Name: MEMORIAL UNIVERSITY OF NEWFOUNDLAND FACULTY OF BUSINESS BUSINESS 6100 TERM TEST # 1 - Value - 21% of your final grade Term test #1 2015 Version 2 Question Marks Suggested Time 1 20 15 minutes 2 10 8 minutes 3 40 30 minutes 4 30 21 minutes 100 75 minutes Penalty if exam is not passed in on time Instructions: 1. NO QUESTIONS WILL BE ANSWERED BY THE INVIGILATOR. Please include with your written answers any assumptions that you feel are necessary. Only logical assumptions will be considered. 2. This entire exam must be returned to the University. Please be neat and logical. 3. Budget your time. Please use a pen. DO NOT TEAR PAGES OUT OF THE 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 ringer on anything that can ring!
1. 20 marks: suggested time - 15 minutes You are provided with the following unadjusted trial balance for Wickenheiser Inc. for December 29, 2014. On the following pages is information needed to prepare adjusting journal entries. You are required to prepare adjusting journal entries at December 31, 2014, in proper format in the spaces provided on this paper. Wickenheiser uses the perpetual method of accounting for inventory. You may omit explanations from your journal entries. Please remember to not tear pages out of your test paper. Wickenheiser Inc. Unadjusted Trial Balance December 29, 2014 Accounts payable 11,800 Accounts receivable 15,000 Accumulated depreciation, equipment 24,000 Advertising expense 12,000 Allowance for doubtful accounts 575 Cash 6,675 Common shares issued during 2014 6,100 Common shares, January 1, 2014 12,000 Depreciation expense 4,000 Dividends 1,200 Equipment 80,000 Income tax expense 6,000 Insurance expense 3,000 Inventory 60,000 Land 28,000 Note payable, due 2016 18,000 Prepaid insurance 500 Rent expense 15,600 Retained earnings, January 1, 2014 16,300 Revenue 175,000 Salaries expense 32,000 Salaries payable 2,000 Supplies expense 4,000 Supplies inventory 1,800 Unearned revenue 4,000 1
Information needed for adjusting entries. Answer on this paper. a) The company estimates that the balance of the uncollectible accounts receivable at December 31 is equal to 4.5% of outstanding accounts receivable. b) Depreciation on equipment for the year needs to be recorded on the declining balance method using a 15% rate. 2
c) Rent expense includes $1,200 per month for the twelve months in 2014 plus $1,200 for January 2015. d) Only $11,275 of inventory remains on hand at December 31. e) After the trial balance on December 29 th was prepared, $5,360 was paid for salaries on December 31 st. This includes the amount owing for salaries on December 29. 3
2. 10 marks: suggested time - 8 minutes On January 1, 2014, Hockey Inc. acquired equipment by signing a 2% two-year note payable for $40,000. The terms of the loan require the following payments: December 31, 2014: $20,000 in principal and $800 in interest December 31, 2015: $20,000 in principal and $400 in interest Hockey Inc s cost of borrowing is 10%. Required: You are not required to prepare journal entries. However, in your answer books, you are to calculate: The cost of the equipment on January 1, 2014 6 marks Interest expense for the year ended December 31, 2014. The company uses the effective interest method for amortizing notes (as was done in class). 2 marks Depreciation expense for the year ended December 31, 2014. The company uses the straight line method for depreciation expense, assuming a five year life for the equipment. 2 marks Please label your calculations. Please keep the PV tables when you turn in your exam. Answer this question in your answer book, not on this test paper. The marker will not see anything that you write on this paper for this question. 4
3. 40 marks: suggested time - 30 minutes Part A: 20 marks On November 1, 2014, top management of Snowflake Inc., a Canadian publicly traded company, approved a detailed plan to discontinue its electronic business, a major line of business. The plan, among other things, identifies steps to find a buyer, at a reasonable listing price, and includes a timetable for disposition within the next nine months, and a calculation of expected gain or loss on disposition. The electronic business is ready for sale immediately. The equipment in the electronics division has a cost of $840,000 and, as of November 1, 2014, had accumulated depreciation of $360,000. Snowflake has engaged an industrial resale firm to handle the sale. The resale firm estimates the old equipment is worth $550,000 before its 15% commission on the sales price is calculated. During the year ended December 31, 2014, the electronics division incurred a pre-tax operating loss of $200,000. Snowflake pays taxes at a rate of 25%. Required: i) Prepare the November 1, 2014 adjusting journal entries in proper format, including one for relevant income taxes (as we did in class). 10 marks ii) Prepare the related presentation for the Statement of Comprehensive Income for the year ended December 31, 2014. 7 marks iii) Where will the equipment be presented on the December 31, 2014 Statement of Financial Position and why? A one sentence answer should suffice. 3 marks Answer this question in your answer book, not on this test paper. The marker will not see anything that you write on this paper for this question. 5
