Test Bank for Financial Accounting with International Financial Reporting Standards, 4th Edi

Financial Accounting with International Financial

Reporting Standards, 4th Edition

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Description

While there is growing interest in IFRS within the US, interest outside the US has

exploded. Weygandt's fourth edition of Financial Accounting: IFRS highlights the

integration of more US GAAP rules, a desired feature as more foreign companies

find the United States to be their largest market. The highly anticipated new edition

retains each of the key features (e.g. TOC, writing style, pedagogy, robust EOC) on

which users of Weygandt Financial have come to rely, while putting the focus on

international companies/examples, discussing financial accounting principles and

procedures within the context of IFRS, and providing EOC exercises and problems

that present students with foreign currency examples instead of solely U.S. dollars.
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 Cost of Buildings
Valuation of Buildings
Betterments on Leased Buildings
Application of Depreciation
Accounting for Land
Valuation of Land
Depreciation or Appreciation of Land
Appreciation of Land Values
Depreciation in Land Values
Valuation of Land Investments
Mortgages on Land
Donated Land
Land as Stock-in-Trade
Wasting Assets—Definition and Characteristics
Dividends May Include Return of Capital
Basis of Depletion Charge
Application of Income Tax to Wasting Assets
Depreciation on Buildings and Machinery of a Wasting Asset
Unusual Risks
Water Rights
Leaseholds

XVIII I A —P ,F ,G -W 316
General Considerations
Patents a Monopoly Grant
Purchase of Patents
Patents Developed Within the Plant
Patents Purchased and Not Used
Elements of Depreciation on Patents
Service Life of Patents
Booking Depreciation on Patents
Accounting Classification of Depreciation on Patents
Royalties
Relation of Depreciation Rate to Cost of Manufacture
Sale Price of Patents
Copyrights
 Trade Secrets
Trade-Marks
Franchises—Definition and Kinds
Depreciation on Franchises
Organization Expenses
Good-Will—Definition and Nature
Local and Personal Character of Good-Will
Difficulty of Valuing Good-Will
Creation of Good-Will by Advertising
Valuation of Good-Will Based on Normal Profits
Valuation of Good-Will Based on Excess Profits
Valuation of Good-Will Based on Capitalization of Profits
False Good-Will to Cover Capital Deficiency
Periodic Revaluation of Good-Will

XIX L B S ;C
C L 339
Form and Valuation
Arrangement on Balance Sheet
Items Within Groups
Cancellation of Liabilities Against Assets
Inventory of Liabilities
Contingent Liabilities

C L
Loans from Bank
General Classification of Notes
Accounts Payable
Accrued Expenses
Booking of Accrued Expenses
Deferred Credits

N C L
Statement of Contingent Liabilities
Notes and Drafts Transferred
Guarantees as a Contingent Liability
 Long-Term Leases
Purchases for Future Delivery
Pending Lawsuits
Stock Not Fully Paid
Accumulated Dividends on Preferred Stock
Signature to Surety Bond

XX F L —B M 356
Nature of Fixed Liabilities
Purpose of Fixed Liabilities
Corporation Bonds
Nature of Bonds
Difference Between Bond and Real Estate Mortgages
Kinds of Corporation Bonds
Authority for the Issue of Bonds
Financial Considerations Involved in Issue
Bonds versus Stock Issues
Accounting for Bond Issue
Entry of Issue on Books
Entry of Premium or Discount on Books
Entry of Interest Payments on Books
Relation of Bond Interest to Premium or Discount
Example of True Interest Cost
Presentation on Balance Sheet
Other Fixed Liabilities

XXI C S V 372
Problems in Valuation
Kinds of Stock
Par, Real, and Market Values
Value Dependent upon Earning Capacity
Increase of Book Capitalization
Capitalization on Cost
The Law and Stock Issues
Treatment of Discount or Premium
Valuation of Stock Issued for Property
 Valuation of Treasury Stock
Redemption and Reduction of Capital Stock
Dividend Stock
Stock Issued as a Bonus
Unissued and Treasury Stock on the Balance Sheet
Preferred Stock Covered by Redemption Contract

