CONCORDIA UNIVERSITYJOHN MOLSON SCHOOL OF BUSINESS

Department of AccountancyACCOUNTANCY 310/2FINAL EXAMINATION

All SectionsFall 2012

Instructions:

1. This examination paper consists of 14 pages including this page. Please make sure your paper has all pages before commencing to write.

2. Write all your answers (except answers to multiple choice questions) in the examination answer booklet. You may answer the questions in any order you prefer. Only the answers in the examination booklet and on your computer input sheet will be graded.

3. Read the questions carefully and budget your time wisely. Show all calculations.

4. This is a closed book examination. However, silent hand-held calculators and standard language dictionaries are permitted.

5. Invigilators will not answer questions (unless you think there is an error in the question).

6. The exam questions must be handed in at the end of the examination.

Materials allowed:Silent cordless calculators Translation dictionaries

Marks MinutesQuestion 1 13 24Question 2 32 57Question 3 33 59Question 4 22 40

Total 100 180

Question 1 (13 marks – 23 minutes)

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For each of the following, choose the letter that corresponds to the best answer and write the on your multiple choice input sheet, not on this examination paper.

1. On the December 31, 2006 balance sheet of Yu Co., the current receivables consisted of the following:

Trade accounts receivable $ 65,000Allowance for doubtful accounts (2,000)Claim against shipper for goods purchased by Yu Co. and

lost in transit (November 2006) 3,000Selling price of unsold goods sent by Yu Co. on consignment at 130 percent of cost (not included in Yu Co's ending inventory) 26,000Security deposit on lease of warehouse used for storingsome inventories 30,000Total $122,000

At December 31, 2006, the correct amount of Yu Co.’s total current net accounts receivable wasa. $66,000.b. $92,000.c. $96,000.d. $122,000.

2. May Co. prepared an aging of its accounts receivable at December 31, 2006 and determined that the net realizable value of the receivables was $290,000. Additional information is available as follows:

Allowance for doubtful accounts at 1/1/06—credit balance $ 34,000Accounts written off as uncollectible during 2006 23,000Accounts receivable at 12/31/06 320,000Uncollectible accounts recovered during 2006 5,000

For the year ended December 31, 2006, May's bad debt expense would bea. $20,000.b. $23,000.c. $16,000.d. $14,000

3. For the year ended December 31, 2006, Colt Co. estimated its allowance for doubtful accounts using the year-end aging of accounts receivable. The following data are available:

Allowance for doubtful accounts, 1/1/06 $51,000Estimated uncollectible accounts during 2006 NO(2% on credit sales of $2,000,000) 40,000Uncollectible accounts written off, 11/30/06 46,000Estimated uncollectible accounts per aging, 12/31/06 69,000

After year-end adjustment, the bad debt expense for 2006 should be

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a. $46,000.b. $57,000.c. $69,000.d. $64,000.

4. Linn Co.'s allowance for doubtful accounts was $92,000 at the end of 2006 and $90,000 at the end of 2005. For the year ended December 31, 2006, Linn reported bad debt expense of $13,000 in its income statement. What amount did Linn debit to the appropriate account in 2006 to write off actual bad debts?a. $2,000b. $11,000c. $13,000d. $15,000

5. Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account

a. increases the allowance for doubtful accounts.b. has no effect on the allowance for doubtful accounts.c. has no effect on net income.d. decreases net income.

6. The following accounts were extracted from Uler Co.'s unadjusted trial balance at December 31, 2006:

Debit Credit Accounts receivable $700,000Allowance for uncollectible accounts 8,000Net credit sales $3,000,000

Uler estimates that 1 percent of the gross accounts receivable will become uncollectible. After adjustment at December 31, 2006, the allowance for doubtful accounts should have a credit balance ofa. $30,000.b. $22,000.c. $15,000.d. $7,000.

7. Which of the following is a method to generate cash from accounts receivable?

Assignment Factoringa. Yes Nob. Yes Yesc. No Yesd. No No

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8. Purchased goodwill should be

a. written off as soon as possible against retained earnings.b. written off as soon as possible as an extraordinary item.c. written off by systematic charges as a regular operating expense over the period

benefited, but not more than 40 years.d. not written off but rather reduced only if impairment occurs.

