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Explain how multiple-deliverable arrangements are measured and reported.
Explain a multiple-deliverable arrangement. What is the major accounting issue related to these arrangements?
What is the nature of a sale on consignment?
Explain a principal-agent relationship and its significance to revenue recognition.
What are the reporting issues in a sale and buyback agreement?
What are the reporting issues in a sale and buyback agreement?
Under what conditions may a seller who is exposed to continued risks of a high rate of return of the product sold recognize sales transactions as current revenue?
What are the three alternative accounting methods available to a seller that is exposed to continued risks of ownership through return of the product?
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What is the proper accounting for volume discounts on sales of products?
When is revenue recognized in the following situations:(a) Revenue from selling products? (b) Revenue from services performed? (c) Revenue from permitting others to use enterprise assets? (d) Revenue from disposing of assets other than products?
What are the criteria to recognize revenue?
What is viewed as a major criticism of GAAP as regards revenue recognition?
Explain the current environment regarding revenue recognition.
Union Planters is a Tennessee bank holding company (that is, a corporation that owns banks). (Union
\r\nPlanters is now part of Regions Bank.) Union Planters manages $32 billion in assets, the largest of which is its loan portfolio of $19 billion. In addition to its loan portfolio, however, like other banks it has significant debt investments. The nature of these investments varies from short-term in nature to long-term in nature. As a consequence, consistent with the requirements of accounting rules, Union Planters reports its investments in two different categories—trading and available-for-sale. The following facts were found in a recent Union Planters’ annual report.
\r\nGross Gross
\r\nAmortized Unrealized Unrealized Fair
\r\n(all dollars in millions) Cost Gains Losses Value
\r\nTrading account assets $ 275 — — $ 275
\r\nSecurities available for sale 8,209 $108 $15 8,302
\r\nNet income 224
\r\nNet securities gains (losses) (9)
\r\nInstructions
\r\n(a) Why do you suppose Union Planters purchases investments, rather than simply making loans? Why does it purchase investments that vary in nature both in terms of their maturities and in type (debt versus stock)?
\r\n(b) How must Union Planters account for its investments in each of the two categories?
\r\n(c) In what ways does classifying investments into two different categories assist investors in evaluating the profitability of a company like Union Planters?
\r\n(d) Suppose that the management of Union Planters was not happy with its net income for the year. What step could it have taken with its investment portfolio that would have definitely increased reported profit? How much could it have increased reported profit? Why do you suppose it chose not to do this?
Instructions
\r\nGo to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc.
\r\n(a) Based on the information contained in these financial statements, determine each of the following for each company.
\r\n(1) Cash used in (for) investing activities during 2011 (from the statement of cash flows).
\r\n(2) Cash used for acquisitions and investments in unconsolidated affiliates (or principally bottling companies) during 2011.
\r\n(3) Total investment in unconsolidated affiliates (or investments and other assets) at the end of 2011.
\r\n(b) (1) Briefly identify from Coca-Cola’s December 31, 2011, balance sheet the investments it reported as being accounted for under the equity method. (2) What is the amount of investments that Coca-Cola reported in its 2011 balance sheet as “cost method investments,” and what is the nature of these investments?
\r\n(c) In its Note 2 on Investments, what total amounts did Coca-Cola report at December 31, 2011, as:
\r\n(1) trading securities, (2) available-for-sale securities, and (3) held-to-maturity securities?
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The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marksand- Spencer-Annual-report-and-financial-statements-2012.pdf.
\r\nInstructions
\r\nRefer to M&S’s financial statements and the accompanying notes to answer the following questions.
\r\n(a) What investments does M&S report in 2012, and where are these investments reported in its financial statements?
\r\n(b) How are M&S’s investments valued? How does M&S determine fair value?
\r\n(c) How does M&S use derivative financial instruments?
Your client, Cascade Company, is planning to invest some of its excess cash in 5-year revenue bonds issued by the county and in the shares of one of its suppliers, Teton Co. Teton’s shares trade on the over-the-counter market. Cascade plans to classify these investments as trading. They would like you to conduct some research on the accounting for these investments.
\r\nInstructions
\r\nAccess the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)
\r\n(a) Since the Teton shares do not trade on one of the large securities exchanges, Cascade argues that the fair value of this investment is not readily available. According to the authoritative literature, when is the fair value of a security “readily determinable”?
\r\n(b) How is an impairment of a debt investment accounted for?
