation to pay the
cash flows to one or more recipients in an arrangement that
meets the conditions in paragraphs 19.”
The amortised cost of a financial asset or financial liability is the
amount at which the financial asset or financial liability is measured
at initial recognition minus principal repayments, plus or minus the
cumulative amortisation using the effective interest method of any
difference between that initial amount and the maturity amount, and
minus any reduction (directly or through the use of an allowance
account) for impairment or uncollectibility.
IFRS7-5
(a)
M&S’s cash and cash equivalents include short-term deposits with
banks and other financial institutions, with an initial maturity of three
months or less and credit card payment received within 48 hours.
(b)
As of March 31, 2012, M&S had 196.1 million pounds in cash and cash
equivalents. The major uses of cash were purchase of property, plant
and equipment, redemption of medium term notes, and equity
dividends paid.
(c)
M&S reports trade receivables of 115.8 million pounds and 114.6
million pounds (net) in 2012. M&S has trade receivables of 2.5 million
pounds that were past due but not impaired.
7-98Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CHAPTER 8
Valuation of Inventories: A Cost-Basis Approach
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1, 2, 3, 5
1.
Inventory accounts;
1, 2, 3, 4,
determining quantities,
5, 6, 8, 9
costs, and items to be
included in inventory;
the inventory equation;
balance sheet disclosure.
1, 3
1, 2, 3,
4, 5, 6
1, 2, 3
2.
Perpetual vs. periodic.
2
9, 13,
17, 20
4, 5, 6
3.
Recording of discounts.
10, 11
7, 8
3
4.
Inventory errors.
7
4
5, 10,
11, 12
2
5.
Flow assumptions.
12, 13, 16,
18, 20
5, 6, 7
9, 13, 14,
15, 16, 17,
18, 19, 20,
21, 22
1, 4, 5,
6, 7
5, 6, 7, 8, 11
6.
Inventory accounting
changes.
18
7
6, 7, 10
7.
Dollar-value LIFO
methods.
22, 23, 24,
25, 26
1, 8, 9,
10, 11
8, 9
14, 15, 17,
18, 19
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
8, 9
Kieso, Intermediate Accounting, 15/e, Solutions Manual
4
(For Instructor Use Only) 8-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1.
Identify major classifications of inventory.
1
1
2.
Distinguish between perpetual and
periodic inventory systems.
3
2
4, 9, 13,
17
4, 5, 6
3.
Determine the goods included in
inventory and
the effects of inventory errors on the
financial statements.
4, 5, 6, 7
4
5, 10, 11,
12
2
CA8-3,
CA8-5
4.
Understand the items to include as
inventory cost.
8
3
1, 2, 3, 4,
5, 6, 7, 8
1, 2, 3
CA8-1,
CA8-2,
CA8-4
5.
Describe and compare the cost flow
assumptions used to account for
inventories.
9, 10, 11,
12
5, 6, 7
9, 13, 14,
1, 4, 5, 6,
15, 16, 17, 7
18, 19, 20,
22
CA8-6,
CA8-7,
CA8-10
6.
Explain the significance and use of a
LIFO reserve.
13, 18
21
CA8-11
7.
Understand the effect of LIFO
liquidations.
20
8.
Explain the dollar-value LIFO method.
14, 15, 17,
19
22, 23, 24, 1, 8, 9,
25, 26
10, 11
CA8-9
9.
Identify the major advantages and
disadvantages
of LIFO.
16
10.
Understand why companies select given
inventory methods.
2
8-2Copyright © 2013 John Wiley & Sons, Inc.
8, 9
Kieso, Intermediate Accounting, 15/e, Solutions Manual
CA8-6,
CA8-8,
CA8-10
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E8-1
E8-2
E8-3
E8-4
E8-5
E8-6
E8-7
E8-8
E8-9
E8-10
E8-11
E8-12
E8-13
E8-14
E8-15
E8-16
E8-17
E8-18
E8-19
E8-20
E8-21
E8-22
E8-23
E8-24
E8-25
E8-26
Inventoriable costs.
Inventoriable costs.
Inventoriable costs.
Inventoriable costs—perpetual.
Inventoriable costs—error adjustments.
Determining merchandise amounts—periodic.
Purchases recorded net.
Purchases recorded, gross method.
Periodic versus perpetual entries.
Inventory errors—periodic.
Inventory errors.
Inventory errors.
FIFO and LIFO—periodic and perpetual.
FIFO, LIFO and average-cost determination.
FIFO, LIFO, average-cost inventory.
Compute FIFO, LIFO, average-cost—periodic.
FIFO and LIFO—periodic and perpetual.
FIFO and LIFO; income statement presentation.
FIFO and LIFO effects.
FIFO and LIFO—periodic.
LIFO effect.
Alternate inventory methods—comprehensive.
Dollar-value LIFO.
Dollar-value LIFO.
Dollar-value LIFO.
Dollar-value LIFO.
Moderate
Moderate
Simple
Simple
Moderate
Simple
Simple
Simple
Moderate
Simple
Simple
Moderate
Moderate
Moderate
Moderate
Moderate
Simple
Simple
Moderate
Simple
Moderate
Moderate
Simple
Simple
Moderate
Moderate
15–20
10–15
10–15
10–15
15–20
10–20
10–15
20–25
15–25
10–15
10–15
15–20
15–20
20–25
15–20
15–20
10–15
15–20
20–25
10–15
10–15
25–30
5–10
15–20
20–25
15–20
P8-1
P8-2
P8-3
P8-4
P8-5
P8-6
Various inventory issues.
Inventory adjustments.
Purchases recorded gross and net.
Compute FIFO, LIFO, and average-cost.
Compute FIFO, LIFO, and average-cost.
Compute FIFO, LIFO, and average-cost—periodic
and perpetual.
Financial statement effects of FIFO and LIFO.
Dollar-value LIFO.
Internal indexes—dollar-value LIFO.
Internal indexes—dollar-value LIFO.
Dollar-value LIFO.
Moderate
Moderate
Simple
Complex
Complex
Moderate
30–40
25–35
20–25
40–55
40–55
25–35
Moderate
Moderate
Moderate
Complex
Moderate
30–40
30–40
25–35
30–35
40–50
P8-7
P8-8
P8-9
P8-10
P8-11
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-3
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
CA8-1
CA8-2
CA8-3
CA8-4
CA8-5
CA8-6
CA8-7
CA8-8
CA8-9
CA8-10
CA8-11
Inventoriable costs.
Inventoriable costs.
Inventoriable costs.
Accounting treatment of purchase discounts.
General inventory issues.
LIFO inventory advantages.
Average-cost, FIFO, and LIFO.
LIFO application and advantages.
Dollar-value LIFO issues.
FIFO and LIFO.
LIFO Choices
Moderate
Moderate
Moderate
Simple
Moderate
Simple
Simple
Moderate
Moderate
Moderate
Moderate
8-4Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Time
(minutes)
15–20
15–25
25–35
15–25
20–25
15–20
15–20
25–30
25–30
30–35
20–25
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO CODIFICATION EXERCISES
CE8-1
(a)
Inventory is the aggregate of those items of tangible personal property that have any of the
following characteristics:
a. Held for sale in the ordinary of business.
b. To process of production for such sale.
c. To be currently consumed in the production of goods or services to be available for sale.
The term inventory embraces goods awaiting sale (the merchandise of a trading concern and the
finished goods of a manufacturer), goods in the course of production (work in process), and goods
to be consumed directly or indirectly in production (raw materials and supplies). This definition of
inventories excludes long-term assets subject to depreciation accounting, or goods which, when
put into use, will be so classified. The fact that a depreciable asset is retired from regular use and
held for sale does not indicate that the item should be classified as part of the inventory. Raw
materials and supplies purchased for production may be used or consumed for the construction
of long-term assets or other purposes not related to production, but the fact that inventory items
representing a small portion of the total may not be absorbed ultimately in the production process
does not require separate classification. By trade practice, operating materials and supplies of
certain types of entities such as oil producers are usually treated as inventory.
(b)
A customer is a reseller or a consumer, either an individual or a business that purchases a
vendor’s products or services for end use rather than for resale. This definition is consistent with
paragraph 280-10-50-42, which states that a group of entities known to a reporting entity to be
under common control shall be considered as a single customer, and the federal government, a
state government, a local government (for example, a country or municipality), or a foreign
government each shall be considered as a single customer.
(c)
Customer includes any purchaser of the vendor’s products at any point along the distribution
chain, regardless of whether the purchaser acquires the vendor’s products directly or indirectly
(for example, from a distributor) from the vendor. For example, a vendor may sell its products to a
distributor who in turn resells the products to a retailer. In that example, the retailer—not the
distributor—is a customer of the vendor.
(d)
A product financing arrangement is a transaction in which an entity sells and agrees to
repurchase inventory with the repurchase price equal to the original sale price plus carrying and
financing costs, or other similar transactions.
CE8-2
According FASB ASC 605-45-45-19 through 21 [Shipping and Handling Fees and Costs]:
45-19 Many sellers charge customers for shipping and handling in amounts in amounts that exceed
the related costs incurred. The components of shipping and handling costs, and the
determination of the amounts billed to customers for shipping and handling, may differ from
entity to entity. Some entities define shipping costs and handling costs as only those costs
incurred for a third-party shipper to transport products to the customer. Other entities include as
shipping and handling costs a portion of internal costs, for example, salaries and overhead
related to the activities to prepare goods for shipment. In addition, some entities charge
customers only for amounts that are a direct reimbursement for shipping and, if discernible,
direct incremental handling costs; however, many other entities charge customers for shipping
and handling in amounts that are not a direct pass-through of costs.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-5
CE8-2 (Continued)
45-20 For those entities that determine under the indicators listed in paragraphs 605-45-45-4 through
45-18 that shipping and handling fees shall be reported gross, all amounts billed to a customer
in a sale transaction related to shipping and handling represent revenues earned for the goods
provided and shall be classified as revenue.
45-21 Also, shipping and handling costs shall not be deducted from revenues (that is, netted against
shipping and handling revenues).
CE8-3
FASB ASC 330-10-35-1 and 15 with respect to adjustments to Lower of Cost or Market:
35-1
A departure from the cost basis of pricing the inventory is required when the utility of the goods
is no longer as great as their cost. Where there is evidence that the utility of goods, in their
disposal in the ordinary course of business, will be less than cost, whether due to physical
deterioration, obsolescence, changes in price levels, or other causes, the difference shall be
recognized as a loss of the current period. This is generally accomplished by stating such
goods at a lower level commonly designated as market.
With respect to Stating Inventories Above Cost:
35-15 Only in exceptional cases may inventories properly be stated above cost. For example,
precious metals having a fixed monetary value with no substantial cost of marketing may be
stated at such monetary value; any other exceptions must be justifiable by inability to determine
appropriate approximate costs, immediate marketability at quoted market price, and the
characteristic of unit interchangeability.
CE8-4
FASB ASC 330-10-S99-3 (SAB Topic 11.F, LIFO Liquidations) The following is the text of SAB
Topic 11.F, LIFO Liquidations.
Facts: Registrant on LIFO basis of accounting liquidates a substantial portion of its LIFO inventory and
as a result includes a material amount of income in its income statement which would not have been
recorded had the inventory liquidation not taken place.
Question: Is disclosure required of the amount of income realized as a result of the inventory liquidation?
Interpretive Response: Yes. Such disclosure would be required in order to make the financial
statements not misleading. Disclosure may be made either in a footnote or parenthetically on the face
of the income statement.
8-6Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ANSWERS TO QUESTIONS
1. In a retailing concern, inventory normally consists of only one category that is the product awaiting
resale. In a manufacturing company, inventories consist of raw materials, work in process, and
finished goods. Sometimes a manufacturing or factory supplies inventory account is also included.
2. (a) Inventories are unexpired costs and represent future benefits to the owner. A statement of
financial position includes a listing of all unexpired costs (assets) at a specific point in time.
Because inventories are assets owned at the specific point in time for which a statement of
financial position is prepared, they must be included in order that the owners’ financial
position will be presented fairly.
(b) Beginning and ending inventories are included in the computation of net income only for the
purpose of arriving at the cost of goods sold during the period of time covered by the statement. Goods included in the beginning inventory which are no longer on hand are expired costs
to be matched against revenues recognized during the period. Goods included in the ending
inventory are unexpired costs to be carried forward to a future period, rather than expensed.
3. In a perpetual inventory system, data are available at any time on the quantity and dollar amount
of each item of material or type of merchandise on hand. A physical inventory is a physical count
of inventory on hand at a point in time. In a periodic system, the inventory is periodically counted
(at least once a year) but that up-to-date records are not necessarily maintained. Discrepancies
often occur between the physical count and the perpetual records because of clerical errors, theft,
waste, misplacement of goods, etc.
4. No, Mishima, Inc. should not report this amount on its balance sheet. As consignee, it does not
own this merchandise and therefore it is inappropriate for it to recognize this merchandise as part
of its inventory.
5. Product financing arrangements are essentially off-balance-sheet financing devices. These arrangements make it appear that a company has sold its inventory or never taken title to it so they can
keep loans off their balance sheet. A product financing arrangement should not be recorded as a
sale. Rather, the inventory and related liability should be reported on the balance sheet.
6. (a)
(b)
(c)
(d)
(e)
(f)
Inventory.
Not shown, possibly in a note to the financial statements if material.
Inventory.
Inventory, separately disclosed as raw materials.
Not shown, possibly a note to the financial statements.
Inventory or manufacturing supplies.
7. This omission would have no effect upon the net income for the year, since the purchases and the
ending inventory are understated in the same amount. With respect to financial position, both the
inventory and the accounts payable would be understated. Materiality would be a factor in
determining whether an adjustment for this item should be made as omission of a large item would
distort the amount of current assets and the amount of current liabilities. It, therefore, might
influence the current ratio to a considerable extent.
8. Cost, which has been defined generally as the price paid or consideration given to acquire an
asset, is the primary basis for accounting for inventories. As applied to inventories, cost means the
sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to
its existing condition and location. These applicable expenditures and charges include all acquisition and production costs but exclude all selling expenses and that portion of general and adminis-
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-7
trative expenses not clearly related to production. Freight charges applicable to the product are
considered a cost of the goods.
8-8Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 8 (Continued)
9. By their nature, product costs “attach” to the inventory and are recorded in the inventory account.
These costs are directly connected with the bringing of goods to the place of business of the buyer
and converting such goods to a salable condition. Such charges would include freight charges on
goods purchased, other direct costs of acquisition, and labor and other production costs incurred
in processing the goods up to the time of sale.
Period costs are not considered to be directly related to the acquisition or production of goods and
therefore are not considered to be a part of inventories.
Conceptually, these expenses are as much a cost of the product as the initial purchase price and
related freight charges attached to the product. While selling expenses are generally considered
as more directly related to the cost of goods sold than to the unsold inventory, in most cases,
though, the costs, especially administrative expenses, are so unrelated or indirectly related to the
immediate production process that any allocation is purely arbitrary.
Interest costs are considered a cost of financing and are generally expensed as incurred, when
related to getting inventories ready for sale.
10. Cash discounts (purchase discounts) should not be accounted for as financial income when payments are made. Income should be recognized when the earning process is complete (when the
company sells the inventory). Furthermore, a company does not earn revenue from purchasing
goods. Cash discounts should be considered as a reduction in the cost of the items purchased.
11. $60.00, $63.00, $61.80. (Freight-In not included for discount.)
12. Arguments for the specific identification method are as follows:
(1) It provides an accurate and ideal matching of costs and revenues because the cost is specifically identified with the sales price.
(2) The method is realistic and objective since it adheres to the actual physical flow of goods
rather than an artificial flow of costs.
(3) Inventory is valued at actual cost instead of an assumed cost.
Arguments against the specific identification method include the following:
(1) The cost of using it restricts its use to goods of high unit value.
(2) The method is impractical for manufacturing processes or cases in which units are commingled and identity lost.
(3) It allows an artificial determination of income by permitting arbitrary selection of the items to
be sold from a homogeneous group.
(4) It may not be a meaningful method of assigning costs in periods of changing price levels.
13. The first-in, first-out method approximates the specific identification method when the physical flow
of goods is on a FIFO basis. When the goods are subject to spoilage or deterioration, FIFO is
particularly appropriate. In comparison to the specific identification method, an attractive aspect of
FIFO is the elimination of the danger of artificial determination of income by the selection of
advantageously priced items to be sold. The basic assumption is that costs should be charged in
the order in which they are incurred. As a result, the inventories are stated at the latest costs.
Where the inventory is consumed and valued in the FIFO manner, there is no accounting recognition
of unrealized gain or loss. A criticism of the FIFO method is that it maximizes the effects of price
fluctuations upon reported income because current revenue is matched with the oldest costs which are
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-9
Questions Chapter 8 (Continued)
probably least similar to current replacement costs. On the other hand, this method produces a
balance sheet value for the asset close to current replacement costs. It is claimed that FIFO is
deceptive when used in a period of rising prices because the reported income is not fully available
since a part of it must be used to replace inventory at higher cost.
The results achieved by the average-cost method resemble those of the specific identification
method where items are chosen at random or there is a rapid inventory turnover. Compared with
the specific identification method, the average-cost method has the advantage that the goods
need not be individually identified; therefore accounting is not so costly and the method can be
applied to fungible goods. The average-cost method is also appropriate when there is no marked
trend in price changes. In opposition, it is argued that the method is illogical. Since it assumes that
all sales are made proportionally from all purchases and that inventories will always include units
from the first purchases, it is argued that the method is illogical because it is contrary to the
chronological flow of goods. In addition, in periods of price changes there is a lag between current
costs and costs assigned to income or to the valuation of inventories.
If it is assumed that actual cost is the appropriate method of valuing inventories, last-in, first-out is
not theoretically correct. In general, LIFO is directly adverse to the specific identification method
because the goods are not valued in accordance with their usual physical flow. An exception is the
application of LIFO to piled coal or ores which are more or less consumed in a LIFO manner.
Proponents argue that LIFO provides a better matching of current costs and revenues.
During periods of sharp price movements, LIFO has a stabilizing effect upon reported income
figures because it eliminates paper income and losses on inventory and smoothes the impact of
income taxes. LIFO opponents object to the method principally because the inventory valuation
reported in the balance sheet could be seriously misleading. The profit figures can be artificially
influenced by management through contracting or expanding inventory quantities. Temporary
involuntary depletion of LIFO inventories would distort current income by the previously
unrecognized price gains or losses applicable to the inventory reduction.
14. A company may obtain a price index from an outside source (external index)—the government, a
trade association, an exchange—or by computing its own index (internal index) using the double
extension method. Under the double extension method the ending inventory is priced at both
base-year costs and at current-year costs, with the total current cost divided by the total base cost
to obtain the current year index.
15. Under the double extension method, LIFO inventory is priced at both base-year costs and currentyear costs. The total current-year cost of the inventory is divided by the total base-year cost to
obtain the current-year index.
The index for the LIFO pool consisting of product A and product B is computed as follows:
Base-Year Cost
Product
Units
Unit
Total
A
25,500
$10.20
$260,100
B
10,350
$37.00
382,950
December 31, 2014 inventory
$643,050
Current-Year Cost
Base-Year Cost
=
$1,007,460
$643,050
8-10Copyright © 2013 John Wiley & Sons, Inc.
Current-Year Cost
Unit
Total
$21.00
$ 535,500
$45.60
471,960
$1,007,460
= 156.67, index at 12/31/14.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Questions Chapter 8 (Continued)
16. The LIFO method results in a smaller net income because later costs, which are higher than
earlier costs, are matched against revenue. Conversely, in a period of falling prices, the LIFO
method would result in a higher net income because later costs in this case would be lower than
earlier costs, and these later costs would be matched against revenue.
17. The dollar-value method uses dollars instead of units to measure increments, or reductions in a
LIFO inventory. After converting the closing inventory to the same price level as the opening
inventory, the increases in inventories, priced at base-year costs, is converted to the current price
level and added to the opening inventory. Any decrease is subtracted at base-year costs to
determine the ending inventory.
The principal advantage is that it requires less record-keeping. It is not necessary to keep records
or make calculations of opening and closing quantities of individual items. Also, the use of a base
inventory amount gives greater flexibility in the makeup of the base and eliminates many detailed
calculations.
The unit LIFO inventory costing method is applied to each type of item in an inventory. Any type of
item removed from the inventory base (e.g., magnets) and replaced by another type (e.g., coils)
will cause the old cost (magnets) to be removed from the base and to be replaced by the more
current cost of the other item (coils).
The dollar-value LIFO costing method treats the inventory base as being composed of a base of
cost in dollars rather than of units. Therefore a change in the composition of the inventory (less
magnets and more coils) will not change the cost of inventory base so long as the amount of the
inventory stated in base-year dollars does not change.
18. (a) LIFO layer—a LIFO layer (increment) is formed when the ending inventory at base-year prices
exceeds the beginning inventory at base-year prices.
(b) LIFO reserve—the difference between the inventory method used for internal purposes
and LIFO.
(c)
19.
LIFO effect—the change in the LIFO reserve (Allowance to Reduce Inventory to LIFO) from
one period to the next.
December 31, 2014 inventory at December 31, 2013 prices, $1,053,000 ÷ 1.08 ........... $975,000
Less: Inventory, December 31, 2013 ............................................................................ 800,000
Increment added during 2014 at base prices ................................................................. $175,000
Increment added during 2014 at December 31, 2014 prices, $175,000 X 1.08 .............. $189,000
Add: Inventory at December 31, 2013 ............................................................................ 800,000
Inventory, December 31, 2014, under dollar-value LIFO method ................................... $989,000
20. Phantom inventory profits occur when the inventory costs matched against sales are less than the
replacement cost of the inventory. The cost of goods sold therefore is understated and profit is
considered overstated. Phantom profits are said to occur when FIFO is used during periods of
rising prices.
