Intermediate Accounting, Volume 2, Seventh Canadian Edition Solution Manual

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-1
Chapter 12: Financial Liabilities and Provisions
Case 12-1 Ski Incorporated
12-2 Prescriptions Depot Limited
12-3 Camani Corporation
Suggested Time
Technical Review
TR12-1 Financial liabilities and provisions (IFRS) ..... 10
TR12-2 Financial liabilities and provisions (ASPE) .... 10
TR12-3 Provision, measurement................................. 10
TR12-4 Guarantee ...................................................... 10
TR12-5 Provision, warranty........................................ 5
TR12-6 Foreign currency............................................ 5
TR12-7 Note payable.................................................. 5
TR12-8 Discounting, note payable.............................. 10
TR12-9 Discounting, provision................................... 10
TR12-10 Classification liabilities.................................. 10
Assignment A12-1 Common financial liabilities .......................... 10
A12-2 Common financial liabilities: taxes ................ 20
A12-3 Common financial liabilities: taxes ............... 20
A12-4 Foreign currency payables (*W) .................... 10
A12-5 Common financial liabilities and foreign currency 25
A12-6 Provisions...................................................... 20
A12-7 Provisions (*W)............................................. 20
A12-8 Provisions...................................................... 20
A12-9 Provision measurement.................................. 15
A12-10 Provision measurement.................................. 15
A12-11 Provisions; compensated absences ................. 15
A12-12 Provisions; warranty ...................................... 15
A12-13 Provisions; warranty ..................................... 20
A12-14 Provisions; warranty ..................................... 25
A12-15 Discounting; no-interest note ......................... 15
A12-16 Discounting; low-interest note (*W) .............. 20
A12-17 Discounting; low-interest note ....................... 20
A12-18 Discounting; provision................................... 15
A12-19 Discounting; provision................................... 25
A12-20 Discounting; provision................................... 25
A12-21 Classification and SCF................................... 20
A12-22 SCF ............................................................... 20
A12-23 Liabilities - ASPE ......................................... 10
A12-24 Liabilities - ASPE (*W)................................. 20
A12-25 Liabilities - ASPE.......................................... 20

12-2 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
*W The solution to this assignment is on the text website, Connect.
The solution is marked WEB.

Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-3
Cases
Case 12-1
Ski Incorporated
To: Members of Board of Directors
From: Accounting Advisor
Overview
Ski Incorporated (SI) is a public company therefore you are using IFRS. The bank loan
has a minimum current ratio so you will need to be careful and watch for any impacts on
the ratio. You have had a tough year this year with a taxable loss so the bank financing is
critical to your operations. Management will be concerned with their bonus based on net
income but this will not be a concern this year with the taxable loss since there will not be
any bonus.
Issues
1. Taxable loss
2. Revenue recognition memberships
3. Revenue recognition guests
4. Special promotions
5. Coupons
6. Dealer Loan
7. Lawsuit
8. Lease
9. Gasoline storage tanks
Analysis and Recommendations
1. Taxable loss
SI had a taxable loss of $400,000 in 20X5. Since this is the first ever taxable loss the loss
would be carried back for up to three years to recover past taxes paid at the tax rates in
those years. Usually you would want to go back three years first so that if you incur
another loss next year you can still go back to the other two years if there is taxable
income remaining. This will result in an income tax receivable which will increase
current assets and have a positive impact on your current ratio.
2. Revenue recognition memberships
The contract with the customer is for the membership in the club. This would be a written
agreement between the member and SI. There is one performance obligation, the
promised service is membership in the ski club. There is no transfer of the service until

