CONCORDIA UNIVERSITY

JOHN MOLSON SCHOOL OF BUSINESS

DEPARTMENT OF ACCOUNTING

ACCO 310/2
Fall 2012

MID TERM EXAMINATION

All sections

October 19, 2012

6:00 to 9:00 P.M.

Marks Minutes

Question 1 25 45
Question 2 20 36
Question 3 35 63
Question 4 20 36

100 180

Materials Allowed

 Silent, cordless calculators (financial calculators are permitted)

 Translation dictionaries
 Please answer the multiple choice questions in your answer booklet

1
Question 1 (25 marks - 45 minutes) All answers = 1 mark

For each of the following, choose the letter that corresponds to the best answer.

1. The body that has the responsibility to set generally accepted accounting principles in
Canada is the

a. FASB.
b. IASB.
c. AcSB.
d. OSC

2. Financial statements are prepared for the user. Which of the following best describes
the responsibility for the preparation of financial statements?

a. They are the responsibility of management.

b. They are the responsibility of external auditors.
c. They are the responsibility of shareholders.
d. They are the responsibility of standard setters

3. 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 in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.

4. Which of the following independent business transactions would most likely be

recorded as an accounting loss?

a. A decrease in a retail store's sales

b. A decrease of a bank's interest income
c. A decrease in net assets from a company's incidental transactions.
d. All of the above

5. Neutrality is an ingredient of the primary quality of

Representational Faithfulness Relevance

a. Yes Yes
b. No Yes
c. Yes No
d. No No

2
6. In classifying the elements of financial statements, the primary distinction between
revenues and gains is

a. the materiality of the amounts involved.

b. the likelihood that the transactions involved will recur in the future.
c. the nature of the activities that gave rise to the transactions involved.
d. the costs versus the benefits of the alternative methods of disclosing the
transactions involved.

7. The assumption that a business enterprise will not be sold or liquidated in the near
future is known as the

a. economic entity assumption.

b. monetary unit assumption.
c. conservatism assumption.
d. none of these.

8. Which of the following is not a time when revenue may be recognized?

a. At time of sale
b. At receipt of cash
c. During production
d. All of these are possible times of revenue recognition.

9. Management Discussion and Analysis (MD&A) is

a. notes on meetings between management and auditors.

b. internal documents not released to shareholders.
c. supplementary information included in the annual report.
d. supplementary information included in the notes to the financial statements

10 Pearson Company reported net income of $450,000. This amount included a pre-tax
. loss of $15,000 that was considered material and pertained to its continuing operations.
Assuming an income tax rate of 35%, Pearson's net income without this loss would
have been

a. $444,750
b. $435,000
c. $440,250
d. $459,750

11 Markete Company has 100,000 common shares outstanding and has a policy of paying
. a $1.20 dividend for each of these shares. Markete has an income tax rate of 40%. Its
retained earnings statement for 2011 had a closing balance of $1,346,000.
Assuming an opening balance of zero, dividend payments according to its usual policy
and no other adjustments, Markete's 2011 net income was

a. $1,418,000
b. $1,394,000
c. $1,466,000
d. $1,451,000

3
12 In 2011 Roswell Company changed from straight-line to double declining-balance
. amortization. The total difference in amortization for all years through 2010 was
$52,000 and for 2011 the difference was $5,000. The tax rate is 30 percent. The
amount that should be reported in the statement of retained earnings for 2011 as a
change in accounting principle is

a. $36,400 debit.
b. $36,400 credit.
c. $39,900 debit.
d. $39,900 credit

13 Quorum Company reported the following information for 2011:

. Sales revenue $520,000
Cost of goods sold 350,000
Operating expenses 55,000
Gain on the sale of capital assets 50,000
Cash dividends received on investment securities 2,000
For 2011, on a multiple-step income statement, Quorum would report other income of

a. $167,000.
b. $165,000.
c. $52,000.
d. $50,000.

