Name: Student ID: WatIAM/Quest ID: Section (please circle): 8:30-9:50 (K. Kelly) 4:00-5:20 (R. Ducharme)

Transcription

1 AFM 291 Intermediate Financial Accounting I University of Waterloo Midterm Exam Friday, October 30, :30pm-6:30pm K. Kelly (Sections ) and R. Ducharme (Section ) Name: Student ID: WatIAM/Quest ID: Section (please circle): 8:30-9:50 (K. Kelly) 4:00-5:20 (R. Ducharme) Instructions: 10:00-11:20 (K. Kelly) 5:30-6:50 (R. Ducharme) 1:00-2:20 (K. Kelly) 1. This is a closed note, closed book examination. You may use pen/pencil and a calculator during the examination. 2. The examination includes 22 pages (including the cover page) - please ensure that all the pages have been included. If any pages are detached, they must be re-attached to the examination before the exam is handed in, to receive marks for work shown on these pages. 3. Show all your work and calculations. We cannot give partial credit if we cannot see the work you have done. No partial credit is given for multiple choice questions. All questions must be answered in the space provided on the examination paper. Answers written outside of the provided space will not be graded. 4. Unless otherwise stated, assume that the fiscal year end is December For parts C thru H of the examination, round your final answers to the nearest dollar. 6. When you have completed the exam, please leave your answers on your desk with the title page facing upwards. 7. You have 2 hours to complete the exam please allocate your time wisely. 8. Good Luck! AFM 291 Midterm Exam Fall 2009 page 1 of 22

2 Part Examination Breakdown: Grading Your Points A Multiple Choice /10 B Multiple Choice /10 C Assigning and Factoring Accounts Receivable /16 D Inventory Costs /10 E Inventory Errors /8 F Investments /17 G Investments /21 H PPE Borrowing Costs /8 Total Points Total /100 AFM 291 Midterm Exam Fall 2009 page 2 of 22

3 Part A: Multiple Choice (1 Point Each No Partial Credit Will be Awarded) Please circle your choice (a, b, c, or d). 1. Which of the following is not a qualitative characteristic of useful information in the IFRS conceptual framework? a. Completeness b. Conservatism c. Faithful representation d. Substance over form 2. In classifying the elements of financial statements, the primary distinction between revenues and gains is a. the materiality of the amounts involved. b. the likelihood that the transactions involved will recur in the future. c. the nature of the activities that gave rise to the transactions involved. d. the costs versus the benefits of the alternative methods of disclosing the transactions involved. 3. Adjusting entries are necessary to a. obtain a proper matching of revenue and expense. b. achieve an accurate statement of assets and liabilities. c. adjust assets and liabilities to their fair market value. d. both a and b. 4. If a zero interest bearing note is received in exchange for cash, its present value is usually? a. The cash paid to the issuer b. The amount that equates the cash paid with the amounts receivable in the future c. Cannot be determined d. The interest at the end of the notes life. 5. If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be a. reported as a deduction from sales in the income statement. b. reported as an item of "other expense" in the income statement. c. reported as a deduction from accounts receivable in determining the net realizable value of accounts receivable. d. reported as sales discounts forfeited in the cost of goods sold section of the income statement. AFM 291 Midterm Exam Fall 2009 page 3 of 22

4 6. Which of the following is correct for the use of the average cost method with a perpetual system? a. A weighted-average cost is calculated at year end. b. A new unit cost is calculated each time a sale is made. c. A new unit cost is calculated each time a purchase is made. d. All of these. 7. Under IAS 39 (Financial Instruments: Recognition and Measurement), transaction costs for available for sale investments are a. expensed. b. capitalized. c. either expensed or capitalized. d. not recorded. 8. If the parent company owns 90% of the subsidiary company's outstanding common shares, the company should generally account for the income of the subsidiary under the a. cost method. b. fair value method. c. consolidation method. d. equity method. 9. If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on a. the significance of the cost allocated to the building in relation to the combined cost of the lot and building. b. the length of time for which the building was held prior to its demolition. c. whether fair value of the building can be reliably measured. d. the intention of management for the property when the building was acquired. 10. A plant site donated by a municipal government to a manufacturer that plans to open a new factory should be recorded on the manufacturer's books at a. the nominal cost of taking title to it. b. its market value. c. one dollar (since the site cost nothing but should be included in the balance sheet). d. the value assigned to it by the company's directors. AFM 291 Midterm Exam Fall 2009 page 4 of 22

