Name: _________________________________________ ID: __________________________

CONCORDIA UNIVERSITY

JOHN MOLSON SCHOOL OF BUSINESS

DEPARTMENT OF ACCOUNTANCY

ACCO 310/2
Fall 2013

MID TERM EXAMINATION

All sections

October 19, 2013

1:00 to 4:00 P.M.

Marks Minutes
Question 1 25 45
Question 2 25 45
Question 3 25 45
Question 4 25 45
100 180

Materials Allowed

 Silent, cordless calculators (financial calculators are permitted)

 Translation dictionaries
Question 1 (25 marks- 1 mark per question, 45 minutes)

1) The going concern or continuity assumption is critical to financial accounting. The assumption
A) Is always maintained for all firms for all years
B) Supports the use of historical cost valuation for assets rather than market values
C) Means that a corporation has a definite ending date
D) Requires that we immediately expense prepaid accounts because they do not represent a future
cash inflow

2) The sales manager of a firm has the use of a blue company-owned automobile to use to visit
potential customers. She also owns her own identical car except that it is red. The manager paid for the
red car with funds earned from her employment as sales manager. The firm will report the cost of the
blue auto in its balance sheet, but not the red auto. This is an example of:
A) Reliability
B) Matching
C) Separate entity
D) Going concern

3) If the progress of a long-term project cannot be estimated reliably, IFRS requires the use of which
revenue recognition method?
A) Percentage-of-completion method.
B) Completed contract method.
C) Cost recovery method.
D) Installment method.

4) MDB reported sales of $800,000, bad debt expense (allowance method) of $30,000, and an increase
in net accounts receivable of $120,000 during 2013. What is MDB's cash collected from customers for
2013 if MDB did not record any write-offs during the period?
A) $650,000
B) $680,000
C) $710,000
D) $800,000

5) Which of the following is not one of the criteria for revenue recognition for sales of goods under
IFRS?
a. The significant risks and rewards of ownership of goods are transferred.
b. Payment has been received.
c. The entity does not retain either a continuing managerial involvement or control over the goods.
d. The costs incurred can be measured reliably.
6) A company started business on January 1, year 1. At the end of year 1, the financial statements
showed the following amounts:
Sales $180
Cost of goods sold 112
Expenses 40
Accrued wages payable 4
Accounts receivable 18
Accounts payable 8

Income on the accrual basis and net cash inflow from operating activities were:
Income accrual basis Cash inflow from operating activities
A) $28 $22
B) $68 $22
C) $28 $28
D $68 $62
)

7) The activities for the year ended December 31, 2013 included the following:
∙ 2013's net income after taxes totaled $125,000.
∙ Accounts receivable increased $32,000
∙ Recorded a $10,000 loss on sale of equipment during the year
∙ Inventory decreased $8,000
How much would be presented as cash flow from operations?
A) $85,000
B) $111,000
C) $127,000
D) $135,000

8) The following entry was recorded by Hollow Inc.:

Cash 70,000
Accumulated depreciation 30,000
Gain on disposal of property, plant and equipment (PPE) 10,000
PPE 90,000

What is the effect on Hollow's financial statements?

A) A cash inflow from investing activities of $70,000.
B) Net assets decreased by $10,000.
C) A decrease of $10,000 in using the indirect method of determining cash flows from operating
activities.
D) Retained earnings decreased by $10,000.
9) Lean Ltd. had a balance of $52,300 in the office supplies account at the start of the year. During the
year, purchases of $141,700 were made and debited to the office supplies account. At the end of the
year, a physical count of the office supplies indicated $41,800 on hand. What was the office supplies
expense for the year?
A) $141,700
B) $152,200
C) $183,500
D) $194,000

10) Which statement describes a difference between IFRS and ASPE?

A) The concept of "comprehensive income" exists under both IFRS and ASPE.
B) A statement of compliance with ASPE is required in note disclosures.
C) A combined statement of comprehensive income can be provided under IFRS.
D) The concept of "comprehensive income" does not exist under ASPE.

11) Which statement best explains the concept of "representational faithfulness"?

A) Transactions should be recorded in accordance with their substance rather than their legal form.
B) Transactions should be recorded in accordance with their legal form rather than their substance.
C) Transactions should be recorded accurately and completely to be useful to financial statement
users.
D) Transactions should be recorded using the rules and guidelines provided in the accounting
standards.

12) Simple Inc. had sales of $1,500,000, which included:

• $30,000 of goods sold that were on consignment from an unrelated company on December 28, 2012
• $10,000 of goods shipped F.O.B shipping point on December 28, 2012.
• $20,000 of goods shipped F.O.B. destination point on December 31, 2012.
On its income statement, what amount of net sales should Simple Inc. record for 2012?
A) $1,440,000
B) $1,470,000
C) $1,480,000
D) $1,450,000

13) Which statement is correct?

