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Company a should accrue the 100 in the current year

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Unformatted text preview: n not that the taxes will be recovered in the foreseeable future, the taxes should be charged to income. Refundable taxes should be accrued with respect to all related elements of income recognized in the period, whether the taxes with respect to such amounts are payable currently or in the future. Company A should accrue the $100 in the current year. It is appropriate to accrue refundable dividend tax at the time the related investment income is recorded, whether or not it is currently taxable. The recovery of refundable taxes charged to equity would be recorded in the financial statements when the conditions prerequisite to a refund have been met. The amount would be recorded when it is known that the amount of the tax is recoverable. For example, the declaration of a qualifying dividend by Company A (whether paid or unpaid) may establish the recoverability of amounts of refundable taxes. Such recoverable amounts would be an asset to be recorded at the date of declaration of the dividend. Disclosure of material refundable taxes should be made. 48 QUESTION 6 (5 marks) Not-for-Profit Accounting -Contributions (CICA 4410 Contributions - Revenue Recognition and EIC 105 Revenue Recognition of Nonrefundable Initiation Fees in Not-for-Profit Organizations) It should be considered if non-refundable initiation fees are revenue or capital contributions. CICA 4410.05 states that membership fees "are considered fees for services when members receive services having a value commensurate with fees paid" while CICA 4410.02(b) states that "A contribution is a non-reciprocal transfer to a not-for-profit organization of cash or other assets…". The payment of a non-refundable initiation fee entitles the person to use HGC's facilities and services, provided all annual fees are paid. This is considered a reciprocal transaction where HGC and the member receive assets or services of approximately equal value. The non-refundable initiation fees are fees for services, not contributions. The revenue from non-refundable initiation fees of $2,250,000 (90 x $25,000) should be recognized, with an appropriate provision for estimated uncollectible amounts, when all material conditions relating to the initiation fees have been substantially performed. The amount receivable will be $1,200,000 (60 X $20,000). Substantial performance is considered to have occurred when: (a) the not-for-profit organization grants the use of its facilities and services to the new members; (b) the not-for-profit organization has no remaining obligation or intent by agreement, practice or legislation to refund amounts received or forgive unpaid amounts owing; and (c) there are no other material unfulfilled conditions affecting completion of the transaction. There is no need for deferral as HGC has provided all services and the $1,500 annual fee is expected to cover the annual operating costs. The annual operating fees are revenue recognized in the amount of $135,000 (90 X $1,500). If the year-end of September 30 is selected, one month of fees would have to be deferred. The nonrefundable initiation fee is large but annual fees are small in relation to future services. When it is probable that annual fees will not cover the operating costs of the not-for-profit organization's continuing services, a portion of the non-refundable initiation fee should be deferred and amortized over the estimated duration of the membership. If an amount is deferred, it should be sufficient to cover estimated costs of continuing services in excess of annual fees. HGC should accrue the interest income on the installments at 6%. The financial statements of HGC should segregate revenue from non-refundable fees from annual fees and disclose the method of accounting for both types of fees. Changing the year-end until after the end of the golf season e.g. November 30 would make sense since all revenue has been earned and the staff have more time available. 49 QUESTION 7 (8 marks) Transfer of Receivables (AcG-12 Transfer of Receivables and AuG-28, Using a Legal Opinion as Audit Evidence Concerning a Transfer of Receivables) Part A (4 marks) The issue is whether the transfer is a sale of the receivables or financing. RPL must surrender control over those receivables for the transfer to be a sale. Paragraph 9(a ) of AcG-12 provides that the transferor has surrendered control over transferred assets if and only if all of the following conditions are met: (a) The transferred assets have been isolated from the transferor. If so, it is presumed they are beyond the reach of RPL and its creditors, even in bankruptcy or other receivership. (b) ARC has the right to pledge or exchange the receivables e.g. no conditions attached. (c) RPL does not maintain effective control over the receivables e.g. there is no agreement for RPL to repurchase or no ability to unilaterally cause ARC to return assets. Part B (4 marks) The nature and extent of supporting evidence required for an assertion in financial statements that the transferred receivable has been isolated depends on the facts and circumstances. Determi...
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