5 Part B: Multiple Choice (2 Points Each No Partial Credit Will be Awarded) Please circle your choice (a, b, c, or d). 11. During the year, Jantz Company made an entry to write off a $4,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $60,000 and the balance in the allowance account was $4,500. The net realizable value of accounts receivable after the write-off entry was a. $60,000. b. $59,500. c. $51,500. d. $55, On January 1, 2006, the merchandise inventory of Colter, Ltd. was $1 million. During 2006 Colter purchased $2,000,000 of merchandise and recorded sales of $2.5 million. The gross profit rate on these sales was 25%. What is the merchandise inventory of Colter at December 31, 2006? a. $500,000. b. $625,000. c. $1,125,000. d. $1,875, Trent Co. uses the retail inventory method. The following information is available for the current year. Beginning inventory $117,000 $183,000 Purchases 442, ,000 Freight-in 8,000 Employee discounts 3,000 Net markups 22,000 Net Markdowns 30,000 Sales 585,000 The approximate cost of the ending inventory by the conventional retail inventory method is a. $143,804. b. $142,380. c. $147,000. d. $153,720. AFM 291 Midterm Exam Fall 2009 page 5 of 22

6 14. Pierce Co. purchased land as a factory site for $500,000. Pierce paid $20,000 to tear down two buildings on the land. Salvage was sold for $2,700. Legal fees of $1,740 were paid for title investigation and making the purchase. Architect's fees for the factory were $20,600. Title insurance cost $1,200, and liability insurance during construction cost $1,300. Excavation cost $5,220. The contractor was paid $1,200,000. An assessment made by the city for pavement was $3,200. Interest costs during construction were $85,000. The cost of the land that should be recorded by Pierce Co. is a. $520,240. b. $523,440. c. $524,940. d. $528, Edwards Corporation purchased a new machine on October 31, A $700 down payment was made and three monthly instalments of $2,100 each are to be made beginning on November 30, The cash price would have been $6,400. Edwards paid no installation charges under the monthly payment plan but a $100 installation charge would have been incurred with a cash purchase. The amount to be capitalized as the cost of the machine on October 31, 2006 would be a. $7,100. b. $7,000. c. $6,500. d. $6,400. AFM 291 Midterm Exam Fall 2009 page 6 of 22

7 Part C: Assigning and Factoring Accounts Receivable (16 Points) Situation 1 On April 1, 2009, SAF Corporation assigns $200,000 of its accounts receivable to the National Bank as collateral for a $100,000 loan that is due July 1, The assignment agreement calls for SAF to continue to collect the receivables. National Bank assesses a finance charge of 3% of the accounts receivable, and interest on the loan is 8% per annum, a realistic rate for a note of this type. REQUIRED: (a) Prepare the April 1, 2009 journal entries for SAF Corporation. Date Account Name Debit Credit (b) Prepare the journal entries for SAF s collection of $180,000 of the accounts receivable on June 30, Date Account Name Debit Credit (c) Prepare the journal entries on the date SAF paid National Bank the entire amount that was due on the loan. Date Account Name Debit Credit AFM 291 Midterm Exam Fall 2009 page 7 of 22

8 Part C (continued) Situation 2 On March 1, 2009, Kelly Corporation factors receivables with a carrying amount of $210,000 to Ducharme Company for $187,000 cash, on a with-recourse basis. REQUIRED: (a) The recourse obligation has a fair value of $6,000. Assuming this transaction should be recorded as a sale, prepare the appropriate journal entries to record the transaction on the books of Kelly Corporation. Date Account Name Debit Credit (b) Prepare the appropriate journal entries on the books of Ducharme Company. Date Account Name Debit Credit AFM 291 Midterm Exam Fall 2009 page 8 of 22

