FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
Financial Accounting: Consolidations and Advanced Issues
(FA4) Exam Review
NOTE: I do NOT know the contents of the exam
: Past exam question solutions are not updated to new material
Part 1: Module 1: Multiple Choice:
Note: Need to make adjustments on exams up to Sept 2002 for changes (goodwill
amortization, negative goodwill, deferral and amortization gains and losses of LT
monetary items). Need to make adjustments on exams up to Sept 2005 for recent changes
(Section 3855: fair value method / new classification; OCI and changes to accounting for
hedges). Adjust for recent Hedges changes up to September 2007 exams.
Notes:
1. All calculations must be shown in an orderly manner to obtain part marks.
2. Round all calculations to the nearest dollar.
3. Narratives for journal entries are not required unless specifically asked for.
4. Assume a December 31 fiscal year-end unless specifically stated otherwise.
5. Assume all amounts are material unless directed otherwise.
6. Assume all companies are public companies unless otherwise noted.
7. Assume no companies use differential reporting unless otherwise noted.
(30 marks = you can budget over an hour for MCQs) 2 marks each
Select the best answer for each of the following unrelated items. Answer each of these
items in your examination booklet by giving the number of your choice. If more than
one answer is given for an item, that item will not be marked. No account will be taken
of any explanations you offer.
Module 1:
a. One of the key qualitative characteristics of financial information provided by financial
statements is reliability. Which of the following statements is most indicative of reliable
financial information?
1) It provides feedback on the past.
2) It is consistent from year to year.
3) It is neutral.
4) It helps assess management stewardship.
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
b. Preparers of financial information have objectives to meet through financial statement
presentation. Which of the following is not considered one of the key objectives of
preparers regarding financial statement presentation?
1) Adequate disclosure
2) Income tax planning
3) Income optimization
4) Stewardship assessment
c. The new CICA Handbook section on differential reporting allows qualifying private
companies to follow different accounting policies than those required for public
companies. Which of the following statements is false for a qualifying private company
under the requirements of this new Handbook section on differential reporting?
1) The cost or equity method can be used instead of consolidations when a parent has
control over a subsidiary.
2) The current-rate method can be used to account for an integrated foreign operation.
3) The taxes payable method can be used to account for income taxes.
4) The cost or equity method can be used to account for a joint venture.
d. Which of the following is a primary source of GAAP?
1) Abstracts issued by the Emerging Issues Committee
2) Pronouncements issued by the Financial Accounting Standards Board (FASB) in the
United States
3) Exposure drafts issued by the Financial Accounting Standards Board (FASB) when
there is no existing primary source of GAAP for this issue
4) Research studies commissioned by the CICA
e. New standards for comprehensive income are being introduced as part of Canadian
GAAP. Which of the following is not true regarding comprehensive income?
1) The introduction of comprehensive income helps to harmonize Canadian and U.S.
GAAP.
2) Unrealized gains on available-for-sale financial assets affect comprehensive income.
3) Unrealized foreign currency gains on the translation of financial statements of a selfsustaining foreign subsidiary affect comprehensive income.
4) Unrealized gains on land held for resale affect comprehensive income.
Multiple Choice solutions: Module 1:
a.
3
b.
4
c.
2
d.
1
e.
4
f.
4
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
Part 2: Module 2:
NOTE: Take the time to review Practice exam (March 2006), Question 2 slide
presentation on new material.
Use the following information to answer parts (f) and (g).
A company was incorporated on January 1, 2000 and has a December 31 year-end. It
purchased furniture on January 1, 2000 for $25,000, which will be amortized on a
straight-line basis over 10 years for financial statement purposes. For tax purposes,
capital cost allowance (CCA) is calculated at 20% declining balance, with one-half
deductible in the first year. The company is subject to a 40% tax rate on its taxable
income and claims the maximum amount of CCA allowable each year.
f. What is the temporary difference related to this asset as of December 31, 2001?
1) $800 temporary difference — taxable
2) $800 temporary difference — deductible
3) $2,000 temporary difference — taxable
4) $2,000 temporary difference — deductible
g. On July 1, 2002, the government unexpectedly enacted a new tax rate, such that the
company will be subject to taxes at 30% from that date forward. What is the future
income tax (FIT) asset or liability relating to the furniture on December 31, 2002?
1) $1,240 FIT asset
2) $1,240 FIT liability
3) $930 FIT asset
4) $930 FIT liability
Use the following information to answer parts (h) and (i).
On July 1, 2000, a public company issued 10-year convertible bonds with a face value of
$5,000,000 and an 8% stated rate of interest, paid annually. The bonds were issued for
proceeds of $4,679,117 to provide an effective yield of 9%. Similar bonds issued by the
company without a conversion feature would have required a yield of 10% to attract
investors, and would have been issued for proceeds of $4,385,543.
h. What premium or discount should be recorded by the company on July 1, 2000, if the
company uses split accounting to determine the premium or discount?
1) $320,883 discount
2) $320,883 premium
3) $614,457 discount
4) $614,457 premium
Journal entry: Cash
4,679,117
Discount
614,457
Bond payable
Conversion rights
5,000,000
293,574
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
i. Three years after the issuance date, $2,500,000 (face value) of the bonds are converted.
Which of the following adjustments would be made to the conversion rights account to
record this conversion?
1) $146,787 debit
2) $160,442 debit
3) $293,574 debit
4) $307,229 debit
j. Which of the following financial instruments will be presented in the equity section of
the balance sheet?
1) Preferred shares that provide for mandatory redemption by the issuer
2) Preferred shares with accelerated dividend requirements that will entice the issuer to
redeem the preferred shares
3) Retractable preferred shares that give the holder the right to redeem the shares for a
fixed amount
4) Preferred shares that give the holder the option to redeem the shares if a highly
unlikely future events occurs
k. New CICA Handbook sections require separate disclosure of other comprehensive
income. Which of the following types of gains are not required to be included in other
comprehensive income?
