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 INTERMEDIATE

LO FISHER
ACCOUNTING
THIRD
EDITION KIN LO GEORGE FISHER THIRD EDITION VOLUME TWO
VOLUME
TWO

ISBN 978-0-13-386595-0
INTERMEDIATE ACCOUNTING
9 0 0 0 0

www.pearsoncanada.ca 9 780133 865950

 H1 vii

Brief Contents

Preface xv

CHAPTER 11 Current Liabilities and Contingencies 500

CHAPTER 12 Non-current Financial Liabilities 560

CHAPTER 13 Equities 616

CHAPTER 14 Complex Financial Instruments 667

CHAPTER 15 Earnings per Share 716

CHAPTER 16 Accounting for Income Taxes 766

CHAPTER 17 Pensions and Other Employee Future Benefits 812

CHAPTER 18 Accounting for Leases 850

CHAPTER 19 Statement of Cash Flows 893

CHAPTER 20 Accounting Changes 970

APPENDIX A Time Value of Money and Simple Valuation Techniques A2

APPENDIX B Case Solving, Comprehensive Cases, and Capstone Cases B1

APPENDIX C Canadian Tire Corporation 2013 Consolidated

Financial Statements C1

Glossary G1

Index I1

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 This page intentionally left blank

A01_LO5943_03_SE_FM.indd iv 04/12/15 4:22 PM

 Contents

Preface xv

CHAPTER 11 Current Liabilities and Contingencies 500

A. Introduction 501
B. Definition, Classification, and Measurement of Liabilities 502
1. Liabilities defined 502
2. Recognition 503
3. Financial and non-financial liabilities 503
4. Current versus non-current liabilities 503
5. Measurement 504
C. Current Liabilities 505
1. Trade payables 505
2. Common non-trade payables 507
3. Notes payable 511
4. Credit (loan) facilities 513
5. Warranties 514
6. Deferred revenues 516
7. Customer incentives 517
8. Other current liabilities 521
D. Contingencies 524
1. Contingencies involving potential outflows 524
2. Contingencies involving potential inflows 527
3. Treatment of contingencies under ASPE 529
E. Commitments and Guarantees 530
1. Commitments 530
2. Guarantees 531
F. Presentation and Disclosure 532
G. Substantive Differences Between Relevant IFRS and ASPE 532
H. Standards in Transition 532
I. Summary 533
J. Answers to Checkpoint Questions 533
K. Glossary 534
L. For Further Reading 535
M. References 535
N. Problems 535
O. Mini-Cases 553

CHAPTER 12 Non-current Financial Liabilities 560

A. Introduction 561
1. Overview 561
2. Financial leverage 562
3. Debt-rating agencies 563
B. Common Non-Current Financial Liabilities 564
1. Notes payable 564
2. Bonds 565
C. Initial Measurement 567
1. Debt exchanged for non-cash assets 568
2. Debt issued at non-market rates of interest 568
3. Compound financial instruments 568
4. Issuing bonds at par, a premium, or a discount 569

A01_LO5950_03_SE_FM.indd ix 28/12/15 2:10 PM

 x Conten ts
5. Determining the sales price of a bond
when the yield is given 570
6. Timing of bond issuance 570
D. Subsequent Measurement 572
1. Effective interest rate 572
2. Amortization using the effective interest method 572
3. Amortization using the straight-line method 577
E. Derecognition 579
1. Derecognition at maturity 579
2. Derecognition prior to maturity 579
3. Derecognition through offsetting and
in-substance defeasance 582
F. Putting It All Together—A Comprehensive Bond Example 583
G. Other Issues 585
1. Decommissioning and site restoration obligations 585
2. Off-balance-sheet obligations 588
3. Bonds denominated in foreign currency 589
H. Presentation and Disclosure 591
I. Substantive Differences Between Relevant IFRS and ASPE 592
J. Summary 593
K. Answers to Checkpoint Questions 593
L. Glossary 594
M. References 595
N. Problems 596
O. Mini-Cases 611

CHAPTER 13 Equities 616

A. Introduction 617
B. Components of Equity for Accounting Purposes 618
1. Contributed capital 618
2. Retained earnings 621
3. Accumulated other comprehensive income (AOCI) 621
4. Summary 623
C. Equity Transactions Relating to Contributed Capital 623
1. Issuance of shares 624
2. Stock splits 626
3. Reacquisition of shares 627
D. Equity Transactions Relating to Retained Earnings 633
1. Cash dividends 633
2. Stock dividends 633
3. Property dividends (dividends in kind) 635
4. Dividend preference 635
E. Statement of Changes in Equity 637
F. Presentation and Disclosure 639
G. Comprehensive Illustration of Equity Transactions 642
H. Substantive Differences Between Relevant IFRS and ASPE 643
I. Summary 644
J. Answers to Checkpoint Questions 645
K. Glossary 646
L. References 646
M. Problems 647
N. Mini-Cases 664

CHAPTER 14 Complex Financial Instruments 667

A. Introduction 668
B. Types of Financial Instruments 669
1. Basic financial assets, financial liabilities,
and equity instruments 669
2. Derivative financial instruments 670
3. Compound financial instruments 673

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 Contents xi
C. Accounting for Complex Financial Instruments 675
1. Derivatives 675
2. Compound financial instruments 676
3. Stock compensation plans 681
D. Hedging 687
1. Overview 687
2. Hedge accounting 689
3. Fair value hedges 689
4. Cash flow hedges 691
E. Presentation and Disclosure 693
F. Substantive Differences Between Relevant IFRS and ASPE 695
G. Summary 695
H. Answers to Checkpoint Questions 696
I. Glossary 697
J. References 698
K. Problems 698
L. Mini-Cases 714

CHAPTER 15 Earnings per Share 716

A. Introduction to Basic and Diluted Earnings Per Share 717
B. Calculating Basic EPS 718
1. Numerator: net income available to ordinary shareholders 719
2. Denominator: weighted average number
of ordinary shares outstanding 721
3. Complicating factors 722
4. Basic EPS 724
C. Calculating Diluted EPS 725
1. Identify all potential ordinary shares 726
2. Compute incremental EPS for all potential ordinary shares 727
3. Rank order incremental EPS 731
4. Sequentially compare incremental EPS to provisional EPS
to determine diluted EPS 731
5. Effect of discontinued operations 734
6. Diluted EPS when basic EPS is negative 736
7. Other considerations 736
8. Putting it all together: A comprehensive example 738
D. Presentation and Disclosure 740
1. Presentation 740
2. Disclosure 740
3. Significant accounting policies 741
E. Substantive Differences Between Relevant IFRS and ASPE 741
F. Summary 741
G. Answers to Checkpoint Questions 742
H. Glossary 742
I. References 743
J. Problems 743
K. Mini-Cases 763

CHAPTER 16 Accounting for Income Taxes 766

A. Introduction 767
B. Methods of Accounting for Income Taxes 768
1. Taxes payable method 769
2. Tax allocation methods 769
3. Summary of alternative approaches 773
C. Applying The Accrual Method: Permanent and Temporary Differences 774
1. Permanent differences 774
2. Temporary differences 776
3. Disposals of depreciable assets 779
4. Schedule for analyzing permanent and temporary differences 782
D. Changes in Tax Rates 783

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 xii Con tents
E. Tax Losses 785
1. Carryback of tax losses 786
2. Carryforward of tax losses 787
F. Measurement: no Discounting for Time Value of Money 789
G. Presentation and Disclosure 789
1. Presentation and disclosure of income tax expense 789
2. Presentation and disclosure of income tax assets and liabilities 790
H. A Practical Illustration: Canadian Tire Corporation 790
I. Substantive Differences Between Relevant IFRS and ASPE 792
J. Summary 793
K. Answers to Checkpoint Questions 794
L. Glossary 794
M. References 795
N. Problems 795
O. Mini-Cases 809

CHAPTER 17 Pensions and Other Employee Future Benefits 812

A. Introduction 813
B. Nature of Pension Plans 814
1. Defined contribution plans 814
2. Defined benefit plans 815
C. Accounting for Defined Contribution Plans 815
D. Accounting for Defined Benefit Plans 816
1. What to account for in defined benefit plans 818
2. Implementing pension accounting for defined benefit plans 823
3. Presentation and disclosure 828
E. Other Issues 830
1. Settlements 830
2. Asset ceiling 830
3. Multi-employer plans 830
4. Other long-term employee benefits 831
F. A Practical Illustration: Canadian Tire Corporation 831
G. Substantive Differences Between Relevant IFRS and ASPE 833
H. Summary 833
I. Answers to Checkpoint Questions 834
J. Glossary 834
K. References 835
L. Problems 835
M. Mini-Cases 847

