Solutions midterm.Fall2009

Solutions midterm.Fall2009 - BROCK UNIVERSITY Midterm...

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Unformatted text preview: BROCK UNIVERSITY Midterm Examination, Fall 2009 Course: ACTG 3P33 Date of Examination: October 24, 2009 Time of Examination: 13:00—15:00 Number of Pages: 12 Number of Students: 130 Number of Hours: 2 Instructors: P. Onulert & R. Roubi %— All questions are to be answered on the examination paper. Please hand this paper in at the completion ofthe exam. 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. Permitted: Scientific or financial calculators. Not permitted: Programmable calculators. MC 1_ C Question _j Maximum Marks Marks Awarded 2 . C 30 i- (5 —l rib j 15 >< a 3‘9 10 '— 10 _I_ NAME: Student Number: , _—' —. '— F— — ACTG 3P33 OCTOBER 24, 2009/—‘ PAGE 2 OF '12 PAGES ;//7 Problem I (Multiple Choice — 30 marks Answer all the multiple choice questions by C CLING the BEST answer. 1. A debt security is classified as held—to—maturity if the reporting entity has the A) positive intent to hold it to maturity. B) positive intent to hold it to maturity and has held it for more than one year. C) positive intent to hold it to maturity and has the ability to hold it to maturity. D) intent to hold it for an indefinite period of time. Use the following to answer questions 2~3: Crown Corporation earns $120,000 and pays cash dividends of $40,000 during 2006. Mace Corporation owns 3,000 of the 10,000 outstanding shares of Crown and exercises significant influence. 2. What amount should Mace Show in the investment account at December 31, 2006 if the beginning of the year balance in the account was $160,000? A) $196,000. B) $160,000. C) $184,000. D) $240,000. 3. How much investment income should Mace report on the income statement in 2006‘? A) $40,000. B) $36,000. C) $24,000. D) $120,000. Use the following to answer questions 4-5: Amber Corporation reported the following results for its first three years of operation: 2007 taxable income (before income taxes) $ 60,000 2008 Accounting loss (before income taxes) (360,000) 2009 Taxable income (before income taxes) 400,000 The 2008 accounting loss includes $100,000 tax exempt dividends received from Canadian corporations. There were no temporary differences during these three years. Assume a corporate tax rate of 30% for 2007 and 2008, and 40% for 2009. ACTG 3P33 OCTOBER 24, 2009 PAGE 3 OF 12 PAGES 4. Assuming that Amber elects to use the carryback and carryforward provisions, what after tax income (loss) is reported in 2008? (Assume that any future tax asset recognized is more likely than not to be realized.) A) $(360,000). B) $(222,000). C) $(282,000). D) $082,000). 5. Assuming that Amber elects to use the carryforward provision and not the carryback provision, what income (loss) is reported in 2008? A) $(360,000). B) $076,000). C) $(216,000). D) $(276,000). 6. Reichor Company sells household furniture. Customers who purchase furniture on the instalment basis make payments in equal monthly instalments over a two-year period, with no down payment required. Reichor's gross profit on instalment sales equals 40% of the selling price of the furniture. For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the instalment method is used. There are no other book and income tax accounting differences, and Reichor’s income tax rate is 30%. If Reichor‘s December 31, 2008, balance sheet includes a future tax liability of $90,000 arising from the difference between book and tax treatment of the instalment sales, it should also include instalment accounts receivable of A) $750,000. B) $300,000. C) $225,000. D) $90,000. ACTG 3P33 OCTOBER 24, 2009 PAGE 4 OF 12 PAGES 7'. Doll Company reported the following results for the year ended December 31, 2008, its