ADMS 3595 Lecture Notes - Lecture 6: Share Capital, Historical Cost, Gross Margin
ADMS 3595 Solutions to Self Practice Questions
1
BRIEF EXERCISE 23-10
The accounting problems related to the presentation of interim data include:
(a) Changes in accounting.
(b) The difficulty of allocating costs, such as income tax, pensions, to the proper quarter.
(c) Presentation of earnings per share (EPS) figures.
(d) Seasonality.
(e) Auditor’s involvement in interim reports.
BRIEF EXERCISE 23-11
Seasonality affects interim reports when wide fluctuations in profits occur because off-season
sales do not absorb the company’s fixed costs. These costs often tend to remain fairly constant
regardless of sales or production.
Revenues and expenses must be recognized and accrued when they are earned or incurred
according to IFRS. Companies can only defer recognition of costs or revenues when it is
appropriate to do so. Deferral of costs is not appropriate unless the costs meet the definition of
an asset. (Note: ASPE does not contain any guidance for reporting segmented information or
interim reporting.)
It is difficult to completely overcome the problem of seasonality, but disclosure as to the nature of
the seasonality factors that face the business and the pattern of revenues and expenses
(including comparative data) may help users of the financial statements to understand whether
seasonality is an adverse issue in any particular case.
The effects of seasonality would be the same for companies following IFRS and ASPE, except
that the level of disclosure would be enhanced for those using IFRS.
BRIEF EXERCISE 23-13
This is a related party transaction since the same individual owns the two companies. Since the
transaction is not in the normal course of business, there is no commercial substance, and there
is no beneficial change in ownership in the assets, the transaction would be recorded at the
carrying amounts of the assets involved.
Fibreright Corp.
Equipment (new) ............................................................................ 15,100
Accumulated Depreciation–Equipment* ......................................... 9,000
Equipment (old) .................................................................. 20,000
Contributed Surplus ............................................................ 4,100
*($20,000 - $11,000)
Frederick Corp.
Equipment (new) ............................................................................ 11,000
Accumulated Depreciation–Equipment* ......................................... 19,900
Retained Earnings ......................................................................... 4,100
Equipment (old) .................................................................. 35,000
*($35,000 - $15,100)
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ADMS 3595 Solutions to Self Practice Questions
2
Under ASPE, certain related-party transactions must be remeasured to the carrying amount of
the underlying assets or services that were exchanged. This is the case if the transaction is not
in the normal course of business, there is no substantive change in ownership, and/or the
exchange amount is not supported by independent evidence. Transactions that are in the normal
course of business that have no commercial substance must also be remeasured, and where the
transaction is also a non-monetary transaction, no gain or loss should be recognized. Note
however, that IFRS does not mandate remeasurement of related-party transactions.
BRIEF EXERCISE 23-14
This transaction is a non-monetary exchange. Since the equipment performs different functions
the transaction would be considered to have commercial substance. The transaction would
therefore be measured at the exchange amount.
Fibreright Corp.
Equipment (new) ............................................................................ 20,800
Accumulated Depreciation–Equipment* ......................................... 9,000
Equipment (old) .................................................................. 20,000
Gain on Disposal of Equipment .......................................... 9,800
*($20,000 - $11,000)
Frederick Corp.
Equipment (new) ............................................................................ 20,800
Accumulated Depreciation–Equipment* ......................................... 19,900
Equipment (old) .................................................................. 35,000
Gain on Disposal of Equipment .......................................... 5,700
*($35,000 - $15,100)
EXERCISE 23-1
Providing additional information to financial statement users to make the information comparable
to other companies in the same industry, while useful, should not be included in the notes to the
financial statements.
The notes to the financial statement are intended to explain and help interpret the information that
is presented in the financial statements. The controller’s suggested additional disclosure would
report “as if” financial results and inventory position had Cambosa prepared its financial
statements under an alternate set of assumptions (known as “pro-forma”) and policies. This pro-
forma information is not a reflection of the actual policies and performance of the business and
should be excluded from the financial statements.
The discussion of the comparison of results to others in the industry and the impact of FIFO versus
LIFO on performance and position could be mentioned in the president’s letter to the shareholders
or elsewhere in the annual report such as in the unaudited Management Discussion and Analysis
(other than in the financial statements).
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ADMS 3595 Solutions to Self Practice Questions
3
EXERCISE 23-6
(a) The transaction is not in the normal course of operations and the transaction has
commercial substance:
Verez Limited:
Machinery (new) ......................................................................
700
Accumulated Depreciation–Machinery* ....................................
6,100
Retained Earnings....................................................................
200
Machinery (old) .............................................................
7,000
*($7,000 - $900)
Consior Inc. :
Machinery (new) ......................................................................
900
Accumulated Depreciation–Machinery* ......................................
24,300
5,300
Contributed Surplus ......................................................
200
Machinery (old) .............................................................
6,000
*($6,000 - $700)
Since the transaction is not in the normal course of operations for the two companies and
there is no change in the ownership interest in the machinery, the transaction is measured
at its carrying amount.
(b) The transaction is not in the normal course of operations and the transaction does not have
commercial substance:
The entries are the same as for part (a). Since the transaction is not in the normal course of
operations for the two companies and there is no change in the ownership interest in the
machinery, the transaction is measured at its carrying amount regardless of whether the
transaction has commercial substance or not.
A related party transaction that is not in the normal course of operations requires additional
support for the substance of the transaction in order for the exchange amount to be used
for financial reporting purposes. This is considered to occur when a change in the ownership
interests in the item transferred is substantive and the exchange is supported by
independent evidence.
In this case, the exchange amount is more representative of the economic reality of the
transaction than the carrying amount and is sufficiently reliable to be used for financial
reporting purposes.
(c) The transaction is in the normal course of operations and the transaction has commercial
substance:
Verez Limited:
Machinery (new) .......................................................................
1,000
Accumulated Depreciation–Machinery* ....................................
6,100
Gain on Disposal of Machinery .....................................
100
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Document Summary
The accounting problems related to the presentation of interim data include: The difficulty of allocating costs, such as income tax, pensions, to the proper quarter. (a) changes in accounting. (b) (c) presentation of earnings per share (eps) figures. (d) seasonality. (e) auditor"s involvement in interim reports. Seasonality affects interim reports when wide fluctuations in profits occur because off-season sales do not absorb the company"s fixed costs. These costs often tend to remain fairly constant regardless of sales or production. Revenues and expenses must be recognized and accrued when they are earned or incurred according to ifrs. Companies can only defer recognition of costs or revenues when it is appropriate to do so. Deferral of costs is not appropriate unless the costs meet the definition of an asset. (note: aspe does not contain any guidance for reporting segmented information or interim reporting. )
