MIDTERM EXAMINATION FALL 2015 INTERMEDIATE FINANCIAL ...
Last Name: __________________ First Name: __________________ Student Number: __________________ Section (8:35am/11:35pm/1:05pm): __________________
MIDTERM EXAMINATION FALL 2015 INTERMEDIATE FINANCIAL ACCOUNTING 1 ACCT 351
DATE: October 16, 2015 TIME: 9-11am (2 hours)
INSTRUCTIONS:
This is a CLOSED BOOK examination. Answer all questions on this examination paper. Return all materials. Dictionaries are PERMITTED. Noiseless non-programmable calculators are PERMITTED. This examination consists of 5 questions on 12 pages. Please ensure that you have a complete examination paper before starting.
Question 1
Marks Available 20
2
15
3
28
4
25
5
12
TOTAL:
Mark
100 1
Question 1 (20 marks) Seda & Cecere is a small tutoring company run by two teachers in Montreal. It is operating under IFRS. Recently, the two owners have some arguments regarding several accounting issues. Seda has come to you, her favorite student, to seek for advices. REQUIRED: In each of the situations below, please indicate whether you agree with Seda or Cecere’s accounting treatment by answering “YES” or “NO” in the boxes provided (note they could both be right or both be wrong sometimes). Please also help them identify one qualitative characteristic or one principle/assumption/constraint from the conceptual framework that best applies to the scenario in the box provided. Lastly, provide a brief explanation on your choice on why Seda and Cecere are right or wrong. Situations: a.
Seda noticed several students in her tutorials have been stealing stationaries from the company. The total amount of stolen stationaries was about $60. Cecere feels that the amount is so small that they could just book it under miscellaneous expense and that “kids are kids”, but Seda feels that the incident should at least be mentioned in the notes to the financial statements when they discuss the company’s internal control.
b.
Cecere has bought most of his teaching materials from the U.S. throughout the year to take advantage of the cheaper prices offered by U.S. publishers. For simplicity, he assumed a 1USD=1.2CDN exchange rate to record the purchases despite the exchange rate has changed over the year. Seda insisted they have to record the acquisition costs of the teaching materials at USD, as exchange rate differences should not be reflected in the financial statements.
c.
The company owns a small office on McGill College Ave. to conduct their tutorials. Seda & Cecere bought the property two years ago at an acquisition price of $200,000. At present, a reliable appraisal shows that the market price of the property is valued at $240,000. Cecere believes the gross property account, before depreciation, should only be reported at cost for $200,000, while Seda thinks the account should only reflect the revaluation amount at $240,000 based on the current accounting rules.
d.
Cecere is discussing with MUS, the student society, the possibility of a joint venture in tutoring McGill students. Before any decision is made, the MUS committee members would want to obtain and analyze the financial statements of Seda & Cecere. Given that the MUS committee members are mainly students with preliminary knowledge of accounting and finance, Cecere is considering to prepare the financial statements using a lot of complicated accounting terms and wordings to show them how sophisticated the company is. Seda, on the other hand, believes the financial statements should be prepared in plain and simple language. Cecere disagrees and argues there is nothing wrong with the financial statements because there was no misleading information reported.
2
Agree with Agree Cecere? Seda?
with Best Concept
a.
Explanation:
b.
Explanation:
c.
Explanation:
d.
Explanation:
3
Question 2 (15 marks) Anna Heatherway is a famous actress who primarily appears in feature films and commercials. Her new accountant has come to you, an aspiring accounting student, for help with her accounts for the year-end of 2015. Ignore income tax. REQUIRED: Please help Anna’s new accountant prepare the adjusting/correcting entries on December 31, 2015. Round to the nearest half-month. No explanation is necessary. The following is the information provided in the ledger accounts at the end of 2015 before adjustments: Movies Revenue Book Revenue Assistant Salaries Expense Depreciation of Beverly Hills Mansion Depreciation of Pink Ferrari Lawsuit Gain on Suing Paparazzi Advertising Expense Transportation Expense Interest Income Rental Revenue Other Operating Expense
$8,800,000 1,500,000 200,000 120,000 30,000 40,000 15,000 110,000 98,000 60,000 180,000
Additional information: 1.
2.
3.
4.
5.