first year of operation: 2008 Income (per books before income taxes) $250,000 Taxable income 400,000 The diSparity between book income and taxable income is attributable to a temporary difference, which will reverse in 2009. What should Doll record as a net future tax asset or liability for the year ended December 31, 2008, assuming that the enacted tax rates in effect are 40% in 2008 and 35% in 2009? A) $60,000 future tax liability B) $52,500 future tax asset C) $60,000 future tax asset D) $52,500 future tax liability Use the following to answer questions 8—10: Easton Co. at the end of 2008, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $300,000 Estimated litigation expense 750,000 lnstalment sales [600,000] Taxable income $450,000 The estimated litigation expense of $750,000 will be deductible in 2010 when it is expected to be paid. The gross profit from the instalment sales will be realized in the amount of $300,000 in each of the next two years. The estimated liability for litigation is classified as noncurrent and the instalment accounts receivable are classified as $300,000 current and $300,000 noncurrent. The income tax rate is 30% for all years. 8. The 2008 total income tax expense is A) $90,000. B) $135,000. (3) $150,000. D) $300,000. ACTG 3P33 OCTOBER 24, 2009 PAGE 5 OF 12 PAGES 9. The future tax asset to be recognized is A) $0. B) $45,000 current. C) $225,000 current. D) $225,000 noncurrent. 10. The future tax liabilityicurrent to be recognized is A) $45,000. B) $67,500. C) $90,000. D) $180,000. AC TG 3P33 OCTOBER 24, 2009 PAGE 6 OF 12 PAGES Problem II (15 marks) 11. Aardvark Inc. purchased $200,000 of 10-year bonds with a stated rate of 9% that pay interest annually on their issue date of January 1, 2006. Aardvark records the bonds on an available-for—saie basis. The current market rate at date of purchase was 10% and as a result Aardvark paid $187,711 for the bonds. On December 31, 2006, the bonds have a market value of $1 85,000. Instructions a. Record the purchase of bonds, the receipt of interest for the year and amortization for the year. We \ b. Record any year-end adjustment. or /_ \Lt ACTG 3P33 OCTOBER 24, 2009 PAGE 7 OF 12 PAGES Problem III (15 marks) 12. Chantiri Corp. began operations on Jan. 2, 2006 and has the following portfolio of available-tbr—salc investments at December 31, 2006. Unrealized Investment Cost Fair Value Gain (Loss) Andrew Corp. $200,000 $160,000 $ (40,000) Bocce Inc. 550,000 800 000 250 000 Total $750,000 $960,000 $210,000 During 2007, Chantiri Corp. sells Andrew Corp. for $140,000 and Bocce Inc.'s fair value increases to $890,000. Instructions a. Prepare all necessary journal entries for the sale of Andrew Corp. stocks, and for December 31, 2007. \W WK} b. Calculate the December 31, 2007 Accumulated Other Comprehensive Income (AOCI) ending balance. / \) R "/3 U ACTG 3P33 OCTOBER 24, 2009 PAGE 8 OF 12 PAGES Problem IV (10 marks) 13. Venus Corp. acquired a 30% interest in Rand Co. on January 1, 2006, for $500,000. At that time, Rand had 1 million of its no par common shares issued and outstanding. During 2006, Rand paid cash dividends of $220,000 and thereafter declared and issued a five percent common stock dividend when the market value was $2 per share. Rand’s net income for 2006 was $480,000. What should be the balance in Venus' investment account at the end of 2006‘? invite“ r; st F 210/ what 302.: 46m) @- ACTG 3P33 OCTOBER 24, 2009 PAGE 9 OF 12 PAGES Problem V (20 maria) 16. The records for Bandy Co. show this data for 2008: Gross profit on instalment sales recorded on the books was $200,000. Gross profit from collections of instalment receivables was $150,000. Golf club dues were $3,800. Machinery was acquired in January for $300,000. Straight-line amortization over a ten-year