High inventory profits through involuntary liquidation occur if a company is forced to reduce its
LIFO base or layers. If the base or layers of old costs are eliminated, strange results can occur
because old, irrelevant costs can be matched against current revenues. A distortion in reported
income for a given period may result, as well as consequences that are detrimental from an
income tax point of view.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-11
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8-1
RIVERA COMPANY
Balance Sheet (Partial)
December 31
Current assets
Cash ...................................................................
Receivables (net) ...............................................
Inventories
Finished goods ..........................................
Work in process ........................................
Raw materials ............................................
Prepaid insurance .............................................
Total current assets ..................................
$ 190,000
400,000
$170,000
200,000
335,000
705,000
41,000
$1,336,000
BRIEF EXERCISE 8-2
Inventory (150 X $34).......................................................
Accounts Payable ..................................................
5,100
Accounts Payable (6 X $34) ............................................
Inventory .................................................................
204
Accounts Receivable (125 X $50) ...................................
Sales........................................................................
6,250
Cost of Goods Sold (125 X $34)......................................
Inventory .................................................................
4,250
5,100
204
6,250
4,250
BRIEF EXERCISE 8-3
December 31 inventory per physical count ...........................
Goods-in-transit purchased FOB shipping point ..................
Goods-in-transit sold FOB destination ..................................
December 31 inventory ..................................................
8-12Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 200,000
25,000
22,000
$ 247,000
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 8-4
Cost of goods sold as reported..............................................
Overstatement of 12/31/13 inventory .....................................
Overstatement of 12/31/14 inventory .....................................
Corrected cost of goods sold........................................
$1,400,000
(110,000)
35,000
$1,325,000
12/31/14 retained earnings as reported .................................
Overstatement of 12/31/14 inventory .....................................
Corrected 12/31/14 retained earnings ...........................
$5,200,000
(35,000)
$5,165,000
BRIEF EXERCISE 8-5
Ending inventory 400 X $11.85 =
$11,850 = $ 11.85
1,000
$ 4,740
Cost of goods available for sale
Deduct ending inventory
Cost of goods sold (600 X $11.85)
$11,850
4,740
$ 7,110
Weighted average cost per unit
BRIEF EXERCISE 8-6
April 23
April 15
Ending inventory
350 X $13 = $ 4,550
50 X $12 =
600
$ 5,150
Cost of goods available for sale
Deduct ending inventory
Cost of goods sold
$11,850
5,150
$ 6,700
BRIEF EXERCISE 8-7
April 1
April 15
Ending inventory
250 X $10 = $ 2,500
150 X $12 =
1,800
$ 4,300
Cost of goods available for sale
Deduct ending inventory
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$11,850
4,300
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-13
Cost of goods sold
8-14Copyright © 2013 John Wiley & Sons, Inc.
$ 7,550
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 8-8
2013
2014
$100,000
$119,900 ÷ 1.10 = $109,000
$100,000 X 1.00 ............................................................
$9,000* X 1.10 ...............................................................
$100,000
9,900
$109,900
*$109,000 – $100,000
2015
$134,560 ÷ 1.16 = $116,000
$100,000 X 1.00 ............................................................
$9,000 X 1.10 ................................................................
$7,000** X 1.16 .............................................................
$100,000
9,900
8,120
$118,020
**$116,000 – $109,000
BRIEF EXERCISE 8-9
2014 inventory at base amount ($22,140 ÷ 1.08)
2013 inventory at base amount
Increase in base inventory
2014 inventory under LIFO
Layer one
$19,750 X 1.00
Layer two
$ 750 X 1.08
$ 20,500
(19,750)
$
750
2015 inventory at base amount ($25,935 ÷ 1.14)
2014 inventory at base amount
Increase in base inventory
2015 inventory under LIFO
Layer one
$19,750 X 1.00
Layer two
$ 750 X 1.08
Layer three
$ 2,250 X 1.14
$ 22,750
20,500
$ 2,250
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 19,750
810
$ 20,560
$ 19,750
810
2,565
$ 23,125
(For Instructor Use Only) 8-15
SOLUTIONS TO EXERCISES
EXERCISE 8-1 (15–20 minutes)
Items 1, 3, 5, 8, 11, 13, 14, 16, and 17 would be reported as inventory in the
financial statements.
The following items would not be reported as inventory:
2. Cost of goods sold in the income statement.
4. Not reported in the financial statements.
6. Cost of goods sold in the income statement.
7. Cost of goods sold in the income statement.
9. Interest expense in the income statement.
10. Advertising expense in the income statement.
12. Office supplies in the current assets section of the balance sheet.
15. Not reported in the financial statements.
18. Short-term investments in the current asset section of the balance
sheet.
EXERCISE 8-2 (10–15 minutes)
Inventory per physical count
Goods in transit to customer, f.o.b. destination
Goods in transit from vendor, f.o.b. seller
Inventory to be reported on balance sheet
$441,000
+ 38,000
+ 51,000
$530,000
The consigned goods of $61,000 are not owned by Jose Oliva and were
properly excluded.
The goods in transit to a customer of $46,000, shipped f.o.b. shipping
point, are properly excluded from the inventory because the title to the
goods passed when they left the seller (Oliva) and therefore a sale and
related cost of goods sold should be recorded in 2014.
The goods in transit from a vendor of $83,000, shipped f.o.b. destination,
are properly excluded from the inventory because the title to the goods
does not pass to Oliva until the buyer (Oliva) receives them.
8-16Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-3 (10–15 minutes)
1.
Include. Ownership of the merchandise passes to customer only
when it is shipped.
2.
Do not include. Title did not pass until January 3.
3.
Include in inventory. Product belonged to Harlowe Inc. at December 31,
2014.
4.
Include in inventory. Under invoice terms, title passed when goods
were shipped.
5.
Do not include. Goods received on consignment remain the property
of the consignor.
EXERCISE 8-4 (10–15 minutes)
1.
2.
Raw Materials Inventory .................................................
8,100
Accounts Payable ..................................................
8,100
Raw Materials Inventory .................................................
28,000
Accounts Payable ..................................................
28,000
3.
No adjustment necessary.
4.
Accounts Payable ...........................................................
7,500
Raw Materials Inventory ........................................
7,500
Raw Materials Inventory .................................................
19,800
Accounts Payable ..................................................
19,800
5.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-17
EXERCISE 8-5 (15–20 minutes)
(a)
Inventory December 31, 2014 (unadjusted)
Transaction 2
Transaction 3
Transaction 4
Transaction 5
Transaction 6
Transaction 7
Transaction 8
Inventory December 31, 2014 (adjusted)
$234,890
13,420
-0-08,540
(10,438)
(10,520)
1,500
$237,392
(b)
Transaction 3
Sales Revenue ............................................... 12,800
Accounts Receivable ...............................................
(To reverse sale entry in 2014)
Transaction 4
Purchases (Inventory) ................................... 15,630
Accounts Payable ....................................................
(To record purchase of merchandise
in 2014)
Transaction 8
Sales Returns and Allowances.....................
Accounts Receivable ...........................
8-18Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
12,800
15,630
2,600
2,600
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-6 (10–20 minutes)
Sales
Sales Returns
Net Sales
Beginning Inventory
Ending Inventory
Purchases
Purchase Returns and Allowances
Freight-in
Cost of Good Sold
Gross Profit
2013
2014
2015
$290,000
(11,000)
279,000
20,000
(32,000*)
242,000
(5,000)
8,000
(233,000)
$ 46,000
$360,000
(13,000)
347,000
32,000
(37,000)
260,000
(8,000)
9,000
(256,000)
$ 91,000
$410,000
(20,000)
390,000
37,000**
(44,000)
298,000
(10,000)
12,000
(293,000)
$ 97,000
*This was given as the beginning inventory for 2014.
**This was calculated as the ending inventory for 2014.
EXERCISE 8-7 (10–15 minutes)
(a)
May 10
Purchases........................................................................
14,700
Accounts Payable ..................................................14,700
($15,000 X .98)
May 11
Purchases........................................................................
13,068
Accounts Payable ..................................................13,068
($13,200 X .99)
May 19
Accounts Payable ...........................................................
14,700
Cash ........................................................................14,700
May 24
Purchases........................................................................
11,270
Accounts Payable
($11,500 X .98) ......................................................11,270
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-19
EXERCISE 8-7 (Continued)
(b)
May 31
Purchase Discounts Lost ...............................................
132
Accounts Payable
($13,200 X .01) .....................................................
(Discount lost on purchase of
May 11, $13,200, terms 1/15, n/30)
132
EXERCISE 8-8 (20–25 minutes)
(a)
(b)
(c)
Feb. 1
Inventory [$10,800 – ($10,800 X 10%)] ...........................
9,720
Accounts Payable .................................................. 9,720
Feb. 4
Accounts Payable [$2,500 –
($2,500 X 10%)] .............................................................
2,250
Inventory ................................................................. 2,250
Feb. 13
Accounts Payable ($9,720 – $2,250) ..............................
7,470
Inventory (3% X $7,470) .........................................224.10
Cash ........................................................................
7,245.90
Feb. 1
Purchases [$10,800 – ($10,800 X 10%)] .........................
9,720
Accounts Payable .................................................. 9,720
Feb. 4
Accounts Payable [$2,500 – ($2,500 X
10%)] .............................................................................
2,250
Purchase Returns and Allowances ............................ 2,250
Feb. 13
Accounts Payable ($9,720 – $2,250) ..............................
7,470
Purchase Discounts (3% X $7,470) .............................
224.10
Cash ........................................................................
7,245.90
Purchase price (list)
Less: Trade discount (10% X $10,800)
Price on which cash discount based
Less: Cash discount (3% X $9,720)
Net price
8-20Copyright © 2013 John Wiley & Sons, Inc.
$10,800.00
1,080.00
9,720.00
291.60
$ 9,428.40
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-9 (15–25 minutes)
(a)
Jan. 4
Jan. 11
Accounts Receivable ......................................................
640
Sales Revenue(80 X $8) .........................................
640
Purchases ($150 X $6) ....................................................
900
Accounts Payable ..................................................
900
Jan. 13
Accounts Receivable ......................................................
1,050
Sales Revenue (120 X $8.75) ................................. 1,050
Jan. 20
Purchases (160 X $7) ......................................................
1,120
Accounts Payable .................................................. 1,120
Jan. 27
Accounts Receivable ......................................................
900
Sales Revenue (100 X $9) ......................................
Jan. 31
900
Inventory ($7 X 110) ........................................................
770
Cost of Goods Sold.........................................................
1,750*
Purchases ($900 + $1,120) .................................... 2,020
Inventory (100 X $5) ............................................... 500
*($500 + $2,020 – $770)
(b)
Sales revenue ($640 + $1,050 + $900)
Cost of goods sold
Gross profit
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$2,590
1,750
$ 840
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-21
EXERCISE 8-9 (Continued)
(c)
Jan. 4
Accounts Receivable ......................................................
640
Sales Revenue (80 X $8) ........................................ 640
Cost of Goods Sold .........................................................
400
Inventory (80 X $5) ................................................. 400
Jan. 11
Inventory ..........................................................................
900
Accounts Payable (150 X $6) .................................... 900
Jan. 13
Accounts Receivable ......................................................
1,050
Sales Revenue (120 X $8.75) ................................. 1,050
Cost of Goods Sold .........................................................
700
Inventory ([(20 X $5) +
(100 X $6)] ............................................................ 700
Jan. 20
Inventory ..........................................................................
1,120
Accounts Payable (160 X $7) ................................. 1,120
Jan. 27
Accounts Receivable ......................................................
900
Sales Revenue (100 X $9) ...................................... 900
Cost of Goods Sold .........................................................
650
Inventory [(50 X $6) +
(50 X $7)] .............................................................. 650
(d)
Sales revenue
Cost of goods sold
($400 + $700 +$650)
Gross profit
8-22Copyright © 2013 John Wiley & Sons, Inc.
$2,590
1,750
$ 840
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-10 (10–15 minutes)
1.
Working capital
Current ratio
Retained earnings
Net income
Current Year
Overstated
Overstated
Overstated
Overstated
Subsequent Year
No effect
No effect
No effect
Understated
2.
Working capital
Current ratio
Retained earnings
Net income
No effect
Overstated*
No effect
No effect
No effect
No effect
No effect
No effect
3.
Working capital
Current ratio
Retained earnings
Net income
Overstated
Overstated
Overstated
Overstated
No effect
No effect
No effect
Understated
*Assume that the correct current ratio is greater than one.
EXERCISE 8-11 (10–15 minutes)
(a)
$370,000
= 1.85 to 1
$200,000
(b)
$370,000 + $22,000 – $13,000 + $3,000
$382,000
=
= 2.06 to 1
$200,000 – $15,000
$185,000
(c)
1.
2.
3.
4.
Event
Understatement of ending
inventory
Overstatement of purchases
Overstatement of ending
inventory
Overstatement of advertising
expense; understatement
of cost of goods sold
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Effect of Error
Decreases net income
Adjust Income
Increase (Decrease)
$22,000
Decreases net income
Increases net income
15,000
(13,000)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
0
$24,000
(For Instructor Use Only) 8-23
EXERCISE 8-12 (15–20 minutes)
Errors in Inventories
Net
Income
Per Books
Year
2009
2010
2011
2012
2013
2014
$ 50,000
52,000
54,000
56,000
58,000
60,000
$330,000
Add
Overstatement Jan. 1
Deduct
Understatement Jan. 1
Deduct
Add
OverstateUnderstatement Dec. 31 ment Dec. 31
$3,000
9,000
$3,000
9,000
$11,000
$11,000
2,000
2,000
8,000
Corrected
Net Income
$ 47,000
46,000
74,000
45,000
60,000
50,000
$322,000
EXERCISE 8-13 (15–20 minutes)
(a)
Units in ending inventory
Beginning balance
Purchase
Goods available
Sales
Ending balance
(b)
300
1,300
1,600
(1,000)
600
(1)
Cost of Goods Sold
LIFO 500 @ $13 = $ 6,500
500 @ $12 =
6,000
$12,500
Ending Inventory
300 @ $10 =
$3,000
300 @ $12 =
3,600
$6,600
(2)
FIFO
300 @ $10 =
700 @ $12 =
$ 3,000
8,400
$11,400
500 @ $13 =
100 @ $12 =
LIFO
100 @ $10 =
300 @ $12 =
200 @ $13 =
$ 1,000
3,600
2,600
$ 7,200
8-24Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$6,500
1,200
$7,700
(For Instructor Use Only)
Ahmed Nawfal
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-25
EXERCISE 8-13 (Continued)
(c)
Sales revenue
$25,400 = ($24 X 200) + ($25 X 500) +
($27 X 300)
11,400 = (200 @ $10) + (100 @ $10)
$14,000
+ (400 @ $12) + (300 @ $12)
Cost of Goods Sold
Gross Profit (FIFO)
Note: FIFO periodic and FIFO perpetual provide the same gross profit
and inventory value.
(d)
LIFO matches more current costs with revenue. When prices are
rising (as is generally the case), this results in a higher amount for
cost of goods sold and a lower gross profit. As indicated in this
exercise, prices were rising and cost of goods sold under LIFO was
higher.
EXERCISE 8-14 (20–25 minutes)
(a)
(1)
LIFO
600 @ $6.00 = $3,600
100 @ $6.08 =
608
$4,208
(2)
Average cost
Total cost
=
Total units
$33,655*
= $6.35 average cost per unit
5,300
700 @ $6.35 = $4,445
*Units
600
1,500
800
1,200
700
500
5,300
@
@
@
@
@
@
Price
$6.00
$6.08
$6.40
$6.50
$6.60
$6.79
8-26Copyright © 2013 John Wiley & Sons, Inc.
=
=
=
=
=
=
Total Cost
$ 3,600
9,120
5,120
7,800
4,620
3,395
$33,655
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-14 (Continued)
(b)
(1)
FIFO
500 @ $6.79 = $3,395
200 @ $6.60 = 1,320
$4,715
(2)
LIFO
100 @ $6.00 = $ 600
100 @ $6.08 =
608
500 @ $6.79 = 3,395
$4,603
(c)
Total merchandise available for sale
Less: Inventory (FIFO)
Cost of goods sold
(d)
FIFO.
$33,655
4,715
$28,940
EXERCISE 8-15 (15–20 minutes)
(a)
Shania Twain Company
COMPUTATION OF INVENTORY FOR PRODUCT
BAP UNDER FIFO INVENTORY METHOD
March 31, 2014
March 26, 2014
February 16, 2014
January 25, 2014 (portion)
March 31, 2014, inventory
(b)
Units
600
800
200
1,600
Unit Cost
$12.00
11.00
10.00
Total Cost
$ 7,200
8,800
2,000
$18,000
Shania Twain Company
COMPUTATION OF INVENTORY FOR PRODUCT
BAP UNDER LIFO INVENTORY METHOD
March 31, 2014
Beginning inventory
January 5, 2014 (portion)
March 31, 2014, inventory
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Units
600
1,000
1,600
Unit Cost
$8.00
9.00
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Total Cost
$ 4,800
9,000
$13,800
(For Instructor Use Only) 8-27
EXERCISE 8-15 (Continued)
(c)
Shania Twain Company
COMPUTATION OF INVENTORY FOR PRODUCT
BAP UNDER WEIGHTED-AVERAGE INVENTORY METHOD
March 31, 2014
Units
600
1,200
1,300
800
600
4,500
Beginning inventory
January 5, 2014
January 25, 2014
February 16, 2014
March 26, 2014
Weighted average cost
($44,600 ÷ 4,500)
Unit Cost
$ 8.00
9.00
10.00
11.00
12.00
Total Cost
$ 4,800
10,800
13,000
8,800
7,200
$44,600
$ 9.91*
March 31, 2014, inventory
*Rounded off.
1,600
$ 9.91
$15,856
EXERCISE 8-16 (15–20 minutes)
(a)
(1) 2,100 units available for sale – 1,400 units sold = 700 units in the
ending inventory.
500 @ $4.58 = $2,290
200 @ 4.60 =
920
700
$3,210 Ending inventory at FIFO cost.
(2) 100 @ $4.10 =
600 @ 4.20 =
700
$ 410
2,520
$2,930 Ending inventory at LIFO cost.
(3) $9,240 cost of goods available for sale ÷ 2,100 units available for
sale = $4.40 weighted-average unit cost.
700 units X $4.40 = $3,080 Ending inventory at weighted-average
cost.
8-28Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-16 (Continued)
(b)
(1) LIFO will yield the lowest gross profit because this method will
yield the highest cost of goods sold figure in the situation
presented. The company has experienced rising purchase prices
for its inventory acquisitions. In a period of rising prices, LIFO will
yield the highest cost of goods sold because the most recent
purchase prices (which are the higher prices in this case) are used
to price cost of goods sold while the older (and lower) purchase
prices are used to cost the ending inventory.
(2) LIFO will yield the lowest ending inventory because LIFO uses the
oldest costs to price the ending inventory units. The company has
experienced rising purchase prices. The oldest costs in this case
are the lower costs.
EXERCISE 8-17 (10–15 minutes)
(a)
(b)
(1)
400 @ $30 =
160 @ $25 =
$12,000
4,000
$16,000
(2)
400 @ $20 =
160 @ $25 =
$ 8,000
4,000
$12,000
(1)
FIFO
$16,000 [same as (a)]
(2)
LIFO
100 @ $20 =
60 @ $25 =
400 @ $30 =
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$ 2,000
1,500
12,000
$15,500
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-29
EXERCISE 8-18 (15–20 minutes)
First-in, first-out
Sales revenue
Cost of goods sold:
Inventory, Jan. 1
Purchases
Cost of goods available
Inventory, Dec. 31
Cost of goods sold
Gross profit
Operating expenses
Net income
$1,050,000
$120,000
592,000*
712,000
(235,000**)
$120,000
592,000
712,000
(164,000***)
548,000
502,000
200,000
$ 302,000
$132,000
250,000
210,000
$592,000
**Computation of inventory, Dec. 31:
First-in, first-out:
7,000 units @ $30 =
1,000 units @ $25 =
8-30Copyright © 2013 John Wiley & Sons, Inc.
$1,050,000
477,000
573,000
200,000
$ 373,000
*Purchases
6,000 @ $22 =
10,000 @ $25 =
7,000 @ $30 =
***Last-in, first-out:
6,000 units @ $20 =
2,000 units @ $22 =
Last-in, first-out
$210,000
25,000
$235,000
$120,000
44,000
$164,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-19 (20–25 minutes)
Sandy Alomar Corporation
SCHEDULES OF COST OF GOODS SOLD
For the First Quarter Ended March 31, 2014
Beginning inventory
Plus purchases
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
Schedule 1
First-in, First-out
$ 40,000
146,200*
186,200
61,300
$124,900
Schedule 2 Last-in,
First-out
$ 40,000
146,200
186,200
56,800
$129,400
*($33,600 + $25,500 + $38,700 + $48,400)
Schedules Computing Ending Inventory
Units
10,000
34,000
44,000
30,000
14,000
Beginning inventory
Plus purchases
Units available for sale
Less sales ($150,000 ÷ 5)
Ending inventory
The unit computation is the same for both assumptions, but the cost
assigned to the units of ending inventory are different.