9 Part D: Inventory Costs (10 points) Trudeau Corporation is a wholesale distributor of truck replacement parts. Initial amounts taken from Trudeau s records are as follows: Inventory at December 31 (based on a physical count of goods in Trudeau s warehouse on December 31) $1,250,000 Accounts payable at December 31: Vendor Terms Amount Baker Company 2/10, n/30 $ 265,000 Charlie Company Net ,000 Dolly Company Net ,000 Eagler Company Net ,000 Full Company Net 30 Greg Company Net 30 $1,000,000 Sales for the year $9,000,000 Additional information: 1. Parts held by Trudeau on consignment from Charlie, amounting to $155,000, were included in the physical count of goods in Trudeau s warehouse and in accounts payable at December Parts totalling $22,000, which were purchased from Full and paid for in December, were sold in the last week of the year and appropriately recorded as sales of $28,000. The parts were included in the physical count of goods in Trudeau s warehouse on December 31 because the parts were on the loading dock waiting to be picked up by customers. The customers have accepted title to the parts at the date of sale. 3. Parts in transit on December 31 to customers, shipped f.o.b. shipping point on December 28, amounted to $34,000. The customers received the parts on January 6 of the following year. Sales of $40,000 to the customers for the parts were recorded by Trudeau on January Retailers were holding goods on consignment from Trudeau, which had a cost of $210,000 and a retail value of $250, Goods, ordered on credit by Trudeau, were in transit from Greg to Trudeau on December 31. The cost of the goods was $25,000, and they were shipped f.o.b. shipping point on December 29. No accounts payable has been recorded as at December A freight bill in the amount of $2,000 specifically relating to merchandise purchased in December, all of which was still in the inventory at December 31, was received on January 3. The freight bill was not included in either the inventory or accounts payable at December All the purchases from Baker occurred during the last seven days of the year. These items have been recorded in accounts payable and accounted for in the physical inventory at cost before discount. Trudeau policy is to pay invoices in time to take advantage of all discounts, adjust inventory accordingly, and record accounts payable net of discounts. AFM 291 Midterm Exam Fall 2009 page 9 of 22

10 Part D (continued) REQUIRED: Prepare a schedule of adjustments to the initial amounts using the format shown below (fill in all the blanks with either an amount appropriately identified as an increase or a decrease, or the word none, blank cells will not be graded). Show the effect, if any, of each of the transactions separately. If the transactions would have no effect on the amount shown, state none (points will not be awarded for blank cells, you must specifically state none). Initial account balance as at December 31 Adjustments increase (decrease): Inventory $1,250,000 Accounts Payable $1,000,000 Sales $9,000, _ Adjusted account balance as at December 31 $ _ $ _ $ _ AFM 291 Midterm Exam Fall 2009 page 10 of 22

11 Part D (continued) Use this space to show your work if needed AFM 291 Midterm Exam Fall 2009 page 11 of 22

12 Part E: Inventory Errors (8 Points) The records of Pelletier Inc. show the following data (which contains the errors described in the additional information below): Income Statement: Sales $300,000 $312,000 $300,000 Cost of goods sold 258, , ,000 Operating expenses 50,000 52,000 50,000 Balance sheet: Inventory 17,000 29,000 17,000 After the company s July 31, 2009 fiscal year end, the controller discovers two errors, which have not yet been corrected: 1. Ending inventory in 2007 was understated by $10, The cost of goods purchased recorded in the Inventory account for 2008 included $25,000 of merchandise that should have been recorded as a purchase in The July 31, 2008, and 2009 inventories were correctly calculated. REQUIRED For each of the three years, calculate the corrected cost of goods sold, gross profit, and ending inventory. Provide your answers in the table below. Cost of goods sold Gross profit Ending inventory AFM 291 Midterm Exam Fall 2009 page 12 of 22

