MARKING GUIDE FOR ACCOUNTING 311 FALL 2001 MID-TERM #1



Marks

Question 1 (15 marks)

(a) $31,600 - $14,200 = $17,400

Dr Bad debt expense 17,400

Cr Allowance for doubtful accounts 17,400]

Marks: 1 for the amount, 1 for each account name. (1 mark off for any error) 3

(b) Dr Allowance for doubtful accounts 2,900

Cr Accounts receivable 2,900]

Marks: 1 each for the two accounts. (1 mark off for any error) 2

(c) $8,200 - $2,400 = $5,800

Dr loss on inventory decline 5,800

Cr Inventory asset 5,800]

Marks: 1 for the amount, 1 for each account name. (1 mark off for any error) 3

(d) Dr Warranty liability 53,000

Cr Warranty expense 53,000

Marks: 1 for the amount, 1 for each account name. (1 mark off for any error) 3

(e) Dr Sales revenue 5,000

Dr Prepaid expense/interest 10,000

Cr Bank loans 15,000

(Or Dr Bank loans 165,000 and Cr the same account 180,000)

Marks: 1 mark for each account title, 1 overall for the amounts. (1 mark off for any error) 4

15

Question 2 (16 marks) Marks

(a) Conclusion: not inconsistent (though may perhaps also argue it is inconsistent) 1

Reasons (2 marks each if well stated, 1 if vague or unclear; max. 4 marks):

• Present value is just a way of calculating the principle value of the debt, which is the same value as used in all liabilities (no future interest is included in any)

• Bank loans and accounts payable carry interest on top of the lent or owed amount, so they too are in effect reported at present value (no interest included)

• Present value is also used in pension accruals 4

5

Mark for conclusion not given if the reasons are inconsistent with it.

(b) Kettle cost = 5,000+305,000-4,000+23,000+27,000+13,000 = 369,000

Marks: 1 1 1 1 1 1 6

(1 mark off for any error or incorrect inclusion)

(c) RE =3,500,000+786,000-230,000-11,000-420,000=3,625,000

Marks: 1 1 1 1 1 5

(1 mark off for any error or incorrect inclusion)

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Marks

Question 3 (15 marks)

Any three of the four items are to be answered. If more than three are answered, only

the first three are to be marked.

(a) Inventory represents value for the future (sale or use)

Prepaid expense also represents value for the future (reduction in future spending)

Concept is that an asset (future economic value) has been acquired

Marks: 2 for each of the above or similar points, max. 5 marks 5

(b) Perpetual methods are used to help management control (or internal control)

by providing accounting records as a check on physical flows of inventories

Perpetual methods are used if the information they provide is worth their cost

Marks: 2 for each of the above or similar points, max. 5 marks 5

(c) Equity is one of the (historical) sources of financing

Retained earnings (part of equity) is used to tie the income statement to the balance sheet (articulation)

Equity is necessary to keep the balance sheet in balance, so accounting for it is part of the double-entry system

Equity is a legal record of shares issued, dividends declared and other transactions with owners

Marks: 2 for each of the above or similar points, max. 5 marks 5

[No marks for commenting on the value of knowing market values etc. – not relevant]

(d) Cost arises from the transactional base of accounting

Cost is verifiable/reliable/objective/documentable See textbook sect 8.2, p.493

Cost is initially equal to market value and value in use

Marks: 2 for each of the above points, max. 5 marks 5

15

Question 4 (21 marks) Marks

(a) Accounts receivable

Inventories

Income tax liability (either payable or future is OK)

Retained earnings

Marks: 1 for each correct account, -1 for any incorrect inclusion (such as cash) 4

(b) (i) OK to recognize revenue earlier if:

• Previous policy was too conservative (unfair)

• Change would make it consistent with the industry

• GAAP (or accounting standards) had changed to the new method

• Or other reasons that reflect fairness etc.

ii) Not OK if:

• Objective is to increase earnings reported to investors

• Objective is to increase management bonuses etc.

• An earlier point would not meet the 4 revenue recognition criteria (textbook p.381: goods/services provided, related costs known, revenue measurable, revenue receipt/collection promised)

• Or other reasons that reflect earnings management, fraud, etc.