CHAPTER 18 Accounting for Leases 850

A. Introduction 851
B. Economics of Leasing 853
C. Classifying and Accounting for Operating and Finance Leases 856
1. Lease classification 856
2. Supporting indicators for lease classification 857
3. Accounting for finance and operating leases 858
4. Preference for finance or operating lease treatment 859
5. Rationale for supporting indicators relating to lease
term and present value 860
6. Basic numerical example 861
D. Complicating Factors in Leases 864
1. Residual values—guaranteed and unguaranteed 864
2. Inclusion of bargain purchase options in minimum lease payments 864
3. Interest rate used in present value calculations 864
4. Cash flows to be included in present value calculations 866
5. Third-party guarantees: an example of rules avoidance 867
E. Presentation and Disclosure 868
1. Current/non-current classification of lease liability or lease receivables 868
2. Disclosures 868

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 Contents xiii
F. Sale—Leasebacks 869
G. Substantive Differences Between Relevant IFRS and ASPE 871
1. Quantitative guidelines for lease classification 872
2. Additional considerations for lease classification on
lessor’s books under ASPE 872
3. Sub-classification of finance leases 872
4. Lessee’s discount rate for present value calculations 873
H. Standards in Transition 874
I. Summary 874
J. Answers to Checkpoint Questions 875
K. Glossary 876
L. References 876
M. Problems 877
N. Mini-Cases 891

CHAPTER 19 Statement of Cash Flows 893

A. Introduction 894
B. Presentation of The Statement of Cash Flows 895
1. Cash and cash equivalents defined 895
2 Classifying cash flows 896
3 Format of the statement of cash flows 900
4 Format of the statement of cash flows under ASPE 904
C. Preparing The Statement of Cash Flows 906
1. Sources of information 907
2 The process—Indirect method 907
3 The process—Direct method 917
4 Effects of specific items on the statement of cash flows 920
5 Putting it all together—A comprehensive example 925
D. Presentation and Disclosure 929
E. Substantive Differences Between IFRS and ASPE 929
F. Summary 930
G. Answers to Checkpoint Questions 931
H. Glossary 931
I. References 932
J. Problems 932
K. Mini-Cases 956

CHAPTER 20 Accounting Changes 970

A. Types of Accounting Changes 971
1. Changes in accounting policy 971
2. Corrections of errors from prior periods 972
3. Changes in accounting estimates 973
4. Summary 974
B. Treatments for Accounting Changes 975
1. Prospective adjustment 975
2. Retrospective adjustment 977
C. Changes in Accounting Standards 979
D. Implementing Retrospective Adjustments 980
1. Retrospective adjustments involving only presentation 981
2. Retrospective adjustments affecting only temporary accounts 981
3. Retrospective adjustments affecting both permanent
and temporary accounts 982
E. Summary 988
F. Answers to Checkpoint Questions 988
G. Glossary 989
H. References 989
I. Problems 989
J. Mini-Case 1003

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 xiv Con tents
APPENDIX A Time Value of Money and Simple Valuation Techniques A1

APPENDIX B Case Solving, Comprehensive Cases,

and Capstone Cases B1

APPENDIX C Canadian Tire Corporation 2013 Consolidated

Financial Statements C1

Glossary G1

Index I1

A01_LO5950_03_SE_FM.indd xiv 28/12/15 2:10 PM

 H1 xv

Preface

“There is too much material to learn!” is a complaint commonly heard among both stu-
dents and instructors of intermediate-level financial accounting. The current environ-
ment in Canada involving multiple accounting standards certainly adds to the prob-
lem. However, this sentiment was prevalent even before the splintering of Canadian
generally accepted accounting principles (GAAP) in 2011. So what is the source of the
problem, and how do we best resolve it?
Regardless of one’s perspective—as an instructor of intermediate accounting, as
a student, or as a researcher reading and writing papers—often the problem of too much
content is an illusion. Instead, the issue is really one of flow, not just of words, but of ideas.
Why does a class, research paper, or presentation appear to cover too much, and why
is it difficult to understand? Most often, it is because the ideas being presented did not
flow—they were not coherent internally within the class, paper, or presentation, or not
well connected with the recipients’ prior knowledge and experiences.
Connecting new ideas to a person’s existing knowledge and efficiently structuring
those new ideas are not just reasonable notions. Modern neuroscience tells us that for
ideas to be retained they need to be logically structured to each other and presented in
ways that connect with a person’s prior knowledge and experiences.

OUR APPROACH
How can we better establish the flow of ideas in intermediate accounting? One
way is to apply more accounting theory to help explain the “why” behind account-
ing standards and practices. Inherently, humans are inquisitive beings who want to
know not just how things work, but also why things work a particular way. When
students understand “why,” they are better able to find connections between differ-
ent ideas and internalize those ideas with the rest of their accumulated knowledge
and experiences.
This approach contrasts with that found in other intermediate accounting text-
books, which present accounting topics in a fragmented way, not only between chap-
ters but within chapters. For example, how is the conceptual framework for financial
reporting connected with other ideas outside of accounting? How do the components
such as qualitative characteristics relate to the elements of financial statements?
Fragmented ideas are difficult to integrate into the brain, which forces students to rely
on memorization tricks that work only for the short term. For example, a frequently
used memory aid for the conceptual framework is a pyramid; this is a poor peda-
gogical tool because the concepts within the diagram are not logically connected and
the pyramid shape itself has no basis in theory. In contrast, we anchor the conceptual
framework on the fundamental notions of economic demand and supply.
Also different from other textbooks, we do not aim to be encyclopedic—who wants
to read an encyclopedia? This textbook is designed as a learning tool for students at
the intermediate level, rather than as a comprehensive reference source they might use
many years in the future. Being comprehensive burdens students with details that are
not meaningful to them. At the rate at which standards are changing, books become
outdated rapidly, and students should learn to refer to official sources of accounting
standards such as the CPA Canada Handbook.

A01_LO5950_03_SE_FM.indd xv 28/12/15 2:10 PM

 xvi P refa ce

ARE INTERMEDIATE ACCOUNTING STUDENTS

READY FOR ACCOUNTING THEORY?
Most programs that offer an accounting theory course do so in their final year, with good
reason—concepts in accounting theory are difficult. Thorough exploration of these con-
cepts requires a solid grounding in accounting standards and practices and higher-level
thinking skills. However, not exposing students to these concepts earlier is a mistake.
Other management (and non-management) disciplines are able to integrate the-
ory with technical applications. For example, when finance students study investments
and diversification, the capital asset pricing model is an integral component. Finance
students also learn about firms’ capital structure choices in the context of Modigliani
and Miller’s propositions, the pecking order theory, and so on. Students in operations
management learn linear programming as an application of optimization theory. Rel-
egating theory to the end of a program is an exception rather than the rule.
Accounting theory is too important to remain untouched until the end of an
accounting program. This text exposes students to the fundamentals of accounting
theory in the first chapter, which lays the foundation for a number of threshold concepts
(see Meyer and Land, 20031).

THRESHOLD CONCEPTS
While by no means perfect, this textbook aims to better establish the flow of ideas
throughout the book by covering several threshold concepts in the first three chap-
ters. Threshold concepts, in this case, are the portals that connect accounting stan-
dards and practices with students’ prior knowledge and experiences. As Meyer and
Land suggest, these threshold concepts will help to transform how students think
about accounting, help students to integrate ideas within and between chapters, and
irreversibly improve their understanding of accounting. Introducing these concepts is
not without cost, because threshold concepts will often be troublesome due to their
difficulty and the potential conflict between students’ existing knowledge and these
new concepts.
The inside front cover identifies the threshold concepts and the layout of the
chapters in both volumes of this text. Crucially, the first chapter in Volume 1 begins
with the threshold concepts of uncertainty and information asymmetry . The need to
make decisions under uncertainty and the presence of information asymmetries
results in economic consequences of accounting choice. Those consequences differ depend-
ing on whether the accounting information interacts with efficient securities markets.
These concepts open up the notion of supply and demand for accounting information,
which forms the basis of the conceptual frameworks for financial reporting (Chapter
2). Decision making under uncertainty leads to the issues surrounding the timing of
recognition under accrual accounting (Chapter 3), which in turn lead to the concept of
articulation between financial statements. Accounting choices having economic conse-
quences leads to considerations of the quality of earnings and the potential for earnings
management (Chapter 3).
These concepts then resurface at different points in the remaining 17 chapters.
For example, the concept of information asymmetry is fundamental to understanding
the reasons that companies issue complex financial instruments (Chapter 14). Another
example is the important role of the moral hazard form of information asymmetry

1.
Meyer, J.H.F., and R. Land. 2003. “Threshold Concepts and Troublesome Knowledge 1: Linkages to Ways of
Thinking and Practicing”. In Improving Student Learning: Ten Years On, C. Rust (Ed.), Oxford, UK: Oxford Centre
for Staff and Learning Development.

