Name: MEMORIAL UNIVERSIY OF NEWFOUNDLAND FACULY OF BUSINESS BUSINESS 6100 ERM ES # 2 - Value - 30% of your final grade March 2016 Version 1 Question Marks Suggested ime 1 12 9 minutes 2 15 11 minutes 3 51 38 minutes 4 22 17 minutes 100 75 minutes Penalty if exam is not passed in on time Instructions: 1. NO QUESIONS WILL BE ANSWERED BY HE INVIGILAOR. Please include with your written answers any assumptions that you feel are necessary. Only logical assumptions will be considered. 2. his entire exam must be returned to the University. Please be neat and logical. 3. Budget your time. Please use a pen. DO NO EAR PAGES OU OF HE EXAM. 4. As noted on your course outline, communication devices may not be accessed during exams. You may use a basic four-function calculator. Please turn off the volume on all electronic devices.
1. 12 marks: suggested time - 9 minutes You are provided with the following information related to Zephyr Construction Corporation s $1,800,000 contract to construct a building. It is the end of the first year of the contract and it is expected that it will take three years to complete the project. otal contract price $1,800,000 Costs incurred during the year 250,000 Estimated costs to complete the project 1,000,000 Estimated total costs for the project 1,250,000 Progress billings during the year 175,000 Collections on billings during the year 130,000 Required: In your answer book, prepare journal entries for the year. Answer this question in your answer book, not on this test paper. he marker will not see anything that you write on this paper for this question. 1
2. 15 marks: suggested time - 11 minutes You are presented with the following data. Kai Ramanathan Inc. Statement of Financial Position December 31 Debits 2015 2014 Change Cash 42,000 32,000 10,000 Accounts receivable 256,000 196,000 60,000 Inventory 342,000 393,000 (51,000) Long-term investments 34,000 (34,000) Capital assets 1,000,000 960,000 40,000 otal debits 1,640,000 1,615,000 Credits Accumulated depreciation 480,000 576,000 (96,000) Accounts payable 124,500 201,500 (77,000) Interest payable 8,000 12,000 (4,000) Income tax payable 3,500 1,500 2,000 Bonds payable 246,000 180,000 66,000 Common shares 455,000 250,000 205,000 Retained earnings 323,000 394,000 (71,000) otal credits 1,640,000 1,615,000..continued on the next page 2
#1 continued Kai Ramanathan Inc. Statement of Comprehensive Income for the year ended December 31, 2015 Sales 1,500,000 Cost of Goods Sold (697,000) Depreciation expense (65,000) Interest expense (20,800) Income tax expense (94,000) Other expenses (457,200) Gain on sale of equipment 5,000 Loss on sale of investments (10,000) Net earnings and comprehensive income 161,000 Other information: a) Sold the long-term investments for cash. b) Sold equipment (capital assets) for cash. Cost of the equipment was $235,000; net book value was $74,000. c) Purchased equipment for cash. Required: You are not required to, nor will you have time to prepare an entire Statement of Cash Flows (SCF) for Kai Ramanathan Inc. for the year ended December 31, 2015. What you are required to do is: a) Calculate cash paid for each of interest and income taxes. b) Prepare the Investing section of the Statement of Cash Flows. Please show all supporting calculations. Answer this question in your answer book, not on this test paper. he marker will not see anything that you write on this paper for this question. 3
3. 51 marks: suggested time - 38 minutes Required: In your answer books, prepare journal entries, in proper format, for each of the following independent situations. he company follows IFRS. You may omit explanations from your journal entries, but you should show any supporting calculations. a) Acme Inc. traded its warehouse for a truck. he transaction has commercial substance. he warehouse cost $90,000, had accumulated depreciation of 58,000, and a fair value of $31,250. Acme received $265 and a truck with a book value of $32,765 and a fair value of $28,000. (6 marks) b) Acme Inc. traded its equipment for another piece of equipment. he transaction does not have commercial substance. Acme s old equipment cost $90,000, had accumulated depreciation of 58,000, and a fair value of $31,250. Acme received $265 and new equipment with a book value of $32,765 and a fair value of $34,000. (6 marks) c) On January 1, Acme sold machinery and accepted a 2%, two-year $25,000 note receivable. he market rate of interest associated with the note is 8%. Interest payments will be made each December 31. he $25,000 principal will be repaid at the end of two years. Record the entries for January 1 and for December 31 of the first year. (12 marks) d) Acme made a credit sale on account of 20,000 U.S. dollars (USD) when the exchange rate was one USD = $1.16 Canadian (CAD). he customer paid 15,000 USD when one USD = $1.24 CAD. 5,000 USD was still owing from the customer at the balance sheet date when one USD = $1.30 (CAD). Prepare three journal entries. (8 marks) e) Acme implemented a customer loyalty plan, awarding one point per litre of fuel sold. Each point had a value of $.04. he points can be