XXII P 387
Difficulty of Determining Profits
Economic Definition
Legal Definition
Accounting Definition
Methods of Determining Profits
The Problem a Question of Valuation
Effect of Asset Losses on Future Profits
Legal Decisions as to Asset Losses
Loss Charged Against Current Profits
Loss Treated as Deferred Expense Charge
Loss Charged to Capital
Profit on Work in Progress
Goods Made for Stock but Not Sold
Goods Made to Order
Profits on Long-Term Contracts
Profit on Goods Awaiting Delivery
Interdepartment Profits
Profits Due to Appreciation of Assets
Capital Profits

XXIII S R 407
Definition
Creation of Margin
Disposition of Profits
Reserves
Different Meanings of Reserves
Reserve for Bad Debts
Under- and Over-Estimate of Reserves
 Depletion Reserves
Operating Reserves for Accrued Costs
Collection Costs Not under Contract
Sales Discounts on the Balance Sheet
Distinction Between Reserves and Accrued Items
Contingent Reserves
Deferred Income—Misuse of Term
Proprietorship Reserves
Secret Reserves
Argument for Secret Reserve
Argument Against Secret Reserve
Earmarking of Reserves
Continuity of Reserve Policy
Covered Reserves
Classification of Reserves
Legitimate Use of Surplus Account
Statement of Surplus

XXIV D 428
Introduction
Disposition of Corporation Profits
Shareholders’ Rights as to Profits
Directors’ Control over Profits
Provisos as to Declaration of Dividends
Stockholders’ Rights to Dividends
Declaration of Dividends
Liability of Director
Revocation of Dividends
Payment of Dividends
Dividends Paid as Salaries
Methods of Paying Dividends
Borrowing to Pay Dividends
Dividends Paid in Property, or by Borrowing on Property
Bond and Scrip Dividends
Stock Dividends
Dividends Proportional to Holdings
 To Whom Payable
Accounting Record
Relation of Capital Losses to Dividends
Liquidating Dividends

XXV T S F 447
Origin and Use
Definitions
Mathematical Principles on which Based
Accumulation Based on Agreement
Effect of Settlement of Debt
Relation of Fund to Profits
Accounting for Sinking Fund
The Sinking Fund on the Balance Sheet
Entries to Sinking Fund
Booking the Trustee’s Report
Treatment of Income and Expense
Final Disposition of Fund
Treatment of Sinking Fund Reserve
Relation Between Depreciation and Sinking Fund

XXVI P C
P L S 466
Interrelation of Profit and Loss and Balance Sheet
Periodic Adjustments
Interest as a Cost of Manufacture
Arguments Against the Inclusion of Interest
Problem of Charging Interest on Books
Unrealized Profits
Corporation Dividends
Discount on Bonds
Sinking Funds
Working Capital
The Correction of Closing Errors

XXVII T P L S —F C 477
 Standardization of Form
Synonymous Terms
Cost of Goods Sold—Manufacturing Concern
Cost of Goods Sold—Trading Concern
Further Differentiation of Terms
Desirability of Uniformity in Terms Used
Profit and Method of Showing
Form of Presentation—Account Form
Non-Technical or Report Form
Examples of Forms of Presentation
Form for Manufacturers and Merchants
Content and Manner of Showing
Supporting Schedules
Adjustment of Inventories
Selling Expense and Administrative Schedules
Schedules for Special Needs

XXVIII L C 493
Reasons for Liquidating—Partial and Complete Liquidation
Current Assets Transferred into Fixed Assets
Tying up Cash in Stocks of Material
Unwise Use of Cash for Paying Dividends
Inability to Secure Cash for Refunding Operations
Excessive Borrowing on Short-Term Securities
Losses in Conducting the Business
Loss Through Fraud, Theft, or Unavoidable Causes
Methods of Liquidation
Liquidation under Bankruptcy
Liquidation under Voluntary Dissolution
Liquidation under Receivership
Status of Creditors in Liquidation
Accounting for Liquidation

XXIX C C 507
Reason for Combination
Types of Consolidation
 Accounting for the Holding Company
Distinction between Consolidation and Merger
Formation of Consolidation and Merger
Principles of Valuation of the Constituent Companies
Fundamental Principle of Equalization of Conditions
Valuation of Partnership
Earning Capacity
Good-Will
Capitalization of a Consolidation or a Merger
Payment of Amalgamated Interests
Closing the Books of the Merged Concerns
Opening the Books of the Merger

