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Unformatted text preview: UNIVERSITY OF TORONTO ‐ ROTMAN SCHOOL OF MANAGEMENT RSM220 Midterm Examination (110 minutes) ‐ October 23, 2009 FIRST NAME _______________________________________ LAST NAME ________________________________________ STUDENT NUMBER:__________________________________ Section (please circle one): Tuesday 8‐10 (B.Xin) Wed 10‐12 (D.S.) Wed 12‐2 (E.Palancz) Thur 10‐12 (M.Callen) Tuesday 10‐12 (B.Xin) Tuesday 3‐5 (B.Xin) Wed 12‐2 (D.S.) Wed 4‐6 (D.S.) Wed 6‐8 (D.S.) Wed 2‐4 (E.Palancz) Thur 2‐4 (M.Callen) Instructions: 1. 2. 3. 4. Write legibly. Illegible answers will not be graded. There are 9 questions on 15 pages. Answer each question in the space provided. If you need additional space, use the back of the page facing the question and clearly identify the question being answered. Pencil or pen may be used. However, papers written in pencil or papers with white outs will not be re‐marked. Your invigilator will NOT clarify any questions for you during the test. You may make any assumptions you believe are needed to answer a question. However, you only receive marks for the answer if the assumptions you made are indeed needed for the question. Make sure you show all calculations for full marks. Question Marks Marks Awarded 1 10 2 10 3 5 4 15 5 15 6 10 7 20 8 15 9 10 Total 110 RSM220-09F Midterm Examination Page 1 of 15 QUESTION 1 (10 marks) REQUIRED: Please answer the following questions (1 mark each): 1. Which of the following types of organizations must report under Canadian GAAP? a) All private corporations b) All public corporations listed on Canadian stock exchanges c) All partnerships d) All not‐for‐profit organizations e) None of the above 2. On what date will most Canadian publicly accountable enterprises start reporting under International Financial Reporting Standards? a) December 31, 2009 b) January 1, 2010 c) December 31, 2010 d) January 1, 2011 e) December 31, 2011 3. The quality of information that gives assurance that it is reasonably free of error and bias and is a faithful representation is a) verifiability b) neutrality c) relevance d) reliability e) all of the above 4. Working capital is a) capital which has been reinvested in the business. b) unappropriated retained earnings c) cash and receivables less current liabilities d) all of the above e) none of the above 5. A generally accepted method of valuation is 1. trading securities at fair value, 2. accounts receivable at estimated amount collectible, 3. inventories at current cost. a) b) c) d) e) 1 2 1 and 3 1 and 2 1 and 2 and 3 RSM220-09F Midterm Examination Page 2 of 15 6. In 2008, SLK Corporation made an arithmetical error when preparing its year‐end financial statements. Decimal point was incorrectly placed in calculating amortization. As a result, net income was reported at almost double the proper amount. In 2009, SLK realized the mistake. How should this error be treated in 2009? a) As an increase in amortization expense for 2009. b) As a component of income for 2009, but separately listed on the income statement and fully explained in a note to the financial statements. c) As restatement of 2008 financials and adjustment to beginning retained earnings, net of tax in 2009. d) As an extraordinary item for 2008. e) As an extraordinary item for 2009. 7. Accumulated other comprehensive income would be reported in a) the shareholders’ equity section. b) the retained earnings section. c) net income. d) net income from continuing operations. e) none of the above 8. How does the failure to record accrued revenue distort the financial reports? a) It understates current assets and overstates shareholders' equity. b) It understates net income, shareholders' equity, and current liabilities. c) It understates revenue, net income, and shareholders’ equity. d) It overstates revenue, shareholders' equity, and current liabilities. e) None of the above 9. When should the consignor recognize revenue in a consignment sale? a) When the consignor signed the contract with the consignee. b) When the consignor learned that the consignee sold the consignment goods. c) When the consignor delivered the consignment goods to the consignee. d) When the consignor received the cash payment from the consignee. e) When the warranty period expires. 