TEST 2 Practice

Chapter 7: Financial Assets

P7-13 Classifying financial assets (10 mins)

Investments in equity that are considered strategic in nature are generally accounted for
differently from portfolio investments in equity. The former uses consolidation, proportionate
consolidation, or the equity method, while the latter uses the fair value through profit or loss
(FVPL) method.

Required:
Explain conceptually why this difference in accounting for strategic versus portfolio investments
is justified. [Hint: consider how information asymmetry differs between them.]

Strategic investments provide the investor with the opportunity to direct or to influence the
strategic direction of the investee. This ability is valuable because it reduces the potential moral
hazard between the investor and the company’s management. In addition, an investor with
control, joint control, or significant influence, implies that the investor has access to valuable
insight information about the investee, which is not available to portfolio investors. The reduction
in both types of information asymmetry, moral hazard and adverse selection, for strategic
investments implies that such investment should not be valued using market prices or other
aspects of fair value.

P7-14 Initial recognition of financial assets (15 mins)

On January 1, 2023, Investor’s Club Inc. (ICI) made a number of non-strategic investments
detailed below:
a. The company acquired 100,000 ordinary shares in Norman Inc. for $5 cash per share
plus a $10,000 transaction fee. ICI’s management did not make any specific election
with respect to the classification of this investment.
b. ICI purchased 5,000, $25, 3.0% cumulative preferred shares in Bleay Inc. for $130,000
including transaction costs of $5,000. ICI irrevocably elected to present changes in fair
value through OCI.
c. ICI paid $2,393,859 plus a $50,000 transaction fee for $2.5 million of 3.5% semi-annual
bonds issued by Zoe Corp. that mature in five years. The effective rate of interest earned
is 2.0% PER PERIOD. The objective of the company’s business model for this type of
asset is to hold the investment for the purpose of collecting the contractual cash flows.

Required:
Record the journal entries necessary to reflect the foregoing transactions. Briefly justify your
chosen treatment.

a. The company acquired 100,000 ordinary shares in Norman Inc. for $5 cash per share
plus a $10,000 transaction fee. ICI’s management did not make any specific election
with respect to the classification of this investment.
In the absence of an election to present the changes in fair value through OCI, they must be
classified as FVPL. The asset is recorded at fair value and the transaction costs are expensed.

Date Accounts Debit Credit

a. Investment in financial assets-FVPL 500,000

(100,000 shares x $5 per share)

Investment transaction costs 10,000

Cash 510,000
($500,000 + $10,000)

b. ICI purchased 5,000, $25, 3.0% cumulative preferred shares in Bleay Inc. for $130,000
including transaction costs of $5,000. ICI irrevocably elected to present changes in fair
value through OCI.

This asset is classified at FVOCI in accordance with irrevocable election. The transaction fee is
capitalized (added to the cost of the asset).

Date Accounts Debit Credit

b. Investment in financial assets-FVOCI 130,000

Cash 130,000
(5,000 shares x $25 per share + $5,000)

c. ICI paid $2,393,859 plus a $50,000 transaction fee for $2.5 million of 3.5% semi-annual
bonds issued by Zoe Corp. that mature in five years. The effective rate of interest earned
is 2.0% PER PERIOD. The objective of the company’s business model for this type of
asset is to hold the investment for the purpose of collecting the contractual cash flows.

Date Accounts Debit Credit

c. Investment in financial assets-Amortized cost 2,443,959

Cash 2,443,959
($2,392,859 + $50,000)

As the investment meets ICI’s investment objectives of holding the asset for the purpose of
collecting the contractual cash flows and as the expected cash inflows are solely payments of
principal and interest on the principal amount outstanding. It is appropriate to classify the
investment at amortized cost. The transaction fee is capitalized (added to the cost of the asset).

P7-15 Subsequent measurement of financial assets (15 mins)

Refer to the facts set out in P7-14 above and consider the following additional information:
a. On July 1, 2023, ICI received a $43,750 interest payment on the Zoe Corp. bonds. The
next interest payment is due on January 1, 2024.
 b. On September 30, 2023, ICI received a $3,750 dividend on the Bleay Inc. cumulative
preferred shares.
c. On December 31, 2023, ICI received a $2,000 dividend on the Norman Inc. ordinary
shares.
d. The market value of the Norman Inc. ordinary shares as at December 31, 2023, was
$4.90 per share.
e. The market value of the Bleay Inc.’s cumulative preferred shares as at December 31,
2023, was $26.25 per share.
f. The market value of the investment in the Zoe Corp. bonds as at December 31, 2023,
was $2,500,000.
g.

ICI has a December 31 year-end. It does not prepare interim financial statements.

Required:
Prepare the necessary journal entries to record income earned on these assets in 2023 and the
requisite fair value adjustments at December 31, 2023.

a. On July 1, 2023, ICI received a $43,750 interest payment on the Zoe Corp. bonds. The
next interest payment is due on January 1, 2024.