9. Goodwill was purchased when a business was acquired. When an impairment to the goodwill is determined, the credit is usually made to

a. the Goodwill account.b. an Accumulated Amortization account.c. a Deferred Credit account.d. a shareholders' equity account.

10. Which of the following principles best describes the current method of accounting for research costs when using Private Enterprise Gaap?

a. Associating cause and effectb. Systematic and rational allocationc. Income tax minimizationd. Immediate recognition as an expense

11. How should research and development costs be accounted for, according to Part 2 of the CICA Handbook ( Private Enterprise Gaap)?

a. Must be capitalized when incurred and then amortized over their estimated useful lives.

b. Must be expensed in the period incurred.c. May be either capitalized or expensed when incurred, depending upon the materiality

of the amounts involved.d. Research costs must be expensed in the period incurred. Development costs must also

be expensed unless they meet certain narrowly defined criteria.

12. Under Private Enterprise Gaap, if a company constructs a laboratory building to be used as a research and development facility, the cost of the laboratory building is matched against earnings as

a. research and development expense in the period(s) of construction.b. research expense and or amortization deducted as part of research and development

costs.c. amortization or immediate write-off, depending on company policy.d. an expense at such time as productive research and development has been obtained

from the facility.

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13. Which of the following research and development related costs should be capitalized and amortized or depreciated over current and future periods?

a. Research and development general laboratory building which can be put to alternative uses in the future

b. Inventory used for a specific research projectc. Administrative salaries allocated to research and developmentd. Research findings purchased from another company to aid a particular research

project currently in process

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Questi on 2 (32 marks-57 minutes)

Bedrock Quarries Ltd. (Bedrock), wholly owned by Betty Rubble, has operated a sand and gravel pit since 1972. During that time, its revenues have increased moderately. On March 15, 2005, after almost two years of negotiation, a Purchase and Sale Agreement between Flintstone Sand and Gravel Ltd. (Flintstone) and Betty Rubble was completed whereby Ms. Rubble sold Bedrock to Flintstone. Mr. Flintstone, sole shareholder of Flintstone, was optimistic about the synergistic benefits that would accrue to the combined operations.

Mr. Harrison, the senior partner of Harrison, Longo and Chan (HLC), Chartered Accountants, and a cousin of Ms. Rubble, has recently been informed that a complaint was made to the Provincial Institute of Chartered Accountants (PICA) regarding his involvement with Bedrock. In February 2006, Mr. Flintstone submitted a complaint to the PICA alleging that HLC, and Mr. Harrison in particular, were associated with financial statements of Bedrock that were false and materially misleading. Apparently, Mr. Flintstone has retained counsel and is preparing to commence legal action against HLC for negligence in its work on the Bedrock engagements.

For each of the fiscal years ended January 31, 2002, and January 31, 2003, HLC prepared audit reports, and for the fiscal years ended January 31, 2004, and January 31, 2005, HLC prepared review engagement reports on the financial statements of Bedrock. Mr. Harrison is adamant that Bedrock’s financial statements were prepared in accordance with International Financial Reporting Standards and that HLC complied with generally accepted auditing and review standards in the conduct of the Bedrock engagements.

The PICA does not have the staff available at the moment and has asked Chapman & Partner, Chartered Professional Accountants (CP), to investigate Mr. Flintstone’s complaint. You, CPA, are employed by CP. Jim Chapman, partner in charge of CP’s litigation department has asked you to prepare a memo discussing all relevant matters regarding the financial accounting issues. He will use it as a basis for discussion in a meeting he has scheduled for next week, on May 12, 2006, with staff from the PICA.

In order to prepare your memo, you have been provided with extracts from Bedrock’s financial statements for the years 2003 to 2005 (see Exhibit I).

You have reviewed the files of HLC and have held discussions with Mr. Flintstone. All significant issues arising from your investigation, including your discussions, are outlined in Exhibit II.

Required

Prepare the memo.