A) Private enterprises must follow IFRS.
B) Publicly accountable enterprises must follow IFRS.
C) Not-for-profit organizations must follow ASPE.
D) Private enterprises must follow ASPE.

14) The objective of financial reporting is:

A) To provide the market value of a firm at a point in time
B) To provide the total market value of its common stock
C) To provide information useful for decision making by investors and creditors
D) To require all companies to comply with GAAP

15) A corporation reported the following information in its income statement:

Sales revenue (none on credit) $60,000

Cost of goods sold (paid in cash) 40,000
Gross margin on sales 20,000
Depreciation expense (2,000)
Amortization expense (1,000)
Wage expense (paid in cash) (2,500)
Income before taxes 14,500
Income taxes (20%) (paid in cash) (2,900)
Net Income $11,600

The corporation should report the following amount on its Statement of Cash Flow for net cash from
operating activities:
A) $11,600
B) $13,600
C) $14,600
D) $17,100

16) The following item is found on the income statement of a corporation: Gain from sale of
equipment, $5,000. The equipment sold during the year originally cost $20,000, had accumulated
depreciation of $16,000 and was sold for cash. The Statement of Cash Flow should show an inflow of
cash from investing activities of:
A) $1,000
B) $4,000
C) $5,000
D) $9,000

17) Sunshine Contractors started a contract in January 2011 to build a bridge at a fixed price of $14
million. The bridge was to be completed by October 2013. Total cumulative costs incurred by the end
of December 2011 and 2012 were $2 million and $6 million, respectively. Sunshine is unable to
estimate the total costs of the project prior to completion. Final costs at the end of the project totaled
$11 million. How much cost of sales will Sunshine report in 2013?
A) $3,000,000
B) $5,000,000
C) $8,000,000
D) $11,000,000

18) Which statement is correct in accordance with IFRS?

A) An enterprise must classify the receipt of interest and dividends received as an operating activity.
B) An enterprise must classify the receipt of interest and dividends received as an investing activity.
C) An enterprise may choose to report the payment of interest and dividends as either an operating or
a financing activity.
D) An enterprise must choose to report the payment of interest and dividends as an operating activity.

19) A firm's accounting policy is to immediately expense the cost of metal wastebaskets it purchases
for use by its employees at their desks. The total cost of wastebaskets in any year is $1,000 and the
firm has $6 billion in total assets. The firm expects the wastebaskets to last indefinitely. The firm
A) Is violating GAAP
B) Is invoking the materiality constraint
C) Is invoking the conservatism constraint
D) Is violating the relevance principle

20) What is included in 'cash and cash equivalents'?

A) Petty cash.
B) Six-month term deposits in Canadian dollars.
C) Guaranteed Investment Certificate maturing in 100 days.
D) Four-month term deposit in U.S. dollars.

21) Neutrality is an ingredient of the qualitative criteria of

Relevance Representational Faithfulness

A) Yes Yes
B) No Yes
C) Yes No
D) No No

22) Predictive value is an ingredient of the qualitative criteria of

Relevance Representational Faithfulness

A) Yes No
B) Yes Yes
C) No No
D) No Yes
23) Which of the following is part of the IFRS Conceptual Framework?
A) Statement of financial position.
B) Elements of financial statements.
C) Information Asymmetry.
D) Financial statement notes.

24) Accounting information is considered to be relevant when it

A) can be depended on to represent the economic conditions and events that it is intended to
represent.
B) is capable of making a difference to a decision-maker.
C) is understandable by reasonably informed users of accounting information.
D) is verifiable and neutral.

25) What is an investing activity?

A) Activities involving the acquisition and disposal of long-term assets.
B) Activities involving changes in the size and composition of the contributed equity.
C) Activities involving the principal revenue-producing activities of the entity.
D) Activities that do not involve cash.
Question 2 (25 marks, 45 minutes)

A friend of yours is the president of Maple Imports Ltd. which follows Accounting Standards for Private
Enterprises. The company sells and services cars imported from Korea. Maple has just completed its
first year of operations. The following statement was prepared by the company bookkeeper:

Maple Imports Ltd.

Statement of Financial Position As at December 31, 2012
Assets
Cash $ 4,000
Accounts receivable 90,000
Cars and car parts 815,000
Accumulated depreciation on cars (87,500)
Equipment 170,000
Land held for future development 228,000
$1,219,500
Equities
Accounts payable $ 419,000
Bank loan payable 320,000
Common shares (40,000 shares authorized and issued) 400,000
Net income 80,500
$1,219,500
Balance Sheet As at December 31, 2012
Additional Information:
1. Accounts receivable is composed of the following:

Debit balances in customer accounts $145,000

Credit balances in customer accounts (55,000)

$ 90,000

2. The cars and car parts account is composed of the following:

Car parts for service department (at cost) $ 65,000

Cars intended for resale (at retail value) 645,000
Cars used by executives for business purposes 105,000
$ 815,000
The purchase price of the cars intended for resale was $530,000. The company recorded the difference
between retail value and purchase price as a gain in net income. The cars for the executives were
purchased on June 30, 2012, at a cost of $105,000.

