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Solution manual kieso intermediate accounting ifrs edition {SPirate} Solution manual kieso intermediate accounting ifrs edition {SPirate} Solution manual kieso intermediate accounting ifrs edition {SPirate} Solution manual kieso intermediate accounting ifrs edition {SPirate} Solution manual kieso intermediate accounting ifrs edition {SPirate} Solution manual kieso intermediate accounting ifrs edition {SPirate} Solution manual kieso intermediate accounting ifrs edition {SPirate} Solution manual kieso intermediate accounting ifrs edition {SPirate} Solution manual kieso intermediate accounting ifrs edition {SPirate}
To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com CHAPTER Financial Reporting and Accounting Standards ASSIGNMENT CLASSIFICATION TABLE TopicsQuestions Cases Global markets Environment of accounting 2, 3, 4 , 5, Objective of financial reporting 5, 6, 7, 8, 9, 10 Standard-setting organizations 11, 12, 13, 14, 15 , 16, 17, 18 , 3, Financial reporting challenges 19, 20, 21, 22, 23 , 24, 25 , 9, 10 Ethical issues 26 *7 11 , 12, 16 13 , 14, 15 27, 28, 29, 30, 31, 32 , 33, 34, 35, 36, 37 , 38 *These questions and cases address material in the appendix to the chapter Authoritative U.S pronouncements and policy-setting bodies ASSIGNMENT CHARACTERISTICS TABLE Level of Description Difficulty ( minutes ) CA1-1 IFRS and standard-setting CA1-2 IFRS and standard-setting CA1-3 Financial reporting and accounting standards Simple Simple Simple CA1-4 Financial accounting Simple CA1-5 Need for IASB Simple CA1-6 IASB role in standard-setting Simple CA1-7 Accounting numbers and the environment Simple Time Item Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1- – 10 – 10 15 – 20 15 – 20 15 – 20 15 – 20 10 – 15 To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com CA1-8 Politicalization of IFRS Complex CA1-9 Models for setting IFRS Simple CA1-10 Economic consequences Moderate CA1-11 Rule-making Issues Complex CA1-12 Financial reporting pressures Moderate *CA1-13 GAAP terminology Moderate *CA1-14 *CA1-15 CA1-16 Accounting organizations and documents issued Accounting pronouncements GAAP and economic consequences Simple Simple Moderate 1-2 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) 15 – 20 10 – 15 25 – 35 20 – 25 25 – 35 20 – 30 3–5 5–7 25 – 35 To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com ANSWERS TO QUESTIONS World markets are becoming increasingly intertwined The tremendous variety and volume of both exported and imported goods indicates the extensive involvement in international trade As a result, the move towards adoption of international financial reporting standards has and will continue in the future 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 Financial statements generally refer to the four basic financial statements: statement of financial position, income statement, statement of cash flows, and statement of changes in 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 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 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 making decisions in their capacity as capital providers General purpose financial statements provide financial reporting information to a wide variety of users To be cost effective in providing this information, general purpose financial statements provide at the least cost the most useful information possible Shareholders, creditors, suppliers, employees, and regulators all use general purpose financial statements The primary user group is capital providers (shareholders and creditors) The proprietary perspective is not considered appropriate because this perspective generally does not reflect a realistic view of the financial reporting environment Instead the entity perspective is adopted which is consistent with the present business environment where most companies engaged in financial reporting have substance distinct from their investors The objective of financial reporting is primarily to provide information to investors interested in assessing the company’s ability to generate net cash inflows and management’s ability to protect and enhance the capital providers’ investments Financial reporting should help investors assess the amounts, timing and uncertainty of prospective cash inflows 10 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 11 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 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1- To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com quality, understandable and international financial reporting standards (IFRSs) for general purpose financial statements Questions Chapter (Continued) 12 The Financial Accounting standards Board (FASB) is an independent organization whose mission is to establish and improve standards of financial accounting and reporting for U.S companies 13 The purpose of the IOSCO is to facilitate cross-border cooperation, reduce global systemic risk, protect investors, and ensure fair and efficient securities markets 14 The mission of the IASB is to develop, in the public interest, a single set of high quality, understandable and international financial reporting standards (IFRSs) for general purpose