NOT FOR CIRCULATION
THE UNIVERSITY OF HONG KONG
ACCT3103 - INTERMEDIATE FINANCIAL ACCOUNTING II
Final Exam
Saturday, May 30, 2020
9:30 am - 11:30 am
Time Allowed: 120 minutes
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Only approved calculators as announced by the Examinations Secretary can be used in this
examination. It is your responsibility to ensure that your calculator operates satisfactorily, and
you must record the name and type of the calculator used in the space provided.
______________________________________________
INSTRUCTIONS:
1. You will have 120 minutes to complete the exam.
2. This exam is closed book - you should NOT use your book or any notes or handouts. You
should NOT use mobile devices for any communications during the exam time.
3. Answer all questions in the answer book. Only the writings (hand-written/typed) in the
answer boxes will be graded.
4. You may use the present value tables in the question paper to answer the questions.
5. There are a total of 10 pages of exam paper, including two present value tables.
6. Round all final answers to the nearest integer unless otherwise specified.
7. When the exam is over, you need to stop writing immediately. Turn in all the pages in the
answer book. Save the file as PDF (with your student ID as the file name) and submit
the file onto MOODLE before 11:50 a.m. (HK time) on May 30, 2020. Late submission
will not be accepted and only one submission is allowed.
UID:
<<< THIS PAPER IS NOT TO BE TAKEN AWAY >>>
Page 1 of 10
SECTION I: Multiple Choice questions (2 marks each, 20 marks in total)
1.
The intrinsic value of cash flow hedge has increased since last balance sheet date. Which
of the following accounting treatment is appropriate for this increased in value at the end
of the current year, if the settlement date of the derivate contract for the cash flow hedge
is at the end of next year?
A. Do not record the increase in the value because it has not been realized in an
exchange transaction.
B. Record the increase in value to current earnings.
C. Record the increase to Other Comprehensive Income.
D. Record the increase to deferred income account.
2. What is the correct treatment of a stock dividend issued in mid-year when computing the
weighted-average number of common shares outstanding for earnings per share purposes?
A. The stock dividend should be weighted by the length of time that the additional
number of shares are outstanding during the period.
B. The stock dividend should be included in the weighted-average number of common
shares outstanding only if the additional shares result in a decrease of 3 percent or
more in earnings per share.
C. The stock dividend should be ignored since no additional capital was received.
D. The stock dividend should be weighted as if the additional shares were issued at the
beginning of the year.
3. Of the following, select the incorrect statement concerning earnings per share.
A. Under a simple capital structure, basic earnings per share and dilutive earnings per
share would be identical.
B. During a loss period, the amount of loss attributed to each share of common stock
should be computed.
C. During a period, changes in stock issued or reacquired by a company may affect
earnings per share.
D. Under a simple capital structure, no adjustment to shares outstanding is necessary
for a stock split on the last day of the fiscal period.
Page 2 of 10
4. The Morris Corporation reported a $59,000 operating loss in 2017. In the next three years,
Morris expect to report the following income before taxes and pay the indicated income
taxes:
Year
2018
2019
2020
Income
$48,000
24,000
36,000
Taxes
$16,800
7,200
10,080
Tax Rate
35%
30%
28%
The amount of tax benefit to be reported in 2017 arising from the tax forward provisions
of the current tax code would be:
A.
B.
C.
D.
5.
For the current year, Eastern Atlantic Company assessed income tax expense of $21,000
based on its taxable income. Income taxes payable at the end of the prior year were
$19,000 and at the end of the current year were $20,000. The deferred tax liability
classified as noncurrent for tax purposes in the balance sheet that results from the use of
accelerated depreciation for tax purposes and the straight-line depreciation for financial
reporting purposes increased from $21,000 at the beginning of the current year to $23,000
at the end of December 31 of the current year. How much cash was paid for income taxes
during the current year?
A.
B.
C.
D.
6.