Previously recorded the following entry:

Date Accounts Debit Credit

c. Investment in financial assets-Amortized cost 2,443,959

Cash 2,443,959
($2,392,859 + $50,000)

● Effective interest rate is 2% per period

Interest in Zoe Bonds
Date Accounts Debit Credit

Jul 1, 2023 Cash 43,750

($2,500,000 x 3.5% / 2)

Investment in financial asset-Amortized cost 5,127

($48,877 - $43,750)

Investment revenue-Interest 48,877

($2,444,859 x 2%)

Cash = Cash payment

Investment revenue-Interest = Interest revenue

● Investment account balance is now $2,443,859 + $5,127 = $2,448,986

● Effective interest rate is 2 per period
Accrual on interest on Zoe bonds
 Date Accounts Debit Credit

Dec 31, Interest receivable 43,750

2023 ($2,500,000 x 3.5% / 2)

Investment in financial asset-Amortized cost 5,230

($48,980 - $43,750)

Investment revenue-Interest 48,980

($2,448,986 x 2%)

b. On September 30, 2023, ICI received a $3,750 dividend on the Bleay Inc. cumulative
preferred shares.

● Recall: The asset is classified at FVOCI in accordance with irrevocable election.

Dividends on Bleay cumulative preferred shares
Date Accounts Debit Credit

Sep 20, Cash 3,750

2023

Investment revenue-Dividends 3,750

c. On December 31, 2023, ICI received a $2,000 dividend on the Norman Inc. ordinary
shares.The market value of the Norman Inc. ordinary shares as at December 31, 2023,
was $4.90 per share.

● Recall: In the absence of an election to present the changes in fair value through OCI,
they must be classified as FVPL.
Dividends on Norman ordinary shares
Date Accounts Debit Credit

Dec 31, Cash 2,000

2023

Investment revenue-Dividends 2,000

d. The market value of the Norman Inc. ordinary shares as at December 31, 2023, was
$4.90 per share.

● Recall: In the absence of an election to present the changes in fair value through OCI,
they must be classified as FVPL.
● The company acquired 100,000 ordinary shares in Norman Inc. for $5 cash per share
Holding loss on Norman ordinary shares
Date Accounts Debit Credit
Dec 31, Holding loss on investment-FVPL 10,000
2023
Investment in financial asset-FVPL 10,000
(100,000 x $4.90 - $500,000)
 e. The market value of the Bleay Inc.’s cumulative preferred shares as at December 31,
2023, was $26.25 per share.

● Recall: The asset is classified as FVOCI in accordance with the irrevocable election.
● ICI purchased 5,000, $25, 3.0% cumulative preferred shares in Bleary Inc. for $130,000
including transaction costs of $5,000

Date Accounts Debit Credit

Dec 31, Investment in financial asset-FVOCI election 1,250
2023
OCI - Holding gain on investments-FVOCI election 1,250
(5,000 x $26.26 - $130,000)

f. The market value of the investment in the Zoe Corp. bonds as at December 31, 2023,
was $2,500,000.

● There is no need to adjust this investment to fair value (unless impaired) as it is

subsequently measured at amortized cost

Chapter 8: Property, Plant, and Equipment

P8-20 PPE capitalization and depreciation (10 mins)

Brow Excavation Corp. (BEC) is a publicly accountable enterprise that has a December 31 year-
end. On February 1, it ordered a new excavator, which was received and ready for use on April
1 but was not brought into use until May 1. Details of the related costs incurred are detailed
below:

The excavator was expected to last 20,000 hours, at which time it was estimated to be worth
$10,000. During its first year of operations, the machine was used 1,500 hours. BEC used the
units-of-production method to calculate depreciation expense on its excavation equipment.

Required:
a. Determine the historical cost base of the excavator.

Cost:
 ● PP&E is initially capitalized at cost
○ Cost represents the fair value of cash and other consideration that has been
exchanged for the goods

Purchase price 90,000

Customs duty 10,000

Provincial sales tax (non refundable tax) 7,000

Goods and services tax (refundable tax) 0

Refundable taxes are not included in the asset’s cost
base as they will be recovered from the taxation
authority

Freight in 4,000

Insurance policy 1,000

⅙ of the insurance expense is included in the asset’s
cost base, as the coverage for the months of February
and March was to insure the asset while it was in
transit, and hence getting it ready for its intended use.
The balance of the policy relates to coverage while the
excavator was ready for use, which is an operating
expense.

Training costs of operator 0

Training costs are excluded from the cost base as they
are not a cost of getting the asset ready for its intended
use. Rather, the training costs benefit the employee
who may or may not continue to work for BEC.

Historical cost base $112,000

b. Prepare the journal entry to record the first year of depreciation expense for the
excavator.