13 Part E (continued) Use this space to show your work if needed AFM 291 Midterm Exam Fall 2009 page 13 of 22

14 Part F: Investments (17 points) On January 1, 2009, Morrison Inc. purchased $400,000 of 3-year, 6% bonds for $389,504. The purchase price was based on a market interest rate of 7%. Interest is received annually on January 1. Morrison s year end is December 31. Morrison intends to hold the bonds until January 1, 2012, the date the bonds mature. The fair value of the bonds on December 31, 2009, was $395,000. REQUIRED (a) Record the purchase of the bonds on January 1, Date Account Name Debit Credit (b) Prepare a bond amortization schedule for the term of the bonds. Use the space below to show your work. AFM 291 Midterm Exam Fall 2009 page 14 of 22

15 Part F (continued) (c) Prepare the required adjusting journal entries for December 31, 2009 and the journal entries to record the receipt of the first interest payment January 1, 2010 (clearly identify the date and purpose of each entry) Date Account Name Debit Credit (d) How would your answer to (c) change if the bonds were classified as available-for-sale (briefly explain and provide any necessary journal entries)? AFM 291 Midterm Exam Fall 2009 page 15 of 22

16 Part G: Investments (21 points) Suzy Friezen, through her professional corporation Suzy Inc., had been awarded $3,000,000 on January 1, 2009 as a signing bonus with her first endorsement contract as a professional golfer. Suzy Inc. has decided to make a few investments and has asked you to help her account for her investments. Short-Term Investments (Power Inc has been classified as held-for-trading; CitiBank has been classified as available-for-sale) Total Shares Security Purchase Date Purchase Cost/share outstanding in company Total Cost Power Inc. Jan.19, ,000 common $23.50/share 1.8 million $235,000 CitiBank Inc. Jan.19, ,000 common $3.75/share 12 million $187,500 On December 31, 2009, Suzy received a $0.10 per share dividend from CitiBank. Long-Term Investments (significant influence) Security Purchase Date Purchase Cost/share Total shares outstanding in company Total Cost GN Inc. Jan.26, ,000 common $2.45/share 1.6 million $980,000 GN reported net earnings of $8,000,000 (of which $800,000 was gain from discontinued operations) and paid dividends of $1,000,000 on December 31. At the end of the semi-annual financial statement periods, the prices of the shares were as follows: June 30,2009 December 31, 2009 Power Inc. $22.60 $22.90 CitiBank Inc. $3.30 $3.45 GN Inc. $2.50 $2.48 AFM 291 Midterm Exam Fall 2009 page 16 of 22

17 Part G (continued) REQUIRED (a) Suzy has not recorded any entries relating to the short-term investments. Record all the required journal entries for 2009 for the short-term securities and any required adjusting entries for each semi-annual financial statement period. Date Account Name Debit Credit AFM 291 Midterm Exam Fall 2009 page 17 of 22

18 Part G (continued) (b) Suzy has not recorded any entries relating to the long-term investments. Record all the required journal entries for 2009 for the long-term securities and any required adjusting entries for each semi-annual financial statement period. Date Account Name Debit Credit AFM 291 Midterm Exam Fall 2009 page 18 of 22

19 Part H: Property, Plant and Equipment (8 points) Early in 2006, Bath Corporation engaged Hubert, Ltd. to design and construct a complete modernization of Bath's manufacturing facility. Construction begun on June 1, 2006 and was completed on December 31, Bath made the following payments to Hubert, Ltd. during 2006: Date Payment June 1, 2006 $3,300,000 August 31, ,800,000 December 31, ,000,000 In order to help finance the construction, Bath issued the following during 2006: 1. $2,000,000 of ten year, 9% bonds payable, issued at par on May 31, 2006, with interest payable annually on May ,000,000 no par common shares, issued at $10 per share on October 1, In addition to the 9% bonds payable, the only debt outstanding during 2006 was a $4,000,000, 12% note payable (issued at par) dated January 1, 2002 and due January 1, 2012, with interest payable annually on January 1. In the first phase of construction, Bath did not need all of the loan proceeds and thus invested the idle funds for a three month period and earned $7,300 of investment income. Bath is considering capitalizing a portion of the interest costs during construction to increase the asset base and reduce the current year expenses. Assume that Bath uses IFRS (i.e., IAS 23: Borrowing Costs). REQUIRED (a) Calculate the weighted-average accumulated expenditures qualifying for capitalization of interest cost. AFM 291 Midterm Exam Fall 2009 page 19 of 22

