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intermediate accounting volume 1
Intermediate Accounting 11th International Edition David Spiceland, Mark W. Nelson, Wayne M. Thomas - Solutions
What is the primary objective of the required lease disclosures for the lessor and lessee?
When are initial direct costs recognized in an operating lease? In a sales-type lease with selling profit? In a salestype lease with no selling profit? Why?
The lessor’s initial direct costs often are substantial. What are initial direct costs?
What nonlease costs might be included as part of lease payments? How are they accounted for by the lessee in a finance lease when paid by the lessee? When paid by the lessor? Explain.
Compare the way a purchase option that is reasonably certain to be exercised and a lessee-guaranteed residual value are treated by the lessee and lessor when determining lease payments.
Occasionally, a lease agreement includes a guarantee by the lessee that the lessor will recover a specified residual value when custody of the asset reverts back to the lessor at the end of the lease term. Under what circumstance can the guaranteed residual value influence the amounts recorded by
What situations cause us to remeasure a lease liability and right-of-use asset? How is that accomplished?
Culinary Creations leased kitchen equipment under a five-year lease with an option to renew for three years at the end of five years and an option to renew for an additional three years at the end of eight years. The first threeyear renewal option can be exercised for one-half the original and
A six-year lease can be renewed for two additional three-year periods, and it also can be terminated after only three years. How do the lessee and lessor decide the lease term to be used in accounting for the lease?
What is a purchase option? How does it affect accounting for a lease?
A lease might specify that lease payments may be increased (or decreased) at some future time during the lease term depending on whether or not some specified event occurs, such as revenues or profits exceeding some designated level. Under what circumstances are contingent rentals included or
A lease that has a lease term (including any options to terminate or renew that are reasonably certain) of twelve months or less is considered a “short-term lease.” How does a lessee record a lease using the shortcut approach available as an option for short-term leases?
The discount rate influences virtually every amount reported in connection with a lease by both the lessor and the lessee. What is the lessor’s discount rate when determining the present value of lease payments? What is the lessee’s discount rate?
In a financing lease, “front loading” of lease expense and lease revenue occurs. What does this mean, and how is it avoided in an operating lease?
Briefly describe the conceptual basis for asset and liability recognition under the right-of-use approach used by the lessee in a lease transaction.
In accounting for an operating lease, how are the lessee’s and lessor’s income statements affected?
At the beginning of an operating lease, the lessor will record what asset or assets, if any?
At the beginning of an operating lease, the lessee will record what asset and liability, if any?
What is selling profit on a sales-type lease? How do we account for a sales-type lease with a selling profit?
In accounting for a finance lease/sales-type lease, how are the lessee’s and lessor’s income statements affected?
Lukawitz Industries leased non-specialized equipment to Seminole Corporation for a four-year period, at which time possession of the leased asset will revert back to Lukawitz. The equipment cost Lukawitz $4 million and has an expected useful life of six years. Its normal sales price is $5.6
A lessee should classify a lease transaction as a finance lease if it is noncancelable and one or more of five classification criteria are met. Otherwise, it is an operating lease. What are these criteria?
How are leases and installment notes the same? How do they differ?
How is interest expense determined in a finance lease transaction? How does the approach compare to other forms of debt (such as bonds payable or notes payable)?
The basic concept of “substance over form” influences lease accounting. Explain.
One of the advantages of leasing rather than purchasing an asset is that leasing offers flexibility and a lower cost when disposing of the asset. Explain.
(Based on Appendix 14B) The way a debtor accounts for the restructuring depends on the extent of the reduction in cash payments called for by the restructured arrangement. Describe, in general, the accounting procedure for the two basic cases: when, under the new agreement, total cash payments (a)
(Based on Appendix 14B) Pratt Industries owes First National Bank $5 million but, due to financial difficulties, is unable to comply with the original terms of the loan. The bank agrees to settle the debt in exchange for land having a fair value of $3 million. The book value of the property on
(Based on Appendix 14B) When the original terms of a debt agreement are changed because of financial difficulties experienced by the debtor (borrower), the new arrangement is referred to as a troubled debt restructuring. Such a restructuring can take a variety of forms. For accounting purposes,
(Based on Appendix 14A) Why will bonds always sell at their price plus any interest that has accrued since the last interest date?
