CONCORDIA UNIVERSITY

JOHN MOLSON SCHOOL OF BUSINESS

DEPARTMENT OF ACCOUNTING

ACCO 310/2

Fall 2011

MID TERM EXAMINATION

All sections

October 21, 2011

6:00 to 9:00 P.M.

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

100 180

Materials Allowed

 Silent, cordless calculators (financial calculators are permitted)

 Translation dictionaries

QUESTION 1- 20 MARKS – 36 MINUTES

1. Which of the following constitute a change of accounting policy according to International
Accounting Standards ?

A A change in the basis of valuing property

B A change in depreciation method
C A decision to capitalise borrowing costs relating to the construction of non-current assets,
rather than writing them off as incurred
D Adopting an accounting policy for a new type of transaction not previously dealt with

2. According to International Accounting Standards, which of the following items would qualify
for treatment as a change in accounting estimate?

(1) Provision for obsolescence of inventory

(2) Correction necessitated by a material error

(3) A change as a result of the adoption of a new International Accounting Standard

(4) A change in the useful life of a non-current asset

A All of the above

B (2) and (3)
C (1) and (3)
D (1) and (4)

3. In accordance with International Accounting Standards, how is a change in accounting policy

accounted for?

A By changing the current year figures but not the previous years’ figures
B Via retrospective application
C No alteration of any figures but disclosure in the notes
D no alteration of any figures or disclosure in the notes

4. Which one of the following would be regarded as a change of accounting policy under
International Accounting Standards?
A An entity changes its method of depreciation of machinery from straight line to reducing
balance
B An entity has started capitalising borrowing costs for non-current assets whereas it
previously wrote those costs off to its income statement as incurred
C An entity changes its method of calculating the provision for warranty claims on its
products sold
D An entity disclosed a contingent liability for a legal claim in the previous year’s accounts.
In the current year, a provision has been made for the same legal claim

5. According to International Accounting Standards, how are each of the following types of
transactions dealt with?

(1) Change in accounting policy

(2) Change in accounting estimate

(3) Correction of a material prior period error

A (1) and (2) are dealt with retrospectively, (3) is dealt with prospectively
B (1) and (3) are dealt with retrospectively, (2) is dealt with prospectively
C (2) and (3) are dealt with retrospectively, (1) is dealt with prospectively
D All are dealt with retrospectively

6. Harriet Ltd has proposed the following changes to its current accounting practices to be used
in its next financial statements.

(1) Motor vehicles have always been depreciated on a straight-line basis. The company has
now decided to change to the reducing balance basis as it now believes that this better reflects
the consumption of economic benefits.

(2) In preparing its income statements, Harriet Ltd has previously classified depreciation on
directors’ motor vehicles as administrative expenses. These depreciation charges are now to be
classified as distribution costs as the company now believes that this gives a more reliable and
relevant presentation.

Which, if any, of these changes represent a change in accounting policy?

A (1) only
B (2) only
C Neither of the above
D Both of the above

7. Which TWO of the following should be treated as a change of accounting policy according to
International Accounting Standards?
A A new accounting policy of capitalising development costs as a project has become
eligible for capitalisation for the first time
B A new policy resulting from the requirements of a new IFRS
C To provide more relevant information, items of property, plant and equipment are now
being measured at fair value, whereas they had previously been measured at cost
D A company engaging in construction contracts for the first time needs an accounting
policy to deal with this

8. How should the following changes be treated, according to International Accounting

Standards

(1) A change is to be made in the method of calculating the provision for uncollectible
receivables.

(2) Investment properties are now measured at fair value, having previously been measured at
cost.

Change (1) Change (2)

A Change of accounting policy Change of accounting policy

B Change of accounting policy Change of accounting estimate

C Change of accounting estimate Change of accounting policy

D Change of accounting estimate Change of accounting estimate

9. Are the following statements true or false, according to IAS1?

(1) Dividends paid should be recognised in the statement of comprehensive income.

(2) A loss on disposal of assets should be recognised in the statement of changes in equity.

Statement (1) Statement (2)

A False False
B False True
C True False
D True True
10. In which section of the statement of financial position should cash that is restricted to the
settlement of a liability due 18 months after the reporting period be presented, according to
IAS1?

A Current assets
B Equity
C Non-current liabilities
D Non-current assets

11. Which of the following statements about contingencies, if any, are correct according to IAS
37?

(1) A contingent liability should be disclosed by note if it is probable that an obligation will arise
and its amount can be estimated reliably

(2) A contingent asset should be disclosed by note if it is probable that it will arise

(3) An entity should not recognise a contingent asset

A None of the statements is correct

B (1) and (2)
C (2) and (3)
D All of the statements are correct

12. In which of the following circumstances would a provision be recognised under International
Accounting Standards in the financial statements for the year ending 31 March 20X6?

