James North and Leanne South have operated a small gardening

James North and Leanne South have operated a small gardening centre and landscaping business for the past 10 years. Their business is incorporated as a private corporation. Since there is no market price for their shares, their shareholder agreement states that in the event a shareholder decides to buy or sell their shares the amount will be based on four times shareholders’ equity. The company has a December 31 year-end.
For the past year, Leanne has been managing all operations and making all accounting policy decisions, as James decided he wanted a career change and went back to school. Last week they met for coffee, and James mentioned he wanted to invoke the shareholders’ agreement. He felt it unfair that Leanne was doing all the work but not getting all the profits. He has no intention of returning to the business; he loves school and is in fact contemplating setting up his own advertising agency. Besides, he said, on a personal note he needs the money to pay back his school loans and set himself up in his new career.
Leanne has been happy with being able to make all the decisions and wants to buy James out rather than get a new partner. She has negotiated with their bank to obtain a loan with a personal guarantee to make the buyout. She is a little nervous, however, about the risk of having a lot of debt.
You have been the accountant for the business since they started. You know both the owners well. This morning you had your usual year-end meeting with the bookkeeper to go over anything new so you can start to prepare their financial statements. The following are notes from your meeting:
1. During the year, a significant amount of inventory of garden gnomes and animal statues were written off. They had been sitting in the gardening centre for the past two years with only a few being sold each year. The bookkeeper said that Leanne thought it was time to write off their bad decision in investing in that inventory.
2. The business has never offered a warranty to go along with their trees and shrubs. All their competitors offer a one-year money-back guarantee. If a shrub or tree dies within a year of purchase, the money is refunded. Leanne decided in the fall it was time to implement a similar policy. The bookkeeper was told by Leanne to recognize warranty expense and set up an estimated liability based on their past history that approximately 5% from the sales of all trees and shrubs this year would need to be replaced based
on her best guess.
3. Another decision made this year by Leanne was to finally invest in some new computer equipment in the gardening centre. A new computer system was installed that keeps track of all sales in the stores, on-line ordering, inventory values, and all sorts of information Leanne feels will be very useful for future decisions on the direction the business should take. The other assets in the business all use straight-line depreciation. Leanne feels that since computer equipment can get obsolete very quickly it would be more appropriate to use declining balance, and proposes a 40% rate with full depreciation in year 1.
You have a meeting with Leanne at the end of the week to discuss the new accounting policies she has proposed.
James was invited to the meeting but he has a class on that date that he cannot miss.

Prepare briefing notes for your discussion with Leanne. Consider if the proposed policy is appropriate, consider valid alternatives, and provide a recommendation for each policy.

A. Voluntary accounting policy changeB. Involuntary accounting policy changeC. Change

A. Voluntary accounting policy change

B. Involuntary accounting policy change

C. Change in accounting estimate

D. Correction of an error

E. None of the above

_____ 1. This is the first year the company has incurred costs for development of a new product.

_____ 2. It was determined that an employee had been stealing inventory from the warehouse and this was not discovered until after year-end. The fraud had been concealed by adjusting inventory records.
_____ 3. Management decided to use the average cost for inventory instead of FIFO.
_____ 4. The number of years used for straight-line amortization was changed from 10 to 12.
_____ 5. Management decided to early adopt the revised Handbook section for financial instruments.


Use the letters given in the first list to indicate the type of accounting change appropriate for the examples on the second list.

You have recently being asked to participate in a symposium

You have recently being asked to participate in a symposium at an accounting conference. One of the sessions at the conference is discussing concerns with the conceptual framework. You have been provided with a number of questions ahead of time so that you can be prepared for the debate.

1. The first discussion topic relates to prudence. Prudence (conservatism) was dropped from the conceptual framework when it was amended in 2010. Are we not still conservative in accounting policies? Provide some specific examples. The Exposure Draft recommends reintroduction of the term prudence, stating that it supports neutrality. The new definition of prudence would be the concern that assets and income not be overstated and expenses not beunderstated. Do you agree?

2. The second discussion topic relates to the question of how to measure assets and liabilities. What are the pros and cons of the use of historical costs compared to current values? Which method is more relevant for the statement of financial position compared to the income statement for users? Are certain types of assets more suited to the use of current values?

3. The final discussion topic relates to other comprehensive income (OCI) and comprehensive income. What is a concern with OCI and comprehensive income? Do you think OCI is useful? If so, in which situations?

In preparation for the symposium prepare notes to address the questions that might be asked concerning the conceptual framework.

