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ADMS 3585 MT 1 F2013 solutions.pdf

17 Pages
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Department
Administrative Studies
Course Code
ADMS 3585
Professor
Liona Lai

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Description
York University Faculty of Liberal Arts and Professional Studies School of Administrative Studies AP/ADMS 3585 Intermediate Financial Accounting I Midterm Examination 1 Fall 2013 Instructor: L. Lai Solutions Version A *The solutions for Version B is the same as Version A, except the order of the multiple choice questions is different. Marks Breakdown Question MC Part B Total Maximum Score 40 40 80 Student Score Part A: Multiple Choice (2 marks each, 40 marks in total) 1. Under the IFRS Conceptual Framework, fundamental qualitative characteristics include a) relevance and comparability. b) representational faithfulness and timeliness. c) relevance and representational faithfulness. d) verifiability and relevance. e) relevance and reliability. 2. If a company has a going concern problem, which measurement basis should it use? a) Historical Cost b) Net Realizable Value c) Current Cost d) Present Value e) None of the above 3. The Internet’s flexibility allows companies to continuously disclosure their financial information and users can access such information by a few clicks. This way of disseminating financial information represents trade-offs between which pair of qualitative characteristics? a) Comparability and Reliability b) Understandability and Comparability c) Relevance and Understandability d) Reliability and Relevance e) Relevance and Conservatism 4. In the beginning of 2012, Sofia Inc. received $500,000 from Amber Corp. on two conditions: st  Sofia Inc. shall repay Amber Corp. $520,000 by January 31 , 2013.  Should Sofia Inc. fail to repay the said amount, the company will transfer a building to Amber Corp. The building has a recorded cost of $200,000 on Sofia Inc.’s balance sheet. By the end of 2012, Sofia Inc. knew that it would not be able to repay the said amount, therefore it recorded the entire transaction as a sale of asset and recognized a gain of ($500,000 - $200,000) $300,000. 1 Which of the following best describes the qualitative characteristic Sofia Inc. had violated? a) Timeliness b) Representational Faithfulness c) Understandability d) Conservatism e) Comparability 5. Mother and Son Ltd. is a private company specializes in children clothing. It is planning to get listed on a Canadian stock exchange in 2015. Currently, the major users of their financial statements are the different banks where the company borrows from. Which accounting standard is Mother and Son Ltd required to follow for year ended December 31, 2013? a) IFRS, if the plan to go public is serious. b) ASPE, since the company is not listed as a public company yet. c) IFRS or ASPE, depending on the current users’ requirements. d) IFRS or ASPE, depending on the stock exchange’s requirements. Note that private company can choose to report under IFRS or ASPE. Since the banks are the major users, Mother and Son Ltd. is required to report following what the banks required. 6. Booklover Inc. is a small bookstore specializes in cookbooks. In June 2013, the sole owner paid $15,000 out of his own pocket to completely renovate the storefront to modernize the store, which is owned by the bookstore. The expenditure includes replacing existing windows and installing some LED televisions for cooking demonstrations. The owner believes that this will help increase sales by attracting the growing population of gourmet food lovers. He did not take back any shares or notes in exchange. Which of the following about this event is correct? a) It should not be recorded in the financial statements of Booklover Inc. because the owner paid the amount out of his own pocket, based on the economic entity assumption. b) There should be a debit to renovation expense for $15,000 and credit to payable- to owner $15,000. c) There should be a debit to other long term assets for $15,000 and credit to payable – to owner $15,000. d) There should be a debit to renovation expense for $15,000 and credit to shareholder’s equity $15,000. e) There should be a debit to other long term assets for $15,000 and credit to shareholder’s equity $15,000. Since the owner put $15,000 into the business, and does not take out a note, it cannot be a liability as Booklover Inc. has no obligation to repay the amount. Thus, b and c are 2 incorrect. The money is spent on windows and TV, and is expected to generate future benefits, therefore asset should be debited. Answer a is incorrect because the $15,000 represents resources that the owner has put into the bookstore. 7. Comprehensive income includes all changes in equity during a period EXCEPT a) gains and losses from discontinued operations. b) unrealized gains and losses on revaluation of land. c) dividends paid to shareholders. d) realized gains and losses from sale of investments. e) Impairment loss on equipment. 8. Which of the following is not a requirement under which a company must meet in order to classify a group of assets as Assets Held for Sale? a) There is an authorized plan to sell. b) The asset is available for sale in its current state. c) There is a buyer identified. d) Sale is probable within one year. e) Changes to the plan are unlikely. The company need only be actively looking for a buyer. 