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Unformatted text preview: ne-time amount of $5,000 each if they will voluntarily leave HC before November 15, 2002. If HC is unable to obtain 10 volunteers for this plan by November 15, then HC will terminate the needed number with a payment of $3,000 each on November 30, 2002. Only the first 5 employees have been notified of this matter. Your staff member is confused by the guidance in the Handbook. As the file must be completed by the end of the next day, you need to explain the difference between a severance benefit and a termination benefit to your staff member and detail the measurement and disclosure requirements, if any, arising from the President’s memorandum for the August 31, 2002 financial statements of HC. Required: Prepare a response to your staff member. 9 Question 4 (7 marks) (13 minutes) Accounting for Investments – Equity Accounting ABC Company (ABC) is a private company with a December 31 fiscal year-end. On January 2, 2002, ABC purchased 4,000 shares, representing a 40% interest, of XYZ Company (XYZ) for cash of $160,000. The following information is available at January 2, 2002: Current assets Land Building and Equipment Liabilities Shareholder’s equity Book Value $ 100,000 50,000 300,000 $ 450,000 150,000 300,000 $ 450,000 The estimated remaining useful life of the building and equipment is ten years. The fair value of the identifiable assets and liabilities approximate the book values except as follows: the land has a fair value of $100,000, the building and equipment of $320,000. The net income of XYZ for the year ended December 31, 2002 is $80,000. It paid dividends of $2 per share during the period. Required: Calculate ABC’s carrying amount of the investment in XYZ and the net effect on ABC’s net income at December 31, 2002. Assume ABC uses the equity method of accounting for the investment in XYZ. Explain all calculations and state all assumptions. Ignore income taxes. 10 Question 5 (6 marks) (11 minutes) Accounting for Income Taxes Refundable taxes are applicable to certain investment income earned and are refundable when distributions are paid to shareholders. For example, Mr. Smith owns 100% of Company A’s issued and outstanding common shares, the only class of shares issued by the company. Company A is required to pay a refundable tax of $100 related to investment income earned in the current year. The tax will be refundable at a rate of $1 for every $3 of dividends paid. No dividends were paid in the current year. Required: Discuss all of the accounting issues related to this refundable tax. 11 Question 6 (5 marks) (8 minutes) Not -for - Profit Accounting - Contributions Haliburton Golf Club (HGC) is a not-for-profit organization formed in January 2002. The initiation fee for a new member is $25,000, which can be paid over 5 years, with interest calculated at 6% at the end of each fiscal year end. The initiation fee is non-refundable and the members will pay annual fees of $1,500 to cover the annual operating costs. If the annual fees or any installments are not paid, the member is denied access to all facilities. The golfing season began on May 1 and continued to October 31, 2002. The following amounts were collected from New Members at the beginning of the season: • 30 paid in full • 60 paid first installment of $5,000 • All 90 members paid the annual fee of $1,500 Your firm will audit the financial statements of HGC. The Board of Directors is considering a September 30 year-end and has asked you, CA, advice on how to account for the amounts received and receivable at that time from the members. Required: Prepare a response to the Board. 12 Question 7 (8 marks) (14 minutes) Transfer of Receivables Richton Products Limited (RPL) sells customized vans to corporate clients. In order to improve cash flows RPL recently transferred 1.2 million dollars of receivables to ARC Trust Company (ARC). RPL is not sure how to record the 1.0 million received from ARC. Required: Part A Outline the conditions required to be met if the receivables are to be removed from the books of RPL. (4 marks) Part B List the items that the auditor of RPL should consider when using a legal opinion as audit evidence for this transaction. (4 marks) 13 Question 8 (6 marks) (11 minutes) Revenue Presentation BigCity College Inc. (BCI) is a privately owned school for adult learners who want to upgrade their computer skills. BCI requires the applicants to submit an application form to Service Limited (SL) who handles the internet application processes for BCI. SL has a contract with BCI where it processes the applications and collects the tuition fees from the applicants. BCI sets the application criteria and the admission fee and when the application is accepted SL must remit 90% of the tuition fees collected to BCI. The potential students submit an electronic application to SL and provide credit card information for the admission fee. The normal admission fee is $5,000 per applicant. SL processes the credit card remittances, collects the funds from the...
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