A01_LO5950_03_SE_FM.indd xvi 28/12/15 2:10 PM

 Preface xvii
in explaining why accounting standards do not permit the recognition of gains and
losses from equity transactions through net income. A third example is the influence
of uncertainty and executives’ risk aversion on the accounting standards for pension
plans, which allow the gains and losses to flow through other comprehensive income
rather than net income. A fourth example is the application of information asymmetry
to the accounting for leases (Chapter 18).
As an aid for students, we have put threshold concepts icons in the margin to iden-
tify when these concepts appear in the various chapters. To further clarify these icons, THRESHOLD
CONCEPT
in the third edition we have added the name of the specific concept next to the icon to
ensure students understand which concepts are being referenced.

ACCOUNTING STANDARDS AND PRACTICES

Along with the unique approach of introducing and integrating theory through the
use of threshold concepts, this text also provides thorough coverage of accounting
standards and practices typically expected of an intermediate accounting course. This
edition reflects recently issued standards, including IFRS 15 on revenue recognition
and IFRS 9 on financial instruments.
Following an overview of the four financial statements in Chapter 3 in Volume 1,
Chapter 4 explores revenue and expense recognition to highlight the connection
financial reporting has to enterprises’ value-creation activities. Chapters 5 to 10 in
this book then examine, in detail, issues involving the asset side of the balance sheet.
The second volume begins with coverage of the right-hand side of the balance
sheet in Chapters 11 to 13. Coverage in Chapters 14 to 18 then turns to special
topics that cut across different parts of the balance sheet and income statement: com-
plex financial instruments, earnings per share, pension costs, income taxes, and leases.
Chapter 19 examines the statement of cash flows, which integrates the various topics
covered in Chapters 4 through 18. Chapter 20 revisits the topic of accounting changes
introduced in Chapter 3.

INTEGRATION OF IFRS
This is the first Canadian text written with International Financial Reporting Stan-
dards (IFRS) in mind throughout the development process, rather than as an after-
thought. For example, we devote a separate chapter (Chapter 10) to explore issues
surrounding asset revaluation and impairment because these issues cut across differ-
ent asset categories under IFRS. The complete integration of standards in the devel-
opment process adds to the smooth flow of ideas in and between chapters. Another
example is Chapter 10’s coverage of agriculture activities, a topic covered by IFRS but
not by past Canadian standards.

COVERAGE OF ASPE
While this text puts emphasis on IFRS, we do not neglect Accounting Standards for
Private Enterprises (ASPE). Near the end of each chapter is a table that identifies
differences between IFRS and ASPE. In contrast to other textbooks, we identify only
substantive differences rather than every detail. In addition to the summary table,
we carefully choose to discuss certain important differences in the main body of the
chapters to create opportunities for understanding the subjective nature of accounting
standards and the advantages and disadvantages of different standards. For example,
Chapter 8 discusses the different treatments of interest capitalization under IFRS and
ASPE. In the end-of-chapter Problems, we have placed icons in the margin to identify A.S.P.E
questions that apply ASPE instead of IFRS.

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 xviii P refa ce

REFERENCE TO ACCOUNTING STANDARDS

Consistent with the threshold concepts described above, this textbook avoids treating
accounting standards as written in stone and with only one interpretation. Ultimately,
it is people who make accounting standards and it is important to analyze and evaluate
the choices that standard setters make to understand the rationale behind the stan-
dards. Where appropriate, the chapters provide specific quotations from authorita-
tive standards so that students begin to develop their ability to interpret the standards
themselves rather than rely on the interpretations of a third party.

INTEGRATION OF LEARNING OBJECTIVES

To enhance the flow of material, each chapter fully integrates learning objectives from
beginning to end. Each chapter enumerates four to six learning objectives that the
chapter covers. The end of each chapter summarizes the main points relating to each
of these learning objectives. We have also organized the problems at the end of each
chapter to match the order of these learning objectives as much as possible.

INTEGRATION OF CPA COMPETENCIES

To ensure students are building the knowledge and skills required for the CPA des-
ignation, the third edition has increased its focus on covering the competencies out-
lined in the CPA Competency Map and Knowledge Supplement. Each chapter now
opens with a list of CPA Competencies, related Knowledge Items, and levels that are
covered in that chapter; also, a master list of all the financial reporting Competencies
and Knowledge Items is available on the back inside cover. As well, all the problems
on MyAccountingLab for Intermediate Accounting 3e are mapped to the Competency,
Knowledge Item, and level that is being assessed. These features will allow students
and faculty interested in the CPA designation to become familiar with the Compe-
tency Map and the material covered in the book.

CHAPTER FEATURES
This text contains a number of features that augment the core text. We are mindful
that too many “bells and whistles” only serve to distract students, so we have been
selective and have included only features that reinforce student learning. The result is
an uncluttered page layout in comparison to competing textbooks. We firmly believe
that clean design supports clear thinking.

Opening Vignettes
Each chapter opens with a short vignette of a real-world example that students will
easily recognize and to which they will relate. These examples range from house-
hold names such as Bank of Montreal, Bombardier, and Telus, to car shopping and
Christopher Columbus. As mentioned earlier, this connection to existing knowledge
and experiences is crucial to learning new concepts. Each vignette serves to motivate
interesting accounting questions that are later addressed in the chapter.

Charts and Diagrams

We have chosen to use graphics sparingly but deliberately. These graphics always serve
to augment ideas in a logical way rather than to serve as memory “gimmicks” that lack
meaning. For instance, it has been popular to use a triangle to organize the Conceptual
Framework for financial reporting. We eschew the use of this triangle because that

A01_LO5950_03_SE_FM.indd xviii 28/12/15 2:10 PM

 Preface xix
shape has no logical foun-
dation or connection with Exhibit 2-2 Outline of a conceptual framework for fi nancial reporting
the Conceptual Framework.
Demand Supply
Instead, we develop the Con-
ceptual Framework from Users and
fundamental forces of supply Constraints
their needs
and demand, so we provide a
diagram that illustrates the
interaction of those forces:

Objectives
Feature Boxes Measure- Recogni-
Elements of
financial
When warranted, we provide ment tion
statements
more in-depth discussions to
reinforce the core message in
the main body of the chap- Qualitative
ters. These discussions often characteristics
take the form of alternative
viewpoints or surprising Assumptions
research results that serve to
broaden students’ perspec-
tives on the issues. Compass
icons identify these feature boxes to denote the different perspectives on various issues.

STILL WAITING…
In 1670, an incorporation under the British royal charter created
“The Governor and Company of Adventurers of England trading into
Hudson’s Bay.” The charter gave the company exclusive rights to the fur trade
in the watershed flowing into Hudson Bay. The company continues to oper-
ate today as The Hudson’s Bay Company. It was publicly traded until January
2006, when it was purchased by private equity firm NRDC Equity Partners. If
investors had to wait until dissolution to find out what happened to their invest-
ments, they would have been waiting for almost three and a half centuries—
and counting!

Checkpoint Questions
At important transitional points in each chapter, we pose “Checkpoint Questions” to
engage students to reflect upon what they have just read, and to review, if necessary,
before proceeding to the next portion of the chapter. These questions appear at the end
of sections and there are five to ten such questions within each chapter. To encourage
students to think about these questions before looking at the answers, we have placed
the answers toward the end of each chapter, immediately after the chapter summary.

End-of-Chapter Problems
The end of each chapter contains many questions for students to hone their skills. Each
chapter in the third edition features new questions, covering new chapter material and
IFRS standards. We choose to use a single label—Problems—for all questions. This
choice follows from our focus on learning objectives. We have organized the Problems

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 xx P reface
in the order of the learning objectives, and within each learning objective according
to the Problem’s level of difficulty (easy, medium, or difficult). This approach allows
students to work on each learning objective progressively, starting with easier ques-
tions and then mastering more difficult questions on the same learning objective. This
approach is much preferable to having students jump around from “exercises” to
“discussion questions” to “assignments,” and so on. Problems in the textbook that are
coloured red are also available on MyAccountingLab. Students have endless oppor-
tunities to practise many of these questions with new data and values every time they
use MyAccountingLab.

Make the grade with MyAccountingLab: The problems marked in red can be
MyAccountingLab found on MyAccountingLab. You can practise them as often as you want, and
most feature step-by-step guided instructions to help you fi nd the right answer.

Cases
We have included Mini-Cases that are based on, or mimic, real business scenarios. The
distinguishing feature of these cases is their focus on decision making. While they are
technically no more challenging than Problems, cases bring in additional real-world
subjective considerations that require students to apply professional judgment.
We have also included an appendix that provides case solving tips to students, as
well as three comprehensive cases that cover topics across multiple chapters and two
capstone cases that cover many of the topics in both volumes of the textbook. These
cases simulate those on professional exams that require four to five hours of an entry-
level professional accountant.

