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 Version) I.D. # Section Type Points Available Points Earned I. Multiple Choice 30 @ 2 = 60 II. Asset Retirement Obligation 13 III. Bonds Payable 13 IV. Deferred Income Taxes 14 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. The use of a financial calculator is required. 9. When the end of the exam is announced, stop writing and turn your exam over immediately. 10. The use of your cellular phone during the exam is prohibited and must be turned off.
I. Multiple Choices Questions: (30 @ 2 points). Circle the best answer and copy it to your SCANTRON form. Only your answers on the SCANTRON form will be graded. 1. Which of the following statements is NOT true about recognition and subsequent accounting for financial liabilities? a. They are initially recognized at their fair value. b. After acquisition, they continue to be accounted for at fair value. c. After acquisition, they are generally accounted for at amortized cost. d. Short term liabilities, such as accounts payable, are usually recorded at their maturity value. 2. Regarding zero-interest-bearing notes, a. they do not have an interest component. b. the debtor receives the future value of the note and pays back the present value. c. any interest is never recognized until the note is repaid. d. the debtor receives the present value of the note and pays back the future value. 3. Under IFRS, even if the entity plans to refinance long term debt, the current portion must be reported as a current liability UNLESS a. long term financing has been completed after the statement of financial position date, but before the financial statements are released. b. management intends to refinance the debt on a long-term basis. c. at statement of financial position date, the entity expects to refinance it or roll it over under an existing agreement for at least a year, and the decision is solely at its discretion. d. management intends to discharge the debt by issuing shares. 4. Regarding Provincial Sales Tax (PST) a. the purchaser includes any PST paid in the cost of the goods or services. b. all PST paid is recorded in a PST Expense account. c. all PST paid is recorded in a PST Recoverable account. d. for statement of financial position presentation, a PST registrant nets any PST paid against any PST collected from customers. 5. A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should a. be accrued during the period when the compensated time is expected to be used by employees. b. be accrued during the period following vesting. c. be accrued during the period when earned. d. not be accrued unless a written contractual obligation exists. 6. 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 ASPE, it is recognized as interest expense. b. Under ASPE, 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. 7. On December 31, 2014, Street Ltd. has $2,000,000 in short-term notes payable due on 2
February 14, 2015. On January 10, 2015, Street arranged a line of credit with Regal Bank, which allows Street to borrow up to $1,500,000 at 1% above the prime rate for three years. On February 2, 2015, Street borrowed $1,200,000 from Regal Bank and used $500,000 additional cash to liquidate $1,700,000 of the short-term notes payable. Assuming Street adheres to IFRS, the amount of the short-term notes payable that should be reported as current liabilities on Street s December 31, 2014 statement of financial position (to be issued on March 5, 2015) is a. $0. b. $300,000. c. $1,200,000. d. $2,000,000. 8. In 2014, Hydrogen Corp. began selling a new line of products that carry a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows: First year of warranty 4% Second year of warranty 5% Sales and actual warranty expenditures for 2014 and 2015 are presented below: 2014 2015 Sales $450,000 $600,000 Actual warranty expenditures 15,000 30,000 Hydrogen uses the expense approach to account for warranties. What is the estimated warranty liability at the end of 2015? a. $73,500 b. $ 3,500 c. $49,500 d. $28,500 9. Potassium Corp. uses the revenue approach to account for warranties. During 2014, the company sold $500,000 worth of products, all of which carried a two year warranty (included in the price). It was estimated that 2% of the selling price represented the warranty portion, and that 40% of this related to 2014, and 60% to 2015. Assuming that Potassium incurred costs of $3,700 to service the warranties in 2015, what is the net warranty revenue (revenue minus warranty costs) for 2015? a. $300 b. $2,300 c. $3,700 d. $4,000 10. Presented below is information available for Radon Corp.: Current Assets Cash... $ 8,000 Marketable securities... 150,000 Accounts receivable... 122,000 Inventories... 220,000 Prepaid expenses... 60,000 Total current assets... $560,000 Total current liabilities are $100,000. To two decimals, Radon s acid-test ratio is a. 5.60. b. 5.30. c. 2.80. d. 0.36. 3
