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Summer 2006
YORK UNIVERSITY
ATKINSON FACULTY OF LIBERAL AND PROFESSIONAL
STUDIES
School of Administrative Studies
ALTERNATE - Advanced Financial Accounting - AK/ADMS 4520A
August 10, 2006: Veri Hall B
7:00pm to 10:00pm (EXAM WITH SOLUTION SET – see end of this document
for solutions)
Course Director:
John Harris
General Instructions:
The midterm has 100 marks and consists of 21 pages. Please ensure that you have all 21 pages
(this cover sheet counts as page number 1).
Neatly print your name, student number and section number on the front of this exam.
Instructions:
1. This test has 2 sections A & B and 21 pages.
2. The marks for the 2 sections total 100.
Section
A
B
B
B
Question
Marks
Time Allocation
1-25
2
3
4
25
20
25
20
100
90 minutes
30 minutes
30 minutes
30 minutes
180 minutes
Section A has multiple choice questions. Choose the most appropriate answer and write
your answer in the space provided on the next page. Your answers for Section B should be
written on the blank pages provided after each question. You must show your work and
your calculations in order to get marks.
Last Name: _______________________________________________________
First Name: _______________________________________________________
Student Number: __________________________________________________
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Section A: Questions 1-25 25 marks (1 mark each) – 90 minutes
– please place your answer in PEN in the space provided in the box immediately below:
Q1/
Q2/
Q3/
Q4/
Q5/
Q6/
Q7/
Q8/
Q9/
A10/
Q11/
Q12/
Q13/
Q14/
Q15/
Q16/
Q17/
Q18/
Q19/
A20/
Q21/
Q22/
Q23/
Q24/
Q25/
1. What is the correct method of treating a purchase price discrepancy arising from a Preferred Share Issue?
a. It should be treated as an adjustment to Goodwill.
b. It should be pro-rated across the subsidiary’s identifiable assets and liabilities.
c. It should be expensed in the current year.
d. It should be adjusted to a Shareholder Equity account.
2. Which of the following statements pertaining to Retained Earnings is correct?
a. If the shares are participating, only the current year’s net income would be allocated to the shares.
b. If the shares are non-participating, only the current year’s net income would be allocated to the shares.
c. If the shares are participating, the current year’s net income would be allocated to the shares only if the subsidiary is
fully owned by the Parent.
d. There can never be any dividends in arrears when the preferred shares are participating.
3.
Intercompany profits on sales of inventory are only realized
a.
b.
c.
d.
4.
once the seller receives payment for the sale.
once the inventory has been sold to outsiders.
when the inventory has been received by the purchaser.
when the inventory has been shipped to the purchaser.
If a parent company borrows money from its subsidiary, what effect (if any) will this have on the NonControlling Interest?
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a.
b.
c.
d.
This would have no effect on the Non-Controlling Interest.
The subsidiary would book its pro-rata share of any interest revenue.
The Non-Controlling Interest Balance would be reduced by the amount of the loan.
The subsidiary would record any interest revenue as an extraordinary gain.
5. A Inc. owns 80% of B’s outstanding voting shares. Under which of the following scenarios would A’s ownership
percentage of B change?
a.
b.
c.
d.
B Inc. announces a 2-for-1 stock split to all its common shareholders.
B issues an additional 10,000 voting shares. A acquires 8,000 shares of the new issue.
B issues an additional 10,000 voting shares. A acquires 6,400 shares of the new issue.
B retires 20,000 voting share, and in doing so, buy back 16,000 shares from B.
6. Assume that X Corp. controls Y Corp. X constantly purchases and sells Y’s voting shares on the open market
while always ensuring that it maintains a controlling interest over Y.
Which of the following statements pertaining to A’s buying and selling activity is correct?
a.
b.
c.
d.
A’s activity has no effect on the Non-Controlling Interest.
As A sells shares of B, the Non-Controlling Interest increases.
As A sells shares of B, the Non-Controlling Interest decreases.
As A buys shares of B, the Non-Controlling Interest increases.