TECHNOLOGY RESOURCES
MyAccountingLab
MyAccountingLab delivers proven results in helping individual students succeed. It
provides engaging experiences that personalize, stimulate, and measure learning for
each student. MyAccountingLab is the portal to an array of learning tools for all learn-
ing styles—algorithmic practice questions with guided solutions are only the begin-
ning. MyAccountingLab provides a rich suite of learning tools, including:
■ Static and algorithmic problems from the textbook
■ DemoDocs Examples—question-specific interactive coaching
■ A personalized study plan
■ An online, interactive Accounting Cycle Tutorial, reinforcing students’ under-
standing of accounting foundations
■ A dynamic eText with links to media assets
■ A Case Solving Primer
■ Sample Tests
■ Questions to accompany the new Financial Statements
■ Learning Catalytics—A “bring your own device” student engagement, assess-
ment, and classroom intelligence system that allows instructors to engage students
in class with a variety of question types designed to gauge student understanding

Pearson eText
Pearson eText gives students access to the text whenever and wherever they have
online access to the Internet. eText pages look exactly like the printed text, offering

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 Preface xxi
powerful new functionality for students and instructors. Users can create notes, high-
light text in different colours, create bookmarks, zoom, click hyperlinked words and
phrases to view definitions, and view in single-page or two-page view.

Learning Solutions Managers

Pearson’s Learning Solutions Managers work with faculty and campus course design-
ers to ensure that Pearson technology products, assessment tools, and online course
materials are tailored to meet your specific needs. This highly qualified team is dedi-
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by assisting in the integration of a variety of instructional materials and media formats.
Your local Pearson Canada sales representative can provide you with more details on
this service program.

Supplements
These instructor supplements are available for download from a password-protected
section of Pearson Canada’s online catalogue (www.pearsoncanada.ca/highered).
Navigate to your book’s catalogue page to view a list of those supplements that are
available. Speak to your local Pearson sales representative for details and access.
■ Instructor’s Solutions Manual. Created by Kin Lo and George Fisher, this
resource provides complete, detailed, worked-out solutions for all the Problems
in the textbook.
■ Instructor’s Resource Manual. The Instructor’s Resource Manual features addi-
tional resources and recommendations to help you get the most out of this text-
book for your course.
■ Computerized Test Bank. Pearson’s computerized test banks allow instructors
to filter and select questions to create quizzes, tests or homework. Instructors
can revise questions or add their own, and may be able to choose print or online
options. These questions are also available in Microsoft Word format.
■ PowerPoint® Presentations. Approximately 30–40 PowerPoint® slides, orga-
nized by learning objective, accompany each chapter of the textbook.
■ Image Library. The Image Library provides access to many of the images, figures,
and tables in the textbook.

ACKNOWLEDGMENTS
During the development of this book, we obtained many helpful and invaluable sug-
gestions and comments from colleagues across the country. We sincerely thank the fol-
lowing instructors who took the time and effort to provide thoughtful and meaningful
reviews during the development of this third edition:

Stephen Bergstrom, SAIT Polytechnic

Carla Carnaghan, University of Lethbridge
Sandra Daga, University of Toronto Scarborough
Kathy Falk, University of Toronto Mississauga
Wenxia Ge, University of Manitoba
Trevor Hagyard, Concordia University
Justin Jin, McMaster University
Liona Lai, York University
Dal Pirot, Grant MacEwan University
Brad Sacho, Kwantlen Polytechnic University
Zvi Singer, McGill University
Rikard Smistad, Mount Royal University

A01_LO5950_03_SE_FM.indd xxi 28/12/15 2:10 PM

 xxii P refa ce
Thanks also go to Desmond Tsang and Zvi Singer, both of McGill University, for
their hard work in creating many of the end-of-chapter Mini-Cases, and to Kim Trot-
tier of Simon Fraser University and Trevor Hagyard of Concordia University for their
creative and challenging Comprehensive Cases.
We would also like to acknowledge the assistance of the many members of the
team at Pearson Canada who were involved throughout the writing and production
process: Megan Farrell, Acquisitions Editor; Patricia Ciardullo, Program Manager;
Johanna Schlaepfer, Developmental Editor; Sarah Gallagher, Project Manager; Yash-
mita Hota, Production Editors; Marg Bukta, Copy Editor; Media Content Editor; and
Loula March Marketing Manager.

Kin Lo
George Fisher

A01_LO5950_03_SE_FM.indd xxii 28/12/15 2:10 PM

 INTERMEDIATE
ACCOUNTING
THIRD EDITION VOLUME TWO

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 CHAPTER 11
Current Liabilities and Contingencies

CPA competencies addressed in this chapter:

1.1.2 Evaluates the appropriateness of the basis of financial accounting
(Level B)
1.1.4 Explains implications of current trends and emerging issues in
financial reporting
a. emerging trends in accounting standards and recent updates
1.2.1 Develops or evaluates appropriate accounting policies and
procedures (Level B)
1.2.2 Evaluates treatment for routine transactions (Level A)
g. Provisions, contingencies, and current liabilities
k. Financial instruments
p. Foreign currency transactions
1.3.1 Prepares financial statements (Level A)
LEARNING OBJECTIVES
1.3.2 Prepares routine financial statement note disclosure (Level B)
After studying this chapter, you 1.4.1 Analyzes complex financial statement note disclosure (Level C)
should be able to:

L.O. 11-1. Describe the

nature of liabilities and dif- Fortis Inc. is the largest investor-owned utility engaged in the distribution of natu-
ferentiate between financial and
ral gas and electricity in Canada. In British Columbia, the company’s operations
non-financial liabilities.
are known as FortisBC, which includes what was previously Terasen Inc. In 2000,
L.O. 11-2. Describe the
Terasen built a natural gas pipeline through the interior of British Columbia. To
nature of current liabilities, and
facilitate the construction, Terasen purchased millions of dollars in equipment.
account for common current
liabilities including provisions. Terasen carefully structured its affairs to avoid paying the 7% provincial sales tax
(PST) on the equipment purchase. Avoidance techniques included reselling the
L.O. 11-3. Describe the
equipment to a trust it created for this purpose and leasing the equipment back.
nature of contingent assets and
liabilities and account for these In 2006, the BC government reassessed Terasen and ordered the company to
items. pay an additional $37.1 million in PST, which through negotiation was reduced to
$7.0 million including interest. In 2009, the trial court found in favour of Terasen,
L.O. 11-4. Describe the
nature of commitments and setting aside the BC government’s reassessment. In 2010, the BC Court of Appeal
guarantees and apply accrual upheld the trial court’s decision.
accounting to them. How do companies such as Terasen determine the amount to report as liabili-
ties at the end of a fiscal year? What is required when the amount originally esti-
mated is subsequently found to be incorrect? What do they do when the amount
owed depends on the outcome of a future event?