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EXHIBIT I

BEDROCK QUARRIES LTD.EXTRACTS FROM BALANCE SHEET

as at January 31 (in thousands of dollars)

2005 2004 2003 (unaudited) (unaudited) (audited)

Assets

Cash and cash equivalents $ 23,397 $ 21,215 $ 29,219Accounts receivable 38,903 28,869 22,927Inventory 18,155 17,011 29,019Land at cost 3,637 3,637 3,637Plant and equipment at cost 93,987 93,987 93,987Accumulated depreciation and depletion (56,091) (51,714) (47,195)Investment in and advances to associated company 9,394 9,165 4,716

$ 131,382 $ 122,170 $ 136,310

Liabilities and Shareholder’s Equity

Bank indebtedness $ 628 $ 503 $ 21,120 Accounts payable 22,695 24,179 20,325 Long-term debt 43,076 39,114 47,161 Deferred taxes 6,296 5,454 396 Common shares 1,000 1,000 1,000 Retained earnings 57,687 51,920 46,308

$ 131,382 $ 122,170 $ 136,310

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EXHIBIT I (continued)

BEDROCK QUARRIES LTD.EXTRACTS FROM INCOME STATEMENT for the years ended January 31

(in thousands of dollars)

2005 2004 2003 (unaudited) (unaudited) (audited)

Revenue $ 78,697 $ 74,750 $ 62,215

Operating expensesCost of sales 54,534 50,988 59,223 Sales and general costs 4,490 3,819 5,051 Development 1,760 2,019 1,693 Depreciation and depletion 4,377 4,519 4,776

65,161 61,345 70,743

Operating profit (loss) 13,536 13,405 (8,528 )

Interest expense, net 1,227 1,119 1,315 Exploration expense 1,149 1,212 976 Research expense 463 404 391

2,839 2,735 2,682

Income (loss) before income taxes 10,697 10,670 (11,210)

Income taxes 4,930 5,058 –

Net income (loss) $ 5,767 $ 5,612 $ (11,210 )

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EXHIBIT II

NOTES FROM REVIEW OF HLC FILES FOR THE FISCAL YEARS 2002 TO 2005

· The final financial statements for fiscal 2005 showed net income that was one-half of the net income on the draft fiscal 2005 financial statements.

· Accounts receivable include amounts owed to Bedrock by Rubble Sales and Haulage Ltd. a company owned by Ms. Rubble.

· The bank loan is secured by an assignment of accounts receivable and land and equipment.

The accounting policies of Bedrock include the following:

· Inventory is valued at net realizable value.

· Revenue is recognized when products are ready for delivery.

· Depreciation and depletion are calculated on a 10-year straight-line basis.

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Question 3 ( 33 marks -59 minutes)

Part A ( 15 marks)The following independent situations relate to inventory accounting:

1. Robin Corp. has the following four items in its ending inventory:Item Cost($) Estimated selling price($) Net realizable value($)Peas 1,820 2,200 2,100Beans 5,000 5,050 4,900Lentils 4,290 4,750 4,625Nuts 3,200 4,325 4,210

2. Sparrow Company’s inventory of $1.1 million at December 31, 2011 was based on a physical count of goods priced at cost and before any year-end adjustments relating to the following items:

(a) Goods shipped f.o.b. shipping point on December 24, 2011 from a supplier at an invoice cost of $69,000 to Sparrow were received on January 4, 2012.

(b) The physical count included $29,000 of goods billed to Sakic Corp., f.o.b. shipping point, on December 31, 2011. The carrier (transport company) picked up these goods and delivered them to Sakic on January 3, 2012.

3. Hawk Industries had 1,500 units on hand of part 54169 on May 1, 2012, with a cost of $21 per unit. Hawk uses a periodic inventory system. Purchases of part 54169 during May were as follows:

Units Unit costMay 9 2,000 $22.00May 17 3,500 $23.00May 26 1,000 $24.00

A physical count on May 31, 2012, shows 2,100 units of part 54169 on hand.