Anna has started shooting a new movie, “Internship 2”, for $5 million on October 15, 2015. She is expected to finish shooting this movie on March 15, 2016. She received an upfront payment of $2 million on October 15, 2015 and the remainder after she finishes shooting the movie. Her accountant appropriately recorded the upfront payment on October 15, 2015 but no entry has been recorded at the year-end. Anna’s pink Ferrari had an original cost of $150,000 with useful life of five years and no residual value. She has been using straight-line deprecation method since she bought the car at the beginning of 2014. Given her recent unpopularity with the press, some crazy fans have vandalized her automobile at the beginning of the current year and the revised total useful life has been reduced to four years. The current reported depreciation expense has not reflected this change because the new accountant does not know how to account for this new situation. Because of her negative reputation in recent years, Anna took a chance to turn this into a business opportunity by writing a book titled “I am beautiful and smart and I won an Oscar so why do people hate me?” She released the book on June 30, 2015 with an initial order of 40,000 books at a cost of $10/book. She re-ordered for another shipment of 30,000 books at the same unit cost on September 15, 2015. The book is sold at a retail price of $30/book. The accountant has been using the periodic inventory system with the use of the “purchase” account to keep track of the purchase of inventory throughout the year. No journal entry for cost of goods sold has been recorded at the year-end. Anna’s investments includes 1,000 shares of Prada stock and 1,000 shares of Whole Foods stock. While she loves her fashion, she thinks Prada designed a bad dress for her at her last award ceremony and hence she plans to sell her Prada stock in the very near future as a revenge. On other hand, she is very health-conscious eating only organic produce, hence she intends to hold onto her Whole Foods stock for a long-term as available-for-sale. For the fiscal year of 2015, stock price of Prada has increased by $5 and stock price of Whole Foods has increased by $2. No entry has been recorded at the year-end. Anna leased out a nice NYC apartment to her co-star Randall so she can obtain some support from her costar’s LGBT community. The rental period started on August 15, 2015 for two years and the rent is at $5,000/month. Randall paid Anna a sum of $60,000, which represents the rent of the first year. The new accountant recorded the whole rent payment as rental revenue on August 1, 2015 and no entry has been recorded at the year-end.
4
Adjusting/Correcting Entries Account
Debit
Credit
5
Question 3 (28 marks) Dong Young (DY) Incorporation is a Korean company that sells Kimchi in Canada. It operates under IFRS. Assume a tax rate of 30%. The following is the information provided in the ledger accounts at the year-end of 2015: Sales Revenue Costs of Goods Sold Salaries Expense Amortization of Franchise Depreciation of Store Improvement Rental Expense Advertising Expense Transportation-Out Interest Expense Unrealized Gain on Investment Unrealized Loss on Foreign Currency Translation Adjustment Loss on Fire Other Operating Expense Income Tax Expense
$880,000 0 200,000 20,000 100,000 40,000 5,000 30,000 28,000 11,000 6,000 4,000 70,000 0
The following is additional information regarding DY for the current fiscal year: 1. DY has been using the periodic inventory system to account for COGS. For 2015, the beginning inventory is $200,000. Purchase, purchase discount, and purchase returns have the following balances as of December 31, 2015: $300,000, $8,000, $4,000. Transportation-in amounted to $3,000 for the year. The ending physical inventory count showed $180,000 remained as of December 31, 2015. 2. The company classifies its operating expenses by functions of (1) “administrative expense”, (2) “selling and distribution expense”, (3) “other operating expense”. Salaries expense should be allocated to (1) and (2) at a ratio of 2:3. Depreciation of store improvement and rental expense should be allocated to (1) and (2) at a ratio of 1:3. Franchise fees are deemed to be classified as (3). 3. The $11,000 unrealized gain on investment includes increase in the value of stock options held for speculative purpose of $2,000 and increase in the value of available-for-sale securities of $9,000. 4. Dong Young, the CEO of DY, has decided to dispose of its Soju division on September 15, 2015. According to the accountant, the division is qualified as discontinued operations. As of the end of 2015, the carrying value of Soju division was $200,000. Consulted with a reliable appraiser on December 31, Dong Young expected to sell the division at a price of $150,000. An agreement of sale was finally reached between Dong Young and Derek Wang Ltd. on October 1, 2016 for $173,000. DY continued to operate the division until October 1, 2016. The net profit and (loss) from operations of Soju (not included in information above) were: January 1, 2015 to September 15, 2015: $30,000 September 15, 2015 to December 31, 2015: $13,000 January 1, 2016 to October 1, 2016: $41,000 5. The loss on fire originally happened on July 15, 2015. The fire destroyed a shipment of DY’s Kimchi with a total loss of $4,000. After endless negotiation with the insurance agency, DY finally got a reimbursement of $2,500 on January 18, 2016. The financial statements are authorized to be issued on February 28, 2016. 6. No tax has been assessed for any item so far for the current fiscal year.
