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Chapter 05 - International Financial Reporting Standards: Part II
28. Cypress Company – Revenue Recognition (rendering of services)
IAS 18 indicates that, when the outcome of a service transaction (a) can be estimated
reliably and (b) it is probable that economic benefits of the transaction will flow to the
enterprise, revenue from the rendering of services should be recognized on a stage of
completion basis. The outcome of a transaction can be estimated reliably when (1) the
amount of revenue, (2) the costs incurred and the costs to be incurred, (3) and the stage of
completion can all be measured reliably. Whether it is appropriate for Cypress Company to
use the stage of completion method for its contract with the Gervais Group depends on
whether these three criteria are met:
29. Phil’s Sandwich Company – Revenue Recognition (customer loyalty program)
Phil’s Sandwich Company has a customer loyalty program that must be accounted for in
accordance with IFRIC 13. In the first quarter of the current year, Phil’s had sales of $84,000
($7.00 average price x 12,000 sandwiches). Phil’s must allocate this amount between
sandwich sales revenue and award credits (deferred revenue) based on the fair value of the
credits awarded. The amount to be allocated to the free sandwich awards is determined as
follows:
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Chapter 05 - International Financial Reporting Standards: Part II
Deferred revenue 4,200
30. Saffron Enterprises, Inc. – Available-for-Sale Financial Asset (foreign currency bonds)
Journal Entries in Year 1
31. Spectrum Fabricators Inc. – Convertible Bonds (initial recognition and interest)
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Chapter 05 - International Financial Reporting Standards: Part II
Interest expense
31. (continued)
Interest expense by year is determined as follows:
Beginning
Balance in
Bonds
Interest
Expense
(8.122%)
Interest
Payment
Ending
Balance in
Bonds
Year 1 $18,310,901 $1,487,218 $1,200,000 $18,598,119
32. Bockster Company – Preferred Shares (classification)
Part A. Preferred Shares Redeemable at Option of Shareholder
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Chapter 05 - International Financial Reporting Standards: Part II
Part B. Preferred Shares Convertible into Common Stock
33. Tempe Company – Long-term Debt (extinguishment)
The carrying value of the 10% bonds of $9,950,000 along with the issuance costs on the 9%
bonds of $100,000 are both included in the calculation of the gain or loss on extinguishment
of debt.
34. Macro Arco Corporation – Long-term Debt (troubled debt restructuring)
Macro Arco Corporation (MAC) records a gain on the debt restructuring, calculated as
follows:
The journal entry would be as follows:
Friendly Neighbor Bank (FNB) would record a loss on the restructuring calculated as follows:
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Chapter 05 - International Financial Reporting Standards: Part II
The journal entry to record the debt restructuring and loss would be as follows:
35. Farley Corporation – Receivables (derecognition)
Farley has retained substantially all of the risks and rewards associated with the financial
assets. Under the right of recourse, Farley ultimately must deliver $100,000 to Town Square
November 1, Year 1
December 31, Year 1
36. Traylor Company – Receivables (derecognition)
By guaranteeing to buy back up to 15% of the receivables that cannot be collected, Traylor
37. Campolino Company – Postretirement Benefit Plan (worksheet)
Campolino Company
General Ledger
Benefit Fund
General Ledger
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Chapter 05 - International Financial Reporting Standards: Part II
Defined
benefit cost
recognized
in
net income
Defined
benefit cost
recognized
in
OCI Cash
Defined
benefit
asset
(liability) PVDBO FVPA
4 Excess of actual return on plan assets over net interest on defined benefit liability:
Journal Entry
38. Stone Company – Stock Options
Part A.
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Chapter 05 - International Financial Reporting Standards: Part II
According to IFRS 2.35, because Stone has granted employees stock options that can be
settled either in cash or in shares of stock, this is a compound financial instrument.
Calculation of Compensation Expense for Year 1 (and Year 2)
For equity-settled share-based payment (SBP) transactions, the services received and
equity recognized is measured at the fair value of the equity instrument at grant date.
Because the fair value of the equity component for Stone is zero, there is no compensation
expense recognized related to the equity component.
38. (continued)
Compensation expense related to the debt component for Year 1:
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Chapter 05 - International Financial Reporting Standards: Part II
Calculation of Compensation Expense for Year 3
Settlement on December 31, Year 3
38. (continued)
Part B.
Under this scenario, employees receive a 10% discount on the exercise price if they choose
to settle in shares of stock. As a result, the equity-settlement alternative has a larger fair
value than the cash-settlement alternative, and therefore, the equity component has a value
greater than zero.
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Chapter 05 - International Financial Reporting Standards: Part II
Calculation of Fair Value of Stock Options at Grant Date
Calculation of Compensation Expense for Year 1
Compensation expense related to the debt component in Year 1 is $1,867 (same as in Part
A).
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