1) Gains from translation of the financial statements of a self-sustaining foreign operation
2) Gains from changes in fair value of available-for-sale securities
3) Gains from cash flow hedging instruments
4) Gains from held-for-trading securities
l. On January 1, 2006, WIN Corporation acquired 2,000 common shares of BIG
Corporation for $40,000, which it classified as an available-for-sale security. At the end
of 2006, these shares had a fair value of $52,000. During 2007, WIN sold 1,000 of the
common shares for $30,000. At the end of 2007, the remaining 1,000 common shares of
BIG had a fair value of $28,000. Which of the following would be included on WIN’s
2007 financial statements (ignore income taxes)?
1) Accumulated other comprehensive income of $8,000
2) Other comprehensive income of $4,000
3) Disposal gain included in net income of $6,000
4) Unrealized holding gain included in net income of $8,000
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
Multiple Choice solutions: Module 2:
f.
3
Tax basis: [$25,000 – ($25,000 × 0.2 × 1/2) – ($22,500 × 0.2)] = $18,000
NBV: ($25,000 – $2,500 – $2,500) = $20,000. 18,000 – 20,000 = ($2,000)
g.
4
Tax basis: ($25,000 – $2,500 – $4,500 – $3,600) = $14,400
NBV: 25,000 – 3($2,500)] = 17,500. 14,400-17,500 = (3,100)0.3 = ($930)
h.
3
$5,000,000 – $4,385,543 = $614,457
i.
1
$4,679,117 – 4,385,543 = 293,574 x 1/2 = $146,787
j.
4
k.
4
l.
1
YE 2006 = $12,000 CR OCI. Sale remove $6,000. YE 2007 $2,000 CR
OCI [28,000 – ($52,000 × 1,000 / 2,000)]. Total under AOCI = $8,000 CR
Part 3: Modules 2 and 3:
As per module 3, students are responsible for both the working paper and direct
approaches for assignments and exams.
Module 3: Multiple Choice:
a. RST acquired 60% of the outstanding shares of XYZ at a cost of $300,000, resulting in
negative goodwill of $50,000. Which of the following would be an acceptable treatment
of the negative goodwill amount?
1) It could be allocated to equipment.
2) It could be allocated to non-current assets such as future income tax assets.
3) It could be reflected on the consolidated financial statements as a liability.
4) It could be allocated to a non-current asset to be disposed of by sale.
Use the following information to answer parts (b) to (d).
On January 1, 2005, FGH acquired 30% of the common shares of MNO at a cost of
$150,000. On January 1, 2005, MNO had net assets of $300,000 and any purchase price
discrepancy is related to equipment with an estimated useful life of 10 years. During
2005, MNO had net income of $50,000 and paid dividends of $40,000. During 2006,
MNO had net income of $80,000 and paid dividends of $60,000.
b. Assuming that FGH has significant influence over MNO, what would be the amount of
FGH’s investment income for the year ended December 31, 2005 regarding its
investment in MNO?
1) $ 3,000
2) $ 9,000
3) $12,000
4) $15,000
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
c. Assume that FGH has significant influence over MNO and that any purchase price
discrepancy is related to goodwill rather than equipment. If there was no goodwill
impairment in 2005 or 2006, what would be the balance in FGH’s “Investment in MNO”
account on December 31, 2006?
1) $150,000
2) $159,000
3) $180,000
4) $189,000
d. Assume that FGH did not have significant influence over MNO. FGH is considering
acquiring an additional 30% interest in the shares of MNO in early 2007. How should
FGH account for its investment in MNO as at December 31, 2006?
1) Available-for-sale
2) Cost method
3) Held-for-trading
4) Equity method
Multiple Choice solutions: Module 3:
a.
1
(Topic 3.8)
Pro-rata reduction on acquired assets except:
Financial assets other than investments accounted for by the equity method
Assets to be disposed of by sale
Future income tax assets
Prepaid assets relating to employee future benefit plans
Any other current assets
b. ($50,000 × 30%) = 15,000 – $6,000 [150,000 – (300,000 × 30%)] = 60,000 / 10
c. 2) $150,000 + ($50,000 – $40,000) (30%) + ($80,000 – $60,000) (30%) = $159,000
d. 1)
Question 3 (15 marks)
Mercedes Homes Limited is a manufacturing company. It manufactures modular homes
in northern British Columbia for sale in the local market. Due to a slowdown in the local
economy, the company had to write off a significant amount of accounts receivable and is
currently near the limit of its operating line of credit. One of the covenants on its longterm debt is that the total debt-to-equity ratio cannot exceed 3 to 1. You have recently
been hired by the company as manager of accounting policy. Your first task is to finalize
the accounting policies for the following outstanding issues:
•
On June 30, 2002, Mercedes issued $3,000,000 of cumulative preferred
shares. The dividend rate on the preferred shares is 8% per year. To
conserve cash, the company does not expect to declare any dividends on
these shares for the first 5 years. The preferred shares must be redeemed by
the company on or before June 30, 2012 at $3,000,000 plus any dividends in
arrears.
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FA4 Exam Review
•
•
Barbara Wyntjes, B.Sc., CGA
On January 1, 2002, Mercedes purchased 20% of the common shares of
Chrysler Fitness Centres Inc. for $1,000,000 in cash. The other shares are
owned by Mr. Hyundai. All members of the board of directors for Chrysler
are appointed by Mr. Hyundai. Chrysler earned income of $750,000 during
the year. On December 15, 2002, Chrysler declared dividends of $600,000
payable on January 15, 2003.