6
REQUIRED: Complete the multiple-step (by function of expenses) comprehensive income statement for DY for the fiscal year of 2015 (excluding the EPS section). Dong Young Comprehensive Income Statement For the Year Ended December 31, 2015
7
Dong Young Comprehensive Income Statement (Continued) For the Year Ended December 31, 2015
8
Question 4 (25 marks) Phil is a real estate agent who recently opened his agency, New Modern Family Realty. The following is a balance sheet prepared by Phil for his company. He has asked his bother-in-law, Mitch, a lawyer with some accounting knowledge, to review the financial statements. Assume New Modern Family Realty follows IFRS and no income tax. New Modern Family Realty Balance Sheet At December 31, 2015 Assets Cash & Cash Equivalence Accounts Receivable (net) Short-term Investment Car Office Property, Furniture & Fixture Goodwill Land Total Assets
$20,000 40,000 15,000 30,000 220,000 40,000 100,000 $465,000
Liabilities and Shareholders’ Equity Unearned Rent Revenue Accounts Payable Notes Payable Mortgage Payable Retained Earnings Contributed Capital Total Liabilities & Equity
$12,000 35,000 15,000 250,000 53,000 100,000 $465,000
Additional information: 1. Cash & cash equivalence includes $3,000 investment in 30-day Canada Treasury Bond and $2,000 in 30-day Greece Government Bond. 2. Short-term investment includes $8,000 investment in Google stock and $7,000 investment in CN 10-year bonds. The intention is to hold the Google stock for speculative purpose and to sell it in the near future. The CN investment is to be held as available-for-sale in the medium-term. As of the balance sheet date, the market value of Google stock is $9,100 and the market value of CN 10-year bond is at $6,300. 3. Net accounts receivable includes a $10,000 notes receivable from a customer due in two years, and a credit balance of allowance for doubtful accounts for $5,000. 4. The car account has original useful life of 10 years and no residual value. The company bought the car at the beginning of 2013 and has been using the cost model and straightline depreciation method to account for the car. At the beginning of the current fiscal year of 2015, there is a change in estimate and it is determined the remaining useful life be adjusted to 4 years because of its increasing wear and tear. The reported value of $30,000 is the amount after recording the new depreciation expense for the current year. 5. Office property, furniture & fixture includes the office that Phil uses to meet with his clients, and all furniture & fixture that are in the office. The property was purchased for $180,000 and the furniture & fixture were purchased for $40,000 at the beginning of the current fiscal year. The company decided to use the cost model to account for this account. At the end of the year, the remaining useful lives for the property and the furniture & fixture are 19 years and 4 years respectively. The residual values of the property and the furniture & fixture are estimated at $80,000 and $10,000 respectively. No adjusting entry for depreciation has been recorded so far for the current fiscal year. 6. Goodwill represents the value of reputation for Phil’s company. The amount is internally generated by Clare, Phil’s wife, as she thinks Phil has been doing a great job and his clients treasure him very much. The increase in goodwill is balanced by an increase in contributed capital. 7. The company bought the land at the beginning of 2012 for $100,000. The company decided to use the revaluation model to account for land. At the end of 2015, after four 9
years, the appraiser estimates the fair value of the land at $138,000 and the estimate is deemed to be reliable. 8. Unearned rent revenue represents a small part of office that Phil sublet to his babysitter, Andy. Andy paid $12,000 in advance at the contract date of August 1, 2015 and the amount covered a lease term of 12 months. No adjusting entry has been recorded so far at the year-end. 9. The notes payable consists of (1) a $2,000 note due on February 1, 2016, (2) a $3,000 note due on July 1, 2016, (3) a $10,000 note due on February 1, 2017. Additionally, there was unrecorded accrued interest associated with these notes at the amount of $1,000 as of December 31, 2015. The whole amount of mortgage payable was long-term.
REQUIRED: Assume the role of Mitch, and prepare a corrected, classified balance sheet for New Modern Family Realty as of December 31, 2015.
New Modern Family Realty Statement of Financial Position As of December 31, 2015
10
New Modern Family Realty Statement of Financial Position (Continued) As of December 31, 2015
11
Question 5 (12 marks) The following information is for Mariah Ltd., which sells concert season tickets on an installment basis: 2013 2014 2015 Sales (on installment plan) Cost of Sales Gross Profit Collections from customers on: 2013 installment sales 2014 installment sales 2015 installment sales
$1,080,000 733,000 $347,000
$1,010,000 890,000 $120,000
$900,000 448,000 $452,000
$525,000
$300,000 600,000
$255,000 312,000 330,000
REQUIRED: Prepare all journal entries that are required in 2015 under the cost recovery method of accounting. No explanation is necessary. Date
Account Name
Debit
Credit
********* END OF MIDTERM **********
12
Question 1
a.
Agree with Agree Cecere? Seda? No Yes
with Best Characteristic/Concept/Principle Relevance (materiality) Or Reliability (free from error or omission)
Explanation: Agree with Seda because despite the amount is immaterial, one should consider the qualitative factor on whether this issue would affect the decision making of financial statement users. The stealing could possibly indicate deficiency in the firm’s internal control, and hence it would affect the relevance of the financial reporting. At the same time, even the amount was reported as miscellaneous expense, the statement is not free from omission because such incident should have been disclosed. b.
