REVIEW QUESTIONS - Solutions Manual, Chapter 14 619 Chapter 14 (A)...

Copyright  2005 McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual, Chapter 14619 Chapter 14 (A) Comprehensive Revaluation of Assets and Liabilities (B) Bankruptcy and Receivership Modern Advanced Accounting in Canada Canadian 8th Edition Hilton Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Copyright  2005 McGraw-Hill Ryerson Limited. All rights reserved.620 Modern Advanced Accounting in Canada, Fourth Edition

REVIEW QUESTIONS

• The basic purpose behind push-down accounting is to have a subsidiary record in its

records the fair value increments used by its parent company when consolidated statements are prepared, in order that the subsidiary’s financial statement items reflect the cost to the parent company. This permits a more meaningful basis for evaluation and decision making.

• If the subsidiary is 100% owned, consolidation is made simpler because when the equity

method has been used the parent's investment account equals the shareholders' equity of the subsidiary, and the parent's income from subsidiary account equals the subsidiary's net income. There will be no purchase discrepancy. (Of course, if entries have been made that result in unrealized intercompany profits this statement is not true.) If the subsidiary is less than 100% owned then consolidation is far more complex if push- down accounting has been used because the noncontrolling interest in the consolidated statements is based on asset values before push-down accounting was applied.

3. Some arguments against the use of push-down accounting are:

(a) it is a violation of the historical cost accounting model that is the foundation behind current financial accounting standards; (b) users may be confused when trying to interpret the new amounts; and (c) over time the lack of consistency in applying accounting principles may make the numbers less meaningful.(d) further differences between the tax basis and the financial accounting records are created by push-down accounting.

Copyright  2005 McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual, Chapter 14621

• The key condition that must be present is that the reorganization must result in a change in

control due to the fact that a substantial realignment of nonequity and equity interests has occurred.

• No. If the fair value established for the company as a whole is greater than the sum of the

fair values of its identifiable assets less liabilities, the difference is not reflected as goodwill, because it is hard to justify the existence of goodwill in a company that has just experienced severe financial difficulties. Instead, the fair values of the identifiable assets and liabilities are used to value the reorganized business.

• The two main classes of creditors are secured creditors and unsecured creditors. These

can be broken down into fully secured, partially secured, unsecured with priority, and unsecured.

7.Voluntary bankruptcy occurs when persons make an assignment of their assets for the benefit of their creditors. In effect, the person turns over the assets to a trustee, who then distributes them in accordance with bankruptcy law. A person becomes bankrupt involuntarily as the result of actions initiated by that person's creditors.

• An accounting statement of affairs is one that is prepared under a quitting concern basis

and shows assets measured at fair values and classified as to their availability to satisfy the various liabilities such as fully secured, partially secured, unsecured, and unsecured with priority.

• A secured creditor is one that holds a mortgage, charge, or lien against the property of a

debtor for a debt due from that debtor. An unsecured creditor is one that holds a debt due from a debtor against which no property has been pledged.

10. A business organization can be declared bankrupt if:

(a) it makes an assignment of its assets for the benefit of its creditors; (b) it makes a proposal to its creditors under the jurisdiction of the Bankruptcy and Insolvency Act or under the provisions of the Companies' Creditors Arrangement Act, and the proposal is rejected;

Copyright  2005 McGraw-Hill Ryerson Limited. All rights reserved.622 Modern Advanced Accounting in Canada, Fourth Edition (c) a court grants a receiving order against it as a result of a petition filed by one or more of its creditors.

11. Yes, there is a difference. An insolvent person is one:

(a) who is not bankrupt but has liabilities in excess of $1,000, and (b) is unable to discharge these liabilities, or (c) whose assets measured at fair values are less than these liabilities.

A bankrupt person is one who under the provisions of the act:

(a) has made an assignment of assets for benefit of creditors, or (b) against whom a receiving order has been made.A bankrupt person is also usually insolvent, but an insolvent person is not necessarily bankrupt.

• A future tax liability probably would not appear on a statement of affairs. It is the result of

accounting for the difference between the carrying value and the tax basis of the company’s capital assets, and represents taxes that might be payable at some future date if certain future events occur. At the time of bankruptcy, it does not represent an amount owing to the government.

• The Official Receiver is a federal civil servant who oversees the administration of the

Bankruptcy and Insolvency Act in a bankruptcy division.A condition of receivership exists when, due to a violation of a debt covenant, a secured creditor has appointed an agent to seize the debtor's property pledged against that debt.A receiving order is the order granted by a court that renders a person bankrupt and allows a trustee to seize the bankrupt's assets.