financial statements 15 The IASB preliminary views are based on research and analysis conducted by the IASB staff IASB exposure drafts are issued after the Board evaluates research and public response to preliminary views IASB standards are issued after the Board evaluates responses to the exposure draft 16 IASB standards are financial accounting standards issued by the IASB and are referred to as International Financial Reporting Standards (IFRS) The IASB Framework for financial reporting sets forth fundamental objectives and concepts that the Board uses in developing future standards of financial reporting The intent of the Framework is to form a cohesive set of interrelated concepts that will serve as tools for solving existing and emerging problems in a consistent manner 17 International Financial Reporting Standards are the most authoritative, followed by International Financial Reporting Interpretations then the IASB framework 18 The International Financial Reporting Interpretations Committee (IFRIC) applies a principles-based approach in providing interpretative guidance The IFRIC issues interpretations that cover newly identified financial reporting issues not specifically dealt with in IFRS, and issues where conflicting interpretations have developed, or seem likely to develop in the absence of authoritative guidance 19 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 20 The sources of pressure are innumerable, but the most intense and continuous pressure to change or influence the development of IFRS come from individual companies, industry associations, governmental agencies, practicing accountants, academicians, professional accounting organizations, and investing public Questions Chapter (Continued) 21 IFRS are considered principles-based accounting These standards provide more general guidance by starting with broad objectives, outcomes, and principles without providing detailed guidance U.S GAAP (referred to as rules-based accounting) is based on the assumption that management needs detailed accounting guidance to ensure that the transaction is reported consistently and appropriately 1-4 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com 22 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 23 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 24 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 25 The expectations gap is the difference between what people think accountants should be doing and what accountants think they can 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 IASB, to serve as guidelines for recording and processing business transactions in the changing economic environment 26 Accountants must perceive the moral dimensions of some situations because IFRS 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 *27 The purpose of the Securities and Exchange Commission (SEC) is to help develop and standardize financial information presented to stockholders The SEC has broad powers to prescribe the accounting practices and standards to be employed by companies within its jurisdiction *28 The Financial Accounting Standards Board’s (FASB) mission is to establish and improve standards of financial accounting and reporting for the guidance of the public, including issuers, auditors, and users of financial information Questions Chapter (Continued) *29 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 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1- To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com 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 *30 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.” *31 It was believed that FASB Statements 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 of full-time compensated members; (2) the FASB has greater autonomy and increased independence; and (3) the FASB has broader representation than the APB *32 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 presents all facts and alternatives related to a specific topic or problem, whereas the exposure draft is a tentative “statement.” After 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 *33 Statements of financial accounting standards 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 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 *34 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 Questions Chapter (Continued) *35 The accounting Standards Codification (or more simply, (the Codification) provides in one place all the authoritative literature related to a particular topic The Codification does not include nonessential information such as redundant document summaries, basis for conclusions sections, and historical content It comprises all literature that is considered authoritative; all other accounting literature is considered non-authoritative *36 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 1-6 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com 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 *37 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 *38 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 TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS CA 1-1 ( Time 5–10 minutes ) Purpose—to provide the student with an opportunity to answer questions about