Question 1 (40marks 48 minutes) Below you will find the financial statements of BCE inc.

. for the year ended December 31, 2007. BCE is Canadas largest communication company. Bell, the core business operation, provides the nations leading provider of wireline and wireless communications services, internet access, data services and video services to residential, business and wholesale customers.

Question 1 (40 marks 48 minutes)

Question 1 (40 marks 48 minutes) Part 1 You are a partner of the accounting firm of Borden & Wineman, you have been asked by a client for your advice on whether or not he should invest in shares of BCE. Inc.. You are to help him investigate further on the potential investment in BCE inc. He has provided you with the ratios for the industry average in the chart below.

Current ratio Return on assets Return on Equity Days to Collect A/R Days Inventory Debt /Equity I Times Interest Earned EPS

1.1 to 1 6% 12 % 30 days 30 days 60% 3 times N/A

Required: Based on your analysis, comment on the financial health of BCE, highlight the areas you are analyzing. Using the ratios that are mentioned in the chart above, advise your client whether or not he should invest in BCE Inc. (32 marks) Question 1 (40 marks 48 minutes) Part 2The client later came to you with the news releases printed below, he is concerned that BCE has engaged in Earnings management (EM). News Release #1 On January 18, 2008 BCE Inc. announced in Montreal several changes to its Board of Directors that will become effective at BCEs Annual General Meeting of shareholders, scheduled for February 17, 2008 in Montreal. Richard Currie, Chair of the Board of Directors of BCE, has announced he will not seek re election as a director. Three other directors- Judith Maxwell, John McArthur and Robert Pozen- have also announced that they will not seek re-election. News Release #2

On June 23, 2008 BCE confirmed that it has received written confirmation approving the proposed acquisition of BCE by an investor group led by Private Capital. Required: a) Explain to your client what EM is. (1 mark) b) Address his concern about the possibility that BCE could have engaged in EM. Explain using EM objectives. (2 marks) Question 1 (40 marks 48 minutes) Part 2 c) Considering the news releases, if BCE did engage in EM what would be the impact on the financial statements? (2 marks) d) Considering the news releases, would they change your opinion about investing in BCE inc.? Explain. (1 mark) Question 2 (18 marks 22 minutes) Strawberry Fields Co. provides you with the following information for the year ended June 30, 2009. The bookkeeper is new and has come from a small company that used cash accounting method to record all financial transactions. The company adjusts the accounts annually.

Required: In the space below, prepare the adjusting journal entries required at June 30, 2009. For each of the AJE recorded give a brief explanation why you made the adjustment, make reference to GAAP and other concepts.

1.

2.

On June 30, 2009, the supplies on hand totalled $2,450. The supplies account at July 1, 2008 had a balance of $3,800. During the year, $5,000 of supplies were purchased and charged to supplies expense. Insurance premiums of $12,000 were paid on October 31, 2008 for a 12 month policy effective Nov 1, 2008. The insurance expense account was debited for the $12,000 at the time of payment. The company leases part of its premises to a tenant. On April 1, 2009 the tenant paid Strawberry Field Co. $24,000 for rent covering the period Apr 1, 2000 to September 30, 2009. Strawberry Field Co. had credited the full $24,000 to the rent revenue account. 4. Strawberry Field purchased a new car for $22.000 on February 2, 2009. The bookkeeper has not yet recorded the amortization on the car. The car is estimated to last 7 years and will have a $1,000 residual value. 5. On July 1, 2008, Strawberry borrowed $75,000 from the bank. The terms of the loan were as follows: The loan is to be repaid July 1, 2013 and interest is

3.

4.

5.

6.

paid semi-annually at a rate of 4%. Interest payments are made every January 1st and July 1st. 6. On June 1, 2009 Strawberry Field declared a dividend of $50,000. The dividend is scheduled to be paid on July 15, 2009.

