Intermediate Financial

Reporting 2
Project 1 Solution

Chartered Professional Accountants of Canada, CPA Canada, CPA

are trademarks and/or certification marks of the Chartered Professional Accountants of Canada.
© 2019, Chartered Professional Accountants of Canada. All Rights Reserved.
2019-08-13
Intermediate Financial Reporting 2

PROJECT 1 SOLUTION (40 MARKS)

Question 1 (12 marks)

Item 20X5 Marks

no.
1 FV = $5,000,000; N = 14; I/Y = 2.5; PMT = $5,000,000 × 1
6%/2; CPT PV = $5,292,273
$5,292,373 – $250,000 = $5,042,273
Feb-01 DR Cash ($5,292,273 – $50,000) 5,042,273 1
CR Bonds payable 5,042,273
To record issuance of bonds and payment of legal fees.
Do not penalize student for correctly presenting two separate entries.

Effective rate of interest per period 1

FV = $5,000,000; N = 14; PMT = $150,000; PV
= -$5,042,273; CPT I/Y = 2.9255%

July-31 DR Interest expense ($5,042,273 × 2.9255%) 147,512 1

DR Bonds payable 2,488
CR Cash 150,000
To record bond interest for the period February 1 to July 31.
Do not penalize for carryforward errors.

Dec-31 DR Interest expense* 122,866 1

DR Bonds payable 2,134
CR Interest payable ($150,000 × 5/6) 125,000
To record accrued bond interest at December 31.
*($5,042,273 – $2,488) × 2.9255% × 5/6
Do not penalize for carryforward errors.
OR students may do the year end accrual as
below. Either is correct.
Dec 31 DR Interest expense 122,866 1
CR Interest payable 122,866
To record accrued bond interest at December 31
*($5,042,273 – $2,488) × 2.9255% × 5/6
Do not penalize for carryforward errors.

2 Jan-1 DR Equipment 5,180,000

CR Cash 2,220,000 1
CR Note payable — equipment 2,960,000

2/9
Intermediate Financial Reporting 2 Project 1 Solution

To record note payable on new equipment at discounted amount.

Cost
€1,500,000 × 1.48 $2,220,000
€2,000,000 × 1.48 = $2,960,000
$5,180,000
Dec-31 DR Depreciation expense — equipment* 518,000 1
CR Accumulated depreciation — equipment 518,000
To record equipment depreciation for the year.
*(5,180,000 – $0) / 10 years
Do not penalize for carryforward errors.

Dec-31 DR Interest expense (€2,000,000 × 4% = €80,000; 120,800 1

€80,000 × €1.51/$1.00)
DR Foreign Exchange loss 1,600
CR Cash 122,400
To recognize the interest payment on the note payable.
Do not penalize for carryforward errors.

Dec-31 DR Foreign exchange loss* 100,000 1

CR Note payable — equipment 100,000
To convert the notes payable to the year-end exchange rate.
€2,000,000 × (1.53 – 1.48)

Do not penalize for separating the component parts in the journal

entry. Do not penalize for carryforward errors.

3 Dec-31 DR Loyalty program expense ($24,000,000 × $0.02) 480,000 1

CR Provision for loyalty program liability 480,000
To record loyalty program expense for the year.

4 Dec-31 DR Warranty expense [($10,000,000 – $500,000) × 2%] 190,000 1

CR Provision for warranty payable 190,000
To record warranty expense for 20X5.

5 Dec-31 DR Contributed surplus (given) 740,000 1

DR Retained earnings ($6,400,000 – $5,000,000 – 660,000
$740,000)
DR Common shares ($30,000,000 / 1,200,000 = 5,000,000
$25/share; 200,000 × $25/share = $5,000,000)
CR Cash 6,400,000
To record repurchase of shares.

Source: Topics 1.6-2, 1.6-3, 1.10-2 and 2.3-5

3/9
Intermediate Financial Reporting 2 Project 1 Solution

Question 2 (15 marks)

a) On NBV/UCC: $9,700,000 NBV – 7,400,000 UCC

= $2,300,000 x 28% 1 mark $644,000 cr.
On warranty liability: $850,000 x 28% 1 mark 238,000 dr.
$406,000 cr.

b) Net income before taxes $1,800,000

Permanent differences
Dividend revenue from a taxable Canadian corporation (450,000)
Life insurance premiums 25,000
Fine on income tax assessment 90,000
Meals and entertainment expenses (1/2) 195,000
Timing differences
Depreciation and amortization expense 1,420,000
CCA (1,130,000)
Gain on sale of equipment (310,000)
Warranty expense 680,000
Warranty costs incurred (720,000)
Development costs incurred (520,000)
1,080,000
x 28%
Current portion of income tax expense $302,400

5 marks – deduct 0.5 marks for each mistake

DIT Account – end of year:

On NBV/UCC:
NBV: $9,700,000 Op + 450,000 Add – 1,420,000 Dep
– 1,140,000 Disp $7,590,000
UCC: $7,400,000 Op + 450,000 Add – 1,130,000 CCA
– 1,450,000 Disp 5,270,000
2,320,000
x 30%
2 marks 696,000 cr.
On Warranty Liability:
$850,000 Op + 680,000 Expense – 720,000 Costs
= $810,000 x 30% 1 mark 243,000 dr.
On Development Costs: $520,000 x 30% 1 mark 156,000 cr.
$609,000 cr.
1 mark for using 30%