First-in, First-out (Schedule 1)
11,000 at $4.40 = $48,400
3,000 at $4.30 =
12,900
14,000
$61,300
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Last-in, First-out (Schedule 2)
10,000 at $4.00 =
$40,000
4,000 at $4.20 =
16,800
14,000
$56,800
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-31
EXERCISE 8-20 (10–15 minutes)
(a)
FIFO Ending Inventory 12/31/14
76 @ $10.89* = $ 827.64
24 @ $11.88** =
285.12
$1,112.76
*[$11.00 – .01 ($11.00)]
**[$12.00 – .01 ($12.00)]
(b)
LIFO Cost of Goods Sold—2014
76 @ $10.89 =
$ 827.64
84 @ $11.88 =
997.92
90 @ $14.85* =
1,336.50
15 @ $15.84** =
237.60
$3,399.66
*[$15.00 – .01 ($15)]
**[$16.00 – .01 ($16)]
(c)
FIFO matches older costs with revenue. When prices are declining, as
in this case, this results in a higher amount for cost of goods sold.
Therefore, it is recommended that FIFO be used by Johnny Football
Shop to minimize taxable income.
EXERCISE 8-21 (10–15 minutes)
(a)
The difference between the inventory used for internal reporting
purposes and LIFO is referred to as the Allowance to Reduce
Inventory to LIFO or the LIFO reserve. The change in the allowance
balance from one period to the next is called the LIFO effect (or as
shown in this example, the LIFO adjustment).
(b)
LIFO subtracts inflation from inventory costs by charging the items
purchased recently to cost of goods sold. As a result, ending
inventory (assuming increasing prices) will be lower than FIFO or
average cost.
8-32Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-21 (Continued)
(c)
Cash flow was computed as follows:
Revenue
$3,200,000
Cost of goods sold
(2,800,000)
Operating expenses
(150,000)
Income taxes
(75,600)
Cash flow
$ 174,400
If the company has any sales on account or payables, then the cash
flow number is incorrect. It is assumed here that the cash basis of
accounting is used.
(d)
The company has extra cash because its taxes are less. The reason
taxes are lower is because cost of goods sold (in a period of inflation)
is higher under LIFO than FIFO. As a result, net income is lower which
leads to lower income taxes. If prices are decreasing, the opposite
effect results.
EXERCISE 8-22 (25–30 minutes)
(a)
(1)
Ending inventory—Specific Identification
Date
No. Units
Unit Cost
December 2
July 20
(2)
Ending inventory—FIFO
Date
No. Units
December 2
September 4
(3)
100
50
150
100
50
150
Ending inventory—LIFO
Date
No. Units
January 1
March 15
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
100
50
150
Total Cost
$30
25
$3,000
1,250
$4,250
Unit Cost
Total Cost
$30
28
$3,000
1,400
$4,400
Unit Cost
Total Cost
$20
24
$2,000
1,200
$3,200
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-33
EXERCISE 8-22 (Continued)
(4) Ending inventory—Average-Cost
Date
Explanation
January 1
March 15
July 20
September 4
December 2
Beginning inventory
Purchase
Purchase
Purchase
Purchase
No.
Units
Unit
Cost
Total
Cost
100
300
300
200
100
1,000
$20
24
25
28
30
$ 2,000
7,200
7,500
5,600
3,000
$25,300
$25,300 ÷ 1,000 = $25.30
Ending Inventory—Average-Cost
No. Units
Unit Cost
Total Cost
150
$25.30
$3,795
(b)
Double Extension Method
Base-Year Costs
Units
150
Base-Year
Cost Per Unit
$20
Current Costs
Total
$3,000
Units
100
50
Current-Year
Cost Per Unit
$30
$28
Ending Inventory for the Period at Current Cost
Ending Inventory for the Period at Base-Year Cost
=
$4,400
= 1.4667
$3,000
Ending inventory at base-year prices ($4,400 ÷ 1.4667)
Base layer (100 units at $20)
Increment in base-year dollars
Current index
Increment in current dollars
Base layer (100 units at $20)
Ending inventory at dollar-value LIFO
8-34Copyright © 2013 John Wiley & Sons, Inc.
Total
$3,000
1,400
$4,400
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$3,000
(2,000)
1,000
1.4667
1,467
2,000
$3,467
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-23 (5–10 minutes)
$97,000 – $92,000 = $5,000 increase at base prices.
$98,350 – $92,600 = $5,750 increase in dollar-value LIFO value.
$5,000 X Index = $5,750.
Index = $5,750 ÷ $5,000.
Index = 115
EXERCISE 8-24 (15–20 minutes)
(a)
(b)
12/31/14 inventory at 1/1/14 prices, $140,000 ÷ 1.12
Inventory 1/1/14
Inventory decrease at base prices
$125,000
160,000
$ 35,000
Inventory at 1/1/14 prices
Less decrease at 1/1/14 prices
Inventory 12/31/14 under dollar-value LIFO method
$160,000
35,000
$125,000
12/31/15 inventory at base prices, $172,500 ÷ 1.15
12/31/14 inventory at base prices
Inventory increment at base prices
$150,000
125,000
$ 25,000
Inventory at 12/31/14
Increment added during 2015 at 12/31/15 prices,
$25,000 X 1.15
Inventory 12/31/15
$125,000
28,750
$153,750
EXERCISE 8-25 (20–25 minutes)
2011
2012
2013
2014
2015
2016
Current $
$ 80,000
115,500
108,000
122,200
154,000
176,900
Price Index
1.00
1.05
1.20
1.30
1.40
1.45
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Base Year $
$ 80,000
110,000
90,000
94,000
110,000
122,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Change from
Prior Year
—
$+30,000
(20,000)
+4,000
+16,000
+12,000
(For Instructor Use Only) 8-35
EXERCISE 8-25 (Continued)
Ending Inventory—Dollar-value LIFO:
2011
$80,000
2012
$80,000 @ 1.00 =
30,000 @ 1.05 =
$ 80,000
31,500
$111,500
2013
$80,000 @ 1.00 =
10,000 @ 1.05 =
$ 80,000
10,500
$ 90,500
2014
$80,000 @ 1.00 =
10,000 @ 1.05 =
4,000 @ 1.30 =
$ 80,000
10,500
5,200
$ 95,700
2015 $80,000 @ 1.00 =
10,000 @ 1.05 =
4,000 @ 1.30 =
16,000 @ 1.40 =
$ 80,000
10,500
5,200
22,400
$118,100
2016 $80,000 @ 1.00 =
10,000 @ 1.05 =
4,000 @ 1.30 =
16,000 @ 1.40 =
12,000 @ 1.45 =
$ 80,000
10,500
5,200
22,400
17,400
$135,500
EXERCISE 8-26 (15–20 minutes)
Date
Dec. 31, 2010
Dec. 31, 2011
Dec. 31, 2012
Dec. 31, 2013
Dec. 31, 2014
Current $
$ 70,000
90,300
95,120
105,600
100,000
8-36Copyright © 2013 John Wiley & Sons, Inc.
Price Index
1.00
1.05
1.16
1.20
1.25
Base-Year $
$70,000
86,000
82,000
88,000
80,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Change from
Prior Year
—
$+16,000
(4,000)
+6,000
(8,000)
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 8-26 (Continued)
Ending Inventory—Dollar-value LIFO:
Dec. 31, 2010 $70,000
Dec. 31, 2011 $70,000 @ 1.00 =
16,000 @ 1.05 =
$70,000
16,800
$86,800
Dec. 31, 2012 $70,000 @ 1.00 =
12,000 @ 1.05 =
$70,000
12,600
$82,600
Dec. 31, 2013 $70,000 @ 1.00 =
12,000 @ 1.05 =
6,000 @ 1.20 =
$70,000
12,600
7,200
$89,800
Dec. 31, 2014 $70,000 @ 1.00 =
10,000 @ 1.05 =
$70,000
10,500
$80,500
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-37
TIME AND PURPOSE OF PROBLEMS
Problem 8-1 (Time 30–40 minutes)
Purpose—to provide a multipurpose problem with trade discounts, goods in transit, computing internal
price indexes, dollar-value LIFO, comparative FIFO, LIFO, and average cost computations, and inventoriable cost identification.
Problem 8-2 (Time 25–35 minutes)
Purpose—to provide the student with eight different situations that require analysis to determine their
impact on inventory, accounts payable, and net sales.
Problem 8-3 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to prepare general journal entries to record purchases on a gross and net basis.
Problem 8-4 (Time 40–55 minutes)
Purpose—to provide a problem where the student must compute the inventory using a FIFO, LIFO, and
average cost assumption. These inventory value determinations must be made under two differing
assumptions: (1) perpetual inventory records are kept in units only and (2) perpetual records are kept in
dollars. Many detailed computations must be made in this problem.
Problem 8-5 (Time 40–55 minutes)
Purpose—to provide a problem where the student must compute the inventory using a FIFO, LIFO, and
average cost assumption. These inventory value determinations must be made under two differing
assumptions: (1) perpetual inventory records are kept in units only and (2) perpetual records are kept in
dollars. This problem is very similar to Problem 8-4, except that the differences in inventory values must
be explained.
Problem 8-6 (Time 25–35 minutes)
Purpose—to provide a problem where the student must compute cost of goods sold using FIFO, LIFO,
and weighted average, under both a periodic and perpetual system.
Problem 8-7 (Time 30–40 minutes)
Purpose—to provide a problem where the student must identify the accounts that would be affected if
LIFO had been used rather than FIFO for purposes of computing inventories.
Problem 8-8 (Time 30–40 minutes)
Purpose—to provide a problem which covers the use of inventory pools for dollar-value LIFO. The
student is required to compute ending inventory, cost of goods sold, and gross profit using dollar-value
LIFO, first with one inventory pool and then with three pools.
Problem 8-9 (Time 25–35 minutes)
Purpose—the student computes the internal conversion price indexes for a LIFO inventory pool and
then computes the inventory amounts using the dollar-value LIFO method.
Problem 8-10 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to compute inventories using the dollar-value
approach. An index must be developed in this problem to price the new layers. This problem will prove
difficult for the student because the indexes are hidden.
Problem 8-11 (Time 40–50 minutes)
Purpose—to provide the student with an opportunity to write a memo on how a dollar-value LIFO
pool works. In addition, the student must explain the step-by-step procedure used to compute dollar
value LIFO.
8-38Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO PROBLEMS
PROBLEM 8-1
1.
$175,000 – ($175,000 X .20) = $140,000;
$140,000 – ($140,000 X .10) = $126,000, cost of goods purchased
2.
$1,100,000 + $69,000 = $1,169,000. The $69,000 of goods in transit on
which title had passed on December 24 (f.o.b. shipping point) should
be added to 12/31/14 inventory. The $29,000 of goods shipped (f.o.b.
shipping point) on January 3, 2015, should remain part of the 12/31/14
inventory.
3.
Because no date was associated with the units issued or sold, the
periodic (rather than perpetual) inventory method must be assumed.
FIFO inventory cost:
1,000 units at $24
1,000 units at 23
Total
$ 24,000
23,000
$ 47,000
LIFO inventory cost:
1,500 units at $21
500 units at 22
Total
$ 31,500
11,000
$ 42,500
Average cost:
1,500 at $21
2,000 at 22
3,500 at 23
1,000 at 24
8,000
$ 31,500
44,000
80,500
24,000
$180,000
Totals
$180,000 ÷ 8,000 = $22.50
Ending inventory (2,000 X $22.50) is $45,000.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-39
PROBLEM 8-1 (Continued)
4.
Computation of price indexes:
12/31/14
$264,000 = 1.10 (110)
$240,000
12/31/15
$286,720 = 1.12 (112)
$256,000
Dollar-value LIFO inventory 12/31/14:
Increase $240,000 – $200,000 =
12/31/14 price index
Increase in terms of 110
Base inventory
Dollar-value LIFO inventory
$ 40,000
X
1.10
44,000 2014 Layer
200,000
$244,000
Dollar-value LIFO inventory 12/31/15:
Increase $256,000 – $240,000 =
12/31/15 price index
Increase in terms of 112
2014 layer
Base inventory
Dollar-value LIFO inventory
5.
$ 16,000
X
1.12
17,920 2015 Layer
44,000
200,000
$261,920
The inventoriable costs for 2015 are:
Merchandise purchased .................................
Add: Freight-in ...............................................
Deduct: Purchase returns .............................
Purchase discounts .........................
Inventoriable cost ...........................................
8-40Copyright © 2013 John Wiley & Sons, Inc.
$909,400
22,000
931,400
$16,500
6,800
Kieso, Intermediate Accounting, 15/e, Solutions Manual
23,300
$908,100
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-2
DIMITRI COMPANY
Schedule of Adjustments
December 31, 2014
Initial amounts
Adjustments:
1.
2.
3.
4.
5.
6.
7.
8.
Total adjustments
Adjusted amounts
Inventory
$1,520,000
Accounts
Payable
$1,200,000
Net Sales
$8,150,000
NONE
76,000
30,000
32,000
26,000
27,000
NONE
4,000
195,000
$1,715,000
NONE
76,000
NONE
NONE
NONE
NONE
56,000
8,000
140,000
$1,340,000
(40,000)
NONE
NONE
(47,000)
NONE
NONE
NONE
NONE
(87,000)
$8,063,000
1.
The $31,000 of tools on the loading dock were properly included in the
physical count. The sale should not be recorded until the goods are
picked up by the common carrier. Therefore, no adjustment is made to
inventory, but sales must be reduced by the $40,000 billing price.
2.
The $76,000 of goods in transit from a vendor to Dimitri were shipped
f.o.b. shipping point on 12/29/14. Title passes to the buyer as soon as
goods are delivered to the common carrier when sold f.o.b. shipping
point. Therefore, these goods are properly includable in Dimitri’s inventory and accounts payable at 12/31/14. Both inventory and accounts
payable must be increased by $76,000.
3.
The work-in-process inventory sent to an outside processor is Dimitri’s
property and should be included in ending inventory. Since this inventory
was not in the plant at the time of the physical count, the inventory
column must be increased by $30,000.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-41
PROBLEM 8-2 (Continued)
4.
The tools costing $32,000 were recorded as sales ($47,000) in 2014.
However, these items were returned by customers on December 31, so
2014 net sales should be reduced by the $47,000 return. Also, $32,000
has to be added to the inventory column since these goods were not
included in the physical count.
5.
The $26,000 of Dimitri’s tools shipped to a customer f.o.b. destination
are still owned by Dimitri while in transit because title does not pass on
these goods until they are received by the buyer. Therefore, $26,000
must be added to the inventory column. No adjustment is necessary in
the sales column because the sale was properly recorded in 2015 when
the customer received the goods.
6.
The goods received from a vendor at 5:00 p.m. on 12/31/14 should be
included in the ending inventory, but were not included in the physical
count. Therefore, $27,000 must be added to the inventory column. No
adjustment is made to accounts payable, since the invoice was included
in 12/31/14 accounts payable.
7.
The $56,000 of goods received on 12/26/14 were properly included in
the physical count of inventory; $56,000 must be added to accounts
payable since the invoice was not included in the 12/31/14 accounts
payable balance.
8.
Since one-half of the freight-in cost ($8,000) pertains to merchandise
properly included in inventory as of 12/31/14, $4,000 should be added
to the inventory column. The remaining $4,000 debit should be reflected in
cost of goods sold. The full $8,000 must be added to accounts payable
since the liability was not recorded.
8-42Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-3
(a)
1.
2.
8/10
Purchases ............................................................... 12,000
Accounts Payable .........................................
12,000
8/13
Accounts Payable ..................................................
Purchase Returns and Allowances ..............
1,200
1,200
8/15
Purchases ............................................................... 16,000
Accounts Payable .........................................
16,000
8/25
Purchases ............................................................... 20,000
Accounts Payable .........................................
20,000
8/28
Accounts Payable .................................................. 16,000
Cash ...............................................................
16,000
Purchases—addition to beginning inventory in cost of goods
sold section of income statement.
Purchase returns and allowances—deduction from purchases in
cost of goods sold section of the income statement.
Accounts payable—current liability in the current liabilities section of the balance sheet.
(b)
1.
8/10
Purchases ............................................................... 11,760
Accounts Payable ($12,000 X .98) ................
11,760
8/13
Accounts Payable ..................................................
Purchase Returns and Allowances
($1,200 X .98) ..............................................
1,176
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
1,176
(For Instructor Use Only) 8-43
PROBLEM 8-3 (Continued)
2.
3.
(c)
8/15
Purchases ............................................................... 15,840
Accounts Payable ($16,000 X .99) ................
15,840
8/25
Purchases ............................................................... 19,600
Accounts Payable ($20,000 X .98) ................
19,600
8/28
Accounts Payable................................................... 15,840
Purchase Discounts Lost.......................................
160
Cash ...............................................................
16,000
8/31
Purchase Discounts Lost.......................................
Accounts Payable
(.02 X [$12,000 – $1,200]) ............................
216
216
Same as part (a) (2) except:
Purchase Discounts Lost—treat as financial expense in income
statement.
The second method is better theoretically because it results in the
inventory being carried net of purchase discounts, and purchase
discounts not taken are shown as an expense. The first method is
normally used, however, for practical reasons.
8-44Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-4
(a)
Purchases
Total Units
April 1 (balance on hand)
April 4
April 11
April 18
April 26
April 30
Total units
Total units sold
Total units (ending inventory)
Sales
Total Units
100
400
300
200
600
200
1,800
1,450
350
April 5
April 12
April 27
April 28
Total units
300
200
800
150
1,450
Assuming costs are not computed for each withdrawal:
1.
2.
First-in, first-out.
Date of Invoice
April 30
April 26
No. Units
200
150
Unit Cost
$5.80
5.60
Total Cost
$1,160
840
$2,000
Last-in, first-out.
Date of Invoice
April 1
April 4
No. Units
100
250
Unit Cost
$5.00
5.10
Total Cost
$ 500
1,275
$1,775
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-45
PROBLEM 8-4 (Continued)
3.
Average-cost.
Cost of Part X available.
Date of Invoice
No. Units
April 1
100
April 4
400
April 11
300
April 18
200
April 26
600
April 30
200
Total Available
1,800
Unit Cost
$5.00
5.10
5.30
5.35
5.60
5.80
Total Cost
$ 500
2,040
1,590
1,070
3,360
1,160
$9,720
Average cost per unit = $9,720 ÷ 1,800 = $5.40.
Inventory, April 30 = 350 X $5.40 = $1,890.
(b) Assuming costs are computed for each withdrawal:
1.
First-in, first out.
The inventory would be the same in amount as in part (a),
$2,000.
8-46Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-4 (Continued)
2.
Last-in, first-out.
Purchased
Date
No. of
units
Unit
cost
April 1
100
April 4
400
Unit
cost
Amount
$5.00
100
$5.00
$
5.10
100
5.00
400
5.10
April 26
100
5.00
100
5.10
300
100
5.00
100
5.10
300
5.30
100
5.00
100
5.10
100
5.30
100
5.00
100
5.10
100
5.30
200
5.35
100
5.00
100
5.10
100
5.30
200
5.35
600
5.60
100
5.00
100
5.10
100
5.30
$5.10
5.30
200
200
600
5.60
800
April 28
150
200
5.30
5.35
April 27
April 30
Unit
cost
300
April 12
April 18
No. of
units
Balance*
No. of
units
April 5
April 11
Sold
5.80
600 @
5.60
200 @
5.35
100 @
5.30
100
5.00
50 @
5.10
50
5.10
100
5.00
50
5.10
200
5.80
500
2,540
1,010
2,600
1,540
2,610
5,970
1,540
755
1,915
Inventory, April 30 is $1,915.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-47
*The balance on hand is listed in detail after each transaction.
8-48Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-4 (Continued)
3.
Average-cost.
Purchased
Date
No. of
units
Unit
cost
April 1
100
April 4
400
No. of
units
Unit
cost*
Amount
$5.00
100
$5.0000
$ 500.00
5.10
500
5.0800
2,540.00
200
5.0800
1,016.00
500
5.2120
2,606.00
300
5.2120
1,563.60
300
300
Unit
cost
Balance
No. of
units
April 5
April 11
Sold
$5.0800
5.30
April 12
200
5.2120
April 18
200
5.35
500
5.2672
2,633.60
April 26
600
5.60
1,100
5.4487
5,993.57
April 27
800
5.4487
300
5.4487
1,634.61
April 28
150
5.4487
150
5.4487
817.30
350
5.6494
1,977.30
April 30
200
5.80
Inventory, April 30 is $1,977.33
*Four decimal places are used to minimize rounding errors.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-49
PROBLEM 8-5
(a) Assuming costs are not computed for each withdrawal (units received,
5,700, minus units issued, 4,700, equals ending inventory at 1,000 units):
1.
2.
3.
First-in, first-out.
Date of Invoice
Jan. 28
No. Units
1,000
Unit Cost
$3.50
Total Cost
$3,500
Last-in, first-out.
Date of Invoice
Jan. 2
No. Units
1,000
Unit Cost
$3.00
Total Cost
$3,000
Unit Cost
$3.00
3.20
3.30
3.40
3.50
Total Cost
$ 3,600
1,920
3,300
4,420
5,600
$18,840
Average-cost.
Cost of goods available:
Date of Invoice
No. Units
Jan. 2
1,200
Jan. 10
600
Jan. 18
1,000
Jan. 23
1,300
Jan. 28
1,600
Total Available
5,700
Average cost per unit = $18,840 ÷ 5,700 = $3.31
Cost of inventory Jan. 31 = 1,000 X $3.31 = $3,310
(b) Assuming costs are computed at the time of each withdrawal:
Under FIFO—Yes. The amount shown as ending inventory would be
the same as in (a) above. In each case the units on hand would be
assumed to be part of those purchased on Jan. 28.