500

M11_LO5950_03_SE_C11.indd 500 30/12/15 1:36 PM

Random documents with unrelated
content Scribd suggests to you:
with measured amounts of adjustment. Ultimately, it seems certain
that researches will regularly take this form.
Adaptation is primarily indicated by changes in the arrangement
and character of the cells of the plant. Since these determine the
form of each organ, morphology also furnishes important evidence in
regard to the course of adaptation, but form can be connected
certainly with adjustment only through the study of cellular
adaptation. In tracing the modifications of cell and of tissue, the
usual methods of histology, viz., sectioning and drawing, suffice for
the individual. It is merely necessary to select plants and organs
which are as nearly typical as can be determined. The question of
quantity becomes paramount, however, since it often gives the clue
to qualitative changes, and hence it is imperative that complete and
accurate measurements of cells, tissues, and organs be made. These
measurements, when extended to a sufficiently large number of
plants, serve to indicate the direction of adaptation in the species.
They constitute the materials for determining biometrically the mean
of adaptation for the species and the probable evolution of the latter.
In its present development, biometry contains too much
mathematics, and too little biology. This has perhaps been
unavoidable, but it is to be hoped that the future will bring about a
wise sifting of methods, which will make biometry the ready and
invaluable servant of all serious students of experimental evolution.
This condition does not obtain at present, and in consequence it
seems unwise to consider the subject of biometry in this treatise.
149. Plasticity and fixity. As the product of accumulated
responses, each species is characterized by a certain ability or
inability to react to stimuli. Many facts seem to indicate that the
degree of stability is connected with the length of time during which
the species is acted upon by the same stimuli. It seems probable that
plants which have reacted to sunlight for hundreds of years will
respond less readily to shade than those which have grown in the sun
for a much shorter period. This hypothesis is not susceptible of proof
in nature because it is ordinarily impossible to distinguish species
upon the basis of the time during which they have occupied one
habitat. Evidence and ultimate proof, perhaps, can be obtained only
by field and control experiments, in which the time of occupation of
any habitat is definitely known. Even in this case, however, it is clear
that antecedent habitats will have left effects which can neither be
traced nor ignored. Additional support is given this view by the fact
that extreme types, both ecological and taxonomic, are the most
stable. Intense xerophytes and hydrophytes are much more fixed
than mesophytes, though the intensity of the stimulus has doubtless
as great an influence as its duration. Composites, labiates, grasses,
orchids, etc., are less plastic than ranals, rosals, etc., but there are
many exceptions to the apparent rule that fixity increases with
taxonomic complexity. At present it seems quite impossible to
suggest an explanation of the rule. Recent experiments indicate that
there may be ancestral fixity of function, as well as of structure. It
has been found, for example, that the flowers of certain species
always react normally to the stimuli which produce opening and
closing, while others make extremely erratic response. If further
work confirms this result and extends it to other functions, the
necessity of arriving at a better understanding of fixity will be greatly
emphasized.
It is impossible to make progress in the study of adaptation
without recognizing the fundamental importance of ancestral fixity
as a factor. E. S. Clements[9] has shown that a number of species
undergo pronounced changes in habitat without showing appreciable
modification. Consequently, it is incorrect to assume that each
habitat puts a structural impress upon every plant that enters it. For
this reason, the writer feels that the current explanation of
xerophytic bog plants, etc., is probably wrong, and that the
discrepancy between the nature of the habitat and the structure of
the plant is to be explained by the persistence of a fixed ancestral
type. The anomaly is scarcely greater than in cases that have proved
capable of being explained.
150. The law of extremes. When a stimulus approaches either
the maximum or minimum of the factor for the species concerned,
response becomes abnormal. The resulting modifications approach
each other and in some respects at least become similar. Such effects
are found chiefly in growth, but they occur to some degree in
structure also. It is imperative that they be recognized in nature as
well as in field and control experiment, since they directly affect the
ratio between response and stimulus. The data which bear upon the
similarity of response to extremes of different factors are too meager
to permit the formulation of a rule. It is permissible, however, to
suggest the general principle that extreme stimuli produce similar
growth responses, and to emphasize the need of testing its
application to adaptation proper.
151. The method of working hypotheses. In the study of
stimulus and response, where the unimpeachable facts are relatively
few, and their present correlation slight, the working hypothesis is an
indispensable aid. “The true course of inductive procedure ... consists
in anticipating nature, in the sense of forming hypotheses as to the
laws which are probably in operation, and then observing whether
the combinations of phenomena are such as would follow from the
laws supposed. The investigator begins with facts and ends with
them. He uses such facts as are in the first place known to him in
suggesting probable hypotheses; deducing other facts which would
happen if a particular hypothesis is true, he proceeds to test the truth
of his notion by fresh observations or experiments. If any result
prove different from what he expects, it leads him either to abandon
or to modify his hypothesis; but every new fact may give some new
suggestion as to the laws in action. Even if the result in any case
agrees with his anticipations, he does not regard it as finally
confirmatory of his theory, but proceeds to test the truth of the
theory by new deductions and new trials.”[10] In the treatment of
adjustment and adaptation which follows, the method of multiple
working hypotheses is uniformly employed. No apology is felt to be
necessary for this, since the whole endeavor is to indicate the proper
points of attack, and not to distinguish between that which is
conjectural and that which is known. If an hypothesis occasionally
seem to be stated too strongly, it is merely that it appears, after a
survey of the problem from all sides, to explain the facts most
satisfactorily. The final proof of any hypothesis, however, rests not
only upon its ability to explain all the facts, but also upon the
inability of other hypotheses to meet the same test. The discovery
and examination of all possible hypotheses, and the elimination of
those that prove inadequate are the essential steps in the method of
working hypotheses.
 HYDROHARMOSE

ADJUSTMENT

152. Water as a stimulus. Plants are continually subjected to

the action of the water of the soil and of the air; exception must
naturally be made of submerged plants. The stimulus of soil water
acts upon the absorbing organ, the root, while that of humidity
affects the part most exposed to the air, viz., the assimilative organ,
which is normally the leaf. But since both are simultaneous water
stimuli, a clearer conception is gained of this operation if they are
viewed as two phases of the same stimulus. This point of view
receives further warrant from the essential and intimate relation of
humidity and water-content as determined by the plant. They are in
fact largely compensatory, as is shown at some length later. In
determining the intensity of the two, a significant difference between
them must be recognized. The total humidity of the air at any one
time constitutes a stimulus to the leaf which it touches. This is not
true of the total soil water. Part of the latter is not available under
any circumstances, and can not affect the plant, at least directly. The
chresard alone can act as a stimulus, but even this is potential in the
great majority of cases, since the actual stimulus is not the water
available but the water absorbed. The latter, moreover, contains
many nutrient salts which are in themselves stimuli, but as they
normally have little bearing upon the action of water as a stimulus
they are to be considered only when present in excessive amounts.
153. The influence of other factors upon water. The amount
of humidity is modified directly by temperature, wind, precipitation,
and pressure, and, through these, it is affected by altitude, slope,
exposure, and cover. Naturally, also, the evaporation of soil water
has a marked influence. In determining water-content, atmospheric
factors, with the exception of precipitation, are usually subordinate
to edaphic ones. Soil texture, slope, and precipitation act directly in
determining soil water, while temperature, wind, and pressure can
operate only through humidity. This is likewise true of altitude,
exposure, and cover, though the latter has in addition a profound
effect upon run-off. Biotic factors can affect humidity or water-
content only through the medium of another factor. Light in itself
has no action upon either, but through its conversion into heat
within the chloroplast, it has a profound effect upon transpiration.
The following table indicates the general relation between water and
the other physical factors of the habitat. The order of the signs, ±,
denotes that the water increases and decreases with an increase and
decrease of the factor, or the reverse, ∓.

Humidity ± Water-content ±
Temperature ∓ Temperature ∓
Wind ∓ Wind ∓
Precipitation ± Precipitation ±
Pressure ± Pressure ∓
Soil texture 0 Soil texture
Altitude ∓ Porosity ∓
Capillarity ±
Slope ∓ Slope ∓
Exposure ∓ Exposure ∓
Cover ± Cover ±

