2017 McGraw-Hill Education. All rights reserved

© 2017 McGraw-Hill Education. All rights reserved Solutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition 2-1

Chapter 2: Accounting Judgements

Case 2-1 Symposium 2-2 Aerotravel Inc.2-3 Dubois Limited Suggested Time Technical 2-1 Underlying assumptions................................... 10 2-2 Underlying assumptions................................... 10 2-3 Qualitative characteristics ................................ 15 2-4 Concepts identification .................................... 15 2-5 Capital maintenance ......................................... 15 2-6 Capital maintenance ......................................... 20 2-7 Measurement methods ..................................... 15 2-8 Measurement methods ..................................... 15 2-9 Fair value measurement ................................... 10 2-10 Fair value measurement ................................... 10 Assignment 2-1 Relevance versus faithful representation ......... 15 2-2 Relevance and faithful repesentation ............... 15 2-3 Questions on principles .................................... 15 2-4 Questions on principles .................................... 15 2-5 Application of principles (*W) ........................ 10 2-6 Realization versus recognition ......................... 15 2-7 Recognition of elements .................................. 10 2-8 Elements of financial statements ..................... 10 2-9 Questions on principles (*W) .......................... 10 2-10 Identification of accounting principles (*W) .... 10 2-11 Revenue recognition ........................................ 15 2-12 Recognition and elements ................................ 15 2-13 Application of principles.................................. 15 2-14 Application of principles.................................. 15 2-15 Implementation of principles ........................... 30 2-16 Implementation of principles ........................... 30 2-17 Implementation of principles ........................... 30 2-18 Recognition criteria .......................................... 25 2-19 Implementation of principles (*W) .................. 30 *W The solution to this exercise/problem is on the text Web site and in the Study Guide. This solution is marked WEB.Intermediate Accounting Volume 1 Canadian 7th Edition Beechy Solutions Manual Visit TestBankDeal.com to get complete for all chapters

©2017 McGraw-Hill Education. All rights reserved 2-2Solutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition Cases Case 2-1 Notes for Symposium

• Prudence

There are many examples where we are conservative in our accounting standards. For example, we recognize contingent liabilities as provisions if they are probable but do not recognize a contingent asset as an asset unless it is virtually certain. We recognize all deferred income tax liabilities but we do not recognize deferred income tax assets unless they are probable. For goodwill we have impairment. (Students could discuss a number of other examples of accounting standards where there is conservatism).Yes I agree with the new definition since there could be both understatement and overtstatement of assets especially where estimates are being made for financial statements. Both of these would be a bias in reporting. Neutrality supports the new definition of prudence. Financial reporting should not have a bias.

• Measurement of Assets and Liabilities

Historical cost has many advantages. It is easy to measure on initial recognition. It is more difficult to measure after initial recognition since it requires a number of estimates e.g. number of years an asset should be depreciated over. Impairment testing involves subjectivity. Current values after initial recognition are more relevant to decisions of users since they can be customized to the needs of those users. However, there are many alternatives in determining current values and measurement uncertainty therefore subjectivity.Current values will provide a more up to date Balance Sheet for the users of the financial statements. However, unrealized and realized gains and losses will impact the Income Statement and create more volatility. Historical cost will create an outdated Balance Sheet and the estimates related to depreciation and impairment testing involve subjectivity.For certain assets current values are more relevant e,g, derivatives where hedge accouting is not elected and investments which are traded on a frequent basis.

• OCI and Comprehensive Income

One concern with OCI and comprehensive income is that there is not clear definition about what belongs in OCI and comprehensive income. OCI is useful since it allows for unrealized gains and losses related to certain remeasurements to not impact the income statement which would create volatility and it avoids accounting mismatches. For example, with a cash flow hedge e.g. a forward contract to protect against the change in the Euro for a future purchase of a machinery in Europe. Without OCI you would have an accounting mismatch. Without OCI the forward contract would be classified as a

© 2017 McGraw-Hill Education. All rights reserved Solutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition 2-3 derivative and impact net income but the forward contract would have no impact until the machinery is purchased in six months. So one side of the hedge would impact net income and the other side would have no impact. To solve this issue the forward contract would impact OCI only until the hedge is terminated. (Students could provide other relevant examples).

©2017 McGraw-Hill Education. All rights reserved 2-4Solutions Manual to accompany Intermediate Accounting, Volume 1, 7 th edition Case 2-2 Sample response

Dear Ms. Yang:

As you requested, I have studied the operations of AeroTravel Inc. with a view of identifying the accounting and reporting ramifications for the company. I believe that while the revenue and expense issues are fairly straight-forward on the surface, there are important estimates and accounting judgements that can affect the numbers reported. The necessary accounting policies involve the timing of revenue and expense recognition, as

well as matching and periodic reporting. The principal issues are as follows:

Revenue recognition ATI obtains its revenue by selling loyalty units to its corporate clients. Although the cash is received upon sale, the revenue will not be earned until the clients’ customers redeem their units for travel or merchandise. Only then can the revenue be reported on the income statement. Until redemption, the amount received from clients must be shown as a liability on ATI’s statement of financial position (i.e., as unearned revenue).Revenue measurement is complicated by the fact that not all units are redeemed. A significant portion of units are never redeemed and therefore represent “free” revenue for ATI—revenue that is never “earned” through the delivery of goods or services. The revenue from never-redeemed units must be estimated; this proportionate amount of revenue can be recognized as revenue in the year the units are sold. Each year, the company reviews its estimate of the proportion of outstanding units that will never be redeemed. Thus, the amount of revenue recognized from unredeemed units will fluctuate from year to year on the basis of both (1) the number of units sold during the year and (2) the accumulated quantity of unredeemed units from past years.For “earned” revenue, recognition will occur when the units are redeemed and the rewards have been delivered, as mentioned above.An additional source of revenue is obtained as fees from client corporations for marketing and for assisting client companies with their own loyalty programs. These revenues should be recognized as the services are rendered, however specified in the contracts. If billings lag expenses, ATI’s net expenses should be shown as unbilled revenue on the SFP. If contract revenue is received in advance of incurring the expenses, the unearned amount should be shown as a current liability.Expense recognition When ATI buys airline seats, merchandise, or other rewards in response to redemption, the company can recognize the revenue and related cost once the rewards have been delivered. Expense recognition of merchandise occurs when it is shipped.However, ATI does not always (and perhaps does not usually) acquire reward travel at the point of unit redemption. ATI buys blocks of airline seats in advance and makes them available to unit-holders, most likely via the ATI website.