Under LIFO—No. During the month the available balance dropped
below the ending inventory quantity so that the layers of oldest costs
were partially liquidated during the month.
8-50Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-5 (Continued)
Under Average-Cost—No. A new average cost would be computed
each time a withdrawal was made instead of only once for all items
purchased during the year.
The calculations to determine the inventory on this basis are given below.
1.
First-in, first-out.
The inventory would be the same in amount as in part (a),
$3,500.
2.
Last-in, first-out.
Received
Date
No. of
units
Unit
cost
Jan. 2
1,200
$3.00
Jan. 7
Jan. 10
600
500
1,000
1,300
3.30
300
Jan. 31
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
3.20
3.30
700
3.30
100
3.20
300
3.00
800
1,600
$3.00
3.40
Jan. 26
Jan. 28
Unit
cost
3.20
Jan. 20
Jan. 23
No. of
units
700
Jan. 13
Jan. 18
Issued
3.40
3.50
1,300
3.50
Balance
No. of
units
Unit
cost*
Amount
1,200
$3.00
$3,600
500
3.00
1,500
500
3.00
600
3.20
500
3.00
100
3.20
500
3.00
100
3.20
700
3.30
200
3.00
200
3.00
1,300
3.40
200
3.00
500
3.40
200
3.00
500
3.40
1,600
3.50
200
3.00
500
3.40
300
3.50
Kieso, Intermediate Accounting, 15/e, Solutions Manual
3,420
1,820
4,130
600
5,020
2,300
7,900
3,350
(For Instructor Use Only) 8-51
Inventory, January 31 is $3,350.
8-52Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-5 (Continued)
3.
Average-cost.
Received
Date
No. of
units
Unit
cost
Jan. 2
1,200
$3.00
Jan. 7
Jan. 10
600
1,000
1,300
3.30
$3.0000
Jan. 31
No. of
units
Unit
cost*
Amount
1,200
$3.0000
$3,600
500
3.0000
1,500
1,100
3.1091
3,420
3.1091
600
3.1091
1,865
300
3.2281
1,300
3.2281
4,197
1,100
3.2281
200
3.2281
646
1,500
3.3773
5,066
700
3.3773
2,364
2,300
3.4626
7,964
1,000
3.4626
3,463
800
1,600
Balance
500
3.40
Jan. 26
Jan. 28
Unit
cost
3.20
Jan. 20
Jan. 23
No. of
units
700
Jan. 13
Jan. 18
Issued
3.3773
3.50
1,300
3.4626
Inventory, January 31 is $3,463.
*Four decimal places are used to minimize rounding errors.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-53
PROBLEM 8-6
(a)
(b)
(c)
(d)
Date
Beginning inventory...................... 1,000
Purchases (2,000 + 3,000) ............. 5,000
Units available for sale ................. 6,000
Sales (2,500 + 2,200) ..................... (4,700)
Goods on hand .............................. 1,300
Periodic FIFO
1,000 X $12 =
2,000 X $18 =
1,700 X $23 =
4,700
$12,000
36,000
39,100
$87,100
Perpetual FIFO
Same as periodic:
$87,100
Periodic LIFO
3,000 X $23 =
1,700 X $18 =
4,700
$69,000
30,600
$99,600
Perpetual LIFO
Purchased
Sold
Balance
1/1
2/4
1,000 X $12
2,000 X $18 = $36,000
1,000 X $12
2,000 X $18
2/20
2,000 X $18
500 X $12
4/2
} $42,000
3,000 X $23 = $69,000
500 X $12
2,200 X $23
= $50,600
}
500 X $12
3,000 X $23
11/4
=
500 X $12
800 X $23
$12,000
$48,000
=
$ 6,000
}
$75,000
}
$24,400
$92,600
8-54Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-6 (Continued)
(e)
(f)
Periodic weighted-average
1,000 X $12 =
$ 12,000
2,000 X $18 =
36,000
3,000 X $23 =
69,000
$117,000 ÷ 6,000 = $19.50
4,700
X $19.50
$91,650
Perpetual moving average
Date
Purchased
Sold
Balance
1/1
1,000 X $12 = $12,000
2/4
2,000 X $18 = $36,000
2/20
2,500 X $16 =
4/2
$40,000
3,000 X $23 = $69,000
11/4
2,200 X $22 =
48,400
3,000 X $16 =
48,000
500 X $16 =
8,000
3,500 X $22a =
77,000
1,300 X $22 =
28,600
$88,400
a
500 X $16 = $ 8,000
3,000 X $23 = 69,000
3,500
$77,000
($77,000 ÷ 3,500 = $22)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-55
PROBLEM 8-7
The accounts in the 2015 financial statements which would be affected by
a change to LIFO and the new amount for each of the accounts are as
follows:
New amount
Account
for 2015
(1) Cash
$176,400
(2) Inventory
120,000
(3) Retained earnings
226,400
(4) Cost of goods sold
792,000
(5) Income taxes
101,600
The calculations for both 2014 and 2015 to support the conversion to LIFO
are presented below.
Income for the Years Ended
12/31/14
12/31/15
Sales revenue
Less: Cost of goods sold
Other expenses
Income before taxes
Income taxes (40%)
Net income
$900,000
525,000
205,000
730,000
170,000
68,000
$102,000
$1,350,000
792,000
304,000
1,096,000
254,000
101,600
$ 152,400
Cost of Goods Sold and
Ending Inventory for the Years Ended
12/31/14
12/31/15
Beginning inventory
Purchases
Cost of goods available
Ending inventory
Cost of goods sold
$120,000
525,000
645,000
(120,000)
$525,000
( 40,000 X $3.00)
(150,000 X $3.50)
( 40,000 X $3.00)
( 40,000 X $3.00)
(180,000 X $4.40)
( 40,000 X $3.00)
$120,000
792,000
912,000
(120,000)
$792,000
Determination of Cash at
12/31/14
12/31/15
Income taxes under FIFO
Income taxes as calculated under LIFO
Increase in cash
Adjust cash at 12/31/15 for 2014 tax
difference
Total increase in cash
Cash balance under FIFO
$ 76,000
68,000
8,000
$116,000
101,600
14,400
—
8,000
130,000
8,000
22,400
154,000
8-56Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Cash balance under LIFO
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$138,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$176,400
(For Instructor Use Only) 8-57
PROBLEM 8-7 (Continued)
Determination of Retained Earnings at
12/31/14
12/31/15
Net income under FIFO
Net income under LIFO
Reduction in retained earnings
Adjust retained earnings at 12/31/15 for
2014 reduction
Total reduction in retained earnings
Retained earnings under FIFO
Retained earnings under LIFO
$114,000
(102,000)
12,000
$174,000
(152,400)
21,600
—
12,000
200,000
$188,000
12,000
33,600
260,000
$226,400
8-58Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-8
(a)
1.
2.
3.
Ending inventory in units
Portable
6,000 + 15,000 – 14,000 =
Midsize
8,000 + 20,000 – 24,000 =
Flat-screen
3,000 + 10,000 – 6,000 =
Ending inventory at current cost
Portable
7,000 X $110 =
Midsize
4,000 X $300 =
Flat-screen
7,000 X $500 =
Ending inventory at base-year cost
Portable
7,000 X $100 =
Midsize
4,000 X $250 =
Flat-screen
7,000 X $400 =
4.
Price index
$5,470,000 ÷ $4,500,000 = 1.2156
5.
Ending inventory
$3,800,000 X 1.0000 =
700,000* X 1.2156 =
7,000
4,000
7,000
18,000
$ 770,000
1,200,000
3,500,000
$5,470,000
$ 700,000
1,000,000
2,800,000
$4,500,000
$3,800,000
850,920
$4,650,920
*($4,500,000 – $3,800,000 = $700,000)
6.
Cost of goods sold
Beginning inventory.................................................
Purchases
[(15,000 X $110) + (20,000 X $300) +
(10,000 X $500)] .....................................................
Cost of goods available ...........................................
Ending inventory ......................................................
Cost of goods sold .............................................
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$ 3,800,000
12,650,000
16,450,000
(4,650,920)
$11,799,080
(For Instructor Use Only) 8-59
PROBLEM 8-8 (Continued)
(b)
7.
Gross profit
Sales revenue
[(14,000 X $150) + (24,000 X $405) +
(6,000 X $600)] ............................................................. $15,420,000
Cost of goods sold ......................................................... 11,799,080
Gross profit ..................................................................... $ 3,620,920
1.
Ending inventory at current cost restated to base cost
Portable
$ 770,000 ÷ 1.10a =
$ 700,000
Midsize
1,200,000 ÷ 1.20b =
$ 1,000,000
Flat-screen
3,500,000 ÷ 1.25c =
$ 2,800,000
a. $110 ÷ $100
b. $300 ÷ $250
c. $500 ÷ $400
2.
3.
4.
Ending inventory
Portable
$ 600,000 X 1.00 =
100,000 X 1.10 =
Midsize
1,000,000 X 1.00 =
Flat-screen
1,200,000 X 1.00 =
1,600,000 X 1.25 =
$
600,000
110,000
1,000,000
1,200,000
2,000,000
$ 4,910,000
Cost of good sold
Cost of good available ................................................
Ending inventory .........................................................
Cost of goods sold ................................................
$16,450,000
(4,910,000)
$11,540,000
Gross profit
Sales revenue ..............................................................
Cost of goods sold ......................................................
Gross profit ..................................................................
$15,420,000
11,540,000
$ 3,880,000
8-60Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-9
(a)
BONANZA WHOLESALERS INC.
Computation of Internal Conversion Price Index
for Inventory Pool No. 1 Double Extension Method
Current inventory at
current-year cost
Product A
Product B
17,000 X $36 =
9,000 X $26 =
Current inventory at
base cost
Product A
Product B
17,000 X $30 =
9,000 X $25 =
2014
$612,000
234,000
$846,000
$510,000
225,000
$735,000
Conversion price index $846,000 ÷ $735,000 = 1.15
(b)
13,000 X $30 =
10,000 X $25 =
$390,000
250,000
$640,000
$840,000 ÷ $640,000 = 1.31
BONANZA WHOLESALERS INC.
Computation of Inventory Amounts
Under Dollar-Value LIFO Method for Inventory Pool No. 1
at December 31, 2014 and 2015
Current
Inventory at
base cost
December 31, 2014
Base inventory
2012 layer ($735,000 – $525,000)
Total
$525,000
210,000
$735,000
December 31, 2015
Base inventory
2012 layer (remaining)
Total
$525,000
115,000
$640,000
(a)
(b)
13,000 X $40 =
10,000 X $32 =
2015
$520,000
320,000
$840,000
Conversion
price index
1.00
1.15
(a)
$525,000
241,500
$766,500
(a)
$525,000
132,250
$657,250
(a)
(b)
(a)
1.00
1.15
Inventory at
LIFO cost
Per schedule for instruction (a).
After liquidation of $95,000 base cost ($735,000 – $640,000).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-61
PROBLEM 8-10
Base-Year
Cost
December 31, 2013
January 1, 2013, base
December 31, 2013, layer
December 31, 2014
January 1, 2013, base
December 31, 2013, layer
December 31, 2014, layer
December 31, 2015
January 1, 2013, base
December 31, 2013, layer
December 31, 2014, layer
December 31, 2015, layer
Index %
Dollar-Value
LIFO
$45,000
11,000
$56,000
100
112*
$45,000
12,320
$57,320
$45,000
11,000
12,400
$68,400
100
112
128**
$45,000
12,320
15,872
$73,192
$45,000
11,000
12,400
1,600
$70,000
100
112
128
130***
$45,000
12,320
15,872
2,080
$75,272
*$62,700 ÷ $56,000
**$87,300 ÷ $68,400
***$90,800 ÷ $70,000
8-62Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-11
(a)
Schedule A
2010
2011
2012
2013
2014
2015
A
B
C
Current $
$ 80,000
111,300
108,000
128,700
147,000
174,000
Price Index
1.00
1.05
1.20
1.30
1.40
1.45
Base-Year $
$ 80,000
106,000
90,000
99,000
105,000
120,000
D
Change from
Prior Year
—
+$26,000
(16,000)
+9,000
+6,000
+15,000
Schedule B
Ending Inventory-Dollar-Value LIFO:
2010
2011
2012
2013
$ 80,000
$80,000 @ $1.00 = $ 80,000
26,000 @ 1.05 =
27,300
$107,300
$80,000 @ 1.00 = $ 80,000
10,000 @ 1.05 =
10,500
$ 90,500
$80,000 @ 1.00 = $ 80,000
10,000 @ 1.05 =
10,500
9,000 @ 1.30 =
11,700
$102,200
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
2014 $80,000 @ $1.00 =
10,000 @ 1.05 =
9,000 @ 1.30 =
6,000 @ 1.40 =
2015 $80,000 @
10,000 @
9,000 @
6,000 @
15,000 @
Kieso, Intermediate Accounting, 15/e, Solutions Manual
1.00 =
1.05 =
1.30 =
1.40 =
1.45 =
$ 80,000
10,500
11,700
8,400
$110,600
$ 80,000
10,500
11,700
8,400
21,750
$132,350
(For Instructor Use Only) 8-63
PROBLEM 8-11 (Continued)
(b)
To:
Richardson Company
From:
Accounting Student
Subject:
Dollar-Value LIFO Pool Accounting
Dollar-value LIFO is an inventory method which values groups or “pools”
of inventory in layers of costs. It assumes that any goods sold during a
given period were taken from the most recently acquired group of goods in
stock and, consequently, any goods remaining in inventory are assumed to
be the oldest goods, valued at the oldest prices.
Because dollar-value LIFO combines various related costs in groups or
“pools,” no attempt is made to keep track of each individual inventory item.
Instead, each group of annual purchases forms a new cost layer of inventory.
Further, the most recent layer will be the first one carried to cost of goods
sold during this period.
However, inflation distorts any cost of purchases made in subsequent years.
To counteract the effect of inflation, this method measures the incremental
change in each year’s ending inventory in terms of the first year’s (base
year’s) costs. This is done by adjusting subsequent cost layers, through
the use of a price index, to the base year’s inventory costs. Only after this
adjustment can the new layer be valued at current-year prices.
To do this valuation, you need to know both the ending inventory at yearend prices and the price index used to adjust the current year’s new layer.
The idea is to convert the current ending inventory into base-year costs.
The difference between the current year’s and the previous year’s ending
inventory expressed in base-year costs usually represents any inventory
which has been purchased but not sold during the year, that is, the newest
LIFO layer. This difference is then readjusted to express this most recent
layer in current-year costs.
8-64Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROBLEM 8-11 (Continued)
1.
Refer to Schedule A. To express each year’s ending inventory (Column A)
in terms of base-year costs, simply divide the ending inventory by the
price index (Column B). For 2010, this adjustment would be $80,000/
100% or $80,000; for 2011, it would be $111,300/105%, etc. The quotient
(Column C) is thus expressed in base-year costs.
2.
Next, compute the difference between the previous and the current
years’ ending inventory in base-year costs. Simply subtract the
current year’s base-year inventory from the previous year’s. In 2011, the
change is +$26,000 (Column D).
3.
Finally, express this increment in current-year terms. For the second
year, this computation is straightforward: the base-year ending inventory value is added to the difference in #2 above multiplied by the price
index. For 2011, the ending inventory for dollar-value LIFO would equal
$80,000 of base-year inventory plus the increment ($26,000) times the
price index (1.05) or $107,300. The product is the most recent layer
expressed in current-year prices. See Schedule B.
Be careful with this last step in subsequent years. Notice that, in 2012, the
change from the previous year is –$16,000, which causes the 2011 layer to
be eroded during the period. Thus, the 2012 ending inventory is valued at
the original base-year cost $80,000 plus the remainder valued at the 2011
price index, $10,000 times 1.05. See 2012 computation on Schedule B.
When valuing ending inventory, remember to include each yearly layer
adjusted by that year’s price index. Refer to Schedule B for 2013. Notice that
the +$9,000 change from the 2013 ending inventory indicates that the 2011
layer was not further eroded. Thus, ending inventory for 2013 would value
the first $80,000 worth of inventory at the base-year price index (1.00), the
next $10,000 (the remainder of the 2011 layer) at the 2011 price index (1.05),
and the last $9,000 at the 2013 price index (1.30).
These instructions should help you implement dollar-value LIFO in your
inventory valuation.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-65
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 8-1 (Time 15–20 minutes)
Purpose—a short case designed to test the skills of the student in determining whether an item should
be reported in inventory. In addition, the student is required to speculate as to why the company may
wish to postpone recording this transaction.
CA 8-2 (Time 15–25 minutes)
Purpose—to provide the student with four questions about the carrying value of inventory. These
questions must be answered and defended with rationale. The topics are shipping terms, freight–in,
weighted-average cost vs. FIFO, and consigned goods.
CA 8-3 (Time 25–35 minutes)
Purpose—to provide a number of difficult financial reporting transactions involving inventories. This case
is vague and much judgment is required in its analysis. Right or wrong answers should be discouraged;
rather emphasis should be placed on the underlying rationale to defend a given position. Includes a
product versus period cost transaction, proper classification of a possible inventory item, and a product
financing arrangement.
CA 8-4 (Time 15–25 minutes)
Purpose—the student discusses the acceptability of alternative methods of reporting cash discounts.
Also, the student identifies the effects on financial statements of using LIFO instead of FIFO when
prices are rising.
CA 8-5 (Time 20–25 minutes)
Purpose—to provide a broad overview to students as to why inventories must be included in the
balance sheet and income statement. In addition, students are asked to determine why taxable income
and accounting income may be different. Finally, the conditions under which FIFO and LIFO may give
different answers must be developed.
CA 8-6 (Time 15–20 minutes)
Purpose—to provide the student with the opportunity to discuss the rationale for the use of the LIFO
method of inventory valuation. The conditions that must exist before the tax benefits of LIFO will accrue
also must be developed.
CA 8-7 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to discuss the cost flow assumptions of average
cost, FIFO, and LIFO. Student is also required to distinguish between weighted-average and movingaverage and discuss the effect of LIFO on the B/S and I/S in a period of rising prices.
CA 8-8 (Time 25–30 minutes)
Purpose—to provide the student with the opportunity to discuss the differences between traditional
LIFO and dollar-value LIFO. In this discussion, the specific procedures employed in traditional LIFO
and dollar-value LIFO must be examined. This case provides a good basis for discussing LIFO
conceptual issues.
CA 8-9 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to discuss the concept of a LIFO pool and its use
in various LIFO methods. The student is also asked to define LIFO liquidation, to explain the use of
price indexes in dollar-value LIFO, and to discuss the advantages of using dollar-value LIFO.
8-66Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
Time and Purposes of Concepts for Analysis (Continued)
CA 8-10 (Time 30–35 minutes)
Purpose—to provide the student with an opportunity to analyze the effect of changing from the FIFO
method to the LIFO method on items such as ending inventory, net income, earnings per share, and
year-end cash balance. The student is also asked to make recommendations considering the results
from computation and other relevant factors.
CA 8-11 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to analyze the ethical implications of purchasing
decisions under LIFO.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-67
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 8-1
(a) Purchased merchandise in transit at the end of an accounting period to which legal title has
passed should be recorded as purchases within the accounting period. If goods are shipped f.o.b.
shipping point, title passes to the buyer when the seller delivers the goods to the common carrier.
Generally when the terms are f.o.b. shipping point, transportation costs must be paid by the buyer.
This liability arises when the common carrier completes the delivery. Thus, the client has a liability
for the merchandise and the freight.
(b) Inventory...............................................................................................
Accounts Payable (Supplier) .............................................................
35,300
Inventory...............................................................................................
Accounts Payable (Transportation Co.) ............................................
1,500
35,300
1,500
(c) Possible reasons to postpone the recording of the transaction might include:
1. Desire to maintain a current ratio at a given level which would be affected by the additional
inventory and accounts payable.
2. Desire to minimize the impact of the additional inventory on other ratios such as inventory
turnover.
3. Possible tax ramifications.
CA 8-2
(a) If the terms of the purchase are f.o.b. shipping point (manufacturer’s plant), Strider Enterprises
should include in its inventory goods purchased from its suppliers when the goods are shipped.
For accounting purposes, title is presumed to pass at that time.
(b) Freight-in expenditures should be considered an inventoriable cost because they are part of the
price paid or the consideration given to acquire the asset.
(c) Theoretically the net approach is the more appropriate because the net amount (1) provides a
correct reporting of the cost of the asset and related liability and (2) presents the opportunity to
measure the inefficiency of financial management if the discount is not taken. Many believe,
however, that the difficulty involved in using the somewhat more complicated net method is not
justified by the resulting benefits.
(d) Products on consignment represent inventories owned by Strider Enterprises, which are physically
transferred to another enterprise. However, Strider Enterprises retains title to the goods until their
sale by the other company (Chavez Inc.).
The goods consigned are still included by Strider Enterprises in the inventory section of its balance
sheet. Often the inventory is reclassified from regular inventory to consigned inventory (Note to
instructor: Additional coverage of consignments is presented in chapter 18.
8-68Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 8-3
(a) According to FASB ASC 330-10-30-1:
“As applied to inventories, cost means in principle the sum of the applicable expenditures and
charges directly or indirectly incurred in bringing an article to its existing condition and
location.”
The discussion includes the following: “Selling expenses constitute no part of the inventory costs.”