You have been asked to prepare the financial statements for

You have been asked to prepare the financial statements for Neema Corp., a private Canadian corporation, for the year ended 31 December 20X4. The company began operations in early 20X4. The following information is available about its business activities during the year:

a. On 2 January, Neema issued no par common shares for $300,000.

b. On 3 January, machinery was purchased for $255,000 cash. It was estimated to have a useful life of 10 years and a residual value of $40,000. Management is considering using either the straight line amortization method or the declining balance method at twice the straight line rate.

c. On 4 January, Neema purchased 20% ownership in a long term investment, ABC Co., for $45,000. During the year, ABC paid dividends of $1,750 and earned net income of $8,000. Neema can use either the cost method or the equity method of accounting for its investment in ABC.

d. Inventory purchases for the year were, in order of acquisition:

Neema uses a periodic inventory system. There were 25,000 units in ending inventory on 31 December. Management is considering whether to use FIFO or weighted average as the inventory accounting method.

e. Sales during the year were $1,500,000, of which 90% were on account and 10% for cash.

f. Management has estimated that approximately 1% of sales on account will be uncollectible. During the year, $1,035,000 was collected on accounts receivable. When management scrutinizes the year end outstanding accounts, it estimates that approximately 6% of the accounts will prove uncollectible.

g. Additional operating expenses for the year were $550,000.

h. On 31 December, the company paid a $5,000 cash dividend on common shares.

i. On 31 December, accounts payable pertaining to operating expenses and inventory purchases totalled $154,000.

j. The cash balance on 31 December was $102,000.


1. Choosing from the alternative accounting policies described above, prepare a single step income statement for the year ended 31 December 20X4 that will produce the lowest net income.

2. What ethical implications are to be considered when selecting from among alternative accounting policies?

A manager of a medium-sized private company recently asked for

A manager of a medium-sized private company recently asked for your advice on the following:
I’m very confused about whether I should continue to use ASPE or change to IFRS. I need to make a recommendation to the Board next week on what we should do. Our bank is a Canadian one and we have a debt-to-equity ratio. Our two major competitors in the market place are public companies. We have no desire to go public in the near future, but the owners have been talking about possibly selling the business within the next five years.


Respond to the manager’s concern, and be sure to provide support for both sides and a recommendation.

Paint Inc. (PI) has been operating as a family owned

Paint Inc. (PI) has been operating as a family owned private company for the past 30 years. It started as a company manufacturing paint for sale in its own retail stores in Ontario. PI is known as a manufacturer of high quality paint. Since then it has expanded with stores across Canada and recently started a decorating business. It has no desire to go public at this point in time and wants to keep accounting costs as low as possible.

With the recent real estate boom and new housing, the company has been very profitable for the past few years. PI has a loan with Canadian Bank. The bank requires audited financial statements and has a maximum debt to equity ratio.

You have recently been hired as an accounting consultant to assist PI’s board of directors. You have been asked to develop appropriate accounting policies for events that have occurred during 20X5. The board has asked that you explain fully your analysis for your recommendations. PI has a 31 December year end.

1. Individuals can purchase paint in the store or order on line. If they order on line they must pay by credit card. Contractors and real estate developers can purchase paint directly at the warehouse in bulk and receive a 15% to 25% discount depending on the quantity they purchase. They also have 30 days in which to pay. The paint provides a three month money back guarantee.

2. In the summer of 20X5, to encourage use of their new decorating services, PI offered customers a special deal. With the purchase of $200 of paint they received one hour of consulting advice from the decorator for free. Normally, the fee for the decorating service is $75 an hour. This deal was very popular with many customers purchasing additional services from the decorator beyond the one hour for free.

3. On 1 April 20X5, PI announced it was going to sell one of its older manufacturing facilities including all of the equipment. This facility will be replaced in a new location with a brand new, fully computerized, state of the art facility. The new facility will be operational in the spring of 20X6. Until that time PI will continue to manufacture in the existing facility. The facility has been listed at a reasonable price. The carrying amount of the facility and equipment is $1,000,000 with a fair value of $850,000. The land has a carrying amount of $200,000 and a fair value of $1,200,000.

4. In 20X5, PI traded a piece of excess land they owned for a potential new store for some manufacturing equipment for the new facility. The land had a carrying amount of $80,000, but three real estate appraisals estimated the fair value to be $500,000. The equipment was specially manufactured for PI and is unique.

5. In 20X5, PI sold a large quantity of paint to a board member who owns a new housing development. The paint was sold to the director for cash and the director was given a 25% discount and 30 days to pay.

6. In February 20X6, PI was informed that one of its building contractors went bankrupt and will not be able to pay an outstanding receivable of $80,000. This receivable was not considered in determining their allowance for bad debts for 20X5.


Prepare the report.

