UNIVERSITY OF ALBERTA, FACULTY OF BUSINESS



UNIVERSITY OF ALBERTA, FACULTY OF BUSINESS

DEPARTMENT OF ACCOUNTING AND MIS

ACCOUNTING 311, FALL TERM 2004, SECTION A1

FINAL EXAMINATION, December 16, 2004: 120 minutes

MARK SUMMARY

Question Page Marks Available Marks Awarded

1 2 9

2 3 14

3 3 5

4 4 15

5 5 14

6 6 16

7 7 20

8 8 16

9 9 11

TOTAL MARKS 120

Question 1 (9 marks and minutes)

Full of enthusiasm and fresh ideas after finishing your business courses, you decide to help your aunt start an electronic products warehouse operation, “Best Sell”. Your aunt has proposed that the business will import electronic products from overseas suppliers, store them in the Edmonton warehouse, and then ship them to large retail stores in western Canada. Your aunt feels that one more employee should be sufficient to help you order the inventory, receive the shipments from the suppliers, fill the orders from the retail stores, and accurately record all transactions. Best Sell will conduct all sale and purchase transactions electronically and therefore the warehouse will have no cash on site. Your aunt does not want to be actively involved and would like you to state three internal controls that you would want to establish for Best Sell. For each, make it clear how the control would work. No marks for vague answers like “bank reconciliations” (in fact, since this was an example, no marks for any point involving bank reconcilations)!

Control 1:

Control 2:

Control 3:

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Question 2 (14 marks and minutes)

On December 1, 2003, Claus Inc. invested in Toy Factory Ltd. (TFL) by purchasing 25% of TFL’s outstanding common shares for $756,900 cash. Sandra Claus is the bookkeeper at Claus Inc., but she is unsure of how the cost method and equity method work for recording an investment such as TFL. For the year ended November 30, 2004, TFL had total net income of $251,004 and declared and paid dividends of $196,352. Claus Inc. has no other investments, and no property, plant or equipment, and did not enter into any other transactions during the year. Complete the table below for Sandra.

|Claus Inc. |Cost Method |Equity Method |

|Total investment income for the year ended November 30, | | |

|2004 | | |

|Balance of investment asset account as at November 30, | | |

|2004 | | |

|Cash (used in)/provided by operating activities for the | | |

|year ended November 30, 2004 | | |

|Cash (used in)/provided by investing activities for the | | |

|year ended November 30, 2004 | | |

|Cash (used in)/provided by financing activities for the | | |

|year ended November 30, 2004 | | |

Question 3 (5 marks and minutes)

Your uncle has invested in a small oil and gas exploration firm and is interested in your thoughts on a recent transaction. Provide brief, non-technical responses to your uncle’s questions.

1) From the shareholder’s perspective, what is the difference between a 2-for-1 share (stock) split and a 100% share (stock) dividend?

2) How should an efficient stock market react to a 2-1 share (stock) split?

Question 4 (15 marks and minutes)

For each of the following independent events of Kerr Inc., write in the appropriate space the dollar effect on net income of that event alone. If there is no effect, put an X in that space. Show any calculations. Kerr Inc.’s income tax rate is 40%.

Dollar effect on Kerr Inc. net income

$ Increase or $ Decrease or No effect

a. Kerr Inc. borrowed $60,000 from the bank, to be repaid in one year plus 5% interest. $________or $________ or ____

b. Kerr Inc. issued shares for $1,000,000 and had to pay $14,000 in legal fees as part of the transaction. $________or $________ or ____

c. Kerr Inc. sold services for $12,000 plus $840 GST to a customer who has promised to pay in 60 days. $________or $________ or ____

d. Kerr Inc.’s accountant estimated that the income tax payable on the year’s income is $240,000 and future income tax for the year is negative $11,000. $________or $_______ or ____

e. Kerr Inc. determined that the allowance for doubt-ful accounts must be increased by $62,000 and that $21,000 of accounts receivable must be written off. $________or $_______ or ____

f. Kerr Inc. announced signing a new contract that would bring in $1,200,000 income. The company’s shares’ market value went up $420,000 on the news. $________or $________ or ____

Question 5 (14 marks and minutes)

Blotz Corp. has some mining activities and is required to return the land it uses to a good state after concluding any mining operation. Therefore, the company has a liability for land reclamation, created by recording as an expense a portion of the eventual cost of reclaiming the land. For example, if the reclamation is expected to cost $200,000 in 20 years, the company would record an expense of $10,000 each year. The company has not finished with any of its mines yet, so has not yet done any reclamation. No reclamation is expected in the next few years, so the reclamation liability is in the noncurrent liabilities section of the balance sheet.

Due to a recent change in the law requiring a more intensive reclamation than had been expected, the company has to change its method of accounting for the eventual cost. The company’s accountant provides the following data:

Reclamation liability at the beginning of this year:

Previous method $1,780,000

New method $2,210,000

Reclamation expense for this year:

Previous method $85,000

New method $138,000

Income tax rate for the past, present and future 40%

State the effect of the accounting policy change on each of the following. Calculate the exact effect if you can, otherwise explain the effect you expect. Show any relevant calculations – note that some answers may not require calculations.