To the extent that warehousing is a necessary function of importing merchandise before it can be
sold, certain elements of warehousing costs might be considered an appropriate cost of inventory
in the warehouse. For example, if goods must be brought into the warehouse before they can be
made ready for sale, the cost of bringing such goods into the warehouse would be considered a
cost of inventory. Similarly, if goods must be handled in the warehouse for assembly or for removal
of foreign packaging, etc., it would be appropriate to include such costs in inventory. However,
costs involved in storing the goods for any additional period would appear to be period costs. Costs
of delivering the goods from the warehouse would appear to be selling expenses related to the
goods sold, and should not under any circumstances be allocated to goods that are still in the
warehouse.
In theory, warehousing costs are considered a product cost because these costs are incurred to
maintain the product in a salable condition. However, in practice, warehousing costs are most frequently treated as a period cost.
Under the Tax Reform Act of 1986, warehousing and off-site storage of inventory, including finished
goods, are specifically included in the “production and resale activities” that are to be capitalized
for tax purposes.
(b) It is correct to conclude that obsolete items are excludable from inventory. Cost attributable to
such items is “nonuseful” and “nonrecoverable” cost (except for possible scrap value) and should
be written off. If the cost of obsolete items was simply excluded from ending inventory, the resultant
cost of goods sold would be overstated by the amount of these costs. The cost of obsolete items, if
immaterial, should be commingled with cost of goods sold. If material, these costs should be
separately disclosed.
(c) The primary use of the airplanes should determine their treatment on the balance sheet. Since the
airplanes are held primarily for sale, and chartering is only a temporary use, the airplanes should
be classified as current assets. Depreciation would not be appropriate if the planes are considered
inventory. FASB ASC Glossary entry for “Inventory” states in part that the term Inventory “excludes
long-term assets subject to depreciation accounting, or goods which, when put into use, will be so
classified.”
(d) The transaction is a product financing arrangement and should be reported by the company as
inventory with a related liability. The substance of the transaction is that inventory has been
purchased and the fact that a trust is established to purchase the goods has no economic
significance. Given that the company agrees to buy the coal over a certain period of time at
specific prices, it appears clear that the company has the liability and not the trust.
CA 8-4
(a) Cash discounts should not be accounted for as financial income when payments are made.
Income should be recognized when the earnings process is complete (when the company sells the
inventory). Furthermore, cash discounts should not be recorded when the payments are made
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-69
because in order to properly match a cash discount with the related purchase, the cash discount
should be recorded when the related purchase is recorded.
8-70Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 8-4 (Continued)
(b) Cash discounts should not be accounted for as a reduction of cost of goods sold for the period
when payments are made. Cost of goods sold should be reduced when the earnings process is
complete (when the company sells the inventory which has been reduced by the cash discounts).
Furthermore, cash discounts should not be recorded when the payments are made because in
order to properly match a cash discount with the related purchase, the cash discount should be
recorded when the related purchase is recorded.
(c) Cash discounts should be accounted for as a direct reduction of purchase cost because they
reduce the cost of acquiring the inventories. Purchases should be recorded net of cash discounts
to reflect the net cash to be paid. The primary basis of accounting for inventories is cost, which
represents the price paid or consideration given to acquire an asset.
CA 8-5
(a)
1. Inventories are unexpired costs and represent future benefits to the owner. A balance sheet
includes a listing of unexpired costs and future benefits of the owner’s assets at a specific point
in time. Because inventories are assets owned at the specific point in time for which a balance
sheet is prepared, they must be included in order that the owner’s financial position will be
presented fairly.
2. Beginning and ending inventories are included in the computation of net income only for
the purpose of arriving at the cost of goods sold during the period of time covered by the
statement. Goods included in the beginning inventory which are no longer on hand are expired
costs to be matched against revenues earned during the period. Goods included in the ending
inventory are unexpired costs to be carried forward to a future period, rather than expensed.
(b) Financial accounting has as its goal the proper reporting of financial transactions and events in
accordance with generally accepted accounting principles. Income tax accounting has as its goal
the reporting of taxable transactions and events in conformity with income tax laws and regulations.
While the primary purpose of an income tax is the production of tax revenues to finance the
operations of government, income tax laws and regulations are often produced by various forces.
The income tax may be used as a tool of fiscal policy to stimulate all of the segments of the
economy or to decelerate the economy. Some income tax laws may be passed because of political
pressures brought to bear by individuals or industries. When the purposes of financial accounting
and income tax accounting differ, it is often desirable to report transactions or events differently
and to report the deferred tax consequences of any existing temporary differences as assets or
liabilities.
(c) FIFO and LIFO are inventory costing methods employed to measure the flow of costs. FIFO
matches the first cost incurred with the first revenue produced while LIFO matches the last cost
incurred with the first revenue produced after the cost is incurred. (This, of course, assumes a
perpetual inventory system is in use and may not be precisely true if a periodic inventory system is
employed.) If prices are changing, different costs would be matched with revenue for the same
quantity sold depending upon whether the LIFO or FIFO system is in use. (In a period of rising or
falling prices FIFO tends to value inventories at approximate market value in the balance sheet
and LIFO tends to match approximately the current replacement cost of an item with the revenue
produced.)
CA 8-6
(a) Inventory profits occur when the inventory costs matched against sales are less than the replacement cost of the inventory. The cost of goods sold therefore is understated and net income is con-
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-71
sidered overstated. By using LIFO (rather than some method such as FIFO), more recent costs
are matched against revenues and inventory profits are thereby reduced.
8-72Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 8-6 (Continued)
(b) As long as the price level increases and inventory quantities do not decrease, a deferral of income
taxes occurs under LIFO because the items most recently purchased at the higher price level are
matched against revenues. It should be noted that where unit costs tend to decrease as
production increases, the tax benefits that LIFO might provide are nullified. Also, where the
inventory turnover is high, the difference between inventory methods is negligible.
CA 8-7
(a) The average-cost method assumes that inventories are sold or issued evenly from the stock on
hand; the FIFO method assumes that goods are sold or used in the order in which they are
purchased (i.e., the first goods purchased are the first sold or used); and the LIFO method
matches the cost of the last goods purchased against revenue.
(b) The weighted-average-cost method combines the cost of all the purchases in the period with the
cost of beginning inventory and divides the total costs by the total number of units to determine the
average cost per unit. The moving-average-cost method, on the other hand, calculates a new
average unit cost when a purchase is made. The moving-average-cost method is used with
perpetual inventory records.
(c) When the purchase prices of inventoriable items are rising for a significant period of time, the
use of the LIFO method (instead of FIFO) will result in a lower net income figure. The reason is
that the LIFO method matches most recent purchases against revenue. Since the prices of goods
are rising, the LIFO method will result in higher cost of goods sold, thus lower net income. On the
balance sheet, the ending inventory tends to be understated (i.e., lower than the most recent
replacement cost) because the oldest goods have lower costs during a period of rising prices. In
addition, retained earnings under the LIFO method will be lower than that of the FIFO method
when inflation exists.
CA 8-8
(a) 1. The LIFO method (periodic) allocates costs on the assumption that the last goods purchased
are used first. If the amount of the inventory is computed at the end of the month under a
periodic system, then it would be assumed that the total quantity sold or issued during the
month would have come from the most recent purchases, and ordinarily no attempt would be
made to compare the dates of purchases and sales.
2. The dollar-value method of LIFO inventory valuation is a procedure using dollars instead of
units to measure increments or reductions in inventory. The method presumes that goods in
the inventory can be classified into pools or homogenous groups. After the grouping into pools
the ending inventory is priced at the end-of-year prices and a price index number is applied to
convert the total pool to the base-year price level. Such a price index might be obtained from
government sources, if available, or computed from the company’s records. The pools or
groupings of inventory are required where a single index number is inappropriate for all
elements of the inventory.
After the closing inventory and the opening inventory have been placed on the same base-year
price level, any difference between the two inventories is attributable to an increase or
decrease in inventory quantity at the base-year price. An increase in quantity so determined is
converted to the current-year price level and added to the amount of the opening inventory as
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-73
a separate inventory layer. A decrease in quantity is deducted from the appropriate layer of
opening inventory at the price level in existence when the layer was added.
8-74Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 8-8 (Continued)
(b) The advantages of the dollar-value method over the traditional LIFO method are as follows:
1. The application of the LIFO method is simplified because, under the pooling procedure, it is not
necessary to assign costs to opening and closing quantities of individual items. As a result,
companies with inventories comprised of thousands of items may adopt the dollar-value
method and minimize their bookkeeping costs.
2. Base inventories are more easily maintained. The dollar-value method permits greater
flexibility because each pool is made up of dollars rather than quantities. Thus, the problem of
LIFO liquidation is less possible.
The disadvantages of the dollar-value method as compared to the traditional LIFO method are
as follows:
1. Due to technological innovations and improvements over time, material changes in the composition of inventory may occur. Items found in the ending inventory may not have existed
during the base year. Thus, conversion of the ending inventory to base-year prices may be
difficult to calculate or to justify conceptually. This may necessitate a periodic change in the
choice of base year used.
2. Application of a year-end index, although widely used, implies use of the FIFO method. Other
indexes used include beginning-of-year index and average indexes.
3. Determination of the degree of similarity between items for the purpose of grouping them into
pools may be difficult and may be based upon arbitrary management decisions.
(c) The basic advantages of LIFO are:
1. Matching—In LIFO, the more recent costs are matched against current revenues to provide a
better measure of current earnings.
2. Tax benefits—As long as the price level increases and inventory quantities do not decrease, a
deferral of income taxes occurs.
3. Improved cash flow—By receiving tax benefits from use of LIFO, the company may reduce its
borrowings and related interest costs.
4. Future earnings hedge—With LIFO, a company’s future reported earnings will not be affected
substantially by future price declines. LIFO eliminates or substantially minimizes write-downs to
market as a result of price decreases because the inventory value ordinarily will be much lower
than net realizable value, unlike FIFO.
The major disadvantages of LIFO are:
1. Reduced earnings—Because current costs are matched against current revenues, net income
is lower than it is under other inventory methods when price levels are increasing.
2. Inventory understated—The inventory valuation on the balance sheet is ordinarily outdated
because the oldest costs remain in inventory.
3. Physical flow—LIFO does not approximate physical flow of the items except in peculiar
situations.
4. Real income not measured—LIFO falls short of measuring real income because it is often not
an adequate substitute for replacement cost.
5. Involuntary liquidation—If the base or layers of old costs are partially liquidated, irrelevant
costs can be matched against current revenues.
6. Poor buying habits—LIFO may cause poor buying habits because a company may simply
purchase more goods and match the cost of these goods against revenue to insure that old
costs are not charged to expense.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-75
CA 8-9
(a) A LIFO pool is a group of similar items which are combined and accounted for together under the
LIFO inventory method.
(b) It is possible to use a LIFO pool concept without using dollar-value LIFO. For example, the specific
goods pooled approach utilizes the concept of a LIFO pool with quantities as its measurement
basis.
(c) A LIFO liquidation occurs when a significant drop in inventory level leads to the erosion of an
earlier or base inventory layer. In a period of inflation (as usually is the case) LIFO liquidation will
distort net income (make it higher) and incur substantial tax payments.
(d) Price indexes are used in the dollar-value LIFO method to: (1) convert the ending inventory at
current year-end cost to base-year cost, and (2) determine the current-year cost for each inventory
layer other than the base-year layer.
(e) The dollar-value LIFO method measures the increases and decreases in a pool in terms of total
dollar value, not by the physical quantity of the goods in the inventory pool. As a result, the dollarvalue LIFO approach has the following advantages over specific goods LIFO pool. First, the pooled
approach reduces record keeping and clerical costs. Second, replacement is permitted if it is a
similar material, or similar in use, or interchangeable. Thus, it is more difficult to erode LIFO layers
when using dollar-value LIFO techniques.
CA 8-10
(a) FIFO (Amounts in thousands, except earnings per share)
2014
$11,000
Sales revenue
Cost of goods sold
Beginning inventory
8,000
Purchases
8,000
Cost of goods available for sale
16,000
1. Ending inventory*
(7,200)
Cost of goods sold
8,800
Gross profit
2,200
Operating expense (15% of sales)
1,650
Depreciation expense
300
Income before taxes
250
Income tax expense (40%)
100
2. Net income
$ 150
8-76Copyright © 2013 John Wiley & Sons, Inc.
2015
$12,000
2016
$15,600
7,200
9,900
17,100
(9,000)
8,100
3,900
1,800
300
1,800
720
$ 1,080
9,000
12,000
21,000
(9,000)
12,000
3,600
2,340
300
960
384
$ 576
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 8-10 (Continued)
2014
$ 0.15
2015
$ 1.08
2016
$ 0.58
4. Cash balance
Beginning balance
$ 400
Sales proceeds
11,000
Purchases
(8,000)
Operating expenses
(1,650)
Property, plant, and equipment
(350)
Income taxes
(100)
Dividends
(150)
Ending balance
$ 1,150
$ 1,150
12,000
(9,900)
(1,800)
(350)
(720)
(150)
$ 230
$
3. Earnings per share
230
15,600
(12,000)
(2,340)
(350)
(384)
(150)
$
606
*2014 = $ 8 X (1,000 + 1,000 – 1,100) = $7,200.
2015 = $ 9 X ( 900 + 1,100 – 1,000) = $9,000.
2016 = $10 X (1,000 + 1,200 – 1,300) = $9,000.
LIFO (Amounts in thousands, except earnings per share)
Sales revenue
Cost of goods sold
Beginning inventory
Purchases
Cost of goods available for sale
1. Ending inventory**
Cost of goods sold
Gross profit
Operating expense
Depreciation expense
Income before taxes
Income tax expense
2014
$11,000
2015
$12,000
2016
$15,600
8,000
8,000
16,000
(7,200)
8,800
2,200
1,650
300
250
100
7,200
9,900
17,100
(8,100)
9,000
3,000
1,800
300
900
360
8,100
12,000
20,100
(7,200)
12,900
2,700
2,340
300
60
24
2. Net income
$
150
$
540
$
36
3. Earnings per share
$
0.15
$
0.54
$
0.04
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-77
CA 8-10 (Continued)
2014
4. Cash balance
Beginning balance
$ 400
Sales proceeds
11,000
Purchases
(8,000)
Operating expenses
(1,650)
Property, plant, and equipment
(350)
Income taxes
(100)
Dividends
(150)
Ending balance
$ 1,150
2015
$ 1,150
12,000
(9,900)
(1,800)
(350)
(360)
(150)
$ 590
2016
$
590
15,600
(12,000)
(2,340)
(350)
(24)
(150)
$ 1,326
**2014 = $8 X (1,000 + 1,000 – 1,100) = $7,200.
2015 = ($8 X 900) + ($9 X 100) = $8,100.
2014 = $8 X 900 = $7,200.
(b)
According to the computation in (a), Harrisburg Company can achieve
the goal of income tax savings by switching to the LIFO method. As
shown in the schedules, under the LIFO method, Harrisburg will have
lower net income and thus lower income taxes for 2015 and 2016 (tax
savings of $360,000 in each year). As a result, Harrisburg will have a
better cash position at the end of 2015 and especially 2016 (year-end
cash balance will be higher by $360,000 for 2015 and $720,000 for 2016).
However, since Harrisburg Company is in a period of rising purchase
prices, the LIFO method will result in significantly lower net income
and earnings per share for 2015 and 2016. The management may need
to evaluate the potential impact that lower net income and earnings
per share might have on the company before deciding on the change
to the LIFO method.
8-78Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CA 8-11
(a)
Major stakeholders are investors, creditors, Wilkens’ management
(including the president and plant accountant), and other employees
of Wilkens Company. The inventory purchase in this instance reduces
net income substantially and lowers Wilkens Company’s tax liability.
Current stockholders and company management benefit during the
current year by this decision. However, the purchasing department
may be concerned about inventory management and complications
such as storage costs and possible inventory obsolescence.
Assuming awareness of these benefits and possible complications,
the plant accountant may follow the president’s recommendation
without violating GAAP. The plant accountant also must consider
whether this action is in the long-term best interests of the company
and whether inventory amounts would provide a meaningful picture
of Wilkens Company’s financial condition.
(b)
No, the president would not recommend a year-end inventory purchase because under FIFO there would be no effect on net income.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-79
FINANCIAL STATEMENT ANALYSIS CASE 1
(a)
Sales ........................................................................
Cost of goods sold* ................................................
Gross profit .............................................................
Selling and administrative expense .......................
Income from operations .........................................
Other expense .........................................................
Income before income tax ......................................
$618,876,000
474,206,000
144,670,000
102,112,000
42,558,000
24,712,000
$ 17,846,000
*Cost of goods sold (per annual report) .................
LIFO effect ($5,263,000 – $3,993,000).....................
Cost of goods sold (per FIFO) ................................
$475,476,000
(1,270,000)
$474,206,000
(b)
$17,846,000 income before taxes X 46.6% tax = $8,316,236 tax;
$17,846,000 – $8,316,236 tax = $9,529,764 net income as compared to
$8,848,000 net income under LIFO. This is $681,764 or about 8%
different. The question as to materiality is to allow the students an
opportunity to judge the significance of the difference between the
two costing methods. Since it is less than 10% different, some students
may feel that it is not material. An 8% change in net income, however,
is probably material, but this would depend on the industry and
perhaps on the company’s own past averages.
(c)
No, the use of different costing methods does not necessarily mean
that there is a difference in the physical flow of goods. As explained
in the text, the actual physical flow need have no relationship to the
cost flow assumption. The management of T J International has determined that LIFO is appropriate only for a subset of its products, and
these reasons have to do with economic characteristics, rather than
the physical flow of the goods.
8-80Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
FINANCIAL STATEMENT ANALYSIS CASE 2
(a)
The most likely physical flow of goods for a pharmaceutical manufacturer would be FIFO; that is, the first goods manufactured would be the
first goods sold. This is because pharmaceutical goods have an expiration date. The manufacturer would be careful to ship the goods made
earliest first and thereby reduce the risk that outdated goods will
remain in the warehouse.
(b)
Noven should consider first whether the inventory costing method
will make a difference. If the prices in the economy, especially if the
raw materials prices, are stable, then the inventory cost will be nearly
the same under any of the measurement methods. If inventory levels
are very small, then the method used will make little difference. Noven
should also consider the cost of keeping records. A small company
might not want to invest in complicated record keeping. The tax effects
of any differences should be considered, as well as any international
rules that might dictate Noven’s measurement of part of its inventory.
(c)
This amount is likely not shown in a separate inventory account
because it is immaterial; that is, it is not large enough to make a difference with investors. Another possible reason is that no goods have yet
been offered for sale. This amount might be in the Inventory of supplies
account, but it is more likely to be included with Prepaid and other
current assets, since it clearly is not just an article of supplies. This
will definitely be shown separately as soon as Noven begins to sell its
products to outside customers.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-81
FINANCIAL STATEMENT ANALYSIS CASE 3
Feb. 25
2012
Revenues ....................................
$36,100
Cost of sales ..............................
28,010
Ending inventories at FIFO ....... $2,492
Ending inventories at LIFO ....... 2,150
Difference ..........................
(342)
FIFO adjusted cost of sales .......
$27,668
(a)
(1) Inventory turnover @LIFO
(2) Inventory turnover @FIFO
Feb. 26
2011
$37,534
29,124
$2,552
2,270
(282)
$28,842
Feb. 27
2010
$40,597
31,444
$2,606
2,342
(264)
$31,180
2012
12.67
10.97
2011
12.63
11.18
Recall that the formula for computing inventory turnover is Cost
of Sales/Average Inventory
(b)
2012
2011
(1) Inventory turnover using sales and LIFO
16.33
16.28
Recall that the formula for computing inventory turnover in part (b)
is Sales/Average Inventory
(2) Inventory turnover using sales and FIFO
14.31
14.55
(c)
Using sales instead of cost of goods sold accounts for the mark-up in
the inventory. By using cost of goods sold, there is a better matching
of the costs associated to inventory, and should result in more useful
information.
8-82Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
(a)
FIFO
Residential pumps:
Ending inventory cost = (300 X $500) + (200 X $475) =
Beginning inventory cost = (200 X $400) =
Purchases = $225,000 + $190,000 + $150,000 =
Cost of goods sold = $80,000 + $565,000 – $245,000 =
$ 245,000
$ 80,000
$ 565,000
$ 400,000
Commercial pumps:
Ending inventory at cost = (500 X $1,000) =
Beginning inventory at cost = (600 X $800) =
Purchases = $540,000 + $285,000 + $500,000 =
Cost of goods sold = $480,000 + $1,325,000 – $500,000 =
$ 500,000
$ 480,000
$1,325,000
$1,305,000
Total ending inventory at cost = $245,000 + $500,000 =
$ 745,000
Total cost of goods sold = $1,305,000 + $400,000 =
$1,705,000
(b)
Dollar-value LIFO (one pool)
Ending inventory at current cost =
Ending inventory at base-year cost =
(500 X $800) + (500 X $400) =
Price index = $745,000 / $600,000 = 1.242
Current
Inventory at
base cost
Ending inventory
Base inventory ($80,000 + $480,000)
Layer ($600,000 – $560,000)
Total
$560,000
40,000
$600,000
$ 745,000
$ 600,000
Conversion
price index
1.000
1.242
Cost of goods sold =
$560,000 + ($565,000 + $1,325,000) – $609,680 =
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Inventory at
LIFO cost
$560,000
49,680
$609,680
$1,840,320
(For Instructor Use Only) 8-83
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Analysis
(a)
The purpose of a current ratio is to provide some indication of the
resources the company has available to meet short term obligations,
if those obligations come due. FIFO, which generally approximates
the current cost of inventory, usually better suits this objective. LIFO
inventory numbers on a balance sheet can sometimes be stated at
lower values.