Depreciation rate per hour = (Historical cost - Residual value) / Useful life
= $112,000 - $110,000 / 20,000 hours = $5.10 per hour

Depreciation expense = Depreciation rate x Annual hours

= $5.10 x 1,500 hours used = $7,650

Date Accounts Debit Credit

Depreciation expense 7,650
Accumulated depreciation 7,650

P8-32 Depreciation - various methods (15 mins)

In January 2023, JN Norman Inc. (JNN) purchased and installed production equipment. It was
first available for use on March 1, 2023. JNN has a December 31 year-end and accounts for
partial years using the number of months that the asset is available for use. The following data
were available for the machine:

Required:
a. Calculate depreciation expense for 2023 and 2024 using the straight-line method.

Historical cost:
Cost excluding amounts below 100,000

Delivery 1,000

Installation 6,000

Testing 3,000

Refundable sales tax 0

Refundable taxes are not included in the asset’s cost
base as they will be recovered from the taxation
authority.

Historical cost base $110,000

Year 1 (2023), asset is first available for use March 1 (used 10 out of 12 months)
Depreciation expense = (Cost of asset - Residual value) / Useful life
= ($110,000 - $4,000) / 8 = $13,250
2023 = Depreciation expense x Used months
= $13,250 x 10 months / 12 months = $11,042

Year 2 (2024)
2024 = $13,250
 b. Calculate depreciation expense for 2023 and 2024 using the double-declining-balance
method (2 / 8 = 25%).
Depreciation expense = Cost of asset x Depreciation rate
= $110,000 x 0.25 = $27,500

Year 1 (2023), asset is first available for use March 1 (used 10 out of 12 months)
2023 = Depreciation expense x Used months
= $27,500 x 10 months / 12 months = $22,917

Carrying amount = Cost of asset - Depreciation expense

Carrying amount end of 2023 = $110,000 - $22,917 = $87,083

Note: you do not consider the residual value in the calculation but it does determine when
depreciation would end

Year 2 (2024)
Depreciation expense = Carrying amount x Depreciation rate
= $87,083 x 0.25 = $21,771

c. Calculate depreciation expense for 2023 and 2024 using the units-of-production method.

Depreciation Rate per Unit of Output = (Acquisition cost - Residual Value) / Estimated
productive outputs in units
= ($110,000 - $4,000) / 40,000 units = $2.65 per unit

Year 1 (2023)
Annual Productive Output Depreciation = Depreciation rate per unit of output x Units produced
2023 = $2.65 x $4,000 = $10,600

There is no proration for the number of months as the units consider what did happen (and likely
would be higher if it was a full year)
Year 2 (2024)
Annual Productive Output Depreciation = Depreciation rate per unit of output x Units produced
2024 = $2.65 x 7,000 units = $18,550

P8-47 Non-monetary exchanges (15 mins)

The “backbone” of the Internet is made up of large fibre-optic cables that link major cities,
countries, and continents. Due to the importance of these links, a number of different companies
have overlapping networks that connect these different locations. Global Xing and Quest
Communications are two such companies. The following provides information on transactions
between these two companies.
Transaction 1: On January 5, 2023, Global Xing sold to Quest a part of its network connecting
North and South America. In exchange, Quest sold to Global Xing cables connecting Europe
and Asia. Global Xing paid $20 million as part of this transaction.

Transaction 2: On January 9, 2023, Global Xing sold to Quest some cables connecting the cities
of Toronto and Montreal. These cables were laid along the shores of Lake Ontario and the St.
Lawrence River. In exchange, Global Xing received from Quest cables connecting the same two
cities, but running through a more inland route farther to the northwest. The rationale for the
exchange was to facilitate servicing and maintenance of the cables. [Note: Fibre-optic cables
require little maintenance in general.] In this transaction, Global Xing received $1 million.

The following table provides additional information on the assets exchanged in the transactions
described above (in $ millions).

Required:
Long lived assets acquired in exchange for non monetary assets
● Valuation alternatives and accounting for non monetary exchanges of long lived assets:
○ If there is commercial substance to the exchange, then the new assets is
recorded based on fair value
○ If there is no commercial substance, or fair value cannot be determined, then the
new assets is recorded based on the net book value of the asset given up

a. Record Transaction 1 on the books of Global Xing.

● Transaction #1: This exchange has commercial substance. The two sets of cable have
different risk, timing, and amount of cash flows because they service different markets
(i.e., continents). Therefore, use fair values to record the exchange.

● The fair market value of the assets given up is used to value the transaction if both the
assets given up and received can be reliable measured
FV North-South America cables = FV North-South America cables + Cash paid
= $390 millions + $20 million = $410 million

Date Accounts Debit Credit

PPE - Europe-Asia cables 410
Accumulated depreciation - North-South America 90
cables
PPE - North-South America cables 300
Gain on sale of cables 180
Cash 20
PPE - Europe-Asia cables = New asset = FV of old asset
Accumulated depreciation - North-South America cables = Accumulated depreciation of old
asset
PPE - North-South America cables = Old asset = Gross carrying amount of old asset
Cash = Cash paid
Gain on sale of cables = (PPE - Europe-Asia cables + Accumulated depreciation - North-South
America cables) - (PPE - North-South America cables + Cash)
= ($410 + $90) - ($300 + $20) = $500 - $320 = $180

b. Record Transaction 2 on the books of Global Xing if it is considered to have commercial

substance.