20 Part H (continued) (b) Calculate the actual interest cost incurred during (c) Determine the total amount of interest cost to be capitalized during AFM 291 Midterm Exam Fall 2009 page 20 of 22

21 Present Value of $1 (Present Value of a Single Sum) PV = FV / (1+r) n (n) Periods 2% 2.5% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 15% AFM 291 Midterm Exam Fall 2009 page 21 of 22

22 Present Value of an Ordinary Annuity of 1 PV A = [1 - [1/(1+r) n ]]/r (n) Periods 2% 2.5% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 15% AFM 291 Midterm Exam Fall 2009 page 22 of 22

23 AFM 291 MIDTERM EXAM - SOLUTION SET Fall 2009 Part A: Multiple Choice (1 point each no partial credit) 1. b 2. c 3. d 4. a 5. a 6. c 7. b 8. c 9. d 10. b Part B: Multiple Choice (2 points each no partial credit) 11. d ($60,000 $4,000) ($4,500 $4,000) = $55, c (step 1) COGS = $2,500,000 x.75 = $1,875,000 (step 2) $1,000,000 + $2,000,000 $1,875,000 = $1,125, a (step 1) (see illustration 8A-6 page 472 of Kieso 8ce text) cost-retail ratio using conventional retail method = = ( ) / ( ) = 567/828 (step 2) inventory cost = $210,000 x = $143, b $500,000 + $20,000 $2,700 + $1,740 + $1,200 + $3,200 = $523, c $6,400 + $100 = $6,500. 1

24 Part C (16 points): Situation 1 (8.5 points) (a) Date: April 1, 2009 Cash... 94,000 Finance Charge Expense ($200,000 x 3%)... 6,000 Loan Payable ,000 (b) Date: June 30, 2009 Cash ,000 Accounts Receivable ,000 (c) Date: July 1, 2009 Loan Payable ,000 Interest Expense... 2,000 Cash ,000 ($100,000 x 8% x 3/12) 0.5 point if student gets all three dates correct, zero otherwise. 2

25 Situation 2 (7.5 points) (a) journal entries on Kelly Corporation s books (the seller) Date: March 1, 2009 Cash ,000 Loss on Sale of Receivables... 29,000 Recourse Liability or Recourse Obligation 6,000 Accounts Receivable ,000 Calculation of net proceeds: Cash received $187,000 Less: Recourse liability 6,000 Net proceeds $181,000 Calculation of gain or loss: Carrying value $210,000 Net proceeds 181,000 Loss on sale of receivables $ 29,000 (b) journal entry on Ducharme Company s books (the buyer) Date: March 1, 2009 Accounts Receivable ,000 Financing Revenue... 23,000 Cash , point if student gets both dates correct, zero otherwise. Minus 0.5 point if student erroneously recorded Ducharme s journal entries as Kelly s journal entries, and Kelly s journal entries as Ducharme s journal entries. 3

26 Part D (10 points) Inventory Accounts Payable Sales Initial account balance as at December 31 $1,250,000 $1,000,000 $9,000,000 Adjustments - increase (decrease): 1. (155,000) (155,000) none (3 x 0.5) 2. (22,000) none none (3 x 0.5) 3. none none 40,000 (3 x 0.5) ,000 none none (3 x 0.5) 5. 25,000 25,000 none (3 x 0.5) 6. 2,000 2,000 none (3 x 0.5) 7. (5,300) (5,300) none (3 x 0.5) Total adjustments 54,700 (133,300) 40,000 Adjusted account balance at December 31 $1,304,700 $ 866,700 $9,040,000 * re:#7: $265,000 gross purchases x 2% discount = $5,300 discount not recorded, but will be taken and Trudeau follows the net method to record purchase discounts grading: adjustments #1-7 3 cells situations = 10.5 points maximum of 10 points (available 10.5 points) Minus 0.5 point for inaccurate summation of adjusted account balances based on student s answers. 4