(b)
The U.S. Securities and Exchange Commission requires companies
using LIFO to disclose the current cost of their inventories. Many
companies disclose the FIFO cost of their inventories since that
generally approximates current cost. This difference between LIFO cost
and current cost is called the “LIFO reserve.” A financial statement
reader can use the LIFO reserve to convert a LIFO company’s
inventory and cost of goods sold to what they would have been if the
company had used FIFO. This makes it possible to directly compare
LIFO and FIFO companies, although the comparison must be done on
a FIFO basis, not LIFO.
Principles
Companies can change from one inventory accounting method to
another, but not back and forth. Changes in accounting method (when
not mandated by a regulatory body such as the FASB) should be to
improve the financial statement reader’s ability to understand the
companies’ financial results and position. The tradeoff is usually
comparability for consistency. That is, if a company changes to a
method that is used by most of its competitors, the change increases
comparability. But, because the company now uses different methods
across different years, consistency is sacrificed. Companies sometimes
change accounting methods because they believe it improves the
matching of expenses to revenues. Again, consistency across reporting
periods is sacrificed, however.
8-84Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL RESEARCH
(a)
According to FASB ASC 605-15-15:
15-2 The guidance in this Subtopic applies to the following
transactions:
a. Sales in which a product may be returned, whether as a
matter of contract or as a matter of existing practice, either
by the ultimate customer or by a party who resells the
product to others. The product may be returned for a refund
of the purchase price, for a credit applied to amounts owed
or to be owed for other purchases, or in exchange for other
products. The purchase price or credit may include amounts
related to incidental services, such as installation. However,
exchanges by ultimate customers of one item for another of
the same kind, quality, and price (for example, one color or
size for another) are not considered returns for purposes of
this Subtopic.
b. Sales by a manufacturer who repurchases the product subject
to an operating lease with the buyer.
(b)
The guidance in this subtopic (FASB ASC 605-15-15) does not apply to
the following transactions:
a. Revenue in service industries if part or all of the service revenue
may be returned under cancellation privileges granted to the buyer.
b. Transactions involving real estate or leases
c. Sales transactions in which a customer may return defective goods,
such as under warranty provisions. (See Topic 460 regarding warranty obligations incurred in connection with the sale of goods or
services that may require further performance by the seller after
the sale has taken place.)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-85
PROFESSIONAL RESEARCH (Continued)
> Right of Return (FASB ASC 605-15)
05-3 It is the practice in some industries for customers to be given the
right to return a product to the seller under certain circumstances.
In the case of sales to ultimate customer, the most usual circumstance is customer dissatisfaction with the product. For sales to
customers engaged in the business of reselling the product,
the most usual circumstance is that the customer has not been
able to resell the product to another party. (Arrangements in
which customers buy products for resale with the right to return
products often are referred to as guaranteed sales.)
(c)
Yes, different industries should be allowed to make different types of
policies. (FASB ASC 605-15-05).
05-4 Sometimes, the returns occur very soon after a sale is made, as
in the newspaper and perishable food industries. In other cases,
returns occur over a longer period, such as with book publishing
and equipment manufacturing. The rate of returns varies
considerably from a low rate usually found in the food industry
to a high rate often found in the publishing industry.
(d)
According to FASB ASC 605-15-25:
25-3 The ability to make a reasonable estimate of the amount of future
returns depends on many factors and circumstances that will vary
from one case to the next. However, any of the following factors
may impair the ability to make a reasonable estimate:
a. The susceptibility of the product to significant external factors,
such as technological obsolescence or changes in demand
b. Relatively long periods in which a particular product may be
returned
8-86Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
PROFESSIONAL RESEARCH (Continued)
c. Absence of historical experience with similar types of sales
of similar products, or inability to apply such experience because of changing circumstances, for example, changes in
the selling entity’s marketing policies or relationships with
its customers
d. Absence of a large volume of relatively homogeneous
transactions.
25-4 The existence of one or more of the factors in the preceding
paragraph, in light of the significance of other factors, may not
be sufficient to prevent making a reasonable estimate; likewise,
other factors may preclude a reasonable estimate.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 8-87
PROFESSIONAL SIMULATION
Explanation
To:
Norwel Management
From:
Student
Re:
Advantages of LIFO
The major advantages of the LIFO inventory method include better matching
of costs with revenues, deferral of income taxes, improved cash flow, and
minimization of the impact of future price declines on future earnings.
Better matching arises in the use of LIFO because the most recent costs
are matched with current revenues. In times of rising prices, this matching
will result in lower taxable income, which in turn will reduce current taxes.
The deferral of taxes under LIFO contributes to a higher cash flow. As
illustrated in the analysis above the switch to FIFO resulted in a higher
ending inventory, which leads to a lower cost of goods sold and higher
income; thus, Norwel’s reported income will be higher but so will its taxes.
Note that under LIFO, future taxes may be higher when lower cost items of
inventory are sold in future periods and matched with higher sales prices.
8-88Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CHAPTER 9
Inventories: Additional Valuation Issues
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Problems
1, 2, 3,
9, 10
1, 2, 3, 5
6
1. Lower-of-cost-or-market.
1, 2, 3,
4, 5, 6
1, 2, 3
1, 2, 3,
4, 5, 6
2. Inventory accounting
changes; relative sales
value method; net realizable value.
7, 8
4
7, 8
3. Purchase commitments.
9
5, 6
9, 10
9
4. Gross profit method.
10, 11,
12, 13
7
11, 12, 13,
14, 15,
16, 17
4, 5
5. Retail inventory method.
14, 15, 16
8
18, 19, 20,
22, 23, 26
6, 7, 8,
10, 11
6. Presentation and
analysis.
17, 18
9
21
9
*7. LIFO retail.
19
10
22, 23
12, 13, 14
11
24, 25,
26, 27
11, 13
28
13, 14
*8. Dollar-value LIFO retail.
*9. Special LIFO problems.
Concepts
for Analysis
Exercises
4, 5
*This material is discussed in an Appendix to the chapter.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
9-1
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Questions
Exercises
Problems
1.
Describe and apply the lowerof-cost-or-market rule.
1, 2, 3, 4
1, 2, 3
1, 2, 3,
4, 5, 6
1, 2, 3,
9, 10
2.
Explain when companies value
inventories at net realizable
value.
5, 6, 7
1, 2, 3
1, 2, 3,
4, 5, 6
1, 2, 3,
9, 10
3.
Explain when companies use
the relative sales value method
to value inventories.
8
4
7, 8
4.
Discuss accounting issues
related to purchase
commitments.
9
5, 6
9, 10
9
5.
Determine ending inventory by
applying the gross profit
method.
10, 11, 12,
13
7
11, 12, 13,
14, 15, 16,
17
4, 5
6.
Determine ending inventory by
applying the retail inventory
method.
14, 15, 16
8
18, 19, 20
6, 7, 8
7.
Explain how to report and
analyze inventory.
17, 18
9
21
9
*8.
Determine ending inventory by
applying the LIFO retail
methods.
19
10, 11
22, 23, 24,
25, 26,
27, 28
11, 12,
13, 14
Concepts
for
Analysis
CA9-1,
CA9-2,
CA9-3,
CA9-5
CA9-6
CA9-4,
CA9-5
*This material is discussed in an Appendix to the chapter.
9-2Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
E9-1
E9-2
E9-3
E9-4
E9-5
E9-6
E9-7
E9-8
E9-9
E9-10
E9-11
E9-12
E9-13
E9-14
E9-15
E9-16
E9-17
E9-18
E9-19
E9-20
E9-21
*E9-22
*E9-23
*E9-24
*E9-25
*E9-26
*E9-27
*E9-28
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Lower-of-cost-or-market—journal entries.
Lower-of-cost-or-market—valuation account.
Lower-of-cost-or-market—error effect.
Relative sales value method.
Relative sales value method.
Purchase commitments.
Purchase commitments.
Gross profit method.
Gross profit method.
Gross profit method.
Gross profit method.
Gross profit method.
Gross profit method.
Gross profit method.
Retail inventory method.
Retail inventory method.
Retail inventory method.
Analysis of inventories.
Retail inventory method—conventional and LIFO.
Retail inventory method—conventional and LIFO.
Dollar-value LIFO retail.
Dollar-value LIFO retail.
Conventional retail and dollar-value LIFO retail.
Dollar-value LIFO retail.
Change to LIFO retail.
Simple
Simple
Simple
Simple
Moderate
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Simple
Moderate
Simple
Simple
Moderate
Moderate
Simple
Simple
Simple
Moderate
Moderate
Simple
Simple
Moderate
Moderate
Simple
15–20
10–15
15–20
10–15
20–25
10–15
15–20
12–17
05–10
15–20
8–13
10–15
15–20
15–20
10–15
15–20
20–25
20–25
12–17
20–25
10–15
25–35
15–20
10–15
5–10
20–25
20–25
10–15
P9-1
P9-2
P9-3
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Entries for lower-of-cost-or-market—cost-of-goodsold and loss.
Gross profit method.
Gross profit method.
Retail inventory method.
Retail inventory method.
Simple
Moderate
Moderate
10–15
25–30
30–35
Moderate
Complex
Moderate
Moderate
20–30
40–45
20–30
20–30
P9-4
P9-5
P9-6
P9-7
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Time
(minutes)
(For Instructor Use Only)
9-3
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Level of
Difficulty
Time
(minutes)
Item
Description
P9-8
P9-9
Moderate
Moderate
20–30
30–40
P9-10
*P9-11
*P9-12
*P9-13
*P9-14
Retail inventory method.
Statement and note disclosure, LCM, and purchase
commitment.
Lower-of-cost-or-market.
Conventional and dollar-value LIFO retail.
Retail, LIFO retail, and inventory shortage.
Change to LIFO retail.
Change to LIFO retail; dollar-value LIFO retail.
Moderate
Moderate
Moderate
Moderate
Complex
30–40
30–35
30–40
30–40
40–50
CA9-1
CA9-2
CA9-3
CA9-4
CA9-5
CA9-6
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Lower-of-cost-or-market.
Retail inventory method.
Cost determination, LCM, retail method.
Purchase commitments.
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
15–25
20–30
15–20
25–30
15–25
10–15
9-4Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO CODIFICATION EXERCISES
CE9-1
(a)
According to the Master Glossary, Inventory is defined as the aggregate of those items of tangible
personal property that have any of the following characteristics:
1. Held for sale in the ordinary course of business
2. In process of production for such sale
3. To be currently consumed in the production of goods or services to be available for sale.
The term inventory embraces goods awaiting sale (the merchandise of a trading concern and the
finished goods of a manufacturer), goods in the course of production (work in process), and goods
to be consumed directly or indirectly in production (raw materials and supplies). This definition of
inventories excludes long-term assets subject to depreciation accounting, or goods which, when
put into use, will be so classified. The fact that a depreciable asset is retired from regular use and
held for sale does not indicate that the item should be classified as part of the inventory. Raw
materials and supplies purchased for production may be used or consumed for the construction of
long-term assets or other purposes not related to production, but the fact that inventory items
representing a small portion of the total may not be absorbed ultimately in the production process
does not require separate classification. By trade practice, operating materials and supplies of
certain types of entities such as oil producers are usually treated as inventory.
(b)
According to the Master Glossary, the phrase lower-of-cost-or-market, the term market means
current replacement cost (by purchase or by reproduction, as the case may be) provided that it
meets both of the following conditions.
1. Market shall not exceed the net realizable value
2. Market shall not be less than net realizable value reduced by an allowance for an approximately normal profit margin.
(c)
According to the Master Glossary, two definitions are provided for the phrase net realizable value
1. Estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal.
2. Valuation of inventories at estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and transportation.
The second definition provides a link to guidance for lower-of-cost-or-market in the agricultural industry
(FASB ASC 905-330-35)
Growing Crops
35-1 Costs of growing crops shall be accumulated until the time of harvest. Growing crops shall be
reported at the lower-of-cost-or-market.
> Developing Animals
35-2 Developing animals to be held for sale shall be valued at the lower-of-cost-or-market.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
9-5
CE9-1 (Continued)
> Animals Available and Held for Sale
35-3 Animals held for sale shall be valued at either of the following:
(a) The lower-of-cost-or-market
(b) At sales price less estimated costs of disposal, if all the following conditions exist:
1. The product has a reliable, readily determinable, and realizable market price.
2. The product has relatively insignificant and predictable costs of disposal.
3. The product is available for immediate delivery.
Inventories of harvested crops and livestock held for sale and commonly referred to as valued at
market are actually valued at net realizable value.
> Harvested Crops
35-4 Inventories of harvested crops shall be valued using the same criteria as animals held for sale in
the preceding paragraph.
CE9-2
According to FASB ASC 330-10-35-1 through 5: Adjustments to Lower-of-Cost-or-Market
A departure from the cost basis of pricing the inventory is required when the utility of the goods is no
longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the
ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence,
changes in price levels, or other causes, the difference shall be recognized as a loss of the current
period. This is generally accomplished by stating such goods at a lower level commonly designated as
market. Thus, in accounting for inventories, a loss shall be recognized whenever the utility of goods is
impaired by damage, deterioration, obsolescence, changes in price levels, or other causes.
The measurement of such losses shall be accomplished by applying the rule of pricing inventories at
the lower-of-cost-or-market. This provides a practical means of measuring utility and thereby determining the amount of the loss to be recognized and accounted for in the current period. However, utility
is indicated primarily by the current cost of replacement of the goods as they would be obtained by
purchase or reproduction. In applying the rule, however, judgment must always be exercised and no
loss shall be recognized unless the evidence indicates clearly that a loss has been sustained.
Replacement or reproduction prices would not be appropriate as a measure of utility when the estimated sales value, reduced by the costs of completion and disposal, is lower, in which case the realizable
value so determined more appropriately measures utility.
In addition, when the evidence indicates that cost will be recovered with an approximately normal profit
upon sale in the ordinary course of business, no loss shall be recognized even though replacement or
reproduction costs are lower. This might be true, for example, in the case of production under firm sales
contracts at fixed prices, or when a reasonable volume of future orders is assured at stable selling prices.
In summary, the determination of the amount of the write-off should be based on factors that relate to
the net realizable value of the inventory, not the amount that will maximize the loss in the current
period. Note that the sale manager’s proposed accounting is an example of “cookie jar” reserves, as
discussed in Chapter 4. By writing the inventory down to an unsupported low value, the company can
report higher gross profit and net income in subsequent periods when the inventory is sold.
9-6Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
CE9-3
According to FASB ASC 330-10-35-6, if inventory has been the hedged item in a fair value hedge, the
inventory’s cost basis used in the lower-of-cost-or-market accounting shall reflect the effect of the
adjustments of its carrying amount made pursuant to paragraph 815-25-35-1(b). And, according to 8152-35-1(b), gains and losses on a qualifying fair value hedge shall be accounted for as follows: The gain
or loss (that is, the change in fair value) on the hedged item attributable to the hedged risk shall adjust
the carrying amount of the hedged item and be recognized currently in earnings.
CE9-4
See FASB ASC 210-10-S99—Regulation S-X Rule 5-02, Balance Sheets
S99-1 The following is the text of Regulation S-X Rule 5-02, Balance Sheets.
The purpose of this rule is to indicate the various line items and certain additional disclosures
which, if applicable, and except as otherwise permitted by the Commission, should appear on
the face of the balance sheets or related notes filed for the persons to whom this article pertains
(see § 210.4–01(a)).
• ASSETS AND OTHER DEBITS
• Current Assets, when appropriate
• [See § 210.4–05]
• 6. Inventories.
– (a) State separately in the balance sheet or in a note thereto, if practicable, the amounts of
major classes of inventory such as:
• 1. Finished goods;
• 2. inventoried cost relating to long-term contracts or programs (see (d) below and
§ 210.4–05);
• 3. work in process (see § 210.4–05);
• 4. raw materials; and
• 5. supplies.
– If the method of calculating a LIFO inventory does not allow for the practical determination of
amounts assigned to major classes of inventory, the amounts of those classes may be stated
under cost flow assumptions other that LIFO with the excess of such total amount over the
aggregate LIFO amount shown as a deduction to arrive at the amount of the LIFO inventory.
– (b) The basis of determining the amounts shall be stated.
If cost is used to determine any portion of the inventory amounts, the description of this method
shall include the nature of the cost elements included in inventory. Elements of cost include,
among other items, retained costs representing the excess of manufacturing or production costs
over the amounts charged to cost of sales or delivered or in-process units, initial tooling or other
deferred startup costs, or general and administrative costs.
– The method by which amounts are removed from inventory (e.g., average cost, first-in, firstout, last-in, first-out, estimated average cost per unit) shall be described. If the estimated
average cost per unit is used as a basis to determine amounts removed from inventory under
a total program or similar basis of accounting, the principal assumptions (including, where
meaningful, the aggregate number of units expected to be delivered under the program, the
number of units delivered to date and the number of units on order) shall be disclosed.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
9-7
CE9-4 (Continued)
– If any general and administrative costs are charged to inventory, state in a note to the
financial statements the aggregate amount of the general and administrative costs incurred in
each period and the actual or estimated amount remaining in inventory at the date of each
balance sheet.
– (c) If the LIFO inventory method is used, the excess of replacement or current cost over
stated LIFO value shall, if material, be stated parenthetically or in a note to the financial
statements.
– (d) For purposes of §§ 210.5–02.3 and 210.5–02.6, long-term contracts or programs include
• 1. all contracts or programs for which gross profits are recognized on a percentageof-completion method of accounting or any variant thereof (e.g., delivered unit,
cost to cost, physical completion), and
• 2. any contracts or programs accounted for on a completed contract basis of
accounting where, in either case, the contracts or programs have associated with
them material amounts of inventories or unbilled receivables and where such
contracts or programs have been or are expected to be performed over a period
of more than twelve months. Contracts or programs of shorter duration may also
be included, if deemed appropriate.
– For all long-term contracts or programs, the following information, if applicable, shall be stated
in a note to the financial statements:
(i) The aggregate amount of manufacturing or production costs and any related deferred
costs (e.g., initial tooling costs) which exceeds the aggregate estimated cost of all inprocess and delivered units on the basis of the estimated average cost of all units
expected to be produced under long-term contracts and programs not yet complete, as
well as that portion of such amount which would not be absorbed in cost of sales on
existing firm orders at the latest balance sheet date. In addition, if practicable, disclose the
amount of deferred costs by type of cost (e.g., initial tooling, deferred production, etc.)
(ii) The aggregate amount representing claims or other similar items subject to uncertainty
concerning their determination or ultimate realization, and include a description of the
nature and status of the principal items comprising such aggregate amount.
(iii) The amount of progress payments netted against inventory at the date of the balance
sheet.
9-8Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
ANSWERS TO QUESTIONS
1. Where there is evidence that the utility of goods to be disposed of in the ordinary course of
business will be less than cost, the difference should be recognized as a loss in the current period,
and the inventory should be stated at market value in the financial statements.
2. The upper (ceiling) and lower (floor) limits for the value of the inventory are intended to prevent the
inventory from being reported at an amount in excess of the net realizable value or at an amount
less than the net realizable value less a normal profit margin. The maximum limitation, not to
exceed the net realizable value (ceiling) covers obsolete, damaged, or shopworn material and
prevents overstatement of inventories and understatement of the loss in the current period. The
minimum limitation deters understatement of inventory and overstatement of the loss in the current
period.
3. The usual basis for carrying forward the inventory to the next period is cost. Departure from cost is
required when the utility of the goods included in the inventory is less than their cost. This loss in
utility should be recognized as a loss of the current period, the period in which it occurred.
Furthermore, the subsequent period should be charged for goods at an amount that measures
their expected contribution to that period. In other words, the subsequent period should be
charged for inventory at prices no higher than those which would have been paid if the inventory
had been obtained at the beginning of that period. (Historically, the lower-of-cost-or-market rule
arose from the accounting convention of providing for all losses and anticipating no profits.)
In accordance with the foregoing reasoning, the rule of “cost or market, whichever is lower” may
be applied to each item in the inventory, to the total of the components of each major category, or
to the total of the inventory, whichever most clearly reflects operations. The rule is usually applied
to each item, but if individual inventory items enter into the same category or categories of finished
product, alternative procedures are suitable.
The arguments against the use of the lower-of-cost-or-market method of valuing inventories
include the following:
(a) The method requires the reporting of estimated losses (all or a portion of the excess of actual
cost over replacement cost) as definite income charges even though the losses have not been
sustained to date and may never be sustained. Under a consistent criterion of realization a
drop in replacement cost below original cost is no more a sustained loss than a rise above
cost is a realized gain.
(b) A price shrinkage is brought into the income statement before the loss has been sustained
through sale. Furthermore, if the charge for the inventory write-downs is not made to a special
loss account, the cost figure for goods actually sold is inflated by the amount of the estimated
shrinkage in price of the unsold goods. The title “Cost of Goods Sold” therefore becomes a
misnomer.
(c) The method is inconsistent in application in a given year because it recognizes the propriety
of implied price reductions but gives no recognition in the accounts or financial statements to
the effect of the price increases.
(d) The method is also inconsistent in application in one year as opposed to another because the
inventory of a company may be valued at cost in one year and at market in the next year.
(e) The lower-of-cost-or-market method values the inventory in the balance sheet conservatively.