In the past, Mercedes has always claimed capital cost allowance equal to
amortization expense. For 2002, Mercedes claimed the maximum capital
cost allowance of $600,000, which was $100,000 more than amortization
expense. It saved $40,000 of income taxes and recorded the following entry:
Future income tax asset
40,000
Gain from tax saved .........................................................40,000
The draft condensed balance sheet for Mercedes at Dec.31, 2002 was as follows:
Current assets:
Cash
Accounts receivable
Inventory
Noncurrent assets:
Tangible capital assets — net
Distributorship rights
Investment in Chrysler Fitness
Future income tax
Total
Liabilities:
Current liabilities
Long-term liabilities
Shareholders’ equity
Preferred shares
Common shares
Retained earnings
Total
$1,340,000
2,800,000
3,265,000
7,405,000
11,595,000
300,000
1,030,000
40,000
12,965,000
$20,370,000
$5,340,000
7,450,000
12,790,000
3,000,000
1,000,000
3,580,000
7,580,000
$20,370,000
The total debt-to-equity ratio was 1.69 based on this draft balance sheet.
9 a. Recommend the best accounting policies for the three outstanding issues. Briefly
explain the rationale for your recommendations using basic accounting principles
and concepts.
6 b. Calculate a revised total debt-to-equity ratio as at December 31, 2002 after taking
into account the changes resulting from your recommendations.
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
Question 3 Solution:
(3) a. • The preferred shares should be recorded as a liability because the
company has an obligation to redeem the shares on or before June 30,
2012. The dividends on the shares should be accrued on each financial
statement date and recorded as dividend expense because the
dividends are cumulative and must be paid on or before June 30, 2012.
$3,000,000 × 8% × ½ = $120,000
(3)
•
The investment in common shares of Chrysler should be recorded as a
portfolio investment and accounted for using the cost method because
Mercedes does not have control or significant influence. Since Mr.
Hyundai owns 80% of the shares and appoints all members of the
board of directors, he has control and Mercedes has no influence.
20% × $750,000 = $150,000 - $600,000 × 20% = $120,000 = $30,000
(3)
•
The temporary difference between accounting income and taxable
income is a taxable temporary difference. Mercedes has saved tax this
year but will have to pay the tax when the temporary differences
reverse. Therefore, Mercedes has a future tax liability and not a future
tax asset.
Future income tax expense
40,000
FIT Liability
40,000
6 b.
(1)
(1)
(1)
(1)
(1)
(1)
Debt
As originally stated
$12,790,000
Reclassify preferred shares
3,000,000
Accrue interest on shares 1
120,000
2
Reverse equity income
—
Record dividend income 3
—
4
Reverse future tax asset – gain
—
Record future tax liability/expense 5
40,000
Adjusted balances
$15,950,000
Equity
D/E
$7,580,000
(3,000,000)
(120,000)
(150,000)
120,000
(40,000)
(40,000)
$4,350,000
1.69
3.67
Notes: 1. $3,000,000 × 8% × ½ = $120,000
2. 20% × $750,000 = $150,000;
3. $600,000 × 20% = $120,000
4. Reverse gain from REs
5. Decrease REs for FIT expense not recorded
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
Part 4: Modules 4 and 5:
Question 2 (28 marks!!!!)
On January 1, 1998, Purple Corporation bought 80% of the outstanding common shares
of Sandy Company for $70,000 cash. On that date, Sandy had $25,000 of common shares
outstanding and $30,000 retained earnings. On January 1, 1998, the book values of each
of Sandy’s identifiable assets and liabilities were equal to their fair values except for the
following:
Book value
Fair Value
Inventory
$ 30,000
$ 35,000
Patent
10,000
20,000
The patent had an estimated useful life of 5 years as at January 1, 1998, and all of the
inventory was sold during 1998. Assume there was a goodwill impairment of
$4,200 up to 2000 and there was a goodwill impairment of $1,400 in 2001. The following
are the separate entity financial statements of Purple and Sandy as at December 31, 2001.
PURPLE AND SANDY
Balance Sheets
December 31, 2001
Assets
Cash
Accounts receivable
Inventory
Investment in Sandy
Equipment, net
Patent, net
Purple
Sandy
$ 80,000
110,000
300,000
70,000
240,000
—
$ 800,000
$ 10,000
90,000
120,000
—
185,000
2,000
$ 407,000
$ 250,000
80,000
330,000
170,000
300,000
$ 800,000
$ 245,000
72,000
317,000
25,000
65,000
$ 407,000
Liabilities and shareholders’ equity
Accounts payable
Future income taxes
Common shares
Retained earnings
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
PURPLE AND SANDY
Statements of Income and Retained Earnings
year ended December 31, 2001
Purple
Sales
$ 900,000
Cost of goods sold
(340,000)
Gross margin
560,000
Amortization expense
(30,000)
Other expenses
(180,000)
Income tax expense
(120,000)
Net income
230,000
Retained earnings, January 1, 2001
70,000
Retained earnings, December 31, 2001
$ 300,000
Sandy
$ 360,000
(240,000)
120,000
(25,000)
(55,000)
(16,000)
24,000
41,000
$ 65,000
Additional Information
1. On January 1, 1999, Purple sold Sandy a piece of equipment with a net book value of
$15,000 for cash consideration of $21,000. This equipment had a remaining useful life of
12 years, and both companies use straight-line amortization.
2. During 2000, Sandy sold inventory recorded on its books at a cost of $24,000 to Purple
for cash consideration of $36,000. Purple’s ending inventory at December 31, 2000
included $6,000 of goods acquired from Sandy, which were sold in 2001 to unrelated
parties for $10,000. Similarly, during 2001, Sandy sold $20,000 of inventory to Purple
for cash consideration of $29,000. Of these goods, 20% remained in Purple’s inventory as
of December 31, 2001.
3. Neither company has ever paid dividends. Both companies pay taxes at a rate of 40%,
and have done so since 1997. None of the transactions detailed above are considered
capital gains for tax purposes. Ignore future income taxes when calculating and
amortizing the purchase price discrepancy.
