YORK UNIVERSITY Name _____________,_________________
SCHOOL OF ADMINISTRATIVE STUDIES (Last) (First)
Professor Sung Kwon (Section B)
Ms. Shaweta Roopra (Section A)
ADMS 3595 I.D. # ______________________________
Intermediate Financial Accounting II
EXAM I, Fall 2013 Section ______________________________
Type Points Available Points Earned
I. Multiple Choice 30 @ 2 = 60 _____________
II. Asset Retirement Obligation 13 _____________
III. Bonds Payable 13 _____________
IV. Deferred Income Taxes 14 _____________
1. Check exam carefully to be sure you have all thirteen pages.
2. When you are instructed to begin the exam, put your name and student I.D. number on this
cover sheet and indicate your section number.
3. You have 120 minutes to complete the exam.
4. Please fill in a scantron form with a pencil only.
5. Show your calculations and work to support your answers for problem questions.
6. Write in pen or pencil neatly because if we cannot understand what you have written, we
cannot give you marks.
7. The exam is closed-book, and you can use only nonprogrammable calculators (i.e., no
laptop/pocket computers are allowed) into the exam room.
8. The use of a financial calculator is required.
9. When the end of the exam is announced, stop writing and turn your exam over immediately.
10. The use of your cellular phone during the exam is prohibited and must be turned off . I. Multiple Choices Questions: (30 @ 2 points). Circle the best answer and copy it to your
SCANTRON form. Only your answers on the SCANTRON form will be graded.
1. Which of the following statements is NOT true about recognition and subsequent
accounting for financial liabilities?
a. They are initially recognized at their fair value.
b. After acquisition, they continue to be accounted for at fair value.
c. After acquisition, they are generally accounted for at amortized cost.
d. Short term liabilities, such as accounts payable, are usually recorded at their maturity
2. Regarding zero-interest-bearing notes,
a. they do not have an interest component.
b. the debtor receives the future value of the note and pays back the present value.
c. any interest is never recognized until the note is repaid.
d. the debtor receives the present value of the note and pays back the future value.
3. Under IFRS, even if the entity plans to refinance long term debt, the current portion must
be reported as a current liability UNLESS
a. long term financing has been completed after the statement of financial position date,
but before the financial statements are released.
b. management intends to refinance the debt on a long-term basis.
c. at statement of financial position date, the entity expects to refinance it or roll it over
under an existing agreement for at least a year, and the decision is solely at its
d. management intends to discharge the debt by issuing shares.
4. Regarding Provincial Sales Tax (PST)
a. the purchaser includes any PST paid in the cost of the goods or services.
b. all PST paid is recorded in a “PST Expense” account.
c. all PST paid is recorded in a “PST Recoverable” account.
d. for statement of financial position presentation, a PST registrant “nets” any PST paid
against any PST collected from customers.
5. A liability for compensated absences such as vacations, for which it is expected that
employees will be paid, should
a. be accrued during the period when the compensated time is expected to be used by
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.
6. Which of the following statements is INCORRECT regarding the recording of the related
increase or accretion in the carrying amount of an asset retirement obligation (ARO)?
a. Under ASPE, it is recognized as interest expense.
b. Under ASPE, it is recognized as an operating expense (but not as interest expense).
c. Under IFRS, it is recognized as a borrowing cost.
d. The amount should be calculated using the same discount (interest rate) as was used
to calculate the initial present value of the ARO.
7. On December 31, 2014, Street Ltd. has $2,000,000 in short-term notes payable due on
2 February 14, 2015. On January 10, 2015, Street arranged a line of credit with Regal Bank,
which allows Street to borrow up to $1,500,000 at 1% above the prime rate for three
years. On February 2, 2015, Street borrowed $1,200,000 from Regal Bank and used
$500,000 additional cash to liquidate $1,700,000 of the short-term notes payable.
