CH 10
CH 10
CH 10
CHAPTER 10
LONG-TERM LIABILITIES
Learning Objectives
1. Explain why long-term liabilities are of significance to users.
2. Identify the long-term liabilities that arise from transactions
with lenders and explain how they are accounted for.
3. Identify the long-term liabilities that arise from transactions
with other creditors and explain how they are accounted for.
4. Identify the long-term liabilities that arise from transactions
with employees and explain how they are accounted for.
5. Identify the long-term liabilities that arise from differences
between accounting standards and income tax regulations or
law.
6. Explain what commitments and guarantees are and how they
are treated.
7. Explain contingencies and how they are accounted for.
8. Calculate leverage and coverage ratios and use the
information from these ratios to assess a company’s financial
health.
LO Learning objective
Bloom's
BT Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
E Easy
M Medium
H Hard
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
Ethics Professional and Ethical Behaviour
PS and DM Problem-Solving and Decision-Making
Comm. Communication
Self-Mgt. Self-Management
Team & Lead Teamwork and Leadership
Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation
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DQ10-6 Three typical ways in which bonds differ from other loans include:
Bonds are held by many creditors, whereas loans are usually
held by a single creditor.
Investors in bonds can sell the bonds in an active secondary
market, similar to the stock exchange for equity investments,
while loans are not normally bought and sold in a secondary
market.
Interest payments are usually made semi-annually and the
principal is repaid at maturity, which is usually at the end of the
term of the debt. On the other hand, loans usually pay interest on
a monthly basis, and the principal payments could be blended
with the interest, or made on a variety of payment dates before
entire loan is repaid.
In addition, bonds tend to have a much longer term to maturity
(as much as 40 years) than loans (usually 1 to 5 years).
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DQ10-7 The yield rate (often referred to as the effective rate, or market
rate) of interest with respect to a bond issue is the interest rate
required by the buyer for investing in the debt instrument. The
yield rate is affected by the rate of interest the buyer could obtain
from similar instruments with similar payments, timing of
payments and level of risk.
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DQ10-10 The par value of a bond is the same as its face value and maturity
value. Most individual bonds have a par value of $1,000. Bonds
will be bought and sold at this par value only when the contract
rate of interest promised in the indenture is the same as the yield,
market or effective rate required by investors.
If the yield, market, or effective rate falls below the contract rate,
investors will bid up the price of the bond above $1,000 because
this bond has agreed to pay a rate higher than is available
elsewhere for similar instruments. The price will get bid up to a
value that makes the cash flows promised by the indenture
provide a yield to the investor equal to the current market rate on
the cost of the bond to the investor. This bond will sell at a
premium, that is, at an amount above $1,000.
However, if the yield, market, or effective rate rises above the rate
promised by the bond indenture, investors will pay less than
$1,000 for the bond because this bond has agreed to pay a rate
lower than the rate investors can achieve elsewhere. The price
will be reduced to a value that makes the cash flows promised by
the indenture provide a yield to the investor equal to the current
market rate on the cost of the bond to the investor. This bond will
sell at a discount, that is, at an amount less than $1,000.
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pays more than par but will receive only the par or face value on
maturity, the yield to the investor (and the interest cost to the
issuer) is below the contract rate of interest promised in the
indenture.
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DQ10-13
When the interest rate required by the market (i.e. investors) is
greater than the contract interest rate promised by the bond, the
bond will sell for less than its face value (at a discount). Bond
interest payments are fixed based upon the face value of the
bond and the contract interest rate. By paying less than the face
value of the bond while receiving the stated interest payment, the
investors effectively earn a return that is higher than the contract
interest rate stated on the bond. It is necessary to sell bonds at a
discount when alternative investments with similar risk will provide
a higher interest rate for investors.
A discount on a bond refers to the amount by which the current
market price differs from (is less than) the face value. The face
value refers to the amount that will be paid on the maturity date of
the bond. The current market value is the present value of the
maturity payment plus the present value of the interest payments
that the bond will make over its life, both discounted at the current
market rate of interest. When the bond is recorded on the books
of the borrower, the accountant records the present value of bond
at its issuance which is equal to face value of the bond less the
discount.
