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									Intermediate Accounting
                                   SI X TH   EDI T ION

         University of Memphis

         JAMES F. SEPE
          Santa Clara University

        MARK W. NELSON
            Cornell University

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the
Americas, New York, NY, 10020. Copyright 2011, 2009, 2007, 2004, 2001, 1998 by The McGraw-Hill
Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or
by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill
Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or
broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the
United States.

This book is printed on acid-free paper.

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ISBN-13: 978-0-07-811083-2 (combined edition)
ISBN-10: 0-07-811083-1 (combined edition)
ISBN-13: 978-0-07-732891-7 (volume 1)
ISBN-10: 0-07-732891-4 (volume 1)
ISBN-13: 978-0-07-732890-0 (volume 2)
ISBN-10: 0-07-732890-6 (volume 2)

Vice president and editor-in-chief: Brent Gordon
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                            Library of Congress Cataloging-in-Publication Data

Spiceland, J. David, 1949-
    Intermediate accounting/J. David Spiceland, James F. Sepe, Mark Nelson.—6th ed.
       p. cm.
    Includes index.
    ISBN-13: 978-0-07-811083-2 (combined edition: alk. paper)
    ISBN-10: 0-07-811083-1 (combined edition: alk. paper)
    ISBN-13: 978-0-07-732891-7 (volume 1: alk. paper)
    ISBN-10: 0-07-732891-4 (volume 1: alk. paper)
    1. Accounting. I. Sepe, James F. II. Nelson, Mark (Mark W.) III. Title.
  HF5636.S773 2011
About the Authors

DAVID SPICELAND                                                 JIM SEPE
              David Spiceland is professor of account-          Jim Sepe is an associate professor of
                ing at the University of Memphis, where         accounting at Santa Clara Univer-
                  he teaches intermediate accounting and        sity where he teaches primarily
                   other financial accounting courses at the    intermediate accounting in both
                   undergraduate and master’s levels. He        the undergraduate and gradu-
                   received his BS degree in finance from the   ate programs. He previously
                  University of Tennessee, his MBA from         taught at California Poly State
                 Southern Illinois University, and his PhD in   University–San Luis Obispo and the
              accounting from the University of Arkansas.       University of Washington and has visited
             Professor Spiceland’s primary research inter-      at Stanford University and the Rome campus
ests are in earnings management and educational research.       of Loyola University of Chicago.
He has published articles in a variety of journals includ-         Professor Sepe received his BS from Santa Clara
ing The Accounting Review, Accounting and Business              University, MBA from the University of California–
Research, Journal of Financial Research, and Journal            Berkeley, and PhD from the University of Washington.
of Accounting Education. David has received university          His research interests concern financial reporting issues
and college awards and recognition for his teaching,            and the use of financial information by capital mar-
research, and technological innovations in the classroom.       kets. He has published in The Accounting Review, the
                                                                Journal of Business Finance and Accounting, Financial
                                                                Management, the Journal of Forensic Accounting, the
                                                                Journal of Applied Business Research, and the Journal
                                                                of Accounting Education. He is a past recipient of the
                                                                American Accounting Association’s Competitive Manu-
                                                                script Award and has served as a member of the editorial
                                                                board of The Accounting Review.
                                                                   Jim has received numerous awards for his teaching
                                                                excellence and innovations in the classroom, including
                                                                Santa Clara University’s Brutocao Award for Excellence
                                                                in Curriculum Innovation.

        Mark Nelson is the Eleanora and George               has been published in The Accounting Review, the Jour-
           Landew Professor of Accounting at Cornell         nal of Accounting Research, Contemporary Accounting
            University’s Johnson Graduate School of          Research, Accounting Organizations and Society, Auditing:
             Management, where he teaches interme-           A Journal of Practice and Theory, and several other jour-
             diate accounting at the MBA level. He           nals. He has won the American Accounting Association’s
             received his BBA degree from Iowa State         Notable Contribution to Accounting Literature Award, and
             University and his MA and PhD degrees           also the AAA’s Wildman Medal for work judged to make
           from Ohio State University. Professor             the most significant contribution to the advancement of the
         Nelson has won teaching awards at Ohio              public practice of accountancy. He has served three times
    State and Cornell, including three of the Johnson        as an editor or associate editor of The Accounting Review,
School’s Apple Award for Teaching Excellence.                and serves on the editorial boards of several journals.
  Professor Nelson’s research is focused on decision         Professor Nelson also served for four years on the
making in financial accounting and auditing. His research    FASB’s Financial Accounting Standards Advisory Council.

Thank You
The authors and McGraw-Hill’s Intermediate Accounting team thank Larry Tomassini for his many contributions
to the book over the last few editions. Larry is an innovator in the use of technology to tutor students, most notably
through his creation of Coach. We wish him the best of luck in his future endeavors!

viii   PREFACE

       Your Vehicle to Success
                                          As your students embark on their professional careers, they will
                                          be challenged to think critically and make good decisions. This
       “I am very impressed with this     new edition of Intermediate Accounting has been designed
       textbook and its supplements.
                                          to ensure that your students’ careers soar to the greatest
       The authors have carefully
       developed the book to meet         heights—to be their vehicle to success!
       the needs of a wide range of
       student learners. It is clearly    Intermediate Accounting is the work not just of its talented
       written in understandable          authors but of the more than 175 faculty reviewers who shared
       terms. There are many features     their insights, experience, and opinions with us. Our reviewers
       available to provide your stu-     helped us to build Intermediate Accounting into the vehicle
       dents with the best chance to      that can propel your students to success in their accounting
       master this material.”             course.
       —Robert Gruber, University
       of Wisconsin—Whitewater                                          Our development process
                                                                        began in the summer of 2008,
                                                                        when we received the first
                                                                        of what would become more
                                                                        than 175 in-depth reviews
                                                                        of Intermediate Accounting.
                                                                        A blend of Spiceland users
       “SSN do a marvelous job of                                       and non-users, these review-
       explaining the conceptual                                        ers explained how they use
       underpinnings of the account-                                    textbooks in their teaching,
       ing standards before describ-                                    and many answered detailed
       ing the details of the rules. In                                 questions about every one of
       sum, this is an excellent text
                                                                        Spiceland’s 21 chapters. And
       book that should be strongly
       considered for any intermedi-                                    the work of improving Interme-
       ate accounting course.”            diate Accounting is ongoing—even now, we’re scheduling new
                                          symposia and reviewers’ conferences to collect even more
       —Albert Nagy,                      opinions from faculty.
       John Carroll University
                                          Intermediate Accounting was designed from the start to
                                          be not simply a textbook, but a complete learning system,
                                          encompassing the textbook, key ancillaries, and online con-
                                          tent, all of which are written by authors Spiceland, Sepe, and
                                          Nelson. The Intermediate Accounting learning system is built
                                          around five key attributes:
       “After reviewing this text, I
       would describe this text to our
       colleagues as an outstanding
       learning package and out-
       standing textbook.”
       —Habib El-Yazeed,
       Minnesota State University
                                                                                    SPICELAND | SEPE | NELSON           ix

     in Intermediate Accounting
① Clarity: Reviewers, instructors, and students all have hailed
     Intermediate Accounting’s ability to explain both simple and complex           “The best available text for
     topics in language that is clear and approachable. Its highly acclaimed        the intermediate accounting
     conversational writing style establishes a friendly dialogue between the       courses at both the graduate
     text and each individual student. So readable is Spiceland that we’ve          and undergraduate level.”
     even received letters from students who bought the book themselves—
                                                                                    —Gerard M. Engeholm,
     despite their instructors using competing books in the course!
                                                                                    Pace University

② A Decision-Making Perspective:
     Recent events have focused public attention on the key role of account-
     ing in providing information useful to decision makers. The CPA exam,          “An excellent textbook that
     too, is redirecting its focus to emphasize the professional skills needed to   covers accounting procedures
     critically evaluate accounting method alternatives. Intermediate Account-      thoroughly from a real-world
     ing provides a decision maker’s perspective to emphasize the profession-       perspective. It is very current
     al judgment and critical thinking skills required of accountants today.        and is accompanied by a great
                                                                                    variety of learning aids to help

③ Flexible Technology: Today’s accounting
                                                                                    students succeed.”

     students have come of age in a digital world, and Spiceland’s Learning         —Kathy Hsiao Yu Hsu,
     System reflects that trend through its comprehensive technology pack-           University of Louisiana–Lafayette
     age. The sixth edition contains even more technology features than the
     previous editions of Spiceland’s Learning System, featuring: McGraw-Hill
     Connect Accounting, Self-Quiz and Study, LearnSmart self-study technol-
     ogy, and Tegrity Campus. See pages xii, xiii and xvii for more details!
                                                                                    “When someone other than
                                                                                    the authors prepares the
④ Consistent Quality: The Intermediate Account-                                     [end-of-chapter material] they
                                                                                    generally do not mirror the
     ing author team ensures seamless compatibility throughout the Spiceland        material that is presented in
     learning package by writing every major supplement themselves: Study           the chapters and they contain
     Guide, Instructor’s Resource Manual, Solutions Manual, Testbank, and           quite a few errors.”
     website content are all created by authors Spiceland, Sepe, and Nelson.
     The end-of-chapter material, too, is written by the author team and tested     —Gloria Worthy, Southwest
     in their classrooms before being included in Intermediate Accounting.          Tennessee Community College

⑤ A Commitment to Currency: Few
     disciplines see the rapid change that accounting experiences, and the
     Spiceland team is committed to keeping your course up to date. The             “Overall, I find the Spiceland
     sixth edition fully integrates the latest FASB standards, including SFAS       end-of-chapter material far
     No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy         superior to that in Kieso in
     of Generally Accepted Accounting Principles—a replacement of FASB              terms of quantity, especially
     Statement No. 162”; SFAS No. 166, “Accounting for Transfers of Finan-          as it relates to the diversity of
     cial Assets—an Amendment of FASB Statement No. 140”; SFAS No. 165,             the problem material.”
     “Subsequent Events”; and FSP No.’s 115-2 and 124-2, “Recognition and           —Chula King,
     Presentation of Other-Than-Temporary Impairments.”                             University of West Florida

What Stands Out in the Sixth Edition?

              The United States is moving rapidly toward converging U.S. GAAP with the International
              Financial Reporting Standards (IFRS) that are followed by most of the rest of the world.
              Therefore, a premier intermediate text must not only offer thorough coverage of U.S. GAAP,
              but also provide clear coverage of key differences between U.S. GAAP and IFRS with end-of-
              chapter assignment material to test student understanding of those differences. In light of
              this need, we have made the following changes for the sixth edition:
              (1) Updated our overview of the background and current status of the convergence process in
                  Chapter 1.
              (2) Expanded our IFRS coverage significantly.
                  This coverage is integrated with text content
                  by including boxes at appropriate points in         “Provides up to date material
                  each chapter, allowing instructors to identify      on many topics, for example
                  key differences between U.S. GAAP and IFRS          IFRS. Students will find it easy
                  as they so choose and discuss those differ-         to follow and to find examples
                  ences in the context of the chapter topics.         in working homework.”
                  Many of these “IFRS boxes” now include
                  numerical illustrations demonstrating the           —Terry G. Elliott,
                  differences from U.S. GAAP, providing com-          Morehead State University
                  parative illustrations, and showing real world
              (3) Expanded and revised end-of-chapter
                  assignment materials to provide extensively more opportunities for students to apply their
                  knowledge of IFRS and the differences between IFRS and U.S. GAAP. IFRS assignments are
                  included in end-of-chapter questions, brief exercises, exercises, problems and cases. The
                  Testbank also contains many new IFRS items for most chapters.
              (4) To provide students the experience of considering a set of IFRS-based financial statements
                  from an all-inclusive perspective, we added the Comprehensive British Airways Case.
                  That case has questions appearing as Broaden Your Perspective cases in most of the text’s
                  chapters, allowing instructors to discuss IFRS and U.S. GAAP differences in the context of
                  a single IFRS-based financial reporting setting. For instructors who prefer to cover IFRS
                  on fewer days in a more concentrated fashion, the British Airways Case questions are
                  repeated in Appendix C but divided into six broad topical classifications to permit cover-
                  age in logical groupings during the course.
                                                                                                                    SPICELAND | SEPE | NELSON   xi

      Revising a book as successful as Intermediate Accounting takes careful consideration and a strong vision
      of what a textbook should be. New features aren’t piled on for their own sake; the Spiceland team only implements
      changes that constitute real improvements that have been identified through extensive research with users. The
      result is a book that never loses its original strengths as it gains in usefulness and flexibility with each revision.

                                                WHERE WE’RE HEADED

       ● LO12                    The FASB and IASB are working together on a project, Financial Statement Presentation,
                                 to establish a common standard for presenting information in the financial statements,
       The FASB and IASB         including classifying and displaying line items and aggregating line items into subtotals and
       are working together      totals. This standard will have a dramatic impact on the format of financial statements. An
       on a standard that        important part of the proposal involves the organization of elements of the balance sheet
       would have a dramatic     (statement of financial position), statement of comprehensive income (including the income
       impact on the format of   statement), and statement of cash flows (SCF) into a common set of classifications.
       financial statements.

