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ACTG 3120 Recommendations on Accounting Policies for 2019 Events Exam

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PI Case (midterm)
From: Koji Aizaki, CPA
To: Margo, the owner of PI
Title: Recommendations on accounting policies for 2019 events
My name is Koji Aizaki and I have recently been hired as an advisor to recommend accounting
policies for events that occurred in 2019.
Constraints:
ASPE: As PI is a private company, it is recommended to follow ASPE although it has the option
of choosing IFRS. Since PI has no plan of going public and is a small company, ASPE should be
followed in this case.
Bank loans: PI has a line of credit with Canada bank. The loan requires audited financial
statements and has a maximum debt to equity ratio. It is important to not violate the ratio as
the bank would recall the loan, making it a current liability instead of non-current liability.
Users and Objectives:
Margo: Margo is a user in this case as she is the owner of PI and she wants the business to be
profitable.
Canada Bank (Primary user): Canada Bank is the primary user in this case as PI has borrowed
loan from them for store expansion. The loans would be called back if PI violates the debt to
equity ratio and therefore, making the bank the primary user as the loans are crucial in running
their business.
Issue 1: Loan
N = 10
i/r =8%
EIR = 8%
FV = 5,000,000
PMT = 5,000,000 * 4%
PMT = 200,000
PV = 5,000,000(p/f, 4%, 20) + 200,000(p/a, 4%, 20)
PV = 5,000,000* 0.45639 + 200,000*13.59033
PV = 5000016
(no need to do the calculation above since the PV is at par)
This issue is regarding the bank loan. Under ASPE, there are two methods which are amortized
cost, or fair value. If amortized cost is used then the transaction costs would be capitalized and

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would reduce the value of the loan. For amortization, PI can choose between straight line
method or the effective interest method.
Issue 2: Convertible Bonds
This issue is regarding the convertible bonds. Margo has invested $1 million in convertible
bonds, making this the investor’s option. We need to determine whether the substance of the
principal and interest payment of the convertible bonds is considered debt or equity. The
interest portion has a semi-annual payment of 6%. Since the payment is necessary, the interest
portion in substance is debt. However, under the current rule in ASPE, the debt would still be
classified as equity. The principal portion is also debt as the bonds are convertible at anytime.
Similarly, the principal portion will be treated as equity under the current rule though in
substance is debt.
Issue 3: Preferred shares
This issue is regarding the preferred shares. The preferred shares have a cumulative dividend of
8% and has a mandatory redemption data in ten years. Additionally, as the unpaid dividends
must also be paid back at that date, both the dividend and the principal are considered debt in
this scenario as it is mandatory to pay them both at this date. However, under the current rule
in ASPE, the debt would still be treated as equity though in substance is debt.
Issue 4: Construction costs
This issue is regarding the construction cost of the new facility. The new facility is expected to
cost $6 million and and is projected to be completed by March 2020. Under ASPE, there is a
choice to expense or capitalize the construction costs. In order to capitalize the cost, we need
to determine whether the facility takes a substantial time to be completed, which in case it
takes more than a year to finish and therefore, it meets the criteria. The 4.5 million that was
incurred by the end of December 31
st
2019 would be capitalized.
Issue 5: Rev Rec
This issue is regarding the revenue recognition of the puppies. Under ASPE, first we need to
determine whether there is a transfer of significant risks and rewards of ownership to the
buyer. The risks and rewards of ownership are transferred when the puppies are handed into
customer’s hands when they come and select the puppy. The performance is to have the puppy
available when they are eights weeks old so that the customers can select the puppy. Cash
collectivity is ensured when the customer pays for the deposit and the remainder of the cost
when they take the puppy.
To recognize revenue, first we need to account for the $1,000 deposit. The $1,000 deposit is
treated as unearned revenue since at that point the customers paid in advance but had not
received the service. The remaining $3,000 is collected when the customer comes to the store
and selects the puppy. The unearned revenue of $1,000 and the $3,000 can both be recognized
when the ownership and control is fully transferred to the customer, and that is when the
customers pay the remaining cash on the day they receive the puppy.

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PI Case (midterm) From: Koji Aizaki, CPA To: Margo, the owner of PI Title: Recommendations on accounting policies for 2019 events My name is Koji Aizaki and I have recently been hired as an advisor to recommend accounting policies for events that occurred in 2019. Constraints: ASPE: As PI is a private company, it is recommended to follow ASPE although it has the option of choosing IFRS. Since PI has no plan of going public and is a small company, ASPE should be followed in this case. Bank loans: PI has a line of credit with Canada bank. The loan requires audited financial statements and has a maximum debt to equity ratio. It is important to not violate the ratio as the bank would recall the loan, making it a current liability instead of non-current liability. Users and Objectives: Margo: Margo is a user in this case as she is the owner of PI and she wants the business to be profitable. ...
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