Required
a. Purple has always used the cost method of recording its investment in Sandy, but it is
considering a change to the equity method. Calculate Purple’s net income on the equity
basis for the year ended December 31, 2001. 8 marks
b. Using the equity method, prepare a schedule showing the detailed calculation of the
“Investment in Sandy” account as of December 31, 2001. 7 marks
c. Calculate the following account balances as they would appear on the consolidated
balance sheet as of December 31, 2001. 5 marks
i) Inventory
ii) Equipment, net
iii) Patent
d. Calculate the following account balances, as they would appear on the consolidated
income statement for the year ended December 31, 2001. 8 marks
i) Cost of goods sold
ii) Income tax expense
iii) Noncontrolling interest
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
Solution: Schedules:
Note 1 — Calculation and allocation of Purchase Discrepancy:
Cost of 80% of Sandy at January 1, 1998
Book value of Sandy
Common shares
$ 25,000
Retained earnings
30,000
$ 55,000
Purple’s share
80%
Purchase price discrepancy (PPD)
Allocated
Inventory
Patent
Goodwill
(Fair Value – Book Value) × %
($35,000 – $30,000) × 80%
($20,000 – $10,000) × 80%
$ 4,000
8,000
$ 70,000
44,000
26,000
12,000
$ 14,000
Purchase discrepancy amortization and impairment loss schedule:
Balance
Jan. 1, 1998
Inventory
$ 4,000
Patent (5 yrs)
8,000
Goodwill
14,000
$ 26,000
Amort/impairment Amort/impairment
1998-2000
2001
$ 4,000
$—
4,800
1,600
4,200
1,400
$ 13,000
$ 3,000
Remaining at
Dec. 31, 2001
$—
1,600 1a
8,400 1b
$ 10,000 1c
Note 2 — Intercompany profits
Before tax
40% Tax
After Tax
$ 6,000
(1,000)
5,000
(500)
$ 4,500
$ 2,400
(400)
2,000
(200)
$ 1,800
$ 3,600
(600)
3,000
(300) 2a
$ 2,700 2b
$ 2,000
$ 800
$ 1,200 2c
$ 1,800
$ 720
$ 1,080 2d
Equipment gain — Purple selling
January 1, 1999 ($21,000 – $15,000)
Amortization to December 31, 2000
Amortization 2001
Balance, December 31, 2001
Inventory profit — Sandy selling
Beginning inventory
($36,000-24,000) × [($6,000/$36,000)
Ending inventory
[($29,000 – $20,000) x 20%]
On cons. BS: Deferred charge – income taxes (Asset): Equipment $1,800 + Unrealized
ending inventory $720 = $2,520
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
a. Equity basis net income = Consolidated Net Income
Net income — Purple
Less: amortization of purchase price discrepancy/impairment loss
(1)
Patent ($8,000/5) (Note 1a)
(1)
Goodwill ($1,400 loss /yr) (Note 1b)
(2)
Add: equipment gain realized (net of tax) (Note 2a)
$ 230,000
$ 1,600
1,400
3,000
300
Adjusted net income
Net income — Sandy
227,300
$ 24,000
(2)
Add: opening inventory profit (net of tax) (Note 2c)
1,200
(1)
Less: ending inventory profit (net of tax) (Note 2d)
(1,080)
Net income — entity
(1)
$ 24,120
Purple’s ownership
80%
19,296
Equity basis net income (which equals consolidated net income)
$ 246,596
b. Investment in Sandy — equity method:
Original investment in Sandy
Less:
(2)
Purchase discrepancy amort/impairment loss to Dec.31, 2001
($13,000 + $3,000) (Note 1c)
(2)
$ 70,000
$ 16,000
Unrealized gain on equipment at December 31, 2001
(net of tax) (Note 2b)
2,700
18,700
Purple’s share of Sandy’s post acquisition retained earnings
Sandy’s retained earnings at December 31, 2001
Sandy’s retained earnings at January 1, 1998
(1)
$ 65,000
30,000
35,000
Less: unrealized upstream inventory profit at
(1)
Dec. 31, 2001 (net of tax) (Note 2d)
1,080
$ 33,920
(1)
Purple’s share of Sandy’s increase in net earnings
“Investment in Sandy” account at December 31, 2001
80%
27,136
$ 78,436
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
c. i) Inventory
Purple’s inventory
Sandy’s inventory
(1)
(1)
$ 300,000
120,000
420,000
Less: unrealized gain on sale of inventory to Purple (Note 2d) 1,800
$ 418,200
ii) Equipment, net
Purple’s equipment
Sandy’s equipment
(1)
(1)
Less: unrealized profits on downstream sale (Note 2b)
$ 240,000
185,000
425,000
(4,500)
$ 420,500
1
Remember, Sandy recorded the equipment at their purchase cost ($21,000) but if the
transaction never occurred, the parent would have it recorded on it’s books at their NBV
of $15,000. Therefore, we need to decrease equipment by the profit remaining to date.
iii) Patent
Sandy’s patent
(1)
Add: unamortized purchase price discrepancy (Note 1a)
d. i) Cost of goods sold (COGS)
Purple’s COGS
Sandy’s COGS
(1)
(1)
(1)
Less: 2001 upstream sales
Less: realized profits in opening inventory (Note 2c)
Add: unrealized profits in ending inventory (Note 2d)
$ 2,000
1,600
$ 3,600
$ 340,000
240,000
580,000
(29,000)
(2,000)
1,800
$ 550,800
ii) Income tax expense
Purple’s income tax expense
Sandy’s income tax expense
(1)
(1)
(1)
$ 120,000
16,000
136,000
Add: income tax on profits in opening inventory (Note 2c)
800
Less: income tax for unrealized profits in ending inventory (Note 2d)
(720)
Add: income tax exp. for profit on downstream sale of equipment (Note 2a) 200
$ 136,280
iii) Noncontrolling interest
(1)
Net income entity (see part (a) above)
(1)
Noncontrolling interest %
$ 24,120
20%
$ 4,824
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
Part 5: Module 6:
a. Providence Company owns 60% of the shares of Quark Company and 20% of the
shares of Riverside Company. Quark owns 40% of the shares of Riverside. Which of the
following statements is correct?