14 Stober, Ltd. decided on January 1, 2011 to discontinue its plastic making division. The
. division, considered a reportable segment, was sold on June 1, 2011. Division assets
with a carrying value of $650,000 were sold for $500,000. Operating income from
January 1, to May 30, 2011 for the division amounted to $80,000. Ignoring taxes, what
amount should be reported on Stober’s income statement for the year ended
December 31, 2011, under the caption "discontinued operations"?

a. $230,000 gain
b. $80,000 gain
c. $150,000 loss
d. $70,000 loss

15 When current debt is refinanced by the issue date of financial statements, it may
. generally be presented as non-current

a. if the company follows IFRS

b. under either private entity GAAP or IFRS
c. if the company follows private entity GAAP
d. None of these

4
16 Wolanski Corp.'s trial balance reflected the following account balances at December31,
. 2010:
Accounts receivable (net) $41,000
Trading securities 7,000
Accumulated depreciation on equipment and furniture 15,000
Cash 10,000
Inventory 27,000
Equipment 25,000
Patent 4,000
Prepaid expenses 1,500
Land held for future business site 18,000
In Wolanski’s December 31, 2010 balance sheet, the current assets total is

a. $104,500.
b. $90,500.
c. $86,500.
d. $73,500.

17 Stockton Ltd changed its inventory system from FIFO to average cost. What type of
. accounting change does this represent?
a. A change in accounting estimate for which the financial statements for the
prior periods included for comparative purposes do not need to be restated.
b. A change in accounting policy for which the financial statements for prior
periods included for comparative purposes do not need to be restated.
c. A change in accounting policy for which the financial statements for prior
periods included for comparative purposes should be restated.
d. A change in accounting estimate for which the financial statements for prior
periods included for comparative purposes should be restated

18 Which of the following is (are) the proper time period(s) to record the effects of a
. change in accounting estimate?
a. Retrospectively only.
b. Current period and prospectively.
c. Current period and retrospectively.
d. Current period only.

19 A company using a perpetual inventory system neglected to record a purchase of

. merchandise on account at year end. This merchandise was also omitted from the
year-end physical count. How will these errors affect assets, liabilities, and
shareholders' equity at year end and net income for the year?

Assets Liabilities Shareholders' Equity Net Income

a. No effect Understate Overstate Overstate.
b. No effect Overstate Understate Understate.
c. Understate Understate No effect No effect.
d. Understate No effect Understate Understate.

5
20 MissTake Corp is a small private corporation that does not prepare comparative
. statements. At the end of their 2012 fiscal year, it was discovered that the 2011
depreciation expense on their computer equipment had been incorrectly debited to
maintenance expense. The books for 2011 are closed. How should MissTake deal with
this situation?

a. Prepare an adjusting entry to debit depreciation expense and credit

maintenance expense.
b. Prepare an adjusting entry to debit retained earnings and credit
maintenance expense.
c. Restate their 2011 financial statements.
d. Ignore it.

21 A successful company’s major source of cash should be

.
a. operating activities.
b. investing activities.
c. financing activities.
d. both operating activities and investing activities.

22 When preparing a statement of cash flows (indirect method), which of the following is
. not an adjustment to reconcile net income to cash flows from operating
activities?

a. An increase in prepaid expenses.

b. An increase in bonds payable.
c. A decrease in income taxes payable.
d. Depreciation expense.

23 When preparing a statement of cash flows using the direct method, a net loss reported
. on the income statement will

a. automatically result in a cash outflow from operating activities.

b. be included in financing activities.
c. be disclosed as a note to the statement of cash flows.
d. not be included on the statement at all

6
 Use the following information for questions 24 and 25.

During calendar 2012, Madeleine Corp sold equipment for $70,000. The equipment
had cost $100,000 and had a book value of $52,000 at the time of sale. Data from their
comparative balance sheets are:
Dec 31/12 Dec 31/11
Equipment $720,000 $650,000
Accumulated Depreciation 210,000 190,000

24 Depreciation expense for 2012 was

.
a. $86,000.
b. $68,000.
c. $18,000.
d. $12,000.

25 Equipment purchased during 2012 was

.
a. $170,000.
b. $100,000.
c. $70,000.
d. $30,000.