154. Response. The normal functional responses to water stimuli

are absorption, diffusion, transport, and transpiration. Of these,
absorption and transpiration alone are the immediate response to
soil water and humidity, respectively. Consequently they are the
critical points of attack in studying the fundamental relation of the
plant to the water of its habitat. In determining the pathway of the
response, it is necessary to trace the steps in diffusion and transport,
but, as these are essentially alike for all vascular plants, this task lies
outside the scope of the work in hand. As previously suggested, the
relation between absorption and transpiration is strictly
compensatory, though, for obvious reasons, the amount of water
transpired is usually somewhat less than the amount absorbed.
Absorption falls below transpiration when extreme conditions cause
temporary or permanent wilting; the two activities are essentially
equal after a growing plant reaches maturity. In all cases, however,
the rule is that an increase or decrease in water loss produces a
corresponding change in the amount of water absorbed, and,
conversely, variation in absorption produces a consequent change in
transpiration. This is strictly true only when the stimuli are normal.
For example, a decrease in humidity causes increased water loss,
which, through diffusion and transport, is compensated by increased
activity of the root surface. Frequently the water supply is
insufficient to compensate for a greater stimulus, and the proper
balance can be attained only by the closing of the stomata. In the
case of excessive stimuli, neither compensation suffices, and the
plant dies. Many mesophytes and all xerophytes have probably
resulted from stimuli which regularly approached the limit of
compensation for each, and often overstepped, but never
permanently exceeded it. For hydrophytes, the danger arises from
excessive water supply, not water loss. There is a limit to the
compensation afforded by transpiration, which is naturally
dependent upon the amount of plant surface exposed to the air. No
compensation occurs in the case of submerged plants; floating
hydrophytes possess a single transpiring leaf surface, while the
leaves of amphibious plants behave as do those of mesophytes. The
whole question of response to water stimuli thus turns upon the
compensation for water loss afforded by water supply where the
latter is moderate or precarious, and upon the compensation for
water supply furnished by water loss where the supply is excessive,
submerged plants excepted.
155. The measurement of absorption. As responses to
measured stimuli of water-content and humidity, it is imperative
that the amount of absorption and of transpiration be determined
quantitatively. It is also extremely desirable that this be done in the
normal habitat of the plant. A careful examination of the problems to
be met quickly discloses the great difficulty of obtaining a direct and
accurate measure of absorption under normal conditions, especially
in the field. For this purpose, the ordinary potometric experiments
by means of cut stems are valueless. The use of the entire plant in a
potometer yields much more trustworthy results, though the fact that
the root is under abnormal conditions can not be overlooked,
especially in the case of mesophytes and xerophytes. While
potometric conditions are less abnormal for amphibious plants, the
error is not wholly eliminated, since the roots normally grow in the
soil. The potometer can be made of value for quantitative work only
by checking the results it gives by means of an instrument or a
method in which the plant functions normally. In consequence, the
potometer can not at present be used to measure absorption directly,
though, as is further indicated in the discussion of transpiration, it is
a valuable supplementary instrument, after the check mentioned has
been applied to its use with a particular species.
An estimate of the amount of absorption may be obtained either in
the field or in the control house by taking samples from the protected
soil at different times. Since it is impossible to determine the weight
of the area in which the roots lie, and since the soil water is often
unequally distributed, this method can not yield exact results. An
accurate method of measuring absorption under essentially normal
conditions has been devised and tested in the control house. The
essential feature of the process is the placing a plant in a soil
containing a known quantity of water, and removing it after it has
absorbed water from the soil for a certain period. In carrying out the
experiment, a soil consisting of two parts of sod and one of sand was
used, since the aeration is more perfect and the particles are more
easily removed from the roots. The soil was completely dried out in a
water bath and then placed in a five-inch battery jar. The latter,
together with the rubber cloth used later to prevent evaporation, was
weighed to the decigram. A weighed quantity of water was added,
and the whole again weighed as a check. Two plants of Helianthus
annuus were taken from the pots in which they had grown, and the
soil was carefully washed from the roots. Each plant was weighed
with its roots in a dish of water to prevent wilting, and then carefully
potted, one in each battery jar. A thistle tube was placed in the soil of
each jar to facilitate aeration, as well as the addition of weighed
amounts of water, when necessary, and the rubber cloth attached in
the usual manner to prevent evaporation. The entire outfit was
weighed again, and the weighing repeated at 8:00 A.M. and 5:00 P.M.
for five days, in order to determine the amount of transpiration and
its relation to the water absorbed. The plants were kept in diffuse
light to prevent excessive water loss while the roots were becoming
established. At the close of the experiment, the jar and its contents
were weighed finally. The plants were removed and weighed, the soil
particles being shaken from the roots into the jar, which was also
weighed. The results obtained were as follows:
 Wt. of pot Wt. of pot Total H2O H2O H2O
and dry and wet soil H2O left absorbed transpired
soil
I II
I 1846.0 g. 2218.0 2174.3 372.0 328.3 43.7 g. 43.7 g.
g. g. g. g.
II 1886.7 g. 2253.2 2221.6 366.5 334.9 31.6 g. 31.6 g.
g. g. g. g.
The amount of water absorbed may be obtained directly by
subtracting the final weight of the jar and moist soil from their first
weight, but a desirable check is obtained by taking the dry weight of
jar and soil from the first, and the final weight of these, and
subtracting the one from the other as indicated in the table. A second
check is afforded by daily weighings, from which the amount of water
transpired is determined. Since the two sunflower plants made
practically no growth during the period of experiment, the exact
correspondence between water absorbed and water lost is not
startling, though it can not be expected that the results will always
coincide.
This method has certain slight sources of error, all of which, it is
thought, have been corrected in a new and more complete series of
experiments now being carried on. The aeration of the soil is not
entirely normal, as is also true of the capillary movements of the
water, on account of the nonporous glass jar and the rubber cloth.
Since the latter are necessary conditions of all accurate methods for
measuring absorption and transpiration, the resulting error must be
ignored. It can be reduced, however, by forcing air through the
thistle tube from time to time. Sturdy plants, such as the sunflower,
are the most satisfactory, since they recover more quickly from the
shock of transplanting. Almost any plant can be used, however, if
repotted in a loose sandy soil often enough. This permits the root
system to develop normally, and also makes it possible to wash the
soil away without injury to the root. The method is so recent that
there has been no opportunity to test it in the field. It would seem
that it can be applied without essential change to plants in their
normal habitats. Very large herbs or plants with extensive root
systems could not be used to advantage, and to be practicable the
experiments would need to be carried on near the base station. The
great value of the method, however, lies in its use as a check in
determining the accuracy of other methods, and in practice it will
often be found convenient and time-saving to use the latter, after
they have once been carefully checked for different groups of species.
This matter is further considered under measures of transpiration.

Fig. 31. Absorption and transpiration of Helianthus annuus. I and II, plants
repotted in soil of known weight and water-content; III, plant undisturbed in the
original soil; IV, potometer containing plant with cut stem; V, potometer with
entire plant.