Date Accounts Debit Credit

Cash 1
PPE - Toronto-Montreal inland cables 20
Accumulated depreciation - Toronto-Montreal shoreline 8
cables
PPE - Toronto-Montreal shoreline cables 23
Gain on sale of cables 6
Cash = Cash received
PPE - Toronto-Montreal inland cables = New asset = FV of new asset
Accumulated depreciation - Toronto-Montreal shoreline cables = Accumulated depreciation of
old asset
PPE - Toronto-Montreal shoreline cables = Old asset = Gross carrying amount of old asset
Gain on sale of cables = Fair value of old asset - Net carry amount of old asset
= $21 - $15 = $6

(Cash + PPE - Toronto-Montreal inland cables + Accumulated depreciation - Toronto-Montreal

shoreline cables) - (PPE - Toronto-Montreal shoreline cables)
= ($1 + $20 + $8) - 23 = $29 - $23 = $6

c. Record Transaction 2 on the books of Global Xing if it is considered to lack commercial

substance.

Date Accounts Debit Credit

Cash 1
PPE - Toronto-Montreal inland cables 14
Accumulated depreciation - Toronto-Montreal shoreline 8
 cables
PPE - Toronto-Montreal shorelines cables 23
Cash = Cash received
PPE - Toronto-Montreal inland cables = New asset = Net carrying amount - Cash
= $15 - $1 = $14
Accumulated depreciation - Toronto-Montreal shoreline cables = Accumulated depreciation of
old asset
PPE - Toronto-Montreal shoreline cables = Old asset = Gross carrying amount of old asset

Chapter 9:

P9-15 Applying development cost capitalization criteria (15 mins)

Norman Corp. (NC) prepares its financial statements in accordance with IFRS. It manufactures
state-of-the-art electronics equipment, the vast majority of which has been developed internally
throughout the years. In preparation for its 2023 year-end, the company has asked you, its
external accountant, to comment on the proper accounting treatment for the three situations
described below:

a. The company spent $5 million in 2023 to manufacture testing equipment. The equipment
is used to verify the sensitivity tolerances of the electronics produced for sale to reduce
future warranty claims.
b. The company supports the advanced electronics research department at Innovative
University (IU) and has provided $2 million of funding per year for the past ten years.
IU’s leading-edge research has resulted in the development of numerous commercially
viable products through the years. NC’s arrangement with IU is that NC is entitled to
40% of the profits from commercial ventures arising from the research it funds. To date,
NC has earned $42 million from these ventures, netting $22 million after deducting the
funding costs. In 2023, NC continued its support of IU and issued IU a $2 million cheque
last month.
c. The company fabricated a prototype of a voice-activated robot butler for domestic use. It
spent $4 million on development costs in 2023, and believes that it will need to spend
another $1 million over the next year to refine the invention sufficiently to get it ready for
mass production. Extensive market research indicated that there will be strong
consumer demand for this product. Company-prepared budgets indicate that NC will be
able to recover its development costs in the first year of sales. The company is
committed to bringing the product to market.

Required:
For each of the three situations, indicate whether the costs incurred in 2023 should be
capitalized or expensed. Provide brief supporting rationale for each of your proposed accounting
treatments.

a. The company spent $5 million in 2023 to manufacture testing equipment. The equipment
is used to verify the sensitivity tolerances of the electronics produced for sale to reduce
future warranty claims.
The $5 million cost of manufacturing the testing equipment should be capitalized in the same
manner as other tangible fixed assets. Depreciation should then be expensed over the
equipment’s useful life. As the testing equipment is used to improve the quality of the electronic
products manufactured, during the production process, the depreciation charge would be
included in the inventoriable costs of the products tested (paragraph 49, IAS 16 and paragraph
2, IAS 2).

b. The company supports the advanced electronics research department at Innovative

University (IU) and has provided $2 million of funding per year for the past ten years.
IU’s leading-edge research has resulted in the development of numerous commercially
viable products through the years. NC’s arrangement with IU is that NC is entitled to
40% of the profits from commercial ventures arising from the research it funds. To date,
NC has earned $42 million from these ventures, netting $22 million after deducting the
funding costs. In 2023, NC continued its support of IU and issued IU a $2 million cheque
last month.

The $2 million contribution to IU is a research expenditure and should be expensed. The fact
that past research costs have been recouped through downstream commercial ventures is
irrelevant, as the non-directed research not being funded does not meet the six development
criteria set out in paragraph 57 of IAS 38.