1) Providence should report its interest in Riverside using the cost method.
2) Providence should report its interest in Riverside using the equity method.
3) Providence should report its interest in Riverside using proportionate consolidation.
4) Providence should report its interest in Riverside using consolidation.
b. For which of the following situations would it be appropriate to prepare consolidated
financial statements for X, Y, and Z?
1) X owns 100% of the outstanding common shares of Y and 49% of Z;
Q owns 51% of Z.
2) X owns 100% of the outstanding common shares of Y; Y owns 75% of Z.
3) X owns 100% of the outstanding common shares of Y and 75% of Z.
X bought Z’s shares 1 month before the year-end and intends to sell it within
2 months of the year-end.
4) There is no interrelationship of financial control among X, Y, and Z.
However, the 3 companies are contemplating the joint purchase of 100% of the
outstanding shares of W.
c. PRI has a 40% interest in NCE, a joint venture. During 2005, NCE reported net income
of $100,000 and paid a dividend of $60,000. NCE’s inventory includes goods purchased
from PRI on which PRI had made a profit of $10,000. What is the amount of income PRI
should report on its investment in NCE for 2005 under the equity method?
1) $24,000
2) $30,000
3) $36,000
4) $40,000
d. When a company is an investor in a joint venture, it uses proportionate consolidation
to report its interest in the joint venture. Which of the following statements is true with
respect to proportionate consolidation?
1) Proportionate consolidation will report less net income than full consolidation.
2) Proportionate consolidation presents the underlying net assets owned by the venturer.
3) Proportionate consolidation presents the underlying net assets controlled by the
venturer.
4) Profits from intercompany transactions are not eliminated under proportionate
consolidation.
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Barbara Wyntjes, B.Sc., CGA
Multiple Choice solutions: Module 6:
a.
4
b.
2
c.
3
Take only 40% share of NI and eliminate only 40% of any intercompany profits,
gains or losses. ($100,000 – $10,000) × 40% = $36,000
Note: under equity method, dividend reduce investment account and not impact
on income recorded.
d.
2
Question 4 (11 marks)
Premium Developers (PD) has a 40% interest in a joint venture, Shared Vision (SV). PD
has held its interest since the venture was started on July 1, 1997. Both entities have a
June 30 year-end. None of the other venturers are affiliated with PD.
PD uses the equity method to record the investment in SV, but has made no entries to its
investment account for the 2000-2001 fiscal year. During the year ended June 30, 2001,
PD sold $50,000 of inventory to SV, and recorded a 30% gross profit on the sales. At
June 30, 2001, $30,000 of these goods remained in SV’s ending inventory. SV had an
accounts payable of $10,000 owed to PD relating to this inventory.
The balance sheets of PD and SV on June 30, 2001, were as follows:
Balance Sheets
June 30, 2001
Premium Developers
Cash
$ 134,000
Accounts receivable
300,000
Inventory
550,000
Investment in SV
416,000
Capital assets (net)
1,620,000
$ 3,020,000
Accounts payable
$ 750,000
Common shares
1,500,000
Retained earnings — beginning of year
700,000
Net income
70,000
$ 3,020,000
Shared Vision
$ 100,000
250,000
400,000
—
800,000
$ 1,550,000
$ 400,000
600,000
440,000
110,000
$ 1,550,000
Required
a. What factors should be considered in determining whether proportionate consolidation
should be used to account for a business combination such as PD’s interest in SV?
b. Prepare a consolidated balance sheet for PD using proportionate consolidation,
including a detailed calculation of consolidated retained earnings as at June 30, 2001.
Ignore the effect of income taxes.
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
Solution:
a. Proportionate consolidation is used to account for joint ventures when the venturers
have a contractual arrangement, which establishes joint control over the venture. Joint
control implies that the parties share the continuing power to determine the strategic
operating, investing, and financing policies of the joint venture.
b. 8 marks
For intercompany transactions with joint ventures, profit is considered realized to
the extent of the other venturers’ percentage ownership as they are considered
outsiders.
PREMIUM DEVELOPERS
Consolidated Balance Sheet
June 30, 2001
Cash [134,000 + 100,000(0.40)]
Accounts receivable [300,000 + 250,000(0.4) – 10,000(0.4)3]
Inventory [550,000 + 400,000(0.4) – 30,000(0.3)(0.4)2]
Capital assets (net) [1,620,000 + 800,000(0.4)]
Accounts payable [750,000 + 400,000(0.4) – 10,000(0.4)3]
Common shares
Retained earnings1
1
PD’s retained earnings
PD’s net income
Less: unrealized profit [30,000(0.3)(0.4)2]
Income of SV
PD’s ownership
2
$ 110,000
× 40%
$ 174,000
396,000
706,400
1,940,000
$ 3,216,400
$ 906,000
1,500,000
810,400
$ 3,216,400
$ 700,000
70,000
(3,600)
44,000
$ 810,400
$30,000 x 30% = 9,000 total profit x 40% = 3,600
3
Intercompany receivable/payable:
$10,000 x 40% = $4,000 must be removed as unrealized.
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Barbara Wyntjes, B.Sc., CGA
Part 6: Module 7:
NOTE: See examples in modules and in the online lecture for Module 7 for changes for
Hedging. Exams up to September 2007 need to be adjusted to new material.
