YORK UNIVERSITY SCHOOL OF ADMINISTRATIVE STUDIES (Last) (First) Professor Sung Kwon (Course Director) and Ms. Trish Farrell

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1 YORK UNIVERSITY Name, SCHOOL OF ADMINISTRATIVE STUDIES (Last) (First) Professor Sung Kwon (Course Director) and Ms. Trish Farrell ADMS 3595 Intermediate Financial Accounting II EXAM I, Winter 2012 (White Version) I.D. # Section Type Points Available Points Earned I. Multiple Choice 2 = 60 II. Premiums 11 III. Bonds Payable 14 IV. Taxable income and Deferred Tax 15 Total 100 INSTRUCTIONS 1. Check exam carefully to be sure you have all thirteen pages. 2. When you are instructed to begin the exam, put your name and student I.D. number on this cover sheet and indicate your section number. 3. You have 120 minutes to complete the exam. 4. Please fill in a scantron form with a pencil only. 5. Show your calculations and work to support your answers for problem questions. 6. Write in pen or pencil neatly because if we cannot understand what you have written, we cannot give you marks. 7. The exam is closed-book, and you can use only nonprogrammable calculators (i.e., no laptop/pocket computers are allowed) into the exam room. 8. When the end of the exam is announced, stop writing and turn your exam over immediately.

2 I. Multiple Choices Questions: 2 points). Circle the best answer and copy it to your SCANTRON form. Only your answers on the SCANTRON form will be graded. 1. According to the Exposure Draft of Proposed Amendments to IAS 37, Provisions, Contingent Liabilities and Contingent Assets a. Only conditional obligations are recorded. b. Liabilities must have measurement certainty. c. The term contingent liabilities is eliminated. d. A conditional obligation related to an unconditional obligation is not recognized. 2. Which of the following liabilities is NOT a financial liability? a. Income taxes payable. b. Accounts payable. c. Notes payable. d. Both a) and b). 3. A liability is classified as current under IFRS if, a. It is not expected to be settled in the entity s normal operating cycle. b. It is held primarily for trading. c. It is due more than 12 months from the end of the reporting period. d. The entity has an unconditional right to defer its settlement for at least 12 months after the balance sheet date. 4. Which of the following is NOT part of the definition of a trade accounts payable? a. a balance owed to others for goods, supplies or services. b. an amount related to the entity s ordinary business activities. c. a good, supply or service purchased on open account. d. an amount related to the owner s personal activities. 5. Which of the following dividends are recognized in the accounting records as a liability? a. Accumulated but undeclared dividends on cumulative preferred shares. b. Stock dividends. c. Cash dividends. d. Both a) and c). 6. As of July 1, 2010, businesses in Ontario should record what entry on the purchase of taxable goods and services? a. A debit to HST recoverable for the amount of the HST paid. b. An increase to the cost of the item acquired by the GST paid. c. Credit HST payable for the amount of the HST charged on sales. d. An increase to the cost of the item acquired by the PST paid. 7. Accumulating rights to benefits (for employees) a. Are often mandated by provincial labour law. b. Include vested rights that do not depend on the employee s continued service. c. Are rights that accrue with employee service. d. All of these statements are correct. 2

3 8. ABC Corporation has a bonus plan with their senior executives which pays the management group bonuses of 12% based on profits after deducting the bonus but before deducting income taxes. ABC Corporation earned $300,000 in 2012 and pays tax at 40%. What is the amount of the bonus for 2012? a. $36,000. b. $32,143. c. $22,689. d. $25, Harold s Auto Sales uses the expense approach to account for warranties. They sell a used car for $15,000 on Oct 25, 2011, with a one year warranty covering parts and labour. Warranty expense is estimated at 2% of the selling price, and the appropriate adjusting entry is recorded at Dec 31, On March 12, 2012, the car is returned for warranty repairs. This cost Harold $100 in parts and $60 in labour. When recording the March 12, 2012 transaction, Harold would debit Warranty Expense with a. $ 0 b. $ 60. c. $160. d. $ Presented below is information available for Lozell Company. Current Assets Cash $ 4,000 Marketable securities 75,000 Accounts receivable 61,000 Inventories 110,000 Prepaid expenses 30,000 Total current assets $280,000 Total current liabilities are $80,000. To two decimals, the acid-test ratio for Lozell is a b c d Under current IFRS requirements, a contingent liability is recognized if a. the amount of the loss can be reliably estimated and it is probable that an asset has been impaired or a liability incurred as of the financial statement date. b. the amount of the loss cannot be measured reliably but it is probable that an asset has been impaired or a liability incurred as of the financial statement date. c. it relates to a lawsuit commenced after the balance sheet date, the outcome of which can be reliably measured. d. it relates to an asset recognized as impaired after the balance sheet date. 3

