This preview shows page 1. Sign up to view the full content.
Unformatted text preview: 's normal practices or legal
requirements. The 5 payments of $1,500 ($7,500) that will be paid on September 5th are severance
payments as staff will not be given notice, there is no specified event and the amount meets
regulatory requirements. The $7,500 should be accrued at August 31, 2002. (CICA 3461.136/137)
Termination benefits can be either contractual or special termination benefits.
Contractual termination benefits are required to be provided to employees under the existing
terms of a benefit plan or a collective bargaining agreement when a specified event, such as a plant
closing, occurs. There is no indication of a contractual obligation or a specified event so the
payments by HC do not appear to be contractual.
Special termination benefits are offered to employees for a short period of time, normally not
exceeding twelve months, in exchange for the employees' voluntary or involuntary termination of
employment. The payments to the second group of employees are special termination benefits given
since they are for a short period, from August to November. For voluntary terminations, a liability
and an expense of $5,000 each should be recognized when the employees accept the offer and the
amount of the special termination benefits can be reasonably estimated. There cannot have been
acceptance by the employees given that they have not even been notified. Though the amount is
specified, it is not accrued at August 31, 2002.
For the special termination benefits to employees for involuntary terminations, the company should
recognize a liability and an expense in the period that:
(a) management having the appropriate level of authority approves and commits the entity to a plan
of termination and establishes the benefits that employees will receive upon their termination of
employment. The president's memo meets these conditions.
(b) the benefit arrangement is communicated to employees in sufficient detail to enable them to
determine the type and amount of benefits they will receive upon termination of their employment.
There is no indication that the information has been communicated to the employees.
(c) the plan of termination specifically identifies the target level of reduction in the number of
employees, their job classification or functions, and their locations. The target level has been set at
15 employees so this condition is met.
(d) the period of time to complete the plan of termination indicates that significant changes to the
plan of termination are not likely. The time period is specified and should be completed by
All of (a) (b) (c) and (d) must be met to record the accrual. As condition (b) has not been met, HC
45 does not need to accrue. The guidance is not followed when the special termination benefits are
directly related to discontinued operations (CICA 3461.143) but this is not relevant in this situation.
For special termination benefits, a public enterprise, co-operative organization, deposit-taking
institution or life insurance enterprise should disclose:
(a) the amount of the expense recognized for the period; and
(b) a description of the nature of the related event or events that resulted in these benefits being
As HC is a private company this guidance is not directed at them. Disclosure is encouraged if it will
provide relevant information to the users of HC in assessing the risks and uncertainties in the
financial statements. 46 QUESTION 4 (7 marks)
Equity Accounting (CICA 1581)
ABC's equity in the earnings of Company B would be calculated as follows:
Investment in 40% of shares of XYZ
40% of the book value of net assets acquired ($300,000)
Excess of purchase price over book value of net assets
Allocation of purchase price:
Net assets of XYZ at book value
Additional amount assigned to land ($50,000X40%)
Additional amount assigned to building ($20,000X40%)
Share of income (40%)
Additional depreciation for building and equipment
(10 year life) 8,000/10
Equity pick-up before taxes (effect on income)
Carrying amount of investment
Book basis of investment, beginning of year
Dividend (4,000 X $2)
* The amount of the equity pick-up will differ if the assumption is made to amortize goodwill or if
there is any impairment in the value of goodwill. 47 QUESTION 5 (6 marks)
Accounting for Refundable Income Taxes (CICA 3465)
Refundable taxes are in the nature of an advance or distributions related to the shareholder.
Company A should record the payable of $100 as a debit to retained earnings and credit to taxes
payable at the time owing as long as it is more likely than not that it will be recovered. The recovery
of such refundable taxes should be credited to retained earnings. When Company A pays a dividend
the reduction of taxes payable would be a debit to income taxes payable and credit to retained
earnings. If it is not more likely tha...
View Full Document
This note was uploaded on 10/27/2013 for the course LAW 10-100 taught by Professor Parsons during the One '10 term at Bond College.
- One '10