$20,650
$22,500
$21,300
$20,100
$20,000
$21,000
$19,000
$18,000
If a forecasted transaction is no longer expected to occur, should an organization transfer
the gains and losses associated with the related hedging activities for the transaction out
of equity to the profit and loss account?
A.
B.
C.
D.
Yes, always.
Only if it is cash flow hedge.
Only if the derivative is terminated.
This depends on the hedge relationship.
Page 3 of 10
7. The Mailer Corporation had the following classes of stock outstanding as of December 31,
2018:
Common stock, $400,000 for 20,000 shares outstanding
Preferred stock, 6 percent dividend rate for cumulative $200,000 outstanding
No dividends were paid on preferred stock for 2016 and 2017. On December 31, 2018, a total
cash dividend of $200,000 was declared. What are the amounts of dividends payable on both
the common and preferred stock, respectively?
A.
B.
C.
D.
$164,000 and $36,000
$0 and $200,000
$176,000 and $24,000
$188,000 and $12,000
8. Which of the following is correct regarding basic and dilutive earnings per share (EPS)?
A. If convertible preferred stock is outstanding, dividends declared on the preferred
stock are always deducted from net income in calculating EPS.
B. EPS can never be negative.
C. All issues of convertible to common stock must be included in the calculation of
diluted EPS.
D. If income from continuing operations is less than zero, potentially dilutive securities
are anti-dilutive.
9. When a property dividend is declared, and the book value of the property exceeds its market
value, the dividend is recorded at the
A. Market value of the property at the date of distribution.
B. Market value of the property at the date of declaration.
C. Book value of the property at the date of distribution if it still exceeds the market
value of the property at the date of declaration.
D. Book value of the property at the date of declaration.
10. Which of the following is an example of a temporary difference that would result in a deferred
tax liability?
A. Use of straight-line depreciation for accounting purposes and an accelerated rate for
income tax purposes.
B. Rent revenue collected in advance when included in taxable income before it is included
in pretax accounting income.
C. Use of a shorter depreciation period for accounting purposes than is used for income tax
purposes.
D. Investment losses recognized earlier for accounting purposes than for tax purposes.
Page 4 of 10
SECTION II: Problem solving questions (80 marks in total)
Question 1: Leases (25 marks)
Bayou Inc. leases equipment to its customers under non-cancelable leases. On January 1, 2019,
Bayou (lessor) leased equipment costing $800,000 to Rockwell Co. (lessee) for nine years, with
an estimated residual value of $160,000 at the end of the lease term. The rental cost was
$88,000 payable in advance semiannually (January 1 and July 1), plus $4,000 semiannually for
executory costs. Rockwell Co. plans to return the equipment to Bayou Inc. at the end of the
lease term. The equipment had an estimated life of 15 years and has a fair market value of
$1,066,050 at the time of the lease agreement. The implicit interest rate is 12 percent.
Required:
Prepare all journal entries on Jan 1, July 1, and Dec 31 for 2019 on Bayou's and Rockwell's
books. Round all calculations to the nearest dollar. Use straight-line depreciation.
(1) Bayou's Books (Lessor)
(13 marks)
(2) Rockwell's Books (Lessee)
(12 marks)
Question 2: Debt financing (15 marks)
Mann, Inc., which owes Doran Co. $900,000 in notes payable with accrued interest of
$72,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann
equipment with a fair value of $780,000, an original cost of $1,050,000, and accumulated
depreciation of $250,000.
Required:
(a) Compute the gain or loss to Mann on the settlement of the debt. Show calculations.
(4 marks)
(b) Compute the gain or loss to Mann on the transfer of the equipment. Show calculations.
(4 marks)
(c) Prepare the journal entry on Mann’s books to record the settlement of this debt.