No
No
Capital Maintenance (Monetary Unit Assumption)
Explanation: Both are wrong in this case, as Cecere should not just use an ad-hoc exchange to translate the firm’s foreign transactions. By monetary unit assumption, Seda is also incorrect for reporting the transactions in USD when the company is in Montreal operating under IFRS. c.
No
No
Historical Cost Principle Or Fair Value
Explanation: Both are wrong in this case, as IFRS allows an option of adopting cost or revaluation model. Firm would have a choice but after they decide on the adoption they would most likely have to follow the same model. By historical cost principle firms have the merit of choosing the cost model since it preserves the cost of the assets. By fair value principle, firms can argue it makes better sense to reflect the current market value of the assets. Students can, however, say both are correct with good justification it is an option between the two methods. d. No Yes Understandability Explanation: Cecere is incorrect because his actions are inconsistent with the concept of understandability. Financial statements have to be understandable to their intended users.
Question 2 Unearned Revenue A/R Movie Revenue Depreciation Expense – Car Accumulated Depr. - Car COGS Inventory Purchase Investment in Prada Investment in Whole Foods (AFS) Unrealized Gains in Prada Unrealized Gains in WF (OCI) Rent Revenue Unearned Rent Revenue
2,000,000 500,000 2,500,000 10,000 10,000 500,000 200,000 700,000 5,000 2,000 5,000 2,000 37,500 37,500 13
Question 3 DY Comprehensive Income Statement For the Year Ended December 31, 2015
marks
Sales Revenue
$880,000
COGS
311,000
3
Gross Profit
569,000
1
(115,000)
3
(260,000)
3
Other Operating Expenses
(90,000)
1
Operating Income Interest expense
104,000
1
Administrative Expenses Salaries Expense
80,000
Depreciation Expense
25,000
Rental Expense
10,000
S&D Expenses Salaries Expense
120,000
Depreciation Expense
75,000
Rental Expense
30,000
Advertising Expense Transportation-Out
Unrealized Gains on stock option Loss on Fire
5,000 30,000
(28,000) 2,000 (1,500)
Income from continuing operations (before tax) Income Tax Expense Income from continuing operations
1 (27,500)
2
76,500
1
(22,950)
1
53,550
1
Discontinued Operations Income from Operations (net of tax) Impairment Loss (net of tax)
30,100
2
(35,000)
2
Income from DO
(4,900)
Net Income
48,650
1
6,300
2
(4,200)
2
50,750
1
OCI Unrealized Gains on AFS (net of tax) Unrealized Loss on Foreign Currency Translation (net of tax) Total Comprehensive Income
14
Question 4 New Modern Family Realty Balance Sheet As of December 31, 2015
marks
Assets Current Assets Cash
$18,000
2
17,400
2
30,000
2
$65,400
1
10,000
1
30,000
2
175,000
1
34,000
1
Land
138,000
1
Total Assets
452,400
Short-term investment Accounts receivables Less: Allowance for doubtful accounts
35,000 5,000
Total current assets
Noncurrent Assets Notes receivable Car Accumulated depreciation Office Property Accumulated depreciation Furniture & fixture Accumulated depreciation
50,000 20,000 180,000 5,000 40,000 6,000
15
Liabilities & Shareholders’ Equity Current Liabilities
marks
Unearned revenue
$7,000
Accounts Payable
35,000
1
Notes payable (current portion)
5,000
1
Interest payable
1,000
1
$48,000
1
10,000
1
Total current liabilities Long Term Liabilities Notes payable Mortgage payable
250,000
Total Liabilities
$308,000
Shareholders’ Equity Contributed capital Retained earnings (53,000+1,10011,000+5,000-1,000) Accumulated other comprehensive income (38,000-700) Total shareholders’ equity Total liabilities and shareholders’ equity
$60,000
1
47,100
3
37,300
2 144,400
1
$452,400
16
Question 5
2013
2014
$0
92,000
2015
Cost Recovery Method Gross profit from 2013 sales Gross profit from 2014 sales
255,000 22,000 277,000
Cash .................................................................................................... 330,000 Instalment Accounts Receivable—2015 …. ............................. 570,000 Instalment Sales...........................................................................
900,000
Cost of Instalment Sales ........................................................................ 448,000 Inventory ......................................................................................
448,000
Cash
.................................................................................................... 567,000 Instalment Accounts Receivable—2013 ..................................... Instalment Accounts Receivable—2014 .....................................
Deferred Gross Profit (income statement) ........................................... Deferred Gross Profit on Instalment Sales (balance sheet)—2015....................................................
