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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CHAPTER Accrual Accounting Concepts LEARNING OBJECTIVES Explain the accrual basis of accounting and the reasons for adjusting entries Prepare adjusting entries for prepayments Prepare adjusting entries for accruals Prepare an adjusted trial balance and financial statements Prepare closing entries and a post-closing trial balance SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO BT Item LO BT Item LO BT Questions 1 C C 11 2,3 AP C 12 C C 13 C C C 10 2,3 C Item LO BT Item LO BT C 16 4,5 C 21 K 2,3 C 17 4,5 C 22 K AN 18 K 14 C 19 C 15 2,3,4 C 20 C Brief Exercises 1 K AP AN 10 AP 13 AP AP 2,3 AP AP 11 AP 14 AP AP AP AN 12 AP 15 K Exercises 1 AP AP 2,3 AP 10 2,3,4 AP 13 AP AP AP 2,3 AP 11 AP 14 AP C AP 2,3 AP 12 AP 13 AP Problems: Set A and B AP 2,3 AP AN 10 AP AP 2,3 AP 2,3,4 AP 11 4,5 AP 2,3 AP 1,2,3,4 AP 2,3,4 AP 12 2,3,4 AN 2,3,4,5 AP 2,3,4,5 AP Accounting Cycle Review Cases 1,2 C 2,3 AN C AP 1,2,3 E 2,3,4 AP Solutions Manual 4-1 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Legend: The following abbreviations will appear throughout the solutions manual file LO Learning objective BT Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech Diversity Diversity Reflective Thinking Reflec Thinking CPA Canada Competency 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 Difficulty: Time: AACSB CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006 Solutions Manual 4-2 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition ANSWERS TO QUESTIONS Adjusting entries are made to adjust the accounts at the end of the period to ensure revenues and expenses are recorded when they are earned or incurred When revenues and expenses should be recognized in the accounting records is dictated by recognition criteria Revenue is recognized or recorded when an increase in future economic benefits arising from an increase in an asset or a decrease in a liability has occurred in the course of ordinary activities In general, revenue recognition occurs when or as the performance obligation has been satisfied In a service company, revenue is considered to be earned when the service is provided In a merchandising company, revenue is considered to be earned when the merchandise is sold (normally at the point of sale) Expenses are recognized in the accounting records when there is a decrease in future economic benefits related to a decrease in an asset or an increase in a liability in the course of ordinary activities Expense recognition is linked to revenue recognition in that expenses are recognized, wherever possible, in the period in which a company makes efforts to generate revenues This gives rise to adjusting entries so that revenues and expenses can be recorded in the proper period LO BT: C Difficulty: S Time: 10 AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 4-3 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley (a) Financial Accounting, Seventh Canadian Edition The five-step process to use to measure and report revenue is: (b) Identify the contract with the client or customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognize revenue when (or as) the company satisfies the performance obligations For the law firm: The contract was created in March between the law firm and the client when the engagement was accepted by the law firm The performance obligation in the contract is to provide legal services The transaction price is $8,000 There is a single task and so there are no other obligations in the contract that need to be allocated The revenue is recognized by the law firm once it satisfies the obligation under the engagement and performs the work for the client in April LO BT: AP Difficulty: M Time: AACSB: Analytic CPA: cpa-t001 CM: Reporting Expenses of $4,500 should be deducted from the revenues in April because that is when the expenses were incurred and the revenues earned LO BT: C Difficulty: S Time: AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual 4-4 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley (a) (b) (c) Financial Accounting, Seventh Canadian Edition The accrual-basis financial statements provide reporting of assets, liabilities, and shareholders’ equity as well as revenues and expenses They include receivables and payables to ensure that revenues are recorded when earned and expenses recorded when incurred in the period revenue is generated Receivables and payables not exist under the cash basis of accounting The cash-basis financial statements provide reliable reporting of cash receipts and cash disbursements No estimates are required, as is the case with accrual-basis financial statements Companies using IFRS or ASPE cannot choose between the cash and accrual basis of accounting for financial reporting purposes because generally accepted accounting principles require the accrual basis In addition, the cash basis could allow for the manipulation of income by delaying or speeding up the timing of cash flow LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting (a) (b) Prepaid expenses are assets because they have a future benefit since they were paid for before they are used or consumed As the benefit of the prepayment expires, (often with the passage of time) the asset must be reduced and an expense recognized This requires an adjustment at the end of