XXX B H A 521
Advantages of Branch and Agency System
Agency and Branch Differentiated
Degree of Control Desired
Factors of Successful Management
Main Principles of Branch Accounting
Agency Accounts
Branch Accounting Records
Illustration of Simple Branch Accounts
Illustration of More Complex Branch Accounts
Purchases
Sales
Adjustments on Branch and Head Office Books
Example of Adjusting Entries
Reports from the Branch
Examples of Reports

XXXI B H A (Continued) 542

Foreign Exchange
The Accounting Problem of the Foreign Branch
Accounts Opened on Books
Handling Fluctuations in Foreign Exchange
Conversion of Branch Results
 Illustrative Bookkeeping Problems
Local Supervision of the Foreign Branch
The Foreign Sales Agency
Method of Conversion of Results
The Foreign Purchasing Agency

XXXII S A ;N A ;
A F L 556

S A
Definition of Suspense Accounts—General Purpose
Reserve for Doubtful Accounts as a Suspense Account
Use of Suspense Ledger
Accounts Receivable Hypothecated
Accounting for Accounts Receivable Discounted

N A
Allotment of Numbers to Accounts

A F L
The Insurance Contract
Requirements in Case of Loss
Determination of Value of Loss
Adjustment of Differences
Effect of Coinsurance Clause
Method of Record-Keeping to Facilitate Ready Adjustment
Adjusting Entries for Fire Losses

XXXIII S B ;P B ;J
V ;B E I 581

S B
Value of Business Statistics
Railroad Statistics
Manufacturing Statistics
Mercantile Statistics
 Use of Graphs in the Presentation of Statistics
Advantages of the Use of Graphs
Principles of Graph Construction

P B
Purpose and Content
Operation of Private Books

J V
Need for the Journal Voucher
Index to Journal Vouchers
Content of Voucher
Other Methods of Authorizing Entries

B E I
Allocation of Building Expense

XXXIV T C B S
P L S 600
Purpose and Function
Problem of Partial Ownership
Conditions under which Used
The Setting Up of the Consolidated Balance Sheet
Showing of Intercompany Accounts
Showing of Notes Discounted
Reconcilement of Current Accounts
Valuation of Inventory
Reserve for Intercompany Profits
Valuation of Inventory—Minority Interests
Valuation of Liabilities
Showing of Capital Stock
Showing of Surplus
Showing of Deficit
Showing of Profit and Loss Summary
The Consolidated Profit and Loss Summary
Illustration of Consolidated Balance Sheet
 XXXV A R R T 620
Appointment of Assignee or Receiver
Appointment of Trustee
Accounts and Reports of a Receiver in Equity
Reports to the Court

A R B P
Initial Statements Presented to the Court
Reports and Accounts of Receiver or Trustee
Liquidating Dividends
Relative Standing of the Creditors
Statement of Affairs
Basis of Valuations in Statement of Affairs
Deficiency Account
Illustration of Statement of Affairs and Deficiency Account

R L A
Evolution of the Realization and Liquidation Account
Supporting Schedules
The Question of Cash
The Handling of Valuation Reserves
Illustration of Realization and Liquidation Statement
Uses to which Realization and Liquidation Statement May be Put