● Paragraph 57 of IAS 38 requires that an asset shall be recognized for development

costs, if, and only if all of the following criteria are met:
○ The project is technically feasible
○ There is an intention to complete the project and either to sell the item or use it
○ There is an ability to use or sell the asset
○ The future economic benefits of the project can be demonstrated
○ The company has adequate technical, financial, and other resources are
available to enable the completing of the project
○ Expenditures on the project can reliably measured

c. The company fabricated a prototype of a voice-activated robot butler for domestic use. It
spent $4 million on development costs in 2023, and believes that it will need to spend
another $1 million over the next year to refine the invention sufficiently to get it ready for
mass production. Extensive market research indicated that there will be strong
consumer demand for this product. Company-prepared budgets indicate that NC will be
able to recover its development costs in the first year of sales. The company is
committed to bringing the product to market.

● These tests appear to have been met, and qualifying costs should be capitalized, subject
to what is said below
○ If the criteria for capitalization are not met, the costs to date should be expensed,
rather capitalized
 ○ Only costs incurred after the projects first met the six tests above are eligible for
capitalization. That is to say that (research) costs previously expensed cannot be
included in the cost of the asset. The asset should be amortized over its useful
life

P9-40 Accounting for mineral resources (5 mins)

Petropower Corporation engages in the exploration, development, and production of oil and
natural gas. In 2023, the company spent $8,500,000 exploring a new site in northern Alberta.
The site was determined to be viable and an additional $4,000,000 was spent on developing the
site. At the end of 2023, proven reserves were estimated to be 500,000 barrels-of-oil-equivalent
(BOE). In 2024, the company began extraction from the site and produced 60,000 BOE.
Estimated proven reserves at the end of 2024 were 540,000 BOE.

Required:
Prepare the journal entries for Petropower using IFRS. Assume that the company has a policy
of capitalizing the costs of exploration and evaluation.

Exploration costs
Date Accounts Debit Credit
2023 Intangible assets 8,500,000
Cash 8,500,000
Exploration costs = $8,500,000 capitalized

Development costs
Date Accounts Debit Credit
2024 Intangible assets 4,000,000
Cash 4,000,000
Development costs = $4,000,000 capitalized

● Note that the depreciation rate should use the best information available, which is the
most recent estimate of reserves at the end of 2024, adjusted to the beginning of the
year.

Beginning of year reserves = End of year reserve (estimated reserves) + Production during
2024
Beginning of year reserves = $540,000 + $60,000 = $600,000

Intangible assets = Exploration costs in 2023 + Developing costs in 2024

= $8,500,000 + $4,000,000 = $12,500,000

Extraction of BOE
Date Accounts Debit Credit
2024 Depletion expense 1,250,000
Intangible assets 1,250,000
Intangible assets = (Production during 2024 / Beginning of years reserves) x Intangible assets
= ($60,000 / $600,000) x $12,500,000 = 0.10 x $12,500,000 = $1,250,000
P9-45 Government grants (5 mins)
Edelweiss Music Production received a government grant to subsidize the production of music
with Canadian content (meaning using Canadian writers, singers, instrumentalists, etc., in the
recordings). Based on activity in the current year, the company is eligible to receive $150,000 to
offset labour costs, and $80,000 to offset equipment purchases.

Required:
Record the journal entries for the government grants using the gross method.

Gross method records government grants as income if the grant is a subsidy of expenses, and
deferred income (a liability) if it is a subsidy if asset cost.

Labour costs
Date Accounts Debit Credit
Government grant receivable 150,000
Other income (government grant) 150,000

Equipment purchases
Date Accounts Debit Credit
Government grant receivable 80,000
Deferred income 80,000

P9-46 Government grants (5 mins)

Refer to the facts in problem P9-45.

Required:
Record the journal entries for the government grants using the net method.

Net method records government grants as deductions in expenses and assets that the grant
subsidizes.
Labour costs
Date Accounts Debit Credit
Government grant receivable 150,000
Wages expense 150,000

Equipment purchases
Date Accounts Debit Credit
Government grant receivable 80,000
Equipment 80,000
FINAL EXAM Practice

Chapter 4: Revenue Recognition

P4-1 Range of revenue recognition alternatives (5 minutes)

Without restricting yourself to published accounting standards, explain how the potential range
of revenue recognition policies corresponds to the idea of value added by an enterprise.

As enterprise creates value at many different points or periods of time. Conceptually, revenue
and associated costs or income, should be recorded whenever the enterprise creates or adds
value. The discovery of a process or product, manufacturing distribution, product display, sales
delivery, credit provisions, warranties, are all value adding activities. So revenue or income
could be recognized at all of these points or periods of time.