each accounting period, to expense the portion of the prepaid that has expired (been used up) during the period LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting (a) (b) Unearned revenue arises when cash is received for goods or services to be provided in the future It represents a liability because the cash has not yet been earned—the company has a future obligation to provide the goods or services Unearned revenues must be adjusted at the end of an accounting period to reflect any revenues that have been earned LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 4-5 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition No Depreciation is the process of allocating the cost of a long-lived asset to expense over its useful life Depreciation results in the presentation of the carrying amount (cost less accumulated depreciation) of the asset, not its current value LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting (a) Depreciation expense is an expense account with a normal debit balance and is reported on the income statement as part of the operating expenses This account shows the portion of the cost of a long-lived asset that has expired during the current accounting period Accumulated depreciation is a contra asset account with a normal credit balance that is reported on the statement of financial position as a reduction of a depreciable asset (such as building and equipment) The balance in the accumulated depreciation account is the total depreciation that has been recognized from the date of acquisition of the depreciable asset to the statement of financial position date (b) Cost is the original cost of the asset when purchased The carrying amount is the original cost of the asset less its related accumulated depreciation, and represents the portion of the asset that has not yet been depreciated LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting A contra asset account is an account with a credit balance that is deducted from the related asset account on the statement of financial position Using a contra asset account, such as Accumulated Depreciation, enables disclosure of both the original cost of the asset and the total estimated cost that has expired or been used up to date This information is useful to the financial statement user who can determine how long until the asset is fully depreciated LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 4-6 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley 10 Financial Accounting, Seventh Canadian Edition Yes, I agree A “simple” adjusting entry affects one statement of financial position account and one income statement account An adjusting entry reallocates amounts between a statement of financial position account and an income statement account For example: to record the expiration of insurance the following entry would be recorded; a debit to Insurance Expense (an income statement account) and a credit to Prepaid Insurance (a statement of financial position account) Compound adjusting journal entries are also possible which would affect more accounts, but at least one statement of financial position account and one income statement account are always affected whether a simple adjusting entry or a compound adjusting entry is made LO 2,3 BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 11 Disagree Adjusting entries never involve the Cash account In making adjusting entries for prepayments, the cash has already been paid or received and recorded The adjusting journal entry is prepared to reflect the fact that a portion of the unearned revenue or prepaid expense arising in the past when the cash flow occurred is now earned or incurred In making adjusting entries for accruals, we record the fact that, although the cash has not been paid or received, revenue has been earned or an expense has been incurred Again, there is no impact on the Cash account because cash has not yet been received or paid but is expected to be subsequently LO 2,3 BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 12 To ensure that the adjusting entry is properly calculated and prepared, the preparer of the adjusting entry must first properly understand the original cash payment transaction that lead to the recording of the prepayment For example, if you are preparing an adjusting entry to record the supplies on hand, you must know first how much is already recorded On the other hand, in the case of an accrual, there is no cash payment to look up in the accounts Consequently, there is no original entry to examine in the process of preparing an adjusting entry related to an accrual LO 2,3 BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 13 (a) Yes, it does matter whether the adjusting entry is made on December 31 If the interest is not accrued on December 31, then expenses (interest expense) and liabilities (interest payable) will both be understated in that year’s financial statements In addition, expenses (interest expense) will be overstated in the subsequent year, when the expense is recorded (incorrectly) when paid on January By not making this journal entry, expenses will not be matched with the period in which the loan was available for use (b) The correct journal entries are as follows: Solutions Manual 4-7 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Dec 31 Interest Expense Interest Payable 100 Jan 100 Interest Payable