255,000 312,000
452,000
Deferred Gross Profit on Instalment Sales (Balance sheet) —2013 .............................................................. 255,000 Deferred Gross Profit on Instalment Sales (Balance sheet) —2014.............................................................. 22,000 Realized Gross Profit on Prior Years' Sales .......................................................................................... 2 marks each first 3 entries, 3 marks each last two entries
452,000
277,000
17
MIDTERM EXAMINATION FALL 2015 INTERMEDIATE FINANCIAL ACCOUNTING 1 ACCT 351
DATE: October 16, 2015 TIME: 9-11am (2 hours)
INSTRUCTIONS:
This is a CLOSED BOOK examination. Answer all questions on this examination paper. Return all materials. Dictionaries are PERMITTED. Noiseless non-programmable calculators are PERMITTED. This examination consists of 5 questions on 12 pages. Please ensure that you have a complete examination paper before starting.
Question 1
Marks Available 20
2
15
3
28
4
25
5
12
TOTAL:
Mark
100 1
Question 1 (20 marks) Seda & Cecere is a small tutoring company run by two teachers in Montreal. It is operating under IFRS. Recently, the two owners have some arguments regarding several accounting issues. Seda has come to you, her favorite student, to seek for advices. REQUIRED: In each of the situations below, please indicate whether you agree with Seda or Cecere’s accounting treatment by answering “YES” or “NO” in the boxes provided (note they could both be right or both be wrong sometimes). Please also help them identify one qualitative characteristic or one principle/assumption/constraint from the conceptual framework that best applies to the scenario in the box provided. Lastly, provide a brief explanation on your choice on why Seda and Cecere are right or wrong. Situations: a.
Seda noticed several students in her tutorials have been stealing stationaries from the company. The total amount of stolen stationaries was about $60. Cecere feels that the amount is so small that they could just book it under miscellaneous expense and that “kids are kids”, but Seda feels that the incident should at least be mentioned in the notes to the financial statements when they discuss the company’s internal control.
b.
Cecere has bought most of his teaching materials from the U.S. throughout the year to take advantage of the cheaper prices offered by U.S. publishers. For simplicity, he assumed a 1USD=1.2CDN exchange rate to record the purchases despite the exchange rate has changed over the year. Seda insisted they have to record the acquisition costs of the teaching materials at USD, as exchange rate differences should not be reflected in the financial statements.
c.
The company owns a small office on McGill College Ave. to conduct their tutorials. Seda & Cecere bought the property two years ago at an acquisition price of $200,000. At present, a reliable appraisal shows that the market price of the property is valued at $240,000. Cecere believes the gross property account, before depreciation, should only be reported at cost for $200,000, while Seda thinks the account should only reflect the revaluation amount at $240,000 based on the current accounting rules.
d.
Cecere is discussing with MUS, the student society, the possibility of a joint venture in tutoring McGill students. Before any decision is made, the MUS committee members would want to obtain and analyze the financial statements of Seda & Cecere. Given that the MUS committee members are mainly students with preliminary knowledge of accounting and finance, Cecere is considering to prepare the financial statements using a lot of complicated accounting terms and wordings to show them how sophisticated the company is. Seda, on the other hand, believes the financial statements should be prepared in plain and simple language. Cecere disagrees and argues there is nothing wrong with the financial statements because there was no misleading information reported.
2
Agree with Agree Cecere? Seda?
with Best Concept
a.
Explanation:
b.
Explanation:
c.
Explanation:
d.
Explanation:
3
Question 2 (15 marks) Anna Heatherway is a famous actress who primarily appears in feature films and commercials. Her new accountant has come to you, an aspiring accounting student, for help with her accounts for the year-end of 2015. Ignore income tax. REQUIRED: Please help Anna’s new accountant prepare the adjusting/correcting entries on December 31, 2015. Round to the nearest half-month. No explanation is necessary. The following is the information provided in the ledger accounts at the end of 2015 before adjustments: Movies Revenue Book Revenue Assistant Salaries Expense Depreciation of Beverly Hills Mansion Depreciation of Pink Ferrari Lawsuit Gain on Suing Paparazzi Advertising Expense Transportation Expense Interest Income Rental Revenue Other Operating Expense
$8,800,000 1,500,000 200,000 120,000 30,000 40,000 15,000 110,000 98,000 60,000 180,000
Additional information: 1.
2.
3.
4.
5.
