Seneca College of Applied Arts and Technology SCHOOL OF ACCOUNTING AND FINANCIAL SERVICES

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1 Seneca College of Applied Arts and Technology SCHOOL OF ACCOUNTING AND FINANCIAL SERVICES Term Test 1 - VERSION A SOLUTIONS Semester Subject Code WINTER 2014 Accounting Basics II ACC220 FAMILY NAME/SURNAME: GIVEN NAME: STUDENT NO.: CLASS SECTION: DATE: February, 2014 TIME ALLOWED: 100 minutes TOTAL MARKS: 88 marks (20% of final mark) AIDS ALLOWED: Calculator (non-programmable) Question 1 12 Question 2 14 Question 3 4 Question 4 26 Question 5 5 Question 6 6 Question 7 5 Question 8 16 TOTAL 88 1

2 PROFESSORS: Peter Alpaugh, Wayne Campbell, Ramona Girdauskas, Ebhana Hardy-Henry, Michael Longworth, Debbie Looijie, Gary Miller APPROVED BY: Karen Murkar, Chair, School of Accounting and Financial Services QUESTION 1 MULTIPLE CHOICE (12 MARKS) Circle the letter next to the best answer OR enter your answer in pencil on the Grade Master card, if supplied. 1. On July 1, 2011, Yukon Minerals Co. purchased the mineral rights to a granite deposit for $700,000. It is estimated that the recoverable granite will be 400,000 tonnes. During 2011, 100,000 tonnes of granite was extracted and 60,000 tonnes were sold. The amount of the depreciation expense to be included in cost of goods sold for 2011 would be: a. $87,500. b. $52,500. c.$105,000. d. $175, Which of the following statements is correct? a. all research and development costs should be capitalized. b. development costs are always capitalized. c. research costs should always be expensed as incurred. d. all research and development costs should be expensed as incurred. 3. If an intangible asset with an indefinite life becomes impaired, the asset must be a. written up to cost. b. written down to fair value. c.sold at its net realizable value. d. No adjustment is required and a loss will be recorded when the intangible asset is sold. 4. The current portion of long-term debt should a. be paid immediately. b. be reclassified as a current liability. c.be classified as a long-term liability. d. not be separated from the long-term portion of debt. 5. Under IFRS, if the company has a contingent liability a. the amount must be disclosed in the notes but not disclosed on the balance sheet. b. the amount must be disclosed in the notes and shown on the financial statements. c. the amount should be shown on the balance sheet but not disclosed in the notes. d. the amount should not be disclosed on either the balance sheet or in the notes. 6. Which revenue recognition method would most likely be used by a retailer? a. point of sale. b. upon cash collection.

3 c.during production. d. upon receipt of the order. 7. The cost benefit constraint a. means that assets and revenues be estimated at the lower end of their range. b. means that assets and revenues be estimated at the higher end of their range. c.means that the value of the information must exceed the cost to produce it. d. means that the information would influence the decision of a statement user. 8. Under International Financial Reporting Standards, the models which companies can choose to account for their long-lived assets are: a. Cost model and units-of-production model b. Units-of-production model and diminishing-balance model c. Revaluation model and straight-line model d. Cost model and revaluation model 9. For the year ended December 31, 2011, Akito Co. has net sales of $1,000,000 and profit of $290,000. Total assets on January 1, 2011 were $1,750,000 and total assets at December 31, 2011 are $1,245,000. Akito s return on assets for 2011 is a. 19.4%. b. 23.3%. c.66.8%. d. 80.3%. 10. Development costs a. are always expensed when incurred. b. cannot be recorded separately from research costs. c.can be capitalized if it can be shown that the costs will provide future benefits. d. are intangible assets that are not depreciated. 11. In recording the acquisition cost of an entire business, a. goodwill is recorded as the excess of cost over the fair value of net identifiable assets. b. assets are recorded at the seller's carrying amounts. c.goodwill, if it exists, is never recorded. d. goodwill is recorded as the excess of cost over the carrying amount of net identifiable assets. 12. The amount of sales tax (GST and PST or HST) collected by a retail store when making sales is a. a miscellaneous revenue for the store. b. a current liability. c.not recorded because it is a tax paid by the customer. d. will increase the profit of the company. 3

4 QUESTION 2 (14 MARKS) A beginning accountant for Alpaugh Tractor Company recorded the following transactions in the records of the company for the year ended December 31, The controller has questioned the appropriateness of the entries since she thinks that they have not been recorded in accordance with generally accepted accounting principles(gaap). Profit for the year, including the entries described below, is $200, On January 1,2013 the company president took a personal vacation trip to the Greece. The trip cost $3,000. The accountant recorded the entry as follows: Travel Expense 3,000 Accounts Payable 3, Merchandise inventory which cost $14,000 had a current net realizable value of $22,000. The accountant made the following entry as a result: Merchandise Inventory 8,000 Inventory Gain 8, Equipment with a fair market value of $15,000 was acquired in a liquidation sale for cash at a cost of $10,000. The accountant recorded the transaction as follows: Equipment 15,000 Cash 10,000 Gain on Purchase of Equipment 5, On December 24, Alpaugh received a written sales order for 10 tractors. The tractors will be shipped in January Accounts Receivable 158,000 Sales 158,000 Cost of Goods Sold 56,500 Inventory 56,500 REQUIRED: (a) For each of the above entries indicate the accounting assumption, principle, or constraint that was violated, if any and prepare the necessary journal entry to correct the original entry. Explain why you think the entry is incorrect. (3 marks each) 1. Economic Entity