life (no residual value) is used. For taxes, CCA is used and Bandy may deduct 14% for 2008. Tax exempt dividends received from a Canadian corporation were $9,000. The estimated warranty liability related to 2008 sales was $19,600. Repair costs under warranties during 2008 were $13,600. The remainder will be incurred in 2009. Pretax financial accounting income is $250,000. The tax rate is 30%. Instructions (*1) Calculate income taxes payable for 2008. ACTG 3P33 OCTOBER 24, 2009 PAGE 10 OF 12 PAGES (b) Prepare the journal entries to record all income taxes for 2008. (WA/Q W” (e) Prepare the income tax section of the 2008 income statement beginning with pretax accounting income. /1 J at {Dacia/7c Hccou mi?" Ila—CW 0253 my? b4 I1 ~ .LnCa/w-e. TMM ACTG 3P33 OCTOBER 24, 2009 PAGE 11 OF 12 PAGES Problem VI (10 marks) Answer both (A) and (B) below: A) ABC Co. acquired 19% of voting common shares of XYZ Inc. for $1 Million paid in cash. XYZ Inc. is located in Dodland, a foreign country that prohibits foreign shareholders from sitting on national companies’ board of directors. Dodland also imposes tight restrictions on the transfer of dollars to foreign banks. As a result, ABC had to open a local bank account to deposit its share of XYZ’s dividends. ABC Co. uses the balance in that account to pay for its imports from XYZ Inc. XYZ Inc. considers ABC corp. as one of its significant customers because it imports almost 30% of XYZ Inc production. XYZ Inc. exports a valuable type of raw materials that is considered critical for ABC’s operations. Discuss how ABC Co. may account for its investment in XYZ Inc. \ i 'I f’ f " ‘r' ‘ i a > .. _. _ "a. . A: ,)";)/{\¢:=L-~‘)..E’C';/ r77.(Ii:"r{;j'l;5,bi_ {y/jgs”'5/" ’ 1‘ L x“ f i’ 3,3. g {vi/J 3 r 1:3 ’ _ . i an. . _ ’ i’éri-Zt-ett’rtx-ir-Cg K ‘ ' ’C ‘) Elf-31:2. (if C] x , c'v'Lt-fi-~. xi L. 1, fi \ . k A )3 {Li-UL: ‘u\_§ i: 0) If. t‘ (3! 2:64" 1.11.343“ {div-V’s”va t H. 7.5-7 "‘- I” r“ _. ff} y ’6 .. 41’ L' .i .m ‘7) 31/: .«i, LL. J 3&5 {L (CfU-HJCLQ'I =_ _ a .- ii, :9 l". I » :‘3 PK "I; ‘ rt? ’v A) '1 in“. . f u. A 1i .3! .- » A .)~' ‘3‘ r r i the. wit . l\ a \ L1. Jami r\ u £11131}; \\,' E.) J ,9 a R .> I») , ‘ i . .. ’ "*"/.;i' n Fin ’ .I" /f’ ‘ a 7 J 13 } M L?“ r “ i “L7 K“ ~ er»: L” C‘ ‘ A if”; r \ ,1? (/5 5 ‘ i {.1 Hg :2 '3 .) L‘s-xi“! L x r X I r i i I ‘\ 4 " ‘11 « m w 5 " H -‘J‘ I" an». /' . _ LL-- Ixr l 5,; “ K ‘ " L1: [ i 1’ “ .. i \- ‘( l, , ,-‘ OJ; ‘5‘ F ( l- . .. ' 1 ‘ 3 x i ' - i ‘ ‘1 ‘ ’ ". l/J j ’ f ' ' "" 51 I t ' ,c, 1 9t ,3” a: " " ’ 1‘ M 3 ACTG 3P33 OCTOBER 24, 2009 PAGE 12 OF 12 PAGES ‘3’ \ _ \ . B) Although the asset-liability method is considered the most conceptually sound method of accounting for income taxes, the method, however, violates some of the basic concepts such as the time value of money, the classical distinction between current and noncurrent classification and the recognition of assets. Comment. {I I Ci fl blur”? £1 a .17? t: 11:52ch V9 (if “(‘9' L, ‘m l I CLLfl l j illld'l—fLQ. (Liz—Q.” (R Cay—LVuCfi flag If; 5 LL I! )u Vila/“‘6— Ll '- W, V ltd/ya, {yell/ed 2 W” N l ., l 1m [Livy {art ate (:2 ,, A ( L 5ger )‘Tui,@rvt_w_;6€ 2 6.11} a l L'llkz/“Lééét’L-Q ~ flirt: '"l/ 27-» ‘i’3’LQTkCD¢.‘ flare; “lb-LUCA“ News m, t? W" L , r) C 1 . . i. - '4 ‘ la’j'tt‘ErUKtm/L- \~\ QUer‘I/lh vi); FLOW ~-~ \‘ Arr-ELLW“ _‘ ’5’ Ang “0 l' :2 ~1le ltculilw'm 0% f lass- .A/ L ‘vbr t5 O UL 1- g “roux— C . ‘ F I .J a_ 1 - <L\1\_.§m‘_u\}._ L's/C- l€;- ug’LcL,2,_-LJJ - ML PM: "7 V” L / ' i pli- LKIQL 9, u (If E If» n ‘ " /‘ x ' ‘r \ —_ 2 ' J \;"i q C ‘ q ' r rm? JLUL. \J CM. [(3 V'WJ ‘m -' (4-HT) “I‘VE-k 0”" 6L 1K ' ti) Q€fi\1'2.t.t;x - C-u '~ r I' ’1 I --r .