4. Eagle Outfitters, a retail store chain, had the following information in its general ledger for the year 2011:Merchandise purchased for resale $909,400Interest on notes payable to suppliers 8,700Purchase returns 16,500Freight-in 22,000Freight-out 17,100Cash discounts on purchases 6,800

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5. Bo Peep Inc. follows IFRS and its assets include the following: sheep, wool, carpet

Required(a) For situation 1, what should Robin report as its total inventory amount on its balance

sheet at year end under IFRS?(b) For situation 2, what should Sparrow report as its inventory amount on its balance sheet

dated December 31, 2011?(c) For situation 3, using the FIFO method, what is the inventory cost of part 54169 at May

31, 2012? Using the weighted average cost formula, what is the inventory cost at May 31, 2012?

(d) For situation 4, what is Eagle’s inventoriable cost for the year 2011? (e) For situation 5, how should the company

(i) value each of the assets mentioned on its balance sheet; and (ii) how would each asset be recognized (account description) on the balance sheet?

Part A 1.

Item Cost NRV LC and NRVPeas 1,820 2,100 1,820

Beans 5,000 4,900 4,900

Lentils 4,290 4,625 4,290

Nuts 3,200 4,210 3,200

Total 14,210

2. 1,100,000

+ 69,000

1,169,000

The $69,000 of goods in transit on which title had passed on December 24 (f.o.b. shipping point) should be added to 12/31/08 inventory

The $29,000 of goods shipped (f.o.b. shipping point) on January 3, 2009, should remain part of the 12/31/08 inventory and has been correctly included in the amount of $1,100,000

3.

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FIFO inventory cost: 1,000 units at $24 24,000

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1,100 units at $23 25,300

49,300

Weighted-avg cost:

1,500 units at $21 31,500

2,000 units at $22 44,000

3,500 units at $23 80,500

1,000 units at $24 24,000

8,000 units 180,000

$180,000 8,000 units = $22.50 / unit

Ending inventory = 2,100units x $22.50 = $47,250

4.The inventoriable costs for 2008 are:

Merchandise purchased 909,400

Add: Freight-in 22,000

Deduct: Purchase returns (16,500)

Deduct: Purchase discounts (6,800)

Inventoriable cost 908,100 5.

Asset Valued at Recorded as

Sheep Fair value less costs to sell Biological asset - sheep Wool Fair value less costs to sell Inventory - wool Carpet Manufacturing cost Inventory - carpet

Part B Each is ½ mark

Part B (18 marks)

Blue States, Inc. is a publicly traded company that was incorporated on January 1, 2007 and has

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a fiscal year end of December 31. It uses the cost model to value its machinery and the revaluation model to value its buildings and land. It depreciates all fixed assets using the straight line method. Consider each of the following scenarios independently.

a) On April 1, 2012, the company sold machinery for $550,000. The machine was acquired on March 31, 2007 for $3,000,000. When acquired, the company estimated a useful life of five years and a residual value of $450,000 for the machine.

Required (3.5 marks):Prepare the journal entry to record the sale of the machine on April 1, 2012.

a) (students may include the entries, but there are no marks allocated to these)

Dr. Cash 550,000 Dr. Accumulated depreciation (5 * 510,000) 2,550,000 Cr. Machine 3,000,000 Cr. Gain on disposal 100,000

b) On June 7, 2012 Blue States acquired a machine from Red States in exchange for 10,000 Blue States’ common shares which were trading at $20 per share. The machine has a fair market value of $225,000. (Assume that the market price of the shares and the fair value of the machine are equally reliable.) The book value of the machine in Red States’ records was $190,000.

Required (2 marks): Record the acquisition of the machine.

b) Machine 225,000 Common Shares 225,000

c) Blue States has a building which it had acquired in 2007. Due to the housing downturn, it revalued the building at the beginning of 2009 to $1,440,000 which resulted in a revaluation loss of $90,000. This was the only time this building was revalued. The building’s carrying value at the beginning of 2012 was $1,080,000. Blue States recorded $120,000 for the building’s depreciation for 2012. The equipment's fair value at the end of 2012 was $1,056,000.

Required (4 marks):Record the journal entry to revalue the building at the end of 2012.