P4-11 Revenue recognition process - transaction price with consideration payable to

customer (10 minutes)
Coffee Heaven is a coffee shop chain with locations throughout Canada. To promote the sale of
its large size coffees, it offers customers a loyalty program card whereby the customers receive
a free large cup of coffee after purchasing seven large cups. Coffee Heaven stamps the loyalty
card each time the customer purchases a large coffee. The customer then exchanges the fully
stamped loyalty card for a large coffee. (Pay for seven cups, receive eight cups).

Large coffees sell for $4.00 each. In September, Coffee Heaven sold 140,000 cups of coffee to
its loyalty program participants. The company has a very loyal customer base and it expects
that 100% of the customers in the loyalty program will subsequently redeem their loyalty cards
for a free coffee. In October, Coffee Heaven redeemed 15,000 loyalty cards.

Required:
a. Prepare a summary journal entry to record the sale of coffee in September to customers
who are enrolled in the loyalty program.
b. Prepare a summary journal entry to record the redemption of the loyalty cards in
October.

Loyalty programs:
● Some suppliers may offer loyalty programs to customers
● These programs require customers to continue buying specific products
● Exchange the customer receives some rewards or incentives
 ● The primary purpose is to attract or retain customers or to encourage repeat customers

● The journal entry for recognizing a contract with a loyalty income element is as follows:

Cash/Receivable xxx
Sales xxx
Deferred revenues xxx
The deferred revenue account records the loyalty revenue until it has been earned.

● The journal entry for when the customer takes advantage of the loyalty program, or the
contract has expired is as follows:

Deferred revenues xxx

Sales xxx

Chapter 5: Cash and Receivables

P5-35 Accounts receivable derecognition - transfer with recourse (10 minutes)

Cassiar Aerodynamics specializes in the manufacture and sale of helicopters. Its customers
include governments, hospitals and ambulance services, and corporations. Due to unfavourable
payment terms negotiated on a large contract to supply the federal government, Cassiar is
facing a cash shortage. To alleviate the pressure, the company decided to factor $45 million of
its receivables with recourse. In exchange, the factor agreed to pay Cassiar 98% of the face
value of the receivables less a 1% holdback on the date of transfer. After several months, the
factor collected a total of $44.8 million from the debtors.

Required:
Record the entries on Cassiar’s books relating to the $45 million of accounts receivable.

Upon transfer of receivables

Date Accounts Debit Credit
Cash 43,650,000
Due from factor 450,000
Short term debt - Asset backed financing 44,100,000
Cash = Accounts receivable x (0.98 - 0.01)
= $45,000,000 x 0.97 = $43,650,000
Due from factor = Accounts receivable x 0.01
= $45,000,000 x 0.01 = $450,000
Short term debt - Asset backed financing = Cash + Due from factor
= $43,650,000 + $450,000 = $44,100,000

Completion of collection
Date Accounts Debit Credit
Cash 250,000
Allowance for doubtful accounts 200,000
Due from factor 450,000
Cash = Due from factor - Allowance for doubtful accounts
= $450,000 = $200,000 = $250,000
Allowance for doubtful accounts = Accounts receivable - Collected amount
= $45,000,000 - $44,800,000 = $200,000
Due from factor = $450,000

As the final step to the factoring, reverse the final portion of the original journal entry (Short-term
debt).
Date Accounts Debit Credit
Short term debt - Asset backed financing 44,100,000
Interest expense 900,000
Accounts receivable 45,000,000
Interest expense = Accounts receivable - Short term debt - Asset backed financing
= $45,000,000 - $44,100,000 = $900,000

Chapter 6: Inventories

P6-10 Inventory costing - initial recognition (15 minutes)

Formula Fabricating Inc. (FFI) is a publicly reportable enterprise. At the beginning of the year,
FFI did not have in inventory any completed units or work in progress. However, it did have
$20,000 in raw materials inventory. Extracts from the company’s general ledger as at the
December 31 year-end follow:
At December 31, there was no work in process, but 15% of the units manufactured remained in
ending finished goods inventory.

Required:
a. What was the cost of goods sold for the year?
b. What was the value of the finished goods inventory on December 31?

To compute cost of goods sold and ending inventory:

1. Compute cost of goods available for sale (COGAS)
Since this is the first year of operations,

COGAS = Current year’s production cost

* Later years would also need to include the cost of beginning inventory
Production costs

Opening raw materials 20,000

Raw materials purchases 140,000

Raw materials inventory, Dec 31 (30,000)

Raw materials used in production 130,000

Plant supplies 13,000

Direct labour 60,000

Production manager’s salary 75,000

Utilities expense 34,000

(40,000 x 85% for manufacturing)

Property taxes 5,600

(8,000 x 70% for manufacturing)

Depreciation - manufacturing 22,000

facility

Depreciation - equipment 14,000

Total production cost = COGAS 353,600

a. What was the cost of goods sold for the year?

Cost of goods sold = COGAS x 85% sold

= $353,600 x 85% = $300,560

b. What was the value of the finished goods inventory on December 31?