Cash 100 100 If no entry is made on Dec 31, and interest expense is recorded on January when paid, interest expense will be understated by $100 and interest payable will be understated by the same amount for the year ended December 31, 2018 LO BT: AN Difficulty: C Time: 10 AACSB: Analytic CPA: cpa-t001 CM: Reporting 14 Financial statements can be prepared from an adjusted trial balance because the balances of all accounts have been adjusted to show the effects of all financial events that have occurred during the accounting period An unadjusted trial balance is not up to date for prepayments and accruals LO BT: C Difficulty: S Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 4-8 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley 15 (a) (b) Financial Accounting, Seventh Canadian Edition Original transaction entries are made throughout the accounting period when transactions arise Adjusting entries are only recorded at the end of the accounting period, prior to the preparation of the financial statements As well, adjusting entries never affect the Cash account and always result in an adjustment to a statement of financial position account and an income statement account Transaction entries often result in a debit or credit to Cash and can affect any account on the statement of financial position or the income statement (or both) Closing entries are required to reset the revenue and expense (income statement) and dividend declared accounts to zero and to update the balance in Retained Earnings to the ending balance as shown in the statement of changes in equity Unlike adjusting entries, which are prepared before the financial statements are prepared and could be prepared more than once per year (for example, monthly, quarterly), closing entries are only prepared and posted after the year-end financial statements have been completed LO 2,3,4 BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 16 The unadjusted, adjusted, and post-closing trial balances are similar in that they prove the equality of the total debit and total credit balances Another similarity between the unadjusted and adjusted trial balances is that they are prepared at the end of an accounting period Where trial balances differ is that the unadjusted trial balance is prepared before any adjusting entries have been recorded or posted An adjusted trial balance is prepared after the adjusting entries have been posted to the accounts The financial statements are prepared from the adjusted trial balance After the financial statements have been prepared, closing entries are prepared and posted The post-closing trial balance is then prepared and used to form the basis of the opening balances for the next accounting period Unlike the adjusted trial balance which will list temporary (revenue, expense, dividend declared) account balances prior to recording the closing entries, a post-closing trial balance will not list temporary account balances as these have now been closed out to the Retained Earnings account 16 (b) (continued) Unadjusted and adjusted trial balances are prepared whenever financial statements are prepared but a post-closing trial balance is prepared only at the end of the year LO 4,5 BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 17 The retained earnings balance on the unadjusted and adjusted trial balances are the same since the account does not yet reflect the changes that arise from the recording of closing entries After the adjusted trial balance and financial statements are prepared, closing entries are recorded These will change the Solutions Manual 4-9 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition retained earnings balance by updating it for the effect of any net income or loss and dividends declared Consequently, the retained earnings balance on the post-closing trial balance will be different from the balance shown on the adjusted trial balance LO 4,5 BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 18 Closing entries are prepared to transfer temporary account balances to retained earnings, a permanent account, so retained earnings will show an up-to-date amount that includes the effect of revenues, expenses, and dividends declared for the year Secondly, closing entries produce a zero balance in each temporary account so that the temporary accounts are ready for the next accounting period, where only transactions relating to that period are recorded in them LO BT: K Difficulty: S Time: AACSB: None CPA: cpa-t001 CM: Reporting 19 The Dividends Declared account is not closed into the Income Summary account along with the expense accounts because it is not an expense; it was not incurred for the purpose of generating revenue and does not appear on the income statement Dividends Declared represent a distribution of retained earnings and is reported on the statement of changes in equity The Dividends Declared account is also a temporary account and therefore requires a closing entry LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 4-10 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition ACR4-2 (CONTINUED) (f) (3) RIVER CONSULTANTS LTD Statement of Financial Position July 31, 2018 Assets Current assets Cash Accounts receivable Prepaid rent Prepaid insurance Supplies Total current assets Property, plant, and equipment Equipment Less: Accumulated depreciation Total assets $15,930 13,000 