Use the following information to answer parts (a) and (b):
NK Company of Halifax, Nova Scotia, issued €500,000 (euros) of 10-year bonds on
January 1, 2005 with a nominal and effective interest rate of 9%. Interest is paid annually
on December 31 each year. The following exchange rates were noted during 2005:
January 1, 2005
€1 = C$1.50
Cash 750,000
Average for 2005
€1 = C$1.53
B/P
750,000
December 31, 2005 €1 = C$1.55
a. What would be the total exchange loss relating to the 10-year bonds’ principal and
interest for the year ended December 31, 2005?
1) $ 0
YE: B/P = €500,000 x 1.55 = $775,000
2) $ 25,000
Interest expenses (1.53)
68,850
3) $ 25,900
Loss
900
4) $ 27,250
Cash (1.55)
69,750
b. Assume that NK plans to issue another €500,000 of bonds on January 1, 2007. It also
plans to enter into a hedge of the euro bonds immediately prior to issuance of the new
bonds. Which of the following is true for the 2007 bond issue under the new Handbook
hedging requirements?
1) The effectiveness of the hedging relationship must be assessed periodically.
2) If hedge accounting is adopted, NK would not be permitted to discontinue hedge
accounting during the life of the bond.
3) The use of hedge accounting will be mandatory for the new bond.
4) Hedge accounting would generally be more appropriate for non-monetary assets or
liabilities because of the enhanced ability to demonstrate effectiveness.
Use the following information to answer parts (c) to (f):
MAP Development Ltd. is a real estate development company. It is listed on the Toronto
Stock Exchange. On January 1, 2005, MAP purchased land in the United States for
US$800,000 by giving a 6-month note for US$800,000 bearing interest at the annual rate
of 10%. The fair value of the land was US$900,000 on June 30, 2005.
The exchange rates were as follows:
January 1, 2005
US$1.00 = C$1.25
Average for quarter 1 for 2005
US$1.00 = C$1.23
Average for quarter 2 for 2005
US$1.00 = C$1.21
June 30, 2005/July 1, 2005
US$1.00 = C$1.20
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Barbara Wyntjes, B.Sc., CGA
c. At what amount should the land be reported on MAP’s Canadian dollar balance sheet
for its June 30, 2005 quarterly financial statements?
1) $ 800,000
2) $ 960,000
3) $ 1,000,000
Land 1,000,000
4) $ 1,080,000
Note Payable 1,000,000
d. At what amount should the note payable (excluding any accrued interest) be reported
on MAP’s Canadian dollar balance sheet for its June 30, 2005 quarterly financial
statements?
1) $ 800,000
2) $ 960,000
3) $ 1,000,000
4) $ 1,080,000
YE: 800,000 x 1.2 = 960,000
N/P
40,000
Gain 40,000
e. What is the interest expense for the 6 months ended June 30, 2005?
1) $40,000
2) $48,000
3) $48,800
Interest expense (average)
48,800
4) $50,000
Cash (1.2)
480,000
Gain
80,000
f. How could MAP hedge against any foreign exchange gains or losses on the principal
and interest payments required on the note payable?
1) By entering into a forward contract on January 1, 2005 to purchase US$800,000 on
July 1, 2005 by paying a specified number of Canadian dollars
2) By entering into a forward contract on January 1, 2005 to purchase US$840,000 on
July 1, 2005 by paying a specified number of Canadian dollars
3) By entering into a forward contract on January 1, 2005 to sell US$800,000 on July 1,
2005 and receive a specified number of Canadian dollars
4) By entering into a forward contract on January 1, 2005 to sell US$840,000 on July 1,
2005 and receive a specified number of Canadian dollars
Multiple Choice solutions: Module 7:
a.
3
Principal: €500,000 (1.50-1.55) = 25,000 loss
Interest: €500,000 x .09 = €45,000 (1.53-1.55) = 900 loss
b.
1
c.
3
US$800,000 × 1.25 = $1,000,000
d.
2
US$800,000 × 1.20 = $960,000
e.
3
[US$800,000 × 10% × 6/12] = US$40,000 [(1.23 + 1.21) × ½] = $48,800
f.
2
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Part 7: Module 8:
Question 3 (24 marks!)
Partners Corporation of Calgary, Alberta, purchased 100% of the outstanding shares of
Sardaigne Company of France on December 31, 2000 for 4,000,000 French francs (FF),
when FF1 = C$0.20. At that date, the carrying values of Sardaigne’s assets and liabilities
were equal to fair values. There was a goodwill impairment loss in 2001 of FF25,000.
The fiscal 2000 financial statements of Sardaigne were as follows:
SARDAIGNE COMPANY
Balance Sheet
December 31, 2000
Cash
Accounts receivable
Inventory
Capital assets (net)
Accounts payable
Bonds payable
Common shares
Retained earnings
FF 500,000
900,000
1,200,000
3,250,000
FF 5,850,000
FF 750,000
1,600,000
2,000,000
1,500,000
FF 5,850,000
Partners anticipated that there would be a low volume of intercompany transactions with
Sardaigne, because Sardaigne obtained most of its raw materials locally and also financed
its operations with retained earnings and local borrowings. Partners was confident that
Sardaigne would continue to grow in the near term with local sales, and in the medium
term with sales within the European Economic Community (EEC).