10. For the type of sale that requires payment of the owed amount over an extended period of time, which two methods are allowed for revenue recognition: a) Cost Recovery Method and Instalment Sales Method b) Instalment Sales Method and Percentage of Completion Method c) Completed Contract Method and Cost Recovery Method d) Completed Contract Method and Percentage of Completion Method e) Multiple Deliverables Method RSM220-09F Midterm Examination Page 3 of 15 QUESTION 2 (10 marks) Accounting Theory is sometimes discussed with reference to “ideal conditions”. Part I: REQUIRED: Describe in detail what is meant by “ideal conditions” in the context of Accounting Theory. (4 marks) Part II: In 2008, Loblaw Companies Limited (LCL) reported the following financial information about its Fixed Assets: Cost: $12,897 million Accumulated Depreciation: $4,852 million Net Book Value: $8,045 million REQUIRED: How would LCL account for Fixed Assets under “ideal conditions”? Be as specific as you can. (2 marks) RSM220-09F Midterm Examination Page 4 of 15 Part III: REQUIRED: How would the purpose of financial reporting and the standards be different under “ideal conditions”? Discuss in detail for full marks. (2 marks) Part IV: REQUIRED: What is the problem with “ideal conditions”? (2 marks) RSM220-09F Midterm Examination Page 5 of 15 QUESTION 3 (5 marks) Forrester Lumber Company (FLC) just started logging (cutting down) the forest on the land that it owns. However, environmental law requires that FLC re‐plant the trees at the approximate cost of $2 million once it finishes the logging (approximately 3 years from now). REQUIRED: Discuss when and how you would account for the re‐planting costs of $2m. Justify your answer in detail with reference to the Canadian or IFRS conceptual frameworks. In other words, use the conceptual framework to decide how you would account for the $2m. RSM220-09F Midterm Examination Page 6 of 15 QUESTION 4 (15 marks) Assets can be measured/valued in many different ways under Canadian GAAP and IFRS. REQUIRED: Complete the table below. • List at least 3 different measurement methods (valuation methods) for assets. For each measurement basis identified, a) give an example of one asset that is measured that way according to GAAP or IFRS, and b) explain WHY it is measured that way (justify your answer with reference to conceptual framework). # Measurement basis Asset that is valued Justification of the measurement basis for the asset identified this way (conceptual framework) Example Lower of cost and Inventory …explanation… market 1 2 3 RSM220-09F Midterm Examination Page 7 of 15 QUESTION 5 (15 marks) The comparative balance sheets of Qwest Corp at the beginning and the end of the year 2008 appear below. Dividends of $33,000 were paid in 2008. New equipment was purchased and none was sold. Dec. 31, 2008 Jan. 1, 2008 Assets Cash $20,000 $13,000 Accounts receivable 106,000 88,000 Equipment 69,000 52,000 Less: Accumulated amortization ‐17,000 ‐11,000 Total $178,000 $142,000 Liabilities and Shareholder’s equity Accounts payable $20,000 $15,000 Long‐term debt 30,000 30,000 Common shares 100,000 80,000 Retained earnings 28,000 17,000 Total $178,000 $142,000 PART I REQUIRED: Comment on the change in the company’s liquidity and financial flexibility. Fully justify your answer, and show all calculations for full marks. (8 marks) RSM220-09F Midterm Examination Page 8 of 15 PART II REQUIRED: Calculate operating cash flow for the year 2008. (7 marks) RSM220-09F Midterm Examination Page 9 of 15 QUESTION 6 (10 marks) Joe Smalt is the new owner of Grey Computer Services (GCS). At the end of August 2009, his first month of ownership, Joe is trying to prepare monthly financial statements. Below is some information related to unrecorded expenses that the business incurred during the month of August: i. At August 31, Joe owed his employees $20,000 in wages that would be paid on September 1. ii. On August 1, Joe borrowed $150,000 from a local bank on a 10‐year mortgage. The annual interest rate is 12%. iii. Sales for the first four days of September in the amount of $447,000 were entered in the sales book as at August 31, 2004. Of these, $121,500 were sales on account and the remainder were cash sales. iv. Cash, not including cash sales, collected in September and entered as at August 31, 2004, totaled $135,324. Of this amount, $123,324 was received on account. The remainder was proceeds from a bank loan. REQUIRED: Prepare the adjusting journal entries as of August 31, 2009, suggested by the information above. For each component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10. RSM220-09F Midterm Examination Page 10 of 15 QUESTION 