(a) Net income for this year

(b) Retained earnings at the end of this year

(c) Cash flow from operations for this year

(d) Working capital at the end of this year

(e) Company’s share price on the day the accounting change is announced

Question 6 (16 marks and minutes)

Boot Camp Inc. sells a wide variety of footwear.

a. (10 marks) One of Boot Camp Inc.’s products is pink fuzzy slippers. At May 1, 2003, there were 700 pairs on hand that had cost the company $4.00 per pair. These events happened in this sequence during the year ended April 30, 2004:

Purchased another 150 pairs for $4.50 each,

Sold 650 pairs for $9.00 each,

Purchased 550 pairs for $5.00 each, and finally,

Sold 250 pairs for $9.50 each.

i. Calculate cost of goods sold for the fuzzy slippers for the year ended April 30, 2004, using the FIFO (first-in, first-out) method.

ii. Calculate the ending inventory cost at April 30, 2004 using the moving average method.

b.(6 marks) Boot Camp Inc. was incorporated a few years ago. The main shareholder, who used to be the sole proprietor before Boot Camp Inc. was incorporated, was looking over some income statements for the earlier proprietorship and was confused about some expenses that are on Boot Camp Inc.’s income statement but were not on the proprietorship’s income statement.

Specify two expenses that are usually on an incorporated business’s income statement but not on a proprietorship’s income statement and explain in just a few words why each is absent from the proprietorship’s income statement.

i. First expense: _________________________________________

Why absent:

ii. Second expense: _________________________________________

Why absent:

Question 7 (20 marks and minutes)

Mud Inc. is considering each of the following independent possibilities. For each, indicate the direction of the effect on each of the five financial statement figures given. (You may use only four categories of direction: up, down, no effect, or can’t tell (from the information given).) There is room to state assumptions, which will be read only if your answer is unexpected. IGNORE ANY INCOME TAX EFFECTS.

|Possibility |Current Assets |Total Assets|Liabilities |Revenue |Net Income |Assumption |

|Move from FIFO to LIFO inventory policy | | | | | | |

|for a product whose cost has been | | | | | | |

|increasing steadily for the past 30 | | | | | | |

|years. | | | | | | |

|Write off a long term investment in a | | | | | | |

|large publicly traded company whose value| | | | | | |

|has decreased to zero. | | | | | | |

|Collect a deposit on a construction | | | | | | |

|project that has not yet begun. | | | | | | |

|Receive $956,678 when you issue a | | | | | | |

|$1,000,000 5 year bond with a stated | | | | | | |

|interest rate of 8%. | | | | | | |

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Question 8 (16 marks and minutes)

Give one reason for and one reason against the following accounting methods or proposals for a publicly traded company’s accounting. There is not much answer space because each reason should be brief: concise and to the point.

a) Capitalize a lease

One reason for:

One reason against:

b) Delay releasing the financial statements to correct an error discovered in the financial statements

One reason for:

One reason against:

c) Record an estimated payment for a lawsuit for wrongful dismissal of an executive before the final court judgment has been received.

One reason for:

One reason against:

d) Report temporary investments at the lower of cost or market

One reason for:

One reason against:

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Question 9 (11 marks and minutes)

Sleigh Incorporated manufactures one-horse open sleighs for customers in northern Canada. On June 22, 2004 Sleigh Inc. suffered a catastrophic fire that destroyed two of its key manufacturing assets (Assets #1 and #2 below). Asset #3 was brand new and was not destroyed by the fire but was damaged by the smoke. Management feels that Asset #3 is probably worth half of what they paid due to the smoke damage. The fire also destroyed eight sleighs that were fully constructed and were ready for. Costs incurred on those eight sleighs totaled $168,000. The only manufacturing asset that was insured was Asset #3 and the proceeds from that insurance were received by the end of August. Sleigh Inc. also had general business insurance that provides 50% of the value of other non-manufacturing assets damaged.

Provide June 22, 2004 journal entries to record the asset damage and the expected insurance proceeds.

| |Original cost |Accumulated Amortization |Insured? |Insurance proceeds |

|Asset #1 |$1,245,700 |$500,800 |yes |$900,000 |

|Asset #2 |$386,540 |$386,540 |no |None |

|Asset #3 |$720,000 |$0 |no |None |

Asset #1:

Asset #2 :

Asset #3:

Any other entries:

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Student ID:

Name (print):

Signature:

This exam has a mixture of content from lectures, seminars, readings, exam practice questions and project work. It covers the whole course.

Please read these instructions:

• Check that you have a complete exam (9 questions on 9 pages, including this cover).

• The exam is closed-book. You may not bring any material to the exam.

• Your calculator must not be programmable.

• 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 clearly all calculations and explanations, and communicate clearly to the marker. Point-form answers are encouraged. GOOD LUCK!

End of Exam

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