3. All cars that require depreciation are being depreciated on a straight-line basis with a three-year
estimated useful life and a residual value of 30% of original cost.

4. The equipment was purchased for $170,000 on January 2, 2012. The price paid was a bargain
because the regular price for this equipment was $218,000. The equipment should last for seven years
but will be worthless at that time. However, the company plans to replace it at the end of five years
and expects to be able to sell it for $25,000 at that time. The company wants to use the declining-
balance method for depreciation with a rate twice the straight-line rate, but has not yet calculated or
recorded the depreciation expense for the equipment for the year.

5. Accounts payable is composed of the following balances:

Amounts owing to suppliers $119,000

Loan received from the majority shareholder 300,000
$419,000
The loan was received from the majority shareholder on October 1, 2012. The loan is repayable over
four years with annual payments of $75,000 plus accrued interest at 6% per year. The first payment is
due on October 1, 2013. No interest has been accrued on the loan.

6. The bank loan is due on demand and is secured by the cars held for resale.

Required:
a. After adjusting for any errors, prepare a classified statement of financial position for Maple Imports
as at December 31, 2012 and state any additional disclosure requirements as per the CICA Handbook.
Ignore income taxes.

b. On February 2, 2013, a fire in Maple’s warehouse destroys $30,000 worth of car parts.
Unfortunately, Maple did not have insurance to cover this loss. The financial statements for 2012 were
not finalized until the end of February 2013. Briefly explain how and why this fire loss should be
recognized or disclosed in the 2012 financial statements.
Question 3 (25 marks, 45 minutes)

It was the night before your midterm exam and you were having an accounting nightmare!
Jolted awake by your 5:00 a.m. alarm, you were frantically trying to recall the question you had dreamt
and that you were convinced would be on the exam. Jumping out of bed, you called your study buddy
and informed her that you could both ace the exam if you could answer this question. You agreed to
both work on your own response and to compare answers in a few hours.
The question that you dreamt:
Boris Inc. was owned by Mr. Bee, who was known for his wheeling and dealing. He had been a
successful entrepreneur for many years and had accumulated great wealth and a number of operating
companies, despite his lack of formal education.
Mr. Bee made most business decisions based on “gut instinct” and insisted that his accountants use
the cash basis to account for everything. His favourite expression is “Cash is king!”
Mr. Bee wants to retire soon and wishes to sell Boris Inc. The following cash based information is
available for the last 3 years:
Boris Inc.
Cash Basis Income Statement
2012 2011 2010
Revenues 3,000,000 3,100,000 3,200,000
Interest income 500,000 100,000 100,000
Royalty income 300,000 300,000 300,000
Cash from sale of surplus land 4,000,000 400,000
7,800,000 3,900,000 3,600,000
Expenses
Purchases of materials and other 840,000 775,000 640,000
manufacturing
Operating costs
expenses 410,000 300,000 225,000
Selling costs paid re: land sale 264,000 - -
Salaries paid re: manufacturing labour costs 990,000 930,000 960,000
Salaries and bonuses paid to Mr. Bee and various family 640,000 560,000 480,000
members
Income taxes paid 1,862,400 534,000 518,000
5,006,400 3,099,000 2,823,000
Net income on a cash basis 2,793,600 801,000 777,000