          The FASB and IASB (International Accounting Standards Board) have set a June 2011 target
          date for the completion of 11 major joint projects that are intended to improve the standards
          of both Boards while further aligning U.S. GAAP and IFRS. We have placed Where We’re
spi10831_ch04_168-231.indd 204                                                                               2/12/10 10:36:29 AM
          Headed boxes throughout the text to describe the potential financial reporting effects of
          many of these projects or of other pronouncements by the Boards.
          Because an unprecedented concentration of major changes is scheduled
          to occur in an unusually short time frame, not only do we feel that these          If your school has paid for a site license
          carefully delineated descriptions of not-yet-GAAP potentialities are war-          of the Academic Accounting Access
          ranted, but that it would be a disservice to students to ignore them.              Program, faculty and students will have
                                                                                             free access to the FASB Codification.
                                                                                             Check with your accounting depart-
                                                                                             ment to determine if your school has
                                                            The FASB Codification
                                                                                             registered for this program. All of the
                                                            became effective on July
                                                                                             features available with the Professional
                   “Very well written in a stream-          1, 2009 and now repre-
                                                                                             View version ( are
                   lined 21 chapter approach with           sents the single source of
                                                                                             included with the Academic Account-
                   IFRS incorporated throughout             authoritative nongovern-
                                                                                             ing Access Program.
                   and excellent end of chapter             mental U.S. GAAP, except
                   materials.”                              for rules and interpretive
                                                            releases of the SEC which
                   —Michael Slaubaugh, Indiana              remain also as sources of authoritative GAAP.
                   University/Purdue University             All other literature is now nonauthoritative.
                                                            Throughout the sixth edition, we use the new
                                                            Accounting Standards Codification System
                                                            (ASC) in footnotes when referencing generally
          accepted accounting principles (FASB ASC followed by the appropriate number). For ease of
          transition, each citation also includes a reference to the original accounting standard that is
          codified in ASC. End-of-chapter exercises and cases have been added that provide students
          with practice in researching the FASB’s Accounting Standards Codification.
               The financial statements and disclosure notes of Dell are included in Appendix B of the
          text. The statements and notes also are available through a link provided at the text website.
          These replace the Google statements packaged with the fifth edition. The Dell statements
          and notes are the basis for text references and cases in most chapters.

Market-Leading Technology

                     McGraw-Hill Connect Accounting
                     Less Managing. More Teaching. Greater Learning.

                                                                       McGraw-Hill Connect Accounting is an
                                                                       online assignment and assessment solution
                                                                       that connects students with the tools and
                                                                       resources they’ll need to achieve success.
                                                                          McGraw-Hill Connect Accounting
                                                                       helps prepare students for their future
                                                                       by enabling faster learning, more effi-
                                                                       cient studying, and higher retention of

                                                                      McGraw-Hill Connect
                                                                      Accounting Features
                                                                      Connect Accounting offers a number of
                                                                      powerful tools and features to make man-
                                                                      aging assignments easier, so faculty can
                                                                      spend more time teaching. With Connect
                                                                      Accounting, students can engage with their
                                                                      coursework anytime and anywhere, making
                                                                      the learning process more accessible and
                                                                      efficient. Connect Accounting offers you
                                                                      the features described on the next page.

                     Student Study Center
                     The Connect Accounting Student Study Center is the place for students to access additional
                     resources. The Student Study Center:
                     • Offers students quick access to lectures, practice materials, eBooks, and more.
                     • Provides instant practice material and study questions, easily accessible on the go.
                     • Gives students access to the Self-Quiz and Study resource described on page xvii.
                                                                                   SPICELAND | SEPE | NELSON   xiii

                                                  Simple Assignment
                                                  With Connect Accounting, creating assign-
                                                  ments is easier than ever, so you can spend
                                                  more time teaching and less time manag-
                                                  ing. The assignment management function
                                                  enables you to:
                                               • Create and deliver assignments easily
                                                  with selectable end-of-chapter questions
                                                  and test bank items.
• Streamline lesson planning, student progress reporting, and assignment grading to
  make classroom management more efficient than ever.
• Go paperless with the eBook and online submission and grading of student assignments.

                                                  Smart Grading
                                                  When it comes to studying, time is pre-
                                                  cious. Connect Accounting helps students
                                                  learn more efficiently by providing feed-
                                                  back and practice material when they need
                                                  it, where they need it. When it comes to
                                                  teaching, your time also is precious. The
                                                  grading function enables you to:
                                               • Have assignments scored automatically,
                                                  giving students immediate feedback on
                                                  their work and side-by-side comparisons
                                                  with correct answers.
• Access and review each response; manually change grades or leave comments for students
  to review.
• Reinforce classroom concepts with practice tests and instant quizzes.

Instructor Library
The Connect Accounting Instructor Library is your repository for additional resources to
improve student engagement in and out of class. You can select and use any asset that
enhances your lecture. The Connect Accounting Instructor Library includes:
• eBook
• PowerPoints
xiv         PREFACE

What Keeps Spiceland Users Coming Back?

Financial Reporting
                                                                 FINANCIAL REPORTING CASE SOLUTION
Each chapter opens with a                                     1. How would you explain restructuring costs and its negative amount in 2009
                                                                 to Becky? Are restructuring costs something Becky should worry about?
Financial Reporting Case that                                    (p. 177) Restructuring costs include employee severance and termination benefits
places the student in the role                                   plus other costs associated with the shutdown or relocation of facilities or downsizing of
                                                                 operations. Certain restructuring costs must be estimated. The negative number in 2009
of the decision maker, engag-                                    is a consequence of overestimating restructuring costs in the prior year. Restructuring
ing the student in an interesting                                costs are not necessarily bad. In fact, the objective is to make operations more efficient.
situation related to the account-                                The costs are incurred now in hopes of better earnings later.
                                                                                                                             “The case at the beginning of
ing issues to come. Then, the                                 2. In addition to discontinued operations, what other events sometimes are
                                                                                                                             each chapter is very captivating.
                                                                 reported separately in the income statement that you might tell Becky
cases pose questions of the                                        b t? Wh            th      it              t d                      read ddi i
                                                                                                                            tAfter I180) I the case, I wanted to
                                                                                                                              l ? (
student in the role of deci-                                                                                      get paper and pencil and answer
sion maker. Marginal notations                                                                                    the questions.”
throughout the chapter point
out locations where each ques-                                                                                    —Carol Shaver,
tion is addressed. Finally, the                                                                                   Louisiana Tech University
questions are answered at the
end of the chapter.

Decision Makers’
Perspective                                                     DECISION MAKERS’ PERSPECTIVE
These sections appear through-                       Cash often is referred to as a nonearning asset because it earns no interest. For this reason,
out the text to illustrate how                       managers invest idle cash in either cash equivalents or short-term investments, both of which
accounting information is put to                     provide a return. Management’s goal is to hold the minimum amount of cash necessary to
                                                     conduct normal business operations, meet its obligations, and take advantage of opportuni-
work in today’s firms. With the                       ties. Too much cash reduces profits through lost returns, while too little cash increases risk.
CPA exam placing greater focus                       This trade-off between risk and return is an ongoing choice made by management (internal
on application of skills in realis-                  decision makers). Whether the choice made is appropriate is an ongoing assessment made
tic work settings, these discus-                     by investors and creditors (external decision makers).5
                                                         A company must have cash available for the compensating balances we discussed in the Companies hold cash
sions help your students gain an                                                                                                  “This is an excellent feature
                                                     previous section as well as for planned disbursements related to normal operating, invest- to pay for planned andof
edge that will remain with them                                                                                                   the vary from unplanned transactions
                                                     ing, and financing cash flows. However, because cash inflows and outflows canbook. It is so important to
                                                                                                                                                     and to satisfy 2/3/10 3:57:34
                                  spi10831_ch04_168-231.indd 207
as they enter the workplace.                         planned amounts, a company needs an additional cash cushion as a precaution against that compensating balance PM
                                                                                                                                  know why and how information

                                                          ti       Th i        f th     hi d        d      th            ’ bilit t           t     h
                                                                                                                                  is used and not just memorizing
Star Problems                                                                                                                     the “right” answers.”
Star problems were a new fea-                                                                                                      —Jeff Mankin, Lipscomb University
ture in the fifth edition. These
are problems (more than one-
third new) in each chapter that                                           “The Star Problems are
are designated by a ✯ to indi-                                            challenging—a good way to
cate that they are particularly                                           illustrate the more difficult
challenging, requiring students                                           concepts and calculations.”
to combine multiple concepts
or requiring judgment beyond                                              —Kenneth R. Henry,
explicit explanation in chapter                                           Florida International University

                                         spi10831_ch07_336-393.indd 341                                                                                                    2/3/10 4:29:51 PM
                                                                                                                                                                    SPICELAND | SEPE | NELSON            xv

               In talking to so many intermediate accounting faculty, we heard more than how to improve the book—there
               was much, much more that both users and nonusers insisted we keep exactly as it was. Here are some of the
               features that have made Spiceland such a phenomenal success in its previous editions.

                 AD D IT IO NAL CONSID ER ATION                                                                                                                         Additional
                We discuss in significant depth in Chapter 7 the problem of accounting for bad debts.                                                                   Consideration Boxes
                However, bad debts related to receivables on sales accounted for using the installment method                                                           These are “on the spot” consid-
                create a unique problem. The reason a company uses the installment method is that it can’t
                                                                                                                                                                        erations of important, but inci-
                                                                      “This is explicitly recognize bad debt
                reliably estimate bad debts. Therefore, the company doesn’t a good technique that I
                expense or create an allowance for uncollectible accounts in the installment method. Rather,                                                            dental or infrequent aspects of
                                                                      actually use in my class and it’s                                                                 the primary topics to which they
                bad debts are dealt with implicitly by deferring gross profit until cash is collected. If the cash
                                                                      good gets included in net income. To
                never is collected, the related deferred gross profit never to see it in a book!”                                                                       relate. Their parenthetical nature,
                illustrate, assume that in the example described in Illustration 5–1, the Belmont Corporation                                                           highlighted by enclosure in Addi-
                                                                      —Ramesh Narasimhan,
                collected the first payment but the customer was unable to make the remaining payments.
                                                                      Montclair State University
                Typically, the seller would repossess the item sold and make the following journal entry:
                                                                                                                                                                        tional Consideration boxes, helps
                                                                                                                                                                        maintain an appropriate level of
                   Repossessed inventory..... .................................................             420,000
                   Deferred gross profit.........................................................           180,000
                                                                                                                                                                        rigor of topic coverage without
                     Installment receivable..... ...............................................                                       600,000                          sacrificing clarity of explanation.
                   This entry removes the receivable and the remaining deferred gross profit and records
                the repossessed land in an inventory account. This example assumes that the repossessed
                land’s current fair value is equal to the net receivable of $420,000. If the land’s fair value at
                                                                                                                                                                        Ethical Dilemmas
                the date of repossession is less than $420,000, a loss on repossession is recorded (debited).                                                           Because ethical ramifications
                                                                                                                                                                        of business decisions impact so
                                                                                                                                                                        many individuals as well as the
                                                                                                                                                                        core of our economy, Ethical
                                                                                                                                                                        Dilemmas are incorporated within
                                     ETHICAL DIL EMMA
                                                                                                                                                                        the context of accounting issues
                                                                                                                                                                        as they are discussed. These fea-
                 The Precision Parts Corporation manufactures automobile parts. The company has reported
                 a profit every year since the company's inception in 1980. Management prides itself on this
                                                                                                                                                                        tures lend themselves very well
                                                                    “Having ethical dilemma boxes
                 accomplishment and believes one important contributing factor is the company's incentive                                                               to impromptu class discussions
                 plan that rewards top management a bonus equalin every chapteroperating income if
                                                                     to a percentage of is much more                                                                    and debates.
                                                                    significant than been a a sepa-
                 the operating income goal for the year is achieved. However, 2011 hashavingtough year,
                 and prospects for attaining the income goal for the year are bleak.
                                                                    rate chapter devoted to increase
                    Tony Smith, the company's chief financial officer, has determined a way to ethics.                                                                  Broaden Your
                                                                     operating can relate to the impor-
                 December sales by an amount sufficient to boost Studentsincome over the goal for the
                 year and earn bonuses for all top management. A tance ofcustomer ethical $120,000 of
                                                                    reputable being ordered in every                                                                    Perspective Cases
                                                                     the rest of business dealings.”
                 parts to be shipped on January 15, 2012. Tony toldaspect of top management “I know we
                 can get that order ready by December 31 even though it will require some production line                                                               Finish each chapter with these
                 overtime. We can then just leave the order on the loading dock until shipment. I see nothing
                                                                    —Gloria Worthy,                                                                                     powerful and effective cases,
                 wrong with recognizing the sale in 2011, since the parts will have been manufactured and                                                               a great way to reinforce and
                                                                    Southwest Tennessee
                 we do have a firm order from a reputable customer.” The company's normal procedure is
                                                                    Community College                                                                                   expand concepts learned in
                 to ship goods f.o.b. destination and to recognize sales revenue when the customer receives
                 the parts.                                                                                                                                             the chapter.

                       BROADEN YOUR PERSPECTIVE

                                               Apply your critical-thinking ability to the knowledge you’ve gained. These cases will provide you an oppor-
                                               tunity to develop your research, analysis, judgment, and communication skills. You also will work with other
                                               students, integrate what you’ve learned, apply it in real world situations, and consider its global and ethical
                                               ramifications. This practice will broaden your knowledge and further develop your decision-making abilities.

                       Ethics Case 6–1         The Damon Investment Company manages a mutual fund composed mostly of speculative stocks. You recently
                       Rate of return          saw an ad claiming that investments in the funds have been earning a rate of return of 21%. This rate seemed quite
                       ● LO1                   high so you called a friend who works for one of Damon’s competitors. The friend told you that the 21% return
                                               figure was determined by dividing the two-year appreciation on investments in the fund by the average invest-
                                               ment. In other words, $100 invested in the fund two years ago would have grown to $121 ($21 ÷ $100 = 21%).
297.indd 242                                   Required:
                                                                                                    “I think students would benefit
                                                                                                                                12/18/09                            5:10:58 PM
                                                                                                   tremendously from    the cases.”
                                               Discuss the ethics of the 21% return claim made by the Damon Investment Company.