If a company prepares its financial statements according to International Financial Reporting Standards, how would it account for convertible bonds it issues for $12.5 million? What is the conceptual justification?
Cordova Tools has bonds outstanding during a year in which the market rate of interest has risen. If Cordova has elected the fair value option for the bonds, will it report a gain or a loss on the bonds for the year? Explain.
At times, companies try to induce voluntary conversion by offering an added incentive—maybe cash, stock warrants, or a more favorable conversion ratio. How is such an inducement accounted for? How is it measured?
Both convertible bonds and bonds issued with detachable warrants have features of both debt and equity. How does the accounting treatment differ for the two hybrid securities? Why is the accounting treatment different?
Air Supply issued $6 million of 9%, 10-year convertible bonds at 101. The bonds are convertible into 24,000 shares of common stock. Bonds that are similar in all respects except that they are nonconvertible, currently are selling at 99 (that is, 99% of face amount). What amount should Air Supply
Early extinguishment of debt often produces a gain or a loss. How is the gain or loss determined?
Long-term debt can be reported either (a) as a single amount, net of any discount or increased by any premium or (b) at its face amount accompanied by a separate valuation account for the discount or premium. Any portion of the debt to be paid during the upcoming year, or operating cycle if longer,
How does an installment note differ from a note for which the principal is paid as a single amount at maturity?
When a note’s stated rate of interest is unrealistic relative to the market rate, the concept of substance over form should be employed. Explain.
What are debt issue costs and how should they be reported?
Compare the two commonly used methods of determining interest on bonds.
When bonds are issued at a premium, the debt declines each period. Explain.
A zero-coupon bond pays no interest. Explain.
How is the price determined for a bond (or bond issue)?
On January 1, 2024, Brandon Electronics issued $85 million of 11.5% bonds, dated January 1. The market yield for bonds of maturity issued by similar firms in terms of riskiness is 12.25%. How can Brandon sell debt paying only 11.5% in a 12.25% market?
What information is contained in a bond indenture? What purpose does it serve?
How are bonds and notes the same? How do they differ?
As a general rule, how should long-term liabilities be reported on the debtor’s balance sheet?
How is periodic interest determined for outstanding liabilities? For outstanding receivables? How does the approach compare from one form of debt instrument (say, bonds payable) to another (say, notes payable)?
, but assume that you report under IFRS.
Answer
You are the plaintiff in a lawsuit. Your legal counsel advises that your eventual victory is inevitable. “You will be awarded $12 million,” your attorney confidently asserts. Describe the appropriate accounting treatment.IFRS
Suppose the Environmental Protection Agency is in the process of investigating Ozone Ruination Limited for possible environmental damage but has not proposed a penalty as of December 31, 2020, the company’s fiscal year-end. Describe the two-step process involved in deciding how this unasserted
How do U.S. GAAP and IFRS differ in their use of present values when measuring contingent liabilities?
How do U.S. GAAP and IFRS differ in their treatment of a range of equally likely losses?
After the end of the reporting period, a contingency comes into existence. Under what circumstances, if any, should the contingency be reported in the financial statements for the period ended?
At December 31, the end of the reporting period, the analysis of a loss contingency indicates that an obligation is only reasonably possible, though its dollar amount is readily estimable. During February, before the financial statements are issued, new information indicates the loss is probable.
Distinguish between the accounting treatment of a manufacturer’s warranty and an extended warranty. Why the difference?
Name a loss contingency that almost always is accrued.
Suppose the analysis of a loss contingency indicates that an obligation is not probable. What accounting treatment, if any, is warranted?
What is the difference between the use of the term contingent liability in U.S. GAAP and IFRS?
Under what circumstances should a loss contingency be accrued?
List and briefly describe the three categories of likelihood that a future event(s) will confirm the incurrence of the liability for a loss contingency.
Define a loss contingency. Provide three examples.
How do IFRS and U.S. GAAP differ with respect to the classification of debt that is expected to be refinanced?