IFRS and standard setting CA 1-2 (Time 5–10 minutes) Purpose—to provide the student with an opportunity to answer questions about IFRS and standard setting CA 1-3 (Time 15–20 minutes) Purpose—to provide the student with an opportunity to answer questions about IFRS and standard setting 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 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 1-6 (Time 15–20 minutes) Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1- To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com Purpose —to provide the student with an opportunity to identify the sponsoring organization of the IASB, the method by which the IASB arrives at a decision, and the types and the purposes of documents issued by the IASB CA 1-7 ( 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 1-8 (Time 15–20 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 1-9 (Time 10–15 minutes) Purpose —to provide the student with an opportunity to focus on what type of rule-making environment exists In addition, this CA explores why user groups are interested in the nature of IFRS and why some groups wish to issue their own rules CA 1-10 (Time 25–35 minutes) Purpose—to provide the student with the opportunity to discuss the role of government officials in accounting rule-making CA 1-11 (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 1-12 (Time 25–35 minutes) Purpose—to provide the student with a writing assignment concerning the ethical issues related to meeting earnings targets Time and Purpose of Concepts for Analysis (Continued) *CA 1-13 (Time 20–30 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 *CA 1-14 (Time 3–5 minutes) Purpose —to provide the student with an opportunity to identify the various documents issued by different accounting organizations This CA should help the student to better focus on the more important documents issued in the financial reporting area *CA 1-15 (Time 5–7 minutes) Purpose—to provide the student with an opportunity to match the descriptions of a number of authoritative pronouncements issued by rule-making bodies to the pronouncements CA 1-16 (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 1-8 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com Net sales Receivables turnover = Average receivables £9,022.0 = £196.7 + £307.6 = 35.78 times Cost of goods sold Inventory turnover = Average inventory £5,535.2 = £416.3 + £488.9 = 12.23 times Current cash debt Net cash provided by operating activities = coverage ratio Average current liabilities £1,069.8 = £1,606.2 + £1,988.9 = 60 times FINANCIAL REPORTING PROBLEM (Continued) Net cash provided by operating activities Cash debt coverage ratio = Average total liabilities Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 14- 71 To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com £1,069.8 = £3,732.8 + £5,197.0 = 24 times Debt to total assets = = 73 Income before income taxes and interest expense Time interest earned = Interest expense £821.0 + £308.1 + £146.6 = £146.6 = 8.70 times Similar to M&S’s liquidity position, the company’s solvency also appears weak It has low coverage of its current and non-current liabilities However, its interest coverage appears adequate Industry and yearto-year comparisons should also be employed In summary, the analysis of liquidity and solvency is suggestive of weakened financial flexibility It is likely that many companies are experiencing similar challenges in the wake of the recent general economic downturn 14-72 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com COMPARATIVE ANALYSIS CASE (a) Debt to total assets ratio: Cadbury £5,361/£8,895 = 60.3% Nestlé CHF51,299/CHF106,215 = 48.3% Times interest earned ratio: Cadbury (£366 + £30 + £50)/ £50 = 8.92 times Nestlé (CHF19,051 + CHF3,787 + CHF1,247)/CHF1,247 = 19.3 times The debt to total assets ratios of over 48% for both Cadbury and Nestlé show both companies to be highly leveraged, Cadbury more so than Nestlé The times interest earned ratios show that interest expense is quite adequately covered by the firms’ net income; Nestlé coverage is more than good; it is superb, especially considering the debt to total assets ratio of 48% (b) Carrying Value Fair Value Cadbury Nestlé £2,385 £2,387 N/A N/A The fair value will vary from the historical cost carrying value due to changes in interest rates (c) Both Cadbury and Nestlé have debt issued in foreign countries These companies may use foreign debt because Lower interest rates may be available in foreign countries Credit may be more readily available in foreign countries COMPARATIVE ANALYSIS CASE (Continued) Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 14- 73 To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com Using foreign debt to finance operations is subject to the risk of foreign currency exchange rate fluctuations Both Cadbury and Nestlé enter into interest rate and foreign currency swaps to effectively change the interest rate and currency of specific debt issuances These swaps are generally entered into concurrently with the issuance of the debt they are intended to modify 14-74 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com FINANCIAL STATEMENT ANALYSIS CASE COMMONWEALTH EDISON CO (a) Due to