                       Analysis                Sally Hamilton has performed well as the chief financial officer of the Maxtech Computer Company and has
                       Case 6–2                                                                   —Joyce Njoroge, Drake University
                                               earned a bonus. She has a choice among the following three bonus plans:
                       Bonus alternatives;     1. A $50,000 cash bonus paid now.
                       present al e            2 A $10 000         l   hb         b    id    h           h       i         i h h fi $10 000 id
xvi       PREFACE

How Does Spiceland Help My Students

Online Learning Center (OLC)
www.m h he .c om/ s p i c e l a n d 6 e

Today’s students are every bit as comfortable using a
web browser as they are reading a printed book. That’s
why we offer an Online Learning Center (OLC) that
follows Intermediate Accounting chapter by chapter.
It doesn’t require any building or maintenance on your
part, and is ready to go the moment you and your stu-
dents type in the URL.

As your students study, they can refer to the OLC web-
site for such benefits as:
iPod content                      Check figures
Self-grading quizzes              Practice exams
Electronic flash cards             FASB pronouncements,
Audio narrated PowerPoints         summaries and updates
                                                                              CPA and CMA Review Questions
Alternate exercises and           Text updates
                                                                              A CPA and CMA Review Questions section includes
                                                                              multiple choice questions used in the Kaplan CPA Review
A secured Instructor Resource Center stores your                              Course and focus on the key topics within each chapter,
essential course materials to save you prep time before                       permitting quick and efficient reinforcement of those
class. The Instructor’s Resource Manual, Solutions                            topics as well as conveying a sense of the way the topics
Manual, PowerPoint, and sample syllabi are now just a                         are covered in the CPA exam. The CMA questions are
couple of clicks away. You will also find useful packag-                       adapted from questions that previously appeared on
ing information and transition notes.                                         Certified Management Accountant (CMA) exams.

                                                                                                                       “Intermediate Accounting is cur-
                                                                                                                       rent, complete, well written, and
  CPA Exam          The following questions are used in the Kaplan CPA Review Course to study current liabilities and contingencies
                                                                                                                       highly detailed. It belongs in the
  Questions         while preparing for the CPA examination. Determine the response that best completes the statements or
                    questions.                                                                                         library of anyone who is prepar-
                                                                                                                       ing for the CPA exam.”
                                                                                                                  —Barbara K. Parks, American
  ● LO3                                                                                                                          University—Online
                    1. On March 1, 2010, Fine Co. borrowed $10,000 and signed a two-year note bearing interest at 12% per annum
                       compounded annually. Interest is payable in full at maturity on February 28, 2012. What amount should Fine
                       report as a liability for accrued interest at December 31 2011?

                                                    iPod Content
                                                    Harness the power of one of the most popular technology tools students use
                                                    today—the Apple iPod®. Our innovative approach allows students to down-
                                                    load audio and video presentations right into their iPod and take learning
                                                    materials with them wherever they go.
                                                       Students just need to visit the Online Learning Center at
                                                    spiceland6e to download our iPod content. For each chapter of the book,
                                                    they will be able to download audio narrated lecture presentations, slide-
                                                    shows and even self-quizzes designed for use on various versions of iPods.
                                                                                     SPICELAND | SEPE | NELSON   xvii

Improve Their Performance?

CPA Simulations
Kaplan CPA Exam Simulations allow students to practice intermediate accounting concepts in a
web-based environment similar to that used in the actual CPA exam. There will be no hesitation
or confusion when your students sit for the real exam: they’ll know exactly what they need to do.

Self-Quiz and Study
Self-Quiz and Study (SQS) resource in Connect Accounting connects each student to the
learning resources needed for success in the course. For each chapter, students:
• Take a practice test to initiate the Self-Quiz and Study.
• Immediately upon completing the practice test, see how their performance compares to
  chapter learning objectives or content by sections within chapters.
• Receive a Self-Quiz and Study resource that recommends specific readings from the text,
  supplemental study material, and practice work that will improve their understanding and
  mastery of each learning objective.

Diagnostic and Adaptive Learning of Concepts: LearnSmart
Students want to make the best use of their study time. The LearnSmart adaptive self-study
technology within Connect Accounting provides students with a seamless combination of prac-
tice, assessment, and remediation for every concept in the textbook. LearnSmart’s intelligent
software adapts to every student response and automatically delivers concepts that advance
the student’s understanding while reducing time devoted to the concepts already mastered.
The result for every student is the fastest path to mastery of the chapter concepts. LearnSmart:
• Applies an intelligent concept engine to identify the relationships between concepts and
  to serve new concepts to each student only when he or she is ready.
• Adapts automatically to each student, so students spend less time on the topics they
  understand and practice more those they have yet to master.
• Provides continual reinforcement and remediation, but gives only as much guidance as
  students need.
• Integrates diagnostics as part of the learning experience.
• Enables you to assess which concepts students have efficiently learned on their own, thus
  freeing class time for more applications and discussion.

Student Progress Tracking
Connect Accounting keeps instructors informed about how each
student, section, and class is performing, allowing for more productive
use of lecture and office hours. The progress-tracking function enables
you to:
• View scored work immediately and track individual or group perfor-
  mance with assignment and grade reports.
• Access an instant view of student or class performance relative to
  learning objectives.
xviii   PREFACE

    Try a New e-Book Option!
                                                                    McGraw-Hill Connect Plus
                                                                    McGraw-Hill reinvents the textbook learn-
                                                                    ing experience for the modern student with
                                                                    Connect Plus Accounting. A seamless inte-
                                                                    gration of an eBook and Connect Account-
                                                                    ing, Connect Plus Accounting provides all
                                                                    of the Connect Accounting features plus
                                                                    the following:
                                                                      • An integrated eBook, allowing for any-
                                                                         time, anywhere access to the textbook.
                                                                      • Dynamic links between the problems or
                                                                         questions you assign to your students
                                                                         and the location in the eBook where
                                                                         that problem or question is covered.
                  • A powerful search function to pinpoint and connect key concepts in a snap.
                  In short, Connect Accounting offers you and your students powerful tools and features that
                  optimize your time and energies, enabling you to focus on course content, teaching, and stu-
                  dent learning. Connect Accounting also offers a wealth of content resources for both instruc-
                  tors and students. This state-of-the-art, thoroughly tested system supports you in preparing
                  students for the world that awaits.
                     For more information about Connect Plus Accounting, go to,
                  or contact your local McGraw-Hill sales representative.

                                                            CourseSmart is a new way to find and buy eText-
                                                            books. At CouseSmart you can can save up to 50 per-
                                                            cent off the cost of a printed textbook, reduce your
                  impact on the environment, and gain access to powerful Web tools for learning. CourseSmart
                  has the largest selection of eTextbooks available anywhere, offering thousands of the most
                  commonly adopted textbooks from a wide variety of higher education publishers. Course-
                  Smart eTextbooks are available in one standard online reader with full text search, notes and
                  highlighting, and email tools for sharing notes between classmates.
                                                                                   SPICELAND | SEPE | NELSON            xix

From innovative self-guided assessment and guidance to complete online course solutions, McGraw-Hill/Irwin
lets you take full advantage of everything the digital age has to offer.

Flexible Online Course Content
No matter what platform you use, McGraw-Hill is committed to making your online course
a success. We provide free, WebCT- and Blackboard-compatible course cartridges containing
all the content you need.

                                                                                     “The course I will use this text
                                                                                     for is a ‘blended’ course . . .
                                                                                     partially online and partially
                                                                                     on campus. This will be very
                                                                                     —Kathy Simons, Bryant College

                                 Tegrity Campus: Lectures 24/7
                                   Tegrity Campus is a service that makes class time available
                                   24/7 by automatically capturing every lecture in a search-
able format for students to review when they study and complete assignments. With a
simple one-click start-and-stop process, you capture all computer screens and correspond-
ing audio. Students can replay any part of any class with easy-to-use browser-based view-
ing on a PC or Mac.
   Educators know that the more students can see, hear, and experience class resources, the
better they learn. In fact, studies prove it. With Tegrity Campus, students quickly recall key
moments by using Tegrity Campus’s unique search feature. This search helps students effi-
ciently find what they need, when they need it, across an entire semester of class recordings.
Help turn all your students’ study time into learning moments immediately supported by
your lecture.

                To learn more about Tegrity watch a 2-minute Flash demo at:

McGraw-Hill Customer Care Contact Information
At McGraw-Hill, we understand that getting the most from new technology can be challeng-
ing. That’s why our services don’t stop after you purchase our products. You can e-mail our
Product Specialists 24 hours a day to get product-training online. Or you can search our knowl-
edge bank of Frequently Asked Questions on our support website. For Customer Support, call
800-331-5094, e-mail, or visit One of
our Technical Support Analysts will be able to assist you in a timely fashion.
xx        PREFACE

       A G R E AT L E A R N I N G S Y S T E M
     D O E S N ’ T S T O P W I T H T H E B O O K.
SUPPLEMENTS                                                                      “Very readable, impressive web-based
                                                                                 supplements, excellent topic coverage.”
                                                                                 —Karen Foust, Tulane University
Many educational institutions today are focused on the
notion of assurance of learning, an important element of
some accreditation standards. Intermediate Accounting is
                                                                        Dell, professional development activities including research,
designed specifically to support your assurance of learn-
                                                                        analysis, communication and judgment, and others);
ing initiatives with a simple, yet powerful solution.
                                                                        and (e) an assignment chart indicating topic, learning
   Each test bank question for Intermediate Accounting
                                                                        objective, and estimated completion time for every
maps to a specific chapter learning objective listed in the
                                                                        question, exercise, problem, and case.
text. You can use our test bank software, EZ Test and
EZ Test Online, or Connect Accounting to easily query
for learning objectives that directly relate to the learning            SOLUTIONS MANUAL
objectives for your course. You can then use the reporting              The Solutions Manual includes detailed solutions for every
features of EZ Test to aggregate student results in similar             question, exercise, problem, and case in the text.
fashion, making the collection and presentation of assur-
ance of learning data simple and easy.                                  INSTRUCTOR’S CD-ROM
                                                                        ISBN-13: 9780077328832 (ISBN-10: 0077328833)
AACSB STATEMENT                                                         This all-in-one resource contains the Instructor’s Resource
The McGraw-Hill Companies is a proud corporate mem-
                                                                        Manual, Solutions Manual, Testbank Word files, Comput-
ber of AACSB International. Understanding the impor-
                                                                        erized, Testbank, and PowerPoint® slides.
tance and value of AACSB accreditation, McGraw-Hill’s
Accounting series recognizes the curricula guidelines
detailed in the AACSB standards for business accredita-                 TESTBANK
tion by connecting selected questions in the text and the               The Testbank is a key component of our Learning System.
test bank to the six general knowledge and skill guide-                 For the sixth edition, an extensive review process was
lines in the AACSB standards.                                           undertaken to ensure the most complete, accurate,
    The statements contained in Intermediate Account-                   rigorous, and flexible Testbank available. Greater variety
ing are provided only as a guide for the users of this                  was added at each level of rigor. It has been revised for
textbook. The AACSB leaves content coverage and                         all changes and additions to the text, most notably the
assessment within the purview of individual schools, the                extensive expansion of IFRS coverage. Over 120 addi-
mission of the school, and the faculty. While Intermediate              tional IFRS items were added to the sixth edition Test-
Accounting and the teaching package make no claim of                    bank, which now includes nearly 4,000 items. In addition,
any specific AACSB qualification or evaluation, we have                   new IFRS materials were added to the Instructor Resource
within Intermediate Accounting labeled selected ques-                   Manual, Online Quizzes, and the Study Guide.
tions according to the six general knowledge and skills
areas.                                                                  AUDIO POWERPOINT SLIDES
                                                                        The Audio PowerPoint slides are created by Jon Booker
INSTRUCTOR’S RESOURCE MANUAL                                            and Charles Caldwell of Tennessee Technological Uni-
This manual provides for each chapter: (a) a chapter                    versity, Susan Galbreath of David Lipscomb University,
overview; (b) a comprehensive lecture outline; (c) exten-               and Cynthia J. Rooney, University of New Mexico, Los
sive teaching transparency masters that can be modified                  Alamos. The slides include an accompanying audio lec-
to suit an instructor’s particular needs or preferences;                ture with notes and are available on the Online Learning
(d) a variety of suggested class activities (real world, ethics,        Center (OLC).

O n lin e L e a r n i n g C e n t e r ( O L C ) : w w w. m hhe. com / s pi cel and6 e
                                                                                        SPICELAND | SEPE | NELSON       xxi

Intermediate Accounting authors Spiceland, Sepe, and Nelson know from their years of teaching experi-
ence what separates a great textbook from a merely adequate one. Every component of the learning package
must be imbued with the same style and approach, and that’s why the Intermediate Accounting authors
write every major ancillary themselves, whether printed or online. It’s one more thing that sets Intermediate
Accounting far above the competition.