Partners uses the cost method to account for its investment in Sardaigne. The fiscal 2001
financial statements of Partners and Sardaigne were as follows:
Balance Sheets
December 31, 2001
Partners
Sardaigne
Assets
Cash
$ 450,000
FF 400,000
Accounts receivable
615,000
950,000
Inventory
1,235,000
1,500,000
Investment in Sardaigne
800,000
—
Capital assets (net)
3,800,000
3,500,000
$ 6,900,000
FF 6,350,000
Liabilities and shareholders’ equity
Accounts payable
$ 950,000
FF 1,000,000
Bonds payable
—
1,600,000
Common shares
3,000,000
2,000,000
Retained earnings
2,950,000
1,750,000
$ 6,900,000
FF 6,350,000
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Barbara Wyntjes, B.Sc., CGA
Statements of Income and Retained Earnings
year ended December 31, 2001
Partners
Sardaigne
Sales
$ 3,000,000
FF 5,000,000
Dividend income
117,500
—
3,117,500
5,000,000
Cost of goods sold
1,800,000
3,200,000
1,317,500
1,800,000
Expenses
Selling and administrative
600,000
550,000
Amortization
250,000
200,000
Bond interest
—
160,000
Other
67,500
140,000
917,500
1,050,000
Net income
400,000
750,000
Retained earnings, January 1, 2001
2,650,000
1,500,000
3,050,000
2,250,000
Dividends
100,000
500,000
Retained earnings, December 31, 2001
$ 2,950,000
FF 1,750,000
Additional information:
1. Sardaigne purchased inventory of FF3,500,000 evenly during 2001. Opening and
ending inventory were purchased evenly over the 4th quarter of 2000 and 2001,
respectively.
2. Foreign exchange rates were as follows:
January 1, 1996
FF1 = C$0.180
Average during 4th quarter of 2000
FF1 = C$0.190
December 31, 2000
FF1 = C$0.200
Average during 2001
FF1 = C$0.220
Average during 4th quarter of 2001
FF1 = C$0.230
December 15, 2001
FF1 = C$0.235
December 31, 2001
FF1 = C$0.240
3. Dividends for both companies were declared and paid on December 15, 2001.
4. Sardaigne’s bonds payable were issued on January 1, 1996 (at 100) and mature on
December 31, 2005. If amortization is required upon translation, it should start at the
beginning of the year of gain/loss.
5. Ignore income taxes for purposes of this question.
Required
4 a. Should the operations of Sardaigne be considered integrated or self-sustaining for
financial reporting purposes from the perspective of Partners? Provide two pieces of
evidence to support your answer, and indicate which method should therefore be used to
translate the operations of Sardaigne.
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FA4 Exam Review
Barbara Wyntjes, B.Sc., CGA
5 b. Ignore your answer to part (a), and assume that the current rate method of translation
should be used. Prepare the calculation for goodwill that would appear on the
consolidated balance sheet at December 31, 2001. Also prepare the calculation for the
exchange gain/loss on the translation of goodwill that would be included in the
cumulative other comprehensive income.
11 c. Assume that the current rate method of translation should be used (that is, ignore
your answer to part (a)). Prepare account balances for the liabilities and shareholders’
equity portion of the consolidated balance sheet at December 31, 2001. Your answer
should include a detailed calculation of the cumulative other comprehensive income.
d. Under the temporal method, calculate the translation gain or loss to be recognized
immediately in the current reporting period.
Solution:
a. Sardaigne should be considered self-sustaining, and therefore the current-rate method
of translation should be used. Evidence to support this includes its independence from its
parent, the low volume of intercompany transactions, the fact that Sardaigne obtains most
of its raw materials and financing locally, and Sardaigne’s focus on sales locally and
within the EEC.
b. Calculation of goodwill and its effect on the cumulative other comprehensive income:
Purchase price
NBV acquired:
Common shares
Retained earnings
FF 4,000,000
FF 2,000,000
1,500,000
Goodwill — December 31, 2000
Impairment loss — 2001
Calculated goodwill
Actual goodwill — December 31, 2001
Exchange gain — cumulative OCI
3,500,000
500,000 × 0.20 $ 100,000
25,000 × 0.22
5,500
94,500
FF 475,000 × 0.24 114,000
$ 19,500
The amount of goodwill reported on the consolidated balance sheet at December 31, 2001
would be $114,000.
The amount arising from the translation of goodwill that would be included in the
cumulative OCI would be all of the exchange gain (that is, $19,500) since Partners owns
100% of Sardaigne.
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c. TEMPLATE: Par’s NBV + Sub’s NBV +/- PD amortization/goodwill impairment loss
+/- intercompany transactions.
PARTNERS CORPORATION
Consolidated Partial Balance Sheet
December 31, 2001
(1) Accounts payable [950,000 + 1,000,000 (0.24)]
(1) Bonds payable [0 + 1,600,000 (0.24)]
(1) Common shares (3,000,000 from Partners)
(3) Retained earnings1
(5) Cumulative other comprehensive income2
$ 1,190,000
384,000
3,000,000
2,992,000
172,000
1
Calculation of consolidated retained earnings:
Retained earnings, Partners, December 31, 2001
Less: impairment of goodwill (part b)
Net income — Sardaigne
FF 750,000 × 0.22
Less: dividends — Sardaigne
FF (500,000) × 0.235
Consolidated retained earnings, December 31, 2001
$ 2,950,000
(5,500)
2,944,500
165,000
3,109,500
(117,500)
$ 2,992,000
NOTE: March 2005 exam Q3 C/S issued – use rate on date of purchase and add to
Calculation of translation gain or loss arising from net assets and net monetary position.
2
Calculation of cumulative OCI
Net assets, Sardaigne, December 31, 2000
Changes in net assets, 2001
Common shares
Net income
Dividends
Calculated net assets, December 31, 2001
FF 3,500,000 × 0.20
$ 700,000
at rate on transaction date
750,000 × 0.22
165,000
(500,000) × 0.235
(117,500)
747,500
Actual net assets, December 31, 2001
FF 3,750,000 × 0.24
Exchange gain from translation
Cumulative translation adjustment — goodwill (part (b))
Total cumulative translation adjustment
900,000
152,500
19,500
$ 172,000
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FA4 Exam Review
d. Net monetary position
Balance Jan. 1, 2001 = Dec 31, 2000
Cash
500,000
A/R
900,000
1,400,000
A/P
(750,000)
Bonds
(1,600,000)
Changes 2001:
Sales
Purchases — inventory
Selling & Admin expenses
Bond interest
Other expense
Common shares
Dividends
Net changes
Calculated position Dec. 31, 2001
Barbara Wyntjes, B.Sc., CGA
FF
(950,000) × 0.20
Dollars
(190,000)
5,000,000 × 0.22
1,100,000
(3,500,000) × 0.22
(770,000)
(550,000) × 0.22
(121,000)
(160,000) × 0.22
(35,200)
(140,000) × 0.22
(30,800)
at rate on transaction date
(500,000) × 0.235
(117,500)
150,000
25,500
(164,500)
Actual position Dec. 31, 2001: net monetary position
Cash
400,000
A/R
950,000
1,350,000
A/P
(1,000,000)
Bonds
(1,600,000)
(1,250,000) × 0.24
Loss on translation 2001
(300,000)
135,500
Multiple-choice questions:
a. Which of the following accounts would not be translated to the domestic currency at
the current rate of exchange for a self-sustaining subsidiary?