Finished goods inventory, December 31 = COGAS x 15%

= $353,600 x 15% = $53,040
 Chapter 7: Financial Assets

P7-53 Subsequent measurement of investments in debt instruments (20 minutes)

The Argyle Company acquired a $10 million face value bond that has an 8% coupon rate (pays
interest annually on December 31) on January 1, 2023. The bond matures on December 31,
2028. On January 1, 2023, the market yield for bonds of equivalent risk and maturity was 6%.

Required:
a. How much did Argyle pay for this bond on January 1, 2023?

N = 6 periods
I=6
PMT = $10,000,000 x 0.08 = $800,000
FV = $10,000,000
PV = $10,983,465

b. On December 31, 2023, the market yield for bonds of equivalent risk and maturity is 7%.
What would be the market value of this bond on December 31, immediately after the
coupon payment on that date?

N=5
I=7
PMT = $10,000,000 x 0.08 = $800,000
FV = $10,000,000
PV = $10,401,020

c. On December 31, 2024, the market yield for bonds of equivalent risk and maturity is 8%.
What would be the market value of this bond on December 31, immediately after the
coupon payment on that date?

N=4
I=8
PMT = $10,000,000 x 0.08 = $800,000
FV = $10,000,000
PV = $10,000,000

d. Assume one of three scenarios: the bond is to be (i) amortized cost, (ii) FVOCI, or (iii)
FVPL:

● How much would the balance sheet value of this bond be on December 31, 2023, and
December 31, 2024?
● How much income would be reported in 2023 and 2024 for this bond?
● How much would OCI and accumulated OCI be for fiscal years 2023 and 2024?
 Dec 31 Beginning + - =
Amortized Cost Interest Income Coupon Payment Ending Amortized
6% 8% Cost

2023 10,983,465 659,008 800,000 10,842,473

2024 10,842,473 650,548 800,000 10,693,021

Amortized cost FVOCI FVPL

Balance sheet, $10,842,473 $10,401,020 $10,401,020
December 31, 2023
Interest income 659,008 659,008 800,000
Unrealized gain (loss) 0 0 (582,445)
Net income through 659,008 659,008 226,555
profit loss
OCI 0 (432,453) 0
AOCI 0 (432,453) 0
Comprehensive income 659,008 226,555 226,555
Amortized cost: no impact on OCI

FVOCI:
2023 OCI unrealized gain or loss = PV Dec 31, 2023 - Ending amortized cost 2023
= $10,410,020 - $10,842,473 = -432,453
FVPL:
2023 unrealized gains (losses) = PV Dec 31, 2023 - PV Jan 1, 2023
= $10,410,020 - $10,983,465 = -573,445

Amortized cost FVOCI FVPL

Balance sheet, $10,693,021 $10,000,000 $10,000,000
December 31, 2024
Interest income 650,548 650,548 800,000
Unrealized gain (loss) 0 0 (410,020)
Net income through 650,548 650,548 389,980
profit loss
OCI 0 (260,568) 0
AOCI 0 (693,021) 0
Comprehensive income 650,548 389,980 389,980
Amortized cost: no impact on OCI

FVOCI:
Accumulated OCI, Dec 31 2023 = -432,453
2024 OCI unrealized gain or loss = PV Dec 31, 2024 - (PV Dec 31, 2023 + Interest 2024 -
coupon payment)
= $10,000,000 - ($10,410,020 + $650,548 - 800,000) = -260,568
Accumulated OCI, Dec 31, 2024 = -432,453 + -260,568 = -693,021

FVPL:
Unrealized gains (losses) = PV Dec 31, 2024 - PV Dec 31, 2023
= $10,000,000 - $10,410,020 = -410,020

Chapter 8: Property, Plant, and Equipment

P8-18 PPE capitalization - bundled purchases of assets (10 minutes)

Clipper Company bought three used machines located in Toronto for $10,000,000. The
arrangement with the seller is to move all the equipment to Clipper’s factory in Edmonton. It is
understood that some of the equipment will be sold as scrap or disassembled and used as
spare parts. A careful inventory of all the equipment is shown below. Clipper plans to maximize
the value of each item by using it in its most beneficial manner.

Required:
Allocate the purchase price among the assets acquired.
PPE category Intended use Appraised Fraction of Total price Allocated price
value in optimal total appraised
use value

Machine A Operate $3,000,000 $3,000,000 / $10,000,000 $2,857,143

$10,500,000

Machine B Spare parts $5,000,000 $5,000,000 / $10,000,000 $4,761,905

$10,500,000

Machine C Scrap $2,500,000 $2,500,000 / $10,000,000 $2,380,952

$10,500,000

Total $10,500,000 $10,000,000

Chapter 9: Intangible Assets, Goodwill, Mineral Resources, and Government Grants

P9-44 Accounting for mineral resources (20 minutes)

Refer to the facts in problem P9-43

The following is the complete mineral exploration, development, and extraction history of Nikko
Minerals Inc. Early in 2019, owners invested $50 million to start the company. No further
financing was required. The company started explorations in 2019. However, all exploration
efforts between 2019 and 2021 were unsuccessful. It was not until early in 2022 that Nikko
found its one and only viable mineral deposit, which it immediately began to develop. It took two
years to complete the development of the site and all the minerals were extracted in three
years, starting in 2024.