SUPPLEMENTS                                                              “This is a well-written text, with good
                                                                         integration. It has a full range of comput-
                                                                         erized and other support materials; and
STUDY GUIDE                                                              the authors personally write and check
                                                                         the practice questions, examples, and
Volume 1: ISBN-13: 9780077328870 (ISBN-10: 0077328876)
                                                                         text items.”
Volume 2: ISBN-13: 9780077328887 (ISBN-10: 0077328884)
                                                                         —Elaine Henry, University of Miami
The Study Guide, written by the text authors, provides
chapter summaries, detailed illustrations, and a wide vari-
ety of self-study questions, exercises, and multiple-choice
problems (with solutions).
                                                                 ALTERNATE EXERCISES AND PROBLEMS
WORKING PAPERS                                                   This online manual includes additional exercises and prob-
                                                                 lems for each chapter in the text. Available on the OLC.
ISBN-13: 9780077328894 (ISBN-10: 0077328892)

Working Papers provide students with formatted tem-              PRACTICE SETS
plates to aid them in doing homework assignments.
                                                                 ISBN-13: 9780077328771 (ISBN-10: 0077328779)

EXCEL TEMPLATES                                                  Grady Wholesale Practice Set: Review of the
Selected end-of-chapter exercises and prob-                      Accounting Cycle
lems, marked in the text with an icon, can be
solved using these Microsoft Excel templates,
located on the OLC.
                                                         e cel

                                                                         “The quality of the material presented
UNDERSTANDING CORPORATE                                                  is second to none. Chapters can be re-
                                                                         arranged as we constantly improve our
ANNUAL REPORTS                                                           accounting curriculum. Most important,
Seventh Edition, by William R. Pasewark                                  students will read this book! The end-of-
ISBN-13: 9780073526935 (ISBN-10: 0073526932)                             chapter material is outstanding.”
This project provides students with instruction for obtain-              —Barbara Reider, University of Montana
ing an annual report from a publicly traded corporation
and for making an industry or competitor comparison.
xxii       PREFACE

What’s New in the Sixth Edition?
                  Chapter                                            Chapter                                           Chapter

                                                         THE INCOME STATEMENT
                                                                                                      TIME VALUE OF MONEY CONCEPTS
    STRUCTURE OF FINANCIAL                                 AND STATEMENT OF                          • Expanded the discussion, illustration, and
         ACCOUNTING                                            CASH FLOWS                              assignment material on the valuation of
• Revised the section on our global market-       • A proposed FASB staff position is slated to        long-term bonds to include the calculation
  place to reflect the most recent develop-          change the definition of what constitutes           of interest expense.
  ments in the move toward global accounting        a discontinued operation. We revised the
  standards.                                        section on discontinued operations to reflect                       Chapter
• Revised the Conceptual Framework material
  to reflect the completed Phase A of the
  joint FASB and IASB conceptual framework
                                                    the change.
                                                  • Enhanced the coverage of the balance
                                                    sheet presentation of assets and liabilities
                                                                                                            CASH AND RECEIVABLES
  project. End-of-chapter assignment materi-        of components considered “held-for
                                                                                                     • Extensively revised the section describing
  als have been revised accordingly.                -sale.”
                                                                                                       financing with receivables to reflect new
• Included information describing the FASB        • Added an IFRS box describing the differ-
  Accounting Standards Codification.                 ences in income statements prepared
                                                                                                     • Revised the discussion of earning quality
• Updated the material on fair value and the        according to U.S. GAAP and those prepared
                                                                                                       with respect to receivables.
  fair value option.                                applying IFRS as well as assignment material
                                                                                                     • Revised the former Appendix 12B (“Impair-
• Added a “Where We’re Headed” box pro-             on those differences.
                                                                                                       ment of a Receivable Due to a Troubled
  viding more information on the joint FASB/      • Expanded the IFRS boxes on comprehen-
                                                                                                       Debt Restructuring”) and moved it to be
  IASB conceptual framework project.                sive income and the statement of cash flows
                                                                                                       Appendix 7B.
                                                    and added assignment material on both
                  Chapter                                                                            • Added IFRS boxes concerning cash and
                                                                                                       cash equivalents, accounts receivable,
            REVIEW OF THE
                                                  • Added a British Airways case related to
                                                    reporting the income statement and state-
                                                    ment of cash flows using IFRS.
                                                                                                       transfers of receivables, and accounting for
                                                                                                       impairments and added related assignment
         ACCOUNTING PROCESS                                                                          • Added a Where We’re Headed box describ-
                                                                     Chapter                           ing FASB and IASB projects concerning
• Enhanced the sections on reversing entries
  and the conversion of cash basis to accrual
  basis and added additional assignment
  material on these topics.                                      INCOME
                                                                        5                              asset derecognition (relevant to transfers of
                                                                                                     • Added a British Airways case related to
                                                           MEASUREMENT AND                             accounting for cash and receivables using
                  Chapter                                                                              IFRS.
                                                          PROFITABILITY ANALYSIS
                     3                            • Revised Graphics 5-2 and 5-3 to better                             Chapter
                                                    relate to each other and to add clarity to
                                                    the chapter discussions.
                                                  • Expanded and enhanced the discussion of
                                                                                                         INVENTORIES: MEASUREMENT
• Revised the section on subsequent event           revenue recognition at delivery of products
                                                    and services                                     • Revised the illustration describing the flow
  disclosures to reflect new GAAP.
                                                  • Revised discussion of revenue recognition          of costs for a manufacturing company for
• Added assignment material on the topics of
                                                    with respect to software and other multiple-       greater clarity.
  financial disclosures and liquidity and financ-
                                                    deliverable contracts.                           • Revised the section on supplemental LIFO
  ing ratios.
                                                  • Provided a new profitability analysis illustra-     disclosures to enhance the coverage of LIFO
• Added an IFRS box describing the differ-
                                                    tion, based on a comparison of Target and          reserves and added related assignment
  ences in balance sheets prepared according
                                                    Walmart.                                           material.
  to U.S. GAAP and those prepared applying
                                                  • Expanded the IFRS boxes on long-term con-        • Expanded the IFRS box describing the
  IFRS as well as assignment material on those
                                                    struction contracts and multiple-deliverable       prohibition on the use of LIFO under IFRS.
                                                    contracts and enhanced assignment material       • Added a British Airways case related to the
• The FASB/IASB joint project on Financial
                                                    related to both topics                             measurement of inventories using IFRS.
  Statement Presentation potentially will dra-
  matically alter the appearance and content      • Added an IFRS box comparing revenue                                Chapter
  of our major financial statements. We added        recognition concepts between U.S. GAAP
  a “Where We’re Headed” box describing
  the proposed new look for the financials and
                                                    and IFRS.,.
                                                  • Added a “Where We’re Headed” box
                                                                                                      INVENTORIES: ADDITIONAL ISSUES
  specifically the statement of financial posi-       describing the joint FASB/IASB revenue
  tion (balance sheet).                             recognition project.                             • Enhanced the section on inventory write-
• Added a British Airways case related to         • Added a British Airways case related to            downs related to the income statement
  reporting the balance sheet using IFRS.           accounting for revenue under IFRS.                 presentation of the write-down.
                                                                                                     SPICELAND | SEPE | NELSON                       xxiii

We received an incredible amount of feedback prior to writing the sixth edition of Intermediate Accounting.
The following list of changes and improvements is a testament to our users and their commitment to making
Intermediate Accounting the best book of its kind.

• Added end-of-chapter material on inventory       of property, plant, and equipment and intan-           Option” provides companies the option to
  errors.                                          gible assets using IFRS.                               value some or all of their financial assets and
• Expanded the IFRS box on the differences                                                                liabilities at fair value. Discussion of how the
  between U.S. GAAP and IFRS in the applica-                         Chapter                              fair value option is applied to liabilities
  tion of the lower-of-cost-or-market rule
  including a comparative illustration and new
  assignment material.
                                                                                                          has been relocated from Part A (Bonds)
                                                                                                          of the chapter to a new Part D (Option to
                                                                                                          Report Liabilities at Fair Value) to provided
• Added a British Airways case related to                                                                 added flexibility of coverage and
  accounting for inventories using IFRS.          • Revised the discussion of impairments to              to emphasize its applicability to debt in
                                                    reflect new GAAP.                                      general and not just to bonds.
                  Chapter                         • Added Appendix 12B on impairments to              •   Enhanced coverage of accounting for
                                                    provide a comprehensive discussion of
                                                    other-than-temporary impairments and new
                                                                                                          convertible debt and added new assignment
                                                                                                          material for convertibles and bonds with
                                                                                                          detachable warrants.
                                                  • Revised IFRS boxes concerning the fair value      •   Expanded IFRS coverage of accounting
                                                    option and the equity method and related              for transaction costs (called debt issue
ASSETS: ACQUISITION AND DISPOSITION                 assignment material.                                  costs under U.S. GAAP) including a com-
• Expanded the IFRS box on the differences        • Added IFRS boxes related to investments               parative illustration and added assignment
  between U.S. GAAP and IFRS in accounting          (including both IFRS No. 9 and IAS No. 39),           material.
  for research and development including a          transfers between investment categories,          •   Added a “Where We’re Headed” box
  comparative illustration and new assignment       the cost method, and accounting for other-            describing the likely change in how we
  material.                                         than-temporary impairments, and also                  account for convertible debt based on an
• Added an IFRS box and new assignment              added related assignment material.                    ongoing joint project of the IASB and FASB,
  material on the differences in accounting       • Added “Where We’re Headed” boxes                      a recent FASB Staff Position, and current
  for software development costs using U.S.         describing the FASB and IASB projects                 treatment under IFRS.
  GAAP and IFRS.                                    concerning a comprehensive overhaul of            •   Expanded IFRS coverage of accounting for
• Added a British Airways case related to           accounting for investments and other finan-            convertible debt including a comparative
  accounting for the acquisition and disposi-       cial instruments, as well as an IASB project          illustration and added assignment material.
  tion of property, plant, and equipment and        likely to require use of the equity method        •   Added a new comparison of the fair value
  intangible assets using IFRS.                     (rather than proportionate consolidation) to          option between IFRS and U.S. GAAP.
                                                    account for joint ventures.                       •   Added a British Airways case related to
                  Chapter                         • Added a British Airways case related to               accounting for bonds and long-term notes

                                                    accounting for investments using IFRS.

                                                                                                          using IFRS.
ASSETS: UTILIZATION AND IMPAIRMENT                                    13                                                     15
• Revised Graphics 11-1A, B and C for greater              CURRENT LIABILITIES
  clarity.                                                 AND CONTINGENCIES                          • Re-ordered the discussions of bargain
• Added new assignment material on asset          • Added new discussion of accounting for gift         purchase options and the effects of residual
  impairment.                                       cards and other unearned revenue.                   values to make each more meaningful to
• Enhanced the IFRS boxes on the subsequent       • Revised IFRS boxes related to classification         students.
  valuation of property, plant, and equipment,      of liabilities to be refinanced and accounting     • Expanded IFRS coverage of lease classifica-
  the subsequent valuation of intangible            for contingencies and added new assign-             tion including a comparative illustration and
  assets, the measurement of impairment of          ment material.                                      added assignment material.
  value for property, plant, and equipment        • Added “Where We’re Headed” boxes                  • Added a “Where We’re Headed” box
  and finite-life intangible assets, and the         describing FASB and IASB projects concern-          describing the “right-of-use” model that is
  impairment of value of goodwill, by expand-       ing performance reporting and accounting            the focus of the ongoing joint project of the
  ing the discussions and by adding illustra-       for contingencies.                                  IASB and FASB.
  tions. Added new assignment material on         • Added a British Airways case related to           • Enhanced the Comprehensive Summary of
  these topics.                                     accounting for current liabilities and contin-      Lease Terms and Concepts.
• Added IFRS boxes on the calculation of            gencies using IFRS.                               • Added discussion of the effect of operating
  depreciation, biological assets, and the                                                              lease commitments on company survival
  impairment of value for indefinite-life intan-                      Chapter                            during the recent economic crisis.
  gible assets other than goodwill including                                                          • Expanded IFRS coverage of accounting
  new assignment material. Added a “Where
  We’re Headed” box on the status of the
                                                    BONDS AND LONG-TERM NOTES
                                                                                                        for sale-leaseback transactions including a
                                                                                                        comparative illustration and added assign-
  joint FASB/IASB impairment project.                                                                   ment material.
• Added a British Airways case related to         • FASB ASC 825–10–25–1: “Financial                  • Added a British Airways case related to
  accounting for the utilization and impairment     Instruments–Overall–Recognition–Fair Value          accounting for leases using IFRS.
xxiv       PREFACE

                  Chapter                            parative illustration and added assignment        changes to and from the LIFO method we
                                                     material.                                         discuss in this chapter would not occur if
                                                 •   Added coverage of the use of the term
                                                     “reserves” and other terminology differ-
                                                                                                       International standards were being applied.
                                                                                                     • U.S. GAAP and International standards are
                                                     ences between U.S. GAAP and IFRS includ-          largely converged regarding accounting
• Revised and enhanced the discussion and            ing a comparative illustration and added          changes and error corrections, but one
  illustration of “Coping with Uncertainty in        assignment material.                              difference concerns error corrections. An
  Income Taxes.”                                 •   Added a new illustration demonstrating            IFRS box is added to indicate that when cor-
• Expanded coverage of the effect of non-tax         the distribution of dividends to preferred        recting errors in previously issued financial
  differences between U.S. GAAP and IFRS on          shareholders.                                     statements, IFRS permits the effect of the
  reported amounts for deferred taxes includ-    •   Revised the integrated coverage of distin-        error to be reported in the current period if
  ing a comparative example.                         guishing between debt and equity under            it’s not considered practicable to report it
• Added discussion of intraperiod tax alloca-        U’S. GAAP and IFRS.                               retrospectively as is required by U.S. GAAP.
  tion within the statement of comprehensive     •   Added a “Where We’re Headed” box                  Related assignment material was added.
  income.                                            describing the FASB/IASB joint project on
• Added an IFRS box indicating the effect of         Financial Statement Presentation and its                          Chapter
  the IFRS prohibition of extraordinary items        effect on the presentation of equity in each
  on intraperiod tax allocation.
• Omitted a no-longer-timely section dealing     •
                                                     of the financial statements.
                                                     Added a British Airways case related to
                                                                                                                STATEMENT OF
  with criticisms of deferred tax accounting.        accounting for shareholders’ equity using
• Added a British Airways case related to            IFRS.
                                                                                                             CASH FLOWS REVISITED
  accounting for income taxes using IFRS.                                                            • At the heart of the collapse of Bear Stearns,
                                                                     Chapter                           Lehman Brothers, AIG, Citigroup, Fannie
                  Chapter                                                                              Mae, Freddie Mac and many other stalwart