11. If bonds are initially sold at a premium and the straight-line method of amortization is used, interest expense in the earlier years will be a. higher than it would have been had the effective interest method of amortization been used. b. less than it would have been had the effective interest method of amortization been used. c. the same as it would have been had the effective interest method of amortization been used. d. less than the stated rate of interest. 12. A ten-year bond was issued in 2014 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2016, the carrying value of the bond was less than the call price. The amount of bond liability removed from the accounts in 2016 would be the a. call price. b. maturity value. c. carrying value. d. face amount plus unamortized discount. 13. If a debt refunding is viewed as a modification or renegotiation, then a. a gain or loss is recorded. b. a new effective interest rate is calculated. c. there is no change in the accounting for the debt. d. the old debt is derecognized. 14. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should a. calculate a new effective interest rate. b. not recognize a loss. c. calculate its loss using the historical effective rate of the loan. d. calculate its loss using the current effective rate of the loan. 15. When the debtor sets aside money in a trust such that the investment and any return will be sufficient to pay the principal and the interest to the creditor, but the creditor does NOT release the company from the primary obligation to settle the debt, this type of arrangement is known as a. in-substance refunding. b. in-substance defeasance. c. substantive repayment. d. legal defeasance. 16. The times interest earned ratio measures a. an enterprise s ability to meet interest payments as they come due. b. the amount of interest expense related to long term debt. c. the percentage of total assets financed by creditors. d. the profitability of an enterprise. 17. On January 1, 2014, Lace 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 2014 is a. $50,000. 4
b. $53,696. c. $53,850. d. $60,000. 18. On January 1, 2013, Fernie Corp issued $900,000 (face value), 10%, ten-year bonds at 103. The bonds are callable at 105. Fernie has recorded amortization of the bond premium by the straight-line method (which was not materially different from the effective interest method under ASPE). On December 31, 2019, Fernie repurchased $300,000 of the bonds in the open market at 96. Bond interest expense and premium amortization have been recorded for 2019. Ignoring income taxes, what is the loss or gain arising from this reacquisition? a. A gain of $9,800. b. A loss of $9,800. c. A gain of $14,700. d. A loss of $14,700. 19. Pineapple owes Dole a $600,000, 12%, three-year note dated December 31, 2009. Pineapple has been experiencing financial difficulties, and still owes accrued interest of $72,000 on this note at December 31, 2011. Under a troubled debt restructuring, on December 31, 2011, Dole agrees to settle the note plus the accrued interest for land that Pineapple owns, which has a fair value of $340,000. Pineapple's original cost of the land is $435,000. Ignoring income taxes, on its 2011 income statement, what should Pineapple report as a result of the troubled debt restructuring? Disposition of Land Restructuring of Debt a. $ 95,000(Gain) $332,000 (Loss) b. $ 95,000(Loss) $332,000(Gain) c. $105,000(Loss) $ 60,000(Loss) d. $105,000(Gain) $132,000(Gain) 20. On January 1, 2014, Queen Ltd. sold property to King Company. There was no established exchange price for the property, and King gave Queen a $3,000,000, zerointerest-bearing note payable in five equal annual instalments of $600,000, with the first payment due December 31, 2014. The market rate of interest for a note of this type is 9%. The present value of the note at 9% was $2,333,791 at January 1, 2014. What should be the balance of the Note Payable to Queen Ltd. account on King s December 31, 2014 adjusted trial balance, assuming that the note is recorded at net and the effective interest method is used? (round to the nearest dollar, if necessary) a. $1,943,832 b. $2,333,791 c. $2,400,000 d. $3,000,000 21. The tax base of a liability is its carrying amount on the statement of financial position a. increased by any amount that will be deductible for tax purposes in future periods. b. reduced by any amount that will be deductible for tax purposes in future periods. c. less any amount that will be taxable in the future. d. plus any amount that will not be taxable in the future. 22. Alabama Corp.'s taxable income differed from its accounting income for 2014. An item that would create a permanent difference in accounting and taxable incomes for the 5