Part B: 20 marks The following transactions were recorded as indicated by Birch Builders Ltd. during the current year. You are to prepare, in proper format, the journal entry needed to correct the mistake made by Birch. You do NOT have to prepare the original correct journal entry. Please answer all parts of this question in your answer book. a) The company sustained a $36,000 storm damage loss during the current year (no insurance). The loss was reported on the balance sheet as a deferred charge, intangible asset. b) The company originally sold and issued 10,000 common shares. During the current year, 9,000 of these shares were outstanding and 1,000 were repurchased from the shareholders and retired. Near the end of the current year, the Board of Directors declared and paid a cash dividend of $3 per share. The dividend was recorded as follows: Retained earnings 30,000 Cash 27,000 Dividend income 3,000 c) Inventory that cost $20,000 has a replacement value of $28,000. The company increased the inventory to $28,000 and recorded an $8,000 unrealized gain on the income statement. d) The company spent $5,000 during the last month of the year for training of employees. The $5,000 has been capitalized as an intangible asset, Training and Development. e) The company purchased a machine that had an estimated fair value of $18,000. The company paid for the machine in full by issuing 10,000 common shares (market price = $1.50). The purchase was recorded as: Machine 18,000 Common shares 15,000 Gain on purchase of equipment 3,000 6
4. 30 marks: suggested time - 21 minutes Part A, 12 marks On this paper, circle the most appropriate answer. Unclear answers will not be graded. Each question is worth one mark. 1. Which of the following is NOT a primary motivator for maximizing net income? a) Compliance with debt covenants. b) Positively influence users assessments of management performance. c) Enhance managers performance-based compensation. d) Minimize the company s income tax liability. 2. Which of the following financial statements are required for companies adhering to IFRS, but NOT ASPE (private entity GAAP)? a) Statement of Changes in Equity. b) Statement of Financial Position / Balance Sheet. c) Statement of Cash Flows. d) Statement of Retained Earnings. 3. The conceptual framework of accounting should have many positive effects as new accounting standards are developed. Which of the following is not one of those effects? a) Standard setting should be more consistent with an overall statement of the objectives and concepts of financial reporting. b) Financial statements among companies and industries should be more consistent and comparable. c) Users understanding and confidence in financial statements should increase. d) Management should have greater latitude in choosing among accounting alternatives. 4. The going concern or continuity assumption: a) supports the use of historical cost valuation for assets rather than current market values. b) is always maintained for all firms for all years. c) means that the company has a definite ending date. d) requires that we immediately expense prepaid accounts because they do not represent a future cash inflow. 5. Preparation of financial statements with adequate notes is primarily based on the a) separate entity assumption b) full disclosure principle c) cost/benefit constraint d) cost principle 6. Charging the cost of a calculator with an estimated useful life of five years as an expense of the period when purchased means the company a) is violating GAAP b) is invoking the cost principle c) is invoking the materiality constraint d) is violating the relevance concept 7
7. The concept that economic activity that can be identified with a particular company must be kept separate and distinct from the owner(s) and from all other economic entities is known as: a) the materiality concept. b) the liquidity concept. c) the solvency concept. d) the separate entity concept. 8. When cash is received in advance of performing a service, the effects on the accounting equation are: a) an increase in assets and an increase in shareholders equity. b) an increase in assets and a decrease in shareholders equity. c) an increase in assets and a decrease in liabilities. d) an increase in assets and an increase in liabilities. 9. If total assets increased by $14,000 during a period of time and shareholders equity decreased by $8,000 during the same period, then the amount and direction (increase or decrease) of the period s change in total liabilities is a(n): a) $22,000 increase. b) $22,000 decrease. c) $6,000 increase. d) $6,000 decrease. 10. Revenues and expenses often are recognized in income statement accounts even though no cash has been received or paid. This is primarily a result of applying the: a) revenue recognition principle b) accrual basis of accounting. c) full disclosure principle. d) continuity assumption. 11. Which one of the following is not a qualitative characteristic of accounting information? a) Relevance b) Verifiability c) Going concern d) Comparability 12. In order for accounting information to be relevant, it must: a) have very little cost. b) be used by a lot of different organizations. c) help predict future events or confirm prior expectations. d) be verifiable. 8
Part B (18 marks): In the space provided on this paper, indicate whether each statement is T (true) or F (false). Unclear answers will not be graded. T (true) or F (false) Statement Other comprehensive income includes unrealized gains on losses of any effective cash flow hedges. Total comprehensive income must be allocated to both the parent (majority shareholders) and the non-controlling interest (NCI) groups. Once an asset has been designated as Held for Sale, it must be remeasured to the lower of its carrying value and its fair value less costs of disposition. The presentation of both net income and other comprehensive income is required under both IFRS and ASPE. Gains or losses from a discontinued operation should be shown, net of tax, in a separate section on the Statement of Comprehensive Income. Under IFRS, any assets Held for Sale arising from the discontinuation of a business segment must be classified as long-term or capital assets. Unusual or infrequent items should be reported separately, net of income tax. To be useful, accounting information should be able to be understood by the average user with a general business and accounting background. Representational faithfulness means that