5 A/P 3,000 Travel Expense 3,000 OR Drawings 3,000 Travel Expense 3,000 OR A/R 3,000 Travel Expense 3, Cost Principle Inventory Gain 8,000 Merchandise Inventory 8, Cost Principle Gain 5,000 Equipment 5, Revenue Recognition Criteria #1 and 2 - Sales 158,000 A/R 158,000 Inventory 56,500 CGS 56,500 (b) What will be the corrected profit after you have done the correcting entries? $200, ,000 8,000-5, , ,500 = $88,500 5

6 QUESTION 3 (4 MARKS) Presented below are selected qualitative characteristics of accounting information. 1. Relevance 2. Neutrality 3. Verifiability 4. Timeliness 5. Faithful representation 6. Comparability 7. Understandability REQUIRED(1/2 mark each)students may have different answers so If you think their answer is correct mark it accordingly. For each of the following situations, indicate which qualitative characteristic(s) was violated. _5 (a) Girdauskas Ltd. reported its merchandise inventory at a net realizable value of $25,000. The company's auditors disagree with this value and estimated the net realizable value to be $20, (b) Hardy-Henry Corporation does not issue its annual financial statements for the year ended December 31, 2013, until December _6 (c) Hurst Mining Ltd. is the only company in the mining industry that uses the straight-line method to depreciate its mining equipment. _6 (d) Longworth Ltd. switches inventory cost formulas from average to FIFO and back to average in a three-year period. _2 (e) Looijie Ltd. intentionally recorded revenue in 2013 for sales made in 2014 to ensure that management would receive their bonuses, which were based on profits. _7 (f) Miller Talk Corporation used terminology in its financial statements and notes to the financial statements that is not commonly used in financial reporting and did not provide explanations of the terminology.

7 _1 (g) Campbell Ltd., a multinational drilling company, reported separately its paper, paper clips, and pens in the balance sheet rather than reporting a single line item for office supplies. Total office supplies were $5,000. _5 (h) Cooper Health Foods Ltd. signed a legal agreement to finance the purchase of equipment. The agreement required annual payments of $15,000 for five years. The agreement referred to the payments as rental payments. The company records rent expense when the annual payments are made. QUESTION 4 (26 MARKS) McKenna Company purchased equipment on account on April 6, 2012, at an invoice price of $442,000. On April 7, 2012, it paid $4,000 for delivery of the equipment. A one-year, $3,000 insurance policy on the equipment was purchased on April 9, On April 22, 2012, McKenna paid $6,000 for installation and testing of the equipment. The equipment was ready for use on May 1, McKenna estimates that the equipment's useful life will be four years, with a residual value of $20,000. It also estimates that, in terms of activity, the equipment's useful life will be 150,000 units. McKenna has an April 30 fiscal year end. Usage for 2012/2013 is 22,600 units and 45,600 units for 2013/2014. REQUIRED: (a) Determine the cost of the equipment.(3 marks) $442,000+4, =452,000 (b) Calculate depreciation expense, accumulated depreciation and carrying amount for 2012/2013(April 30, 2013) and 2013/2014(April 30, 2014) under the following depreciation methods: (6 marks each) 7

8 (c) Which method would you recommend that McKenna Company use? Why?(2 marks) The method which suits the pattern of consumption for the asset. In this case it is units of production. (d) Which method would result in the least cash used for the year ended April 30, 2013? (1 mark) All methods would use the least cash as cash is independent of depreciation method. (e) Assume that at the time McKenna purchased the equipment, it had a legal obligation to ensure that the equipment was recycled at the end of its useful life. Assume the cost of doing this is significant. Would this have had an impact on the answers to (a) and (b) above? Explain.(2 marks) Yes it would have an impact on the cost and depreciation. This is referred to asset retirement costs. It is a cost incurred to get the asset ready for its intended use as such it must be capitalized with the asset. QUESTION 5 (5 MARKS) Equipment was acquired on January 1, 2011, at a cost of $90,000. The equipment was originally estimated to have a residual value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2012, using the straight-line method. On January 1, 2013, a new part was added to the machine at a cost of $12,500. After this addition, the estimated residual value was revised to $6,000 and the useful life was revised to a total of 8 years. The new part will reduce operating expenses. REQUIRED: Determine the depreciation expense for and 2012 Depreciation Expense is $8,500/year($17,000) Carrying Value on January 1, 2013 is $73,000(90,000 17,000)(1 mark) $73,000 + $12,500 - $6,000 = $$79,500(amount left to depreciate as of January 1, 2013(2 marks) Note we add $12,500 to asset because it increases the efficiency of asset.