Marks: 2 for each valid point (only 1 if the point is vague/unclear) 8

(c) COGS = 3,000,000/150% = 2,000,000

Gross margin = 3,000,000 – 2,000,000 = 1,000,000

Marks: 1 2 (1 off for any error) 3

Dollar effect on net income = 1,000,000 x (1 - .35) = 650,000 increase

Marks: above 1 1 2

5

(d) Two ways the policy change would/might hurt the company/shareholders:

• Increased income tax to be paid due to higher income

• Might be perceived as income manipulation and hurt the company’s reputation or share price

• Or other reasons that appear to hurt (no marks for repeating ethical points)

Marks: 2 for each valid point (only 1 if the point is vague/unclear) 4

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Question 5 (19 marks) Marks

(a) Ending inventory = 782,500 + 5,492,260 – 5,393,620 = 881,140

Marks: 1 1 1 (1 off for any error) 3

(b) LIFO would produce a lower income before tax by 5,558,710 – 5,444,890 = 113,820

Marks: 1 1 1 3

(1 mark off for any error. Conclusion should follow calculation even if errors.)

(c) Average cost = 782,500 + 5,492,260 – 5,444,890 = 829,870

Marks: 1 1 1 (1 mark off for any error) 3

(have to compute this in order to compare NRV)

NRV = 843,000

Lower= 829,870 cost

Marks: 1 for stating NRV, 1 for choosing the lower 2

5

(Only 2 marks for just stating that NRV is lower without showing that it is.)

(d) (i) RC > cost in both cases so no inventory write-down to expense would be needed.

RC would have no effect on income.

RC = 885,000; FIFO = 881,400 (part a), AVGE = 829,870 (part c), both < RC.

Marks: 1 each for comparing FIFO and AVGE to RC 2

1 for concluding that both are < RC, 1 for stating no inventory adjustment 2

(ii) NRV = 843,000, which is lower than FIFO but higher than AVGE.

Therefore NRV could affect income – would depend on what cost method is used.

Marks: 1 each for comparing FIFO and AVGE to NRV 2

1 for concluding that one is > and one is < NRV, 1 for saying it depends 2

8

No penalty in (i) or (ii) if wrong numbers that were already penalized earlier are used.

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Question 6 (19 marks) Marks

(a) BV = 150,000 – 3 years @ 1/20 x (150,000 – 5,000) = 150,000 – 21,750 = 128,250

Marks: 1 1 1 1 1 (1 off for any error) 5

(b) Per-Thing: (150,000 – 5,000) / 2,000,000 Things = .0725 per Thing

Marks: 1 1 1 (1 off for any error) 3

Amort for 2003 = .0725 x 220,000 = 15,950

Marks above 1 (1 off for any new error) 1

4

(c) G or L = 85,000 proceeds – BV from (a)

Marks: 1 1 (no further penalty for any error in part a) 2

= 85,000 – 128,250

= 43,250 Loss (1 mark for specifying G or L; 1 off for any new error) 1

3

(d) Conclusion: No.

Support: Amortization allocates cost to expense over useful life, doesn’t value at market. G or L is just an amortization adjustment, generally inevitable in attempting to anticipate future. (2 marks for explaining amortization adjustment well, 1 for less clear)

OR

Conclusion: Yes.

Support: Failure to anticipate the actual useful life (very short, as it turned out) might be called an error!

Marks: 2 for support, 1 for either conclusion as long as it is consistent with the support 3

(e) Amort = 2/20 x (150,000 – 2/20 x 150,000)= 2/20 x 135,000 = 13,500

Marks: 1 1 1 1 (1 mark off for any error) 4

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Question 7 (15 marks) Marks

(a) Would add Kitty Litter debt and minority interest (1 each) 2

Would not add any equity 1

Therefore would increase the consolidated debt-equity ratio 1

4

(b) Total expense = 40% x 960,000 + (978,000 – 789,000) = 384,000 + 189,000 = 573,000.

Marks: 1 1 1 1 1 (1 mark off for any error) 5

(c) Present value = + (80,000 / .07) (1 – 1 / (1.07)4

Marks: 1 1 1 1 4

= + (80,000 / .07) (1 – 1 / 1.310796) = 270,977 (or thereabouts)

Dr Capital lease asset 270,977

Cr Capital lease liability 270,977

Marks: 1 mark for each account title 2

6

(1 mark off for any error in dollar calculation. Account titles need to have the word lease in both and it must be clear that the Dr is an asset and the Cr is a liability.)

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