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2010 midterm solution

2010 midterm solution - ACTG 3P33 JUNE 4 2010 Page 1 of 14...

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ACTG 3P33 JUNE 4, 2010 Page 1 of 14 pages THIS SCRIPT WILL NOT BE DEPOSITED IN THE LIBRARY BROCK UNIVERSITY Midterm Examination, Spring, 2010 Number of Pages: 14 COURSE: ACTG 3P33 Number of Students: 135 DATE: June 4, 2010 Number of Hours: 3 TIME: 12:30 – 3:30 p.m. Instructor: S. Felton All questions must be answered on the examination paper. Be sure to fill in your name, student number and section number below. You may use only a nonprogrammable calculator and those interest tables that are provided by the instructor. No examination aids other than those specified are permitted. Use or possession of unauthorized materials will automatically result in the award of a zero grade for this examination. SHOW ALL CALCULATIONS. MARKS MAY NOT BE AWARDED IF CALCULATIONS ARE NOT SHOWN. QUESTION MARKS AWARDED 1. Multiple Choice 15 2. Discussion 21 3. Leases 21 4. Investments (equity) 20 5. Investments (debt) 12 6. Pensions 11 Total 100 NAME ______________________________________ STUDENT NUMBER_________________________ SECTION (please circle): (01) 9:00 – 11:00 a.m. (02) 11:00 – 1:00 p.m. (03) 1:30 – 3:30 p.m.
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ACTG 3P33 JUNE 4, 2010 Page 2 of 14 pages QUESTION 1 (15 marks) Indicate the ONE best answer for each of the following. ___1. On January 1, 2009 Dov Co. sold for its fair value of $440,000 equipment that had a net book value of $400,000 and a remaining life of 20 years. That same day, the equipment was leased back at $24,000 per year for 8 years with no option to renew the lease or purchase the equipment. Lease payments are paid on the first day of each year, beginning January 1, 2009 and the present value of the lease payments is $140,840. The total effect of these transactions on Dov’s income before tax for the year ended December 31, 2009 is: a) $40,000 increase b) $24,000 decrease c) $16,000 increase d) $19,000 decrease e) None of the above ___2. The factor which differentiates a sales-type lease from a direct financing lease is related to: a) whether the cost of the property to the lessor equals its market value at the inception of the lease b) whether or not the lease includes a bargain purchase option c) whether title of the property will transfer to the lessee at the end of the lease d) whether the lease meets one of the three criteria for capitalization set out in the CICA Handbook e) whether the lessor can meet the two additional criteria necessary for revenue recognition ___3. Which of the following items would most likely be recorded by a lessor for an operating lease? a) rent expense and interest expense b) rent revenue and interest revenue c) interest revenue and amortization expense d) interest expense and amortization expense e) amortization expense and rent revenue ___4. On January 1, 2010 Rita Co. (lessee) leases a machine for 15 years under a contract that calls for equal annual payments of $10,000 to be made at the end of each year, with the first payment due December 31, 2010. This is a capital lease with a discount rate of 10% and Rita correctly records
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2010 midterm solution - ACTG 3P33 JUNE 4 2010 Page 1 of 14...

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