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Intermediate Financial Accounting Course Review

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Double-Declining Depreciation

  • Double the depreciation rate of Straight Line method
  • (1/# of years)  x 2

Chapter 13: Current Liabilities and Contingencies

  • Interest bearing notes: charge against interest expense to interest payable
  • Non-interest bearing notes: charge against interest expense to notes payable
  • Sales tax:
  • PST is not recoverable
  • GST and HST are recoverable
  • Provisions
  • Expense method: set up warrant liability, charge expenses against it
  • Revenue method: create unearned warranty revenue and charge against that every year to warranty revenue and expense expenses

Chapter 14: Long-Term Financial Liabilities

  • Entry for issuance of bond

DR. Cash

        Cr. Bonds payable

  • Amortizing bond premium discount:
  • Straight line method
  • Journal entry for discount:

Add/subtract to bonds payable, offset interest expense

  • Effective interest method
  • Period interest expense = carrying value x market rate
  • Amount to amortize is Interest paid – interest expense
  • No straight line under IFRS
  • Bond issue costs:
  • Subtract issues costs from PV, recalculate interest rate
  • Extinguishment of Debt
  • Need to recognize gain/loss if early
  • Debt modifications:
  • Substantial if PV (using original eff. Rate) is 10% different
  • Recognize gain or loss
  • Minor:
  • No gain or loss
  • Find new effective rate using original PV and new flows
  • ARO:
  • Journal entries
  • Find PV of ARO
  • Add ARO to asset
  • Depreciation expense for ARO charge to zero
  • Interest expense ARO balance to add to ARO balance
  • End with ARO Dr. and Credit cash plus gain/loss

Chapter 15: Shareholder’s Equity

  • Issuing shares at par value  anything over is contributed surplus
  • Shares sold by subscription:

Dr. Subscription receivable

        Cr. Shares subscribed

Dr. Cash

        Cr. Subscriptions Receivable

Dr. Shares subscribed

        Cr. Common shares

  • More than 1 type of security, how to allocate?
  • Relative fair value: proportionate to total
  • Residual value: value and allocate first and proceed
  • Share issue costs: Credit share capital for amount
  • Journal entry for dividend when declared

DR. Dividends (Cash)

        Cr. Dividend Payable

  • Cash Dividend amount preferred by rate on book value of shares
  • Stock dividend amount calculated on fair value, not book value

Stock dividend JE:

DR. Dividend (Stock)

        Cr. Common Shares

→ This is just a rearrangement within the equity category

Chapter 16: Complex Financial instruments

Measurement: IFRS requires fair value method; ASPE allows both (easier first)

  • Convertible Debt Issue Example:
  • Find PV of bond using market IR PMT  difference from par is contributed surplus (conversion rights)


        Bonds Payable

        Contributed Surplus (conversion rights)

When convertible debt is converted, need to cancel contributed surplus (conversion rights)

  • Induced conversion:

Bonds Payable

Loss (FV-carrying value)

Contributed Surplus – conversion rights

RE (premium minus the loss)

        Common shares


  • Normal retirement:

Bonds Payable

Contributed surplus – conversion rights

        Contributed surplus – conversion rights expired


  • Early retirement:

Bonds Payable

Expense – Debt Retirement

Contributed surplus – conversion rights



  • Derivatives:
  • Recognize gains and losses (in net income), treat as asset
  • Forwards:
  • Measured at fair value
  • Recognize gain and loss on derivative asset/liability
  • Futures:
  • Same as forwards but exchange traded  readily available market value
  • Purchase commitment:
  • Not treated as derivative if company intends to take delivery of goods
  • Direct stock award:
  • Fair value compensation expense, allocated over service period
  • Options:
  • Compensation expense: determined at grant date and allocated over required service period

DR. Compensation expense

        Cr. Contributed Surplus – stock options

  • CSOP JE:


Contributed surplus – stock options

        Common shares

  • ESOP JE:

Treated like investment transaction

Dr. Cash

        Cr. Contributed surplus – stock options

Dr. Cash

Dr. Contributed surplus – stock options

        Cr. Common shares

CSOP is expensed, ESOP receive cash for contributed surplus – stock options
Chapter 17: EPS

  • Simple capital structure:
  • EPS=(Net Income – Preferred Shares)/(Weighted avg. # of shares)
  • Calculate weighted avg. # of shares:
  • Levels (amounts): portion of year outstanding * amount
  • Layers (changes): BB*12/12 + each change *months outstanding
  • If common shares will be issued in the future, assume already taken place (includes passage of time)
  • Complex capital structure:
  • Diluted EPS=(Net Income avail. +Income from potential dilution)/(weighted avg. # of shares plus share dilution)
  • Only apply if lowers EPS
  • For each dilutive instrument
  • Find after tax add. To net income/dilution = EPS ranked lowest to highest and apply sequentially
  • Options and warrants
  • Treasury stock method:
  • Use cash from issue to buy back shares  net new shares issued
  • Reverse treasury stock method (put options):
  • Issue shares to raise enough cash to buy shares  net new shares
  • Dilutive EPS:
  • If options in money, exercise to find new EPS
  • Calculate stand alone EPS on convertible bonds and preferred
  • Rank, and add if lowering, stop if gets to greater
  • If negative EPS, all dilutive are deemed antidilutive

Chapter 18: Income Taxes



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