L P I
Nature of the Problem
Illustration of Liquidation by Instalments

A A—P W S —F H -Y 655
B—P W S —S H -Y 694
C—M P S W 727
D—R Q 755

FORMS AND CHARTS

P
Stock Book or Stock Ledger 22
Stock Book to be Kept by Brokers
(New York Form Prescribed by Comptroller) 23
Stock Book to be Kept by Corporations and Transfer Agents
(New York Form Prescribed by Comptroller) 23
Voucher 30, 31
Voucher Check—Double 33
Voucher Check—Single 34
Voucher Register 35
Chart Showing Actual and Theoretical Depreciation 105
Chart Showing Progress of Uniform Depreciation
and of Diminishing Efficiency 115
Graphic Chart—Straight Line Method 153
Graphic Chart—Working Hours Method 155
Graphic Chart—Fixed Percentage of Diminishing Value Method 158
Graphic Chart—Sinking Fund Method 162
Graphic Chart—Annuity Method 166
Plant Ledger 193
Branch Report to Head Office 541
Head Office Ledger Account—Summary of Branch Expenses 541
Chart Showing Comparison of Sales with Cost of Advertising 585
Chart Showing Comparison of Sales with Gross Profits 586
Chart Showing Comparison of Sales, Purchases,
and Sales Salaries 587
Chart Showing Comparison of Sales with Cost of Sales 588
Journal Voucher 593
Card Index for Journal Vouchers 594, 595
Accounting—Theory and Practice
 CHAPTER I
THE CORPORATION
The Corporation
In Volume I, Chapters XLVIII and XLIX, the fundamental characteristics of
the corporation were explained and discussed briefly and some of its peculiar
accounting features were set forth. Here these matters will be gone into more
fully and additional aspects of this type of organization will be treated. In Volume
I were explained the advantages and disadvantages of the corporate form, the
procedure incident to the formation of a corporation, its charter, officers, working
organization and management, the records peculiar to a corporation, the showing
of proprietorship, opening the corporation’s books, booking premium and
discount on stock, change from partnership to corporation, the distribution of
profits, dividends, etc. Only so much of the information already presented will
now be repeated as may be necessary to make the treatment here complete.
Classification and Definitions
As instruments for the transaction of business, corporations may be classified
in a number of ways. First, all corporations are either public or private. Public
corporations are the governmental organizations set up to transact the collective
business of a city, a county, a township, or school district.
Private corporations are divided into two subclasses, stock and non-stock.
Under stock corporations are included all those organized to carry on business for
a profit. Under non-stock corporations are included all those organized to carry
on non-profit-making enterprises, such as libraries, hospitals, religious
organizations, eleemosynary undertakings, etc.
Under the head of stock corporations we may have the following subclasses:
(a) industrial or manufacturing, (b) commercial or trading, (c) public utility or
quasi-public, and (d) financial, i.e., banks, trust companies, insurance companies,
etc.
From the standpoint of the sovereignty to which allegiance is due,
corporations are either domestic or foreign. A corporation is domestic in the state
in which it is organized; foreign in any other state or country. Thus corporations
chartered in New York are domestic in New York and foreign in New Jersey and
Canada. A foreign corporation may be at a distinct disadvantage with a domestic
corporation. To obviate this, one occasionally sees a separate incorporation in
every state in which a concern intends to do business. Very infrequently is a
domestic corporation subject to more stringent supervision and regulation than a
foreign.
From the standpoint of the fact of incorporation, corporations may be classed
as (1) de jure and (2) de facto, the former comprising those which have met fully
all legal requirements for incorporation, the latter comprising those which have
not met fully all legal requirements but are to all intents and purposes
corporations in fact.
Method of Ownership
Business corporations are sometimes spoken of as “open” or “close.” An open
corporation is one in which ownership of the stock is not held closely but is being
passed about, traded in, or transferred from one owner to a new. A close
corporation is one in which the stock is held very closely in order to retain control
and keep profits and trade secrets within a small compass of ownership. Thus
some corporations are strictly family affairs; others are held by a few families or a
small group.
What is known as a corporation “sole,” while little known now, virtually
exists in some close corporations, as where one man holds all but two shares of
stock. The incorporation of a single individual is not legally possible in this
country.
The corporation, because of its peculiar advantages over other forms of
business organization, has become the accepted form for most large enterprises.
The gathering together of large capital funds, the ease and efficiency of
management and control, continuous life, the facility of transfer of ownership,
and the limited liability of the stockholders, make the corporate form attractive to
the investor and absolutely necessary to the large businesses carried on today. In
some states encouragement is given the small business to incorporate; in the State
of New York, for example, the minimum limit of capitalization is only $500. In a
few other states the old-time fear of the corporate form is still expressed in their
general corporation laws in which the minimum limit for corporate capitalization
is set as high as $10,000.
Working Organization
The peculiar features of the stock corporation are the method of ownership
and working organization. This latter is effected through a board of directors who
are responsible directly to the owners at periodic intervals. Within the board are
its officers and committees to whom duties are assigned by by-laws, custom,
common consent or action of the board. Under these official heads are the rank
and file of the organization—department heads, clerks, employees, etc. It is not
necessary to treat here this phase of the organization further.
Different Classes of Stock
The collective capital of a corporation is divided into shares of equal value.
Ownership of a share or shares in a corporation is evidenced by formal
certificates of stock. Each share carries with it the same privileges, powers, and
duties of ownership as every other share of the same class. It represents a pro rata
share of the total interest of its class. There may be several different kinds or
classes of ownership within the corporation, these classes will have different
privileges, and there may be other points of differentiation. The reason for setting
up these different classes is almost always to secure additional capital from
outside sources by making the investment as attractive as possible. Upon a
reorganization, an adjustment of the various interests concerned may require a
grading of ownership, a differentiation by classes in order equitably to satisfy the
claims of all interested parties. These various classes of stock ownership will be
discussed under the following heads:

