Solution manual for business activity model 3rd edition by catanach

viINDEX Introduction Presentation to Students on Business Activity Model 1 Requirement 2 Year 1 Correcting Entries and Financial Statements 7 Requirements 6 and 7 Asset Acquisition

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TABLE 1 TOPICAL COVERAGE

Accrued Revenues and Expenses

Revenue Recognition

Repairs and Maintenance vs

Additions

Optional Proof

of Cash

Preferred Stock-Company Goes Public

Change in Depreciation Method

LIFO vs FIFO LIFO Liquidation

Start-up Costs

Allowance for D/A and Bad Debt Expense

Capital Leases

Repairs and Maintenance vs

Replacements

Dividend Allocation

Warranty Expense

Overhead Allocation to Inventory

Accounting for NOLs

PPE and Depreciation Methods

Investment Securities

Equity Method Securities

Change from Equity Method

to Cost Method

Business Combination

Research and Development

Intangible Asset (License)

Capitalized Interest

Pension Accounting

LCM Inventory Valuation

Freight Allocation

Goodwill and Impairment

New Deferred Taxes

Common Stock

Deferred Taxes

New Deferred Taxes

Inventory Cut-Off Errors

Segment Reporting Stock Split

Correction of Error

EPS Calculations

Notes Payable, Interest Accrual, Covenants

Permanent Tax Difference

Audit vs

Review

Two-Class and Diluted EPS

Optional Non-monetary Transactions

F/S Restatement Complete Set of

F/S with Note Disclosures

Comparative F/S with New Disclosures

New Disclosures

Review vs

Audit

Present Value Calculations

Other Comprehensive Income

Optional Tax Return

Optional Construction Accounting The Optional Take-Home Assignments cover additional areas including Bonds,

Stock Options, Derivatives, and Asset Impairments

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vi

INDEX

Introduction Presentation to Students on Business Activity Model 1

Requirement 2 Year 1 Correcting Entries and Financial Statements 7

Requirements 6 and 7 Asset Acquisition Costs and Interest Capitalization 17

Optional Assignment Income Tax Accounting Review 25

Traditional Lecture Inventory and Investments 59

Optional Assignment Proof of Cash and Tax Return for Year 4 78

Requirements 14 and 15 Dividend Allocation Exercise and Year 5 Student

Group Questions

81

Optional Assignment Tax Return for Year 5 102

Requirements 19 and 20 Inventory Costing and Non-Monetary Transactions 121

Optional Assignment Tax Return for Year 6 128

Requirements 23 and 24 Change in Revenue Recognition Method 142

Other Optional Assignments Stock Options, Financial Instruments (Derivatives),

Asset Impairments, etc

142

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INTRODUCTION

HANDOUTS:

Course syllabus

COURSE REFERENCE TEXT:

Refer students to text required or recommended for the course together with any supporting materials (e.g Business Activity Model CD Rom, etc.)

SYNOPSIS:

This class session introduces students to the Business Activity Model (BAM) approach

to intermediate financial accounting The instructor should discuss the BAM's goals and objectives and provide information on how to access requirements The instructor should emphasize that students will be required throughout the semester to refer to actual pronouncements issued by the various accounting standard-setting bodies Access to these materials will be provided at a later date Emphasize that the text will only be used as a reference tool and will not “drive” the course

Use this time to clearly explain what is required of the students from the BAM

Specifically, remind students that their course responses should not be superficial, but in-depth, as if they were dealing with a real client Emphasize the importance of group work and research for analysis

During this period, the instructor should display the usage of any additional course software or materials that may be used to complement the Business Activity Model

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REQUIREMENT 1 CLASSROOM TOOLS:

Power Point file Hydromaint Year 1 (Hydro_Y1)

CONTENT CHANGES IN 3D EDITION:

Unearned revenue related to maintenance contracts has been removed from Year 1 A valuation allowance has been added for the NOL tax asset created by the first year’s net operating loss A variety of numbers have been changed throughout all the

transactions

SYNOPSIS:

This is the first class specifically devoted to the Business Activity Model The instructor will find it useful to give students a brief description of the business in which

Hydromaint operates: hydraulic maintenance A simple discussion of how the local water system operates is usually sufficient to give students an adequate understanding

of the business

The major activity of this class is students presenting questions that they developed based on their conduct of an analytical review of client prepared financial statements and ledgers Remind the students that a “review of financial statements” requires performing inquiry and analytical procedures to obtain a reasonable basis for

expressing limited assurance that financial statements conform with generally accepted accounting principles

When teaching this section, it is important that students ask in-depth questions These questions also must be crafted and presented in a manner that is appropriate for

clients, not just the classroom If the questions are superficial the instructor should query and guide the groups to ask questions at an appropriate level

If groups have difficulty identifying accounting issues and creating questions, the

following questions and approaches are useful in stimulating student thinking:

1 Flip through the basic set of financial statements Do you notice anything

missing (EPS disclosure, statement of cash flows, common stock disclosures)?