(: LIE LI iii/Z J” 2-H 7 g i , r ‘ ,. J _ 49/ kt. EAL LEA—k CTLCMRL L3 jgdflu/L/«t ‘ h I r' ‘1‘“ camc- l‘ a r .f‘ {afi- x” l ,4‘ a f" . J ‘LL'X? ’! l Qa'fii /. [.1 g” ('5 L Km». T51“. L3 rem/{[1} r ,- t, LLI... «fig-gig“ , i L _- Al; '3 ‘ -‘- . "We " ‘ “(K-“Cl: 142’ “L L‘— Ol L/lfinq fl \ l/Q'i Mg. :- o, l t lCQ \ 7 I“ 3 .-* - Jul N “ I: l A mg ’L kobfilgj Illa" slit—dng ‘L 519“:- “KEY” J ' ‘4 \ AC'TG 3P33 OCTOBER 24, 2009 PAGE 13 OF 12 PAGES Answer Key 1. C positive intent to hold it to maturity and has the ability to hold it to maturity. Origin: Chapter 9- Investments, 9 Format: Multiple Choice 2. C $184,000. Origin: Chapter 9- Investments, 69 Reference: Ref 9—3 Format: Multiple Choice 3. B $3 6,000. Origin: Chapter 9- Investments, 70 Reference: Ref 93 Format: Multiple Choice 4. D $022,000). Origin: Chapter 18— Income Taxes, 38 Reference: Ref 18-3 Format: Multiple Choice 5. B $076,000). Origin: Chapter 18- Income Taxes, 39 Reference: Ref 18—3 Format: Multiple Choice 6. A $750,000. Origin: Chapter 18— Income Taxes, 36 Format: Multiple Choice 7. B $52,500 future tax asset Origin: Chapter 18— Income Taxes, 34 Format: Multiple Choice 8. A $90,000. Origin: Chapter 18— Income Taxes, 28 Reference: Ref 18-1 Format: Multiple Choice 9. D $225,000 noncurrent. Origin: Chapter 18- Income Taxes, 29 Reference: Ref 18-1 Fomiat: Multiple Choice ACTG 3P33 OCTOBER 24, 2009 PAGE 14 OF 12 PAGES 10. C $90,000. Origin: Chapter 18- Income Taxes, 30 Reference: Ref 18—1 Format: Multiple Choice 11- a. Effecavemterest—yeart=$137,?11x.10= $13,??1 Animal interest 18,000 Discount amortization $ T11 Cash .......................................................................................... ._ 13,000 fimortizatinn of Discount ........................................................... .. 7"?1 3 Interestlncnrnem, .......... .......... ............ ................... .. [email protected] b. Carrying value ofbonds = $131711 1 + $771 = $188,482 Market value 185,000 Unrealized loss 3 3,482 - - 3/733 Unreahzed Loss on Available-for—Sale Bends (0C1) ..................... .. 3,4 82 \_/ Available-for-Sale Bonds __________ __ 31+§2 f3" ,- Origin: Chapter 9- Investments, 101 Format: Short Answer 12. a. Additional UL 7 Andrew Co . : UH(L) —— 0C1 $20,000 @ AFS — Andrew Corp. $20,000 Loss Reclassification Ent for A: Realized Loss on Sale of Andrew Corp. $60,000 (9 UH(L) i 0C1 $60,000 C9 Sale of Andrew Stocks: Cash $140,000 @1 AFS—Andrew Corp. $140,000 Rise In Bocce FV: -. AFS u Bocce $ 90,000 6/ x" UHGeOCI $90,000 W ACTG 3P33 OCTOBER 24, 2009 PAGE 15 OF 12 PAGES A b. may” Beginning AOCI balance (December 31, 2006) 1 $210,000 ’ b Additional UHL for Andrew Corp. Stock 1 $120,000 1/ / Balance $190,000 Reclassification Loss — Andrew Corp. 1 $ 60,000 -" Balance $250,000 Additional UHG for Bocce 1 $ 90 000 x [2,3 Ending AOCI Balance (December 31, 2007) $340,000 /- (—ZIL/ Origin: Chapter 9- Investments, 100 Format: Short Answer 13' Cost $500,000 Share of net income(3 X $430,000) 144,000 Share of dividends (.3 X $220,000) (06,000) Balance in maestment account m Origin: Chapter 9— Investments, 91 Format: Short Answer 16. (a) Pretax financial income $250,000 Permanent differences Golf dues 3,000 © Dividends (9,000) © Temporary differences Instalment sales ($200,000 — $150,000) (50,000) @ CC‘A ($42,000 — $30,000) (12,000) Warranties ($19,600 — $13,600) 6 000 g Taxable income $188,800( E} (b) Currentlncome Tax Expense .... .................................. .. 56,640 63 Income Tax Payable (30% X $188,800) ......... .. 56,64 ® Future Income rfax Expense ($18,600 — $1,800) 10,800 Future Tax Asset (30% x 330,000) ...................... ..E.g_.T/-3 ......... .. 1,300 Future Tax Liability (30% X $62,000), 18 60 1 Origin: Chapter 18— Income Taxes, 52 Format: Short Answer ...
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Solutions midterm.Fall2009 - BROCK UNIVERSITY Midterm...

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