7 (20 marks) Consider the following information for Deerfield Corporation for the year ended December 31, 2009. During 2009, Deerfield Corporation disposed of Clark Division, a major segment of its business. Deerfield sold Clark division at a gain of $20,000. Clark's operating losses were $45,000 in 2009. In February 2009, the area was hit by an earthquake and damaged one of Deerfield’s production plants. This is the first time the area was hit by an earthquake. The earthquake damage was $80,000. Sales revenues, cost of goods sold (CGS), and Selling and Administrative expenses for Deerfield Corp. (excluding Clark division’s operations) were as follows: Sales revenue $960,000 CGS $350,000 Selling and Administrative expenses $ 265,000 PART I REQUIRED: Prepare a multiple‐step income statement in good form and including all items for 2009 for Deerfield Corporation, assuming a 20 percent income tax rate on all tax related items. (14 marks) RSM220-09F Midterm Examination Page 11 of 15 PART II REQUIRED: Explain how the loss from earthquake damage would be reflected under IFRS? (3 marks) PART III REQUIRED: How does your income statement presentation assist users in the assessment of the quality of earnings for Deerfield Corporation? (3 marks) RSM220-09F Midterm Examination Page 12 of 15 QUESTION 8 (15 marks) Balla Inc. has the following transactions with respect to its cell phone business in the first half of 2009: January 20 Inventory purchased on account at $20,000. March 15 Inventory delivered to ABC Company and a full amount of $30,000 was received. Balla Inc. offered ABC Company a “3‐month unconditional right of return” , i.e., Balla Inc. promises to buy all the returned products back from ABC Company at the original selling price within 3 months. May 10 Balla Inc. received some returned cell phones from ABC Company. This batch of cell phone has a value of $6,000 calculated at the selling price to ABC Company. Balla Inc. paid the full amount back to ABC Company as promised. June 15 The “3‐month unconditional right of return” expired. PART I Assume that on March 15th, Balla Inc. estimated that 20% of the inventory sold to ABC would be returned under the unconditional right of return (based on a long and stable history of cell‐phone sales at Balla Inc. and industry as a whole). REQUIRED: a. When shall Balla Inc. recognize the revenue for cell phone sales? How much revenue should be recognized at this time? Provide an in‐depth justification of both answers, with full calculations (if necessary). (6 marks) b. How would you account for the expiration of the return period on June 15th? How would Balla Inc.’s Owner’s Equity change on June 15? Explain your answer in detail and show all calculations (if necessary). (4 marks) RSM220-09F Midterm Examination Page 13 of 15 PART II Assume that 2009 was Balla Inc’s first year of operations, and so on March 15th, the company had no idea about what the percentage of sales to ABC would be returned under the unconditional right of return. Balla Inc. did realize that this rate could potentially be very significant. REQUIRED: When should Balla Inc. recognize the revenue for cell phone sales to ABC? What is the amount of sales revenue should be recognized? Justify your answer in detail. (5 marks) QUESTION 9 (10 marks) Answer the following independent questions. PART I REQUIRED: On October 20, 2009, Mattox entered into a $950,000 contract with a customer to supply a piece of sophisticated manufacturing equipment plus a five‐year regular service. Both the equipment and the service could be negotiated separately either with Mattox or with another supplier. The fair values of the equipment and the 5‐year service contract were $600,000 and $400,000 respectively. The equipment was shipped to the customer, and the customer paid on the same day. Prepare the journal entry for this transaction. For each component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (I/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (I/S) $10. Show all calculations for full marks. (5 marks) RSM220-09F Midterm Examination Page 14 of 15 PART II REQUIRED: Provide TWO examples that sales revenue may be recognized before delivery of goods/service. (2 marks) . PART III REQUIRED: Is transfer of legal title from seller to buyer sufficient in determining whether revenue should be recognized? Use an example to illustrate your point. (3 marks) RSM220-09F Midterm Examination Page 15 of 15 ...
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