Anna has started shooting a new movie, “Internship 2”, for $5 million on October 15, 2015. She is expected to finish shooting this movie on March 15, 2016. She received an upfront payment of $2 million on October 15, 2015 and the remainder after she finishes shooting the movie. Her accountant appropriately recorded the upfront payment on October 15, 2015 but no entry has been recorded at the year-end. Anna’s pink Ferrari had an original cost of $150,000 with useful life of five years and no residual value. She has been using straight-line deprecation method since she bought the car at the beginning of 2014. Given her recent unpopularity with the press, some crazy fans have vandalized her automobile at the beginning of the current year and the revised total useful life has been reduced to four years. The current reported depreciation expense has not reflected this change because the new accountant does not know how to account for this new situation. Because of her negative reputation in recent years, Anna took a chance to turn this into a business opportunity by writing a book titled “I am beautiful and smart and I won an Oscar so why do people hate me?” She released the book on June 30, 2015 with an initial order of 40,000 books at a cost of $10/book. She re-ordered for another shipment of 30,000 books at the same unit cost on September 15, 2015. The book is sold at a retail price of $30/book. The accountant has been using the periodic inventory system with the use of the “purchase” account to keep track of the purchase of inventory throughout the year. No journal entry for cost of goods sold has been recorded at the year-end. Anna’s investments includes 1,000 shares of Prada stock and 1,000 shares of Whole Foods stock. While she loves her fashion, she thinks Prada designed a bad dress for her at her last award ceremony and hence she plans to sell her Prada stock in the very near future as a revenge. On other hand, she is very health-conscious eating only organic produce, hence she intends to hold onto her Whole Foods stock for a long-term as available-for-sale. For the fiscal year of 2015, stock price of Prada has increased by $5 and stock price of Whole Foods has increased by $2. No entry has been recorded at the year-end. Anna leased out a nice NYC apartment to her co-star Randall so she can obtain some support from her costar’s LGBT community. The rental period started on August 15, 2015 for two years and the rent is at $5,000/month. Randall paid Anna a sum of $60,000, which represents the rent of the first year. The new accountant recorded the whole rent payment as rental revenue on August 1, 2015 and no entry has been recorded at the year-end.
4
Adjusting/Correcting Entries Account
Debit
Credit
5
Question 3 (28 marks) Dong Young (DY) Incorporation is a Korean company that sells Kimchi in Canada. It operates under IFRS. Assume a tax rate of 30%. The following is the information provided in the ledger accounts at the year-end of 2015: Sales Revenue Costs of Goods Sold Salaries Expense Amortization of Franchise Depreciation of Store Improvement Rental Expense Advertising Expense Transportation-Out Interest Expense Unrealized Gain on Investment Unrealized Loss on Foreign Currency Translation Adjustment Loss on Fire Other Operating Expense Income Tax Expense
$880,000 0 200,000 20,000 100,000 40,000 5,000 30,000 28,000 11,000 6,000 4,000 70,000 0
The following is additional information regarding DY for the current fiscal year: 1. DY has been using the periodic inventory system to account for COGS. For 2015, the beginning inventory is $200,000. Purchase, purchase discount, and purchase returns have the following balances as of December 31, 2015: $300,000, $8,000, $4,000. Transportation-in amounted to $3,000 for the year. The ending physical inventory count showed $180,000 remained as of December 31, 2015. 2. The company classifies its operating expenses by functions of (1) “administrative expense”, (2) “selling and distribution expense”, (3) “other operating expense”. Salaries expense should be allocated to (1) and (2) at a ratio of 2:3. Depreciation of store improvement and rental expense should be allocated to (1) and (2) at a ratio of 1:3. Franchise fees are deemed to be classified as (3). 3. The $11,000 unrealized gain on investment includes increase in the value of stock options held for speculative purpose of $2,000 and increase in the value of available-for-sale securities of $9,000. 4. Dong Young, the CEO of DY, has decided to dispose of its Soju division on September 15, 2015. According to the accountant, the division is qualified as discontinued operations. As of the end of 2015, the carrying value of Soju division was $200,000. Consulted with a reliable appraiser on December 31, Dong Young expected to sell the division at a price of $150,000. An agreement of sale was finally reached between Dong Young and Derek Wang Ltd. on October 1, 2016 for $173,000. DY continued to operate the division until October 1, 2016. The net profit and (loss) from operations of Soju (not included in information above) were: January 1, 2015 to September 15, 2015: $30,000 September 15, 2015 to December 31, 2015: $13,000 January 1, 2016 to October 1, 2016: $41,000 5. The loss on fire originally happened on July 15, 2015. The fire destroyed a shipment of DY’s Kimchi with a total loss of $4,000. After endless negotiation with the insurance agency, DY finally got a reimbursement of $2,500 on January 18, 2016. The financial statements are authorized to be issued on February 28, 2016. 6. No tax has been assessed for any item so far for the current fiscal year.