                   17                                                  19
                                                      SHARE-BASED COMPENSATION
                                                                                                       companies and the subsequent worldwide
                                                                                                       economic decline was a shortage of cash
     PENSIONS AND OTHER                                                                                flows. Discussion was added of how describ-
                                                       AND EARNINGS PER SHARE                          ing how each of these meltdowns involved
 POSTRETIREMENT BENEFIT PLANS                    • Added integrated coverage of differences            a lack of measuring and monitoring the ebb
• Added discussion of the effect of the recent     between U.S. GAAP and IFRS in the recogni-          and flow of cash.
  economic crisis on the funded status of pen-     tion of deferred tax asset for stock options      • At the heart of the FASB/IASB joint project
  sion plans.                                      including a comparative illustration and            on Financial Statement Presentation is
• Expanded the integrated IFRS coverage of         added assignment material.                          the classification of activities in a com-
  accounting for actuarial gains and losses      • Frequently stock option awards specify              mon fashion within each of the financial
  including a comparative illustration and         that recipients gradually become eligible to        statements, perhaps following the current
  added assignment material.                       exercise their options rather than all at once.     classification within the statement of cash
• Added integrated coverage of differences         This is called “graded vesting.” We added           flows. We added a “Where We’re Headed”
  between U.S. GAAP and IFRS in accounting         a section on accounting for such plans              box describing the proposed new look for
  for prior service cost (called past service      including an illustration and an IFRS box and       the financials and the possible elimination of
  cost under IFRS) including a comparative         added related assignment material.                  the indirect method of reporting operating
  illustration and added assignment material.    • Revised the integrated IFRS coverage of             activities.
• Added new discussion and T-Account visuals       earnings per share.                               • Added integrated coverage of differences
  enhance student understanding of the way we    • Restricted stock awards are quickly replac-         between U.S. GAAP and IFRS in the classifi-
  record changes in the PBO and Plan Assets.       ing stock options as the share-based                cation of cash flows including a comparative
• Added a “Where We’re Headed” box                 compensation plan of choice. The discussion         illustration and added assignment material.
  describing the direction of International        of the effect of these stock award plans on       • Added a British Airways case related to
  Financial Reporting Standards for pensions       EPS calculations is expanded and is pre-            reporting a statement of cash flows using
  and other postretirement plans based on          sented in a way that allows flexibility in the       IFRS.
  a recent Exposure Draft proposing that           extent to which it is included in lesson plans
  we report in net income all changes in the       and assignments.
  obligation and the value of plan assets.       • Added a “Where We’re Headed” box
• Added a British Airways case related to          describing the FASB/IASB joint project on
  accounting for postretirement benefit plans       earnings per share.
  using IFRS.                                    • Added a British Airways case related to
                                                   accounting for share-based compensation
                  Chapter                          and earnings per share using IFRS.

                   18                                                Chapter
• Added a new learning objective and com-
  bined two others to better reflect the core
  competencies within the chapter.                         CHANGES AND ERRORS
• Added integrated coverage of differences       • LIFO is not a permissible method for
  between U.S. GAAP and IFRS in reporting          accounting for inventory under IFRS. An
  comprehensive income including a com-            IFRS box is added to point out that the
                                                                                         SPICELAND | SEPE | NELSON        xxv


Sixth Edition Reviewers                                       Robert Derstine, Villanova University
                                                              Doug DeVidal, University of Texas–Austin

Peter Aghimien, Indiana University–South Bend                 Victoria Dickinson, University of Florida–Gainesville

Pervaiz Alam, Kent State University                           Jan Duffy, Iowa State University

Dave Alldredge, Salt Lake Community College                   Barbara Durham, University of Central Florida

Matthew J. Anderson, Michigan State University–East Lansing   Terry G. Elliott, Morehead State University

Marie Archambault, Marshall University                        James Emig, Villanova University

Debbie Archambeault, University of Tennessee–Chattanooga      Denise English, Boise State University

Paul Ashcroft, Missouri State University                      Kathryn Epps, Kennesaw State University

Florence Atiase, University of Texas–Austin                   Ed Etter, Eastern Michigan University

Steven Balsam, Temple University                              Larry Farmer, Middle Tennessee State University

James Bannister, University of Hartford                       Anita Feller, University of Illinois–Champaign

Charles P. Baril, James Madison University                    Pat Fort, University of Alaska–Anchorage

Cheryl Bartlett, Central New Mexico Community College         Karen Foust, Tulane University

Homer Bates, University of North Florida                      Gail Fraser, Kean University

Ira Bates, Florida A & M University                           Ann Gabriel, Ohio University–Athens

Deborah F. Beard, Southeast Missouri State University         Clyde Galbraith, West Chester University of PA

Yoel Beniluz, Rutgers University–New Brunswick                Aloke Ghosh, Bernard M. Baruch College

Rick Berschback, Walsh College                                Daniel Gibbons, Columbia College–Christian County

Mark Bezik, Idaho State University                            John Giles, NC State University–Raleigh

Bruce Branson, NC State University–Raleigh                    Lisa Gillespie, Loyola University–Chicago

Phil Buchanan, George Mason University                        Dan Givoly, Penn State University–University Park

Jay Buchanon, Burlington Community College                    Ronald Gray, University of West Florida

Charles A. Carslaw, University of Nevada–Reno                 Daryl Max Guffey, Clemson University

Dennis Chambers, Kennesaw State University                    Ronald Halsac, Community College of Allegheny County

Kimberly Charland, Kansas State University                    Coby Harmon, University of California–Santa Barbara

Linda Chase, Baldwin-Wallace College                          Carolyn Hartwell, Wright State University–Dayton

Agnes Cheng, Louisiana State University–Baton Rouge           Daniel He, Monmouth University

Cal Christian, East Carolina University                       John Hoffer, Stark State College of Technology

Stan Chu, Borough of Manhattan Community College              Harry Howe, State University College–Geneseo

Karen Collins, Lehigh University                              Kathy Hsiao Yu Hsu, University of Louisiana–Lafayette

Elizabeth Conner, University of Colorado–Denver               Patricia Hughes, University of Pittsburgh

Teresa Conover, University of North Texas                     Evelyn Hwang, Eastern Michigan University

Paul Copley, James Madison University                         Raghavan J. Iyengar, North Carolina Central University

John Dallmus, Arizona State University–West                   Christopher Jones, California State University–Northridge

Li Dang, California Polytechnic State University              Lisa Koonce, University of Texas–Austin

Charles Davis, California State University–Sacramento         Jerry Kreuze, Western Michigan University–Kalamazoo

Denise de la Rosa, Grand Valley State University              Timothy Krumwiede, Bryant University

Keren Deal, Auburn University–Montgomery                      Steven Lafave, Augsburg College

Robert Depasquale, Saint Vincent College                      Sheldon Langsam, Western Michigan University–Kalamazoo

Patricia Derrick, Salisbury University                        Doug Laufer, Metro State College of Denver
xxvi        PREFACE

As you know if you’ve read this far, Intermediate Accounting would not be what it is without the
passionate feedback of our colleagues. Through your time and effort, we were able to create a learning
system that truly responds to the needs of the market, and for that, we sincerely thank each of you.

Janice Lawrence, University of Nebraska–Lincoln               Jeri Ricketts, University of Cincinnati
Charles Leflar, University of Arkansas–Fayetteville           Carol Rogers, Central New Mexico Community College
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Joseph Lipari, Montclair State University                     Huldah A. Ryan, Iona College–New Rochelle
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Susan Pallas, Southeast Community College                     Michael Yampuler, University of Houston

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Simon Pearlman, California State University–Long Beach
Ray Pfeiffer, University of Massachusetts–Amherst             Fifth Edition Reviewers
Catherine Plante, University of New Hampshire
                                                              The Spiceland team also extends sincere thanks to the reviewers of
John Plouffe, California State University–Los Angeles         our previous edition, without whose input we could not have made
                                                              Intermediate Accounting the extraordinary success it has been.
Grace Pownall, Emory University
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Raymond Reisig, Pace University                               Matthew Anderson, Michigan State University
                                                                                    SPICELAND | SEPE | NELSON                  xxvii


Joseph W. Antenucci, Youngstown State University         Mary Halford, Prince Georges Community College
Marie Archambault, Marshall University                   John M. Hassell, Indiana University/Purdue University –Indianapolis
Jack Aschkenazi, American Intercontinental University    Frank Heflin, Florida State University–Tallahassee
Florence Atiase, University of Texas                     Kenneth Henry, Florida International University–Miami
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Yoel Beniluz, Rutgers University                         Marianne James, California State University–Los Angeles
Lila Bergman, Hunter College                             Agatha Jeffers, Montclair State University
John Bildersee, New York University                      Cynthia Jeffrey, Iowa State University
Robert Bloom, John Carroll University                    Keith Jones, George Mason University
William J. Bradberry, Bluefield State College            Khondkar Karim, Rochester Institute of Technology
Russell Briner, University of Texas                      Ronald Kilgore, University of Tennessee–Martin
Nat R. Briscoe, Northwestern State University            Gordon Klein, University of California–Los Angeles
R. Eugene Bryson, University of Alabama–Huntsville       Lisa Koonce, University of Texas–Austin
Gary Burkette, East Tennessee State University           Cynthia L. Krom, Marist College
Al Case, Southern Oregon University                      Joan Lacher, Nassau Community College
Jack M. Cathey, University of North Carolina–Charlotte   Janice Lawrence, University of Nebraska–Lincoln
Lanny Chasteen, Oklahoma State University                Philip Lee, Nashville State Tech Community College
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Stanley Chu, Bernard M. Baruch College                   Tim M. Lindquist, University of Northern Iowa
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Edwin Cohen, DePaul University                           Patty Lobingier, Virginia Polytechnic Institute
Teresa Conover, University of North Texas                Susan Logorda, Lehigh Carbon Community College
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John Corless, California State University–Sacramento     Jeff Mankin, Lipscomb University
Charles D’Alessandro, SUNY–Suffolk                       Josephine Mathias, Mercer County Community College
Bobbie W. Daniels, Jackson State University              Robert W. McGee, Barry University
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Denise de la Rosa, Grand Valley State University         Charles Miller, California Polytechnic State University
Susan A. Dehner, Delaware Tech Community College–Dover   Anita Morgan, CTU Online
Larry A. Deppe, Weber State University                   Barbara Muller, Arizona State University
Wendy Duffy, Illinois State University                   Ramesh Narasimhan, Montclair University
Gerard M. Engeholm, Pace University                      Sia Nassiripour, William Paterson University
Kathryn K. Epps, Kennesaw State University               Siva Nathan, Georgia State University
Patricia A. Fedje, Minot State University                Joyce Njoroge, Drake University
Anita Feller, University of Illinois–Champaign           George Nogler, University of Massachusetts–Lowell
Ehsan H. Feroz, University of Washington–Tacoma          Emeka Ofobike, University of Akron
Karen Foust, Tulane University                           Derek Oler, Indiana University
Gail E. Fraser, Kean University                          William A. Padley, Madison Area Technical College–Truax
Jeanne Gerard, Franklin Pierce College                   Hong S. Pak, California State Poly University–Pomona
Aloke Ghosh, Bernard M. Baruch College                   Barbara K. Parks, American Intercontinental University
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Julia Grant, Case Western Reserve University             Simon Pearlman, California State University–Long Beach
xxviii      PREFACE