Question 3 (24 marks 28 minutes) Below is single step income statement of Complex Corp. Complex Corp., is a client of yours the bookkeeper does not understand how to interpret the income statement. The manager of Complex Corp gave you a list of questions he has concerning the income statement..
Complex Corporation Income Statement For the year ended January 31, 2009 Revenues and ordinary gains: Sales revenue Dividend revenue Gain on sale of investments Expenses and ordinary losses: Cost of goods sold Selling expenses Administrative expenses Interest expense Loss on sale of capital assets Income before tax, discontinued operations and extraordinary items Income tax expense Income before discontinued operations and extraordinary items Discontinued operations: Loss from the operations of the Downer Division, net of tax Gain on the sale of the Downer Division, net of tax Income before extraordinary item Extraordinary item: Loss from meteorite damage, net of tax Net income $ (123,366) 13,746 $ 2,230,000 31,000 87,000

$ 2,348,000

$ 1,385,000 362,500 220,750 29,050 11,600 (2,008,900) $ 339,100 (135,640) $ 203,460

(109,620) $ 93,840 (54,600) $ 39,240

Question 3 (24 marks 28 minutes) Required : Answer the following questions:

a) What is the gross profit for Complex Corp. for the year? Show all work. (2 marks) b) What is the common sized percentage for the selling expenses and administrative expenses? What can you conclude from those ratios? (4 marks) c) What in the income from operations for Complex Corp. for the year? Show all work. (3 marks) d) Based on the income tax expense recorded, a what rate is Complex Corp. taxed at? Show all work. (2 marks) e) What does the dividend revenue of $31,000 come from? Why is it in the income statement and not in the statement of retained earnings? Explain. (3 marks) f) What does the loss on sales of capital assets represent? Explain. (2 marks) g) Complex Corp. reported an extraordinary item during 2009. Breifly explain the significance of the loss being classified as extraordinary and list the 3 criteria that must be met in order for the loss to be classified as an extraordinary item. (4 marks) h) Is Complex Corp. engaged in any financing activities? What item on the income statement has led you to make your conclusion? (2 marks) i) Is Complex Corp. engaged in any investing activities? What item on the income statement has led you to make your conclusion? (2 marks) Question 4 (18 marks 22 minutes) Revenue reported on financial statements is the single largest number in a set of financial statements. The revenue recognition principle helps one to determine how and when revenue should be recognized. The following three independent situations address the revenue recognition principle. Situation #1 Cardio Plus successfully operates two fitness centres in the same town. Members pay a $100 non-refundable initiation fee, and then a one-year membership for unlimited access to the facilities costs an additional $600. In 2008 they have 1,600 active members. Memberships are required to be paid in full over the first 3 months of a membership year. Partial refunds, of the annual fees, are only given if a member moves more than 50 kilometres away. In addition to the facilities, there is a juice bar that sells fruit smoothies and healthy snacks. Members can sign for their purchases at the juice bar and then they are billed at the end of the month. Required: Discuss which revenue recognition policy Cardio Plus should select and then explain how revenues should be recognized in 2008. Support your discussion with reference to GAAP revenue recognition criteria and matching principle.

Situation #2 Digital World sells electronic equipment and appliances. During 2008 they made sales of $2,400,000. The average gross profit on products was 30%. All products include a one-year warranty and estimated warranty costs are normally 10% of the sales price. At the end of 2008, Digital World had only spent $100,000 repairing products it had sold that year. Required: Discuss which revenue recognition policy Digital should select and then explain how revenues and expenses should be recognized in 2008. Support your discussion with reference to GAAP revenue recognition criteria and matching principle. Situation #3 Montgomery Construction signed a contract to build a warehouse for a customer. Construction covers a four-year period. The following data pertain to the contract and subsequent construction: Contract price: $1,750,000 Estimated costs: 1,500,000

Year 1 2 3 4

Estimated Costs $750,000 $450,000 $225,000 $ 75,000

Cash Receipts $205,000 $137,000 $600,000 $408,000

Required: Discuss which revenue recognition policy Montgomery should select and then explain how revenues and expenses should be recognized in 2008 through to 2011. Support your discussion with reference to GAAP revenue recognition criteria and matching principle. Situation #4 A semi- professional basketball team called The Montreal Matrix sells tickets to its weekly games two different ways: Season tickets are sold to its fans. Fans pay a discounted price of the tickets before the season begins and fans receive tickets for all of the teams home games. One set of seasons tickets sell for $1,200.

Door tickets can be purchased or reserved the week of the home game; tickets can be picked up for $55 each and paid for at the ticket counter the day of the game. Required: Discuss which revenue recognition policy Matrix should select and then explain how revenues and expenses should be recognized. Support your discussion with reference to GAAP revenue recognition criteria.