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c) Dr. Accumulated depreciation 480,000 Cr.Equipment 384,000 Cr. Gain on revaluation 90,000 Cr. Revaluation surplus 6,000 OR (here give half the equipment marks for each equipment line)Dr. Accumulated depreciation 480,000 Cr.Equipment 480,000Dr. Equipment 96,000 Cr. Gain on revaluation 90,000 Cr. Revaluation surplus 6,000 OR (much less likely) Proportional methodDr. Equipment (+10% × $1,440,000) 144,000 Cr. Accumulated depreciation (+10% × $480,000) 48,000 Cr. OCI — revaluation surplus 6,000 Cr. Gain on revaluation 90,000

d) Blue States has two product lines. Due to changing consumer tastes, the company is evaluating these two cash generating units for impairment for the year ending December 31, 2012.

Product A Product BOriginal cost $7,200,000 $12,000,000Accumulated depreciation 2,500,000 4,000,000Fair value 5,000,000 8,000,000Costs to sell 100,000 350,000Value in use (discounted cash flows) 4,375,000 7,500,000Undiscounted cash flows 5,000,000 8,537,158

Required (4 marks):Based on the information provided, determine whether either product line is impaired, and if so, the amount of the impairment. Provide the basis for your conclusions. Journal entries are not required.

d)Product AValue in use $4,375,000

Fair value less costs to sell $4,900,000

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Original cost 7,200,000 Less: accumulated depreciation (2,500,000)

Net carrying value 4,700,000

Less: recoverable amount (higher of value in use and FV less costs to sell)

4,900,000

Impairment loss $ 0 Since fair value less costs to sell is greater than net carrying value, there is no impairment.

Product BValue in use $7,500,000Fair value less costs to sell $7,650,000

Original cost 12,000,000 Less: accumulated depreciation (4,000,000)Net carrying value 8,000,000Less: recoverable amount (higher of value in use and FV less costs to sell)

7,650,000

Impairment loss $

350,000

**To get marks for value in use and fair value less costs to sell, student must clearly be using these values in determining the impairment loss.

e) Because of declining demand, the company is considering selling certain assets:i. Blue States has land, valued at $1 million, that is currently vacant. The land was purchased several years ago in anticipation that it would increase in value. Management is unsure whether a willing buyer can be found.ii. Blue States’ operations are located in an office building and a separate storage facility. It owns the land on which these facilities reside. It can vacate the storage facility on short notice and there is an active market for similar storage. The company operates out of the office and does not anticipate leaving the office space in the near future.

Required (2 marks): Determine how these assets (vacant land, office/storage land, office, and storage) should be classified on the balance sheet. Provide brief supporting explanations for your conclusions.

e. The vacant land may be classified as investment property in PP&E. It is not reclassified as

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held for sale since sale is not probable. The partnership plans to continue its operations, so the office and related land are not available for sale. They are PP&E assets.The storage facility may be reclassified as a current asset held for sale. PP&E is also acceptable if student argues there is no clear plan to sell.

f) Discuss whether/how your answers for a) through d) would change if Blue States instead reported using Private Entity GAAP. No journal entries are necessary. (2.5 marks)

f. a. entry would be the same b. entry would be the same c. PE firms do not revalue, so no entry would be made. d. compare carrying value with undiscounted cash flows to determine whether asset is impaired. For product A carrying value is $4,700,000 and cash flows are $5,000,000 so the asset is not impaired. For product B carrying value is $8,000,000 and cash flows are $8,537,158, so the asset is not impaired.

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Question 4 (22 marks – 40 minutes)

Asylum Technologies Inc. incorporated on Jan 2, 2012 and set up an account called Intangible Assets. The following summary discloses the debit entries that were recorded in that account during the first year of operations ending December 31, 2012

Intangible Assets

Jan 2 Incorporation fees 1,000

2 Purchase of wall-to-wall carpet for office 10,000

2 Purchase of insurance policy 12,000

Mar 31 Legal fees to obtain patent 60,000

Apr 30 Promotional costs related to startup of business 160,000

June 30 Expenditures on new product idea 400,000

Payment of construction cost for research facility 5,000,000

Sept 30 Legal fees for unsuccessful defense of the patent 3,000obtained on March 31

Dec 31 Expenditures on new product idea 600,000

Employee recruiting and training costs during the 100,000first year of operations

Purchase of Geffen Enterprises 863,000

TOTAL BALANCE 7,209,000

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Additional information

Jan 2 Asylum Technologies Inc. signed a 10-year lease (with no renewal option) for office space and paid $10,000 for the installation of wall-to-wall carpet with a useful life of 15 years and no residual value

The company began construction of a research facility.