9. Super Mario Inc., a mushroom and banana processing company, is being sued by one of its employees for not maintaining a proper work environment. The employee slipped on a banana peel while working in the food processing facility in September 2012, which resulted in some head injuries. He was suing the company for $100,000. The lawyers believe that the potential loss could be in the range of $30,000 to $60,000 based on past precedent, if the claim is successful, but the likelihood of success is not known yet. The case will not be tried in court until a year from the financial reporting date and the company has a December 31 year end. How should Super Mario Inc. report this lawsuit in its financial statements? a) No disclosure or recognition of the lawsuit is necessary because the outcome is still highly uncertain. b) To be conservative, the entire $100,000 should be recognized as a liability because it has material impact on investors’ decision. c) The amount of $30,000 should be recognized as a liability because it is at the lower range of the estimate and will not adversely affect the liquidity ratios. d) No recognition or disclosure of the lawsuit is necessary because this is a subsequent event. e) No recognition of a liability is necessary but a disclosure of the lawsuit with the range of possible losses should be made. No disclosure is necessary because the likelihood of losing the case is unknown. If the likelihood is probable and the amount is estimable, then it should be recognized as a 3 liability. If the likelihood is probable but only a range is estimable, then it should be disclosed. 10. Dracula Ltd. records its long-term construction contracts using the completed contract method. During 2011, Dracula Ltd. started work on a $1,350,000 fixed-price contract for which costs were originally estimated at $1,200,000. Information related to this contract for fiscal years ended December 31, 2011, December 31, 2012, and December 31, 2013 follows: 2011 2012 2013 Costs incurred during the year $400,000 $780,000 $200,000 Estimated costs to complete $850,000 $220,000 $0 Progress billings during the year $300,000 $700,000 $350,000 Collections on billings during the year$250,000 $750,000 $350,000 Which one of the following amounts represents the gross profit that Dracula Ltd. should recognize for 2013? a. $0 b. $20,000 profit c. $30,000 loss d. $50,000 loss e. None of the above Overall profitability of the contract calculated at the end of 2011, 2012, 2013: $100K, ($50K), (30K), respectively. Since ($50K) loss has been recognized in 2012, but the actual loss at the end of the contract is ($30K), that means a 20K profit will need to be recognized in 2013. 11. Under which of the following circumstances should the completed contract revenue recognition method be used? a) The company follows IFRS. b) The contract extends over several annual reporting periods c) The enterprise cannot reasonably estimate the extent of progress towards completion d) The enterprises wishes to defer revenue recognition for taxation purposes e) Both a and b Use the following to answer Question 12 and 13: Jackson Corporation records its long-term construction contracts using the completed contract method. Contract #160 is a $2 million contract for which costs were originally estimated at $1.6 million. The records to date show: 4 2011 2012 Cost incurred during the year $900,000 $600,000 Estimated costs to complete $900,000 $375,000 Progress billings during the year $500,000 $625,000 Collections on billings during the year $450,000 $525,000 12. Which one of the following amounts represents the balance in the construction in process account at the end of 2012? a) $0 b) $900,000 c) $975,000 d) $1,500,000 e) $1,800,000 Since the company uses the completed contract method and at the end of 2012, this is still a profitable contract, only construction costs incurred would be accumulated in the construction in process account ($900K + $600K) 13. If the company cannot reliably estimate the costs to complete and uses the zero-profit method, what is the current asset/liability related to this contract (apart from accounts receivable) that should be presented on the Statement of Financial Position at the end of 2012? a) $400,000 asset b) $25,000 liability c) $150,000 asset d) $375,000 asset e) $575,000 liability CIP balance @2012 =$1,500K; Billings balance @2012 = ($500K+$625K)=$1,125; CIP> Billings: Asset = $1500-$1125 = $375K. Use the following information to answer Question 14 - 16: Below is selected financial information on Nebula Corporation: Nebula Corporation Income Statement For the Year Ended December 31, 2013 Net sales..........................................................................620,000................. Operating expenses.................................................................410,000......... Income from operations.............................................................210,000...... Other revenues and expenses 5 Gain on sale of equipment............................................................... 30,000 Interest expense..............................................................22,000............ 8,000 Income before income taxes ......................................................232,000...... Income taxes .....................................................................92,800................ Net income.......................................................................139,200................ Nebula Corporation Comparative Account Information Relating to Operations For the Year Ended December 31, 2013 Net Income139.2K 2013 2012 Adjust: Current Assets: Cash 103,000 156,000 Accounts receivable 56,000 40,000 -16K Prepaid insurance 5,000 6,000 +1K Current Liablities: Accounts payable 59,000 47,000 +12K Interest payable 600 1,500 -0.9K Income taxes payable 4,200 6,000 -1.8K Unearned revenue 20,000 14,000 Average current liabilities76,150 83,800 68,500 +6K Gain on sale of equip -30K
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