accumulated and later redeemed for gas or products. Acme had gas sales of $89,000 which represented 100,000 litres of gas. (6 marks) f) Acme. has accounts receivable of $440,000, transfers the receivables to a financial institution and receives proceeds of $415,000. he transfer is on a non-notification basis, which means the customer pays Acme and Acme remits the cash to the financial institution. Later, the customers pay $440,000 to Acme on schedule and the remittance is forwarded to the financial institution. he transfer of receivables is recorded as a borrowing. Prepare four journal entries. (8 marks) g) he company was showing the following amounts at year-end: Accounts receivable $100,000 Allowance for doubtful accounts ( 10,000) Net realizable value $ 90,000 he company estimated that it could actually collect $85,000 of its accounts receivable. (5 marks) 4
4. 22 marks: suggested time - 17 minutes Part A: 4 marks On this paper, circle the most appropriate answer. Unclear answers will not be graded. Each question is worth one mark. 1. Under the aging of a company's accounts receivable, the uncollectible accounts are estimated to be $26,000. If the unadjusted balance for the Allowance for Doubtful Accounts is $9,000 debit, what is the amount of bad debts expense for the year? (a) $17,000 (b) $18,000 (c) $26,000 (d) $35,000 2. he net realizable value of the Accounts Receivable is $21,000 before the write off of a $1,500 account. What is the net realizable value after the write off? (a) $22,500 (b) $21,000 (c) $19,500 (d) $0 3. Cashmere Corporation purchased merchandise inventory with an invoice price of $16,000 and credit terms of 2/10, n/30. How much cash will Cashmere pay if they pay within the discount period? (a) $16,000 (b) $15,680 (c) $11,200 (d) $14,400 4. Sales Returns and Allowances is a(n) (a) asset account. (b) contra asset account. (c) expense account. (d) contra revenue account. 5
Part B: 18 marks For each of the following, indicate in the table below whether the statement is (rue) or F (False). Unclear answers will not be graded. rue or False Statement Biological assets are valued at fair value less cost to sell. Cash equivalents include investments convertible into a known amount of cash within three months or less of the balance sheet date. An increase in accounts receivable is added in the operating section of the Statement of Cash flows. Nonrefundable upfront fees should be recognized as revenue when the cash is received. he terms 2/10, n/30 mean that a 2% discount is allowed on payments made later than 10 days, but within the 30 day credit period. If a company does not have control of goods and services prior to sale to the ultimate customer, the company is acting as an agent and will record revenue on a net basis. he change in fair value less costs to sell of biological assets during the period is recognized in earnings for the year. An increase in accounts payable is added in the operating section of the Statement of Cash flows. he progress billings or billings on contract account is a liability account. Dividends paid are subtracted in the investing section of the Statement of cash Flows. A company should record revenue on a net basis if, among other things, it has inventory risk, can change the price, and has credit risk. Under IFRS, revenue from the exchange of dissimilar goods and services is measured by the fair value of the goods or services received. Under bill-and-hold arrangements, if certain conditions are met, the buyer takes title and accepts billing for a product before the product is received from the seller. Fees charged by a credit card company before transferring money to a retailer, are an expense to a retailer. A non-monetary acquisition of equipment is disclosed in the notes to the Statement of Cash Flows. An onerous contract is one in which the consideration yet to be received is less than the lowest cost of settling the obligation. If the estimate of bad debt expense is made on the basis of net realizable value of accounts receivable, the entry made each period to the Allowance for Doubtful Accounts adjusts for the prior balance in that account. Revenue should not be recognized if the buyer s obligation to pay the seller is contingent on the resale of the product. 6
B6100 test #2 Winter 2016 Version 1 solution #1 version 1 Marks Construction in progress (or work in process) inventory 250,000 Cash, payables, etc. 250,000 3 Accounts receivable 175,000 Billings on contracts (or progress billings) 175,000 3 Cash 130,000 Accounts receivable 130,000 3 Construction in progress (or work in process) inventory 110,000 Costs of construction 250,000 Revenue 360,000 3 12 or the last entry could be summarized as: Construction in progress (or work in process) inventory 110,000 Gross profit 110,000 Percent complete X total revenue = revenue recognized Costs incurred during the year 250,000 20% Estimated total costs for the project 1,250,000 otal contract price 1,800,000 Revenue to date 360,000 7