Long-term obligations usually are reclassified and reported as current liabilities when they become payable within the upcoming year (or operating cycle, if longer than a year). So, a 25-year bond issue is reported as a long-term liability for 24 years but normally is reported as a current
When companies have debt that is not due to be paid for several years, but that is callable (due on demand) by the creditor, do they classify the debt as current or as long-term?
Amounts collected for third parties represent liabilities until remitted. Provide several examples of this kind of collection.
How do companies account for gift cards?
How are refundable deposits and customer advances similar? How do they differ?
Under what conditions should an employer accrue an expense and the related liability for employees’compensation for future absences? How do company customs and practices affect the accrual decision?
Salaries of $5,000 have been earned by employees by the end of the period but will not be paid to employees until the following period. How should the expense and related liability be recorded? Why?
How does commercial paper differ from a bank loan? Why is the interest rate often less for commercial paper?
Banks sometimes loan cash under noninterest-bearing notes. Is it true that banks lend money without interest?
Bank loans often are arranged under existing lines of credit. What is a line of credit? How does a noncommitted line of credit differ from a committed line?
Bronson Distributors owes a supplier $100,000 on open account. The amount is payable in three months. What is the theoretically correct way to measure the reportable amount for this liability? In practice, how will it likely be reported? Why?
What distinguishes current liabilities from long-term liabilities?
What are the essential characteristics of liabilities for purposes of financial reporting?
(Based on Appendix 12B) How does IFRS differ from current U.S. GAAP with respect to accounting for impairments?
but assume that the investment is classified as AFS.
(Based on Appendix 12B) Answer
(Based on Appendix 12B) When market rates of interest rise after a fixed-rate security is purchased, the value of the now-below-market, fixed-interest payments declines, so the market value of the investment falls. How would that drop in fair value be reflected in the investment account for a
(Based on Appendix 12A) Whole-life insurance policies typically can be surrendered while the insured is still alive in exchange for a determinable amount of money called the cash surrender value. When a company buys a life insurance policy on the life of a key officer to protect the company against
(Based on Appendix 12A) Northwest Carburetor Company established a fund in 2021 to accumulate money for a new plant scheduled for construction in 2024. How should this special purpose fund be reported in Northwest’s balance sheet?
Some financial instruments are called derivatives. Why?
Define a financial instrument. Provide three examples of current liabilities that represent financial instruments.
What is the effect of a company electing the fair value option with respect to an investment that otherwise would be accounted for using the equity method?
How does IFRS differ from U.S. GAAP with respect to using the equity method?
Sometimes an investor’s level of influence changes, making it necessary to change from the equity method to another method. How should the investor account for this change in accounting method?
Superior Company owns 40% of the outstanding stock of Bernard Company. During 2024, Bernard paid a$100,000 cash dividend on its common shares. What effect did this dividend have on Superior’s 2024 financial statements?
The fair value of depreciable assets of Penner Packaging Company exceeds their book value by $12 million. The assets’ average remaining useful life is 10 years. They are being depreciated by the straight-line method. Finest Foods Industries buys 40% of Penner’s common shares. When adjusting
In the application of the equity method, how should dividends from the investee be accounted for? Why?
The equity method has been referred to as a one-line consolidation. What might prompt this description?
Under what circumstances is the equity method used to account for an investment in stock?
Do U.S. GAAP and IFRS differ in the amount of flexibility that companies have in electing the fair value option? Explain.
What is the effect of a company electing the fair value option with respect to a held-to-maturity investment or an available-for-sale investment?
Under IFRS No. 9, which reporting categories are used to account for equity investments when the investor lacks the ability to significantly influence the operations of the investee?
Under IFRS No. 9, what reporting categories are used to account for debt investments?
Is it necessary for an investor to report individual amounts for the three categories of investments—held-tomaturity, available-for-sale, or trading—in the financial statements? What information should be disclosed about these investments?
Western Die-Casting Company holds an investment in unsecured bonds of LGB Heating Equipment, Inc. When the investment was acquired, management’s intention was to hold the bonds for resale. Now management has the positive intent and ability to hold the bonds to maturity. How should Western account
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