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intermediate accounting volume 1
Intermediate Accounting 11th International Edition David Spiceland, Mark W. Nelson, Wayne M. Thomas - Solutions
It’s not easy sometimes to distinguish between a change in principle and a change in estimate. In these cases, how should the change be accounted for?
Direct Assurance Company revised the estimates of the useful life of a trademark it had acquired three years earlier. How should Direct account for the change?
Southeast Steel, Inc., changed from the FIFO inventory costing method to the LIFO method during 2024. How would this change likely be reported in the 2024 comparative financial statements?
Most changes in accounting principles are recorded and reported retrospectively. In a few situations, though, the changes should be reported prospectively. When is prospective application appropriate? Provide examples.
Sugarbaker Designs Inc. changed from the FIFO inventory costing method to the average cost method during 2024. Which items from the 2023 financial statements should be restated on the basis of the average cost method when reported in the 2024 comparative financial statements?
Lynch Corporation changes from the sum-of-the-years’-digits method of depreciation for existing assets to the straight-line method. How should the change be reported? Explain.
We report most changes in accounting principle retrospectively. Describe this general way of recording and reporting changes in accounting principle.
There are three basic accounting approaches to reporting accounting changes. What are they?
For accounting purposes, we classify accounting changes into three categories. What are they? Provide a short description of each.
(Based on Appendix 19B) LTV Corporation grants SARs to key executives. Upon exercise, the SARs entitle executives to receive either cash or stock equal in value to the excess of the market price at exercise over the share price at the date of grant. How should LTV account for the awards?
(Based on Appendix 19A) The fair value of stock options can be considered to comprise two main components.What are they?
In addition to EPS numbers themselves, what additional disclosures should be provided concerning the EPS information?
When the income statement includes discontinued operations, which amounts require per share presentation?
Diluted EPS would be precisely the same whether convertible bonds were actually converted or not. Why?
Wiseman Electronics has an agreement with certain of its division managers that 50,000 contingently issuable shares will be issued next year in the event operating income exceeds $2.1 million that year. In what way, if any, is the calculation of EPS affected by these contingently issuable shares,
If stock options and restricted stock are outstanding when calculating diluted EPS, what are the components of the “proceeds” available for the repurchase of shares under the treasury stock method?
A convertible security may appear to be dilutive when looked at individually but might be antidilutive when included in combination with other convertible securities. How should the order be determined for inclusion of convertible securities in an EPS calculation to avoid including an antidilutive
How is the potentially dilutive effect of convertible preferred stock reflected in EPS calculations by the if-converted method? How is this different from the way convertible bonds are considered?
The potentially dilutive effect of convertible securities is reflected in EPS calculations by the if-converted method. Describe this method as it relates to convertible bonds.
The treasury stock method is used to incorporate the dilutive effect of stock options, stock warrants, and similar securities. Describe this method as it applies to diluted EPS.
Distinguish between basic and diluted EPS.
Why are preferred dividends deducted from net income when calculating EPS? Are there circumstances when this deduction is not made?
Blake Distributors had 100,000 common shares outstanding at the beginning of the year, January 1. On May 13, Blake distributed a 5% stock dividend. Blake retired 1,200 shares on August 1. What is the weighted-average number of shares for calculating EPS?
When calculating the weighted-average number of common shares, how are stock dividends and stock splits treated? Compare this treatment with that of additional shares sold for cash at midyear.
What is a simple capital structure? How is EPS determined for a company with a simple capital structure?
Stock option (and other share-based) plans often specify a performance condition or a market condition that must be satisfied before employees are allowed the benefits of the award. Describe the general approach we use to account for performance-based options and options with market-related
The Tax Code differentiates between qualified option plans, including incentive plans, and nonqualified plans.What are the major differences in tax treatment between incentive plans and nonqualified plans?
Stock option plans provide employees the option to purchase (a) a specified number of shares of the firm’s stock,(b) at a specified price, (c) during a specified period of time. One of the most controversial aspects of accounting for stock-based compensation is how the fair value of stock options
What is restricted stock? How do restricted stock awards differ from restricted stock units (RSUs)? Describe how compensation expense is determined and recorded for a restricted stock award plan.
