Solution Manual For Intermediate Accounting Volume 1, Seventh Canadian Edition

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Solutions Manual to accompany Intermediate Accounting, Volume 1, 7th edition 1-1
Chapter 1: The Framework for Financial Reporting
Case 1-1 North and South
1-2 Richard Ploughwright
1-3 Milton Kidd
Suggested Time
Technical 1-1 Chapter overview, true-false ............................ 10
1-2 Chapter overview, true-false .......................... . 10
1-3 Acronyms……………………………………… 10
1-4 IFRS or ASPE…………………………………. 10
1-5 IFRS or ASPE…………………………………. 10
1-6 Disclosed basis of accounting………………… 10
1-7 GAAP and reporting currency........................ . 10
1-8 GAAP and reporting currency........................ . 10
1-9 Users and objectives………………………….. 10
1-10 Required financial statements ........................ . 10
Assignment 1-1 IASB standard-setting.................................... 10
1-2 International comparisons .............................. 10
1-3 Accounting choices........................................ 10
1-4 Effect of accounting policies (*W)................. 15
1-5 Reporting alternatives .................................... 10
1-6 Non-IFRS situations . .................................... 15
1-7 Reporting situations ....................................... 20
1-8 Reporting situations ....................................... 15
1-9 Objectives of financial reporting .................... 20
1-10 Impact of differing objectives (*W) ............... 20
1-11 Accounting policy disagreement .................... 15
1-12 Accounting policies and reporting objectives . 10
1-13 Policy choice ................................................. 20
*W The solution to this exercise/problem is on the text Web site and in
the Study ............Guide. This solution is marked WEB.

©2016 McGraw-Hill Ryerson Ltd. All rights reserved
1-2 Solutions Manual to accompany Intermediate Accounting, Volume 1, 7th edition
Cases
Case 1-1
Notes for Discussion With Leanne:
There is a conflict of interest between the objectives of Leanne and James due to the
shareholder agreement. Leanne will have a motivation to decrease shareholders’ equity
since this will reduce the amount that she will be required to pay to buy out James. James
will be interested in increasing shareholders’ equity to increase the amount he will
receive. It must be clarified who I am working for since I may have a conflict of interest
since I know both parties.
It is important that all accounting policies are ‘fair’ to both sides. What is considered
‘fair’? Fair could be consistent accounting policies with the past since that would be the
expectation of James that the accounting policies would be the same. Fair could be if the
economic events change the accounting policy would change. Fair could be both sides
split the difference. In the future it is important that the shareholders agreement is more
specific. Due to the choices allowed within GAAP a policy could be selected that would
be more beneficial to one of the parties. It is assumed since this is a small private
company that they are using ASPE. There is no indication that they would be using IFRS.
Inventory
Leanne wants to write off the inventory value for the garden gnomes and statues and this
will decrease the amount of her payment to James. According to ASPE inventory would
be valued at the lower of cost and net realizable value. Even though this inventory has
been sitting in the gardening centre there is still a few being sold each year. This indicates
there is still some value and they should not be written off to zero. It should be
determined what the net realizable value of this inventory is to determine the amount of
the write off. If it is all written off and then sold at a later date this would not be fair to
James since Leanne would get the benefit if these are sold at a later date. The purchase of
this inventory would have been a decision made by both James and Leanne so if it was a
bad decision they should both bear the impact of this decision.
Warranty
According to ASPE the accounting policy is appropriate and a warranty expense should
be included for the guarantee. The impact is that this would decrease shareholders equity
and the amount of the payment to James. This is a new policy that did not exist until this
year. The estimate of 5% was only based on sales from the fall. Since it is a new policy
that was made by Leanne on her own it may be appropriate that the impact of this is
excluded from the calculation of the shareholders equity. At a minimum the estimate
should be reviewed to determine if it is reasonable.
Computer Equipment
ASPE is flexible in the method used to depreciate assets. The declining balance method
using 40% would write off the value of the computers in approximately two years. This is

Solutions Manual to accompany Intermediate Accounting, Volume 1, 7th edition 1-3
very fast especially for a small company than is likely to use a computer for a longer
period of time that a large company due to limited resources. Just because it will become
obsolete quickly does not mean the business will not continue to use the computer. The
impact of this is this would reduce the payment to James. If we look at consistency with
other assets it would be appropriate to use the straight line method. Since again since this
was a decision made only be Leanne maybe it should be excluded from the calculation or
maybe they policy should be consistent with their other assets.

©2016 McGraw-Hill Ryerson Ltd. All rights reserved
1-4 Solutions Manual to accompany Intermediate Accounting, Volume 1, 7th edition
Case 1-2
Dear Mr. Ploughwright:
I am happy to respond to your questions regarding the accounting changes that the new
banker has requested. It is important that you realize that the needs of the banker are
different than your needs. The bank is interested in your ability to make loan payments
therefore wants to know your future cash flows as well as if you cannot pay back the loan
and the value of any collateral.
First, there is the issue of moving to the accrual basis. While it’s true that, ultimately,
what you earn is the net cash in your pocket, the cash basis of accounting doesn’t wholly
capture all of the cash flows that will happen in the future. Your banker wants to know
what liabilities you’ll have to pay in the coming months (and years), and what cash you
currently are owed that will be collected in the future weeks or months. The accrual
method really gives a clear picture of future “cash flow”.
It’s for much the same reason that he wishes you to show your cattle at market value. I’m
sure he recognizes that both your dairy cattle and your breeders are intended for
continued use and are not for sale in the normal course of business.As saleable stock, the
cattle represent a potential cash resource in the event of bankruptcy or default. After all,
you probably use the cattle as collateral for loans, and he needs to know the value of that
collateral.
You should not try to estimate the value of your stock by yourself. For credibility, you
should obtain an independent estimate. The valuation will require a professional
evaluation (and the cost thereof), but will be necessary in order to satisfy the bank.
As for my bill, that may change somewhat in the first year due to switching to the accrual
method. However, once the accrual approach has been put in place, the cost of the annual
compilation or review engagement (case not specific about type of engagement) will not
be any higher than it would be had you continued to use the cash basis.
Sincerely,
Andriana

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