Its effect on the income statement, however, may be the opposite. Although the income
statement for the year in which the unsustained loss is taken is stated conservatively, the net
income on the income statement of the subsequent period may be distorted if the expected
reductions in sales prices do not materialize.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
9-9
Questions Chapter 9 (Continued)
(f)
In the application of the lower-of-cost-or-market rule a prospective “normal profit” is used in
determining inventory values in certain cases. Since “normal profit” is an estimated figure
based upon past experiences (and might not be attained in the future), it is not objective in
nature and presents an opportunity for manipulation of the results of operations.
4. The lower-of-cost-or-market rule may be applied directly to each item or to the total of the
inventory (or in some cases, to the total of the components of each major category). The method
should be the one that most clearly reflects income. The most common practice is to price the
inventory on an item-by-item basis. Companies favor the individual item approach because tax
requirements require that an individual-item basis be used unless it involves practical difficulties. In
addition, the individual item approach gives the most conservative valuation for balance sheet
purposes.
5. (1)
(2)
(3)
(4)
(5)
$14.50.
$16.10.
$13.75.
$9.70.
$15.90.
6. One approach is to record the inventory at cost and then reduce it to market, thereby reflecting a
loss in the current period (often referred to as the loss method). The loss would then be shown as
a separate item in the income statement and the cost of goods sold for the year would not be
distorted by its inclusion. An objection to this method of valuation is that an inconsistency is
created between the income statement and balance sheet. In attempting to meet this inconsistency
some have advocated the use of a special account to receive the credit for such an inventory
write-down, such as Allowance to Reduce Inventory to Market which is a contra account against
inventory on the balance sheet. It should be noted that the disposition of this account presents
problems to accountants.
Another approach is merely to substitute market for cost when pricing the new inventory (often
referred to as the cost-of-goods-sold method). Such a procedure increases cost of goods sold by
the amount of the loss and fails to reflect this loss separately. For this reason, many theoretical
objections can be raised against this procedure.
7. An exception to the normal recognition rule occurs where (1) there is a controlled market with a
quoted price applicable to specific commodities and (2) no significant costs of disposal are
involved. Certain agricultural products and precious metals which are immediately marketable at
quoted prices are often valued at net realizable value (market price).
8. Relative sales value is an appropriate basis for pricing inventory when a group of varying units is
purchased at a single lump-sum price (basket purchase). The purchase price must be allocated in
some manner or on some basis among the various units. When the units vary in size, character,
and attractiveness, the basis for allocation must reflect both quantitative and qualitative aspects. A
suitable basis then is the relative sales value of the units that comprise the inventory.
9. The drop in the market price of the commitment should be charged to operations in the current year
if it is material in amount. The following entry would be made [($6.20 – $5.90) X 150,000] = $45,000:
Unrealized Holding Gain or Loss—Income (Purchase Commitments) .......
Estimated Liability on Purchase Commitments ...............................
45,000
45,000
The entry is made because a loss in utility has occurred during the period in which the market
decline took place. The account credited in the above entry should be included among the current
liabilities on the balance sheet with an appropriate note indicating the nature and extent of the
9-10Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
commitment. This liability indicates the minimum obligation on the commitment contract at the
present time—the amount that would have to be forfeited in case of breach of contract.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-11
Questions Chapter 9 (Continued)
10. The major uses of the gross profit method are: (1) it provides an approximation of the ending
inventory which the auditor might use for testing validity of physical inventory count; (2) it means
that a physical count need not be taken every month or quarter; and (3) it helps in determining
damages caused by casualty when inventory cannot be counted.
11. Gross profit as a percentage of sales indicates that the markup is based on selling price rather
than cost; for this reason the gross profit as a percentage of selling price will always be lower than
if based on cost. Conversions are as follows:
25% on cost =
33 1/3% on cost =
33 1/3% on selling price =
60% on selling price =
20% on selling price
25% on selling price
50% on cost
150% on cost
12. A markup of 25% on cost equals a 20% markup on selling price; therefore, gross profit equals
$1,000,000 ($5 million X 20%) and net income equals $250,000 [$1,000,000 – (15% X $5 million)].
The following formula was used to compute the 20% markup on selling price:
Gross profit on selling price =
Percentage markup on cost
.25
=
= 20%
100% + Percentage markup on cost
1 + .25
13. Inventory, January 1, 2014 ....................................................................
Purchases to February 10, 2014 ............................................................
Freight-in to February 10, 2014..............................................................
Merchandise available....................................................................
Sales revenue to February 10, 2014 ......................................................
Less gross profit at 40% .................................................................
Sales at cost ..............................................................................
Inventory (approximately) at February 10, 2014 .........................
$ 400,000
$1,140,000
60,000
1,200,000
1,600,000
1,950,000
780,000
1,170,000
$ 430,000
14. The validity of the retail inventory method is dependent upon (1) the composition of the inventory
remaining approximately the same at the end of the period as it was during the period, and
(2) there being approximately the same rate of markup at the end of the year as was used
throughout the period.
The retail method, though ordinarily applied on a departmental basis, may be appropriate for the
business as a unit if the above conditions are met.
15. The conventional retail method is a statistical procedure based on averages whereby inventory
figures at retail are reduced to an inventory valuation figure by multiplying the retail figures by a
percentage which is the complement of the markup percent.
To determine the markup percent, original markups and additional net markups are related to the
original cost. The complement of the markup percent so determined is then applied to the inventory
at retail after the latter has been reduced by net markdowns, thus in effect achieving a lower-ofcost-or-market valuation.
An example of reduction to market follows:
Assume purchase of 100 items at $1 each, marked to sell at $1.50 each, at which price 80 were
sold. The remaining 20 are marked down to $1.15 each.
9-12Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
The inventory at $15.33 is $4.67 below original cost and is valued at an amount which will produce
the “normal” 33 1/3% gross profit if sold at the present retail price of $23.00.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-13
Questions Chapter 9 (Continued)
Computation of Inventory
Purchases
Sales revenue
Markdowns (20 X $.35)
Inventory at retail
Inventory at lower-of-cost-or-market $23 X 66 2/3% = $15.33
16. (a)
Cost
$100
Retail
$150
(120)
(7)
$ 23
Ratio
66 2/3%
Ending inventory:
Cost
Beginning inventory ..........................................................
Purchases.........................................................................
Freight-in ..........................................................................
Totals ........................................................................
Add net markups...............................................................
$ 149,000
1,400,000
70,000
1,619,000
_________
$1,619,000
Deduct net markdowns .....................................................
Deduct sales revenue .......................................................
Ending inventory, at retail..................................................
Ratio of cost to selling price
$1,619,000
$2,535,500
Retail
$
283,500
2,160,000
2,443,500
92,000
2,535,500
48,000
2,487,500
2,175,000
$ 312,500
= 63.85%.
Ending inventory estimated at cost = 64% X $312,500 = $200,000.
(b)
The retail method, above, showed an ending inventory at retail of $312,500; therefore, merchandise not accounted for amounts to $17,500 ($312,500 – $295,000) at retail and $11,200
($17,500 X .64) at cost.
17. Information relative to the composition of the inventory (i.e., raw material, work-in-process, and
finished goods); the inventory financing where significant or unusual (transactions with related
parties, product financing arrangements, firm purchase commitments, involuntary liquidations of
LIFO inventories, pledging inventories as collateral); and the inventory costing methods employed
(lower-of-cost-or-market, FIFO, LIFO, average cost) should be disclosed. If Deere Company uses
LIFO, it should also report the LIFO reserve.
18. Inventory turnover measures how quickly inventory is sold. Generally, the higher the inventory
turnover, the better the enterprise is performing. The more times the inventory turns over, the
smaller the net margin can be to earn an appropriate total profit and return on assets. For
example, a company can price its goods lower if it has a high inventory turnover. A company with
a low profit margin, such as 2%, can earn as much as a company with a high net profit margin,
such as 40%, if its inventory turnover is often enough. To illustrate, a grocery store with a 2% profit
margin can earn as much as a jewelry store with a 40% profit margin and an inventory turnover of
1 if its turnover is more than 20 times.
19. Two major modifications are necessary. First, the beginning inventory should be excluded from the
numerator and denominator of the cost-to-retail percentage and second, markdowns should be
included in the denominator of the cost-to-retail percentage.
9-14Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-1
(a)
Ceiling
Floor
(b)
$106.00
(c)
$51.00
$193.00 ($212 – $19)
$161.00 ($212 – $19 – $32)
BRIEF EXERCISE 9-2
Item
Jokers
Penguins
Riddlers
Scarecrows
Cost
$2,000
5,000
4,400
3,200
Designated
Market
$2,050
4,950
4,550
3,070
LCM
$2,000
4,950
4,400
3,070
BRIEF EXERCISE 9-3
(a)
Cost-of-goods-sold method
Cost of Goods Sold .........................................................21,000
Allowance to Reduce Inventory to Market ...........
21,000*
*($286,000 – $265,000)
(b)
Loss method
Loss Due to Market Decline of Inventory ......................21,000
Allowance to Reduce Inventory to Market ...........
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
21,000
(For Instructor Use Only) 9-15
BRIEF EXERCISE 9-4
Group
Number
of CDs
Sales
Price
per CD
1
2
3
100
800
100
$ 5
$10
$15
Total
Sales
Price
Relative
Sales
Price
$
5/100* X $8,000 =
80/100 X $8,000 =
15/100 X $8,000 =
500
8,000
1,500
$10,000
*$500/$10,000 = 5/100
Cost
Allocated
to CDs
Total
Cost
$ 400
6,400
1,200
$8,000
Cost
per CD
$ 4**
$ 8
$12
**$400/100 = $4
BRIEF EXERCISE 9-5
Unrealized Holding Loss—Income (Purchase
Commitments) ..............................................................
Estimated Liability on Purchase
Commitments ($1,000,000 – $950,000) ...............
50,000
50,000
BRIEF EXERCISE 9-6
Purchases (Inventory) ..................................................... 950,000
Estimated Liability on Purchase Commitments ............ 50,000
Cash ........................................................................
1,000,000
BRIEF EXERCISE 9-7
Beginning inventory ...................................................
Purchases ...................................................................
Cost of goods available .............................................
Sales revenue .............................................................
Less gross profit (35% X 700,000) .............................
Estimated cost of goods sold ....................................
Estimated ending inventory destroyed in fire ..........
9-16Copyright © 2013 John Wiley & Sons, Inc.
$150,000
500,000
650,000
$700,000
245,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
455,000
$195,000
(For Instructor Use Only)
Ahmed Nawfal
BRIEF EXERCISE 9-8
Beginning inventory.............................................
Net purchases ......................................................
Net markups .........................................................
Totals ....................................................................
Deduct:
Net markdowns ....................................................
Sales revenue .......................................................
Ending inventory at retail ....................................
Cost
$ 12,000
120,000
$132,000
Retail
$ 20,000
170,000
10,000
200,000
7,000
147,000
$ 46,000
Cost-to-retail ratio: $132,000 ÷ $200,000 = 66%
Ending inventory at lower-of cost-or-market (66% X $46,000) = $30,360
BRIEF EXERCISE 9-9
Inventory turnover:
$9,275
$1,615 + $1,620
2
= 5.73 times
Average days to sell inventory:
365 ÷ 5.73 = 63.7 days
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-17
*BRIEF EXERCISE 9-10
Beginning inventory ..............................................
Net purchases........................................................
Net markups...........................................................
Net markdowns......................................................
Total (excluding beginning inventory) .................
Total (including beginning inventory) ..................
Deduct: Sales revenue .........................................
Ending inventory at retail......................................
Cost
$ 12,000
120,000
120,000
$132,000
Retail
$ 20,000
170,000
10,000
(7,000)
173,000
193,000
147,000
$ 46,000
Cost-to-retail ratio: $120,000 ÷ $173,000 = 69.4%
Ending inventory at cost
$20,000 X 60% ($12,000/$20,000) = $12,000
26,000 X 69.4%
= 18,044
$46,000
$30,044
*BRIEF EXERCISE 9-11
Beginning inventory ..............................................
Net purchases........................................................
Net markups...........................................................
Net markdowns......................................................
Total (excluding beginning inventory) .................
Total (including beginning inventory) ..................
Deduct: Sales revenue .........................................
Ending inventory at retail......................................
9-18Copyright © 2013 John Wiley & Sons, Inc.
Cost
$ 12,000
120,000
120,000
$132,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Retail
$ 20,000
170,000
10,000
(7,000)
173,000
193,000
147,000
$ 46,000
(For Instructor Use Only)
Ahmed Nawfal
*BRIEF EXERCISE 9-11 (Continued)
Cost-to-retail ratio: $120,000 ÷ $173,000 = 69.4%
Ending inventory at retail deflated to base year prices
$46,000 ÷ 1.15 = $40,000
Ending inventory at cost
$20,000 X 100% X 60% = $12,000
20,000 X 115% X 69.4% = 15,962
$27,962
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-19
SOLUTIONS TO EXERCISES
EXERCISE 9-1 (15–20 minutes)
Per Unit
Part No.
110
111
112
113
120
121
122
Totals
Quantity
600
1,000
500
200
400
1,600
300
(a)
$330,820.
(b)
$340,020.
Cost
$ 90
60
80
170
205
16
240
Market
$100.00
52.00
76.00
180.00
208.00
0.20
235.00
Total
Cost
$ 54,000
60,000
40,000
34,000
82,000
25,600
72,000
$367,600
Total
Market
$ 60,000
52,000
38,000
36,000
83,200
320
70,500
$340,020
Lower-ofCost-orMarket
$ 54,000
52,000
38,000
34,000
82,000
320
70,500
$330,820
EXERCISE 9-2 (10–15 minutes)
Item
D
E
F
G
H
I
Net
Realizable
Value
(Ceiling)
$90*
80
65
65
80
60
Net
Realizable
Value
Less
Normal
Profit
(Floor)
$70**
60
45
45
60
40
Replacement
Cost
$120
72
70
30
70
30
Designated
Market
$90
72
65
45
70
40
Cost
$75
80
80
80
50
36
LCM
$75
72
65
45
50
36
*Estimated selling price – Estimated selling expense = $120 – $30 = $90.
**Net realizable value – Normal profit margin = $90 – $20 = $70.
9-20Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 9-3 (15–20 minutes)
Item
No.
Cost
per
Unit
Replacement
Cost
Net
Realizable
Value
1320
1333
1426
1437
1510
1522
1573
1626
$3.20
2.70
4.50
3.60
2.25
3.00
1.80
4.70
$3.00
2.30
3.70
3.10
2.00
2.70
1.60
5.20
$4.15*
3.00
4.60
2.95
2.45
3.40
1.75
5.50
Net Real.
Value
Less
Normal
Profit
Designated
Market
Value
Quantity
$2.90**
2.50
3.60
2.05
1.85
2.90
1.25
4.50
$3.00
2.50
3.70
2.95
2.00
2.90
1.60
5.20
1,200
900
800
1,000
700
500
3,000
1,000
Final
Inventory
Value
$ 3,600
2,250
2,960
2,950
1,400
1,450
4,800
4,700***
$24,110
*$4.50 – $.35 = $4.15.
**$4.15 – $1.25 = $2.90.
***Cost is used because it is lower than designated market value.
EXERCISE 9-4 (10–15 minutes)
(a)
(b)
12/31/13
Cost of Goods Sold.........................................................
19,000
Inventory.................................................................19,000
12/31/13
Cost of Goods Sold.........................................................
15,000
Inventory.................................................................15,000
12/31/14
Loss Due to Market Decline of
Inventory.......................................................................
19,000
Allowance to Reduce Inventory
to Market ..............................................................19,000
12/31/14
Allowance to Reduce Inventory
to Market .......................................................................
4,000*
Loss Due to Market Decline
of Inventory ......................................................... 4,000
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-21
EXERCISE 9-4 (Continued)
*Cost of inventory at 12/31/13
Lower of cost or market at 12/31/13
Allowance amount needed to reduce inventory
to market (a)
$346,000
(327,000)
Cost of inventory at 12/31/14
Lower of cost or market at 12/31/14
Allowance amount needed to reduce inventory
to market (b)
$410,000
(395,000)
Recovery of previously recognized loss
(c)
$ 19,000
$ 15,000
= (a) – (b)
= $19,000 – $15,000
= $4,000.
Both methods of recording lower-of-cost-or-market adjustments
have the same effect on net income.
EXERCISE 9-5 (20–25 minutes)
(a)
Sales revenue
Cost of goods sold
Inventory, beginning
Purchases
Cost of goods available
Inventory, ending
Cost of goods sold
Gross profit
Gain (loss) due to market
fluctuations of inventory*
9-22Copyright © 2013 John Wiley & Sons, Inc.
February
$29,000
March
$35,000
April
$40,000
15,000
20,000
35,000
15,100
19,900
9,100
15,100
24,000
39,100
17,000
22,100
12,900
17,000
26,500
43,500
13,000
30,500
9,500
(2,000)
$ 7,100
1,100
$14,000
700
$10,200
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 9-5 (Continued)
*
Jan. 31
Feb. 28
Mar. 31
Apr. 30
Inventory at cost
Inventory at the lower-of-costor-market
Allowance amount needed to
reduce inventory to market
Gain (loss) due to market
fluctuations of inventory**
$15,000
$15,100
$17,000
$13,000
14,500
12,600
15,600
12,300
500
$ 2,500
$ 1,400
$
700
$ (2,000)
$ 1,100
$
700
$
**$500 – $2,500 = $(2,000)
$2,500 – $1,400 = $1,100
$1,400 – $700 = $700
(b)
Jan. 31
Loss Due to Market Decline of Inventory ......................
500
Allowance to Reduce Inventory
to Market ..............................................................
500
Feb. 28
Loss Due to Market Decline of Inventory ......................
2,000
Allowance to Reduce Inventory
to Market .............................................................. 2,000
Mar. 31
Allowance to Reduce Inventory to Market .........................
1,100
Recovery of Loss Due to Market
Decline of Inventory ............................................ 1,100
Apr. 30
Allowance to Reduce Inventory to Market .........................
700
Recovery of Loss Due to Market
Decline of Inventory ............................................ 700
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-23
EXERCISE 9-6
Net realizable value (ceiling)
Net realizable value less normal profit (floor)
Replacement cost
Designated market
Cost
Lower-of-cost-or-market
$45 – $14 = $31
$31 – $ 9 = $22
$35
$31 Ceiling
$40
$31
$35 figure used – $31 correct value per unit = $4 per unit.
$4 X 1,000 units = $4,000.
If ending inventory is overstated, net income will be overstated.
If beginning inventory is overstated, net income will be understated.
Therefore, net income for 2013 was overstated by $4,000 and net income
for 2014 was understated by $4,000.
9-24Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
$3,000
4,000
2,400
9
15
17
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Gross
Profit
Cost
Per
Lot
$2,100
2,800
1,680
Number
of Lots
Sold*
4
8
15
* 9–5
=4
15 – 7
=8
17 – 2
= 15
27
$ 5,800
Net income
$56,000
25,200
22,400
$ 8,400
$80,000
36,000
32,000
$12,000
$24,000
10,800
9,600
$ 3,600
18,200
Operating expenses
Sales
24,000
$80,000
$40,800/$127,800 X
$60,000/$127,800 X
Gross profit
Cost of
Lots
Sold
Total
Cost
89,460
89,460
$27,000/$127,800 X $89,460
Relative Sales
Price
56,000
$127,800
40,800
60,000
$ 27,000
Total
Sales
Price
Cost of goods sold (see schedule)
Sales revenue (see schedule)
Sales
Price Per Lot
No. of
Lots
$89,460
28,560
42,000
$18,900
Cost
Allocated
to Lots
1,680
2,800
$2,100
Cost Per Lot
(Cost Allocated/
No. of Lots)
EXERCISE 9-7 (15–20 minutes)
(For Instructor Use Only) 9-25
Kieso, Intermediate Accounting, 15/e, Solutions Manual
Total
Group 3
Group 2
Group 1
Group 3
Group 2
Group 1
9-26Copyright © 2013 John Wiley & Sons, Inc.
(For Instructor Use Only)
Ahmed Nawfal
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Cost
per
Chair
Number
of Chairs
Sold
100
120
Armchairs
Straight chairs
31.50
50.40
$56.70
(700 – 120) X $31.50 = $18,270
Inventory of straight chairs
200
Lounge chairs
Chairs
50
700
Straight chairs
80
300
Armchairs
$90
400
No. of
Chairs
Lounge chairs
Chairs
Sales
Price
per Lot
6,000
$32,000
$20,160
8,000
$18,000
Sales
$35,000/$95,000
$24,000/$95,000
$36,000/$95,000
Relative Sales
Price
3,780
5,040
$11,340
Cost of
Chairs
Sold
$95,000
35,000
24,000
$36,000
Total
Sales
Price
X
X
$11,840
2,220
2,960
$ 6,660
Gross
Profit
59,850
59,850
X $59,850
Total
Cost
$59,850
22,050
15,120
$22,680
Cost
Allocated
to Chairs
31.50
50.40
$56.70
Cost per
Chair
EXERCISE 9-8 (12–17 minutes)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-27
EXERCISE 9-9 (5–10 minutes)
Unrealized Holding Gain or Loss—Income
(Purchase Commitments)............................................ 35,000
Estimated Liability on Purchase
Commitments ($400,000 – $365,000)..................
35,000
EXERCISE 9-10 (15–20 minutes)
(a)
If the commitment is material in amount, there should be a footnote in
the balance sheet stating the nature and extent of the commitment.
The footnote may also disclose the market price of the materials. The
excess of market price over contracted price is a gain contingency
which per FASB Statement No. 5 cannot be recognized in the
accounts until it is realized.