Required:
Assume Nikko uses the full cost method to account for exploration costs and complete the
following table. Balance sheet amounts should be presented as at the year-end of December
31. Note also that when the ore is extracted, capitalized exploration and development (E&D)
costs are amortized using a units-of-production depletion rate, which is the accumulated
 deferred costs divided by the estimated units of ore discovered (6,000,000 units).

(000’s) 2019 2020 2021 2022 2023 2024 2025 2026

Cash 45,000 38,000 30,000 20,000 9,000 31,000 66,000 75,000

Cap E+D cost 5,000 12,000 20,000 30,000 41,000 27,333 10,250 0

Total assets 50,000 50,000 50,000 50,000 50,000 58,333 76,250 75,000

Share capital 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000

Retained Earnings (deficit) 0 0 0 0 0 8,333 26,250 25,000

Total owners equity 50,000 50,000 50,000 50,000 50,000 58,333 76,250 75,000

Revenue 0 0 0 0 0 26,000 40,000 12,000

Exploration cost 0 0 0 0 0 0 0 0

Extraction cost 0 0 0 0 0 (4,000) (5,000) (3,000)

Amortization of cap. E+D 0 0 0 0 0 (13,667) (17,083) (10,250)

cost
Net income (loss) 0 0 0 0 0 8,333 17,917 (1,250)

Chapter 10: Applications of Fair Value to Non Current Assets

P10-33 Impairment of assets (15 minutes)

uper Computers Inc. (SCI) is a publicly accountable enterprise that manufactures computer
microchips. It is conducting various impairment tests in concert with the preparation of its
financial statements for the year ended December 31, 2023. Management is concerned that due
to the recent introduction of more mechanized production equipment, it is possible that the value
of one of SCI’s machines is impaired. SCI uses the cost model to account for the machine and
is depreciating it on a straight-line basis over four years.

Other relevant information follows:

Required:
a. Determine whether the asset is impaired, and, if so, prepare the journal entry.
b. Management determined that the fair value less costs to sell off the machine as at
December 31, 2024, was $975,000. Prepare the required journal entry, if any.

Refer to problem P10-32. Assume that Super Computers Inc. is a private company that elects to
report its financial results in accordance with ASPE. Provide the required information above.
Requirement a. Determine whether the asset is impaired, and, if so, prepare the journal entry.
Impairment under ASPE
● Perform impairment test when events or circumstances indicate that the carrying value
of asset or asset group exceeds the fair value
● If trigger exists, apply two step test:
1. Calculate the discounted cash flows and compare the carrying amount. If
discounted cash flows less than the carrying amount, then
 2. Write asset down to its fair value (i.e. discounted cash flows)

Determine recoverable amount (not discounted due to ASPE)

Evaluation Dec 31, 2023 Nominal amount

Incremental cash flow 2024 550,000

Incremental cash flow 2025 550,000

Incremental cash flow 2026 550,000

Incremental cash flow 2027 0

Recoverable amount $1,650,000

Impairment test

Original cost $2,400,000

Less: Accumulated $600,000

depreciation

Net carrying value $1,800,000

Less: recoverable amount $1,650,000

Net carrying value > Recoverable amount = Impaired

Impairment test

Net carrying value $2,400,000

Less: Fair value $600,000

Impairment $400,000

Record the impairment

Date Accounts Debit Credit
Impairment loss - Machine 400,000
Accumulated depreciation - Machine 400,000

Requirement b. Management determined that the fair value less costs to sell off the machine
as at December 31, 2024, was $975,000. Prepare the required journal entry, if any.

Assuming we are at year 2024

Evaluation Dec 31, 2024 Nominal amount

Incremental cash flow 2025 550,000

Incremental cash flow 2026 550,000

 Incremental cash flow 2027 0

Recoverable amount $1,100,000

Depreciation 2024

Net carrying value after impairment $1,400,000

Estimated remaining useful life 3

Depreciation expense $466,667

Net carrying value after impairment = Original cost - Accumulated depreciation - Impairment
= $2,400,000 - $600,000 - $400,000 = $1,400,000

Impairment test

Original cost $2,400,000

Less: Accumulated $1,466,667

depreciation

Net carrying value $933,333

Less: recoverable amount $1,100,000

Accumulated depreciation = Accumulated depreciation + Impairment + Depreciation expense

= $600,000 + $400,000 + $466,667 = $1,466,667
Net carrying value < Recoverable amount = not impaired

No entry is required.