(Based on Appendix 18) A quasi reorganization is sometimes employed by a firm undergoing financial difficulties but with favorable future prospects. What are two objectives of this procedure? Briefly describe the procedural steps.
Suppose you own 80 shares of Facebook common stock when the company declares a 4% stock dividend. What will you receive as a result?
What is a reverse stock split? What would be the effect of a reverse stock split on one million $1 par shares? On the accounting records?
Brandon Components declares a 2-for-1 stock split. What will be the effects of the split, and how should it be recorded?
The prescribed accounting treatment for stock dividends implicitly assumes that shareholders are fooled by small stock dividends and benefit by the market value of their additional shares. Explain this statement. Is it logical?
Discuss the conceptual basis for accounting for a share buyback as treasury stock.
When a corporation acquires its own shares, those shares assume the same status as authorized but unissued shares, as if they never had been issued. Explain how this is reflected in the accounting records if the shares are formally retired.
The costs of legal, promotional, and accounting services necessary to effect the sale of shares are referred to as share issue costs. How are these costs recorded? Compare this approach to the way debt issue costs are recorded.
Companies occasionally sell more than one security for a single price. How is the issue price allocated among the separate securities?
At times, companies issue their shares for consideration other than cash. What is the measurement objective in those cases?
The balance sheet reports the balances of shareholders’ equity accounts. What additional information is provided by the statement of shareholders’ equity?
How do we report components of comprehensive income created during the reporting period?
What is comprehensive income? How does comprehensive income differ from net income? Where do companies report it in a balance sheet?
The par value of shares historically indicated the real value of shares and all shares were issued at that price.The concept has changed with time. Describe the meaning of par value as it has evolved to today.
Most preferred shares are cumulative. Explain what this means.
Terminology varies in the way companies differentiate among share types. But many corporations designate shares as common or preferred. What are the two special rights usually given to preferred shareholders?
What is meant by a shareholder’s preemptive right?
The owners of a corporation are its shareholders. If a corporation has only one class of shares, they typically are labeled common shares. Indicate the ownership rights held by common shareholders, unless specifically withheld by agreement.
How does the Model Business Corporation Act affect the way corporations operate?
Distinguish between publicly held and privately (or closely) held corporations.
Distinguish between not-for-profit and for-profit corporations.
Corporations offer the advantage of limited liability. Explain what is meant by that statement.
Identify the three common forms of business organization and the primary difference between the way they are accounted for.
Identify and briefly describe the two primary sources of shareholders’ equity.
How do U.S. GAAP and IFRS differ with regard to reporting gains and losses from changing assumptions used to measure the pension obligation?
The income statement of Mid-South Logistics includes $12 million for amortized prior service cost. Does Mid-South Logistics prepare its financial statements according to U.S. GAAP or IFRS? Explain.
The EPBO for Branch Industries at the end of 2024 was determined by the actuary to be $20,000 as it relates to employee Will Lawson. Lawson was hired at the beginning of 2010. He will be fully eligible to retire with health care benefits after 15 more years but is expected to retire in 25 years.
The components of postretirement benefit expense are similar to the components of pension expense. In what fundamental way does the service cost component differ between these two expenses?
How are the costs of providing postretirement benefits other than pensions expensed?
What are two ways to measure the obligation for postretirement benefits other than pensions? Define these measurement approaches.
A pension plan is underfunded when the employer’s obligation (PBO) exceeds the resources available to satisfy that obligation (plan assets) and overfunded when the opposite is the case. How is this funded status reported on the balance sheet if plan assets exceed the PBO? If the PBO exceeds plan
TFC Inc. revises its estimate of future salary levels, causing its PBO estimate to increase by $3 million. How is the $3 million reflected in TFC’s financial statements?
When accounting for pension costs, how should the payment into the pension fund be recorded? How does it affect the funded status of the plan?
Evaluate this statement: The excess of the actual return on plan assets over the expected return decreases the employer’s pension cost.
Which are the components of pension expense that involve delayed recognition?
What two components of pension expense may be negative (i.e., reduce pension expense)?
Is a company’s PBO reported in the balance sheet? Its plan assets? Explain.