4 12. Which of the following statements is NOT correct for both long-term notes payable and bonds payable? a. both have fixed maturity dates. b. both carry a stated interest rate. c. both are traded on public securities markets. d. both are valued at the present value of its future interest and principal cash flows. 13. Mosstown Corp issued ten year bonds with a maturity value of $400,000. If the bonds were issued at a premium, this indicates that a. the market rate was higher than the stated rate. b. the stated rate was higher than the market rate. c. the market and stated rates were the same. d. no relationship exists between the two rates. 14. XYZ Co. uses the straight line method to amortize bond discounts and premiums. On March 1, 2012 XYZ issued $500,000 of 10% interest bonds payable semi-annually on January 1 and July 1, at 105 plus accrued interest. How much cash does XYZ receive on March 1, 2012? a. $500,000. b. $525,000. c. $533,333. d. $550, On January 1, 2011, Heartland Ltd sold five year, 12% bonds with a face value of $500,000. Interest will be paid semi-annually on June 30 and December 31. The bonds were sold for $538,500 to yield 10%. Using the effective interest method of amortization of bond discount or premium, interest expense for 2011 is a. $50,000. b. $53,696. c. $53,850. d. $60, Which of the following statements is INCORRECT regarding the recording of the related increase or accretion in the carrying amount of an asset retirement obligation (ARO)? a. Under private enterprise standards, it is recognized as interest expense. b. Under private enterprise standards, it is recognized as an operating expense (but not as interest expense). c. Under IFRS, it is recognized as a borrowing cost. d. The amount should be calculated using the same discount (interest rate) as was used to calculate the initial present value of the ARO. 17. In a troubled debt restructuring in which the debt is settled by a transfer of assets with a fair market value less the carrying amount of the debt, the debtor would recognize a. a gain on the settlement. b. no gain or loss on the settlement. c. a loss on the settlement. d. none of the above. 4

5 Use the following information for questions 18 through 20: On December 31, 2010, Diaz Corp. is in financial difficulty and cannot pay a $900,000 note with $90,000 accrued interest payable to Cameron Ltd, which is now due. Cameron agrees to accept from Diaz equipment that has a fair value of $435,000, an original cost of $720,000, and accumulated depreciation of $345,000. Cameron also forgives the accrued interest, extends the maturity date to December 31, 2013, reduces the face amount of the note to $375,000, and reduces the interest rate to 6%, with interest payable at the end of each year. 18. Diaz should recognize a gain or loss on the transfer of the equipment of a. $0. b. $60,000 gain. c. $90,000 gain. d. $285,000 loss Diaz should recognize a gain on the partial settlement and restructuring of the debt of a. $0. b. $22,500. c. $112,500. d. $180, Diaz should record interest expense for 2013 of a. $0. b. $22,500. c. $45,000. d. $67, Continental Company s 2012 financial statements contain the following selected data: Income tax expense $40,000 Interest expense 10,000 Net income 80,000 Continental s times interest earned for 2012 is a. 8 times. b. 11 times. c. 12 times. d. 13 times. 22. Based on the conceptual framework, which of the following is NOT part of the definition of an future income tax liability? a. It is an obligation. b. It represents the future sacrifice of economic resources. c It is based on provisions of the Income Tax Act. d. It results from a past transaction or event. 23. Interperiod tax allocation causes 5

6 a. the income tax expense reported on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the future income tax asset or liability balances for the year. b. the income tax expense reported on the income statement to bear a normal relation to the tax liability. c. the income tax liability reported on the balance sheet to bear a normal relation to the income before tax reported on the income statement. d. the income tax expense reported on the income statement to be presented with the specific revenues causing the tax. 24. Which of the following is not a permanent difference between accounting and taxable income? a. Premiums on key man life insurance for senior executives where the corporation makes and deducts the payments. b. Non deductible meals and entertainment. c. Non deductible golf club membership fees which are included as a marketing expense. d. Unearned revenue which is included in taxable income when received. 25. DSW reported an opening deferred tax liability of $20,000 and an ending deferred tax liability of $15,000. Total income tax expense for the year was $85,000. These are the only items related to income tax on the company s general ledger. What is the amount of taxes payable for the year? a. $75,000. b. $80,000. c. $85,000. d. $90, Under IFRS, how are future or deferred tax asset and liability accounts presented on the balance sheet? a. They must be segregated into current and noncurrent items. b. They must be shown as noncurrent assets or liabilities. c. They must be shown as current assets or liabilities. d. They must be reported as a reduction of the related asset or liability accounts. 27. JEN Company reported a tax loss in its first year of operations. The company s management believes it is more likely than not that the tax loss will be utilized in the future. There were no temporary differences during the year. Which of the following best describes the impact of the tax loss on the financial statements? a. Deferred tax asset (loss carryforward) is recognized; net loss is reduced; retained earnings increases b. Tax receivable increases assets; net loss is reduced; retaining earnings increases. c. Deferred tax asset (loss carryforward) is recognized; net loss is increased; retained earnings decreases d. Deferred tax liability (loss carryforward) is recognized; net loss is reduced; retained earnings increases. 6

