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Mid-Term Exam (2013 Fall, Section A1).docx

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University of Alberta
Jason Lee

UNIVERSITY OFALBERTA SCHOOL OF BUSINESS DEPARTMENT OFAOIS ACCOUNTING 415 – MID-TERM EXAM SECTIONA1 Instructor: Jason Lee October 28, 2013 Student Name: I.D. Number: ************************************************************************************ THIS EXAM CONSISTS OF 4 QUESTIONS ON PAGES 2 TO 12. PLEASE CHECK THATYOU HAVEACOMPLETE EXAM. ************************************************************************************ INSTRUCTIONS and FORMULAS: 1. This is a closed-book exam – only pens/pencils and calculators are permitted. 2. Be sure to state any assumptions that you find necessary and show all calculations. 3. Answer each question in the space provided. 4. You have 80 minutes to complete the exam. 5. The present value formulas are provided on the next page. 1 Present Value Formulas Annual Compounding Semi-annual Compounding Lump Sum: 1 n 1 2n (1+i) 1+ i ( )2 Periodic Payments: 1 1− 1 1 1− 1 i{ (1+i)} ( ) i 2n 2 { }( )(2 where i = annual interest rate n = number of years until maturity MARKALLOCATION: Maximum marks Marks awarded Question 1 20 Question 2 24 Question 3 20 Question 4 16 TOTAL 80 2 Question 1 (20 marks) This question consists of two independent parts I and II below. Part I Verlander Ltd. manufactures and sells industrial equipment. On January 1, 2013, the company sold 1,000 units for $16,000 per unit. Verlander Ltd. provides a 2-year parts and labor warranty on each unit sold. The estimated cost of each warranty is $800 whereas a comparable 2-year warranty can be purchased from a third party for $1,200. The company expects that 60% of warranty claims will be made in the first year (i.e., within one year after the sale) and the remaining 40% in the second year. In 2013, Verlander Ltd. incurred actual warranty costs of $350,000 for the 1,000 units sold on January 1, 2013: $210,000 for parts and $140,000 for labor. The company's fiscal year ends on December 31. Required: Assuming that Verlander Ltd. uses the expense approach, prepare all the journal entries required for 2013 for all revenue and warranty transactions. Make sure that you indicate the appropriate date for each journal entry. (7 marks) 3 Part II Scherzer Corp. is a TSX-listed firm. It issued $5 million of 6-year, 8% bonds on January 1, 2013, which are due on December 31, 2018. Interest is payable annually at December 31. The bonds were sold to yield 9% effective annual interest. The bonds are callable at 101. The company's fiscal year ends on December 31. Required: (Note that the required includes sub-partsA, B, C, and D below.) Notes: 1. Round to the nearest dollar, where applicable. 2. Show all supporting calculations. A. Prepare the journal entry/entries for the bonds issued on January 1, 2013. (5 marks) B. Complete the following amortization schedule for the indicated dates: (3 marks) Premium/Discount Carrying Value Date Cash Paid Effective Interest Amortized of Bonds Jan. 1, 2013 Dec. 31, 2013 Dec. 31, 2014 4 C. Prepare the journal entry/entries for the bonds on December 31, 2014. (2 marks) D. On January 1, 2015, Scherzer Corp. retires all the bonds at the call price. Prepare the journal entry/entries for the early retirement of the bonds. Ignore interest accrued since December 31, 2014. (3 marks) 5 Question 2 (24 marks) Cabrera Enterprises has two classes of shares outstanding: preferred and common. Both classes of shares are listed on the TSX. On December 31, 2012, the firm reported the following shareholders' equity: Preferred shares, $2.00, cumulative, non-participating, callable at $26; $2,200,000 100,000 shares outstanding Common shares, 800,000 shares outstanding 6,400,000 Contributed surplus (i.e., contributed capital) – preferred shares 450,000 Contributed surplus (i.e., contributed capital) – common shares 200,000 Retained earnings 5,000,000 The firm did not pay the preferred dividends for the last two years (i.e., 2011 and 2012). During 2013, the company had the following transactions: Jan. 30 Declared and distributed $1,120,000 in dividends. Feb. 10 Redeemed 10,000 preferred shares at the call price. Apr. 28 Repurchased and retired 80,000 common shares at $12 per share. May 15 Cabrera Enterprises had 720,000 common shares outstanding. Declared and distributed a 10% stock dividend on common shares. The common shares were trading at $11 per share. Jun. 20 Issued 40,000 preferred shares and 100,000 common shares in exchange for a building appraised at $2,800,000. The preferred shares were trading at $25 per share and the common shares were trading at $15 per share. Aug. 1 Sold 400,000 common shares for $14 per share on a subscription basis. The first instalment was 40% of the subscription price, payable on August 1. The second instalment was 60% of the subscription price, payable on September 1. Sep. 1 90% of subscribers paid the second instalment. However, 10% of the subscribers defaulted. The first instalment paid by these investors onAugust 1 was forfeited. Nov. 30 Implemented a 2-for-1 stock split on common shares. Required: Prepare the journal entries for the 2013 transactions. If a transaction/event does not require any journal entry,
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