1. Common
2. Preferred
3. Guaranteed
4. Founders’
5. Debenture

Common Stock
Common or ordinary stock is that which is evidence of ordinary ownership in
the corporation. The share of ownership of the original organizers of the
corporation is usually in the common stock. The common stockholder is a sort of
remainderman, a residuary legatee. Upon dissolution, after the special claims and
privileges of the other classes of owners have been satisfied, the common
stockholders come in for their share. After the satisfaction of the claims of
preferred owners, the common stockholders have a right to all that is left, their
rights being simply residuary. They are subsequent to those of the other classes
and to that extent inferior to them, though they may be more valuable.
Preferred Stock
Preferred stock has some kind of preference over the common. Such stocks
differ among themselves, there being no standardized features applicable in every
way to all kinds of preferred stocks. The basic purpose of the various preferences
is to make the stock attractive from an investment standpoint. Common to all
preferred stocks, however, is a preference as to dividends. Whenever profits have
been made and have been set aside for dividend purposes, the preferred
stockholders receive their dividends ahead of the common stockholders. If only
sufficient profits are available to meet the requirements of the preferred
stockholders and are appropriated for that purpose, the common owners receive
nothing. Stock may be preferred as to assets as well as to profits. By this is meant
that in case of dissolution the net assets remaining after payment of all outside
claims are applied first to satisfy the interests of the owners of preferred stock and
any remainder then goes to the common stockholders.
Cumulative and Non-Cumulative. Preferred stock carries with it a definitely
stated minimum rate of dividend. The preferred claim to the profits may be
cumulative or non-cumulative. In the one case, if profits are insufficient at any
time to meet the preferred dividend requirements or are not appropriated for that
purpose, the claims of the preferred owners accumulate from period to period
until satisfied in full. This satisfaction must take place before the ordinary owners
can have any share in the profits. The rate of accumulation is the specified
minimum and usually interest on unpaid dividends is allowed when the company
finally settles these preferred claims. Of course, since dividends can be declared
only out of profits, no claim for preferred dividends or any other kind can exist
unless sufficient profits have been made. Non-cumulative stock is stock on which
the dividend claim does not, if unsatisfied at any time, accumulate from period to
period. Preferred stock is cumulative unless otherwise specified.
Dividends on cumulative stock do not have to be paid just because sufficient
profits have been made. Declaration of dividends rests entirely with the board of
directors who may see fit to appropriate profits to other purposes. A holder of
non-cumulative stock may be very unjustly discriminated against in favor of the
common stockholder by the withholding of all profits for a number of periods
until a large amount has been accumulated. This is then disbursed as a dividend to
the common owners after the deduction of as much as may be necessary to satisfy
the preferred owner for the current period. On this account a non-cumulative
stock is not attractive to investors.
Participating and Non-Participating. Preferred stock may be participating or
non-participating. It is said to be participating when the terms under which it is
issued provide that it shall share in any dividend in excess of its own specified
minimum. Thus, if it is 6% preferred, after the preferred receives its 6% the
common stock receives a like dividend, and then the preferred and common may
share alike or in any agreed ratio in any further dividends declared in that year.
Both participating and non-participating stock is either cumulative or non-
cumulative. Preferred stock is non-participating when it is limited to the rate of
dividend specified in the terms of its issue.
Redeemable and Convertible. Other features met in some preferred stocks are
redeemability and convertibility. Preferred stock may be issued under a contract
to redeem it, after a certain length of time, at a named figure—frequently par plus
one year’s dividend. Redemption may be either at the option of the holder or the
company. Redemption may be serial, i.e., a certain amount called at stated
intervals for redemption. Preferred stock is convertible when under the contract in
the terms of its issue it may be converted into some other form of ownership or
