Mr
Student ID
Acctg 311
Fall 2005
Final Exam
December 12, 2005
Please read these instructions:
• Check that you have a complete exam (8 pieces of paper including this cover).
• Enter your student ID number above and your name at the top of page 3.
• Do not start the exam until directed to by the exam proctor.
• The exam is closed book. You may not bring any material or study aids into this exam.
• You should use a non-programmable calculator. The exam proctor has the right to check all programmable calculators and erase the calculator’s memory.
• You have 120 minutes to complete the exam. No extra time will be provided.
• Answer each question in the space provided. State any assumptions you need. Show your work clearly, provide explanations where necessary, and communicate clearly to the markers.
• Point form answers are encouraged.
• If you need to leave the exam room before the end of the exam, hand your paper and ONECARD to the proctor before you leave.
• At the end of the exam, remain seated and the exam proctor will collect your paper. Do not leave during the last 10 minutes of the exam.
• You can unstaple your exam to work on the questions but you must restaple it before handing it in. We have staplers for your use.
• Have a great holiday season and good luck with your courses next semester!!
|Question |Marks available |Marks awarded |
|1 |42 | |
|2 |13 | |
|3 |12 | |
|4 |11 | |
|5 |10 | |
|Total |88 | |
Question 1 [42 marks]
Name (Last, First)
Mr. Percy, the friendly local banker, has recently approached you for some advice on a local candy store, Suck This Inc. Ms. Vera Sour opened Suck This Inc. on Jan 1, 2004. Vera owns all of the common shares of Suck This Inc.
An income statement and balance sheet for Suck This Inc. have already been prepared and are shown on page 4. Mr. Percy would like you to prepare a statement of cash flows for the year ended December 31, 2005 using the indirect method. Vera has some questions regarding the statement of cash flow and she would also like you to calculate and interpret the Scott formula for Suck This Inc. using the December 31, 2005 information. There is space to prepare the statement of cash flows on page 5 and space to calculate the Scott formula is on page 6. Vera’s questions about the statement of cash flow and the Scott formula are on page 7. Show your work!
Rough notes and calculations only – this will NOT be marked
|INCOME STATEMENT |
| Suck This Inc. |
| | Year ended |
| |Dec 31/05 |
| Sales | $ 182,940 |
| Cost of goods sold | 69,517 |
| Gross profit | 113,423 |
| | |
| Advertising | 14,400 |
| Amortization | 32,875 |
| Interest | 19,573 |
| Utilities | 16,800 |
| Wages and benefits | 21,000 |
| | 104,648 |
| Net income before tax | 8,775 |
| Income tax expense | 3,071 |
| Net income | $ 5,704 |
| | |
| | |
| STATEMENT OF RETAINED EARNINGS |
| Balance at December 31, 2004 | $ 17,000 |
| Net income | 5,704 |
| Dividends ** | (18,000) |
| Balance at December 31, 2005 | $ 4,704 |
|BALANCE SHEET |
| Suck This Inc. |
| | As at |
| |Dec 31/2005 |Dec 31/2004 |
| ASSETS | | |
| Cash | $ 19,484 | $ 15,250 |
| Accounts receivable | 21,300 | 6,700 |
| Inventory | 15,695 | 22,765 |
| Prepaid asset | 5,000 | 3,000 |
| | 61,479 | 47,715 |
| | | |
| Property, plant and equipment * | 210,585 | 183,585 |
| Accumulated Amortization | (67,575) | (34,700) |
| | 143,010 | 148,885 |
| TOTAL ASSETS | $ 204,489 | $ 196,600 |
| | | |
| LIABILITIES | | |
| Accounts payable | $ 23,450 | $ 10,365 |
| Income tax payable | 3,071 | - |
| Current portion of mortgage | 25,000 | 20,000 |
| | 51,521 | 30,365 |
| Long term mortgage | 111,585 | 136,585 |
| | 163,106 | 166,950 |
| EQUITY | | |
| Common shares | 36,679 | 12,650 |
| Retained earnings | 4,704 | 17,000 |
| | 41,383 | 29,650 |
| TOTAL LIABILITIES AND EQUITY | $ 204,489 | $ 196,600 |
* Suck This Inc. did not dispose of any property, plant or equipment during the year ended December 31, 2005.