DIT expense = $609,000 - 406,000 - $203,000 1 mark

4/9
Intermediate Financial Reporting 2 Project 1 Solution

c) Income tax expense – current $302,400

Income tax instalment $140,000
Income taxes payable 162,400
1.5 marks

Income tax expense – deferred 203,000

DIT Account 203,000
0.5 marks

Source: Topics 3.4, 3.5, 3.6, 3.7 and 3.11

5/9
Intermediate Financial Reporting 2 Project 1 Solution

Question 3 (6 marks)
Marks
a) March 1, 20X4
DR Cash 5,600,000
1.0
CR Common shares 5,600,000
To record issuance of 160,000 new common shares.

DR Common shares 210,000

1.0
CR Cash 210,000
To record the issuance costs related to the common share issue.

Marking guidance: The journal entries may be combined without penalty as

follows

DR Cash 5,390,000 2.0

CR Common shares 5,390,000
To record issuance of 160,000 new common
shares net of issuance costs

November 1, 20X4
DR Land 1,200,000
1.0
CR Common shares 1,200,000
To record the issuance of 65,000 common shares for land. (Note that the fair value of the land is used,
rather than the fair value of the shares issued.)
The fair value of the property is used because IFRS 2 requires that the fair value of the goods received
be used as the basis of measuring the transaction, unless no reliable estimate of fair value is available.
There is no indication that the figure of 1,200,000 is not reliable; therefore, it should be used.

b) Total dividends paid 2,239,000

Allocated to:
Series A cumulative preference shares
90,000 × $2.50 × 3
Arrears years 675,000 0.5
Current year 90,000 × $2.50 225,000 0.5
Total dividends on Series A preference shares 900,000
Series B non-cumulative preference shares $11,250,000 × 4% 450,000 0.5
Series C non-cumulative convertible preference shares $1,750,000 × 2.3% 40,250 0.5

Total dividends paid on preference shares 1,390,250

Dividends paid on common shares 848,750

c) December 1, 20X6
DR Retained earnings 2,239,000
CR Dividends payable — Series A preference shares 900,000
CR Dividends payable — Series B preference shares 450,000 1.0
CR Dividends payable — Series C preference shares 40,250
CR Dividends payable — common shares 848,750

Marking guidance: Do not penalize students for using a single dividends payable account
instead of dividends payable accounts for each class. Do not penalize for carryforward
errors.

6/9
Intermediate Financial Reporting 2 Project 1 Solution

Source: Topics 2.3 and 2.4

7/9
Intermediate Financial Reporting 2 Project 1 Solution

Question 4 (7 marks) Marks

a) January 1, 20X3
No entry required — deduct 0.5 marks if entry was prepared.

December 31, 20X3

DR Compensation expense 15,600
CR Contributed surplus — stock options 15,600 0.5
To record stock option expense for 20X3.

Old New
Debt balance (no change) $ 160,000 $ 160,000 1
Assets balance $ 300,000 $ 300,000
Debt/asset ratio 0.53 0.53

20X3
Calculations: Stock option benefits
Potential shares to be issued 20,000
Expected redemption rate 90% 0.5
Expected number of options to be vested 18,000
Option value at grant date $ 2.60 0.5
Maximum compensation expense $ 46,800
% of vesting period expired (1/3) 33.33% 0.5
Total compensation expense to be recorded to date $ 15,600

b) January 1, 20X3
No entry required — deduct 0.5 marks if entry was prepared.

December 31, 20X3

DR Compensation expense 66,000
CR SARs liability 66,000 0.5
To record SAR expense for 20X3.

Old New
Debt balance $ 160,000 $ 226,000
Assets balance $ 300,000 $ 300,000
Debt/asset ratio 0.53 0.75 1

Calculation of SARs
Potential SARs 20,000
Expected redemption rate 90% 0.5
Expected number of SARs to vest 18,000
SAR value at December 31, 20X3 $ 11.00 0.5
Maximum compensation expense $ 198,000
% of vesting period expired (1/3) 33.33% 0.5
Total compensation expense to be recorded to date $ 66,000

Marking guidance: Award full marks for correctly calculating the stock option
benefits and the share appreciation rights. Students should not be penalized for

8/9
Intermediate Financial Reporting 2 Project 1 Solution

carrying out the calculations for the stock option benefits and SARS in a different
order.

c) Cash-settled SARs result in an increase in liabilities, which increases the

debt-to-asset ratio. Stock options have no impact on the debt-to-asset ratio.
However, the fair value of the SAR changes each year, depending on the underlying
share price, which will impact the amount of the liability. 0.5
As long as the share price continues to increase, the liability will also increase,
increasing the debt to asset ratio.
Recommendation is to use the stock options, as there is no impact on the
debt-to-asset ratio. 0.5

Marking guidance: A note about how SARSs change each year is required for full marks.

Source: Topic 2.9

9/9