DQ10-13 (Continued)
Since the issuing company must repay the bond’s face value on
maturity, the amount in the bond (note) liability account at the
maturity date must equal the face or maturity value of the bond.
Therefore, the carrying amount in the bond (note) account must
increase over time and be equal to the face value at the maturity
date (the opposite is true for bond premiums).
The periodic increase in the liability account over time is referred
to as the amortization of the discount. In terms of the accounting
entry to record the cash outflow and the expense related to the
interest payments, the amortization of the discount results in the
cash outflow for the interest payments being less than the interest
expense and consequently the carrying amount of the bond (note)
liability is increased. The following journal entry demonstrates
this:
Interest Expense XXXX
Notes Payable XXXX
Cash XXXX
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DQ10-15 Companies may lease capital assets rather than purchase them
outright for a number of reasons:
Company does not have sufficient cash for outright purchase, or
the cash it does have is required for other purposes
The company may have reached its borrowing limits and
therefore, cannot borrow the cash that would be required to
purchase the asset
Some assets, such as technology assets, become obsolete after
a relatively short time. Rather than purchase this type of asset
and then have to deal with its subsequent disposal and
replacement, it may be more effective for the company to lease
the assets and have the lessor replace them on a periodic basis.
Some assets, such as buildings or parts of buildings may be
required for only a small portion of the asset’s useful life. In this
case, it may be more cost effective to lease asset for the period
the asset is needed.
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DQ10-16 Virtually all the leases entered into by public companies result in a
right-of-use asset and a lease liability being recorded. Accounting
for a lease is identical to accounting for borrowing of funds on a
long-term basis and using the proceeds to acquire the capital
asset. The asset is recognized as a right-of-use asset and the
long-term obligation to make lease payments is recognized as a
long-term lease liability. The right-of-use asset is then
depreciated, and the lease payments typically involve blended
payments for the interest expense and the reduction of principal
of the lease liability.
The statement of financial position reports the right-of-use asset,
net of accumulated depreciation within the PP&E section; and the
lease liability outstanding is split between its current portion (in
current liabilities) and long-term portion (in long-term liabilities).
Interest expense and depreciation expense are reported on the
statement of income.
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DQ10-17
If the low-value lease exemption is used (which is for leases of
assets with a value of $5,000 US or less when new), the lease
payments can be treated as rent expense in the period they are
incurred. With the low-value lease exemption, there is nothing
reported on the statement of financial position related to the
lease. This differs from the normal lease treatment of setting up a
right-of-use asset and lease liability. This supports the cost
constraint from the conceptual framework, where the cost of
capturing and reporting financial information exceeds the benefits
of reporting it.
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DQ10-19 A hybrid pension plan differs from a defined benefit pension plan
in that the employer and the employee share the risk of
inadequate pension fund assets. Under a hybrid plan, either the
targeted benefits could be reduced, or both the employer and
employee together would be responsible for making up a pension
deficiency.
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DQ10-20 There are benefits to both defined benefit plans and defined
contribution plans. Under a defined benefit plan, the employee
can better plan for retirement as it is easier to determine how
much pension income s/he will receive, the pension is payable
for life, the retiree does not have to worry about using up all the
pension assets during the retirement period, and the employer
takes on the risk if there are economic downturns in the future.
DQ10-20 (Continued)
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DQ10-22 While the employer’s contribution to the pension fund, and thus
the amount of the expense, are known directly for defined
contribution plans, the measurements associated with a defined
benefit plan are much more difficult. This is because the
company must estimate its present obligation for benefits that
will be paid far into the future to determine its current pension
expense. This is done through a complex calculation using such
variables as the employees’ length of service, best salary years,
amount of salary earned in those years, turnover rates, and so
on. Two of the most difficult variables to estimate are the long-
run rate of return expected to be earned on the pension assets
and the discount rate in determining the present value of these
pension obligations.