\r\n(c) To avoid volatility in their financial statements due to fair value adjustments, Cascade debated whether the bond investment could be classified as held-for-collection; Cascade is pretty sure it will hold the bonds for 5 years. What criteria must be met for Cascade to classify it as held-for-collection?
Komissarov Company has a debt investment in the bonds issued by Keune Inc. The bonds were purchased at par for $400,000 and, at the end of 2014, have a remaining life of 3 years with annual interest payments at 10%, paid at the end of each year. This debt investment is classified as held-for-collection. Keune is facing a tough economic environment and informs all of its investors that it will be unable to make all payments according to the contractual terms. The controller of Komissarov has prepared the following revised expected cash flow forecast for this bond investment.
\r\nDec. 31 Expected Cash Flows
\r\n2015 $ 35,000
\r\n2016 35,000
\r\n2017 385,000
\r\nTotal cash flows $455,000
\r\nInstructions
\r\n(a) Determine the impairment loss for Komissarov at December 31, 2014.
\r\n(b) Prepare the entry to record the impairment loss for Komissarov at December 31, 2014.
\r\n(c) On January 15, 2015, Keune receives a major capital infusion from a private equity investor. It informs Komissarov that the bonds now will be paid according to the contractual terms. Briefly describe how Komissarov would account for the bond investment in light of this new information.
On December 21, 2014, Zurich Company provided you with the following information regarding its trading investments.
\r\nDecember 31, 2014
\r\nInvestments (Trading) Cost Fair Value Unrealized Gain (Loss)
\r\nStargate Corp. shares $20,000 $19,000 $(1,000)
\r\nCarolina Co. shares 10,000 9,000 (1,000)
\r\nVectorman Co. shares 20,000 20,600 600
\r\nTotal of portfolio $50,000 $48,600 $(1,400)
\r\nPrevious fair value adjustment balance –0–
\r\nFair value adjustment—Cr. $ (1,400)
\r\nDuring 2015, Carolina Company shares were sold for $9,500. The fair value of the shares on December 31, 2015, was Stargate Corp. shares—$19,300; Vectorman Co. shares—$20,500.
\r\nInstructions
\r\n(a) Prepare the adjusting journal entry needed on December 31, 2014.
\r\n(b) Prepare the journal entry to record the sale of the Carolina Company shares during 2015.
\r\n(c) Prepare the adjusting journal entry needed on December 31, 2015.
Assume the same information as in IFRS17-12 except that Roosevelt has an active trading strategy for these bonds. The fair value of the bonds at December 31 of each year-end is as follows.
\r\n2014 $534,200 2017 $517,000
\r\n2015 $515,000 2018 $500,000
\r\n2016 $513,000
\r\nInstructions
\r\n(a) Prepare the journal entry at the date of the bond purchase.
\r\n(b) Prepare the journal entries to record the interest received and recognition of fair value for 2014.
\r\n(c) Prepare the journal entry to record the recognition of fair value for 2015.
On January 1, 2014, Roosevelt Company purchased 12% bonds, having a maturity value of $500,000, for $537,907.40. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2014, and mature January 1, 2019, with interest receivable December 31 of each year. Roosevelt’s business model is to hold these bonds to collect contractual cash flows.
\r\nInstructions
\r\n(a) Prepare the journal entry at the date of the bond purchase.
\r\n(b) Prepare a bond amortization schedule.
\r\n(c) Prepare the journal entry to record the interest received and the amortization for 2014.
\r\n(d) Prepare the journal entry to record the interest received and the amortization for 2015.
Use the information from IFRS17-10 but assume the shares were purchased to meet a non-trading regulatory requirement. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.
Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment for $13,200. During the year, Sherman paid a cash dividend of $3.25 per share. At year-end, Sherman shares were selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment.
Carow Corporation purchased, as a held-for-collection investment, $60,000 of the 8%, 5-year bonds of Harrison, Inc. for $65,118, which provides a 6% return. The bonds pay interest semiannually.
\r\nPrepare Carow’s journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization.
Ramirez Company has a held-for-collection investment in the 6%, 20-year bonds of Soto Company.
\r\nThe investment was originally purchased for $1,200,000 in 2013. Early in 2014, Ramirez recorded an impairment of $300,000 on the Soto investment, due to Soto’s financial distress. In 2015, Soto returned toprofitability and the Soto investment was no longer impaired. What entry does Ramirez make in 2015 under (a) GAAP and (b) IFRS?
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