7. How would any management fees charged by a Parent Company to its Subsidiary be accounted for during the
Consolidation process?
a.
b.
c.
d.
The Parent Company would only record its pro rata share of any Management Revenues.
The Parent Company’s profit on the rendering of Management Services would be charged to Retained
Earnings.
Both the Parent’s Management Fees and the Subsidiary’s related expense would be eliminated when
preparing Consolidated Financial Statements.
No special accounting treatment is required, since this would have no effect on Consolidated Net Income.
18. Section 3055 of the Handbook requires that Joint Ventures be accounted for using
a. the Cost Method.
b. the Pooling of Interests Method.
c. the Entity Theory.
d. Proportionate Consolidation.
9. Company A and B agree to engage in a joint venture. Which of the following statements pertaining to Joint
Ventures is correct?
a.
b.
c.
d.
Both parties to a joint venture must contribute an equal amount of resources to the venture.
The party contributing the most resources to the venture has control over the venture.
Both parties have joint control over the venture.
All joint ventures have a stated economic useful life.
10. How are intercompany transactions handled in a joint venture?
a.
b.
c.
d.
They are ignored.
They are completely eliminated.
Only the venturer’s share of any after tax profit is eliminated.
Intercompany profits are treated as an adjustment to the Purchase Discrepancy.
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11. Which of the following statements pertaining to any Purchase Price discrepancy arising from a Joint Venture
is correct?
a. There can be no Purchase Price Discrepancy arising from the formation of a new Joint Venture.
b. The Purchase Price Discrepancy arising from a newly formed Joint Venture is allocated across the venture’s
identifiable net assets.
c. The Purchase Price Discrepancy arising from a newly formed Joint Venture is immediately charged to the
Retained Earnings of each venturer on a pro-rata basis.
d. There can be no Purchase Price Discrepancy arising from the sale of a venturer’s interest in the joint venture.
12. Which of the following is not a requirement for a business component to be considered an Operating Segment?
a. Discrete financial information must be available.
b. Operating results are regularly reviewed by the enterprise’s Chief Operating Decision Maker. to make decisions
about resources to be allocated to the segment and assess its performance.
c. The reportable income or loss must be at least 10% of the combined profit or loss for the combined entity.
d. It engages in business activities from which it may earn revenues and incur expenses.
13. Which of the following is NOT used as a quantitative threshold to determine that an operating segment is
reportable?
a. 10% of the combined revenues of all reported operating segments
b. 10% of the combined assets of all segments
c. 10% of all expenses are traced to the segment
d. 10% or more of the absolute amount of the combined reported profit of all operating segments that did not report a
loss OR 10% or more of the absolute amount of the combined reported losst of all operating segments that did report a
loss
14. Assuming no intercompany transactions, what effect would the elimination of the
parent’s ownership interest in the shareholder equity of the subsidiary against the Investment in the subsidiary have on
the preparation have on the preparation of financial statements?
a. The difference arising from the elimination entry would yield the unamortized purchase price discrepancy on
that date.
b. The difference arising from the elimination entry would give the purchase price discrepancy amortized to date.
c. The difference arising from the elimination entry would be allocated to Goodwill.
d. The difference arising from the elimination entry would provide the balance in the Non-Controlling Interest
account.
15. Assuming that A acquired a controlling interest in B through numerous small acquisitions, what would be the
CICA Handbook’s recommendation(s) with respect to these acquisitions?
a.
b.
c.
d.
A purchase price discrepancy must be computed following each purchase.
The Equity method must be adopted retroactively once 20% ownership is obtained.
The purchases should all be grouped together and treated as a single block purchase.
The Cost method should be used until a controlling interest is acquired.
16. Any unallocated portion of the difference between a parent’s ownership interest in the shareholder equity of a
subsidiary against the Investment in that subsidiary would be
a. allocated to Goodwill.
b. attributable to the Non-Controlling Interest.
c. expensed.
d. pro-rated across all identifiable assets and liabilities.
17. A owns 80% of B, which in turn owns 55% of C. Which of the following statements is correct?
a. A has direct control over C.