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DQ10-23
Deferred income taxes arise because income tax expense on
the statement of income is based on the accounting income
determined according to accounting standards, while the income
taxes payable to the government (i.e. income taxes payable
reported on the statement of financial position) are based on
taxable income determined under the Income Tax Act and its
regulations.
DQ10-23 (Continued)
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DQ10-24 Deferred income taxes are not amounts currently owing to the
government. Any taxes owing to the government would be
presented as income taxes payable on the statement of financial
position. Deferred income taxes can meet the definition of a
liability if it is probable that differences between accounting and
tax treatment for certain items (i.e. depreciation versus CCA or
the treatment of warranties) will result in net income for tax
purposes being higher than net income for accounting purposes
in future periods. This will result in income taxes payable
(determined using net income for tax purposes) being higher
than income tax expense (determined using net income for
accounting purposes). There will be a future outflow of
economic benefits which can be measured reliably and results
from actions already taken, thus the definition of a liability is met.
It should be noted that deferred income taxes can also be an
asset if net income for accounting purposes will be higher than
net income for tax purposes in the future.
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DQ10-28
From the perspective of the investor, a higher degree of
leverage is preferable than a lower one. This is because it would
mean that the company is using the capital of others (creditors)
to generate higher returns for the investors. There is a point
where investors would consider a company to be over-
leveraged, resulting in a higher risk of the company defaulting on
its debt obligations and being forced into bankruptcy.
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AP10-1A
a. The interest expense decreases each month because the monthly
payment includes a payment on the principal as well as interest.
Therefore, the outstanding balance of the loan is reduced with each
payment so the interest portion of the next payment reduces. Interest
expense is calculated as the carrying amount (outstanding principal
balance) times the interest rate for the loan. Since the carrying
amount of the loan decreases with each blended payment, the interest
expense portion of each payment also decreases, while the principal
portion of each payment increases.
b.
Oct. 1 Cash 1,000,000
Mortgage Payable 1,000,000
AP10-2A
Cash 900,000
Mortgage Payable 900,000
Payment 1:
Payment 2:
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AP10-3A
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AP10-4A
a. Investors were not willing to pay $50 million for the bonds for one of two
reasons. The risks associated with Spring Water Company Ltd. may
have increased since the terms of the bond indenture were fixed, so that
the investors required a higher yield on their investment than the contract
rate written into the bond indenture. Alternatively, the risk associated with
Spring Water Company might be unchanged, but the yield rate
demanded in the general economy for an investment of the same risk
might have increased, so that the alternative investments to the company
bond were providing a higher yield. In either case, the yield required
ended up being 5% when the bonds were issued and this exceeded the
contract interest rate offered on the bonds (4.5%). Consequently, the
bonds sold at less than their par or face value, and the company was not
able to raise the $50 million that it had hoped for.
Cash 48,050,000
Notes Payable 48,050,000
AP10-4A (Continued)
June 30
Interest Expense 1,201,250
Cash 1,125,000
Notes Payable 76,250
December 31
Interest Expense 1,203,156
Cash 1,125,000
Notes Payable 78,156
d. The amount reported for the bond (notes) payable at December
31, 2021 = $48,050,000 + $76,250 + $78,156 = $48,204,406.
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AP10-5A
AP10-5A (Continued)
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AP10-6A
a. Journal entry for the issuance of the bonds (notes):
Cash 57,069,000
Notes Payable 57,069,000
b. The face value of the bonds:
Issue price $57,069,000 / 1.2682 = $45,000,000
Investors are willing to pay more than the face value for the bonds
because the bond’s contract interest rate is higher than the market
rate (the return they would receive had they chosen the next best
investment). The bond price gets bid up in this situation until the
yield to the investor equals the lower market rate.
c. Interest entry for the first interest payment:
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AP10-7A
Cash 78,240,000
Notes Payable 78,240,000
b. Interest entry for the first interest payment:
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AP10-8A
Cash 118,112,500
Notes Payable 118,112,500
b. Interest entry for the first interest payment:
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AP10-9A
AP10-10A
i. At 6%, the market or yield rate equals the bond contract rate.