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12-4 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
the membership is provided. The contract price is $10,000. The non-refundable deposit is
an advance payment towards this initiation fee and is part of the overall transaction price.
The performance obligation for the initiation fee is satisfied over the period of time that
the member belongs to the club. The $10,000 would be recognized over the average
period a member belongs. There should be enough historical data available to come up
with a reasonable estimate. There would be no cash collection risk since the amount is
paid upfront.
The annual fee is a written agreement between the member and SI. There is again one
performance obligation the service for this year. The fee of $2,000 is the total contract
price and is received in 20X5 for the 20X6 ski season. This would be unearned revenue
when received. Assuming the ski season goes from Dec 1 until March 31 $500 would be
recognized in 20X5 and the remainder in 20X6 which would be the period in which the
service is performed. There would be no cash collection risk since the amount is paid
upfront.
3. Revenue recognition guests
The contract with the guest is the written contract when they receive the ticket to ski not
when the reservation is made since this reservation could be cancelled. The performance
obligation is the right to ski that day. The overall contract price is the price of the ski
ticket. The performance would be the right to ski on that day. There is no cash collection
risk since the guest pays by credit card when they purchase the ticket.
4. Special promotions
The contract with the customer is the written contract when they receive the ticket and
the right to a future lesson. There are two separate performance obligations the right to
ski and the right to the lesson. The total contract price is $100. This price would need to
be allocated to the two separate performance obligations based on their relative fair value.
Fair value ski pass 80 = 61.5% x 100 = $61.50
Fair value lesson 50 = 38.5% x 100 = $38.50
Total fair value 130
The $61.50 for the ski pass the performance obligation would be satisfied on the day that
they ski. For the $38.50 the performance obligation would be satisfied on the day they
take the lesson. There would be no cash collection risk assuming a credit card is used to
purchase the special pass.
5. Coupons
It must be determined if an economic loss would occur for the coupons. The coupons are
for $5 and the price of a ski pass is $80. This is a minor amount compared to the price of
the ski pass so SI would still be selling the ski pass at a profit. Therefore, the coupons
should only be recognized as a cost when they are redeemed.

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-5
6. Dealer Loan
The manufacturer of the ski lift has provided a 0% interest loan. This is often referred to
as a dealer loan. The loan is either measured in FVTPL or other liabilities. Most liabilities
are measured in other liabilities and since there is no mismatch I recommend this loan be
recorded in other liabilities. SI is required to record the loan at fair value using the market
rate of interest which would be their incremental borrowing rate of 8%. Therefore, the
loan would be recorded at $2.5 million (2 periods, 8%) = $2,143,350. The loan would
then be amortized using the effective interest method and interest expense of $171,468
would be recorded in 20X5. This would not impact the current ratio in 20X5 because the
full amount would be presented as long term.
7. Lawsuit
It must be determined if the lawsuit is probable and if the amount can be measured. The
Board has decided to settle the lawsuit therefore it is probable there will be a payment.
The amount will be based on managements best estimate. Since there is a range this
would be the midpoint of the range or $250,000 should be accrued as a provision. In
addition, there would be note disclosure on the details of the lawsuit. This liability would
be current if the payment is made next year which would have a negative impact on the
current ratio.
8. Lease
The lease would be an onerous contract since the costs exceed the benefits since the
leased property will not be used by SI. A provision should be set up for the $10,000 –
5,000 = $5,000 x 24 months = $120,000. The current portion of the provision would have
a negative impact on the current ratio.
9. Gasoline storage tanks
The gasoline storage tanks would be set up as an item of property, plant and equipment
and depreciated over the 15 years. The costs to remove the tanks would be a legal
obligation and would need to be set up as a decommissioning provision. The provision
would be set up at the present value of the $2.5 million. The PV would be $2.5 million
(15 periods, 8%) = $788,100. This amount would be debited to the gasoline storage tanks
and credited to the provision. Since the life of the storage tanks and the decommission
provision are the same the $10,788,100 would be depreciated over the 15 years which
would be $719,207 of depreciation expense in 20X5. Interest expense of $63,048 would
also be recognized in 20X5 which would increase the decommissioning provision. The
asset would be a long term asset and the decommissioning provisions would be a long
term liability so this would not impact the current ratio.

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12-6 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Case 12-2
Prescriptions Depot Limited
Overview
Prescriptions Depot Limited (PDL) is a large private company with revenues of $5.4
billion and earnings of $295 million. The company complies with IFRS, and is
contemplating a public offering in the medium term. GAAP compliance is therefore
important. Reporting objectives are to report growth in sales, especially year-over-year
same-store sales growth, and stable earnings. Because of possible analyst interest, sales
measurement is of critical importance. Ethical reporting choices are critical, given the
possibility for increased scrutiny in the future; sudden changes in accounting policy at a
later date may not be viewed with favor by analysts. Reporting objectives are meant to
support a public offering.
Issues
1. Loyalty points program
2. Decommissioning obligations
3. Cash refund program
4. Coupon program
Analysis and recommendations
1. Loyalty points program
PDL operates a loyalty points program, which will impact on the measurement of
sales revenue, important for analysts.
Currently, a sale transaction with point value attached is recognized as a sale entirely
in the current period. An expense and liability for the cost – not sales value – of goods
to be redeemed in the future is recognized in the same time period as the sale.
This policy maximizes the sales value recorded with the initial transaction. It does not
reflect the substance of the transaction, though, which is that PDL has rendered
multiple deliverables in sale: both the initial sale, and the subsequent sale based on
points value are being sold.
Accordingly, PDL must consider an alternate approach to its loyalty point program:
1. The sale in the store is a contract with the customer but there are two separate
performance obligations. There is the sale of the goods now and the future
redemption of points. This loyalty program provides the customer with a
material right. On a sale that involves issuance of points, the consideration
received must be allocated between the sale of the product and the points on a