#2 version 1 Interest expense 20,800 Marks Plus decrease in interest payable 4,000 Cash paid for interest 24,800 3 Income tax expense 94,000 Less increase in income tax payable (2,000) Cash paid for income taxes 92,000 3 Cash used in investing activities: Decrease in long term investments 34,000 Less loss on sale of investments (10,000) Cash received for sale of investments 24,000 24,000 3 Net book value of equipment sold 74,000 Plus gain on sale of equipment 5,000 Cash from sale of equipment 79,000 79,000 3 Cash for purchase of equipment (275,000) (275,000) 3 Capital assets: Beginning balance 960,000 Less: cost of equipment sold (235,000) 725,000 Plus: equipment purchased for cash 275,000 Equals: ending balance 1,000,000 (172,000) 15 8
Version 1 #3 Journal entries Marks a) ruck 28,000 Accumulated depreciation 58,000 Cash 265 Loss on trade 3,735 Warehouse 90,000 6 Commercial substance: valued at fair value given up, $30,985. Value of new asset cannot exceed that asset's fair value. b) Equipment 31,735 Accumulated depreciation 58,000 Cash 265 Equipment 90,000 6 No commercial substance: value at book value given up, $31,735 Fair value of new asset is $34,000. 9
#3 version 1, continued c) January 1 Note receivable 22,390 Sales revenue 22,390 6 December 31 Cash 500 Note receivable 1,291 Interest revenue 1,791 6 Cash received = face value X 2% Interest revenue = present value X 8% Alternate entries January 1 Note receivable 25,000 Discount on note 2,610 Sales revenue 22,390 December 31 Cash 500 Discount on note 1,291 Interest revenue 1,791 Face value of note 25,000 Stated interest rate 2.00% Market rate 8.00% Present value of principal: Face value X PVIF n=2, i=.08 25,000 0.86000 21,500 Present value of interest payments: $500 X PVIFA n=2, i=.08 500 1.78000 890 PV of note 22,390 10
#3 version 1, continued d) Marks Accounts receivable 23,200 Sales revenue 23,200 3 20,000 USD X 1.16 Cash 18,600 Foreign exchange gain 1,200 Accounts receivable 17,400 3 Cash = 15,000 USD X 1.24 Remove A/R 15,000 USD X 1.16 Accounts receivable 700 Foreign exchange gain 700 2 Remeasure remaining 5,000 USD from 1.16 to 1.30 Or if the entire accounts receivable was remeasured when the rate increased to 1.24, then the last two entries would be: Cash 18,600 Accounts receivable 400 Foreign exchange gain 1,600 Accounts receivable 17,400 Cash = 15,000 USD X 1.24 Remove A/R 15,000 USD X 1.16 Remeasure A/R 5,000 USD from 1.16 to 1.24 Accounts receivable 300 Foreign exchange gain 300 Remeasure remaining 5,000 USD from 1.24 to 1.30 e) Marks Cash 89,000 Sales revenue 85,172 Provision for loyalty program 3,828 6 Fair value allocation Gas 89,000 95.70% 85,172 Points 4,000 4.30% 3,828 93,000 89,000 11
#3 version 1, continued Marks f) Cash 415,000 Discount on notes payable 25,000 Note payable 440,000 2 Cash 440,000 Accounts receivable 440,000 2 Note payable 440,000 Cash 440,000 2 Finance or interest expense 25,000 Discount on notes payable 25,000 2 g) Bad debts expense 5,000 Allowance for doubtful accounts 5,000 5 12
#4 version 1 MCQ 1 2 3 4 d b b d rue or False F F F F F F F Statement Biological assets are valued at fair value less cost to sell. Cash equivalents include investments convertible into a known amount of cash within three months or less of the balance sheet date. An increase in accounts receivable is added in the operating section of the Statement of Cash flows. Nonrefundable upfront fees should be recognized as revenue when the cash is received. he terms 2/10, n/30 mean that a 2% discount is allowed on payments made later than 10 days, but within the 30 day credit period. If a company does not have control of goods and services prior to sale to the ultimate customer, the company is acting as an agent and will record revenue on a net basis. he change in fair value less costs to sell of biological assets during the period is recognized in earnings for the year. An increase in accounts payable is added in the operating section of the Statement of Cash flows. he progress billings or billings on contract account is a liability account. Dividends paid are subtracted in the investing section of the Statement of cash Flows. A company should record revenue on a net basis if, among other things, it has inventory risk, can change the price, and has credit risk. Under IFRS, revenue from the exchange of dissimilar goods and services is measured by the fair value of the goods or services received. Under bill-and-hold arrangements, if certain conditions are met, the buyer takes title and accepts billing for a product before the product is received from the seller. Fees charged by a credit card company before transferring money to a retailer, are an expense to a retailer. A non-monetary acquisition of equipment is disclosed in the notes to the Statement of Cash Flows. An onerous contract is one in which the consideration yet to be received is less than the lowest cost of settling the obligation. If the estimate of bad debt expense is made on the basis of net realizable value of accounts receivable, the entry made each period to the Allowance for Doubtful Accounts adjusts for the prior balance in that account. Revenue should not be recognized if the buyer s obligation to pay the seller is contingent on the resale of the product. 13