Therefore, the full face value ($100,000,000) will be received.
ii. At 6.5%, issued at 94.448 (or 94.448% of face value):
Cash received = $100,000,000 X .94448
= $94,448,000
iii. At 5.5%, issued at 106.02 (or 106.02% of face value):
Cash received = $100,000,000 X 1.0602
= $106,020,000
b. i. Cash 100,000,000
Notes Payable 100,000,000
Cash interest paid semi-annually:
$100,000,000 X 6% X 6/12 = $3,000,000
First interest:
Interest Expense 3,000,000
Cash 3,000,000
Second interest:
Interest Expense 3,000,000
Cash 3,000,000
AP10-10A (Continued)
Second interest:
Interest Expense 2 3,071,821
Cash 3,000,000
Notes Payable 71,821
2
Interest expense:
($94,448,000 + $69,560) x 6.5% x 6/12 = $3,071,821
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AP10-11A
Cash 66,991,500
Notes Payable 66,991,500
First interest:
Interest Expense1 2,344,703
Cash 2,250,000
Notes Payable 94,703
1
Interest expense:
$66,991,500 x 7% x 6/12 = $2,344,703
Second interest:
Interest Expense2 2,348,017
Cash 2,250,000
Notes Payable 98,017
2
Interest expense:
($66,991,500 + $94,703) x 7% x 6/12 = $2,348,017
The carrying value on the bonds one year after issuance, just after
the second semi-annual interest payment is:
$66,991,500 + $94,703 + $98,017 = $67,184,220
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AP10-12A
a. Bountee’s statement of financial position would include a right-of-use
leased capital asset and a corresponding lease liability. The right-of-
use asset would be initially recorded at $537,800 (the present value
of the lease payments under the lease) and a lease liability would be
recorded in the same amount. The right-of-use asset would be
depreciated, so its carrying value at the end of January would be:
$533,318 [$537,800 – ($537,800/10 years / 12 months = $4,482)].
The lease liability at the end of January would be:
The lease liability January 1, 2020 $537,800
Monthly repayment January 2020:
Total monthly payment amount $6,535
Less interest ($537,800 x 8% x 1/12) 3,535
Principal repayment $2,940 (2,940)
The lease liability at the end of January $534,860
b. Bountee’s statement of income for the one month ended January 31,
2020 would show:
Depreciation expense $4,482
Interest expense 3,585
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AP10-13A
= 56% or 0.56:1
Fessenden would not exceed the .9:1 ratio set by the lender.
AP10-14A
a. 2020
Debt to Equity = Net Debt (Interest Bearing Debt – Cash)
Shareholder’s Equity
2019
Debt to Equity = Net Debt (Interest Bearing Debt – Cash)
Shareholder’s Equity
AP10-15A
AP10-15A (Continued)
AP10-1B
b.
May 1 Cash 800,000
Mortgage Payable 800,000
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AP10-2B
Cash 500,000
Mortgage Payable 500,000
Payment 1:
Payment 2:
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AP10-3B
a. The cash received on issuance was equal to the face value of the
bonds issued ($100,000,000) as the bond was issued at par. The
yield is 6%.
Interest payments= $100,000,000 x 6% x 6/12 = $3,000,000
b. Given the bonds were issued at par, the May 1, 2020 entry:
Cash 100,000,000
Notes Payable 100,000,000
c. Journal entry on October 31, 2020
Interest expense 3,000,000
Cash 3,000,000
On December 31, 2020, Morneau’s year end, it is necessary to accrue
interest expense for two months since the last interest payment. As of
December 31, an obligation (liability) exists related to two months
interest. The liability for interest and interest expense both accrue with
the passage of time. The interest payable and the interest expense for
November and December must be recorded and reported on the year-
end financial statements.
Interest expense and interest payable at December 31, 2020 for
November and December 2020:
$100,000,000 x 6% x 2/12 = $1,000,000
Note that amount payable and expense are the same in this
case because bonds were issued at par or face value.