                                                  We Are
Rachel Pernia, Essex County College
Anthony R. Piltz, Rocky Mountain College
Joann Pinto, Montclair State University
Terence Pitre, University of South Carolina
David Plumlee, University of Utah
Grace Pownall, Emory University
                                                  We would like to acknowledge Ilene Persoff,      We are most grateful for the talented as-
Frederick M. Richardson, Virginia Polytechnic
                                                  CW Post Campus/Long Island University, for       sistance and support from the many people
Institute                                         her detailed accuracy check of the Testbank.     at McGraw-Hill/Irwin. We would particu-
                                                  Special thanks are also due to Vic Stanton       larly like to thank Brent Gordon, editor in
Michael Riordan, James Madison University
                                                  of the University of California–Berkeley and     chief; Stewart Mattson, editorial director;
Byung Ro, Purdue University–West Lafayette        Stanford University for his contributions to     Tim Vertovec, publisher; Dana Woo, senior
                                                  the accuracy and quality of the PowerPoints.     sponsoring editor, Daryl Horrocks, senior
Pamela Roush, University of Central Florida       Anita Feller of the University of Illinois–      developmental editor; Michelle Heaster,
Huldah A. Ryan, Iona College                      Champaign made many valuable contribu-           marketing manager; Greg Patterson, re-
                                                  tions to our codification exercises and cases.    gional sales manager; Pat Frederickson, lead
Anwar Salimi, California State Poly University–   Bill Padley of Madison Area Technical College    project manager; Debra Sylvester, senior
Pomona                                            contributed greatly to the production of         production supervisor; Laurie Entringer,
                                                  the Working Papers. In addition, we thank        designer; Jeremy Cheshareck, senior photo
Angela Sandberg, Jacksonville State University    Jon A. Booker and Charles W. Caldwell of         research coordinator; and Kerry Bowler,
                                                  Tennessee Technological University, Cynthia      media project manager.
Alex Sannella, Rutgers University
                                                  J. Rooney of University of New Mexico,
Gerald Savage, Essex County College               and Susan C. Galbreath of David Lipscomb         Finally, we extend our thanks to Kaplan
                                                  University for crafting the PowerPoint Slides;   CPA Review for their assistance develop-
Gary Schader, Kean University
                                                  and Jack E. Terry, ComSource Associates, for     ing simulations for our inclusion in the
Paul Schloemer, Ashland University                developing the Excel Templates. Anita Feller     end-of-chapter material, as well as Dell
                                                  of the University of Illinois–Champaign, Law-    and British Airways for allowing us to use
Kathy Sevigny, Bridgewater State College          rence Tomassini of the Ohio State University,    their Annual Reports throughout the text.
Carol Shaver, Louisiana Tech University           Andreas Simon of California Polytechnic          We also acknowledge permission from the
                                                  State University, Barbara Muller of Arizona      AICPA to adapt material from the Uniform
Ronald Singleton, Western Washington University   State University, and Mark McCarthy of East      CPA Examination, the IMA for permission to
Kenneth Smith, Salisbury University               Carolina University contributed new content      adapt material from the CMA Examination,
                                                  and accuracy checks of our new Learn-            and Dow Jones & Co., Inc., for permission
Nancy Snow, University of Toledo                  Smart and Self-Quiz and Study products. We       to excerpt material from The Wall Street
Paulette Tandy, University of Nevada–Las Vegas    greatly appreciate everyone’s hard work on       Journal.
                                                  these products!
Katherene P. Terrell, University of Central
Oklahoma                                          Ilene Persoff, CW Post Campus/Long Island
                                                  University, and Mark McCarthy, East Carolina
Robert Terrell, University of Central Oklahoma    University, made significant contributions to
Karen Turner, University of Northern Colorado     the accuracy of the text, end-of-chapter ma-
                                                  terial, and solutions manual. In addition, we
Michael Tyler, Barry University                   appreciate the help and guidance received
Michael G. Welker, Drexel University              from Teresa Conover from North Texas
                                                  University, for her insights regarding the
Michael L. Werner, University of Miami–           International Financial Reporting Standards.
Coral Gables                                      A big thank you to Jerry Kreuze of Western
                                                  Michigan University for his detailed analysis
Gloria Worthy, Southwest Tennessee University     of the end-of-chapter material. We appreci-
                                                  ate the assistance of James Lynch at KPMG,       David Spiceland
Jing-Wen Yang, California State University–
                                                  who provided us with valuable feedback on        Jim Sepe
East Bay                                          various difficult issues.                         Mark Nelson
Contents in Brief
The Role of Accounting as an Information System

 1   Environment and Theoretical Structure of Financial Accounting,   2
 2   Review of the Accounting Process, 50
 3   The Balance Sheet and Financial Disclosures, 112
 4   The Income Statement and Statement of Cash Flows, 168
 5   Income Measurement and Profitability Analysis, 232
 6   Time Value of Money Concepts, 298                                     SECTION

Economic Resources

 7 Cash and Receivables, 336
 8 Inventories: Measurement, 394
 9 Inventories: Additional Issues, 446
10 Property, Plant, and Equipment and Intangible Assets: Acquisition and
   Disposition, 500
11 Property, Plant, and Equipment and Intangible Assets: Utilization and   SECTION
   Impairment, 556

Financial Instruments and Liabilities

12   Investments, 618
13   Current Liabilities and Contingencies, 690
14   Bonds and Long-Term Notes, 746
15   Leases, 806
16   Accounting for Income Taxes, 872
17   Pensions and Other Postretirement Benefits,   934                     SECTION
18   Shareholders’ Equity, 1006

Additional Financial Reporting Issues

19 Share-Based Compensation and Earnings Per Share,       1068
20 Accounting Changes and Error Corrections, 1136
21 The Statement of Cash Flows Revisited, 1182


Appendix A: Derivatives, A–0
Appendix B: Dell Annual Report, B–1
Appendix C: IFRS Comprehensive Case,        C–0
Glossary, G–0
Photo Credits, Cr–1
Index, I–0
Present and Future Value Tables, P–1

                           The Role of Accounting as an Information System

                                                                     Brief Exercises, 38

                                                                     Exercises, 39
           CHAPTER                                                   CPA and CMA Review Questions, 43
           Environment and Theoretical                               Broaden Your Perspective, 45
           Structure of Financial Accounting, 2
Part A: Financial Accounting Environment, 4
The Economic Environment and Financial Reporting, 5
      The Investment-Credit Decision—A Cash Flow Perspective, 6
      Cash versus Accrual Accounting, 7
The Development of Financial Accounting and Reporting
                                                                       2      CHAPTER
                                                                              Review of the Accounting
                                                                              Process, 50
Standards, 9
      Historical Perspective and Standards, 9                        The Basic Model, 52
      The Establishment of Accounting Standards—A Political             The Accounting Equation, 52
      Process, 12                                                       Account Relationships, 53
      Our Global Marketplace, 13                                     The Accounting Processing Cycle, 55
      The Role of the Auditor, 16
                                                                     Concept Review Exercise: Journal Entries for External
      Financial Reporting Reform, 16
                                                                     Transactions, 64
      A Move Away from Rules-Based Standards, 18
                                                                     Adjusting Entries, 66
Ethics in Accounting, 19                                                Prepayments, 67
      Ethics and Professionalism, 19
                                                                        Accruals, 70
      Analytical Model for Ethical Decisions, 19
                                                                        Estimates, 72
Part B: The Conceptual Framework, 20                                 Concept Review Exercise: Adjusting Entries, 74
Objective of Financial Reporting, 21
                                                                     Preparing the Financial Statements, 76
Qualitative Characteristics of Financial Reporting Information, 22      The Income Statement, 76
      Fundamental Qualitative Characteristics, 23
                                                                        The Balance Sheet, 77
      Enhancing Qualitative Characteristics, 24
                                                                        The Statement of Cash Flows, 78
Practical Boundaries (Constraints) to Achieving Desired                 The Statement of Shareholders’ Equity, 79
Qualitative Characteristics, 25
                                                                     The Closing Process, 79
      Cost Effectiveness, 25
      Materiality, 25                                                Concept Review Exercise: Financial Statement Preparation and
      Conservatism, 26                                               Closing, 81
Elements of Financial Statements, 26                                 Conversion from Cash Basis to Accrual Basis, 83
Recognition and Measurement Concepts, 27                             Appendix 2A: Use of a Worksheet, 87
      Recognition, 27                                                Appendix 2B: Reversing Entries, 88
      Measurement, 28                                                Appendix 2C: Subsidiary Ledgers and Special Journals, 90
      Underlying Assumptions, 28                                     Questions for Review of Key Topics, 93
      Broad Accounting Principles, 29                                Brief Exercises, 93
Evolution of Accounting Principles, 33                               Exercises, 94
   The Asset/Liability Approach, 33                                  CPA Review Questions, 101
   The Move toward Fair Value, 34                                    Problems, 102
Questions for Review of Key Topics, 38                               Broaden Your Perspective, 109

                                                                                                           Contents    xxxi

                                                                Change in Accounting Principle, 188
                                                                Change in Depreciation, Amortization, or Depletion

                                                                Method, 189
                                                                Change in Accounting Estimate, 190
         The Balance Sheet and                                  Change in Reporting Entity, 191
         Financial Disclosures, 112                          Correction of Accounting Errors, 192
                                                                Prior Period Adjustments, 192
Part A: The Balance Sheet, 115                               Earnings per Share Disclosures, 192
Usefulness and Limitations, 115                              Comprehensive Income, 194
Classifications, 116                                            Other Comprehensive Income, 194
   Assets, 116                                                  Flexibility in Reporting, 194
   Liabilities, 120                                             Accumulated Other Comprehensive Income, 196
   Shareholders’ Equity, 121                                 Concept Review Exercise: Income Statement
Concept Review Exercise: Balance Sheet Classification, 123   Presentation, 197
Part B: Financial Disclosures, 124                           Part B: The Statement of Cash Flows, 198
Disclosure Notes, 125                                        Usefulness of the Statement of Cash Flows, 198
   Summary of Significant Accounting Policies, 125           Classifying Cash Flows, 199
   Subsequent Events, 125                                       Operating Activities, 199
   Noteworthy Events and Transactions, 126                      Investing Activities, 203
Management Discussion and Analysis, 128                         Financing Activities, 203
Management’s Responsibilities, 128                              Noncash Investing and Financing Activities, 204

Auditors’ Report, 129                                        Concept Review Exercise: Statement of Cash Flows, 205
                                                             Questions for Review of Key Topics, 209
Compensation of Directors and Top Executives, 131
                                                             Brief Exercises, 209
Part C: Risk Analysis, 132                                   Exercises, 211
Using Financial Statement Information, 132                   CPA and CMA Review Questions, 218
Liquidity Ratios, 133                                        Problems, 219
   Financing Ratios, 135                                     Broaden Your Perspective, 225
Appendix 3: Reporting Segment Information, 140               British Airways Case, 230
Questions for Review of Key Topics, 143                      CPA Simulation 4–1, 231
Brief Exercises, 144
Exercises, 145

CPA and CMA Review Questions, 153
Problems, 154                                                         CHAPTER
Broaden Your Perspective, 160                                         Income Measurement and
                                                                      Profitability Analysis, 232

  4      CHAPTER
         The Income Statement and
         Statement of Cash Flows, 168
                                                             Part A: Revenue Recognition, 234
                                                             Revenue Recognition at Delivery, 238
                                                                Product Revenue, 238
                                                                Service Revenue, 238
                                                             Revenue Recognition after Delivery, 239
Part A: The Income Statement and Comprehensive                  Installment Sales, 239
Income, 170                                                  Concept Review Exercise: Installment Sales, 243
Income from Continuing Operations, 170                          Right of Return, 243
   Revenues, Expenses, Gains, and Losses, 170                   Consignment Sales, 245
   Income Tax Expense, 172                                   Revenue Recognition Prior to Delivery, 245
   Operating versus Nonoperating Income, 172                    A Comparison of the Completed Contract and Percentage-of-
   Income Statement Formats, 172                                Completion Methods, 251
Earnings Quality, 175                                        Concept Review Exercise: Long-Term Construction
   Manipulating Income and Income Smoothing, 175             Contracts, 257
   Operating Income and Earnings Quality, 176                Industry-Specific Revenue Issues, 258
   Nonoperating Income and Earnings Quality, 179                Software and Other Multiple-Deliverable Arrangements, 259
Separately Reported Items, 180                                  Franchise Sales, 260
   Intraperiod Income Tax Allocation, 180                    Part B: Profitability Analysis, 263
   Discontinued Operations, 182                                 Activity Ratios, 263
   Extraordinary Items, 186                                     Profitability Ratios, 265
   Unusual or Infrequent Items, 187                          Profitability Analysis—An Illustration, 267
Accounting Changes, 188                                      Appendix 5: Interim Reporting, 271
xxxii     Contents

Questions for Review of Key Topics, 273                     Expected Cash Flow Approach, 308
Brief Exercises, 273                                        Part B: Basic Annuities, 309
Exercises, 275                                              Future Value of an Annuity, 310
CPA and CMA Review Questions, 282                              Future Value of an Ordinary Annuity, 310
Problems, 284                                                  Future Value of an Annuity Due, 311
Broaden Your Perspective, 291
                                                            Present Value of an Annuity, 312
British Airways Case, 297
                                                               Present Value of an Ordinary Annuity, 312
CPA Simulation 5–1, 297
                                                               Present Value of an Annuity Due, 313
                                                               Present Value of a Deferred Annuity, 314
                                                            Financial Calculators and Excel, 316

  6      CHAPTER
         Time Value of Money
         Concepts, 298
                                                            Solving for Unknown Values in Present
                                                            Value Situations, 316
                                                            Concept Review Exercise: Annuities, 319
                                                            Preview of Accounting Applications of Present Value
Part A: Basic Concepts, 300                                 Techniques—Annuities, 320
Time Value of Money, 300                                       Valuation of Long-Term Bonds, 320
   Simple versus Compound Interest, 300                        Valuation of Long-Term Leases, 321
                                                               Valuation of Pension Obligations, 321
Valuing a Single Cash Flow Amount, 301
   Future Value of a Single Amount, 301                     Summary of Time Value of Money Concepts, 322
   Present Value of a Single Amount, 302                    Questions for Review of Key Topics, 324
   Solving for Other Values When FV and PV Are Known, 304   Brief Exercises, 325
                                                            Exercises, 326
Concept Review Exercise: Valuing a Single
                                                            CPA and CMA Review Questions, 329
Cash Flow Amount, 305
                                                            Problems, 331
Preview of Accounting Applications of Present Value
                                                            Broaden Your Perspective, 334
Techniques—Single Cash Amount, 306