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-7
relative stand alone basis. The value of points to be redeemed in the future is
recorded as unearned revenue.
2. As is now the case, careful measurement of the amount - unearned revenue,
now - includes analysis of redemption, bonus offers, breakage, expiry, and
the like.
3. When points are redeemed, the sales value of the redemption transaction is
recorded as sales revenue and cost of goods sold reflects the merchandise
purchased.
This approach defers sales revenue and gross profit to later periods.
As a result, current earnings (and sales) are lower, but future periods show higher
sales and earnings. Trends may be affected. Analysts will react better to accurate
information, and there is time for this to be assessed since plans to offer shares to
the public are described as “medium term”.
2. Decommissioning obligation
PDL has an obligation to remove its customized, specialized pharmacy installations in
leased premises. This is a future obligation based on a past action, and represents a
provision in the financial statements. It is not now recorded. This is essentially a
decommissioning obligation, and standards require recognition.
Accordingly, PDL must estimate the cost to restore premises, removing the custom
set-up. PDL must also estimate when restoration is likely to happen; lease renewal
must be assessed. Finally, a borrowing rate for the appropriate term and amount must
be estimated, and a discounted liability calculated.
The discounted liability is recognized as an asset and a liability. The asset is
depreciated over the life of the leased premises. Interest is accrued annually on the
liability. These two charges will decrease earnings, but represent appropriate
accounting measurement.
Note also that estimates must be revised, and any changes in estimate are reflected in
a revised present value and asset balance.
3. Cash refund program
The cash refund program is now accounted for when the refund takes place, recording
a reduction to cash and a reduction to sales.
Since the promotion involves a cash refund, an obligation exists to pay cash in the
future, based on a past transaction.

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12-8 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
If there was a refund period open over the end of a reporting period, this accounting
policy would not capture the obligation to provide refunds. That is, if the six week
documentation window were open, after a given promotion, there would be refunds to
be made based on recorded sales of the period. This obligation to provide refunds
would not be reflected in the financial statements.
Therefore, PDL must estimate the extent of cash refunds waiting to be filed and
record them as a liability when the promotion weekend ends. Estimates can be based
on past practice.
The amount refunded to customers should be reported as a sales discount (a contra-
sales account), not as a direct decrease to sales. It should also not be recorded as a
promotion expense, as it is a reduction in sales value. Recording the amounts as a
sales discount is preferable to directly reducing sales, because it may help preserve
information about the extent of program use for internal tracking. Analyses of sales
trends may focus on net sales, so this accounting treatment may not improve sales
trends, a corporate reporting objective.
The policy will record refunds earlier, and may decrease earnings in the short term.
Over time, there will be no cumulative difference to earnings.
4. Coupon program
The coupon program is now accounted for by recording sales at the amount of cash
received from customers. PDL then reduces inventory – and thus cost of goods sold -
for manufacturer rebates given for coupons redeemed. (i.e., debit accounts payable,
and credit inventory which becomes cost of goods sold). This has the correct impact
on gross profit (give or take some timing issues of inventory sale), but understates
sales.
Since PDL is increasingly concerned with correct measurement of sales, the
accounting policy for coupons must be revisited. The correct treatment:
1. Sales is measured at the retail price, regardless of whether the value is received
from customers ($20,000, in the case example) or from the manufacturer in the
form of coupons ($5,000). The coupons are in essence an account receivable, used
to reduce an account payable.
2. Merchandise is recorded at the invoice cost ($98,000) not the amount of cash paid
($93,000).
Using the existing accounting policy, sales are recorded at $20,000, and cost of goods
sold (for many products, one assumes) at $93,000. With the revised system, sales are
$25,000 and cost of goods sold is $98,000.
There is no overall change to earnings, but sales are more accurately stated, which is
preferable for PDL.