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b. A has indirect control over C.
c. A has no control over C.
d. A has contingent control over C.
18. X owns 70% of Y which in turn owns 25% of Z. X also owns 20% of Z. Which of the following statements is
correct?
a. X has direct control over Z.
b. X has indirect control over Z.
c. X has no control over Z.
d. X has contingent control over Z.
The following information pertains to question 7 through 13 inclusively.
Jay Inc owns 80% of Tesla Inc and uses the Cost Method to account for its Investment. The 2003 Income
Statements of both companies are shown below.
Gross Profit
Jay
$100,000
Tesla
Miscellaneous Expenses
Depreciation Expense
Income Tax Expense
$30,000 $20,000
$20,000 $15,000
$20,000 $ 6,000
Net Income
$30,000 $9,000
$50,000
On January 1, 2001, Tesla sold equipment to Jay at a profit of $3,000. Jay had been depreciating this equipment
over a 20 year period. Both companies are subject to an effective tax rate of 40%.
19. The amount of Gross Profit appearing on Jay’s 2003 Consolidated Income Statement would be
a.
b.
c.
d.
$150,000.
$153,000.
$147,000.
$147,600.
20. The amount of Miscellaneous Expense appearing on Jay’s 2003 Consolidated Income Statement would be
a.
b.
c.
d.
$50,000.
$53,000.
$47,000.
$47,600.
21. The amount of Depreciation Expense appearing on Jay’s 2003 Consolidated Income Statement would be
a.
b.
c.
d.
$15,000.
$35,000.
$34,850.
$34,880.
22. The amount of Income Tax Expense appearing on Jay’s 2003 Consolidated Income Statement would be
a.
b.
c.
d.
$26,000.
$26,060.
$25,940.
$34,880.
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23. The amount of Non-Controlling Interest in Earnings appearing on Jay’s 2003 Consolidated Income Statement
would be
a.
b.
c.
d.
Nil.
$1,800.
$1,830.
$1,818.
24. The amount of Net Income appearing on Jay’s 2003 Consolidated Income Statement would be
a.
b.
c.
d.
$30,000.
$37,200.
$36,000.
$37,272.
25. The amount of Future Income Tax appearing on Jay’s 2003 Consolidated Balance Sheet would be
a.
b.
c.
d.
Nil.
$2,550.
$1,020.
$1,000.
SOLUTION SET SUMMARY
Q1/ Ans: D
Q2/ Ans: B
Q3/ Ans: B
Q4/ Ans: A
A5/ Ans: C
Q6/ Ans: B
Q7/ Ans: C
Q8/ Ans: D
Q9/ Ans: C
Q10/ Ans: C
Q11/ Ans: A.
Q12/ Ans: C
Q13/ Ans: C
Q14/ Ans : A
Q15/ Ans: C
Q16/ Ans: B
Q17/ Ans: B
Q18/ Ans: C
Q19/ Ans: A
Q20/ Ans: A
Q21/ Ans: C
Q22/ Ans: B
Q23/ Ans: D
Q24/ Ans: D
A25/ Ans: C
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Question 2
On January 1, 2002, Elmo Enterprises purchased all of the voting shares of Grover Corp for $1,600,000. Grover’s
balance sheet on that date was as follows:
Book Value
Fair Value
Cash
Accounts Receivable
Inventory
Fixed Assets (net)
$700,000
$300,000
$100,000
$600,000
$ 700,000
$ 360,000
$ 140,000
$ 720,000
Total Assets
$1,700,000
Current Liabilities
Long-Term Debt
Common Stock
Retained Earnings
$400,000
$800,000
$100,000
$400,000
Liabilities and Equity
$1,700,000
$400,000
$760,000
During 2002, Grover’s Accounts Receivable was collected, while the company’s inventory was all sold during 2004.
The Fixed Assets had a remaining useful life of 10 years on the date of acquisition, while the Long-Term debt comes
to term on December 31, 2011. A Goodwill impairment loss of $20,000 was recorded in 2002.