6
REQUIRED: Complete the multiple-step (by function of expenses) comprehensive income statement for DY for the fiscal year of 2015 (excluding the EPS section). Dong Young Comprehensive Income Statement For the Year Ended December 31, 2015
7
Dong Young Comprehensive Income Statement (Continued) For the Year Ended December 31, 2015
8
Question 4 (25 marks) Phil is a real estate agent who recently opened his agency, New Modern Family Realty. The following is a balance sheet prepared by Phil for his company. He has asked his bother-in-law, Mitch, a lawyer with some accounting knowledge, to review the financial statements. Assume New Modern Family Realty follows IFRS and no income tax. New Modern Family Realty Balance Sheet At December 31, 2015 Assets Cash & Cash Equivalence Accounts Receivable (net) Short-term Investment Car Office Property, Furniture & Fixture Goodwill Land Total Assets
$20,000 40,000 15,000 30,000 220,000 40,000 100,000 $465,000
Liabilities and Shareholders’ Equity Unearned Rent Revenue Accounts Payable Notes Payable Mortgage Payable Retained Earnings Contributed Capital Total Liabilities & Equity
$12,000 35,000 15,000 250,000 53,000 100,000 $465,000
Additional information: 1. Cash & cash equivalence includes $3,000 investment in 30-day Canada Treasury Bond and $2,000 in 30-day Greece Government Bond. 2. Short-term investment includes $8,000 investment in Google stock and $7,000 investment in CN 10-year bonds. The intention is to hold the Google stock for speculative purpose and to sell it in the near future. The CN investment is to be held as available-for-sale in the medium-term. As of the balance sheet date, the market value of Google stock is $9,100 and the market value of CN 10-year bond is at $6,300. 3. Net accounts receivable includes a $10,000 notes receivable from a customer due in two years, and a credit balance of allowance for doubtful accounts for $5,000. 4. The car account has original useful life of 10 years and no residual value. The company bought the car at the beginning of 2013 and has been using the cost model and straightline depreciation method to account for the car. At the beginning of the current fiscal year of 2015, there is a change in estimate and it is determined the remaining useful life be adjusted to 4 years because of its increasing wear and tear. The reported value of $30,000 is the amount after recording the new depreciation expense for the current year. 5. Office property, furniture & fixture includes the office that Phil uses to meet with his clients, and all furniture & fixture that are in the office. The property was purchased for $180,000 and the furniture & fixture were purchased for $40,000 at the beginning of the current fiscal year. The company decided to use the cost model to account for this account. At the end of the year, the remaining useful lives for the property and the furniture & fixture are 19 years and 4 years respectively. The residual values of the property and the furniture & fixture are estimated at $80,000 and $10,000 respectively. No adjusting entry for depreciation has been recorded so far for the current fiscal year. 6. Goodwill represents the value of reputation for Phil’s company. The amount is internally generated by Clare, Phil’s wife, as she thinks Phil has been doing a great job and his clients treasure him very much. The increase in goodwill is balanced by an increase in contributed capital. 7. The company bought the land at the beginning of 2012 for $100,000. The company decided to use the revaluation model to account for land. At the end of 2015, after four 9
years, the appraiser estimates the fair value of the land at $138,000 and the estimate is deemed to be reliable. 8. Unearned rent revenue represents a small part of office that Phil sublet to his babysitter, Andy. Andy paid $12,000 in advance at the contract date of August 1, 2015 and the amount covered a lease term of 12 months. No adjusting entry has been recorded so far at the year-end. 9. The notes payable consists of (1) a $2,000 note due on February 1, 2016, (2) a $3,000 note due on July 1, 2016, (3) a $10,000 note due on February 1, 2017. Additionally, there was unrecorded accrued interest associated with these notes at the amount of $1,000 as of December 31, 2015. The whole amount of mortgage payable was long-term.
REQUIRED: Assume the role of Mitch, and prepare a corrected, classified balance sheet for New Modern Family Realty as of December 31, 2015.
New Modern Family Realty Statement of Financial Position As of December 31, 2015
10
New Modern Family Realty Statement of Financial Position (Continued) As of December 31, 2015
11
Question 5 (12 marks) The following information is for Mariah Ltd., which sells concert season tickets on an installment basis: 2013 2014 2015 Sales (on installment plan) Cost of Sales Gross Profit Collections from customers on: 2013 installment sales 2014 installment sales 2015 installment sales
$1,080,000 733,000 $347,000
$1,010,000 890,000 $120,000
$900,000 448,000 $452,000
$525,000
$300,000 600,000
$255,000 312,000 330,000
REQUIRED: Prepare all journal entries that are required in 2015 under the cost recovery method of accounting. No explanation is necessary. Date
Account Name
Debit
Credit
********* END OF MIDTERM **********
12
Question 1
a.
Agree with Agree Cecere? Seda? No Yes
with Best Characteristic/Concept/Principle Relevance (materiality) Or Reliability (free from error or omission)
Explanation: Agree with Seda because despite the amount is immaterial, one should consider the qualitative factor on whether this issue would affect the decision making of financial statement users. The stealing could possibly indicate deficiency in the firm’s internal control, and hence it would affect the relevance of the financial reporting. At the same time, even the amount was reported as miscellaneous expense, the statement is not free from omission because such incident should have been disclosed. b.