The following transactions have been encountered in practice. Assume that

The following transactions have been encountered in practice. Assume that all amounts are material.

a. A company decided to put the assets of one product line up for sale (intended to be sold within next year) because management had decided to outsource production of that product to Mexico. The company established a plan of sale and engaged an industrial broker. The assets consisted of inventory with a carrying value of $80,000 and equipment with a carrying value of $840,000. The estimated recoverable amount was $60,000 for the inventory and $560,000 for the equipment, before deducting a 5% broker’s commission.

b. A company suffered damages due to heavy snow accumulation and an ice storm that caused one of their warehouses to collapse amounting to $800,000. The company has had damages due to heavy winds ripping off the roof of one of their warehouses but never due to an ice and snow storm.

c. A company paid $225,000 damages assessed by the courts as a result of an injury to an employee while working on heavy machinery two years earlier.

d. A company sold a capital asset and recorded a gain of $50,000. The asset originally had a carrying value of $660,000 but had been written down to $500,000 in the prior year.

e. A major supplier of raw materials to a company experienced a prolonged strike. As a result, the company reported a loss of $250,000. This is the first such loss; however, the company has three major suppliers, and strikes are not unusual in the industry. With the economic downturn it is anticipated that more strikes are likely next year.

f. A Canadian company owns a majority of the shares of a publicly traded subsidiary in India. The shares have been held for a number of years and are viewed as long term investments. During the past year, 10% of the shares were sold to meet an unusual cash demand. Additional disposals are not anticipated. In the process of translating the subsidiary’s financial statements from rupees to the Canadian dollar, a translation adjustment arose from exchange rate changes that had occurred over the year.


For each of the foregoing transactions, explain how financial statement elements will be affected and how the results of the transactions and events should be reported in each company’s year end financial statements.

Marcella Ltd. (ML) is a Northern Ontario based manufacturer of

Marcella Ltd. (ML) is a Northern Ontario based manufacturer of building materials. In the fourth quarter of 20X1, ML’s board of directors agreed with senior management that the company needed to restructure its operations so as to be more competitive, as competition from abroad was intensifying. Therefore, the board reviewed and accepted management’s recommendations for the following series of actions:

a. Production of insulation products will cease. Instead, a western company will be contracted to supply insulation products that will be sold under ML’s label. ML’s insulation production equipment will be sold, assuming a buyer can be found; if no buyer can be found, the facilities will be scrapped. The current carrying value of the facilities is $1,800,000. ML’s production manager estimates that the equipment could be sold for about $750,000, provided that ML paid the dismantling (estimated at $50,000) and shipping costs (which would depend on the location of the buyer).

b. The 12 employees currently involved exclusively in insulation production will be given eight weeks’ severance pay. The average wage is $950 per week. Six other employees only partly involved in the insulation division will be assigned to other duties within the organization.

c. The production processes in the adhesives division will be modernized and streamlined. Computer controlled mixing will be introduced for more consistent product quality. The upgrade has been priced at $2,200,000. Employee retraining will be required, which will cost an additional $180,000. The old equipment will be dismantled and the salvage sent for recycling.

By the end of 20X1, the employees of the insulation division had been notified of the outsourcing of insulation products and the planned shutdown of production. Management set 20 April 20X2 as the changeover to outsourcing. Of course, the restructuring plan had become public knowledge by that time, a development that was causing some agitation in the provincial government. By 20X1 year end, ML had entered into a contract for supplying the new computerized equipment for adhesives mixing; the value of the contract was $1,250,000 and ML had paid a 10% advance to the supplier. Other equipment (estimated to cost $620,000) had not yet been ordered, although a nonbinding memorandum of agreement had been
reached with a supplier.

Assume that ML is a public company. How would the events described above be reported in its financial statements at the end of 20X1? Be specific.

Golf Inc. is a public company that has been in

Golf Inc. is a public company that has been in business since the 1980s. It owns and operates over 40 golf courses across Canada. It also owns and operates pro shops and dining facilities. On 1 November 20X4 GI announced it was going to sell three of its golf courses that were underperforming. They have had declining memberships over the past couple of years. GI is currently looking for a buyer. The asking prices are reasonable, and real estate agents expect that the courses will be sold before the spring of next year. The carrying amount of the land is $50,000 but the fair market value is $750,000. The equipment, for example golf carts, has a carrying amount of $600,000 and a fair market value of $450,000. GI has a December 31 year end.


How would GI account for the disposal of the three golf courses? Explain the impact on the financial statements.

Loschiavo Ltd. (LL) has a 31 December fiscal year end.

Loschiavo Ltd. (LL) has a 31 December fiscal year end. LL disposed of its Computer Programming Group (CPG) on 31 July 20X3. CPG had a net loss (after taxes) of $18,850,000 in 20X3, to the date of disposal. The division was sold for $237,800,000 in cash plus future royalties through 31 May 20X4, which were guaranteed to be $10,000,000. The minimum guaranteed royalties were included in the computation of the 20X3 gain on the sale of the division. Actual royalties received in 20X4 were $15,000,000. Excerpts from comparative income statements found in the 31 December 20X4 financial statements are as follows:

1. Determine the net book value of CPG at the date of disposal.

2. Why does LL report a gain on the sale of the discontinued operation of $2.2 million in the year ending 31 December 20X4?

3. LL reports an after tax loss from discontinued operations of $18.8 million for the year ending 31 December 20X3. Over what period was the loss accrued?