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-9
Conclusion
Any company with an eye on public markets must carefully assess its reporting
practices and ensure appropriate accounting is followed. PDL has several policies,
for loyalty points, cash refunds and coupon transactions that impact on reporting
of sales and timing of earnings. In addition, they have unrecorded
decommissioning obligations. Appropriate accounting demonstrates the ethical
commitment of management.

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12-10 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Case 12-3
Camani Corporation
Overview
Camani Corporation has been negatively affected by economic conditions, and the 20X3
financial results are under particular scrutiny to determine the viability of the existing
strategic model. The executive team will receive a “return to profitability” bonus if 20X3
earnings are positive. Under these circumstances, there is obvious pressure to shade
reporting policies and estimates to support higher earnings. There are significant ethical
pressures on all stakeholders in the company, but especially management.
Issues
1. Calculate cash from operating activities, based on current draft financial
statements.
2. Analyse reporting implications of identified estimated financial statements
elements: legal issues, depreciation policy, technology contract, inventory
valuation, restructuring and environmental liability.
3. Re-calculate cash from operating activities, based on revised financial statements
Analysis and conclusions
1. Cash flow from operating activities, existing draft financial statements
Exhibit 1 shows that cash flow from operating activities is a negative, at ($1,721).
Earnings of $1,535 reflect cash flows of ($800), and dividends on common shares
are another ($921). The negative operating cash flows are caused by large build-ups
in account receivable and inventory. The increase in accounts payable and accrued
liabilities works to mitigate this, but is not as large as the inventory build-up.
This is contrary to a return to profitability implied by positive earnings, and calls into
question the declaration of common dividends.
2. Analysis of accounting policies and estimates
a. Legal issues
The accrual has been made based on one set of expected values, resulting in the
accrual of $830. If a different, less optimistic set of probabilities is used, the accrual
is $1,110:
Total payment
(in 000’s)
Alternate
probability
Expected
value

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-11
(000’s)
$ 100 0% 0
500 20 $ 100
700 30 210
1,200 30 360
2,200 20 440
$ 1,110
This is an additional liability and expense of $280 (See Exhibit 2).
b. Depreciation policy
Retaining prior years’ estimates for depreciation amounts would result in $200
additional depreciation. (See Exhibit 2).
c. Technology services
CC had recorded $1,200 as an estimate for technology services rendered; if the
$4,000 contract is considered 45% complete (rather than 30%), another $600 (15%)
must be recorded. This is a liability and presumably an expense. (See Exhibit 2).
d. Inventory valuation
Retaining prior years’ estimates for inventory valuation would result in $775
additional write-down ($3,125 - $2,350.) Note that inventory levels are higher in
20X3, which is not consistent with less need for a valuation adjustment. Much might
depend on the state of the economy, though, and a thorough review of the analysis the
CC has prepared. (See Exhibit 2).
e. Restructuring
No accrual has yet been recorded for a restructuring. The plan has not been
announced or approved, and the plan is not formal the plan at this stage. Only a
formal plan, once communicated, would meet the requirements of a constructive
liability. At this stage, recording is premature, and no accrual has been recorded.
f. Environmental liability
If the liability had been recorded at 5%, rather than 7%, $329 ($400, 4 years, 5%)
would have been recorded, rather than $306. Interest would have been $16, not $21
(a $5 difference), and depreciation, over four years, would have been $82, rather than
$77 (a $5 difference). These adjustments are minor, and are summarized in Exhibit 2.
Effect on financial performance

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12-12 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
The adjustments indicated by these areas have been included in the revised draft
statement of financial position and financial performance shown in Exhibit 3. The
statement of earnings now reflects a loss of $320. This would eliminate any return to
profitability bonus, and means that the operating strategy of the company needs to be
assessed.
3. Cash flow from operating activities, revised draft financial statements
The reported loss of $320 is more consistent with the negative cash flow from
operating activities. Exhibit 4 shows the revised operating activities section of the
SCF. Cash used by operating activities is unchanged, at ($1,721). This demonstrates
the reason that many focus on the SCF, since it is unaffected by estimates that
underlie earnings measurement.
Conclusion
Additional information should be requested by the audit committee in each these
areas, to gather evidence to support the accrual that has been made, or suggest a
more appropriate amount. Since profits are marginal and there is significant incentive
for management to show profit in 20X3, very careful evaluation of these areas is
warranted.