No
No
Capital Maintenance (Monetary Unit Assumption)
Explanation: Both are wrong in this case, as Cecere should not just use an ad-hoc exchange to translate the firm’s foreign transactions. By monetary unit assumption, Seda is also incorrect for reporting the transactions in USD when the company is in Montreal operating under IFRS. c.
No
No
Historical Cost Principle Or Fair Value
Explanation: Both are wrong in this case, as IFRS allows an option of adopting cost or revaluation model. Firm would have a choice but after they decide on the adoption they would most likely have to follow the same model. By historical cost principle firms have the merit of choosing the cost model since it preserves the cost of the assets. By fair value principle, firms can argue it makes better sense to reflect the current market value of the assets. Students can, however, say both are correct with good justification it is an option between the two methods. d. No Yes Understandability Explanation: Cecere is incorrect because his actions are inconsistent with the concept of understandability. Financial statements have to be understandable to their intended users.
Question 2 Unearned Revenue A/R Movie Revenue Depreciation Expense – Car Accumulated Depr. - Car COGS Inventory Purchase Investment in Prada Investment in Whole Foods (AFS) Unrealized Gains in Prada Unrealized Gains in WF (OCI) Rent Revenue Unearned Rent Revenue
2,000,000 500,000 2,500,000 10,000 10,000 500,000 200,000 700,000 5,000 2,000 5,000 2,000 37,500 37,500 13
Question 3 DY Comprehensive Income Statement For the Year Ended December 31, 2015
marks
Sales Revenue
$880,000
COGS
311,000
3
Gross Profit
569,000
1
(115,000)
3
(260,000)
3
Other Operating Expenses
(90,000)
1
Operating Income Interest expense
104,000
1
Administrative Expenses Salaries Expense
80,000
Depreciation Expense
25,000
Rental Expense
10,000
S&D Expenses Salaries Expense
120,000
Depreciation Expense
75,000
Rental Expense
30,000
Advertising Expense Transportation-Out
Unrealized Gains on stock option Loss on Fire
5,000 30,000
(28,000) 2,000 (1,500)
Income from continuing operations (before tax) Income Tax Expense Income from continuing operations
1 (27,500)
2
76,500
1
(22,950)
1
53,550
1
Discontinued Operations Income from Operations (net of tax) Impairment Loss (net of tax)
30,100
2
(35,000)
2
Income from DO
(4,900)
Net Income
48,650
1
6,300
2
(4,200)
2
50,750
1
OCI Unrealized Gains on AFS (net of tax) Unrealized Loss on Foreign Currency Translation (net of tax) Total Comprehensive Income
14
Question 4 New Modern Family Realty Balance Sheet As of December 31, 2015
marks
Assets Current Assets Cash
$18,000
2
17,400
2
30,000
2
$65,400
1
10,000
1
30,000
2
175,000
1
34,000
1
Land
138,000
1
Total Assets
452,400
Short-term investment Accounts receivables Less: Allowance for doubtful accounts
35,000 5,000
Total current assets
Noncurrent Assets Notes receivable Car Accumulated depreciation Office Property Accumulated depreciation Furniture & fixture Accumulated depreciation
50,000 20,000 180,000 5,000 40,000 6,000
15
Liabilities & Shareholders’ Equity Current Liabilities
marks
Unearned revenue
$7,000
Accounts Payable
35,000
1
Notes payable (current portion)
5,000
1
Interest payable
1,000
1
$48,000
1
10,000
1
Total current liabilities Long Term Liabilities Notes payable Mortgage payable
250,000
Total Liabilities
$308,000
Shareholders’ Equity Contributed capital Retained earnings (53,000+1,10011,000+5,000-1,000) Accumulated other comprehensive income (38,000-700) Total shareholders’ equity Total liabilities and shareholders’ equity
$60,000
1
47,100
3
37,300
2 144,400
1
$452,400
16
Question 5
2013
2014
$0
92,000
2015
Cost Recovery Method Gross profit from 2013 sales Gross profit from 2014 sales
255,000 22,000 277,000
Cash .................................................................................................... 330,000 Instalment Accounts Receivable—2015 …. ............................. 570,000 Instalment Sales...........................................................................
900,000
Cost of Instalment Sales ........................................................................ 448,000 Inventory ......................................................................................
448,000
Cash
.................................................................................................... 567,000 Instalment Accounts Receivable—2013 ..................................... Instalment Accounts Receivable—2014 .....................................
Deferred Gross Profit (income statement) ........................................... Deferred Gross Profit on Instalment Sales (balance sheet)—2015....................................................
255,000 312,000
452,000
Deferred Gross Profit on Instalment Sales (Balance sheet) —2013 .............................................................. 255,000 Deferred Gross Profit on Instalment Sales (Balance sheet) —2014.............................................................. 22,000 Realized Gross Profit on Prior Years' Sales .......................................................................................... 2 marks each first 3 entries, 3 marks each last two entries
452,000
277,000
17