Mr. Bee thinks that since net income shown above has been increasing steadily over the past three
years, now would be the best time to sell, so as to maximize the selling price and the amount of cash
he would receive.
The following additional information was also obtained:
1. Mr. Bee thinks that accounting for and recording inventory is more trouble than it is worth. His
accountant told you that he estimates that 20% of the annual cash purchases are typically on
hand at the end of each year.
2. The accountant confessed that he thinks Mr. Bee has been acting “a little strangely lately” as he
ordered $150,000 worth of honey bees just before the end of the year and has not paid for
them as yet. Mr. Bee thinks that if he can “get the ball rolling” on honey production before he
sells the business it will vastly increase his ability to fetch top dollar as he says the market for
organic honey has increased threefold in the past few years.
3. The transfer of the title for the surplus land sold occurred in 2012. The $400,000 received in
2011 was paid in advance by the buyer so that Mr. Bee would take down the “for sale sign”
while the buyer determined whether the plot would be suitable for his plans. The deposit was
fully refundable in the event that the sale did not go through. The cost of the land was
$550,000 when Mr. Bee bought it in 1985.
4. Mr. Bee has been sending the government tax payments based on 40% of his income
calculation before taking into account the tax payment. He believes that he has overpaid but is
not certain. He knows that accountants do some adjustments for “accruals and some other
stuff” but he is not sure how that works.
5. Included in the cash deposits for revenues in the year is a $90,000 deposit from a customer for
a special order. The order will only be manufactured in 2013.
6. The royalty income is received monthly, on the 30th of each month, from the government of
British Columbia for royalties related to timber rights owned by Boris Inc. These royalties are
paid as per a fixed agreement which has been in place for many years. The timber rights were
acquired just prior to the liquidation of the business of a former important customer who was
unable to pay an amount of $900,000 owing to Boris Inc. Mr. Bee says this was the smartest
deal he ever made!
Required
Mr. Bee wants to get a fair price for his business and maximize the cash he will receive from the sale of
the business. Mr. Bee’s son, Billy Bee, a younger and more enlightened entrepreneur, likes to give
students hands on experience in “providing real solutions for real world problems.” Frustrated and
worried that his father will speed ahead to sell the business without first preparing a proper set of
financial statements, Billy Bee has asked you to prepare a memo to Mr. Bee which outlines the
accounting and related issues that he should be aware of before he lists the business for sale. The
memo should offer guidance on what needs to be done, how information should be prepared and
what additional details should be provided so that potential buyers obtain a true picture of the actual
financial situation of Boris Inc.
 Question 4 (25 marks, 45 minutes)

Presented below is information which relates to Labrador Limited a public company for 2014:

Collections of credit sales............................................................................................. $1,100,000

Retained earnings, January 1, 2014.............................................................................. 432,000
Sales.............................................................................................................................. 1,900,000
Selling and administrative expenses............................................................................. 290,000
Loss from fire (pre-tax)................................................................................................. 250,000
Cash dividends declared on common stock.................................................................. 34,000
Cost of goods sold......................................................................................................... 1,100,000
Other revenues............................................................................................................. 180,000
Other expenses............................................................................................................. 120,000
Loss from early bond retirement (pre-tax)................................................................... 240,000
Unrealized gain from foreign currency translation (pre-tax)........................................ 220,000
Proceeds from sale of Strathroy common shares......................................................... 60,000
Common Shares…………………………………………………………………………………………………………. 500,000

Additional information:

1. Early in 2014, Labrador changed depreciation methods for its plant assets from the double declining-
balance to the straight-line method. The affected assets were purchased at the beginning of 2012 for
$200,000, had no residual value, and had useful lives of 10 years. Depreciation expense of $20,000 is
included in the "Selling and Administrative Expenses" of $290,000.

2. On September 1, 2014, Labrador sold one of its segments (product line) to Best Industries for a gain (pre-
tax) of $550,000. During the period January 1 to August 31, the discontinued segment incurred an operating
loss (pre-tax) of $480,000. This loss is not included in any of the numbers shown above.

3. Included in "Selling and Administrative Expenses" is "Bad Debts Expense" of $19,000. Labrador bases its bad
debts expense upon a percentage of sales. In 2012 and 2013, the percentage was 0.5 %. In 2014, the
percentage was changed to 1%.

4. Assume a 20% income tax rate. 20,000 common shares were outstanding during the year. There was no
issuance or repurchase of Labrador’s common shares during the year.

Required:

(1) In good form, prepare a multiple-step comprehensive income statement for 2014.

(2) Prepare a Statement of Changes in Equity for the year.

Question 5 (19.5 Marks) [This question was Question 3 on the final exam]
Johnson Construction Inc. had the following data relating to one of its long-term construction
contracts. The contract called for the delivery of a large office building to its client for a fixed price of
$80 million.

Data pertaining to the contract are found below:

Year 1 Year 2 Year 3

Costs Incurred by Year: $ 36,000,000 $ 20,000,000 $ 19,000,000

Expected Completion Costs: $ 24,000,000 $ 28,848,485 $ -

Costs Incurred to Date: $ 36,000,000 $ 56,000,000 $ 75,000,000

Billings to Date: $ 40,000,000 $ 60,000,000 $ 80,000,000

Cash Collections by Year: $ 30,000,000 $ 25,000,000 $ 25,000,000

Required:

1) Provide all journal entries with respect to this contract for Years 1, 2 & 3 using the percentage of
completion method. (14.5 marks)

2) Show how the effects of this contract would be presented on Johnson’s Year 2 Balance Sheet as at
the end of Year 2, using the percentage of completion method. (3 marks)

3) Assume that Johnson Inc. follows ASPE and that there is significant uncertainty with respect to this

contract. How much profit or loss would Johnson need to recognize in Year2? Journal entries are not

required. (2 marks)