corporation would be a. a balance in the Unearned Rent account at year end. b. using CCA for tax purposes and straight-line depreciation for book purposes. c. a payment of the golf club dues for the president s membership. d. making instalment sales during the year. 23. One objective of interperiod tax allocation is to a. recognize the tax effects in the accounting period when the transactions and events are recognized for financial reporting purposes. b. recognize a distribution of earnings to the shareholders. c. reconcile the tax consequences of permanent and reversible differences appearing on the current year's financial statements. d. adjust income tax expense on the income statement to be in agreement with income taxes payable on the statement of financial position. 24. The effective tax rate differs from the statutory rate because of a. permanent differences and temporary differences. b. changes in statutory tax rates and temporary differences. c. changes in statutory tax rates and permanent differences. d. changes in effective tax rates and permanent differences. 25. Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in Taxable Temporary Deductible Temporary Differences Differences a. Yes No b. Yes Yes c. No Yes d. No No 26. A corporation records an unrealized gain on short-term securities. This would result in what type of difference and in what type of deferred tax account? Type of Difference Deferred tax a. Reversible Liability b. Reversible Asset c. Permanent Liability d. Permanent Asset 27. In its 2014 income statement, it s first year of operations, Maine Corp. reported depreciation of $525,000 and interest revenue from a Canadian corporation of $105,000. For 2014 income tax purposes, Maine claimed CCA of $825,000. The difference in depreciation/cca will reverse in equal amounts over the next three years. Maine's income tax rates are 35% for 2014, 30% for 2015, and 25% for both 2016 and 2017. What amount should be included as the deferred tax liability on Maine's December 31, 2014 statement of financial position? a. $99,000 b. $90,000 c. $80,000 d. $75,000 28. On January 1, 2014, Lake Corp., a publicly accountable enterprise, purchased 40% of the 6
common shares of Michigan Inc. and accounts for this investment by the equity method. During 2014, Michigan reported earnings of $900,000 and paid dividends of $300,000. Lake assumes that all of Michigan's undistributed earnings will be distributed as dividends in future periods when the enacted tax rate will be 20%. Lake's current income tax rate is 25%. The increase in Lake's deferred tax liability for this temporary difference is a. $120,000. b. $100,000. c. $ 60,000. d. $ 48,000. Use the following information for questions 29 and 30. Black Raven Corporation reported the following results for its first three years of operations: 2013 income (before income taxes) $ 40,000 2014 loss (before income taxes) (360,000) 2015 income (before income taxes) 400,000 There were no permanent or reversible differences during these three years. Assume an income tax rate of 25% for 2013 and 2014, and 30% for 2015, and that any future income tax asset recognized is more likely than not to be realized. 29. If Black Raven elects to use the carryback provisions, what income (loss) is reported in 2014? a. $(360,000). b. $(254,000). c. $(220,000). d. $ 0. 30. Assuming that Black Raven elects to use the carryforward provisions and not the carryback provisions, what income (loss) is reported in 2014? a. $ 0. b. $(216,000). c. $(252,000). d. $(360,000). 7
II. Asset Retirement Obligation (13 points) Mining Core Ltd. (MCL) specializes in extracting ore. It prides itself for following high environmental standards in the extraction process. On January 1, 2010, MCL purchased the rights to use a parcel of land from the province of Ontario. The rights cost $15,000,000 and allowed the company to extract ore for five years, i.e., until Dec 31, 2014. MCL expects to extract the ore evenly over the contract period. At the end of the contract, MCL has to clean up and restore the land. MCL estimates this will cost $2,000,000. Assume that 100% of the total asset retirement cost estimate is caused by the asset acquisition itself. MCL uses a discounted cash flow method to calculate the fair value of this obligation and believes that 8% is the appropriate discount rate. MCL uses straight-line depreciation method. MCL uses the calendar year as its fiscal year and follows IFRS. Required (Round all values to the nearest dollar.) a. Prepare the journal entries to be recorded on January 1, 2010. (3 points) b. Prepare the journal entries to be recorded on December 31, 2010. Show the amounts and accounts to be reported on the classified statement of financial position at December 31, 2010. (5 points) c. Prepare the journal entries to be recorded on December 31, 2014. Show the amounts and accounts reported on the classified statement of financial position at December 31, 2014. (5 points) 8