Journal entry on December 31, 2020:
Interest Expense 1,000,000
Interest Payable 1,000,000
April 30, 2021 entry:
Interest expense for second period of six months:
$100,000,000 x 6% x 6/12 = $3,000,000
Less amount recognized in 2020 1,000,000
Expense for Jan. 1 – April 30 $2,000,000
Interest Expense 2,000,000
Interest Payable 1,000,000
Cash 3,000,000
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AP10-4B
a. Investors were not willing to pay $150 million for the bonds for one of
two reasons. The risks associated with Volta Desalination Ltd. may
have increased since the terms of the bond indenture were fixed, so
that the investors required a higher yield on their investment than the
contract rate written into the bond indenture of 3% (calculated using
the interest payment amount of $2,250,000 ÷ the face amount of the
bonds $150,000,000 x 2 = 1.5% x 2 = 3% annual interest rate).
Alternatively, the risk associated with Volta Desalination might be
unchanged, but the yield rate demanded in the general economy for
an investment of the same risk might have increased, so that the
alternative investments to the company bond were providing a higher
yield. In either case, the yield required ended up being 3.54% when
the bonds were issued and this exceeded the contract interest rate
offered on the bonds of 3%. Consequently, the bonds sold at less
than their par or face value, and the company was not able to raise
the $150 million that it had hoped for and did not raise enough funds
for the construction of their water desalination facility.
Cash 141,600,000
Notes Payable 141,600,000
AP10-4B (Continued)
March 31
Interest Expense 2,506,320
Cash 2,250,000
Notes Payable 256,320
September 30
Interest Expense 2,510,857
Cash 2,250,000
Notes Payable 260,857
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AP10-5B
a.
b. Investors are willing to pay more than the face value for the bonds
because the bond’s contract interest rate is higher than the market rate
(the return they would receive had they chosen the next best
investment). The bond price gets bid up in this situation until the yield to
the investor equals the lower market rate.
The bond notes were issued at a premium (since the bond contract or
stated rate is higher than the market or yield rate). Thus, the initial
carrying amount of the bonds is higher than the face value of the bonds.
The carrying value will decrease over the period to maturity as the
premium is amortized until the carrying value is equal to the face value of
the bonds. This will occur at maturity.
c. The carrying value of the bonds at the end of payment 4 is $73,790,379.
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AP10-6B
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AP10-7B
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AP10-8B
Cash 197,000,000
Notes Payable 197,000,000
b. Interest entry for December 31 accrual:
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AP10-9B
a. The cash proceeds on the issuance of the bonds
= $150,000,000 X 1.0697 = $160,455,000
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AP10-10B
a. Amount of cash received:
i. At 7%, the market or yield rate equals the bond contract rate.
Therefore, the full face value ($200,000,000) will be received.
ii. Issued at 95.542 (or 95.542% of face value):
Cash received = $200,000,000 X .95542
= $191,084,000
iii. Issued with a $9,500,000 premium
Cash received = $200,000,000 + $9,500,000
= $209,500,000
b. i. Cash 200,000,000
Notes Payable 100,000,000
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AP10-11B
a.
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AP10-12B
a. MUHC Ltd’s statement of financial position would include a right-of-
use leased capital asset and a corresponding lease liability. The
right-of-use asset would be initially recorded at $368,175 the present
value of the lease payments under the lease) and a lease liability
would be recorded in the same amount. The right-of-use asset would
be depreciated, so its carrying value at the end of January would be
$357,948 [$368,175 – ($368,175 / 3 years / 12 months = $10,227)].
b. MUHC Ltd’s statement of income for the one month ended January
31, 2020 would show:
Depreciation expense $10,227
Interest expense 920
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AP10-13B
= 53%
Ferguson would also exceed the 50% ratio set by the lender.