4,000 3,300 3,240 39,470 $24,000 500 23,500 $62,970 Liabilities and Shareholders’ Equity Current liabilities Accounts payable Salaries payable Interest payable Unearned revenue Total current liabilities Non-current liabilities Bank loan payable Total liabilities Shareholders’ equity Common shares Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity $ 3,000 11,000 100 2,000 $16,100 20,000 36,100 $13,600 13,270 26,870 $62,970 (Assets = Liabilities + Shareholders’ equity) Solutions Manual 4-164 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition ACR4-2 (CONTINUED) (g) July 31 31 31 31 Fees Earned Income Summary 39,120 Income Summary Salaries Expense Rent Expense Professional Fees Expense Supplies Expense Utilities Expense Depreciation Expense Insurance Expense Interest Expense Income Tax Expense 32,350 Income Summary Retained Earnings 6,770 Retained Earnings Dividends Declared 5,000 39,120 22,000 4,000 2,200 1,250 800 500 300 100 1,200 6,770 5,000 (Income statement accounts are closed to the Income Summary account) (h) Current ratio $39,470 $16,100 = 2.5:1 River Consultants has exceeded the benchmark of 2:1 for its current ratio LO 2,3,4,5 BT: AP Difficulty: M Time: 80 AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual 4-165 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT4-1 (a) Financial Accounting, Seventh Canadian Edition FINANCIAL REPORTING CASE Accounts appearing on North West’s balance sheet that may have been used in an adjusting entry for prepayments include: Prepaid expenses Property and equipment The related statement of earnings accounts that most likely include adjusting entries at the end of the year for prepayments include: (b) Selling, operating, and administrative expenses o Depreciation expense (which North West calls amortization expense) which would be part of selling, operating, and administrative expenses o Insurance expense included would be part of selling, operating, and administrative expenses o Other choices are also possible Accounts appearing on North West’s balance sheet that may have been used in an adjusting entry for accruals include: Accounts payable and accrued liabilities Income tax payable The related statement of earnings accounts that most likely include adjusting entries at the end of the year for accruals include: Salaries expense which would be part of selling, operating, and administrative expenses Income tax expense Other choices are also possible Solutions Manual 4-166 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT4-1 (CONTINUED) (c) The five-step process of revenue recognition includes: Identify the contract with the client or customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations in the contract Recognize revenue when (or as) the company satisfies the performance obligation For North West: The contract is created when the customer selects goods in the stores The performance obligation is the provision of goods The transaction price is labelled for each item in the stores The per item price fulfils the total performance obligation in the contract The revenue is recognized when the customer goes though the cash register system and pays for the purchase LO 1,2 BT: C Difficulty: M Time: 20 AACSB: Communication and Analytic CPA: cpa-t001 CM: Reporting Solutions Manual 4-167 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT4-2 Financial Accounting, Seventh Canadian Edition FINANCIAL REPORTING CASE Revenue and expense criteria require that revenue be recognized when earned and expenses when incurred At the time of signing the three-year maintenance contact, the customer has not received any services and no revenue has been earned Although $100,000 was collected at the time of signing the contract, the full amount should be recorded to the Unearned Revenue account As the performance obligations of the contract (maintenance service) are delivered, revenue from the services provided can be recognized and the related unearned revenue reduced This will ensure that the expenses incurred in the performance of the contract will be matched to the revenues recognized The financial statements for 2017, 2018, and 2019 will be affected as follows: For 2017, only statement of financial position accounts will be affected Cash and Unearned Revenue will increase For 2018, the income statement will be affected Revenue earned from the provision of the maintenance services will be recognized and there will be a corresponding entry to reduce the unearned revenue created when the cash was collected on Dec 29, 2017 Related expenses will be recognized and matched to the revenues in the same accounting period The second collection of $100,000 on Dec 29, 2018 will affect the statement of financial position Cash and Unearned Revenue will increase For 2019, the same effect for the income statement and the statement of financial position will occur as is described for 2018 LO BT: AP Difficulty: M Time: 15 AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual 4-168 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT4-3 Financial Accounting, Seventh Canadian Edition PROFESSIONAL JUDGEMENT CASE Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS (a) To record the additional depreciation, the following would be recorded: Depreciation Expense Accumulated Depreciation—Furniture 400,000 400,000 To increase the accrual for operating expenses by $80,000 ($230,000 – $150,000) the following entry would be made: Office Expense Accounts Payable (b) 300,000 To accrue the additional salary expense, the following would be recorded: Salaries Expense Salaries Payable 300,000 80,000 Income before income tax as originally determined Additional depreciation expense Additional salaries expense Additional office expense Income before income tax revised 80,000 $2,800,000 (300,000) (400,000) (80,000) $2,020,000 Solutions Manual 4-169 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT4-3 (CONTINUED) (c) Anna suggested that the useful life of the furniture be lowered to increase the amount of depreciation recorded in each year This would lower income before income tax and strengthen management’s argument that the company could not afford to increase salaries (d) In order to accrue an expense such as severance pay, it must have been incurred Since the decision to shut down the stores has not yet been made, it would be inappropriate to record such an expense (e) It is not unusual for a company to have to accrue amounts for utilities prior to the invoice being received in order to record the expense in the appropriate period The company should be able to make a reasonable estimate by calling the utility company and looking at past history However, increasing the estimate from $150,000 to $230,000 appears to have been done without any adequate support or justification This seems like an attempt to lower the net income of the company prior to negotiations with the union LO 2,3 BT: AN Difficulty: M Time: 30 AACSB: Ethics and Analytic CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics Solutions Manual 4-170 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT4-4 (a) Financial Accounting, Seventh Canadian Edition ETHICS CASE The stakeholders in this situation are: Sundream’s controller Sundream’s Chief Executive Officer Sundream’s shareholders Sundream’s creditors (b) By adding $12,000 to sales revenue and reducing interest expense by $3,000, net income increases by $15,000 Unearned revenue reduces by $12,000 and interest payable reduces by $3,000 Consequently, the current and total liabilities would reduce by $15,000 and the shareholders’ equity would increase by $15,000 on the statement of financial position The Sundream Travel Agency’s liquidity improves as a result of the changes suggested by the CEO The current ratio should be 1.9:1 ($400,000 ÷ $210,000) but it is now increased to 2.1:1 [($400,000 ÷ ($210,000 – $12,000 – $3,000)] (c) Intentionally misrepresenting the company’s financial condition and its results of operations is unethical and is also illegal It is obvious from the request that the CEO’s intention is to manipulate the amount of the current liabilities, to ensure that the current ratio conforms to the 2:1 requirement of the bank loan (d) Accounting standards are known and understood by the users and the preparers of the financial statements Those who prepare the financial statements are bound by the accounting standards An intentional breach of these standards, as is suggested by the CEO in this case, cannot be passed off as an oversight or ignorance of the fundamental rules of accounting Consequently, the CEO is aware of the breach in the accounting standards when he suggests the changes to the controller He knows that his behaviour is unethical and his suggestions should be challenged by his controller LO 1,2,3 BT: E Difficulty: M Time: 20 AACSB: Ethics and Analytic CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics Solutions Manual 4-171 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT4-5 (a) Financial Accounting, Seventh Canadian Edition FINANCIAL REPORTING CASE Since First Capital Realty Inc is required to release financial statements quarterly, it would need to post adjusting entries at least quarterly Since Skyline Group of Companies only releases financial statements annually, it will need to prepare adjusting entries at least annually Although external financial statements are released on a quarterly basis for First Capital and on an annual basis for Skyline, it is likely that management of both companies would need monthly financial statements so that they can assess the company’s performance on a timely basis For this reason, it is likely that the adjusting entries are prepared on a monthly basis for each of the companies and that there are no significant differences in the accounting cycle for each company (b) The criteria for, and timing of, revenue recognition may differ between the two companies, depending on their source of revenue This is not likely though given that the two companies are both REITs, but it is possible depending on the terms of specific performance contracts In terms of financial reporting, Skyline would not be required to prepare a statement of changes in equity, but rather would prepare a statement of retained earnings Skyline would also not report other comprehensive income in the shareholders’ equity section of its statement of financial position and it would not prepare a statement of comprehensive income (we will learn more about comprehensive income in a later chapter) First Capital Realty would prepare a statement of changes in equity and a statement of comprehensive income (if it had any other comprehensive income) Otherwise, the remaining financial statements would be the same for each company Compared