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CONCORDIA UNIVERSITY

JOHN MOLSON SCHOOL OF BUSINESS

DEPARTMENT OF ACCOUNTANCY

ACCO 310/1
Summer 2010

MIDTERM EXAMINATION

May 25, 2010

Marks Minutes
Question 1 10 15
Question 2 25 38
Question 3 30 45
Question 4 18 27
Question 5 17 25

Total 100 150


Question 1 (10 marks; 15 minutes)

Choose the best answer for each of the following questions and enter the identifying letter in the
examination booklet.

1. How does failure to record accrued revenue distort the financial reports?
a. It understates revenue, net income, and current assets.
b. It understates net income, shareholders’ equity, and current liabilities.
c. It overstates revenue, shareholders’ equity, and current liabilities.
d. It understates current assets and overstates shareholders’ equity.

2. A contingent liability, which is normally accrued, is


a. notes receivable discounted.
b. accommodation endorsements on customer notes.
c. additional compensation that may be payable on a dispute now being arbitrated.
d. estimated claims under a service warranty on new products sold.

3._ Which of the following items is a current liability?


a. Bonds due in three months (for which there is an adequate sinking fund classified
as a long-term investment).
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in
eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the
marketability of the refunding issue.

4._ On June 15, 2009, Greer Corporation accepted delivery of merchandise which it
purchased on account. As of June 30 Greer had not recorded the transaction or
included the merchandise in its inventory. The effect of this error on its balance sheet
for June 30, 2009 would be
a. assets and shareholders’ equity were overstated but liabilities were not affected.
b. shareholders’ equity was the only item affected by the omission.
c. assets and liabilities were understated but shareholders’ equity was not affected.
d. assets and shareholders’ equity were understated but liabilities were not
affected.

5. Reversing entries are most commonly used in relation to year-end adjusting entries
that
a. allocate the expired portion of a depreciable asset to expense.
b. amortize intangible assets.
c. provide for bad debts expense.
d. accrue interest revenue on notes receivable.

6. Of the following adjusting entries, which one would cause an increase in assets at
the end of the period?
a. The entry to record the earned portion of rent received in advance.
b. The entry to accrue unrecorded interest expense.
c. The entry to accrue unrecorded interest revenue.
d. The entry to record expiration of prepaid insurance.
7. Why is it necessary to make adjusting entries?
a. The accountant has made errors in recording external transactions.
b. Certain facts about the affairs of the business are not included in the ledger as
built up from external transactions.
c. The accountant wants to show the largest possible net income for the period.
d. The accountant wants to show the net cash flow for the year.

8._ Notes to financial statements should not be used to


a. describe the nature and effect of a change in accounting principles.
b. identify substantial differences between book and tax income.
c. correct an improper financial statement presentation.
d. indicate basis for asset valuation.

9._ The characteristic of consistency is best demonstrated when


a. expenses are reported as charges against the period in which incurred.
b. the effect of changes in accounting procedure is properly disclosed.
c. exceptional gains and losses are not reported on the income statement.
d. accounting procedures are adopted which give a consistent rate of net income.

10._ The current asset section of a balance sheet should never include
a. a receivable from a customer not collectible for over one year.
b. amount paid for a Held for Trading investment.
c. goodwill arising from the purchase of a going business.
d. customers' accounts with credit balances.
Question 2 (25 marks; 38 minutes)

Jag Corporation
Balance Sheet
Year Ended December 31, 2008

Assets

Current Assets:
Cash $ 18,000
Securities (fair value, $32,000) 27,000
Accounts receivable 75,000
Grain inventory 60,000
Supplies inventory 3,000
Warehouse held for rent and capital appreciation 60,000 $243,000
Investments:
Cumulative other comprehensive income 78,000
Tangible Fixed Assets:
Buildings and land ( fair value $300,000) 113,000
Less: Reserve for amortization 60,000
Farming Land (fair value $120,000) 100,000 153,000

Deferred Charges:
Unamortized patent (original cost $4000) 3,000
Other Assets:
Cash surrender value of life insurance 54,000
$531,000

Liabilities and Capital

Current Liabilities:
Accounts payable $ 25,000
Reserve for bad debts 20,000
Provision for warranty 42,000
Customer's accounts with credit balances 3 $ 87,003

Long-Term Liabilities:
Bonds payable 120,000
Total Liabilities 207,003

Capital Stock:
Capital stock 225,000
Earned surplus 74,997
Cash dividends payable 24,000 323,997
$531,000
Required:

1. Prepare the Statement of Financial Position as per IFRS, in good form using the reverse
liquidity format. Make any corrections necessary due to errors, which include
misclassifications, lack of adequate disclosure, and poor terminology. If an item can be
classified in more than one category indicate your rationale for selecting a particular
category. (20 marks)
2. Based on your restated Statement of Financial position assess this company as a
potential investment. (5 marks)
Question 3 (30 marks: 45 minutes)

Chretien Company’s reported retained earnings for 2010 and the previous year is presented
below:
2010 2009
Retained earnings beginning of the year $210,000 $95,000
Net income $ 150,000 $125,000
Dividends (20,000) (10,000)
Retained earnings end of the year $340,000 $210,000
2010’s net income was properly determined after giving effect to the following accounting
changes and error corrections, etc. which took place during the year. The income for 2009 does
not take these items into account and is stated at the amount determined in that year. Ignore
income taxes.