AP10-14B
a. 2020
Debt to Equity = Net Debt (Interest Bearing Debt – Cash)
Shareholder’s Equity
2019
Debt to Equity = Net Debt (Interest Bearing Debt – Cash)
Shareholder’s Equity
= X – $65,000 = 0.75
$1,875,000
AP10-14B (Continued)
AP10-15B
AP10-15B (Continued)
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LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
LO 2 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
LO 2 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
UP10-6
a. The effect of the use of this exemption has on the financial
statements relates more to the statement of financial position
than to the statement of income. On the statement of income,
the effect is often insignificant because the rent expense
recorded on the low-value exemption is similar in amount to the
total of depreciation expense and interest expense recorded for
leases. On the statement of financial position, the company’s
contractual obligations to make rental payments into the future
are not captured as liabilities under the low-value exemption and
the assets being leased are not captured and reported as
assets. Therefore, the debt to total assets ratio is understated
and the return on total assets ratio is overstated. Because of
this, the company appears to be using less debt in its financial
structure than it is (and is perceived to be less risky), and it
appears to be generating income on a smaller amount of assets
than it is using for operations (and therefore appears more
profitable).
LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
LO 3 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
UP10-8
I agree with this statement. It is possible that two separate
companies could report the transaction in a different way if the
computers met the criteria for a short term or low-value lease (12
months in length or less or $5,000 US in value or less when
new). One company could elect to use the exemption while the
other company could elect not to use it.
LO 3 BT: C Difficulty: E Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
UP10-9
UP10-9(Continued)
In a hybrid plan, the employer and the employee share the risk
of inadequate pension fund assets. These plans combine
features of both defined contribution plans and defined benefit
plans. They establish targeted benefit levels (similar to defined
benefit plans) which are targets rather than guaranteed benefits.
The contributions from the employee and employer are fixed
(similar to defined contribution plans), but these can be adjusted
by mutual consent. If need be, either the targeted benefits could
be reduced, or both the employer and employer together could
agree to change their contributions if this was necessary to
make up a pension deficiency.
LO 4 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
UP10-10 a. and b.
Memo:
As you are likely aware, there have historically been two basic
types of pension plans – defined benefit plans and defined
contribution plans. Each has its advantages.
UP10-10(Continued)
In this way, both the risks and costs are shared between the
employer and the employee, and the employee is more certain
of the benefit outcomes that he or she can expect.
LO 4 BT: C Difficulty: M Time: 20 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
UP10-11
Defined benefit plans are the most beneficial plans for employees to
have. They define how much the employees will receive in retirement
and the employer bears the risk of making sure it is funded properly.
This can cause pension envy among employees if they don’t have as
good a pension plan or any at all. It is the defined benefit plan that
would cause the most pension envy.
LO 4 BT: C Difficulty: E Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
UP10-12
a. As a manager, I might prefer to record the cost of post-
employment benefits as the expenditures are incurred, because
I would not have to record obligations (liabilities) related to these
future payments on my current statement of financial position
nor large estimated expenses on the current statement of
income. Also, it is difficult to estimate the present value of these
obligations as they may not be settled for many years and
amounts accrued will require adjustments.
LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
UP10-13
UP10-13 (Continued)
LO 6,7 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
UP10-14 (Continued)
For example, when the cash is received in the future from the
sale of land, taxable income will increase and income tax will be
payable on the gain. And when the company takes less CCA
(tax depreciation) than straight-line depreciation in the future, the
company’s taxable income will be higher than its accounting-
reported income and the company will have to pay additional
income tax. The additional tax really relates to the previous
years when its actual taxes paid were reduced by taking more
CCA than depreciation expense. In both cases, in the current
year, the company reports the income taxes that will become
payable in the future as a deferred income tax liability and
includes the related future tax expense on the current year’s
income statement. This matches the total tax expense with the
decisions and transactions and amounts reported for accounting
purposes in the current year.
UP10-14 (Continued)
Does the obligation result from a past transaction? Yes, the land
was sold during the current year and this is what gives rise to
the deferred income tax obligation. More CCA (tax depreciation)
was claimed than book depreciation in the current period. This
will require a reversal and more tax to be paid in the future.
LO 5 BT: C Difficulty: H Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting
LO 5 BT: C Difficulty: H Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
WORK IN PROGRESS
WIP10-1
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
WIP10-2
LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
WIP10-3
LO 3 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
WIP10-4
Flaws:
A pension plan does not defer wage-related expenses to
future periods, pension expense is recognized in the current
year to reflect the pension benefit earning in the current
period. Only a portion of the payment may be deferred if the
company doesn’t fully fund its pension obligation.
LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
WIP10-5
Flaws:
The lawsuit creates a contingent liability. The need to record the
liability is dependent upon the outcome of the case, or the
settlement of the case out of court. To the extent that management
has the view that a negative outcome is probable and can be
reasonably be determined and measured, the amount must be
recorded in the financial statements. In addition, details of any
additional exposure in the matter would be discussed in the notes
to the financial statements. If the probability of the occurrence of
the liability could not established, or is low, or if the amount cannot
be estimated, the contingent liability would only be disclosed in the
notes to the financial statements. The company must not delay in
the recognition and disclosure of the contingent liability merely
based on an ongoing court case.
LO 7 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
WIP10-6
LO 8 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
RI10-1 (Continued)
Metro’s non-current debt to total capital ratio is well below the 50%
limit. It may set this objective to control the risk associated with
having too much debt that requires regular interest and principal
repayments. If the ratio is too high, company runs the risk of not
being able to meet its commitments and the creditors will require
higher interest rates to compensate them for additional risk they
take on.
e. The Senior Note 2026 does not have any principal repayment
over their term, just at maturity and the interest payments are
due semi-annually at 5.875% per annum. The Senior Note
2023 does not have any principal repayment over their term,
just at maturity and the interest payments are due semi-
annually at 5.625% per annum.
LO 2 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
a. When it states that the all the Series debentures are “senior
unsecured debentures” it means that these unsecured debt
instruments (i.e., debentures) have a priority claim to the
organization’s assets before any unsecured subordinated
debentures, should the University encounter difficulties
repaying its debt.
LO 2 BT: C Difficulty: E Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
LO 2 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
c. The fair value of the defined benefit plan assets for Rogers
Sugar is $97,033,000 at October 1, 2016 .
LO 2 BT: C Difficulty: H Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
LO 5 BT: C Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
b. The major change in the ratios is causes by the net debt being
reduced to zero in 2016, likely by using the proceeds from the
sale of the property. The gain from the sale is the main source
of the net income for 2016 and explains the increase in the
times interest earned ratio. If the gain had been excluded from
net income the times interest earned ratio for 2016 would have
essentially become income from operations divided by interest
expense or 7.8 times ($52,718,589 - $46,659,169) ÷ $778,557].
With the elimination of debt and substantial amounts of cash
and short term investments, the first two ratios are not
applicable.
RI10-7 (Continued)
RI10-8 (Continued)
RI10-9 (Continued)
This note tells us that during the next fiscal year, Second Cup has
no choice but to make good under these contractual
commitments, thus it will spend at least US$849 thousand
acquiring coffee bean inventory. This will be accounted for as
inventory purchases by the company and then into cost of goods
sold as the coffee is sold to customers. It also means that the
company will incur liabilities of an equal amount, at a minimum,
with these suppliers, and these amounts will require cash
payments in the future.
LO 6 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
Secondly,
The government in Brazil is investigating and has brought
charges against BT Brazil (a wholly owned subsidiary of the
company) for cartel activity in the purchase of equipment and
construction and maintenance of rail lines in Brazil. If the charges
are successful, the company would face administrative fines,
state actions for repayment of overcharges and potentially,
disqualification for a certain period to obtain government
contracts. The company is currently and will continue to
cooperate with the investigations and intends to defend itself
vigorously.
LO 7 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
LO 5,6,7,8 BT: AN Difficulty: H Time: 90 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance
CASE SOLUTIONS
Mark,
C10-1 (Continued)
LO 2,3 BT: C Difficulty: M Time: 35 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
Jonah,
C10-2 (Continued)
Mike
LO 2 BT: C Difficulty: M Time: 30 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
LO 3 BT: C Difficulty: M Time: 30 min. AACSB: Communication CPA: cpa-t001 CM: Reporting
LO 3 BT: C Difficulty: E Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
C10-5 (Continued)
C10-5 (Continued)
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