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-13
Exhibit 1
Operating activities, SCF
Existing draft summarized financial statements
Camani Corporation
Operating Activities Section of the Statement of Cash Flow
Year ended 31 December 20x3
Operating Activities:
Net income ....................................................................... $1,535
Adjustments for non-cash items:
Depreciation.................................................................... 3,900
Interest ............................................................................ 21
5,456
Changes in current assets and current liabilities:
Increase in accounts receivable........................................ (3,740)
Increase in inventory ....................................................... (6,950)
Increase in prepaids......................................................... (87)
Increase in accounts payable and accrued liabilities......... 4,521
(800)
Cash paid for common dividends ($1,535 + $643 = $2,178- $1,257) (921)
Net cash provided (used) by operations .................................. $(1,721)
Exhibit 2
Camani Corporation
Adjustments based on estimated amounts
1) Expense ($1,110 - $830) ............................................................ 280
Accrued liabilities ...................................................................... 280
2) Depreciation Expense ($4,100 - $3,900)..................................... 200
Plant and equipment (net)........................................................... 200
3) Expense ..................................................................................... 600
Accrued liabilities ...................................................................... 600
4) Expense ($3,125 - $2,350)......................................................... 775
Inventory.................................................................................... 775
5) None
6) Depreciation expense ($82 - $77) ............................................... 5
Asset ($329-$306) less $5 extra depreciation.............................. 18
Interest expense ($21 - $16) ....................................................... 5
Accrued liabilities ($329 - $306) less $5 change in interest......... 18

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12-14 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Exhibit 3
Camani Corporation
REVISED Summarized Draft 20X3 Financial Statements
REVISED Summarized Draft Statement of Financial Position
At 31 December (in 000’s)
Assets
20X3 20X2
Cash $ 2,340 $ 1,680
Accounts receivable 16,780 13,040
Inventory (-$775) 61,145 54,970
Prepaids 542 455
Land 5,860 5,860
Plant and equipment (net) (-$200 +$18) 19,538 18,650
Other assets 650 290
Total debits $106,855 $94,945
Liabilities
Accounts payable and accrued liabilities(+$280 + $600) 48,268 42,867
Long-term debt (+$18) 53,545 46,200
Equity
Common shares 5,640 5,235
Retained earnings ($643 -$320 loss - $921 divs) (598) 643
Total credits $106,855 $94,945
REVISED Summarized Draft Statement of Earnings
For the year ended 31 December 20X3
Sales revenue $104,910
Cost of goods sold (+$775) (67,005)
Depreciation expense (+$200 + $5) (4,105)
Operating, administration and marketing (+$280 + $600 - $5) (34,120)
Earnings and comprehensive income $ (320)

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-15
Exhibit 4
REVISED Operating activities, SCF
Revised draft summarized financial statements
Camani Corporation
Operating Activities Section of the Statement of Cash Flow
Year ended 31 December 20x3
Operating Activities:
Net income (loss).............................................................. ( $320)
Adjustments for non-cash items:
Depreciation.................................................................... 4,105
Interest ............................................................................ 16
3,801
Changes in current assets and current liabilities:
Increase in accounts receivable........................................ (3,740)
Increase in inventory ....................................................... (6,175)
Increase in prepaids......................................................... (87)
Increase in accounts payable and accrued liabilities......... 5,401
(800)
Cash paid for common dividends (unchanged) ....................... (921)
Net cash provided (used) by operations .................................. $(1,721)

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12-16 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Technical Review
Technical Review 12-1
1. T
2. F – The effective interest method is required in IFRS.
3. F – The gain or loss is recognized in earnings.
4. T – if each point in the range is equally likely
5. F – the refinancing must be completed by the year-end date for the mortgage to be
classified as long term
Technical Review 12-2
1. F – only legal obligations are included not constructive obligations
2. T
3. T
4. F – if each point in the range is equally likely the lower end of the range not the
midpoint would be used
5. T

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-17
Technical Review 12-3
Case Most likely outcome Expected value To record
1. Most likely outcome is 0, p
= 70%
Expected value is
($100,000 x 10%) +
($200,000 x 10%)+
($300,000 x 5%)+
($400,000 x 5%) =
$65,000.
(Still less than one
payout)
No accrual based
on most likely
outcome
2. Likely (90%)
The most likely payout is
$200,000
Expected value is
($100,000 x 10%) +
($200,000 x 60%)+
($300,000 x 5%)+
($400,000 x 15%) =
$205,000.
(Very close to most
likely outcome)
Accrual of
$200,000, most
likely outcome
3. Likely (90%)
The most likely payout is
$100,000
Expected value is
($100,000 x 30%) +
($200,000 x 20%)+
($300,000 x 20%)+
($400,000 x 20%) =
$210,000.
(NOT close to most
likely outcome)
Accrual of
$210,000
60% chance that
payout is higher
than $100,000 so
accrual of most
likely outcome is
not adequate.
Technical Review 12-4
A guarantee is measured at its fair value. It would be measured at $300,000 x 30% =
$90,000.