(7 marks)
Page 5 of 10
Question 3: Income Taxes (15 marks)
Quick Company reports the following revenues and expenses in its pretax financial income for
the year ended December 31, 2018:
Revenues
Expenses
Pretax financial income
$329,600
(189,100)
$140,500
The revenues included in pretax financial income are the same amount as the revenues
included in the company’s taxable income. A reconciliation of the expenses reported for pretax
financial income to the expenses reported for taxable income. However, reveals three
differences:
1.
2.
3.
Depreciation deducted for financial reporting exceeded depreciation deducted for income
taxes by $12,000.
Warranty costs deducted for tax reporting exceeded warranty expenses deducted for
financial income taxes by $4,600.
Legal expense of $5,800 was deducted for financial reporting; it will be deducted for
income taxes when paid in a future year.
Assume deferred tax liability and deferred tax assets accounts have zero balance at the
beginning of 2018. The income tax rate for 2018 is 35%, but the government enacted a 30%
rate for 2019 and future years.
Required:
(1)
Compute the Quick Company’s taxable income for 2018. Show calculations. (6 marks)
(2)
Prepare the journal entry for income taxes of Quick Company for 2018. Assume no
valuation allowance is necessary.
(9 marks)
Page 6 of 10
Question 4A: Earnings per Share (10 marks)
At December 31, 2019, Kissit Inc. had 400,000 shares of common stock outstanding. The
company also had 40,000 shares of $7 cumulative convertible preference stock. Each share is
convertible into 4 shares of common stock.
Transactions during 2020:
July 1, 2020
July 8, 2020
September 1, 2020
October 1, 2020
Sold 200,000 shares
Declared 100% stock dividend
Sold 120,000 shares
Purchased 60,000 shares to be retired
Kissit Inc. reported a loss of $670,700 for the year 2020.
Required:
(1)
(2)
Compute the basic earnings per share. Show calculations.
(Round off the answer to 2 decimal places.)
(5 marks)
Conduct the dilution test, compute diluted earnings (loss) per share, and discuss what
Kissit Inc. should report for EPS for the year’s annual report. Show calculations.
(Round off the answer to 2 decimal places.)
(5 marks)
Question 4B: Earnings per Share (5 marks)
Woolery Ltd. had 60,000 ordinary shares outstanding at January 1, 2018. On Oct 1, 2018, an
additional 15,000 shares were sold for cash. Woolery also had convertible bonds outstanding
throughout the year. The carrying amount of the bonds on January 1, 2018 was $5 million and
the effective interest rate was 5%. The bonds are convertible into 50,000 ordinary shares. Net
income for the year was $450,000. The tax rate is 30%.
Required:
Compute the diluted earnings per share for the year ended December 31, 2018. Show
calculations. (Round off the answer to 2 decimal places.)
(5 marks)
Page 7 of 10
Question 5: Hedge accounting (10 marks)
Stiggins Fitness Enterprises uses soybeans to make one of their nutritional supplement
products. Stiggins anticipates a need of 500,000 pounds of soybeans in January of 2019. On
November 1, 2018, Stiggins purchased a call option for 500,000 pounds of soybeans on January
1, 2019, at a price of $0.35 per pound, which is the market price on November 1. Stiggins paid
$2,000 for the call option and designated this option as a hedge against price fluctuations for
their January purchase of soybeans. On December 31, 2018, and January 1, 2019, the prevailing
market price for soybeans is $0.45 per pound. On January 1, 2019, Stiggins purchased 500,000
pounds of soybeans.
Required:
(1) Prepare all necessary journal entries on Stiggins' books at November 1, 2018. (2 marks)
(2) Prepare all necessary journal entries on Stiggins' books at December 31, 2018. (2 marks)
(3) Prepare all necessary journal entries on Stiggins' books at January 1, 2019.
(6 marks)
Page 8 of 10
Appendix 1 – Present value of a single amount of $1
Page 9 of 10
Appendix 2 – Present value of annuity of $1
<<End of paper>>
Page 10 of 10