9 $79,500/6 = $13,250(2 marks) QUESTION 6 (6 MARKS) John Company purchased equipment in 2004 for $80,000 and estimated an $8,000 residual value at the end of the equipment's 10-year useful life. At December 31, 2010, there was $50,400 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2011, the equipment was sold for $21,000. REQUIRED: Prepare the appropriate journal entries to remove the equipment from the books of John Company on March 31, Dep Expense 1,800 ACC Dep 1,800 (2 marks) Cash 21,000 Acc Dep 52,200 (7,200x7)+(7,200x3/12) Loss 6,800 (21,000 27,800) Equipment 80,000 (4 marks) QUESTION 7 (5 MARKS) Select one(1) of the following questions.. 1. In Canada as of 2011, some corporations have the choice to use International Financial Reporting Standards(IFRS) or Accounting Standards for Private Enterprises(ASPE). However, certain corporations must use IFRS. How do you know which one (IFRS or ASPE) to use? What are some differences between IFRS and ASPE with respect to long-lived assets? Q2. Publicly traded corporation(e.g., RIM) must follow IFRS. If the corporation trades on a stock exchange(e.g., TSX, NYSE) it has to follow IFRS. Private corporations may follow ASPE or IFRS depending on their circumstances. Long Lived Assets IFRS choice of cost model or revaluation model - for PPE and intangible assets with finite lives must determine each year if indicators of impairment are present and if so perform an impairment test. 9

10 Reversals of impairment losses are allowed - for goodwill and intangible assets with indefinite lives must perform impairment test annually. Impairment losses re goodwill can not be reversed - depreciation is used to describe cost allocation for PPE ASPE only cost model - For PPE and intangible assets with finite lives no annual requirement to determine if indicators of impairement exist, but when it is apparent they exist, an impairment test occurs in two steps;(1) determine that the cash flows from the asset do not exceed its carrying value and calculate the impirement loss. Impairment losses cannot be reversed. - for goodwill and intangible assets with indefinite lives we do the same approach with PPE - amortization may be used instead of depreciation 2. Liabilities can be organized into two main categories. Discuss these two categories, giving examples of each. Also, define what a liability is. Q2. Current liabilities are obligations that are expected to be settled within one year of the balance sheet date. Determinable or certain current liabilities have known amount, payee, due date. Examples include; Operating line of credit and bank overdraft Short-term notes payable Sales and property taxes Current maturities of long-term debt Uncertain liabilities include: 1. Estimated Liabilities The obligation exists but the amount and timing is uncertain - Product Warranties - Customer Loyalty Programs - Gift Cards 2. Contingent Liabilities 3. What factors might need to be taken into account when calculating depreciation expense? Q3. Depreciation expense reflects the utilization of the productive capacity of an asset as a result of declines in its revenue-producing ability that happen due to physical factors such as wear and tear, and economic factors such as obsolescence. Three specific factors that affect the calculation of depreciation expense are: the asset s cost, useful life, and residual value. The cost less the residual value determines the depreciable amount that is allocated via depreciation expense over the asset s useful life. QUESTION 8 (16 MARKS) On January 1, 2014, Chun Company's general ledger had these liability accounts: Accounts payable $63,700

11 Redemption rewards liability 2,150 CPP payable 2,152 EI payable 1,019 HST payable 11,390 Income tax payable 4,563 Unearned revenue 16,000 Vacation pay payable 9,120 Warranty liability 5,750 In January, the following selected transactions occurred: Jan. 5 Sold merchandise for $15,800 cash, plus 13% HST. Chun uses a periodic inventory system. 14 Paid the Receiver General (federal government) sales taxes collected in December Borrowed $18,000 from Second National Bank on a three-month, 6% note. Interest is payable monthly on the 15th day of the month. 20 Sold 500 units of a new product on account for $60 per unit, plus 13% HST. This new product has a two-year warranty. It is expected that 6% of the units sold will be returned for repair at an average cost of $10 per unit. 31 Issued 50,000 loyalty points worth $1 each. Based on past experience, 10% of these points are expected to be redeemed. 31 Determined that the company had used $875 of parts inventory in January to honour warranty contracts. REQUIRED: 11 Record all necessary transactions for January, including adjusting entries. Cash 17,854 Sales 15,800 HST 2,054 (3 marks) HST Payable 11,390 Cash 11,390(1 mark) Cash 18,000 Note Payable 18,000(1 mark)

12 A/R 33,900 Sales 30,000 HST Payable 3,900(3 marks) Warranty Expense 300 Warranty Liab 300(2 marks) Sales Discount 5,000 Redemption Liability 5,000(2 marks) Warranty Liability 875 Inventory 875(2 marks) Int Exp 45 Int Payable 45(2 marks)