156. The quantitative relation of absorption and

transpiration. Burgerstein[11] has summarized the results of
various investigators in the statement “that between the quantitative
absorption of water on the one hand and emission on the other there
exists no constant parallelism or proportion,” and he has cited the
work of Kröber, and of Eberdt in proof. This statement holds,
however, only for short periods of a few hours, or more rarely, a day,
and even here its truth still remains to be conclusively demonstrated.
The discrepancy between absorption and transpiration for a short
period is often greater than for a longer time, but it is evident that a
transient change in behavior or a small error in the method would
inevitably produce this result. Eberdt found the discrepancy for a few
hours to be 1–2 ccm. in an entire plant of Helianthus annuus, while
for a whole day the water absorbed was 33.57 ccm. and the water lost
33.98 ccm. Kröber’s experiments with cut branches of Asclepias
incarnata showed a maximum difference for 12 hours of 2.5 ccm.,
but the discrepancy for the first 24 hours was 1 ccm. and for the
second 1.9 ccm. In both cases, the potometer was employed.
Consequently, as will be shown later, Eberdt’s results are not entirely
trustworthy, while those of Kröber, made with cut stems, are
altogether unreliable. Hence, it is clear that the discrepancy is slight
for a period of several days or weeks, and that it may be ignored
without serious error, except in a few plants that retain considerable
water as cell-sap, in consequence of extremely rapid growth.
Accordingly, the amount of transpiration, which may be readily and
accurately determined, can be employed as a measure of absorption
that is sufficiently accurate for nearly all purposes. The truth of this
statement may be easily confirmed. It is evident that the amount of
water absorbed equals the amount transpired plus that retained by
the plant as cell-sap, or used in the manufacture of organic
compounds. In plants not actively growing, the amount lost equals
that absorbed, as already shown in the experiment with Helianthus.
According to Gain[12], Dehérain has found that a plant rooted in
ordinary soil transpired 680 kg. of water for each kilogram of dry
substance elaborated. In Helianthus annuus, the dry matter is 10 per
cent of the weight of the green plant. A well-grown plant weighing
1,000 grams, therefore, consists of 100 grams of dry matter and 900
of water. The length of the growing period for such a plant is
approximately 100 days, during which it transpires 68 kilograms of
water. Assuming the rate of transpiration and of growth to be
constant, the plant transpires 680 grams daily, adds 9 grams to its
cell-sap, and 1 gram to its dry weight. The amount of water in a gram
of cellulose and its isomers is about ⅗. Consequently, the total water
absorbed daily by the plant is 689.6 grams. The 680 grams
transpired are 98.6 per cent of the amount absorbed; in other words,
only 1.4 per cent of the water absorbed is retained by the plant. From
this it is evident that the simplest and most convenient measure of
absorption under normal conditions can be obtained through
transpiration, since the discrepancy between absorption and
transpiration is scarcely larger than the error of any method
applicable to the field. Conversely, the measure of absorption
obtained by the process described in the preceding section serves
also as a measure of transpiration. The determination of the latter in
the field is so much simpler, however, that it is rarely desirable to
apply the absorption method.
157. Measurement of transpiration. The water loss of a plant
may be determined absolutely or relatively. Absolute or quantitative
determinations are by (1) weighing, (2) collecting, or (3) measuring
the water absorbed; relative values are indicated by hygroscopic
substances. A number of methods have been employed more or less
generally for measuring transpiration. The great majority of these
can be used to advantage only in the laboratory, and practically all
fail to meet the fundamental requirement for successful field work,
namely, that the plant be studied under normal conditions in its own
habitat. The following is a summary of the various methods, the
details of which may be found in Burgerstein.
1. Weighing. This is the most satisfactory of all methods for
determining water loss. It is more accurate than any other, and is
unique in that it does not place the plant under abnormal conditions.
On the score of convenience, moreover, it excels every other method
capable of yielding quantitative results. Various modifications of
weighing are employed, but none of these have all the advantages of
a direct, simple weighing of the plant in its own soil.
2. Collecting the water transpired. This may be done by collecting
and weighing the water vapor exhaled by a plant placed within a bell
jar, or by weighing a deliquescent salt, such as calcium chloride,
which is used to absorb the water of transpiration. The decisive
disadvantage of these methods is that transpiration is carried on in
an atmosphere far more humid than normal. If an excessive amount
of salt is used, the air is abnormally dry. In both cases, the water loss
decreases until it reaches a point much below the usual amount.
Finally, all methods of this kind are open to considerable error, and
are inconvenient, especially in field work. They are of relatively slight
value in comparison with weighing.
3. Potometers. It has already been shown that the amount of water
absorbed is a close measure of the amount transpired. In
consequence, the potometer can be used to determine the amount of
transpiration provided the absorption is not abnormal. It is rarely
and only with much difficulty that this condition can be met. The use
of cut stems and branches does not meet it, and even in the case of
plants with roots, the results must be compared with those obtained
from absorption experiments made with plants rooted in soil before
they can be relied upon. This necessity practically puts the potometer
out of commission for accurate work, unless future study may show a
somewhat constant ratio between the absorption of a plant in its own
soil and that of a plant placed in a potometer.
4. Measuring absolute humidity. The cog psychrometer makes it
possible to determine the increased relative humidity produced
within a glass cylinder or special tin chamber by a transpiring plant.
From this result the absolute humidity is readily obtained, and by
means of the latter the actual amount of water given off. The evident
drawback to this method is that the increasing humidity within the
chamber gives results entirely abnormal for the plant concerned.
5. Self-registering instruments. There are various methods for
registering the amount of transpiration, based upon weighing, or
upon the potometer. The Richard recording evaporimeter has all the
advantages of weighing, inasmuch as the water loss is measured in
this way, and in addition the amount is recorded upon a revolving
drum, obviating the necessity of repeated attention in case it is
desirable to know the exact course of transpiration. On the other
hand, methods which depend upon the potometer, while graphic, are
not sufficiently accurate to be of value.
6. The use of hygroscopic materials. Hygroscopic substances
change their form or color in response to moisture. As they indicate
comparative water loss alone, they are of value chiefly in the study of
the stomatic surfaces of leaves. F. Darwin[13] has used strips of horn,
awns of Stipa, and epidermis of Yucca to construct small
hygroscopes for this purpose. In these instruments the error is large,
but as no endeavor is made to obtain exact results, it is negligible.
Filter paper impregnated with a 3–5 per cent aqueous solution of
cobalt chloride is deep blue when dry. If a strip of cobalt paper is
placed upon a leaf and covered with a glass slip it turns bright rose
color, the rapidity of the change affording a clue to the amount of
transpiration.
158. Field methods. The conditions which a satisfactory field
method of measuring transpiration must fulfill have already been
discussed; they are accuracy, simplicity, and normality. These
conditions are met only by weighing the plant in its own soil and
habitat. This has been accomplished by means of the sheet-iron soil
box, already described under the determination of the chresard. The
method is merely the familiar one of pot and balance, slightly
modified for field use. The soil block, which contains the plant to be
studied, is cut out, and the metal plates put in position as indicated
in section 53. Indeed, it is a great saving of time and effort to
determine transpiration and chresard in the same experiment; this is
particularly desirable in view of the close connection between them.
In this event, the soil block must be small enough not to exceed the
load of a field balance. After the block is cut and encased, all the
plants are removed, except the one to be studied. If several
individuals of the same species are present, it is an advantage to
leave all of them, since the error arising from individual variations of
water loss may, in this way, be almost completely eliminated. A sheet
of rubber or rubber cloth is carefully tied over the box to prevent
evaporation from the soil. A broad band is passed under the box to
aid in lifting it upon the scales. The latter must be of the platform
type, and should have a capacity as great as consistent with the need
for moving it about in the field. Weighings are made in the usual
way, care being taken to free the surface of the box from soil. The
aeration of the soil block is kept normal by removing the rubber for a
few minutes from time to time, or by forcing air through a thistle
tube. Water is also added through the latter, when it is desired to
continue the experiment for a considerable period. After the study of
transpiration is concluded, the rubber cloth is removed, soil samples
taken, and the soil allowed to dry out until the plant becomes
thoroughly wilted. If the box is weighed again, the difference
represents the amount of available water. The per cent of chresard is
also obtained in the usual way by taking samples for ascertaining the
echard, and subtracting this from the holard. Field determinations of
water loss yield the most valuable results when different habitat
forms, or ecads, of the same species are used. There is little profit in
comparing the transpiration of a typical sun plant, such as Touterea
multiflora, with that of a shade plant, such as Washingtonia obtusa.
But the simultaneous study of plants like Chamaenerium
angustifolium, Gentiana acuta, Scutellaria brittonii etc., which grow
in several different habitats, furnishes direct and fundamental
evidence of the course of adjustment and adaptation.
Hesselmann[14], in his study of open woodlands in Sweden, has
employed a method essentially similar to the preceding. Young
plants of various species were transferred to pots in the field, where
they were allowed to grow for several months before a series of
weighings was made to determine the amount of transpiration. Since
weighing is the measure used in each, both methods are equally
accurate. The one has a certain advantage in that the pots are,
perhaps, more easily handled, while the other has the advantage of
maintaining the normal relation of soil and roots, a condition more
or less impossible in a pot. In both instances the weighing should be
done in the habitat, which was not the case in Hesselmann’s
researches.
The slight value of the potometer, which has had a vogue far
beyond its merits, is indicated by the following table. These results
were obtained from three plants of Helianthus annuus; III was left
undisturbed in the pot where it had been growing, IV was placed in a
potometer, after the root had been cut off, and V was an entire plant
placed in a potometer. The amount of transpiration is indicated in
grams per square decimeter of leaf surface. The plants were kept in
diffuse light, except for a period of two hours (8:00 to 10:00 A.M.) on
the last day, when they were in full sunshine at a temperature of 75°
F. Plant IV wilted so promptly in the sunshine that it was found
necessary to conclude the experiment in diffuse light.
8 5 8 5 8 5 8 10 5 8 Total
A.M. P.M. A.M. P.M. A.M. P.M. A.M. A.M. P.M. A.M.
III 2.9 7.3 2.4 6.0 1.7 1.6 2.0 3.4 2.0 1.8 31.1
IV 4.7 7.2 2.9 2.3 1.0 0.6 0.9 0.5 0.5 0.4 21.0
V 3.7 5.3 3.2 4.8 2.5 1.6 3.0 2.6 1.6 2.6 30.9
The cut plant, IV, lost more water the first day than either of the
others, but the water loss soon decreased, and at the end of the
period was almost nil. The total transpiration for III and V is much
the same, but the range of variation for periods of 12 hours is from
+2 to –1 gram. This experiment is taken as a fair warrant that the use
of cut stems in potometers can not give accurate results. It is
inconclusive, however, as to the merits of potometric values obtained
by means of the entire plant, and further studies are now being made
with reference to this point.
159. Expression of results. From the previous discussion of the
relation between them, it follows that an expression of the amount of
transpiration likewise constitutes an expression of absorption. It is
very desirable also that the latter be based upon root surface and
chresard, but the difficulty of determining the former accurately and
readily is at present too great to make such a basis practicable. In
expressing transpiration in exact terms, the fact that plants of the
same species or form are somewhat individual in their behavior must
be constantly reckoned with. In consequence, experiments should be
made upon two or three individuals whenever possible, in order to
avoid the error arising from this source.
Water loss may be expressed either in terms of transpiring surface
or of dry weight. Since there is no constant relation between surface
and weight, the terms are not interchangeable or comparable, and in
practice it is necessary to use one to the exclusion of the other.
Obviously, surface furnishes by far the best basis, on account of its
intimate connection with stomata and air-spaces, a conclusion which
Burgerstein (l. c., p. 6) has shown by experiment to be true. For the
best results, the whole transpiring surface should be determined.
This is especially necessary in making comparisons of different
species. In those studies which are of the greatest value, viz., ecads of
the same species, it is scarcely desirable to measure stem and petiole
surfaces, unless these organs show unusual modification. The actual
transpiring surface is constituted by the walls of the cells bordering
the intercellular spaces, but, since it is impossible to determine the
aggregate area of these, or the humidity of the air-spaces themselves,
the leaf surface must be taken as a basis. Since the transpiration
through the stomata is much greater than that through the epidermal
walls, the number of stomata must be taken into account. Since they
are usually less abundant on the upper surface, their number should
be determined for both sides of the leaf. The errors arising from
more or less irregular distribution are eliminated by making counts
near the tip, base, and middle of two or three mature leaves. The
most convenient unit of leaf surface is the square decimeter. The
simplest way to determine the total leaf area of a plant is to outline
the leaves upon a homogeneous paper, or to print them upon a
photographic paper. The outlines are then cut out and weighed, and
the leaf area obtained in square decimeters by dividing the total
weight by the weight of a square decimeter of the paper used. The
area may also be readily determined by means of a planimeter.
160. Coefficient of transpiration. At present it does not seem
feasible to express the transpiration of a plant in the form of a
definite coefficient, but it is probable that the application of exact
methods to each part of the problem will finally bring about this
result. Meanwhile the following formula is suggested as a step
toward this goal: t = g(u/l)LHT, in which t, the transpiration relation
of a plant, is expressed by the number of grams of water lost per
hour, on a day of sunshine, by one square decimeter of leaf,
considered with reference to the stomata of the two surfaces, and the
amount of the controlling physical factors, light, humidity, and
temperature, at the time of determination. For Helianthus annuus,
this formula would appear as follows: t = 2(²⁰⁰⁄₂₅₀) : 1 : 50 : 75°. To
avoid the large figures arising from the extent of surface considered,
the number of stomata per square decimeter is divided by 10,000.
This amounts to the number per square millimeter, and time may
consequently be saved by using this figure directly. While this
formula obviously leaves much to be desired, it has the great
advantage of making it possible to compare ecads of one species, or
species of the same habitat or of different habitats, upon an exact
basis of factor, function, and structure.