7
Question 2 (20 marks - 36 minutes)

Platinum Inc. is a publicly traded company. The balance sheet for fiscal 2011 and 2012 follows:

2012 2011
Cash $204,800 $550,000
Accounts receivable 1,150,000 1,300,000
Inventory 410,000 250,000
Investments - short-term 400,000 0
Investments - long-term 150,000 0
Property plant and equipment 3,400,000 3,400,000
Accumulated depreciation (1,860,000) (1,570,000)
Total $3,854,800 $3,930,000

Accounts payable 260,000 80,000

Bank loan 2,226,000 2,850,000
Bonds payable 187,800 185,000
Preferred shares 0 15,000
Common shares 597,000 450,000
Retained earnings 584,000 350,000
Total $3,854,800 $3,930,000

Additional information:
1. The short-term investments are not cash equivalents. Cash includes cash on hand and cash at banks.
2. Net income was $290,000.
3. Preferred shares were converted to common shares during the year at their book value.
4. The company borrowed $200,000 from the bank to purchase the investments.
5. The face value of the bonds is $200,000. The company pays 6% interest per year on the bonds.
The change in bonds payable on the balance sheet results from amortizing the bond discount.
6. Cash dividends were paid during 2012.
7. Interest expense for the year was $130,000. Income tax expense was $116,000.

Required:
Prepare a cash flow statement using the indirect method including any disclosures required.

8
Question 3 (35 marks - 54 minutes)

You have just been hired as a temporary replacement for the accountant of Candace Inc, who has been
hospitalized and who will be off work for at least a month.

The preliminary balance sheet has been prepared and is as follows:

Candace Inc.
Balance Sheet
December 31, 2011

Cash $ 57,000 Accounts payable $ 85,000

Accounts receivable (net) 52,200 Long-term liabilities 100,000
Inventories 90,000 Shareholders’ Equity 308,500
Investments 76,300
Equipment (net) 186,000
Patents 32,000
$493,500 $493,500

In addition, you have discovered a file containing the following information, that needs to be incorporated
into the balance sheet as at December 31, 2011

Additional Information:

1. The company records inventory using a periodic system. At the end of December, inventory
belonging to Candace Inc., which was recently received, still on the company’s loading dock, and
included in the physical count on December 31 st, amounted to $20,000, at cost. As at December
31, 2011, the invoice had not yet been processed for this shipment.

2. The investments were recorded at cost and included $50,000 of trading securities with a market
value of $55,000 as at December 31, 2011. The remaining investments were comprised of term
deposits with a year end market value that approximated their cost.

3. The company purchased a 3 year insurance policy in November 2011, effective from December
1, 2011 through November 30, 2014. The premium, which cost $7,200 for the three years, had
been fully paid on December 15, 2011.

4. The net accounts receivable balance includes credit balances for customers who have not been
refunded overpayments made in the past year of $15,000. The account is also shown net of an
allowance for doubtful accounts $4,800.

5. Shareholders Equity, at December 31, 2011, as shown above, is comprised of:

a. Share capital--- 100,000 common shares at $1 each
b. Accumulated other comprehensive income of $58,500
c. Retained earnings of $150,000

9
 6. The company changed its accounting policy for the depreciation of fixed assets from the
declining balance method to a straight line method , effective January 1, 2011 as a result of an
engineer’s assessment of a prolonged life for the assets resulting from an improvement to the
maintenance regime for all company assets. The calculated effect of this change was a reduction
in the accumulated depreciation of the fixed assets as at December 31, 2010 of $36,000, a four
year increase in the assets’ remaining useful life such that there were 10 years remaining as of the
first of January 1, 2011, and no residual value. The accountant did not have a chance to record
this adjustment prior to becoming ill and has not recorded any depreciation for 2011. Candace
Inc. is subject to a 40% tax rate.