the markdown from 99.803 to 99.25, Commonwealth Edison would record a slightly larger discount and, of course, receive and record less cash Amortization of the larger discount will result in a larger interest expense charge in each year the bonds are outstanding As a result of the additional $5.50 markdown, the effective-interest rate increased from 9.3% to 9.45% (b) In the same Wall Street Journal article, the following explanation was provided for Commonwealth Edison’s bond markdown and slow sale: “Commonwealth had the misfortune to begin its giant offering only hours before investor sentiment was soured by the report last Thursday of a record increase in the nation’s money supply The monetary surge, plus a recent rebound in industrial productivity reported Friday, halted the market rally triggered in early May by signs of an economic slowdown and a peaking of interest rates.” Other economic events that can and affect the price of securities issued are: A change in the Federal Reserve’s lending rate A change in the bank prime rate A flood of other similar securities issues A good or poor earnings report for the issuer A change in the issuer’s credit rating The issuance of a favorable or unfavorable broker’s or other financial analysis FINANCIAL STATEMENT ANALYSIS CASE (Continued) Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 14- 75 To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com Of course, noneconomic, political, or other world events can also affect the day-today sale of securities The “recent rebound in industrial productivity” mentioned in the article would normally not be a depressant on a securities issue; but because the financial community was anticipating, even hoping for, a recession to “cool off the economy” and, thus, lower the then existing high interest rates, the rebound represented a delay in the recession and the lowering of interest rates 14-76 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com FINANCIAL STATEMENT ANALYSIS CASE PEPSICO (a) Answers will vary The company may have decided to refinance in order to free cash needed for some other purpose, to reduce current cash needs, or to leave a credit line available for quick access (b) The investor probably enjoys a higher interest rate than that obtained from other types of bonds Also, a smaller initial investment is required Bonds Payable 780,000,000 Cash 780,000,000 This bond would be listed in current liabilities in the year prior to the year of payment (c) Cash [($250,000,000 X 1.02) + ($95,000,000 X 99)] 349,050,000 Bonds Payable 349,050,000 OR the two bonds could be shown separately: Cash 255,000,000 Bonds Payable 255,000,000 and Cash 94,050,000 Bonds Payable 94,050,000 Possible reasons for the difference could be that the stated interest rate on the Australian bond was very attractive to Australian investors, therefore it sold at a premium; and the interest rate on the Italian bond was unattractive to Italian investors, so it sold at a discount FINANCIAL STATEMENT ANALYSIS CASE (Continued) Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 14- 77 To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com (d) Answers will vary One advantage would be that it is a bond whose principal may not need to be paid in the foreseeable future Current Portion of Non-Current Debt 100,000,000 Non-Current Debt 100,000,000 No journal entry is necessary to record the change in interest rate 14-78 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com ACCOUNTING, ANALYSIS, AND PRINCIPLES ACCOUNTING Bond calculations: PV of bonds at issuance = (€1,500 X PVF10,6) + (€1,500 X 0.05 X PVF – OA10,6) = (€1,500)(0.55839) + (€1,500)(0.05)(7.36009) = €837.59 + €552.01 = €1,389.60 Interest expense for months ending 06/30/11 = (€1,426 X 0.06) = €85.56 Interest paid with cash = (€1,500 X 0.05) = €75.00 Statement of financial position value at 06/30/11 = €1,426 + €85.56 – €75.00 = €1,436.56 Interest expense for months ending 12/31/11 = (€1,436.56 X 0.06) = €86.19 Interest paid with cash = €75.00 Statement of financial position value at 12/31/11 = €1,436.56 + €86.19 – €75.00 = €1,447.75 BUGANT, INC INCOME STATEMENT for the yeared ended 12/31/11 Sales Expenses: COGS Salary Expense Depreciation Expense Interest Expense Net Income Income statement calculations: €2,922 1,900 700 80 172 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 14- 79 2,852 € 70 To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com COGS = €1,800 + €2,000 – €1,900 = €1,900 Depreciation expense = €2,000 ÷ 25 = €80 Interest expense = €85.56 + €86.19 = €171.75 ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued) BUGANT, INC STATEMENT OF FINANCIAL POSITION DECEMBER 31 2011 Assets Plant, and equip Accumulated dep €2,000 (240) 2010 2011 Equity €2,000 Share capital €1,500 (160) Retained earnings 1,134 2010 €1,500 1,164 Inventory Cash 1,900 422 1,800 450 Liabilities Bonds payable 1,448 1,426 Total Assets €4,082 €4,090 Total equity & liabilities€4,082 €4,090 Statement of financial position calculations: Cash = €450 + €2,922 – €2,000 – €700 – €100 – €75 – €75 = €422 Accumulated depreciation = €160 + €80 = €240 Retained earnings = €1,164 + €70 – €100 = €1,134 ANALYSIS Debt-to-asset ratio: 2010: €1,426 ÷ €4 ,090 = 0.3487 or 34.87 