(b)
The drop in the market price of the commitment should be charged to
operations in the current year if it is material in amount. The following
entry would be made:
Unrealized Holding Gain or Loss—Income
(Purchase Commitments) ............................................10,800
Estimated Liability on Purchase
Commitments [$36,000 X ($3.00 – $2.70)]..........
10,800
The entry is made because a loss in utility has occurred during the
period in which the market decline took place. The account credited in
the above entry should be included among the current liabilities on
the balance sheet, with an appropriate footnote indicating the nature
and extent of the commitment. This liability indicates the minimum
obligation on the commitment contract at the present time—the
amount that would have to be forfeited in case of breach of contract.
(c)
Assuming the $10,800 market decline entry was made on December
31, 2014, as indicated in (b), the entry when the materials are received
in January 2015 would be:
Raw Materials ..................................................................97,200
Estimated Liability on Purchase Commitments ............10,800
Accounts Payable ..................................................
9-28Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
108,000
(For Instructor Use Only)
Ahmed Nawfal
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-29
EXERCISE 9-10 (Continued)
This entry records the raw materials at the actual cost, eliminates the
$10,800 liability set up at December 31, 2014, and records the contractual liability for the purchase. This permits operations to be charged
this year with the $97,200, the other $10,800 of the cost having been
charged to operations in 2014.
EXERCISE 9-11 (8–13 minutes)
1.
20%
100% + 20%
= 16.67% OR 16 2/3%.
2.
25%
100% + 25%
= 20%.
3.
33 1/3%
= 25%.
100% + 33 1/3%
4.
50%
100% + 50%
= 33.33% OR 33 1/3%.
EXERCISE 9-12 (10–15 minutes)
(a)
Inventory, May 1 (at cost)
Purchases (at cost)
Purchase discounts
Freight-in
Goods available (at cost)
Sales revenue (at selling price)
$1,000,000
Sales returns (at selling price)
(70,000)
Net sales (at selling price)
930,000
Less: Gross profit (30% of $930,000)
279,000
Net sales (at cost)
Approximate inventory, May 31 (at cost)
9-30Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$160,000
640,000
(12,000)
30,000
818,000
651,000
$167,000
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 9-12 (Continued)
(b) Gross profit as a percent of sales must be computed:
30%
100% + 30%
= 23.08% of sales.
Inventory, May 1 (at cost)
Purchases (at cost)
Purchase discounts
Freight-in
Goods available (at cost)
Sales revenue (at selling price)
$1,000,000
Sales returns (at selling price)
(70,000)
Net sales (at selling price)
930,000
Less: Gross profit (23.08% of $930,000)
214,644
Net sales (at cost)
Approximate inventory, May 31 (at cost)
$160,000
640,000
(12,000)
30,000
818,000
715,356
$102,644
EXERCISE 9-13 (15–20 minutes)
(a)
Merchandise on hand, January 1
Purchases
Less: Purchase returns and allowances
Freight-in
Total merchandise available (at cost)
Cost of goods sold*
Ending inventory
Less: Undamaged goods
Estimated fire loss
*Gross profit =
$ 38,000
72,000
(2,400)
3,400
111,000
75,000
36,000
10,900
$ 25,100
33 1/3%
= 25% of sales.
100% + 33 1/3%
Cost of goods sold = 75% of sales of $100,000 = $75,000.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-31
EXERCISE 9-13 (Continued)
(b)
Cost of goods sold = 66 2/3% of sales of $100,000 = $66,667
Total merchandise available (at cost)
[$111,000 (as computed above) – $66,667]
Less: Undamaged goods
Estimated fire loss
$44,333
10,900
$33,433
EXERCISE 9-14
Beginning inventory
Purchases
Purchase returns
Goods available (at cost)
Sales revenue
Sales returns
Net sales
Less: Gross profit (40% X $626,000)
Estimated ending inventory (unadjusted for
damage)
Less: Goods on hand—undamaged (at cost)
$21,000 X (1 – 40%)
Less: Goods on hand—damaged (at net
realizable value)
Fire loss on inventory
9-32Copyright © 2013 John Wiley & Sons, Inc.
$170,000
390,000
560,000
(30,000)
530,000
$650,000
(24,000)
626,000
(250,400)
Kieso, Intermediate Accounting, 15/e, Solutions Manual
375,600
154,400
(12,600)
(5,300)
$136,500
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 9-15 (10–15 minutes)
Beginning inventory (at cost)
Purchases (at cost)
Goods available (at cost)
Sales revenue (at selling price)
Less sales returns
Net sales
Less: Gross profit* (2/7 of $112,000)
Net sales (at cost)
Estimated inventory (at cost)
Less: Goods on hand ($30,500 – $6,000)
$ 38,000
85,000
123,000
$116,000
4,000
112,000
32,000
80,000
43,000
24,500
Claim against insurance company
$ 18,500
40%
= 2/7 of selling price
100% + 40%
*Computation of gross profit:
Note: Depending on details of the consignment agreement and Duncan’s
insurance policy, the consigned goods might be considered owned for
insurance purposes.
EXERCISE 9-16 (15–20 minutes)
Inventory 1/1/14 (cost)
Purchases to 8/18/14 (cost)
Cost of goods available
Deduct cost of goods sold*
Inventory 8/18/14
Lumber
Millwork
Hardware
$ 250,000
1,500,000
1,750,000
1,664,000
$ 86,000
$ 90,000
375,000
465,000
410,000
$ 55,000
$ 45,000
160,000
205,000
150,000
$ 55,000
*(See computations on next page)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-33
EXERCISE 9-16 (Continued)
Computation for cost of goods sold:*
Lumber:
$2,080,000
= $1,664,000
1.25
Millwork:
$533,000
1.30
= $410,000
Hardware:
$210,000
1.40
= $150,000
*Alternative computation for cost of goods sold:
Markup on selling price:
Cost of goods sold:
Lumber:
25%
= 20% or 1/5
100% + 25%
$2,080,000 X 80% = $1,664,000
Millwork:
30%
= 3/13
100% + 30%
$533,000 X 10/13 = $410,000
Hardware:
40%
= 2/7
100% + 40%
$210,000 X 5/7 = $150,000
9-34Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 9-17 (20–25 minutes)
Ending inventory:
(a)
Gross profit is 45% of sales
Total goods available for sale (at cost)
Sales (at selling price)
Less: Gross profit (45% of sales)
Sales (at cost)
Ending inventory (at cost)
(b)
$2,500,000
1,125,000
1,375,000
$ 725,000
Gross profit is 60% of cost
60%
100% + 60%
= 37.5% markup on selling price
Total goods available for sale (at cost)
Sales (at selling price)
Less: Gross profit (37.5% of sales)
Sales (at cost)
Ending inventory (at cost)
(c)
$2,100,000
$2,100,000
$2,500,000
937,500
1,562,500
$ 537,500
Gross profit is 35% of sales
Total goods available for sale (at cost)
Sales (at selling price)
Less: Gross profit (35% of sales)
Sales (at cost)
Ending inventory (at cost)
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$2,100,000
$2,500,000
875,000
Kieso, Intermediate Accounting, 15/e, Solutions Manual
1,625,000
$ 475,000
(For Instructor Use Only) 9-35
EXERCISE 9-17 (Continued)
(d)
Gross profit is 25% of cost
25%
100% + 25%
= 20% markup on selling price
Total goods available for sale (at cost)
Sales (at selling price)
Less: Gross profit (20% of sales)
Sales (at cost)
Ending inventory (at cost)
$2,100,000
$2,500,000
500,000
2,000,000
$ 100,000
EXERCISE 9-18 (20–25 minutes)
(a)
Beginning inventory
Purchases
Net markups
Totals
Net markdowns
Sales price of goods available
Deduct: Sales revenue
Ending inventory at retail
(b)
1.
2.
3.
4.
Cost
$ 58,000
122,000
_______
$180,000
Retail
$100,000
200,000
10,345
310,345
(26,135)
284,210
186,000
$ 98,210
$180,000 ÷ $300,000 = 60%
$180,000 ÷ $273,865 = 65.73%
$180,000 ÷ $310,345 = 58%
$180,000 ÷ $284,210 = 63.33%
9-36Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
EXERCISE 9-18 (Continued)
(c)
1.
2.
3.
Method 3.
Method 3.
Method 3.
(d)
58% X $98,210 = $56,962
(e)
$180,000 – $56,962 = $123,038
(f)
$186,000 – $123,038 = $62,962
EXERCISE 9-19 (12–17 minutes)
Cost
$ 200,000
1,375,000
1,575,000
Beginning inventory
Purchases
Totals
Add: Net markups
Markups
Markup cancellations
Totals
_________
$1,575,000
Deduct: Net markdowns
Markdowns
Markdowns cancellations
Sales price of goods available
Deduct: Sales revenue
Ending inventory at retail
Cost-to-retail ratio =
$1,575,000
$2,500,000
Retail
$ 280,000
2,140,000
2,420,000
$95,000
(15,000)
35,000
(5,000)
80,000
2,500,000
30,000
2,470,000
2,200,000
$ 270,000
= 63%
Ending inventory at cost = 63% X $270,000 = $170,100
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-37
EXERCISE 9-20 (20–25 minutes)
Cost
$30,000
48,000
(2,000)
2,400
78,400
Beginning inventory
Purchases
Purchase returns
Freight on purchases
Totals
Add: Net markups
Markups
Markup cancellations
Net markups
Totals
Retail
$ 46,500
88,000
(3,000)
_______
131,500
$10,000
(1,500)
_______
$78,400
8,500
140,000
Deduct: Net markdowns
Markdowns
Markdowns cancellations
Net markdowns
Sales price of goods available
Deduct: Net sales ($99,000 – $2,000)
Ending inventory, at retail
Cost-to-retail ratio =
$78,400
$140,000
9,300
(2,800)
6,500
133,500
97,000
$ 36,500
= 56%
Ending inventory at cost = 56% X $36,500 = $20,440
EXERCISE 9-21 (10–15 minutes)
(a)
(b)
Inventory turnover:
2012
$10,436
= 5.7 times
$1,870 + $1,803
2
Average days to sell inventory:
2012
365 ÷ 5.7 = 64 days
9-38Copyright © 2013 John Wiley & Sons, Inc.
2011
$9,390
$1,803 + $1,598
2
= 5.5 times
2011
365 ÷ 5.5 = 66 days
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
*EXERCISE 9-22 (25–35 minutes)
(a)
Conventional Retail Method
Cost
$ 38,100
130,900
169,000
________
$169,000
Inventory, January 1, 2013
Purchases (net)
Add: Net markups
Totals
Deduct: Net markdowns
Sales price of goods available
Deduct: Sales (net)
Ending inventory at retail
Cost-to-retail ratio =
$169,000
$260,000
Retail
$ 60,000
178,000
238,000
22,000
260,000
13,000
247,000
167,000
$ 80,000
= 65%
Ending inventory at cost = 65% X $80,000 = $52,000
(b)
LIFO Retail Method
Inventory, January 1, 2013
Net purchases
Net markups
Net markdowns
Total (excluding beginning inventory)
Total (including beginning inventory)
Deduct sales (net)
Ending inventory at retail
Cost-to-retail ratio =
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
$130,900
$187,000
Cost
$ 38,100
130,900
130,900
$169,000
Retail
$ 60,000
178,000
22,000
(13,000)
187,000
247,000
167,000
$ 80,000
= 70%
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-39
*EXERCISE 9-22 (Continued)
Computation of ending inventory at LIFO cost, 2014:
Ending Inventory
at Retail Prices
Layers at
Retail Prices
$80,000
2013 $60,000
2014 20,000
*$38,100
$60,000
Cost to Retail
(Percentage)
Ending Inventory
at LIFO Cost
63.5%*
70.0%
$38,100
14,000
$52,100
Cost
$14,000
58,800
7,500
Retail
$ 20,000
81,000
X
X
(prior years cost to retail)
*EXERCISE 9-23 (15–20 minutes)
(a)
Inventory, January 1, 2014
Net purchases
Freight-in
Net markups
Totals
Sales revenue
Net markdowns
Estimated theft
Ending inventory at retail
Cost-to-retail ratio:
$80,300
$110,000
$80,300
9,000
110,000
(80,000)
(1,600)
(2,000)
$ 26,400
= 73%
Ending inventory at lower-of-average-cost-or-market = $26,400 X 73%
= $19,272
9-40Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
*EXERCISE 9-23 (Continued)
(b)
Cost
$58,800
7,500
Purchases
Freight-in
Net markups
Net markdowns
Totals
Cost-to-retail ratio:
$66,300
$66,300
$88,400
Retail
$81,000
9,000
(1,600)
$88,400
= 75%
The increment at retail is $26,400 – $20,000 = $6,400.
The increment is costed at 75% X $6,400 = $4,800.
Ending inventory at LIFO retail:
Beginning inventory, 2014
Increment
Ending inventory, 2014
Cost
$14,000
4,800
$18,800
Retail
$20,000
6,400
$26,400
*EXERCISE 9-24 (10–15 minutes)
(a)
Cost-to-retail ratio—beginning inventory:
$216,000
= 72%
$300,000
*($294,300 ÷ 1.09) X 72% = $194,400
*Since the above computation reveals that the inventory quantity has
declined below the beginning level, it is necessary to convert the
ending inventory to beginning-of-the-year prices (by dividing by 1.09)
and then multiply it by the beginning cost-to-retail ratio (72%).
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-41
*EXERCISE 9-24 (Continued)
(b)
Ending inventory at retail prices deflated $365,150 ÷ 1.09
Beginning inventory at beginning-of-year prices
Inventory increase in terms of beginning-of-year dollars
$335,000
300,000
$ 35,000
Beginning inventory (at cost)
Additional layer, $35,000 X 1.09 X 76%*
$216,000
28,994
$244,994
*($364,800 ÷ $480,000)
*EXERCISE 9-25 (5–10 minutes)
Ending inventory at retail (deflated) $100,100 ÷ 1.10
Beginning inventory at retail
Increment at retail
Ending inventory on LIFO basis
First layer
Second layer ($16,500 X 1.10 X 60%)
9-42Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$91,000
74,500
$16,500
Cost
$36,000
10,890
$46,890
(For Instructor Use Only)
Ahmed Nawfal
*EXERCISE 9-26 (20–25 minutes)
(a)
Beginning inventory
Net purchases
Net markups
Totals
Net markdowns
Sales revenue
Ending inventory at retail
Cost
$ 30,100
108,500
________
$138,600
Cost-retail ratio = 66% ($138,600/$210,000)
Ending inventory at cost ($78,100 X 66%)
(b)
Cost
$ 30,100
108,500
Beginning inventory
Net purchases
Net markups
Net markdowns
Total (excluding beginning inventory)
108,500
Total (including beginning inventory)
$138,600
Sales revenue
Ending inventory at retail (current)
Ending inventory at retail (base year)
($78,100 ÷ 1.10)
Cost-to-retail ratio for new layer:
$108,500/$155,000 = 70%
Layers:
Base layer
$50,000 X 1.00 X 60.2%* =
New layer
($71,000 – $50,000) X 1.10 X 70% =
Retail
$ 50,000
150,000
10,000
210,000
(5,000)
(126,900)
$ 78,100
$ 51,546
Retail
$ 50,000
150,000
10,000
(5,000)
155,000
205,000
(126,900)
78,100
$ 71,000
$ 30,100
16,170
$ 46,270
*($30,100/$50,000)
(c)
Cost of goods available for sale
Ending inventory at cost, from (b)
Cost of goods sold
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
$138,600
46,270
$ 92,330
(For Instructor Use Only) 9-43
*EXERCISE 9-27 (20–25 minutes)
2013
Restate to base-year retail ($118,720 ÷ 1.06)
$112,000
Layers: 1. $100,000 X 1.00 X 54%* =
2. $ 12,000 X 1.06 X 57% =
Ending inventory
$ 54,000
7,250
$ 61,250
*$54,000 ÷ $100,000
2014
2015
2016
Restate to base-year retail ($138,750 ÷ 1.11)
$125,000
Layers: 1. $100,000 X 1.00 X 54% =
2. $ 12,000 X 1.06 X 57% =
3. $ 13,000 X 1.11 X 60% =
Ending inventory
$ 54,000
7,250
8,658
$ 69,908
Restate to base-year retail ($125,350 ÷ 1.15)
$109,000
Layers: 1. $100,000 X 1.00 X 54% =
2. $ 9,000 X 1.06 X 57% =
Ending inventory
$ 54,000
5,438
$ 59,438
Restate to base-year retail ($162,500 ÷ 1.25)
$130,000
Layers: 1. $100,000 X 1.00 X 54% =
2. $ 9,000 X 1.06 X 57% =
3. $ 21,000 X 1.25 X 58% =
Ending inventory
$ 54,000
5,438
15,225
$ 74,663
*EXERCISE 9-28 (5–10 minutes)
Inventory (beginning) ...................................................... 7,600
Adjustment to Record Inventory at Cost* .............
($212,600 – $205,000)
7,600
*Note: This account is an income statement account showing the effect of
changing from a lower-of-cost-or-market approach to a straight cost basis.
9-44Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
TIME AND PURPOSE OF PROBLEMS
Problem 9-1 (Time 10–15 minutes)
Purpose—to provide the student with an understanding of the lower-of-cost-or-market approach to
inventory valuation, similar to Problem 9-2. The major difference between these problems is that
Problem 9-1 provides some ambiguity to the situation by changing the catalog prices near the end of
the year.
Problem 9-2 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the lower-of-cost-or-market approach to
inventory valuation. The student is required to examine a number of individual items and apply the
lower-of-cost-or-market rule and to also explain the use and value of the lower-of-cost-or-market rule.
Problem 9-3 (Time 30–35 minutes)
Purpose—to provide a problem that requires entries for reducing inventory to lower-of-cost-or-market
under the perpetual inventory system using both the cost-of-goods-sold and the loss methods.
Problem 9-4 (Time 20–30 minutes)
Purpose—to provide another problem where a fire loss must be computed using the gross profit method.
Certain goods remained undamaged and therefore an adjustment is necessary. In addition, the inventory
was subject to an obsolescence factor which must be considered.
Problem 9-5 (Time 40–45 minutes)
Purpose—to provide the student with a complex problem involving a fire loss where the gross profit
method must be employed. The problem is complicated because a number of adjustments must be made
to the purchases account related to merchandise returned, unrecorded purchases, and shipments in
transit. In addition, some cash to accrual computations are necessary.
Problem 9-6 (Time 20–30 minutes)
Purpose—to provide the student with a problem on the retail inventory method. The problem is relatively
straightforward although transfers-in from other departments as well as the proper treatment for normal
spoilage complicate the problem. A good problem that summarizes the essentials of the retail inventory
method.
Problem 9-7 (Time 20–30 minutes)
Purpose—to provide the student with a problem on the retail inventory method. This problem is similar
to Problem 9-6, except that a few different items must be evaluated in finding ending inventory at retail
and cost. Unusual items in this problem are employee discounts granted and loss from breakage.
A good problem that summarizes the essentials of the retail inventory method.
Problem 9-8 (Time 20–30 minutes)
Purpose—to provide the student with a problem on the retail inventory method. This problem is similar
to Problems 9-6 and 9-7, except that the student is asked to list the factors that may have caused the
difference between the computed inventory and the physical count.
Problem 9-9 (Time 30–40 minutes)
Purpose—to provide the student with a problem requiring financial statement and note disclosure of
inventories, the income statement disclosure of an inventory market decline, and the treatment of
purchase commitments.
Problem 9-10 (Time 30–40 minutes)
Purpose—to provide the student with an opportunity to write a memo explaining what is designated
market value and how it is computed. As part of this memo, the student is required to compute
inventory on the lower-of-cost-or-market basis using the individual item approach.
Ahmed Nawfal Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only) 9-45
Time and Purpose of Problems (Continued)
*Problem 9-11 (Time 30–35 minutes)
Purpose—to provide the student with a retail inventory problem where both the conventional retail and
dollar-value LIFO method must be computed. An excellent problem for highlighting the difference
between these two approaches to inventory valuation. It should be noted that the cost-to-retail percentage is given for LIFO so less computation is necessary.
*Problem 9-12 (Time 30–40 minutes)
Purpose—to provide the student with a comprehensive problem covering the retail and LIFO retail
inventory methods, the computation of an inventory shortage, and the treatment of four special items
relative to the retail inventory method.
*Problem 9-13 (Time 30–40 minutes)
Purpose—to provide the student with a basic problem illustrating the change from conventional retail to
LIFO retail. This problem emphasizes many of the same issues as Problem 9-11, except that a dollarvalue LIFO computation is not needed. A good problem for providing the essential issues related to a
change to LIFO retail.
*Problem 9-14 (Time 40–50 minutes)
Purpose—to provide the student with a retail inventory problem where both the conventional retail and
dollar-value LIFO method must be computed. The problem is similar to Problem 9-10, except that the
problem involves a three-year period which adds complexity to the problem. This problem provides an
excellent summary of the essential elements related to the change of the retail inventory method from
conventional retail to LIFO retail and dollar-value LIFO retail.
9-46Copyright © 2013 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 15/e, Solutions Manual
(For Instructor Use Only)
Ahmed Nawfal
SOLUTIONS TO PROBLEMS
PROBLEM 9-1
Item
Cost
Replacement
Cost
Ceiling*
Floor**
A
B
C
D
$470
450
830
960
$ 460
430
610
1,000
$ 450
480
820
1,070
$350
372
640
830
Designated
Market
$
450
430
640
1,000
Lower-