The financial statements for Elmo and Grover as at December 31, 2004 are shown below. Elmo has used the Equity
Method to account for its Investment in Grover. Grover was instructed to apply push-down accounting from the
acquisition date onwards.
Income Statements
Elmo
Grover Corp
Sales
Investment Income (Equity Method)
Other Revenues
$2,400,000
$ 200,000
$ 120,000
$1,200,000
Cost of Goods Sold:
Depreciation Expense
Other Expenses
$2,000,000
$ 100,000
$ 360,000
$780,000
$ 60,000
$160,000
Net Income
$ 260,000
$200,000
Less: Expenses:
Retained Earnings Statements
Elmo
Grover Corp.
Balance, January 1, 2003
Net Income
Less: Dividends
$ 800,000
$ 260,000
($ 20,000)
$240,000
$200,000
($20,000)
Retained Earnings
Balance Sheets
$1,040,000
$420,000
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Cash
Accounts Receivable
Inventory
Fixed Assets (net)
Investment in Grover
Goodwill
Other Investments
$2,100,000
$ 680,000
$ 200,000
$ 600,000
$ 820,000
$320,000
$200,000
$880,000
$400,000
Total Assets
$4,700,000
$1,900,000
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
$ 860,000
$ 800,000
$2,000,000
$1,040,000
$780,000
$300,000
$400,000
$420,000
Total Liabilities and Equity
$4,700,000
$1,900,000
$100,000
$ 300,000
REQUIRED:
A. Prepare the Consolidated Income Statement for 2004.
B. Prepare the Consolidated Retained Earnings Statement for 2004.
C. Prepare the Consolidated Balance Sheet for 2004.
Solution to PART A:
Elmo Inc
Consolidated Income Statement
For the Year ended December 31, 2004
Sales
Other Revenues
$3,600,000
$ 120,000
Less: Expenses:
Cost of Goods Sold:
Depreciation Expense
Other Expenses
$2,780,000
$ 160,000
$ 520,000
Net Income
$ 260,000
Solution to PART B:
Consolidated Statement of Retained Earnings
As at December 31, 2004
Beginning Retained Earnings
$800,000
Add: Consolidated Net Income
$260,000
Less: Dividends (Slater)
($20,000)
Consolidated
$1,040,000
Retained Earnings
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Solution to PART C:
Elmo Corp.
Consolidated Balance Sheet
As at December 31, 2004
Cash
Accounts Receivable
Inventory
Fixed Assets (net)
Goodwill
Other Investments
$ 2,420,000
$ 880,000
$ 1,080,000
$ 1,000,000
$ 100,000
$ 300,000
Total Assets
$5,780,000
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
$1,640,000
$1,100,000
$2,000,000
$1,040,000
Total Liabilities and Equity
$5,780,000
Question 3/
On January 1, 2000, Alpha, Beta and Gamma agree to enter into a joint venture and thereby formed Find Corp. Alpha
contributed 40% of the assets to the venture, which was also its stake in the venture. Presented below are the Financial
Statements of Alpha and Find as at December 31, 2004:
Balance Sheets:
Alpha
Find
Current Assets
Investment in Find
Other Assets
$600,000
$ 50,000
$100,000
$300,000
Total Assets
$750,000
$350,000
Current Liabilities
Long-Term Debt
Capital Stock
Retained Earnings
$200,000
$150,000
$200,000
$200,000
$100,000
$100,000
$ 90,000
$ 60,000
Total Liabilities and Equity
$750,000
$350,000
Revenues
Income from Find
$826,000
$ 20,000
$70,000
Total Revenues
$846,000
$70,000
Expenses
$780,000
$60,000
Net Income
$ 66,000
$10,000
$ 50,000
Income Statements:
Alpha’s Investment has been accounted for using the partial equity method. No intercompany eliminations have been
recorded.
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Alpha supplies Find with an important component that is used by Find as it carries out its business activities. The
December 31, 2004 Inventory of Find contains items purchase from Alpha on which Alpha recorded a gross profit of
$10,000. Intercompany sales are always priced to provide the seller with a gross margin of 40% on sales. Both
companies are subject to a tax rate of 40%. On December 31, 2004, Find still owed $5,000 to Alpha for unpaid
invoices.