7 28. JJ corporation reported income tax expense of $60,000 for the year ended December 31, JJ s deferred tax assets increased by $5,000 during the year, and deferred tax liability increased by $6,000. Opening taxes payable was $21,000 and the ending balance was $23,000. How much cash was paid for income taxes during the year? a. $61,000. b. $59,000. c. $57,000. d. $62, In regard to reconciling income reported on the financial statements to taxable income, which of the following statements is incorrect? a. All differences between accounting income and taxable income are considered. b. Only reversible differences are considered. c. Only those that result in temporary differences are considered when determining future income tax amounts for the balance sheet. d. Permanent differences may be added back to or deducted from accounting income. 30. Owl Corporation's partial income statement for its first year of operations is as follows: Income before income taxes $1,750,000 Income tax expense Current $483,000 Future 42, ,000 Net income $1,225,000 Owl uses straight-line depreciation for financial reporting purposes and CCA for tax purposes. The depreciation expense for the year was $700,000. No other differences existed between accounting income and taxable income except for the depreciation. Assuming a 30% tax rate, what amount was claimed for CCA on the corporation's tax return for the year? a. $560,000. b. $665,000. c. $700,000. d. $840,000. II. Customer Premiums (11 points) Best Dog Food Inc. gives its customers coupons which are redeemable for a dog puzzle plus a dog bowl. One coupon is issued for each dollar of sales. On presentation of 100 coupons and $5.00 cash, the customer receives the puzzle and dog bowl. Best Dog Food Inc. estimates that 80% of the coupons will be presented for redemption. Sales for 2011 were $1,050,000, and 510,000 coupons were redeemed. Sales for 2012 were $1,260,000, and 1,275,000 coupons were redeemed. Best Dog Food Inc. bought 30,000 puzzles at $2.00 each, and 30,000 dog bowls at $5.50 each. Instructions Prepare the entries to record the estimated liability and redemption of the coupons for both years. Assume all the coupons expected to be redeemed from 2011 were redeemed by the end of (11 marks) 7

8 II. (continued) 8

9 III. Sale and subsequent buyback of bonds (14 points) On July 1, 2011, Markov Corp. issued $400,000 par value, 10%, 10-year bonds dated July 1, 2011, with interest payable semi-annually on January 1 and July 1. The bonds were issued for $454,361 and yield 8%. On January 1, 2013, Markov offered to buy back the bonds for 4 points above the market value of the bond, which was 99 at that date, i.e., at 103. Forty percent of the bondholders accepted the offer. Markov uses the effective interest method of amortizing premium or discount. Instructions (a) Prepare the journal entry to record the bond issuance. (2 marks) (b) Prepare the adjusting entry at December 31, 2011, the end of the fiscal year. (3 marks) (c) Prepare the entries during 2012 for the payment of interest. (5 marks) (d) Record the retirement of the bonds on January 1, (4 marks) 9

10 III.(continued) 10

11 IV. Taxable income and Deferred (Future) Income Taxes (15 points). Canadian Apparel Inc. ( CAP ) is a public company that reports under IFRS that was incorporated on January 1, 20X7 with invested capital of $1,000,000. The company spent $300,000 on capital assets on that day, and began operations. The following information was extracted from the company s books: 20X7 20X8 20X9 Accounting income/(loss) $ 60,000 $85,000 $ 100,000 Tax rate 40% 40% 50% Additional information: Depreciation is calculated on a straight line basis at $30,000 per year. The company incurred entertainment expenses of $8,000, $10,000, and $14,000 respectively over the three-year period. (Assume that only 50% of entertainment expenses are taxdeductible) CAP purchased a $10,000 corporate membership to the Wooden Sticks Golf & Country Club in 20X9. The accounting income figures include dividends of $15,000 per year from another taxable Canadian corporation. CCA is $45,000 in 20X7, $40,000 in 20X8 and $35,000 in 20x9. CAP set up an initial expense for warranties of $14,000 at the beginning of 20X7. In 20X8, the accounting expense was $7,000 and then bumped up to$17,000 for the end of 20X9. Actual warranty spending amounted to $2,000, $7,000, and $14,000 respectively over the three-year period. Required: a) Calculate CAP s taxable income for 20X7, 20X8, and 20X9. (5 marks) b) Prepare the necessary journal entries for these years. (8 marks) c) Assume in 20X10 CAP incurs a loss for accounting and tax purposes of $50,000 (CCA equals depreciation of $30,000 and warranty expense equals warranty spending. The tax rate remains the same for 20X10 at 50%). Prepare the entry in 20X10 to carry back the loss. (2 marks) 11

12 IV. (continued) 12

13 IV. (continued) 13

YORK UNIVERSITY SCHOOL OF ADMINISTRATIVE STUDIES (Last) (First) Professor Sung Kwon (Section B) Ms. Shaweta Roopra (Section A)

YORK UNIVERSITY SCHOOL OF ADMINISTRATIVE STUDIES (Last) (First) Professor Sung Kwon (Section B) Ms. Shaweta Roopra (Section A) YORK UNIVERSITY Name, SCHOOL OF ADMINISTRATIVE STUDIES (Last) (First) Professor Sung Kwon (Section B) Ms. Shaweta Roopra (Section A) ADMS 3595 Intermediate Financial Accounting II EXAM I, Fall 2013 (White