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Case 18–4 (continued)
This is the measure of comprehensive income Cisco reported in the disclosure
note. Notice that each component is reported net of its related income tax expense or
income tax benefit.
Requirement 4.
One component of Other comprehensive Income for Cisco Is "unrealized gains on
investments.” For reporting purposes, investments in some marketable equity
income at the end of fiscal 2013:
13. Shareholders’ Equity
(e) Accumulated Other Comprehensive Income (in part)
The components of AOCI, net of tax, and other comprehensive income (loss) are
summarized as follows (in millions):
Net Unrealized Net Unrealized Cumulative Accumulated
Gains on Gains (Losses) Translation Other
Investments Cash Flow Adjustment Comprehensive
Hedging and Other Income
Instruments
Balance at July 31, 2010 $333 $27 $263 $623
Other comprehensive income (loss) 154 (21) 538 671
18–78 Intermediate Accounting, 8/e
Case 18–4 (concluded)
Requirement 5.
Nonowner changes other than those that are part of traditional net income are the
Judgment Case 18–5
Requirement 1
Alcoa has two choices of how to account for the buyback:
1. The shares can be formally retired.
2. The shares can be called “treasury stock”
Regardless of the choice, total shareholders’ equity will be the same. Cash is paid
In contrast, when a share repurchase is viewed as treasury stock, the cost of the
treasury stock is simply reported as a reduction in total shareholders’ equity. Alcoa
would account for the purchase of the treasury stock by debiting treasury stock and
crediting cash for the cost of the purchase. The treasury stock should be presented
separately in the shareholders' equity section of Alcoa’s balance sheet as an
unallocated reduction of shareholders' equity. These shares are considered issued
but not part of common stock outstanding.
Requirement 2
Alcoa can choose not to make any journal entry for the stock split. Alternatively,
Alcoa can choose to effect the split “in the form of a stock dividend.” In that case,
18–80 Intermediate Accounting, 8/e
Case 18–5 (concluded)
Requirement 3
Alcoa should account for the cash dividend on the declaration date by debiting
retained earnings and crediting cash dividends payable for $.25 per share
Communication Case 18–6
sample memo:
Memorandum
To: Les Kramer
Supervisor
From: {your name}
Re: Share issue costs
Date: {current date}
This memo is in response to your request for information about how IBR accounted
for share issue costs in its recent equity offering. When a company sells shares, it
In IBR’s case, the shares sold for a total of $53.289 million (2,395,000 shares times
$22.25 per share). Since paid-in capital—excess of par is credited for the excess of
the $50.2 million net proceeds over the par amount of the shares sold, the effect of
share issue costs (underwriting discount and offering expenses) is to reduce the
amount credited to that account. In particular, IBR would have recorded the
following journal entry upon the issue of the shares.
18–82 Intermediate Accounting, 8/e
Case 18–6 (concluded)
Suggested Grading Concepts And Grading Scheme:
Content (80% )
30 Accounting for share issue costs.
Nature of costs.
Reduces the net proceeds from selling the shares.
Bonus (5) The FASB has suggested in Concept Statement 6 that debt issue
costs should be treated the same way as share issue costs. But Concept
Statements do not constitute GAAP, so until new GAAP, the prescribed
practice is to record debt issue costs as assets and expense the asset over
the maturity of the debt.
80–85 points
Writing (20%)
5 Terminology and tone appropriate to the audience of supervisor.
Analysis Case 18–7
Requirement 1
The ratio is computed by dividing net income by average shareholders' equity.
The return on shareholders' equity is an important ratio for the owners of a
company. It measures the ability of company management to generate net income
from the resources that owners provide. AGF’s return is comparable to other firms,
although slightly less. Like most ratios, though, it should not be viewed in isolation.
For example, when the return on shareholders’ equity is greater than the return on
assets, management is using debt funds to enhance the earnings for stockholders. The
return on assets is a measure of a company's ability to use assets profitably, regardless
of how the assets were financed. It is computed by dividing net income by average
total assets.