obligation. Thus, provision may be made that after a certain time has elapsed,
preferred shares may be converted into common according to specified rates of
conversion; or conversion into bonds of the company is sometimes provided for.
Many nice adjustments may become necessary from an accounting viewpoint,
when redemption or conversion take place at any ratio other than book values.
Guaranteed Stock
Stock which is issued under a guarantee to pay a specified dividend is said to
be guaranteed stock. Inasmuch as dividends can be declared only out of profits, a
company cannot guarantee its own stock—or rather a guarantee on the company’s
own issue must always be dependent or contingent upon the earning of profits
sufficient for that purpose. Stock issued by one company and guaranteed by
another may with strict propriety be called guaranteed stock. Thus, a large
company may enter into a contract of lease with a smaller concern whereby the
compensation shall be, let us say, an 8% dividend guaranteed to all holders of the
stock of the smaller concern. Such a guarantee is not contingent but becomes a
lien or claim on the guarantor company, regardless of the amount of its earnings.
Founders’ Stock
In England there is issued what is known as “founders’” stock, a stock
preferred as to its share of dividends. Thus, a comparatively small portion of the
common stock authorized might be set aside as founders’ or promoters’ shares
with the stipulation that these founders’ shares shall receive a dividend out of
proportion to the ratio which they bear to the total common stock. The provision
might be that these shares shall receive one-half or one-third—or any other
specified share—more dividends than shall be given to the common owners.
Instead of being preferred stock with specified dividend rate, it is preferred over
the rest of the shares of the group from which it was originally set aside but its
share of dividends is dependent upon the dividends given the rest of the shares.
The par value of the founders’ shares might represent only one-twentieth of the
value of the rest of the group, while their share of the dividends would be, say,
one-fourth as much as that of the other shares. This preference as to amount of
dividends may give founders’ shares a much higher market value than the other
shares. Provision is sometimes made for their redemption, as usually there is such
a marked difference between their amount ratio and their dividend ratio as
compared with the other shares, that dissatisfaction among the owners results.
Outstanding founders’ shares may then interfere seriously with the marketability
of the other shares.
Debenture Stock
The term debenture stock is applied to a class of liabilities rather than to
proprietorship items. In England debentures of various kinds are frequently used.
A recent book[1] thus describes them: “In Great Britain the term ‘debenture stock’
is used to designate an unsecured loan issued in irregular amounts. If the amounts
were fixed and equal, the issue would be called ‘debenture bonds’ or simply
‘debentures.’ Debenture stock is a debt of the corporation and does not resemble
stock as used in this country.” Debenture stock has not proven popular in this
country, although used to some extent in Canada. The Public Service Commission
of the State of New York defines debenture stocks as “those issued under contract
to pay absolutely thereon at specified intervals a specified return.” These stocks,
while usually of limited life like bonds, are sometimes “perpetual and give the
holders no right to demand the repayment of their capital, and the company no
right to repay it.”[2] When issued as perpetual, they somewhat resemble capital
stock, as the term stock is used in this country. Because of the fixed and absolute
charge for interest—or dividends as it is sometimes called—which these stocks
carry, they are much more of the nature of bonds than of a stock indicating
proprietorship. Debenture stocks are therefore to be classed as liabilities.
Stock of No Par Value
A characteristic of most stock is that it bears a specified par value which must
be uniform for all the shares within a class. The par value of the different classes
may differ, however. In most states no regulation is made of the amount of par
value. A par value of $100 is customary for industrial and commercial concerns,
and of $1 for mining companies. Between those limits, and even beyond them,
one finds stocks of almost any par value.
In the State of New York the issuance of stock of no par value is allowed.
Both preferred and common classes may be issued without par value, but if the
preferred shares have preference as to assets, the certificates for preferred shares