27 Part E (8 points): (CORRECTED) PELLETIER INC. Income Statement(s) For the Year(s) Ended July 31, 2009, 2008 and Sales $300,000 $312,000 $300,000 Cost of goods sold (1) 283,000 3 (1) 258,000 2 (1) 248,000 1 Gross profit (1) 17,000 (1) 54,000 (1) 52,000 Correct calculation of gross profit involves deducting COGS from sales. Do not penalize carry-forward errors (i.e. student makes an error in COGS calculations) Inventory (0.5) 17,000 (0.5) 29,000 (1) 27,000 1 $258,000 - $10,000 = $248,000 (2007 EI was understated, thus 2007 COGS was overstated) 2 $273,000 + $10,000 - $25,000 = $258,000 (2008 BI was understated, thus COGAS was understated by $10,000, and since 2008 EI was correct, then 2008 COGS was understated) (Also: 2008 COGS was overstated by $25,000 of goods purchased in 2009 that were erroneously recorded in 2008 COGS) 3 $258,000 + $25,000 = $283,000 (2009 COGS was understated by the $25,000 of purchases recorded in 2008 that should have been recorded in 2009) Note: Points are not deducted for carry-forward errors. ********** Although not asked for, these are the uncorrected income statements created from the data provided (which contains errors): (INCORRECT income statements for comparison purposes only not asked for in question) PELLETIER INC. INCORRECT Income Statement(s) For the Year(s) Ended July 31, 2009, 2008 and Sales $300,000 $312,000 $300,000 Cost of goods sold 258, , ,000 Gross profit 42,000 39,000 42,000 Operating expenses 50,000 52,000 50,000 Net Income (Loss) $(8,000) $(13,000) $(8,000) 5

28 Part F (17 points) calculation of PV (issue price) of the HTM bonds (not required per question): Present value of the principal (single-sum): $400,000(PV* 3,7% ) = { } $326,520 Present value of the coupon (annuity): $24,000(PV*OA 3,7% ) = { } 62,984 Present value of the note 389,504 (a) (2 points) Date: Jan 1, 2009 Investment in Bonds HTM (must indicate HTM to get credit) 389,504 Cash ,504 Note: Points for date associated with parts c and d. Full credit given if students record Dr Investment in Bonds (HTM) 400,000 Cr Bond discount 10,496 Cr Cash 389,504 (b) (6.5 points) Date of Issue Morrison Inc. Bond Discount Amortization Schedule 6% Note Discounted at 7% Cash Received Interest Revenue ($400k x 6%) (CV x 7%) Discount Amortization Carrying Value $389,504 Jan.1,2010 $24,000 $27,265 $3, ,769 Jan.1, ,000 27,494 3, ,263 Jan.1, ,000 * 27,737 * 3, ,000 $72,000 $82,496 $10, point for correct cash in each period. Total = 1.5 points * small rounding adjustment 0.5 point for correct calc. of interest based on 7% in each period. Total = 1.5 points 0.5 point each for correct calc. of premium amortization in each period. Total = 1.5 points 0.5 point each for correct calc. of carrying value in each period, including beginning carrying value. Total = 2 points 6