                           Economic Resources

  7      CHAPTER
         Cash and Receivables, 336
Part A: Cash and Cash Equivalents, 338
                                                            Financing with Receivables, 356
                                                               Secured Borrowing, 356
                                                               Sale of Receivables, 358
                                                               Transfers of Notes Receivable, 361
                                                               Deciding Whether to Account for a Transfer as a Sale
Internal Control, 338                                          or a Secured Borrowing, 361
   Internal Control Procedures—Cash Receipts, 339              Disclosures, 362
   Internal Control Procedures—Cash Disbursements, 339
                                                            Concept Review Exercise: Financing with Receivables, 365
Restricted Cash and Compensating Balances, 340
                                                            Decision Makers’ Perspective, 365
Decision Makers’ Perspective, 341
                                                            Appendix 7A: Cash Controls, 369
Part B: Current Receivables, 342
Accounts Receivable, 342                                    Appendix 7B: Impairment of a Receivable Due
   Initial Valuation of Accounts Receivable, 342            to a Troubled Debt Restructuring, 372
   Subsequent Valuation of Accounts Receivable, 344         Questions for Review of Key Topics, 374
Concept Review Exercise: Uncollectible Accounts             Brief Exercises, 375
Receivable, 351                                             Exercises, 376
                                                            CPA and CMA Review Questions, 382
Notes Receivable, 352
                                                            Problems, 384
   Interest-Bearing Notes, 352
                                                            Broaden Your Perspective, 390
   Noninterest-Bearing Notes, 353
                                                            British Airways Case, 393
   Subsequent Valuation of Notes Receivable, 355
                                                                                                         Contents     xxxiii

                                                               Other Issues Pertaining to the Retail Method, 462
                                                            Concept Review Exercise: Retail Inventory Method, 463

  8      CHAPTER
         Inventories: Measurement, 394

Part A: Recording and Measuring Inventory, 396
                                                            Part C: Dollar-Value LIFO Retail, 465
                                                            Concept Review Exercise: Dollar-Value LIFO Retail Method, 468
                                                            Part D: Change in Inventory Method and Inventory
                                                            Errors, 469
Types of Inventory, 396                                     Change in Inventory Method, 469
   Merchandising Inventory, 396                                Most Inventory Changes, 469
   Manufacturing Inventories, 396                              Change to the LIFO Method, 471
Perpetual Inventory System, 397                             Inventory Errors, 472
                                                               When the Inventory Error is Discovered the Following
Periodic Inventory System, 398
                                                               Year, 473
A Comparison of the Perpetual and Periodic Inventory           When the Inventory Error is Discovered Subsequent to the
Systems, 399                                                   Following Year, 473
What Is Included in Inventory?, 400
                                                            Concept Review Exercise: Inventory Errors, 474
   Physical Quantities Included in Inventory, 400
                                                            Earnings Quality, 474
   Expenditures Included in Inventory, 401
                                                            Appendix 9: Purchase Commitments, 476
Inventory Cost Flow Assumptions, 404
                                                            Questions for Review of Key Topics, 478
   Specific Identification, 405
                                                            Brief Exercises, 479
   Average Cost, 405
                                                            Exercises, 480
   First-In, First-Out (FIFO), 407
                                                            CPA and CMA Review Questions, 487
   Last-In, First-Out (LIFO), 408
                                                            Problems, 489
   Comparison of Cost Flow Methods, 410
                                                            Broaden Your Perspective, 494
Decision Makers’ Perspective—Factors Influencing Method     British Airways Case, 497
Choice, 411
                                                            CPA Simulation 9–1, 498
Concept Review Exercise: Inventory Cost Flow Methods, 414   CPA Simulation 9–2, 498
Decision Makers’ Perspective, 417
Part B: Methods of Simplifying LIFO, 420
LIFO Inventory Pools, 420
Dollar-Value LIFO, 421
   Advantages of DVL, 422
   Cost Indexes, 422
                                                             10          CHAPTER
                                                                         Property, Plant, and
                                                                         Equipment and Intangible Assets:
   The DVL Inventory Estimation Technique, 422                           Acquisition and Disposition, 500
Concept Review Exercise: Dollar-Value LIFO, 423
Questions for Review of Key Topics, 425                     Part A: Valuation at Acquisition, 502
Brief Exercises, 426                                        Types of Assets, 502
Exercises, 427                                              Costs to Be Capitalized, 504
CPA and CMA Review Questions, 433                              Property, Plant, and Equipment, 504
Problems, 435                                                  Intangible Assets, 509
Broaden Your Perspective, 441                               Lump-Sum Purchases, 512
British Airways Case, 445
                                                            Noncash Acquisitions, 512
                                                               Deferred Payments, 513
                                                               Issuance of Equity Securities, 515

                                                               Donated Assets, 515
                                                            Decision Makers’ Perspective, 516
         Inventories: Additional Issues, 446                Part B: Dispositions and Exchanges, 517
                                                            Dispositions, 517
Part A: Reporting—Lower of Cost or Market, 448              Exchanges, 518
Determining Market Value, 449                                  Fair Value Not Determinable, 519
   Applying Lower of Cost or Market, 451                       Exchange Lacks Commercial Substance, 519
   Adjusting Cost to Market, 452                            Concept Review Exercise: Exchanges, 521
Concept Review Exercise: Lower of Cost or Market, 454       Part C: Self-Constructed Assets and Research and
Part B: Inventory Estimation Techniques, 455                Development, 521
The Gross Profit Method, 456                                Self-Constructed Assets, 521
   A Word of Caution, 457                                      Overhead Allocation, 522
The Retail Inventory Method, 458                               Interest Capitalization, 522
   Retail Terminology, 459                                     Research and Development (R & D), 526
   Cost Flow Methods, 460                                   Appendix 10: Oil and Gas Accounting, 534
xxxiv     Contents

Questions for Review of Key Topics, 535                 Intangible Assets Subject to Amortization, 571
Brief Exercises, 536                                    Intangible Assets Not Subject to Amortization, 572
Exercises, 537                                       Concept Review Exercise: Depletion and Amortization, 573
CPA and CMA Review Questions, 543
                                                     Part B: Additional Issues, 575
Problems, 546
                                                     Partial Periods, 575
Broaden Your Perspective, 550
                                                     Changes in Estimates, 576
British Airways Case, 554
                                                     Change in Depreciation, Amortization, or Depletion
                                                     Method, 577
                                                     Error Correction, 578

 11          CHAPTER
             Property, Plant, and
             Equipment and Intangible Assets:
                                                     Impairment of Value, 580
                                                        Assets to Be Held and Used, 580
                                                     Assets to Be Sold, 587
                                                        Impairment Losses and Earnings Quality, 588
             Utilization and Impairment, 556
                                                     Part C: Subsequent Expenditures, 589
Part A: Depreciation, Depletion, and                    Expenditures Subsequent to Acquisition, 589
Amortization, 558                                       Repairs and Maintenance, 589
Cost Allocation—An Overview, 558                        Additions, 590
                                                        Improvements, 590
Measuring Cost Allocation, 559
                                                        Rearrangements, 590
   Service Life, 559
                                                        Costs of Defending Intangible Rights, 591
   Allocation Base, 559
   Allocation Method, 560                            Appendix 11A: Comparison with MACRS (Tax Depreciation), 594
Depreciation, 560                                    Appendix 11B: Retirement and Replacement
   Time-Based Depreciation Methods, 560              Methods of Depreciation, 594
   Activity-Based Depreciation Methods, 562          Questions for Review of Key Topics, 596
Decision Makers’ Perspective—Selecting               Brief Exercises, 596
a Depreciation Method, 563                           Exercises, 598
Concept Review Exercise: Depreciation Methods, 565   CPA and CMA Review Questions, 605
                                                     Problems, 607
Group and Composite Depreciation Methods, 566
                                                     Broaden Your Perspective, 612
Depletion of Natural Resources, 569                  British Airways Case, 616
Amortization of Intangible Assets, 571               CPA Simulation 11–1, 617

                           Financial Instruments and Liabilities

 12          CHAPTER                                 Concept Review Exercise: Various Investment
                                                     Securities, 640
             Investments, 618                        Financial Statement Presentation and Disclosure, 642
                                                     Part B: Investor Has Significant Influence, 644
Part A: Investor Lacks Significant Influence, 620    How the Equity Method Relates to Consolidated
Securities to Be Held to Maturity, 622               Financial Statements, 644
Trading Securities, 625                              What Is Significant Influence?, 645
Securities Available-for-Sale, 629                   A Single Entity Concept, 645
   Comparison of HTM, TS, and AFS Approaches, 635    Further Adjustments, 647
Transfers between Reporting Categories, 637          Reporting the Investment, 649
   Fair Value Options, 637                           What If Conditions Change?, 651
Impairment of Investments, 639                          If an Equity Method Investment Is Sold, 652
                                                                                                      Contents   xxxv

   Comparison of Fair Value and Equity Methods, 652     Exercises, 725
   Fair Value Option, 653                               CPA and CMA Review Questions, 731
Concept Review Exercise: The Equity Method, 654         Problems, 733
                                                        Broaden Your Perspective, 738
Decision Makers’ Perspective, 656
                                                        British Airways Case, 744
Financial Instruments and Investment Derivatives, 657
Appendix 12A: Other Investments (Special Purpose
Funds, Investments in Life Insurance Policies), 659
Appendix 12B: Impairment of Investments, 660
Questions for Review of Key Topics, 666
Brief Exercises, 668
Exercises, 669
                                                         14          CHAPTER
                                                                     Bonds and Long-Term
                                                                     Notes, 746
CPA and CMA Review Questions, 676
Problems, 678                                           The Nature of Long-Term Debt, 747
Broaden Your Perspective, 685
                                                        Part A: Bonds, 748
British Airways Case, 688
                                                        The Bond Indenture, 748
CPA Simulation 12–1, 689
                                                        Recording Bonds at Issuance, 749
                                                           Determining the Selling Price, 750
                                                        Determining Interest—Effective Interest Method, 752

                                                           Zero-Coupon Bonds, 753
             CHAPTER                                       Bonds Sold at a Premium, 754
             Current Liabilities and                       When Financial Statements Are Prepared between
                                                           Interest Dates, 756
             Contingencies, 690
                                                        The Straight-Line Method—A Practical Expediency, 756
                                                        Concept Review Exercise: Issuing Bonds and Recording
Part A: Current Liabilities, 692                        Interest, 757
Characteristics of Liabilities, 692
                                                        Debt Issuance Costs, 758
What Is a Current Liability?, 693                       Part B: Long-Term Notes, 759
Open Accounts and Notes, 693                            Note Issued for Cash, 760
   Accounts Payable and Trade Notes Payable, 694        Note Exchanged for Assets or Services, 760
   Short-Term Notes Payable, 694                        Installment Notes, 762
   Commercial Paper, 697
                                                        Financial Statement Disclosures, 763
Accrued Liabilities, 697                                Decision Makers’ Perspective, 765
   Accrued Interest Payable, 698
                                                        Concept Review Exercise: Note with an Unrealistic
   Salaries, Commissions, and Bonuses, 698
                                                        Interest Rate, 767
Liabilities from Advance Collections, 700               Part C: Debt Retired Early, Convertible into Stock,
   Deposits and Advances from Customers, 700            or Providing an Option to Buy Stock, 769
   Gift Cards, 701                                      Early Extinguishment of Debt, 769
   Collections for Third Parties, 702
                                                        Convertible Bonds, 769
A Closer Look at the Current and Noncurrent                When the Conversion Option Is Exercised, 771
Classification, 702                                        Induced Conversion, 772
   Current Maturities of Long-Term Debt, 702
                                                        Bonds with Detachable Warrants, 772
   Obligations Callable by the Creditor, 702
   When Short-Term Obligations Are Expected to Be       Concept Review Exercise: Issuance and Early
   Refinanced, 703                                      Extinguishment of Debt, 774
Concept Review Exercise: Current Liabilities, 704       Part D: Option to Report Liabilities at
                                                        Fair Value, 775
Part B: Contingencies, 705
                                                           Determining Fair Value, 775
Loss Contingencies, 706
                                                           Reporting Changes in Fair Value, 775
   Product Warranties and Guarantees, 708
                                                           Mix and Match, 777
   Premiums, 710
   Litigation Claims, 711
                                                        Appendix 14A: Bonds Issued between Interest Dates, 779
   Subsequent Events, 713                               Appendix 14B: Troubled Debt Restructuring, 780
   Unasserted Claims and Assessments, 715               Questions for Review of Key Topics, 784
                                                        Brief Exercises, 785
Gain Contingencies, 716
                                                        Exercises, 786
Concept Review Exercise: Contingencies, 717             CPA and CMA Review Questions, 792
Decision Makers’ Perspective, 719                       Problems, 794
Appendix 13: Payroll-Related Liabilities, 721           Broaden Your Perspective, 800
Questions for Review of Key Topics, 723                 British Airways Case, 804
Brief Exercises, 724                                    CPA Simulation 14–1, 805
xxxvi     Contents

                                                          Problems, 859

                                                          Broaden Your Perspective, 866
             CHAPTER                                      British Airways Case, 869
             Leases, 806                                  CPA Simulation 15–1, 870

Part A: Accounting by the Lessor and Lessee, 808
Decision Makers’ Perspective—Advantages of Leasing, 808