18–84 Intermediate Accounting, 8/e
Case 18–7 (concluded)
Requirement 2
Earnings per share, in its simplest form, is simply a firm’s net income divided by
the number of shares outstanding throughout the year. It expresses a firm’s
profitability on a per share basis.
To complement the return on shareholders’ equity ratio, analysts sometimes
calculate the earnings-price ratio in order to relate earnings to the market value of
equity. This ratio is the earnings per share divided by the market price per share:
The earnings-price ratio measures the return on the market value of common
stock. Remember, shareholders’ equity is a measure of the book value of equity. The
market value of a share of stock (or of total shareholders’ equity) usually is different
= 5.7%
Ethics Case 18–8
Discussion should include these elements.
Return on assets:
Rate of return on assets is net income divided by assets. The lower the asset base,
the higher the percentage return.
Ethical Dilemma:
Is the desire to boost return justification for questionable accounting treatment of
the transaction?
Who is affected?
Benson
Sharp
18–86 Intermediate Accounting, 8/e
Research Case 18–9
The results students report will vary depending on the companies chosen. It can
be interesting to have students compare in class their findings with those of their
classmates.
Communication Case 18–10
You may wish to suggest to your students that they consult the FASB 1990
Discussion Memorandum, “Distinguishing between Liability and Equity Instruments
and Accounting for Instruments with Characteristics of Both,” which sets forth the
most common arguments on the issues in this case. Or, you may prefer that they think
for themselves and approach the issue from scratch.
Arguments Supporting View 1:
Some students likely will argue that convertible bonds and other similar
instruments can be appropriately classified in the two existing categories on the
basis of existing distinctions and definitions. For instance, they might focus on
Three essential characteristics of a liability are:
a. It embodies a present duty or responsibility to one or more other entities for
settlement by probable future transfer or use of assets at a specified or
18–88 Intermediate Accounting, 8/e
Case 18–10 (continued)
Equity of a business enterprise is defined simply as the residual interest: the
difference between an enterprise's assets and its liabilities. The essential
characteristics of equity focus on the conditions for transferring assets to the
The distinction between liabilities and equity is important to reported financial
position. So, whether an issue of convertible bonds is classified as a liability or as
equity affects both reported amounts of total liabilities and equity and summary
amounts based on those amounts, such as ratios. The distinction also is critical in
measuring income. Comprehensive income is defined in Concepts Statement 6 to
Case 18–10 (continued)
Arguments Supporting View 2:
Arguments here center on the “entity theory” of accounting first proposed by W.
A. Paton in 1922, which views the accounting equation as:
Assets = Equities
with equities including both what are termed liabilities and equity in the current
Balance Sheet
Cash $ 2,050 Accounts payable $ 1,200
Investments 5,000 Mortgage 4,000
Income Statement
Sales $30,000
Cost of goods sold 10,000
Selling and other expenses 4,000
18–90 Intermediate Accounting, 8/e
Case 18–10 (concluded)
or, alternatively:
Sales $30,000
Cost of goods sold 10,000
Selling and other expenses 4,000
Enterprise net income $16,000
Many issues would have to be resolved if this approach were to be seriously
pursued. For instance, would all present liabilities be treated as "equities"? If
not, which would be treated differently? Today the distinction between short
The concept of income under this approach is another question. Would an
attempt to eliminate the line between liabilities and equity make it inappropriate
Air France–KLM Case
Requirement 1
Air France–KLM lists four items in the shareholders’ equity section of the
balance sheet. If AF used U.S. GAAP, Issued share capital would be Common stock,
Reserves and retained earnings would be separated into retained earnings and one or
Requirement 2
Note 29.4 indicates that the items that comprise “Reserves and retained
earnings” as reported in the balance sheet are Legal reserve, Distributable reserves,
Pension defined benefit reserves, Derivatives reserves, Available for sale securities
Requirement 3
The order of presentation of the components of the balance sheet usually is