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III. Bonds Payable (13 points) Black and White Corp (BWC) desired to raise cash to fund its expansion by issuing long-term bonds. On June 1, 2014, BWC sold $500,000 in long-term bonds. The bonds will mature in 10 years and have a stated interest rate of 8%. Other bonds that BWC has issued with identical terms are traded based on a market rate of 10%. The bonds pay interest semi-annually on May 31 and November 30. The bonds are to be accounted for using the effective interest method. Legal, accounting, and other costs of $37,689 were incurred in connection with the issue. On June 1, 2016 BWC decided to retire 20% of the bonds. At that time the bonds were selling at 98. Required: (Round all values to the nearest dollar) a. Prepare the journal entry for the issuance of the bonds on June 1, 2014. (2 points) b. What was the interest expense related to these bonds that would be reported on BWC s calendar 2014 income statement? Prepare an effective-interest amortization table for the first 4 payments. (4.5 points) c. Prepare all entries from after the issue of the bond till December 31, 2014. (3 points) d. Calculate the gain or loss on the partial retirement of the bonds on June 1, 2016. (2 points) e. Prepare the journal entries to record the partial retirement on June 1, 2016. (1.5 points) 10
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IV. Deferred income taxes (14 points) In 2014, the first year of its existence, Virginia Ltd.'s accountant, in preparing both the income statement and the tax return, developed the following list of items creating differences between accounting and taxable income: 1. The company sells its merchandise on an installment contract basis. In 2014, Virginia elected, for tax purposes, to report the gross profit from these sales in the years the receivables are collected. However, for financial statement purposes, the company recognized all the gross profit in 2014. These procedures created a $240,000 difference between book and taxable incomes for 2014. Future collections of installment receivables are expected to result in taxable amounts of $120,000 in each of the next two years. 2. The company depreciates all of its property, plant and equipment using CCA for tax purposes and straight-line for accounting purposes. This resulted in $42,000 excess CCA over accounting depreciation. This temporary difference will reverse equally over the three year period from 2015 2017. 3. On July 1, 2014, Virginia leased part of its building to Swift Books Ltd. on a two-year operating lease. The monthly rent is $30,000, and Swift paid the first year's rent in advance (July 1, 2014 to June 30, 2015). Virginia reported the entire amount on its tax return. This resulted in a $180,000 difference between book and taxable incomes. 4. Virginia sold $150,000 of bonds issued by the Government of Canada at a gain of $18,000, which was included as other income in its income statement. A taxable capital gain of $9,000 was reported for tax purposes. 5. In 2014, Virginia insured the lives of its chief executives. The premiums paid were $12,000 and this amount was shown as an expense on the income statement. However, this amount was not deductible for tax purposes. Virginia is a publicly accountable enterprise adhering to IFRS. Their 2014 income statement showed "Income before income taxes" of $900,000. The currently enacted income tax rate (and for the foreseeable future) is 40%. Except for those items mentioned above, there are no other differences between book and taxable incomes. Instructions a. Calculate the income tax payable for 2014. (3.5 points) b. Prepare a schedule of future taxable/deductible amounts at the end of 2014. (1.5 points) c. Prepare a schedule of the deferred tax asset and deferred tax liability at the end of 2014. (3 points) d. Calculate the net deferred tax expense (benefit) for 2014. (1.5 points) e. Prepare the journal entry (entries) recording income tax expense, income tax payable, and deferred income taxes for 2014. (2.5 points) f. How would the income tax expense and any deferred taxes be disclosed on the financial statements? (2 points) 12
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