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12-18 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Technical Review 12-5
Requirement 1
Warranty expense in April, $24,750 ($550,000 × 4.5%)
Requirement 2
Balance in the warranty provision account at the end of April is $18,450
($16,400 + $24,750 – $8,700 – $14,000)
Technical Review 12-6
1) The Canadian equivalent of the payable when it is first recorded is US $150,000 x Cdn
@ .75 = $112,500. The inventory would be valued at $112,500.
2) The amount in the exchange gain or loss account at the end of the year would be year
end US $150,000 x Cdn @ .72 = $108,000. Therefore, the difference of $112,500 –
108,000 = 4,500 would be in the exchange gain or loss account. The $4,500 represents a
foreign exchange gain (credit to the account).
Technical Review 12-7
1 October 20x6
Cash ........................................................................................... 120,000
Note payable....................................................................... 120,000
31 December 20x6
Interest expense ($120,000 x 9% x 3/12) .................................... 2,700
Interest payable .................................................................. 2,700
30 September 20x7
Interest expense ($120,000 x 9% x 9/12) ................................... 8,100
Interest payable .......................................................................... 2,700
Cash (120,000 x 9%) .......................................................... 10,800
31 December 20x7
Interest expense ($120,000 x 9% x 3/12) .................................... 2,700
Interest payable .................................................................. 2,700
30 September 20x8
Interest expense ($120,000 x 9% x 9/12) ................................... 8,100
Interest payable .......................................................................... 2,700
Cash (120,000 x 9%) .......................................................... 10,800
Note payable .............................................................................. 120,000
Cash ................................................................................... 120,000

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-19
Technical Review 12-8
Requirement 1
Principal $250,000 (P/F, 7%, 2) = $250,000 × (0.87344) .................................... $218,360
Interest $5,000 (P/A, 7%, 2) = $5,000 × (1.80802) ............................................. 9,040
$227,400
Requirement 2
(1)
Opening
Net
Liability
(2)
Interest
Expense 7%
Market Rate
(3)
Interest Paid
(4)
Discount
Amortization
(2) – (3)
(5)
Closing
Net
Liability
(1) + (4)
$227,400 $15,918 $5,000 $10,918 $238,318
238,318 16,682 5,000 11,682 250,000

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12-20 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Technical Review 12-9
Requirement 1
Present value $420,000 (P/F, 6%, 10) = $420,000 × (0.55839) ........................... $234,524
Requirement 2
(1)
Opening
Net
Liability
(2)
Interest
Expense @
Market Rate
(1)  6%
(3)
Closing Net
Liability
(1) + (2)
$234,524 $14,071 $248,595
248,595 14,916 263,511
263,511 15,811 279,322
(three years only)
Requirement 3
Revised present value $490,000 (P/F, 8%, 7) = $490,000 × (0.58349) ................ $285,910
Interest expense, 20X8 (line 3 of table above) .................................................... $ 15,811
Adjustment to asset and obligation ($285,910 less $279,322 (Table, above))...... $ 6,588
Technical Review 12-10
1. Current
2. Current
3. Current
4. Non-current
5. Current

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-21
Assignments
Assignment 12-1
Requirement 1
a. Office supplies inventory ....................................................... 5,200
Accounts payable................................................................ 5,200
b. Cash ...................................................................................... 30,000
Note payable .......................................................................... 30,000
c. Inventory .............................................................................. 143,000
Accounts payable ................................................................. 143,000
d. Utilities expense .................................................................... 2,600
Accounts payable ..................................................................... 2,600
e. Dividends, preferred (or retained earnings) ............................ 6,000
Dividends, common (or retained earnings)............................. 5,000
Dividends payable .................................................................. 11,000
f. Accounts payable................................................................... 35,200
Inventory.............................................................................. 35,200
g. Accounts payable................................................................... 53,900
Cash ($143,000 - $35,200) x 50%......................................... 53,900
h. Interest expense ($30,000 x 10 % x 1/12)............................... 250
Interest payable .................................................................... 250
i. Rent expense.......................................................................... 2,400
Accounts payable ................................................................... 2,400
Note: Students may record utilities and rent is separate payable accounts, or in
accounts payable. Both are acceptable.
Requirement 2
Accounts payable 64,100 cr. (1)
Note payable 30,000 cr.
Interest payable 250 cr.
Dividends payable 11,000 cr. (1)