1. Early in 2010, Chretien Company determined that equipment purchased in January 2008
at a cost of $64,000, with an estimated life of five years and residual value of $4,000 is
now estimated to continue in use until December 31, 2014 and will have a $2,000 residual
value. Chretien records its 2010 amortization at the end of 2010.

2. Chretien determined that it had understated its amortization by $24,000 in 2009 owing to
the fact that an adjusting entry did not get recorded.

3. Chretien bought a truck January 1,2007 for $54,000 with a $6,000 estimated residual value
and a six-year life. The company debited an expense account and credited cash on the
purchase date. The truck is expected to be traded at the end of 2013. Chretien uses
straight-line amortization for its trucks.

4. During 2010, Chretien changed from the straight-line method of amortizing its cement
plant to the double declining-balance method. The cement plant was purchased in
January 2007 for $420,000 and had a remaining life of 5 years at that time.

5. Chretien, in reviewing its provision for uncollectibles during 2010, has determined that 1%
is the appropriate amount of bad debt expense to be charged to operations. The company
had used 1.5% as its rate in 2009 when the expense had been $14,000
. The company would have recorded $24,000 of bad debt expense on December 31, 2010
under the old rate.

6. During 2010, Chretien decided to change from the FIFO method of valuing inventories to
average cost. The net incomes involved under each method were as follows:
2010 2009
FIFO $42,500 $48,500
Average 52,500 57,500
Assume no difference between FIFO and Average inventory values in years prior to 2009.
Required:

(a) For each of the situations described above give the journal entry or entries Chretien
Company made to record them during 2010. Assume that all information was determined
at the beginning of the year although the journal entries are made at the end of the year.
If no entry is required, write “none.”

(b) Prepare the retained earnings portion of the Statement of Changes in Equity of Chretien
Company for the year ending 2010 in proper form, including comparative data.
Question 4 ( 18 marks; 27 minutes)

Patrick Company
Comparative Statement of Financial Position
December 31
2009 2008
Cash $ 43,000 $ 24,000
Accounts receivable, net 35,000 38,000
Inventory 114,000 82,000
Land 120,000 190,000
Building 200,000 200,000
Accumulated amortization (50,000) (40,000)
Equipment 1,030,000 600,000
Accumulated amortization (118,000) (94,000)
$1,374,000 $1,000,000

Accounts payable $ 115,000 $ 100,000


Bonds payable 320,000 -0-
Common shares 750,000 750,000
Retained earnings 189,000 150,000
$1,374,000 $1,000,000
Additional Data:
1. Net income for the year amounted to $84,000.
2. Cash dividends were paid amounting to $45,000.
3. Land was sold for $80,000.
4. Patrick sold equipment, which cost $150,000 and had accumulated amortization of
$60,000, for $70,000.

Required:

1) Prepare a statement of cash flows for 2009 using the indirect method.
2) Explain why the direct method is considered more useful information to the reader.
3) Evaluate the financial liquidity of Patrick Company.
Question 5 (17 marks; 25 minutes)

Marcy Anover owns 50 percent of the Seneca Hockey Club Limited (SHCL). The other 50
percent is owned by a major league hockey team. The major league team supplies many of the
players for the team, which plays in the Class A Central College League. Some of the players
are owned by SHCL, which signed them to contracts.

Most of the players that are signed to contracts by SHCL are paid a small signing bonus plus an
annual wage. The wage is negotiated on the basis of the player’s skills and promise for rising to
the major league level. Some of the players are not successful and are eventually released
from their contracts. Players showing promise are promoted to AA and AAA leagues. Their
contracts are purchased by the teams in the higher leagues. As a result, SHCL can sometimes
make sizeable profit gains on sales of players’ contracts.

Until recently, SHCL has expensed all payments to players. However, this year they have spent
close to $2,000,000 signing several promising players. Management believes that it should be
able to develop several of these players and sell their contracts to teams at higher levels. The
president of SHCL has asked you whether he can record the signing bonuses as assets, and
only expense the players’ monthly wages. He believes that the players represent the major
assets of a hockey team.

The president is willing to expense the capitalized signing bonuses whenever a player is
released from the team. However, whenever a player’s contract is sold, the proceeds of sale
would be recorded as revenue. The capitalized cost would then be expensed.

Required:

1) Select some key accounting concepts from the conceptual framework that you could use to
defend your opinion that the signing bonuses:
i) Should not be capitalized as assets.
ii) Should be capitalized, and expensed only when the player is released, or his
contract is sold. Explain your reasoning.
2) If the signing bonuses are capitalized, and a player’s contract is later sold, should revenue
be credited? Explain using the conceptual framework.