Assuming Street adheres to IFRS, the amount of the short-term notes payable that should
be reported as current liabilities on Street’s December 31, 2014 statement of financial
position (to be issued on March 5, 2015) is
8. In 2014, Hydrogen Corp. began selling a new line of products that carry a two-year
warranty against defects. Based upon past experience with other products, the estimated
warranty costs related to dollar sales are as follows:
First year of warranty 4%
Second year of warranty 5%
Sales and actual warranty expenditures for 2014 and 2015 are presented below:
Sales $450,000 $600,000
Actual warranty expenditures 15,000 30,000
Hydrogen uses the expense approach to account for warranties. What is the estimated
warranty liability at the end of 2015?
b. $ 3,500
9. Potassium Corp. uses the revenue approach to account for warranties. During 2014, the
company sold $500,000 worth of products, all of which carried a two year warranty
(included in the price). It was estimated that 2% of the selling price represented the
warranty portion, and that 40% of this related to 2014, and 60% to 2015. Assuming that
Potassium incurred costs of $3,700 to service the warranties in 2015, what is the net
warranty revenue (revenue minus warranty costs) for 2015?
10. Presented below is information available for Radon Corp.:
Total current assets..............$560,000
Total current liabilities are $100,000. To two decimals, Radon’s acid-test ratio is
3 11. If bonds are initially sold at a premium and the straight-line method of amortization is
used, interest expense in the earlier years will be
a. higher than it would have been had the effective interest method of amortization been
b. less than it would have been had the effective interest method of amortization been
c. the same as it would have been had the effective interest method of amortization been
d. less than the stated rate of interest.
12. A ten-year bond was issued in 2014 at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date in 2016, the carrying
value of the bond was less than the call price. The amount of bond liability removed from
the accounts in 2016 would be the
a. call price.
b. maturity value.
c. carrying value.
d. face amount plus unamortized discount.
13. If a debt refunding is viewed as a modification or renegotiation, then
a. a gain or loss is recorded.
b. a new effective interest rate is calculated.
c. there is no change in the accounting for the debt.
d. the old debt is derecognized.
14. In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows, the creditor should
a. calculate a new effective interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.
15. When the debtor sets aside money in a trust such that the investment and any return will
be sufficient to pay the principal and the interest to the creditor, but the creditor does NOT
release the company from the primary obligation to settle the debt, this type of
arrangement is known as
a. in-substance refunding.
b. in-substance defeasance.
c. substantive repayment.
d. legal defeasance.
16. The times interest earned ratio measures
a. an enterprise’s ability to meet interest payments as they come due.
b. the amount of interest expense related to long term debt.
c. the percentage of total assets financed by creditors.
d. the profitability of an enterprise.
17. On January 1, 2014, Lace Ltd. sold five year, 12% bonds with a face value of $500,000.
Interest will be paid semi-annually on June 30 and December 31. The bonds were sold for
$538,500 to yield 10%. Using the effective interest method of amortization of bond
discount or premium, interest expense for 2014 is
4 b. $53,696.
18. On January 1, 2013, Fernie Corp issued $900,000 (face value), 10%, ten-year bonds at
103. The bonds are callable at 105. Fernie has recorded amortization of the bond
premium by the straight-line method (which was not materially different from the effective
interest method under ASPE).
On December 31, 2019, Fernie repurchased $300,000 of the bonds in the open market at
96. Bond interest expense and premium amortization have been recorded for 2019.
Ignoring income taxes, what is the loss or gain arising from this reacquisition?
a. A gain of $9,800.
b. A loss of $9,800.
c. A gain of $14,700.
d. A loss of $14,700.
19. Pineapple owes Dole a $600,000, 12%, three-year note dated December 31, 2009.
Pineapple has been experiencing financial difficulties, and still owes accrued interest of
$72,000 on this note at December 31, 2011. Under a troubled debt restructuring, on
December 31, 2011, Dole agrees to settle the note plus the accrued interest for land that
Pineapple owns, which has a fair value of $340,000. Pineapple's original cost of the land
is $435,000. Ignoring income taxes, on its 2011 income statement, what should Pineapple