financial reporting must present legal form of a transaction, not its economic substance. There is comparability when companies with similar circumstances use the same accounting standards. An increase in the dividends account will result in an increase in the Retained Earnings account. A private corporation is one whose shares are traded on an organized stock exchange, like the Toronto Stock Exchange. If the fair value of an investment classified as Fair Value Through Other Comprehensive Income increases, the unrealized gain is included in the calculation of net income. Once an asset has been abandoned, amortization (depreciation) stops and it is written down to its recoverable value. Once an asset becomes idle, amortization (depreciation) stops and it is written down to its recoverable value. If the fair value of an investment classified as Fair Value Through Other Comprehensive Income decreases, the unrealized loss is included in the calculation of other comprehensive income. All elements of OCI must eventually be recycled to the income statement. Having a conceptual framework of accounting helps the clarity and consistency of standards and practices. Answer this question on this page please not in the answer books. 9
#1 B6100 Term test #1 Winter 2015 Version 2 solution Marks a Bad debt expense 100 Allowance for doubtful accounts (AFDA) 100 4 A/R X 4.5% = $675 ending AFDA $675 - current balance in AFDA = adjusting j/e b Depreciation expense 8,400 4 Accumulated depreciation 8,400 Cost minus accumulated depreciation =$56,000 Net book value X 15% = depreciation c Prepaid rent (or prepaid expenses) 1,200 4 Rent expense 1,200 d Cost of Goods Sold (COGS) not inventory expense 48,725 4 Inventory 48,725 Inventory per T/B - 11,275 e Salaries payable 2,000 Salaries expense 3,360 Cash 5,360 4 20 #4 part a 1 D 7 D 2 A 8 D 3 D 9 A 4 A 10 B 5 B 11 C 6 C 12 C 10
Version 2 T (true) or F (false) Statement Other comprehensive income includes unrealized gains on losses of any effective cash flow hedges. Total comprehensive income must be allocated to both the parent (majority shareholders) and the non-controlling interest (NCI) groups. Once an asset has been designated as Held for Sale, it must be remeasured to the lower of its carrying value and its fair value less costs of disposition. The presentation of both net income and other comprehensive income is required under both IFRS and ASPE. Gains or losses from a discontinued operation should be shown, net of tax, in a separate section on the Statement of Comprehensive Income. Under IFRS, any assets Held for Sale arising from the discontinuation of a business segment must be classified as long-term or capital assets. Unusual or infrequent items should be reported separately, net of income tax. To be useful, accounting information should be able to be understood by the average user with a general business and accounting background. Representational faithfulness means that financial reporting must present legal form of a transaction, not its economic substance. There is comparability when companies with similar circumstances use the same accounting standards. An increase in the dividends account will result in an increase in the Retained Earnings account. A private corporation is one whose shares are traded on an organized stock exchange, like the Toronto Stock Exchange. If the fair value of an investment classified as Fair Value Through Other Comprehensive Income increases, the unrealized gain is included in the calculation of net income. Once an asset has been abandoned, amortization (depreciation) stops and it is written down to its recoverable value. Once an asset becomes idle, amortization (depreciation) stops and it is written down to its recoverable value. If the fair value of an investment classified as Fair Value Through Other Comprehensive Income decreases, the unrealized loss is included in the calculation of other comprehensive income. All elements of OCI must eventually be recycled to the income statement. Having a conceptual framework of accounting helps the clarity and consistency of standards and practices. 11
#3, part A version 2 Marks Accumulated depreciation 360,000 Equipment 360,000 2 Eliminate depreciation Loss on assets held for sale 12,500 4 Equipment 12,500 Carrying amount: $840,000 - $360,000 or $480,000 Revalue to $550,000 X 85% or $467,500 Equipment: Held for Sale (current asset) 467,500 2 Equipment 467,500 Deferred income tax asset 3,125 2 Deferred income tax expense 3,125 Loss X 25% 10 Marks Discontinued operations: 1 Loss from electronics business (200,000) Tax savings of 25% 50,000 (150,000) (150,000) 3 Impairment loss on equipment (12,500) Tax savings of 25% 3,125 (9,375) (9,375) 3 Loss from discontinued operations* (159,375) 7 *Calcs presented for teaching purposes, although IFRS requires a single line presentation The equipment will be presented as a current asset as it meets the criteria for Held for Sale. 3 If one combined entry: Equipment: Held for Sale (current asset) 467,500 Accumulated depreciation 360,000 Loss on assets held for sale 12,500 Deferred income tax asset 3,125 Equipment 840,000 Deferred income tax expense 3,125 12
#3 part B, version 2 Marks a Storm loss 36,000 Deferred charge 36,000 4 b Dividend income 3,000 Retained earnings 3,000 4 c Unrealized gain 8,000 Inventory 8,000 4 d Training expense 5,000 Training and development 5,000 4 e Gain on purchase of equipment 3,000 Machine 3,000 4 20 #2 version 2 Present value of principal: Face value X PVIFA n=2, i=.10 20,000 1.74000 34,800 Present value of interest payments: $800 X PVIF n=1, i=.10 800 0.91000 728 $400 X PVIF n=2, i=.10 400 0.83000 332 PV of note payable and equipment 35,860 6 marks Interest expense: PV of note payable X market rate of interest $35,860 X 10% $3,586 2 marks Depreciation expense: cost of asset / five year life $35,860 divided by 5 $7,172 2 marks 13