(1) A board decision was made on 15 March 20X6 to close down a division. Potential costs are
$100,000. At 31 March 20X6 the decision had not been communicated to managers, employees
or customers

(2) There are anticipated costs from returns of a defective product in the next few months of
$60,000. In the past all returns of defective products have always been refunded to customers

(3) It is anticipated that a major refurbishment of the company’s head office will take place from
June 20X6 onwards costing $85,000

A (1) and (2)

B (2) and (3)
C (2) only
D (3) only
13. The Snowfinch Company is closing one of its operating divisions, and the conditions for
making restructuring provisions in IAS have been met.

The closure will happen in the first quarter of the next financial year. At the current year end, the
company has announced the formal plan publicly and is calculating the restructuring provision.

Which ONE of the following costs should be included in the restructuring provision?

A Retraining staff continuing to be employed

B Relocation costs relating to staff moving to other divisions
C Contractually required costs of retraining staff being made redundant from the division
being closed
D Future operating losses of the division being closed up to the date of closure

14. During the year ended 31 December 20X8 the following events occurred at

The Gosling Company:

(1) It was decided to write off $80,000 from inventory which was over two years old as it was
obsolete.

(2) Sales of $60,000 had been omitted from the financial statements for the year to 31
December 20X7.

According to IAS, how much should be shown as a prior period adjustment in Gosling's financial
statements for the year to 31 December 20X8?

A $60,000
B $140,000
C $80,000
D $20,000

15. Which ONE of the following items should be presented under Cash flows from investing
activities, according to IAS7?

A Employee costs
B Property revaluation
C Redemption of debentures
D Development costs capitalised in the period

16. Which TWO of the following can be classified as Cash and cash equivalents under IAS?

A Redeemable preference shares due in 180 days

B Loan notes held due for repayment in 90 days
C Equity investments
D A bank overdraft
QUESTION 2- 35 MARKS – 63 MINUTES

You, Le Compablo have just taken over as accountant at BTS Inc. and have been asked to look
over the following adjustment sheet that was prepared by your predecessor and to prepare a
likely explanation for this week’s management committee meeting to explain the changes that
are being made. Management wants to know what kind of error, omission or other problem
likely happened in the past two years, such that the adjustments noted below are required. It is
believed that the adjustments shown below are correct.

In addition, since nobody else on the management team has any accounting expertise, you have
been asked to prepare a Statement of Shareholder’s Equity for 2010 and 2009, using the
information from the adjustment sheet and the additional information given below.

ADJUSTMENT SHEET
2010 2009

Net Income as previously reported $600,000 $880,000

1. Amortization adjustment(s) (50,000) 50,000

2. Insurance expense adjustment(s) (6,000) 5,000
3. Cost of goods sold adjustment(s) 80,000 (60,000)
4. Salary expense adjustment(s) 5,000 (25,000)
5. Contingent liability adjustment - (100,000)
6. Fixed Asset adjustment 30,000 ---

Revised Net Income $659,000 $750,000

Additional Information

 The fixed asset adjustment relates to an asset purchased on the last day of the 2010 fiscal
year.
 The company uses a straight line amortization method for all depreciable assets, whether
tangible, or intangible.
 The company enjoys a temporary tax holiday such that it’s tax rate is 0%.
 In 2009, the company purchased some investments which cost $400,000 and which have
subsequently declined in value to $250,000 as at December 31, 2010. At December 31,
2009, the fair value of the investments was $380,000. The investments are recorded at
cost on the balance sheet.
 It is now October 2011 and the previous years’ financial statements have already been
issued
 The opening balance of retained earnings at the beginning of 2009 that was previously
reported was $500,000
 The company paid dividends in both 2009 and 2010 of $100,000 and $125,000
respectively
 The company has 100,000 common shares outstanding, all of which were issued at the
inception date, which was May 1, 2007.
 The company has not as yet recorded any of the adjustments described above in the
books of the corporation
 The closing entries have been made for 2010
 The company’s cash account is correct at each year end date
 The company wishes to be in compliance with international accounting standards

REQUIRED

1.For each adjustment shown of the Adjustment Sheet, give a likely explanation as to the
reason for the adjustment and the effect on the financial statements of not making the
adjustment.. Be sure to include an explanation of the income statement , balance sheet
and cash flow effects for each. (15 marks)

2.Prepare the journal entries required as at the present time ( October 2011) to record the
adjustments shown above. Your entries should be logically consistent with your likely
explanations from part 1 of the required. (9 marks)

3. Calculate Total Comprehensive Income for 2010 and 2009. ( 2 marks)

4. Prepare a Statement of Shareholders’ Equity from the information provided in this

problem, in accordance with the requirements of International Accounting Standards, in
proper format. ( 9 marks)
QUESTION 3- 25 MARKS – 45 MINUTES

Your client, Mr. Kong, has provided you with the following account information, which was
extracted from the trial balance of Cageco Inc. as at December 31, 2010.