Capital Leases and Installment Notes
Compared, 809                                                          CHAPTER
Lease Classification, 810                                              Accounting for Income Taxes, 872
   Classification Criteria, 811
   Additional Lessor Conditions, 813                      Part A: Deferred Tax Assets and Deferred Tax
Operating Leases, 815                                     Liabilities, 874
   Advance Payments, 815                                  Conceptual Underpinning, 874
   Leasehold Improvements, 816                            Temporary Differences, 875
Capital Leases—Lessee and Lessor, 817                     Deferred Tax Liabilities, 875
   Depreciation, 819                                         The FASB’s Balance Sheet Approach, 877
   Accrued Interest, 820                                     Types of Temporary Differences, 878
Concept Review Exercise: Direct Financing Lease, 821      Deferred Tax Assets, 882
Sales-Type Leases, 822                                    Valuation Allowance, 885
Part B: Bargain Purchase Options and Residual             Permanent Differences, 886
Value, 824                                                Concept Review Exercise: Temporary and Permanent
Bargain Purchase Options, 824
                                                          Differences, 889
   When a BPO Is Exercisable Before the End of the
   Lease Term, 827                                        Part B: Other Tax Accounting Issues, 890
                                                          Tax Rate Considerations, 890
Residual Value, 827
                                                             When Enacted Tax Rates Differ, 890
   Effect on the Lessee of a Residual Value, 828
                                                             Changes in Tax Laws or Rates, 891
   Effect on the Lessor of a Residual Value, 828
                                                          Multiple Temporary Differences, 892
Part C: Other Lease Accounting Issues, 832
                                                          Net Operating Losses, 894
Executory Costs, 832
                                                             Operating Loss Carryforward, 895
Discount Rate, 832
                                                             Operating Loss Carryback, 896
   When the Lessee’s Incremental Borrowing Rate Is
   Less Than the Lessor’s Implicit Rate, 833              Financial Statement Presentation, 897
   When the Lessor’s Implicit Rate is Unknown, 833           Balance Sheet Classification, 897
   Lessor’s Initial Direct Costs, 834                        Disclosure Notes, 898
Contingent Rentals, 835                                   Coping with Uncertainty in Income Taxes, 900
A Brief Summary, 835                                      Intraperiod Tax Allocation, 902
Lease Disclosures, 835                                    Decision Makers’ Perspective, 904

Decision Makers’ Perspective—Financial Statement          Concept Review Exercise: Multiple Differences and Operating
Impact, 838                                               Loss, 905
   Balance Sheet and Income Statement, 838                Questions for Review of Key Topics, 908
   Statement of Cash Flow Impact, 839                     Brief Exercises, 909
                                                          Exercises, 911
Concept Review Exercise: Various Lease Accounting
                                                          CPA and CMA Review Questions, 918
Issues, 840
                                                          Problems, 920
Part D: Special Leasing Arrangements, 842
                                                          Broaden Your Perspective, 926
Sale-Leaseback Arrangements, 842
                                                          British Airways Case, 931
   Capital Leases, 843
                                                          CPA Simulation 16–1, 932
   Operating Leases, 844
   Losses on Sale-Leasebacks, 845
Real Estate Leases, 846
   Leases of Land Only, 846
   Leases of Land and Building, 846
   Leases of Only Part of a Building, 846
Leveraged Leases, 846
                                                           17          CHAPTER
                                                                       Pensions and Other
                                                                       Postretirement Benefits, 934
Questions for Review of Key Topics, 848
Brief Exercises, 849                                      Part A: The Nature of Pension Plans, 936
Exercises, 850                                            Defined Contribution Pension Plans, 938
CPA and CMA Review Questions, 857                         Defined Benefit Pension Plans, 939
                                                                                                                   Contents      xxxvii

Pension Expense—An Overview, 940                                        Treasury Stock, 1010
Part B: The Pension Obligation and Plan Assets, 941                     Accumulated Other Comprehensive Income, 1010
The Pension Obligation, 941                                             Reporting Shareholders’ Equity, 1012
   Accumulated Benefit Obligation, 941                               The Corporate Organization, 1015
   Vested Benefit Obligation, 941                                       Limited Liability, 1015
   Projected Benefit Obligation, 942                                    Ease of Raising Capital, 1015
   Illustration Expanded to Consider the Entire Employee Pool, 947      Disadvantages, 1015
Pension Plan Assets, 947                                                Types of Corporations, 1016
   Reporting the Funded Status of the Pension Plan, 949                 Hybrid Organizations, 1016
                                                                        The Model Business Corporation Act, 1016
Part C: Determining Pension Expense, 949
The Relationship between Pension Expense and Changes in              Part B: Paid-In Capital, 1017
the PBO and Plan Assets, 949                                         Fundamental Share Rights, 1017
   Components of Pension Expense, 951                                Distinguishing Classes of Shares, 1017
   Income Smoothing, 953                                                Typical Rights of Preferred Shares, 1018
Part D: Reporting Issues, 955                                           Is It Equity or Is It Debt?, 1019
Recording Gains and Losses, 955                                      The Concept of Par Value, 1020
Recording the Pension Expense, 956                                   Accounting for the Issuance of Shares, 1020
Recording the Funding of Plan Assets, 958                               Shares Issued For Cash, 1020
Comprehensive Income, 960                                               Shares Issued for Noncash Consideration, 1021
                                                                        More Than One Security Issued for a Single Price, 1021
Income Tax Considerations, 961
                                                                        Share Issue Costs, 1022
Putting the Pieces Together, 962
                                                                     Concept Review Exercise: Expansion of Corporate
Decision Makers’ Perspective, 963
                                                                     Capital, 1023
Settlement or Curtailment of Pension Plans, 963
                                                                     Share Buybacks, 1024
Concept Review Exercise: Pension Plans, 964
                                                                     Decision Makers’ Perspective, 1024
Part E: Postretirement Benefits Other Than                              Shares Formally Retired or Viewed as Treasury Stock, 1025
Pensions, 966                                                           Accounting for Retired Shares, 1026
What Is a Postretirement Benefit Plan?, 967                             Accounting for Treasury Stock, 1027
   Postretirement Health Benefits and Pension Benefits                  Resale of Shares, 1028
   Compared, 967
   Determining the Net Cost of Benefits, 968
                                                                     Concept Review Exercise: Treasury Stock, 1028
Postretirement Benefit Obligation, 969
                                                                     Part C: Retained Earnings, 1031
                                                                     Characteristics of Retained Earnings, 1031
   Measuring the Obligation, 969
   Attribution, 969                                                  Dividends, 1031
                                                                        Liquidating Dividend, 1031
Accounting for Postretirement Benefit Plans Other
Than Pensions, 970                                                      Retained Earnings Restrictions, 1032
   A Comprehensive Illustration, 972                                    Cash Dividends, 1032
                                                                        Property Dividends, 1033
Decision Makers’ Perspective, 973
                                                                     Stock Dividends and Splits, 1033
Concept Review Exercise: Other Postretirement
                                                                        Stock Dividends, 1033
Benefits, 974
                                                                        Stock Splits, 1035
Appendix 17: Service Method of Allocating Prior
                                                                        Stock Splits Effected in the Form of Stock Dividends
Service Cost, 977
                                                                        (Large Stock Dividends), 1035
Questions for Review of Key Topics, 978
                                                                     Decision Makers’ Perspective, 1037
Brief Exercises, 979
Exercises, 980                                                       Concept Review Exercise: Changes in Retained
CPA and CMA Review Questions, 989                                    Earnings, 1038
Problems, 990                                                        Appendix 18: Quasi Reorganizations, 1042
Broaden Your Perspective, 998                                        Questions for Review of Key Topics, 1044
British Airways Case, 1003                                           Brief Exercises, 1044
CPA Simulation 17–1, 1004                                            Exercises, 1046
                                                                     CPA and CMA Review Questions, 1053
                                                                     Problems, 1054

 18          CHAPTER
             Shareholders’ Equity, 1006
Part A: The Nature of Shareholders’ Equity, 1008
                                                                     Broaden Your Perspective, 1060
                                                                     British Airways Case, 1066
                                                                     CPA Simulation 18–1, 1066

Financial Reporting Overview, 1008
   Paid-in Capital, 1009
   Retained Earnings, 1010
xxxviii   Contents

                         Additional Financial Reporting Issues

 19         CHAPTER
            Share-Based Compensation
            and Earnings Per Share, 1068
                                                              Appendix 19B: Stock Appreciation Rights, 1108
                                                              Questions for Review of Key Topics, 1111
                                                              Brief Exercises, 1112
                                                              Exercises, 1113
                                                              CPA and CMA Review Questions, 1119
Part A: Share-Based Compensation, 1070
                                                              Problems, 1121
Stock Award Plans, 1070
                                                              Broaden Your Perspective, 1127
Stock Option Plans, 1071
                                                              British Airways Case, 1134
   Expense—The Great Debate, 1072
                                                              CPA Simulation 19–1, 1134
   Recognizing the Fair Value of Options, 1073
   When Options are Exercised, 1075
   When Unexercised Options Expire, 1075
   Plans with Graded Vesting, 1077
   Plans with Performance or Market Conditions, 1079
Employee Share Purchase Plans, 1080
Decision Makers’ Perspective, 1080
Concept Review Exercise: Share-Based
                                                               20           CHAPTER
                                                                            Accounting Changes
                                                                            and Error Corrections, 1136
Compensation Plans, 1081
                                                              Part A: Accounting Changes, 1138
Part B: Earnings Per Share, 1082                              Change in Accounting Principle, 1139
Basic Earnings Per Share, 1083
                                                              Decision Makers’ Perspective—Motivation for Accounting
   Issuance of New Shares, 1083                               Choices, 1139
   Stock Dividends and Stock Splits, 1084                        The Retrospective Approach: Most Changes in Accounting
   Reacquired Shares, 1085                                       Principle, 1141
   Earnings Available to Common Shareholders, 1086               The Prospective Approach, 1144
Diluted Earnings Per Share, 1087                              Change in Accounting Estimate, 1146
   Potential Common Shares, 1087                                 Changing Depreciation, Amortization, and Depletion
   Options, Rights, and Warrants, 1087                           Methods, 1147
   Convertible Securities, 1088                               Change in Reporting Entity, 1148
Antidilutive Securities, 1092                                 Error Correction, 1149
   Options, Warrants, Rights, 1092                            Concept Review Exercise: Accounting Changes, 1150
   Convertible Securities, 1093
                                                              Part B: Correction of Accounting Errors, 1152
   Order of Entry for Multiple Convertible Securities, 1093
                                                              Prior Period Adjustments, 1152
Concept Review Exercise: Basic and Diluted EPS, 1095
                                                              Error Correction Illustrated, 1153
Additional EPS Issues, 1096                                      Error Discovered in the Same Reporting Period That It
   Components of the “Proceeds” in the Treasury Stock            Occurred, 1153
   Method, 1096                                                  Error Affecting Previous Financial Statements, but Not Net
   Contingently Issuable Shares, 1097                            Income, 1154
   Summary of the Effect of Potential Common Shares on           Error Affecting a Prior Year’s Net Income, 1154
   Earnings Per Share, 1098
                                                              Concept Review Exercise: Correction of Errors, 1159
   Actual Conversions, 1099
                                                              Questions for Review of Key Topics, 1161
   Financial Statement Presentation of Earnings Per Share
   Data, 1100                                                 Brief Exercises, 1161
                                                              Exercises, 1162
Decision Makers’ Perspective, 1102
                                                              CPA and CMA Review Questions, 1168
Concept Review Exercise: Additional EPS Issues, 1104          Problems, 1170
Appendix 19A: Option-Pricing Theory, 1107                     Broaden Your Perspective, 1177
                                                                                                         Contents   xxxix

                                                              Part C: Preparing an SCF: The Indirect Method
                                                              of Reporting Cash Flows from Operating

 21        CHAPTER
           The Statement of Cash Flows
           Revisited, 1182
                                                              Activities, 1218
                                                              Getting There through the Back Door, 1218
                                                              Components of Net Income That Do Not Increase or
                                                              Decrease Cash, 1219
                                                              Components of Net Income That Do Increase or Decrease
Part A: The Content and Value of the Statement of             Cash, 1219
Cash Flows, 1184
                                                              Comparison with the Direct Method, 1220
Decision Makers’ Perspective—Usefulness of Cash Flow
Information, 1184                                             Reconciliation of Net Income to Cash Flows from Operating
                                                              Activities, 1221
Cash Inflows and Outflows, 1184
                                                              Decision Makers’ Perspective—Cash Flow Ratios, 1223
Role of the Statement of Cash Flows, 1185
  The Importance of Cash Flows in an Economic Decline, 1187   Appendix 21A: Spreadsheet for the Indirect Method, 1225
  Cash and Cash Equivalents, 1187                             Appendix 21B: The T-Account Method of Preparing the
  Primary Elements of the Statement of Cash Flows, 1188       Statement of Cash Flows, 1229
Preparation of the Statement of Cash Flows, 1194              Questions for Review of Key Topics, 1231
                                                              Brief Exercises, 1232
Part B: Preparing an SCF: The Direct Method
                                                              Exercises, 1233
of Reporting Cash Flows from Operating
                                                              CPA and CMA Review Questions, 1242
Activities, 1197
                                                              Problems, 1244
Using a Spreadsheet, 1197
                                                              Broaden Your Perspective, 1256
  Income Statement Accounts, 1199
                                                              British Airways Case, 1263
  Balance Sheet Accounts, 1207
                                                              CPA Simulation 21–1, 1263
Concept Review Exercise: Comprehensive Review, 1214

Appendix A: Derivatives, A–0
Appendix B: Dell Annual Report, B–1
Appendix C: IFRS Comprehensive Case, C–0
Glossary, G–0
Photo Credits, Cr–1
Index, I–0
Present and Future Value Tables, P–1

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