How should gains or losses related to pension plan assets be recognized? How does this treatment compare to that for gains or losses related to the pension obligation?
Define prior service cost. How is it reported in the financial statements? How is it included in pension expense?
The return on plan assets is the increase in plan assets (at fair value), adjusted for contributions to the plan and benefits paid during the period. How is the return included in the calculation of the periodic pension expense?
Define the interest cost component of the periodic pension expense.
Define the service cost component of the periodic pension expense.
What are the components that might be included in the calculation of net pension cost recognized for a period by an employer sponsoring a defined benefit pension plan?
Name three events that might change the balance of the plan assets.
Name five events that might change the balance of the PBO.
Differentiate between the accumulated benefit obligation and the projected benefit obligation.
What is the vested benefit obligation?
Lamont Corporation has a pension plan in which the corporation makes all contributions and employees receive benefits at retirement based on the balance in their accumulated pension fund. What type of pension plan does Lamont have?
Qualified pension plans offer important tax benefits. What is the special tax treatment and what qualifies a pension plan for these benefits?
What is a pension plan? What motivates a corporation to offer a pension plan for its employees?
The CARES Act allows some companies to (1) save more taxes and (2) obtain those savings faster. How does the Act enable those benefits?
What are the primary ways in which the CARES Act changed accounting for the tax effects of NOLs?
IFRS and U.S. GAAP follow similar approaches to accounting for taxation. Nevertheless, differences in reported amounts for deferred taxes are among the most frequent between IFRS and U.S. GAAP. Why?
What is intraperiod tax allocation?
Accounting for uncertainty in tax positions is prescribed by GAAP in FASB ASC 740–10: Income Taxes–Overall [previously FASB Interpretation No. 48 (FIN 48)]. Describe the two-step process required by GAAP.
Additional disclosures are required pertaining to the income tax expense reported in the income statement. What are the needed disclosures?
Additional disclosures are required pertaining to deferred tax amounts reported on the balance sheet. What are the needed disclosures?
How are deferred tax assets and deferred tax liabilities reported in a classified balance sheet?
A net operating loss occurs when tax-deductible expenses exceed taxable revenues. Tax laws permit the net operating loss to be used to reduce taxable income in future profitable years. How are loss carryforwards recognized for financial reporting purposes?
In late 2017, the federal tax rate for subsequent years was decreased from 35% to 21%. How would this affect an existing deferred tax liability? How would the change be reflected in net income?
The income tax rate for Hudson Refinery has been 35% for each of its 12 years of operation. Company forecasters expect a much-debated tax reform bill to be passed by Congress early next year. The new tax measure would increase Hudson’s tax rate to 42%. When measuring this year’s deferred tax
Identify three examples of differences with no deferred tax consequences.
Temporary differences result in future taxable or deductible amounts when the related asset or liability is recovered or settled. Some differences, though, are not temporary. What events create permanent differences? What effect do these have on the determination of income taxes payable? Of
The benefit of future deductible amounts can be achieved only if future income is sufficient to take advantage of the deferred deductions. For that reason, not all deferred tax assets will ultimately be realized. How is this possibility reflected in the way we recognize deferred tax assets?
Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts. Describe two general situations that have this effect. How are such situations recognized in the financial statements?
A deferred tax liability (or asset) is described as the tax effect of the temporary difference between the financial statement carrying amount (book value) of an asset or liability and its tax basis. Explain this tax effect of the temporary difference. How might it produce a deferred tax liability?
A member of the board of directors is concerned that the company’s income statement reports income tax expense of $12.3 million, but the income tax obligation to the government for the year is only $7.9 million.How might the corporate controller explain this difference?
Zimmern Machines sold equipment with a 10-year economic life to Bourdain Acres, while concurrently entering into an eight-year leaseback. Eight years is considered a major part of the economic life of the equipment. The sale agreement contains no option for Zimmern to repurchase the equipment or
When a company sells an asset and simultaneously leases it back, what criteria must be met to apply saleleaseback accounting rather than accounting for the transaction as a loan?
Could a finance lease under IFRS be classified as an operating lease under U. S. GAAP? Explain.
Where can we find authoritative guidance for accounting for leases under IFRS?
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