percent of Bugant’s assets were financed with debt 2011: €1,448 ÷ €4 ,082 = 0.3547 or 35.47 percent Times interest earned ratio: 14-80 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com 2010: (€550 + €169) ÷ €169 = 4.25 2011: (€70 + €172) ÷ €172 = 1.41 Less than half of Bugant’s financing comes from debt, which is relatively low In 2010, Bugant earned four-and-a-quarter times its interest expense However, in 2011, the company’s earnings fell considerably and it is now barely covering its interest charges This would be cause for considerable concern If income continues to slide, the company will likely have trouble meeting its interest payments ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued) Note that interest expense in this problem is larger than the company’s yearly cash interest payments Cash payments for interest are €150 per year Thus, one might argue the times interest earned ratio ‘understates’ the company’s ability to make interest payments Essentially, the company is delaying the payment of some of the interest each year until the bond’s maturity date With the company’s current cash balance and low income, one would have to question the company’s ability to meet its obligation on the maturity date when it arrives PRINCIPLES One could argue that this represents a classic trade-off between relevance and faithful representation Many people think that the fair values of companies’ assets and liabilities are relevant to making investing and financing decisions However, the determination of fair value is the responsibility of management Management may have incentives to ‘skew’ reported fair value numbers one direction or the other For example, in this case, changes in the fair value of debt would be part of the period’s net income Thus, management may have an incentive to bias their estimate of the fair values of their debt On the other hand, one might argue that fair values of debt are not really relevant if the company will not pay off the debt early PROFESSIONAL RESEARCH According to IAS 39: Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 14- 81 To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com (a) Initial measurement of financial assets and financial liabilities When a financial asset or financial liability is recognised initially, an entity shall measure it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability (para 43) (b) Derecognition of a financial liability An entity shall remove a financial liability (or a part of a financial liability) from its statement of financial position when, and only when, it is extinguished—ie when the obligation specified in the contract is discharged or cancelled or expires (para 39) An exchange between an existing borrower and lender of debt instruments with substantially different terms shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability Similarly, a substantial modification of the terms of an existing financial liability or a part of it ( whether or not attributable to the financial difficulty of the debtor ) shall be accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability (para 40) The difference between the carrying amount of a financial liability (or part of a financial liability) extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, shall be recognised in profit or loss (para 41) PROFESSIONAL SIMULATION Journal Entries April 1, 2009 Cash 5,307,228.36* 14-82 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com Bonds Payable 5,307,228.36 *Price using Tables: $5,000,000 X 38554 = $1,927,700 550,000 X 6.14457 = 3,379,514 $5,307,214 Difference due to rounding in tables April 1, 2010 Interest Payable Cash Note: Entry made on March 31, 2010: Interest Expense Bond Payable Interest Payable Resources 550,000.00 550,000.00 530,722.84 19,277.16 550,000.00 PROFESSIONAL SIMULATION (Continued) Financial Statements BALZAC INC Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 14- 83 To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com Statement of Financial Position as of March 31, 2010 Non-current liabilities 11% bonds payable (Note A) $5,287,951 Asset retirement obligation, warehouse site 35,000 Notes payable (Note B) 1,100,000 Total non-current liabilities $6,422,951 Note A—Bonds The 11% bonds call for annual interest payments on each April The bonds mature on April 1, 2019 Note B—Notes Payable The current liabilities include current maturities of several notes payable The long-term notes payable mature as follows Due Date Amount Due April 1, 2011 – March 31, 2012 March 31, 2013 500,000 $600,000 April 1, 2012 – 14-84 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and test bank, visit http://allzinone.blogspot.com ... issued by the Accounting Principles Board Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual (For Instructor Use Only) 1- To download more slides, ebook, solutions and... Congress on the accounting for derivatives 1-8 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual ( For Instructor Use Only ) To download more slides, ebook, solutions and... accounting transactions These standards and procedures are called international financial reporting standards (IFRS) 1-16 Copyright © 2011 John Wiley & Sons, Inc Kieso, IFRS, 1/e, Solutions Manual