7. The preliminary calculation of net income for 2011, as determined by the accountant, was
$60,000.

REQUIRED

1. Prepare a classified Balance Sheet at December 31, 2011 in proper format, in accordance with the
requirements of the CICA Handbook for private enterprises, taking into account all of the
information given above. Indicate any additional disclosure requirements for the balance sheet
components. (15 marks)

2. Prepare a Statement of Retained Earnings for the year ended December 31, 2011, in accordance
with the requirements of the CICA Handbook for private enterprises taking into account all of
the information given above. (7 marks)

3. Assume that the books for 2011 are still open. Prepare the adjusting entries required to correct
or /adjust for the items 1 through 7 above. (8 marks)

4. While awaiting the elevator in the MB building the other day, your overheard another student
comment to his friend:

“ I really don’t understand why we bother to study the balance sheet in Acco 310. It appears that
there are many limitations to the information provided on the balance sheet, regardless of whether
one is prepared using Private Enterprise Gaap or IFRS/IAS.”

Identify and explain at least two of the limitations of the balance sheet. ( 5 marks)

10
Question 4 (20 marks - 36 minutes)

Prior to the advent of the civil code in Quebec, a progressive landowner had decided to designate
each of his children named Argon and Aubergine as partial heirs to the family fortune and would
begin to distribute his assets prior to his demise. The ultimate decision regarding the distribution of
the remaining assets would however, depend on which child had been more successful in
managing the initial resources given to him/her.

Specifically, each would receive a small farm consisting of 300 sheep and 20 acres of land. Each
twin would be allowed to manage his/her property as he/she deemed appropriate. After a
designated period, the landowner would call his children before him to account for their actions. The
heir to the rest of the family fortune would be chosen on the basis of which child had produced a
larger increase in wealth during the test period.

At the end of the test period , Argon boasted that he had 714 sheep under his control while
Aubergine had only 330. Furthermore, Argon stated that he had increased his land holdings to 27
acres. The 7-acre increase resulted from two transactions. First, on the day that the contest started,
Argon used 20 sheep to buy 10 additional acres, and second, he sold 3 of these acres for a total of
9 sheep on the last day of the test period. Also, Argon’s flock had produced 75 newborn sheep
during the period of accounting. He had been able to give his friends 50 sheep in return for the help
that they had given him in building a fence, thereby increasing not only his own wealth but the
wealth of his neighbors as well. Argon boasted that the fence was strong and would keep his herd
safe from predatory creatures for 5 years.

Aubergine countered that Argon was holding 400 sheep that belonged to another herder. Argon had
borrowed these sheep on the day that the contest had started. Furthermore, Argon had agreed to
return 424 sheep to the herder. The 24 additional sheep represented consideration for the use of
the herder’s flock. Argon had agreed to return the sheep immediately after the test period ended.

During the test period, Aubergine’s flock had produced 37 newborn sheep, but 2 sheep had gotten
sick and died during the accounting period. Aubergine had also lost 5 sheep to predatory creatures.
She had no fence, and some of her sheep strayed from the herd, thereby exposing themselves to
danger. Knowing that she was falling behind, Aubergine had taken a spouse in order to boost her
productivity. Her spouse owned 170 sheep on the day they were married; his sheep had produced
16 newborn sheep since the date of his marriage to Aubergine. Argon had not included the
husband’s sheep in his count of Aubergine’s herd. If her spouse’s sheep had been counted,
Aubergine’s herd would contain 516 instead of 330 sheep suggested by Argon’s count.

Argon charged that 7 of Aubergine’s sheep were sick with symptoms similar to those exhibited by
the 2 sheep that were now dead. Áubergine interjected that she should not be held accountable for
acts of nature such as illness. Furthermore, she contended that by isolating the sick sheep from the
remainder of the herd, she had demonstrated prudent management practices that supported her
case to be designated as heiress.

Required

Assume that landholder (Seigneur Castonguay) has hired you to assist him in resolving the issue.
Prepare a comprehensive but concise memo to him, accompanied by a relevant numerical analysis,
as appropriate, showing how well each child’s business performed during the year of the contest
and making your recommendation to Seigneur Castonguay. Your assertions should be based on

11
the conceptual framework and current accounting principles. Any assumptions or estimates that
you make should be noted, including your assumption with respect to the monetary unit being used
in your analysis.

12