29 (c) (5 points) December 31, 2009 year end adjusting journal entries to record interest revenue Interest Receivable (or A/R) (not Cash)... 24,000 Investment in Bonds HTM... 3,265 Interest Revenue... 27,265 NOTE: Minus 2 points if student attempts to adjust HTM investment to fair value. It is erroneous to adjust HTM investment to fair value. January 1, 2010 journal entries to record receipt of interest payment Cash... 24,000 Interest Receivable (or A/R)... Note: Points for date associated with parts a and d. 24,000 (d) (3.5 points, including 1 point for all dates) The adjusting journal entries to record interest revenue at 31 Dec 2009 are the same (0.5 point) The journal entries to record receipt of interest payment on 1 Jan 2010 are the same (0.5 point). OR if student indicates/infers that all journal entries in part c are the same (1 point). Additional journal entries are required on 31 Dec 2009 to - adjust the bonds to their fair value of $395,000 and - recognize an unrealized gain of $2,231 ($395,000 - $392,769) in OCI and the bonds would be reported at fair value on the balance sheet. Dec 31, 2009 Investment in Bonds AFS (must indicate AFS to get credit) Unrealized holding gain (OCI)... (must indicate OCI to get credit) 2,231 2, point if all four dates (in parts a, c, and d) are correct, zero otherwise. 7

30 Part G (21 points) (a) (13.5 points) Market Value Shares Cost June 30 Dec 31 unrealized G/L Power Inc. $235,000 $226,000 $229,000 HFT (NI) CitiBank Inc. 187, , ,500 AFS (OCI) Jan. 19 HFT Investment Power Inc 235,000 AFS Investment CitiBank Inc 187,500 Cash 422,500 June 30 Unrealized Loss (NI) HFT 9,000 HFT Investments - Power 9,000 Unrealized Loss AFS (OCI) (must indicate OCI to get credit) AFS Investment Citibank 22,500 22,500 Dec 31 Cash 5,000 Dividend Revenue (CitiBank 50,000 x $0.10) Dec 31 HFT Investments Power Inc 3,000 Unrealized Gain (NI) HFT AFS Investments CitiBank Inc 7,500 Unrealized Gain AFS (OCI) (must indicate OCI to get credit) 0.5 points if all dates are correct, otherwise zero. 5,000 3,000 7,500 8

31 (b) (7.5 points) Jan.26 Equity Investment GN common 980,000 Cash (To record the purchase of 25% equity investment with significant influence) Dec.31 Equity Investment GN common 2,000,000 Gain from Discontinued Operations in GN Revenue from Investment in GN (or Investment Income) (To record 25% equity in GN s net earnings disc. ops. = $800,000 x 25% = $200,000 continuing ops. = ($8,000,000-$800,000) x 25% = $1,800,000) 980, ,000 1, Dec.31 Cash 250,000 Equity Investment GN common (To record dividends received = $1,000,000 dividends x 25%) 250, point if all dates are correct, otherwise zero. Minus 0.5 point if student attempts to adjust equity investment to fair value. It is erroneous to adjust equity investment to fair value. 9

32 Part H (8 points) (a) Weighted-Average Date Capitalization Expenditures Period Accumulated Expenditures June 1 $3,300,000 7/12 $1,925,000 (0.5 points) August 31 4,800,000 4/12 1,600,000 (0.5 points) December 31 4,000, $3,525,000 (0.5 point) 0.25 point partial credit given if student gets either capitalization expenditure or weighted average period for each expenditure correct. (b) Actual interest incurred during 2006: 9% bonds payable, $2,000,000 x.09 x 7/12 $105,000 (1 point) 12% note payable, $4,000,000 x ,000 (1 point) $585,000 (0.5 point) 0.5 point partial credit if student gets either principal amount or interest rate for each debt instrument corre.t Minus 0.5 point if student calculates weighted average expenditures as actual interest cost, and actual interest cost as weighted average expenditures. (c) Borrowing costs on asset-specific borrowing Borrowing costs on general borrowing Weighted-Average Accumulated Expenditures $2,000,000 x 7/12 = $1,166,667 Appropriate Avoidable Interest Rate Interest.09 $105,000 (1 point) 2,358, ,000 (1 point) $3,525, ,000 Less: Investment Income (7,300) (1 point) Interest to be capitalized $380,700 (1 point) 10