ADAPTATION

161. Modifications due to water stimuli. In adaptation, the

great desideratum is to connect each modification quantitatively with
the corresponding adjustment. This is even more difficult than to
ascertain the quantitative relation between stimulus and functional
response, a task still beset with serious obstacles. At the present
time, little more can be done than to indicate the relation of marked
adaptations of organs and tissues to the direct factors operating upon
them, and to attempt to point out among the functions possibly
concerned the one which seems to be the most probable connection
between the probable stimulus and the structure under investigation.
In the pages that follow, no more than this is attempted. The general
changes of organs and tissues produced by water are first discussed,
and after this is given a summary of the structural features of the
plant types based upon water-content.
162. Modifications due to a small water supply. A water
supply which may become deficient at any time is compensated
either by changes which decrease transpiration, or by those that
increase the amount of water absorbed or stored. These operate upon
the form and size of the organs concerned, as well as upon their
structure. Modifications of the form of leaf and stem are alike in that
they lessen transpiration by a reduction of the amount of surface
exposed to the air. Structural adaptations, on the other hand, bring
about the protection of epidermal cells and stomata, and often
internal cells also, from the factors which cause transpiration, or they
anticipate periods of excessive transpiration by the storage of water
in specialized cells or tissues. In certain extreme types the epidermis
is itself modified for the absorption of water vapor from the air.
163. The decrease of water loss. The following is a summary
of the contrivances for reducing transpiration.
1. Position of the leaf. Since the energy of a ray of sunlight is
greatest at the sun’s highest altitudes, those leaves transpire least
which are in such a position during midday that the rays strike them
as obliquely as possible. A leaf at right angles to the noonday sun
receives ten times as much light and heat upon a square decimeter of
surface as does one placed at an angle of 10 degrees. This device for
reducing the intensity of insolation is best developed in the erect or
hanging leaves of many tropical trees. In temperate zones, it is found
in such plants as Silphium laciniatum and Lactuca scariola, and in
species with equitant leaves. In such plants as Helianthus annuus,
the effect is just the opposite, since the turning of the crown keeps
the leaves for a long time at a high angle to the incident rays. In the
case of mats, it is the aggregation of plants which brings about the
mutual protection of the leaves from insolation and wind.
2. Rolling of the leaf. Many grasses and ericaceous plants possess
leaves capable of rolling or folding themselves together when drouth
threatens. In other cases, the leaves are permanently rolled or folded.
The advantage of this device arises not only from the reduction of
surface, but also from the fact that the stomata come to lie in a
chamber more or less completely closed. In the case of those mosses
whose leaves roll or twist, a reduction of surface alone is effected.
3. Reduction of leaf. The transpiring surface of a plant is reduced
by decreasing the number of leaves, by reducing the size of each leaf,
or by a change in its form. In so far as the stem is a leaf, a decrease in
size or a change in shape brings about the same result. The final
outcome of reduction in size or number is the complete loss of leaves,
and more rarely, of the stem. Such marked decrease of leaf area is
found only in intense xerophytes, though it occurs in all deciduous
trees as a temporary adaptation. Changes in leaf form are nearly
always accompanied by a decrease in size. Of the forms which result,
the scale, the linear or cylindrical leaf, and the succulent leaf are the
most common. Leaves which show a tendency to divide often
increase the number of lobes or make them smaller.
4. Epidermal modifications. Excretions of wax and lime by the
epidermis have a pronounced effect by increasing the impermeability
of the cuticle, and, hence, decreasing epidermal transpiration. It
seems improbable that a coating of wax on the lower surface of a
diphotic leaf can have this purpose. The thickening of the outer wall
of epidermal cells to form a cuticle is the most perfect of all
contrivances for decreasing permeability and reducing transpiration.
In many desert plants, the greatly thickened cuticle effectually
prevents epidermal transpiration. In these also the cuticle is
regularly developed in such a way as to protect the guard cells, and
even to close the opening partially. An epidermis consisting of two or
more layers of cells is an effective, though less frequent device
against water loss. When combined with a cuticle, as is usually the
case, the impermeability is almost complete. Hairs decrease
transpiration by screening the epidermis so that the amount of light
and heat is diminished, and the access and movement of dry air
impeded. While hairs assume the most various forms, all hairy
coverings serve the same purpose, even when, as in the case of
Mesembryanthemum, they are primarily for water-storage. Hairs
protect stomata as well as epidermal cells: the greater number of the
former on the lower surface readily explains the occurrence of a hairy
covering on this surface, even though absent on the more exposed
upper side. In some cases, hairs are developed only where they serve
to screen the stomata.
The modifications of the stomata with respect to transpiration are
numerous, yet all may be classed with reference to changes of
number or level. With the exception of aquatic and some shade
plants, the number of stomata is normally greater on the less
exposed, i. e., lower surface. The number on both surfaces decreases
regularly as the danger of excessive water loss increases, but the
decrease is usually more rapid on the upper surface, which finally
loses its stomata entirely. It has been shown by many observers that
species growing in dry places have fewer stomata to the same area
than do those found in moist habitats. This result has been verified
experimentally by the writer in the case of Ranunculus sceleratus, in
which, however, the upper surface possesses the larger number of
stomata. Plants of this species, which normally grow on wet banks,
were grown in water so that the leaves floated, and in soils
containing approximately 10, 15, 30, and 40 per cent of water. The
averages for the respective forms were: upper 20, lower 0; upper 18,
lower 10; upper 18, lower 11; upper 11, lower 8; upper 10, lower 6.
Reduction of number is effective, however, only under moderate
conditions of dryness. As the latter becomes intense, the guard cells
are sunken below the epidermis, either singly or in groups. In both
cases, the protection is the same, the guard cells and the opening
between them being withdrawn from the intense insolation and the
dry air. The sun rays penetrate the chimney-shaped chambers of
sunken stomata only for a few minutes each day, and they are
practically excluded from the stomatal hollows which are filled with
hairs. The influence of dry winds is very greatly diminished, as is also
true, though to a less degree, for leaves in which the stomata are
arranged in furrows. Sunken stomata often have valve-like
projections of cuticle which reduce the opening also. Finally, in a few
plants, water loss in times of drouth is almost completely prevented
by closing the opening with a wax excretion.
5. Modifications in the chlorenchym. A decrease in the size and
number of the air passages in the leaf renders the movement of
water-laden air to the stomata more difficult, and effects a
corresponding decrease in transpiration. The increase of palisade
tissue, though primarily dependent upon light, reduces the air-
spaces, and consequently the amount of water lost. The development
of sclereids below the epidermis likewise hinders the escape of water.
Finally the character of the cell sap often plays an important part,
since cells with high salt-content or those containing mucilaginous
substances give up their water with reluctance.
164. The increase of water supply. Plants of dry habitats can
increase their absorption only by modifying the root system so that
the absorbing surfaces are carried into the deep-seated layers of soil,
and the surfaces in contact with the dry soil are protected by means
of a cortex. Exception must be made for epiphytes and a few other
plants that absorb rain water and dew through their leaves, and for
those desert plants that seem to condense the moisture of the air by
means of hygroscopic salts, and absorb it through the epidermis of
the leaf. The storage of water in the leaf is a very important device; it
increases the water supply by storing the surplus of absorbed water
against the time of need. Modifications for water-storage are
occasionally found in roots and stems, but their chief development
takes place in the leaf. The epidermis frequently serves as a reservoir
for water, either by the use of the epidermal cells themselves, by the
formation of hypodermal water layers, or by means of superficial
bulliform cells. The water cells of the chlorenchym regularly appear
in the form of large clear cells, scattered singly or arranged in groups.
In this event, they occur either as transverse bands, or as horizontal
layers, lying between the palisade and sponge areas, and connecting
the bundles. A few plants possess tracheid-like cells which also serve
to store water. In the case of succulent leaves, practically the whole
chlorenchym is used for storing water, though they owe their ability
to withstand transpiration to a combination of factors.
165. Modifications due to an excessive water supply.
Water plants with aerial leaf surfaces are modified in such manner as
to increase water loss and to decrease water supply, but the resulting
modifications are rarely striking. There is a marked tendency to
increase the exposed surface. This is indicated by the fact that, while
the leaves of mud and floating forms become larger, they change
little or not at all in thickness. The lobing of leaves is also greatly
reduced, or the lobes come to overlap. Leaves of water plants are
practically destitute of all modifications of epidermis and stomata,
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