Chapter2_ Solutions

Chapter2_ Solutions - Chapter 2 Assigned Problems 12 14 16...

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Chapter 2 Assigned Problems: 12, 14, 16, 22, 23 12. a. Most industrial and retail firms regard revenue as earned at the point of sale. This is usually the earliest point at which the significant risks and rewards of ownership pass to the buyer, and at which the amount of revenue can be determined with reasonable reliability. b. Under RRA, revenue is recognized when oil and gas reserves are proven. This point in the operating cycle does not meet either of IAS 18 criteria for revenue recognition. Since the reserves are not sold, the significant risks and rewards of ownership have not been passed on. Also, the large number of revisions to estimates under RRA casts doubt on the reliability of the amount of revenue recognized. Presumably, this is why RRA is presented as supplementary information only. 14. a. Sure Corp. Balance Sheet As at December 31, 2008 Financial Asset Shareholders’ equity Cash (500-50) $450.00 Capital stock $1336.51 Capital asset, at PV $916.70 Net income $80.19 Dividend (50.00) $1366.70 $1366.70 Sure Corp. Income Statement For the year ended December 31, 2008 Net Income (1336.51×.06) $80.19 b. Page 1 of 6 19 . 0 8 $ .06 1,336.51 discount) of (Accretion Income Net 70 . 916 $ 06 . 1 500 06 . 1 500 51 . 1336 $ 06 . 1 500 06 . 1 500 06 . 1 500 ) 1 ( 2 1 3 2 1 0 = × = = + = = + + = + = = PA i R PA n j j j
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Cash includes $450 ×.06=$27 interest on cash balance. Retained earnings calculated as $80.19-50+82-50=$62.19 Sure Corp. Balance Sheet As at December 31, 2009 Financial Asset Shareholders’ equity Cash (450+500+27-50) $927.00 Capital stock $1336.51 Capital asset, at PV 471.70 Retained Earnings $62.19 $1398.70 $1398.70 Sure Corp. Income Statement For year ended December 31, 2009 Net Income (1,366.70×.06) $82.00 c. Under ideal conditions, present value and market value are equal. This is because of arbitrage. Under real conditions, market values provide only a partial implementation of fair value accounting. Because of incomplete markets, market values are not available for all assets and liabilities. If market values are not available for all assets and liabilities, fair value accounting based on market values cannot be fully implemented. d. The main reason is the difficulty of estimating future cash flows. Since, under realistic conditions these estimates are subject to error and bias, reliability is reduced. Another reason arises from possible error and bias in the choice of interest rate for discounting. However, the prime bank rate and central bank rate are available as proxies.
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