The company purchased a one-year insurance policy for $12,000 insuring the research facility

The company began a research project on a new product idea

June 30 Completed construction of the research facility which was put into use on July 1.Total construction cost of the facility was $5,000,000 which was paid in cash on June 30. The estimated useful life of the facility is 20 years with no residual value.

Expenditures on the new product idea totaled $400,000 as at June 30.

On June 30 it was determined that the future benefits of the product under development were reasonably assured (i.e. technical feasibility; intention, resources, and ability to complete and sell; market demand; and a reliable estimate of development costs; were all present)

Expenditures on the new product idea between July 1 and December 31 totaled $600,000. None of these costs were incurred at the new research facility.

Dec 31 Asylum acquired Geffen Enterprises for a cash payment of $863,000. At the time of purchase, Geffen’s balance sheet showed equipment assets of $900,000 (with a remaining useful life of 10 years and no residual value), notes payable of $460,000 due in 6 months, and owners’ equity of $440,000. The fair value of Geffen’s equipment assets was estimated to be $1,160,000.

Required

A. Prepare the reclassification journal entry to clear the Intangible Assets account and set up separate accounts as required before the December 31, 2012 year-end financial statements are prepared. The books for 2012 are open. ( 15 marks)

Question 4

Part A - solution

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Reclassification journal entry:

Debit Credit

Organization expenses 1,000

Leasehold improvements (carpet) 10,000 Patent 60,000 Insurance expense (12,000/12 months = 1,000/month x 6 months) 6,000

Research facility (capitalized insurance expense) 6,000 (12,000/12 months = 1,000/month x 6) Research facility (construction cost) 5,000,000 Equipment (acquired by acquisition) 1,160,000 Goodwill 163,000 Advertising (promotional) expenses 160,000 Legal expenses 3,000

Research expense 400,000 Deferred development costs (or Development costs) 600,000

Employee recruiting and training expenses 100,000

Intangible assets 7,209,000

Notes payable (acquired by acquisition) 460,000

B. Indicate the balances that should be shown under the following separate headings on the balance sheet as at December 31, 2012: property, plant and equipment; intangible assets and goodwill. ( 7 marks)

Part B - solution

BALANCE SHEET (Partial) Asylum Technologies Inc. December 31, 2012

Fixed Assets, net Equipment 1,160,000Building 4,880,850Leasehold Improvements 9,000 6,049,850Intangible assetsPatent 57,750Deferred Development Costs 600,000 657,750Goodwill 163,000

The following are supporting details:

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Property, Plant and Equipment Equipment 1,160,000 Less: Accumulated depreciation 0 1,160,000

Building (Research facility) 5,006,000 Less: Accumulated depreciation 125,150 4,880,850

Leasehold improvements (carpet) 10,000 Less: Accumulated depreciation 1,000 9,000

Intangible assets Patent 60,000 Less: Accumulated amortization 2,250 57,750Deferred development costs (or Development costs) 600,000 Less: Accumulated amortization 0 600,000

Goodwill 163,000

Current liabilities Notes payable 460,000

Calculations:Amortization expense - Patent.............................................................. Accumulated Amortization - Patent.................................................

2,2502,250

(60,000 20 years legal life) x 9/12 months = 2,250

Depreciation expense – Leasehold Improvements (carpet).................. 1,000 Accumulated depreciation – Leasehold Improvements.................. 1,00010,000 10 years = 1,000

Research expense (Research facility)................................................... 125,150 Accumulated depreciation – Research facility................................ 125,150Acquisition cost = 5,000,000 (construction cost) + 6,000 (capitalized insurance 6 months) . = 5,006,000(5,006,000 20 years) = 250,300 x 6/12 months =125,150

Calculation of Goodwill:Purchase price

863,000Fair value of equipment assets $1,160,000Fair value of liabilities (Notes payable) 460,000

Fair value of net assets 700,000Value assigned to goodwill $163,000

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