Mr. Kong usually asks his daughter, Tracee to do the company’s accounting but she is currently
travelling in Europe and will not return for at least 8 months, Mr. Kong is a software engineer
and knows very little about accounting.

ACCOUNT INFORMATION

Debit Credit Unknown

Cash 141,000
Receivables 163,500
Allowance for doubtful accounts 6,700
Prepaid Rent 12,600
Inventory 308,700
Available-For-Sale Investments - Long-Term 349,000
Land 85,000
Factory Construction, Incomplete Project 124,000
Patents 28,000
Equipment 258,000
Unamortized Discount on Bonds Payable 21,000
Accounts Payable 148,000
Dividends Payable 15,000
Unearned Revenues 98,200
Notes Payable 90,000
Bonds Payable 400,000
Common Shares 500,000
Retained Earnings, 1/1/10 170,000
Accumulated Other Comprehensive Income 36,100
Net Income 65,000
Dividends Declared 15,000
Prior Year’s error 9,800
1,473,700 1,359,100

Additional Information

Mr. Kong has also informed you of the following:

1. The inventory included items costing $58,600 received on consignment from XYZ
Company on November 1, 2010 which were recorded as Unearned Revenues when
received. These are yet unsold on December 31, 2010. The net realizable value of the
remaining inventory was $245,000 on December 31, 2010.

2. Cash included $25,000 invested in Bell Canada shares

3. The accounts receivable balance is uncertain. Mr. Kong estimated that 5% of the current
year’s credit sales of $1,000,000 would be uncollectible in the future and this has not been
taken into account. Further, he informed you that a credit balance of $15,700 due to one
customer was netted against the total receivables. He thinks the company uses the
percentage of sales method to account for bad debts.

4. The rent was paid in advance for twelve months on November 1, 2010.

5. The company holds several notes with different terms and due dates. One of these notes, for
$20,000, is due on May 1, 2011 while the others have due dates longer than two years.

6. The market value of the Available-For-Sale Investments amounted to $350,000 on

December 31, 2010.

7. The unamortized discount on bonds payable is to be amortized over 7 more years on a

straight-line basis, including 2010. Mr. Kong is sure that the entry to record this has not yet
been done. Further, the Patents purchased by the company last year at a cost of $35,000 are
being amortized on a straight-line basis. Mr. Kong says that the amortization for the current
year on the patents has not been taken into account but he thinks the prior year is fine.

8. 200,000 no par common shares are authorized from which 50,000 shares have been issued
and are outstanding.

9. Mr. Kong referred to some written notes and informed you that the accumulated
amortization on Equipment amounting to $142,000 was netted against the cost of the
equipment. Amortization for all years has been correctly accounted for.

10. On December 1st, 2010, the company issued its latest edition of it’s software. Several clients
have experienced computer system failures subsequent to the installation of the new
software edition. On February 1, 2011, Mr. Kong received a letter from the law firm
representing two of Cogeco’s clients, claiming damages of $500,000 each, for business lost
due to computer failures. Mr. Kong has not heard anything since, but his own lawyers tell
him it is not likely Cogeco will win their defense as other engineers have indicated that the
company overlooked some testing protocol and released the software too early.

REQUIRED
Prepare a classified Balance Sheet at December 31, 2010 in proper format, as per the
requirements of Accounting Standards for Private Enterprises, taking into account all of the
information given above in Notes 1-10. Also ensure that you indicate the nature and extent of
any related additional disclosures required.

QUESTION 4- 20 MARKS – 36 MINUTES

The Coffee Corporation (TCC) is a publicly owned corporation that trades on the Toronto Stock
Exchange.
During January 2010 TCC was charged, along with four other coffee importers and distributors
of conspiring to fix wholesale prices of some types of coffee in Canada from 2006 to 2009. The
company is in the process of finalizing its financial statements for the year ended December 31,
2010 and is wondering how to handle this charge.

The action has been brought under the Combines Investigation Act. TTC denies the charges.
Officials of the company know that few charges under this Act have resulted in convictions.
However, costs of defending the companies that have previously been charged have tended to be
large.

The company’s legal advisors believe that the evidence against TTC is thin and that there are
good technical defenses against the charges.

Traditionally fines levied under the Act have not been major.

Nevertheless, one of the companies charged jointly with TTC has just issued its 2010 financial
statements. Note 7 states “The company has been named as the defendant in an action brought
under the Combines Investigation Act (Canada). The company intends to offer defenses against
the charge. In the opinion of the company’s solicitors it is too early to predict the outcome to the
charge or to estimate costs or possible fines. The auditors’ report accompanying the financial
statements is qualified and states in part , “subject to the outcome of the charges described in
Note 7 to the financial statements……..accompanying financial statements ….present fairly”.

REQUIRED

Assume that you are the auditor of TTC.

What reporting would you expect that officials of TTC would want to give to the charge in their
2010 financial statements? What options do they have? Be specific, fully explain and support
your reasoning and make a recommendation.