** All dividends were paid before year end.
Statement of Cash Flow [18 marks]
Calculate the Scott formula. Clearly show your work. [16 marks]
Based on the components of the Scott formula, suggest three ways that Vera Sour could improve her overall investment return. If your suggestion does not relate directly to the Scott formula, no marks will be awarded. [3 marks]
Vera Sour is concerned about the ability of Suck This Inc. to meet the necessary mortgage repayments in 2006. Using information from the statement of cash flows, the income statement, and the balance sheet respond to Vera’s concern. Remember that she is a relatively unsophisticated user. Provide five distinct points that would be helpful to Vera. [5 marks]
Question 2 [13 marks]
On November 30, 2005, The Brotherhood Ltd. purchased 75% of the voting shares of Ya Ya Sisterhood Ltd. for $17,000. At the date of acquisition, Ya Ya Sisterhood’s balance sheet showed total assets of $25,600 and total liabilities of $12,000. On the date of acquisition, both parties agreed that the fair market value of Ya Ya’s assets was $30,000 and the fair market value of Ya Ya’s liabilities was $15,000.
Balance Sheet
The Brotherhood Ltd.
November 30, 2005
General Assets $150,000
Investment in Ya Ya Sisterhood Ltd. $ 17,000
Total Assets $167,000
General Liabilities $ 95,000
Equity $ 72,000
Total Liabilities and Equity $167,000
What new accounts will be created on the Brotherhood’s Balance sheet on the date of acquisition? [2 marks]
Create the consolidated balance sheet for The Brotherhood Ltd. as at November 30, 2005. Clearly show your work. [11 marks]
Question 3 [12 marks]
Answer all of the following points.
1) The fourth paragraph of a standard auditor’s report for a Canadian company is usually the most informative part of the auditor’s report. True or false? Briefly explain your answer. [2 marks]
2) Sir Conrad Black is considered by most business people to be one of the most honest and upstanding Chief Executive Officers of the newspaper industry. True or false? Briefly explain your answer. [2 marks]
3) Your roommate wakes you up again at 2 am one Saturday morning and says that they have just one more accounting question, “Why do we have accounting principles that are different from the set of income tax rules? It seems like we should just have one set of rules and principles that accomplishes both jobs!” [2 marks]
4) If accounting information is not useful to the capital market participants, it should not be produced. Agree or disagree? Briefly explain your answer. [2 marks]
5) What is the definition of revenue? [2 marks]
6) Explain why segregation of duties is an effective internal control for valuable assets. [2 marks]
Question 4 [11 marks]
Provide journal entries for each independent event listed below. Ignore any income tax effect. If no journal entry is required, state so, explain why and discuss what disclosure would be required in the financial statements. Clearly identify all accounts you use as current or non-current, and whether the account is an asset, liability, equity, revenue, or expense account.
1. Mawani Inc. ordered a beer bottling machine for $40,000 from Blackout Ltd yesterday. The machine will have a useful life of 10 years and an expected salvage value of $5,000. Mawani Inc. will pay Blackout Ltd. $5,000 every month starting next month plus 2% interest on the remaining balance. The machine is to be delivered in 3 weeks. [3 marks]
2. Mawani Inc. has recently settled 6 years of disputed property tax payments with the municipality. The total payment was $43,788. This payment consisted of $34,688 that Mawani Inc. had accrued for the missed payments, $6,700 for next year’s property tax, and $2,400 to cover legal fees related to the dispute.[3 marks]
3. Mawani Inc. paid $25,000 to purchase an option contract that allows Mawani Inc. to purchase the High Level Bridge for $3,000,000 at any time before December 31, 2010. [2 marks]
4. Mawani Inc. exercised their option contract (described above) on the High Level Bridge, paid the required funds to the City of Edmonton, and took ownership of the bridge. [3 marks]
Question 5 [10 marks]
Brassoff Inc. is a small company based in Edmonton. A summary of some of Brassoff Inc.’s accounts as at December 31, 2004 is provided below. During 2005 Brassoff Inc. completed the following events:
1. Brassoff Inc. issued 10,000 preferred shares for total cash payment of $105,900.
2. Brassoff Inc. declared and paid $12,340 of common share dividends.
3. Brassoff Inc. declared $4,500 of preferred share dividends. None of this amount had been paid by year end.
4. Net income before tax for the year ended December 31, 2005 was $14,560. Included in this amount was amortization of $15,600.
5. Brassoff Inc.’s taxable income for the year ended December 31, 2005 was $20,000 including a deduction for capital cost allowance of $10,160. Brassoff Inc. is subject to a corporate tax rate of 35%.
|Account |Dec 31/04 balance |
|Cash |$12,345 |
|Accounts receivable |56,700 |
|Accounts payable |42,575 |
|Future income tax liability |3,578 |
|Common shares |450,987 |
|Retained earnings |23,645 |
Complete the requests on the next page.
Complete the preparation of Brassoff Inc.’s income statement for the year ended December 31, 2005 beginning with “Net income before tax” and ending with “Net income”.
Complete the “Equity” section of Brassoff Inc.’s balance sheet as at December 31, 2005.
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Put your student ID here.
Put your ONECARD on your desk.
Put your name at the top of page 3.
End of exam
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