REQUIRED:
A/ Prepare a schedule of Intercompany items as at December 31, 2004.
B/ Prepare Alpha’s Consolidated Income Statement for the year ended December 31, 2004.
C/ Prepare Alpha’s Balance Sheet as at December 31, 2004.
Solution to Part A:
Intercompany eliminations:
Sales and Purchases
($25,000*40%)
Receivables and Payables ($5,000*40%)
$10,000
$ 2,000
Intercompany Profits
Closing Inventory:
Considered Realized
Unrealized
Net of Tax:
$10,000
($ 6,000)
$ 4,000
$ 2,400
Solution to Part B:
Alpha,
Consolidated Income Statement
For the year ended December 31, 2004
Revenues ($826,000+40%*$70,000-$10,000)
$844,000
Expenses ($780,000+40%*$60,000-$10,000+$2,400)
$796,400
Net Income
$ 47,600
Solution to Part C:
Alpha,
Consolidated Balance Sheet
As at December 31, 2004
Current Assets
Other Assets
Future Income Tax
$714,000
$120,000
$ 1,600
Total Assets
$835,600
Current Liabilities
Long-Term Debt
Capital Stock
Retained Earnings
$238,000
$190,000
$200,000
$207,600 (Note 1)
Total Liabilities and Equity
$835,600
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Note 1: Retained Earnings is calculated as follows:
Retained Earnings, December 31 – Alpha
$200,000
Less: Able’s Reported Net Income:
($40,000)
Add: Consolidated Net Income:
$47,600
Consolidated Retained Earnings:
$207,600
Question 4/
Segment Reporting.
Luton Company is a diversified company which has developed the following information about its five segments:
SEGMENTS
Total sales
A
$200,000
Operating profit (loss)
(125,000)
Identifiable assets
800,000
B
$ 850,000
C
$150,000
240,000
20,000
2,900,000
600,000
D
$ 160,000
(150,000)
1,700,000
E
$ 290,000
(5,000)
2,800,000
Instructions
Identify which segments are significant enough to warrant disclosure by applying the following quantitative tests:
a.
Revenue test
b.
Operating profit or loss test
c.
Identifiable assets test
d.
As the External Auditor for the Luton Company, you have been asked by the Chief Accountant, Al Font, who
reports to the Finance Committee of the Company’s Board of Directors for background as to the need for Segment
Disclosure beyond three tests above. Briefly provide a outline as to the need for Segment Disclosure to Al including
an identification of the items that Segment Disclosure requires However
Solution:
a.
Revenue test—a segment is reportable if its total sales are $165,000 or more (10% × $1,650,000). Segments A,
B, and E satisfy the revenue test.
b.
Operating profit or loss test—a segment's absolute profit or loss must be $28,000 or more [10% of the absolute
greater of $260,000 or ($280,000)]. Segments A, B, and D satisfy the operating profit or loss test.
c.
Identifiable assets test—a segment's identifiable assets must be $880,000 or more (10% × $8,800,000).
Segments B, D, and E satisfy the identifiable test.
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Segments A, B, D, and E are identified as significant and therefore reportable because they passed at least one of the
significance tests.
d. Segment Disclosure requires the reporting of disaggregated financial data about operating segments and also about
their products and services, the geographic areas in which they operate, and their major customers.
The CICA requires that an enterprise report the following disaggregated information (need to identify 4 of the 6 items
of disaggregated information the CICA requires that an enterprise report):
1.
General information about its reportable segments.
2.
Segment profit and loss and related information.
3.
Reconciliation of the total of the segments’ revenues to total revenues, a reconciliation of the total of operating
segments’ profits and losses to its income before income taxes, discontinued operations and extraordinary items,
and a reconciliation of the total of the operating segments’ assets to total assets.
4.
Information about products and services and geographic areas.
5.
Total amount of revenues derived from major customers.