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-23
Assignment 12-2
a. Cash ...................................................................... 3,780,000
Sales revenue ...................................................................... 3,600,000
GST payable ($3,600,000 x 5%).......................................... 180,000
b. Cash ...................................................................................... 13,020,000
Sales revenue ...................................................................... 12,400,000
GST payable ($12,400,000 x 5%)........................................ 620,000
c. Equipment ..............................................................................1,250,000
GST payable ($1,250,000 x 5%).............................................. 62,500
Cash .................................................................................... 1,312,500
d. Salaries expense ..................................................................... 85,800
Employee income tax payable ............................................. 7,400
EI payable ........................................................................... 1,400
CPP payable ........................................................................ 1,200
Cash .................................................................................... 75,800
e. Cash ......................................................................................2,940,000
Sales revenue ...................................................................... 2,800,000
GST payable ($2,800,000 x 5%).......................................... 140,000
f. Inventory (or purchases)....................................................... 12,200,000
GST payable ($12,200,000 x 5%)............................................ 610,000
Cash .................................................................................... 12,810,000
g. Salaries expense ..................................................................... 85,800
Employee income tax payable ............................................. 7,400
EI payable ........................................................................... 1,400
CPP payable ........................................................................ 1,200
Cash .................................................................................... 75,800
h. Salary expense........................................................................ 6,320
CPP payable ($1,200 x 2) .................................................... 2,400
EI payable ($1,400 x 2 x 1.4)............................................... 3,920
i. Employee income tax payable ................................................. 14,800
EI payable ($1,400 x 2) + $3,920............................................. 6,720
CPP payable ............................................................................ 4,800
Cash .................................................................................... 26,320
j. GST payable............................................................................ 267,500
Cash .................................................................................... 267,500

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12-24 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Balance: ($180,000 + $620,000 + $140,000) – ($62,500 + $610,000) = $267,500
Assignment 12-3
Liabilities:
GST payable (1) ...............................................................................$122,000
Income tax deductions payable (2).................................................... 47,400
CPP payable (3) ............................................................................... 13,500
EI payable (4)................................................................................... 13,280
(1) $43,000 + $708,000 – ($1,920,000 x 5%) – $533,000 = $122,000
(2) $2,600 + $21,400 + $23,400 = $47,400
(3) $1,900 + $2,800 + $3,000 + employer, $5,800= $13,500
(4) $800 + $2,400 + $2,800 + employer, ($5,200 x 1.4) = $13,280

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-25
Assignment 12-4 (WEB)
a) Inventory (70,000 x $2.11) .................................................. 147,700
Accounts payable ................................................................ 147,700
b) Inventory (150,000 x $1.11) ................................................ 166,500
Accounts payable ................................................................ 166,500
c) Inventory (20,000 x $2.13) .................................................. 42,600
Accounts payable ................................................................ 42,600
d) Accounts payable ................................................................ 166,500
Foreign exchange loss ......................................................... 9,000
Cash (150,000 x $1.17) ....................................................... 175,500
e) Accounts payable ................................................................ 42,600
Foreign exchange loss ......................................................... 1,400
Cash (20,000 x $2.20) ......................................................... 44,000
f) Accounts payable ................................................................ 147,700
Foreign exchange loss ......................................................... 4,200
Cash (70,000 x $2.17) ......................................................... 151,900