with ASPE, additional disclosure is required by companies reporting under IFRS in the notes to the financial statements LO BT: C Difficulty: M Time: 15 AACSB: Communication CPA: cpa-t001 CM: Reporting Solutions Manual 4-172 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT4-6 Financial Accounting, Seventh Canadian Edition SERIAL CASE (a) June 30 Advertising Expense Supplies 600 30 Depreciation Expense Accumulated Depreciation—Buildings ($165,000 ÷ 30 years) 5,500 30 Depreciation Expense Accumulated Depreciation—Equipment 7,070 30 Depreciation Expense Accumulated Depreciation—Vehicles 4,200 30 Interest Expense Interest Payable 50 30 Insurance Expense ($12,000 × 6/12 months) Prepaid Insurance 6,000 30 Utilities Expense Accounts Payable 1,025 30 Accounts Receivable Sales 1,600 30 Salaries Expense (2 × 20 × $25) Salaries Payable 1,000 30 Income Tax Expense Income Tax Payable 5,000 600 5,500 7,070 4,200 50 6,000 1,025 1,600 1,000 5,000 Solutions Manual 4-173 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT4-6 (CONTINUED) (b) June Bal Note: June balances were taken from the answer to CT3-6 Cash 34,534 June Bal Accounts Receivable June Bal 10,490 30 Adj 1,600 June Bal 12,090 June Bal June Bal June Bal June Bal June Bal Accumulated Depreciation-Equipment June Bal 14,000 30 Adj 7,070 June Bal 21,070 Vehicles June Bal 52,500 Inventory 16,250 Supplies 4,375 June 30 Adj 3,775 Prepaid Insurance 12,000 June 30 6,000 Equipment 44,520 Accumulated Depreciation-Vehicles June 30 Adj 4,200 600 Accounts Payable June Bal 30 Adj June Bal 6,240 1,025 7,265 6,000 Land June Bal 100,000 Buildings June Bal 165,000 Accumulated Depreciation-Buildings June Bal 137,500 30 Adj 5,500 June Bal 143,000 Unearned Revenue June Bal 1,000 Salaries Payable June 30 Adj 1,000 Interest Payable June 30 Adj 50 Income Tax Payable June 30 Adj 5,000 Bank Loan Payable June Bal 22,500 CT4-6 (CONTINUED) (b) (continued) Mortgage Payable June Bal 53,200 Common Shares Solutions Manual 4-174 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley June Bal Financial Accounting, Seventh Canadian Edition 300 Retained Earnings June Bal 146,788 Dividends Declared June Bal 30,000 Rent Revenue June Bal June Bal 30 Adj June Bal 9,600 Insurance Expense June 30 Adj 6,000 Property Tax Expense June Bal 5,950 6,000 Sales June Bal 638,758 30 Adj 1,600 June Bal 640,358 Cost of Goods Sold June Bal 102,386 June Bal June Bal 30 Adj June Bal Interest Expense 5,299 50 5,349 Income Tax Expense June Bal 13,000 30 Adj 5,000 June Bal 18,000 Salaries Expense 390,782 1,000 391,782 Depreciation Expense June 30 Adj 5,500 30 Adj 7,070 30 Adj 4,200 June Bal 16,770 June Bal Office Expense 18,000 Utilities Expense June Bal 12,200 30 Adj 1,025 June Bal 13,225 Advertising Expense June Bal 9,000 30 Adj 600 Solutions Manual 4-175 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT4-6 (CONTINUED) (c) ANTHONY BUSINESS COMPANY LTD Adjusted Trial Balance June 30, 2017 Debit Cash Accounts receivable Inventory Supplies Prepaid insurance Land Buildings Accumulated depreciation—buildings Equipment Accumulated depreciation—equipment Vehicles Accumulated depreciation—vehicles Accounts payable Unearned revenue Salaries payable Interest payable Income tax payable Bank loan payable Mortgage payable Common shares Retained earnings Dividends declared Rent revenue Sales Cost of goods sold Salaries expense Depreciation expense Office expense Utilities expense Advertising expense Insurance expense Property tax expense Interest expense Income tax expense Totals (Total debits = Total credits) $ Credit 34,534 12,090 16,250 3,775 6,000 100,000 165,000 $ 143,000 44,520 21,070 52,500 4,200 7,265 1,000 1,000 50 5,000 22,500 53,200 300 146,788 30,000 6,000 640,358 102,386 391,782 16,770 18,000 13,225 9,600 6,000 5,950 5,349 18,000 $1,051,731 000 0000 $1,051,731 Solutions Manual 4-176 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT4-6 (CONTINUED) (d) Revenues: Sales Rent revenue Expenses Cost of goods sold Salaries expense Depreciation expense Office expense Utilities expense Advertising expense Insurance expense Property tax expense Interest expense Income tax expense Net income Net income Cash Difference $640,358 6,000 $102,386 391,782 16,770 18,000 13,225 9,600 6,000 5,950 5,349 18,000 $646,358 587,062 $ 59,296 $59,296 34,534 $24,762 LO 2,3,4 BT: AP Difficulty: M Time: 70 AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual 4-177 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Legal Notice Copyright © 2017 by John Wiley & Sons Canada, Ltd or related companies All rights reserved The data contained in these files are protected by copyright This manual is furnished under licence and may be used only in accordance with the terms of such licence The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd (MMXVII vi F2) Solutions Manual 4-178 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited ... 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. .. accrual basis of accounting for financial reporting purposes because generally accepted accounting principles require the accrual basis In addition, the cash basis could allow for the manipulation... basis of accounting provides more useful information for decision makers because it recognizes revenue when earned and expenses when incurred This provides a better measurement of performance
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