Is there anything there that should not be there?

2 Is there anything in the financial statements that seems contradictory with the information in the materials?

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Students are expected to develop the following questions for Requirement 1

Instructors may wish to refer students to specific pages of their text if access to

authoritative literature is limited or not available The answers to the following

questions will be provided to students in Requirement 2

If this question proves difficult for students, ask them to identify the main source of cash flow to Hydromaint (collections from service contracts) and the biggest threat to its continued receipt Has this risk been considered? What authoritative cites govern our disclosure of allowance accounts (SFAS No 5 and APB No 12)?

If students do not identify this question, have them look at the journal and ask them to identify any potential expenses that really represented the purchase of assets Then ask them how likely it is that every supply item was actually used during the fiscal

period Note that the client probably missed this adjusting entry at the end of the

period

Ask the students if they are concerned that over 40% of total assets are intangible in nature What implications does this have for your review of these costs? Are these costs handled the same way on the statements? Ask the students what literature is available to guide them in their analysis of these costs

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The AICPA issued Statement of Position 98-5, Reporting on the Costs of Start-Up

Activities, in April of 1998 that requires all costs of start-up and organization to be

expensed as incurred Licensing costs (similar to franchise rights) are intangible

assets whose costs should be amortized over the life of the license

Ask students if they believe service income recognition has been appropriate? Make sure they understand how the client has recorded revenue Specifically, all of the contract revenue has been recognized Ask them what disclosures are necessary for such contracts and what the authoritative cite is for these disclosures

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6 What are the terms of your lease or rental agreements? I need to determine whether any of

them should be capitalized

On 1/1/20X1 we executed a five-year lease on our office building and shop; the rent is

$36,000 per year payable on each 1/1 and is allocated $30,000 to the shop and $6,000

to the office The cost of a similar building with office and shop is around $400,000 The useful life of the building is 20 years

Crew trucks are rented at $100/day, with no fixed term

On 1/1/20X1 we also signed a five-year lease on office furniture and equipment for

$5,000 per year payable on each 1/1 The useful lives of these items approximate 10 years The cost to buy this furniture and equipment would be about $27,000

None of the above leases required a deposit.

To provoke this question, ask the students what the second largest expense is for Hydromaint (after wages) What accounting issues are related to this expenditure? What information do you need from the client to address these issues? Ask the

students to tell you what the authoritative literature is for these issues What type of leases are these and what are the criteria for determining capital leases from operating leases?

SFAS No 13 provides guidance on operating and capital lease accounting and

disclosure Remind the students that lease issues will affect the balance sheet, income statement, and note disclosures

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If students have difficulty with this question, ask them to look at the balance sheet to determine if the equity disclosures are complete Ask them to tell you about the

shareholders using the information on the client prepared balance sheet only What are the authoritative sources for the required disclosures?

See SFAS No 129 Disclosures need to show shares authorized, issued, and

outstanding Tell them that we are going to show this in the notes to the financial

statements, not on the face of the balance sheet The issuance dates are needed for the weighted average shares outstanding calculation for EPS We also need to know if the stock sales were for cash for the statement of cash flows

If students have trouble identifying this issue, ask them to look at the income statement and see if anything is missing in which shareholders might have an interest Once this question has been identified, ask the students why this disclosure is necessary In this case the bank wants the EPS number, but if the bank had not requested it, is it

necessary to disclose it?

SFAS No 128 requires EPS disclosure for most companies Only nonpublic

companies are exempt due to cost benefit considerations

If students do not ask this question, as them what constitutes a complete set of

financial statements Do we have all of them? Once this question is asked, ask the students to cite the authority for this requirement What information are you going to need to prepare this?

SFAS No 95 requires this statement for all companies

Other Questions

Some students will propose questions about whether the client has made year-end accruals for a variety of expenses Tell them that all year-end adjustments were

supposed to have been made, but that they might not have been and it is up to the students to determine which were not, given the information provided

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Another legitimate question that may arise is what are the capitalization criteria for property, plant, and equipment? Depreciation methods, rates? Are they the same for book and tax?

Planning Memoranda

Students should be encouraged to write planning memoranda to document what they have learned about the client for inclusion in the client’s permanent file Two such memos are warranted at this time: one to document basic client information and another to document the nature of the services required Consider providing samples

of these memoranda to students in class

REMINDERS FOR NEXT CLASS:

Correcting entries and financial statements will be due for the next class

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