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12-26 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Assignment 12-5
Requirement 1
Cash ...........................................................................................1,029,000
Sales revenue ...................................................................... 980,000
GST payable........................................................................ 49,000
Salary expense............................................................................ 117,000
EI payable ........................................................................... 3,800
CPP payable ........................................................................ 2,200
Employee income tax payable ............................................. 12,200
Cash .................................................................................... 98,800
Salary expense............................................................................ 7,520
EI payable ($3,800 x 1.4) .................................................... 5,320
CPP payable ........................................................................ 2,200
Inventory ...................................................................................1,520,000
GST payable ($1,520,000 x 5%)................................................. 76,000
Accounts payable ................................................................ 1,596,000
Cash .....................................................................................3,297,000
Sales revenue ...................................................................... 3,140,000
GST payable ($3,140,000 x 5%).......................................... 157,000
Accounts receivable ($176,000 x $1.03) ..................................... 181,280
Sales revenue ...................................................................... 181,280
The US customer has been billed in US dollars, and $176,000 is owing.
Cash ($140,000 x $1.07)............................................................. 149,800
Accounts receivable ($140,000 x $1.03) .............................. 144,200
Foreign exchange gains and losses....................................... 5,600
GST Payable ............................................................................. 192,800
Cash ($62,800 + $49,000 + $157,000 - $76,000) ............... 192,800
Accounts payable ....................................................................... 957,600
Cash (60% of $1,596,000) ................................................... 957,600
Accounts receivable ................................................................... 1,080
Foreign exchange gains and losses....................................... 1,080
($176,000 - $140,000) = $36,000 still owing. Recorded at $1.03; now worth $1.06
$36,000 x $.03 = $1,080

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12-28 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Assignment 12-6
Item Accounting treatment
a. Record; specific plan that has been communicated in a substantive way
b. Record; cash rebate is a required payout; liability for 65% x 500 x $10
c. Do not record; plans not yet concrete.
d. Record; legislative requirement; amount has to be estimated and
discounted for the time value of money
e. Record; announced intent that can be relied on by outside parties; amount
has to be estimated and discounted for the time value of money
f. Do not record; executory contract until time passes. Disclosure as
commitment.
g. Record when tower is built; remediation required under contract; amount
has to be discounted for the time value of money
h. Do not record; no firm offer or acceptance of out-of-court settlement.
Disclosure.
i. Do not record; no obligation is established because the case has not been
settled and the company will likely successfully defend itself. Disclosure
unless probability of payment is remote.
j. Record; obligation for the expected value of $4 million
k. Record; some might claim that the expectation of successful defense
means that the amount might simply be disclosed, and this is an
acceptable response. However, the author is pessimistic about the success
of appeals on CRA rulings and thus suggests recording.

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Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition 12-29
Assignment 12-7 (WEB)
Item Accounting treatment
a. Do not record; executory contract until goods are delivered.
b. Loss and liability recognized; record $40,000 loss from decline in market
value (onerous contract.)
c. Liability for $105,000 at year-end; originally recorded at $110,000 Cdn.
amount received and $5,000 foreign exchange gain recognized to reflect
change in exchange rate.
d. Probable that there will be payout
Record loss and liability at most likely outcome of $500,000. Expected
value; $425,000($2 million x 5%) + ($500,000 x 65%); appropriate to
record higher value of $500,000, reflecting payout.
e. Record loss and liability at expected value; company stands ready to make
payment in the event of default; amount is $300,000 x 10%.
Note: because this is a financial instrument, expected value or fair value is
used for valuation. Most likely outcome is not used for valuation.
f. Record loss and liability at expected cash outflow; obligation to make
payment; amount is $10,000 ( $100 x 1,000 x 10%).
g. Record as a liability; part of initial sales price allocated to liability;
Amount is expected fair value of merchandise to be distributed.

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12-30 Solutions Manual to accompany Intermediate Accounting, Volume 2, 7th edition
Assignment 12-8
Item Accounting treatment
A. Constructive obligation: Record costs of recall; may be an additional
$1,800,000 expense and liability ($1,200,000 ÷ 0.4 x 0.6) if costs are linear
with progress.
Company likely liable for any settlements or lawsuits for product damages,
but testing must be completed to ascertain if there is indeed a problem with
existing product.
B. Not recorded; all that can be recorded is loss events of the year; no amount
can be recorded to smooth out losses expected
C. Record at expected value; a warranty expense and a warranty provision are
recorded at the expected $100,000 outflow. Subsequent payments reduce
the provision.
D. Record since the company has decided to settle to avoid negative publicity.
Since there is a range and no amount in the range is more likely than
another, the midpoint of the range $375,000 would be managements best
estimate.
E. Record at expected value; company is required by legislation to remediate
the site. Amount must be estimated, both timing and amount, even though
uncertain. Amount to be discounted for interest rate over correct risk and
term.

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