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EXAM
Marks Question 1 (15 marks)
(a) $31,600 - $14,200 = $17, Dr Bad debt expense 17, 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, 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, Dr loss on inventory decline 5, 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, Cr Warranty expense 53, Marks: 1 for the amount, 1 for each account name. (1 mark off for any error) 3
(e) Dr Sales revenue 5, Dr Prepaid expense/interest 10, Cr Bank loans 15, (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
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EXAM
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, 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, Marks: 1 1 1 1 1 5 (1 mark off for any error or incorrect inclusion)
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EXAM
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, Gross margin = 3,000,000 – 2,000,000 = 1,000, 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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EXAM
Question 5 (19 marks) Marks
(a) Ending inventory = 782,500 + 5,492,260 – 5,393,620 = 881, 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, 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, Marks: 1 1 1 (1 mark off for any error) 3 (have to compute this in order to compare NRV) NRV = 843, 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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EXAM
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, Cr Capital lease liability 270, 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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