1) Sales
2) Monetary liabilities with a fixed and ascertainable long-term life
3) Capital assets
4) Inventory carried at market under the lower-of-cost-or-market principle
b. Which of the following accounts would be translated to the domestic currency at the
current rate of exchange for an integrated subsidiary?
1) Sales
2) Non-monetary liabilities
3) Capital assets
4) Inventory carried at market under the lower-of-cost-or-market principle
Multiple Choice solutions: Module 8:
a.
1
b.
4
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Barbara Wyntjes, B.Sc., CGA
Part 8: Modules 9 and 10: Multiple-choice questions
BC is a not-for-profit organization, which has had average annual revenues of
approximately $750,000 in each of the past 3 fiscal years. On July 1, 2001, XD donated a
van to BC, which had a net book value of $7,500 on XD’s books. The van had a fair
market value of $8,000, but XD agreed to donate the van in exchange for the nominal
amount of $1. The van is expected to last 5 years and will be useful for BC’s operations.
a. BC wants to minimize the amount of amortization expense on its December 31, 2001
financial statements. At what amount should BC record the vehicle for reporting
purposes, in accordance with CICA Handbook requirements?
1) $ 0
2) $ 1
3) $7,500
4) $8,000
b. BC also owns a collection of works of art worth $100,000 in 2001. These works of art
meet the definition of a collection according to the CICA Handbook. Which of the
following is a minimum requirement for collections, according to the CICA Handbook?
1) Capitalization at fair market value
2) Amortization over a maximum of 40 years
3) Disclosure of a description of the collection
4) Disclosure of the amount of government assistance received during the year
c. Two unrelated not-for-profit organizations set up a joint venture to coordinate their
famine relief efforts for a drought-stricken country. According to the CICA Handbook,
how must such a joint venture be reported for financial statement purposes?
1) Using the equity method
2) By consolidation
3) By proportionate consolidation
4) Either by proportionate consolidation or using the equity method
d. The Boys Club, a not-for-profit organization, has a roster of volunteers who assist in a
recreational program for young boys in the Oshawa area. This volunteer work is greatly
appreciated but would not be paid for if it was not donated. How should the Boys Club
account for these contributed services?
1) It should recognize these donated services as revenue and as salaries expense.
2) It should recognize these donated services as a direct credit to surplus and as salaries
expense.
3) It should recognize these donated services as a deferred credit and as salaries expense.
4) It should not recognize these donated services in the financial statements.
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Barbara Wyntjes, B.Sc., CGA
e. King’s College, a not-for-profit organization, received $100,000 cash from an alumnus.
The donor specified that the money was to be invested in guaranteed investment
certificates, and that only the interest on the money could be used for scholarships for
accounting students. How should the $100,000 contribution be accounted for under the
following revenue recognition methods?
Deferral Method
1) Direct increase in net assets
2) Direct increase in net assets
3) Revenue
4) Revenue
Restricted Fund Method
Revenue of the general fund
Revenue of the endowment fund
Revenue of the endowment fund
Revenue of the general fund
f. A not-for-profit organization completed a fund raising drive in June 2000. It received
$50,000 in cash donations and an additional $20,000 in pledges. In preparing its June 30,
2000 financial statements, the controller noted that $18,000 of pledges remained
uncollected as of June 30, 2000. Which of the following would be the recommended
accounting treatment for contributions receivable?
1) Contributions receivable of $20,000 should be recorded.
2) Contributions receivable should not be recorded. The pledges of $18,000 should be
recorded as revenue as the cash is received.
3) Contributions receivable of $70,000 should be recorded.
4) Contributions receivable of $18,000 should be recorded, partially offset by an
allowance for estimated uncollectible amounts.
g. A medium-sized not-for-profit organization has annual revenues of $375,000. In fiscal
2000, it received a $35,000 donation in the form of a new truck from a local business
person. How should the not-for-profit organization account for this donated truck?
1) It must capitalize and subsequently amortize the new truck.
2) It must write off the new truck as an expense.
3) It should either capitalize and subsequently amortize the new truck, or expense it.
4) It should capitalize the new truck and should only amortize the truck if it intends to
dispose of it in the future.
Multiple Choice solutions: Modules 9 and 10:
a.
4
b.
3
c.
4
d.
4
e.
2
f.
4
g.
3
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Part 9: Modules 9 and 10: Long answer questions
Various formats: statements, slide presentations, memos, journal entries, etc.
Question 1 (15 marks)
Zak Organization is a not-for-profit organization set up for famine relief. It uses fund
accounting and has three funds: a general fund; a capital fund (through which it is raising
cash to support the purchase of a new administrative building); and an endowment fund.
Zak has been operating for 25 years and has a December 31 year end. Zak’s policy with
respect to capital assets is to capitalize and amortize the capital assets over their expected
useful lives.
On June 30, 2000, Zak received three donations from a former director:
i) $30,000 cash for famine relief
ii) $50,000 to be used solely for construction of the new administrative building. Of the
$50,000, 70% was received in cash, with the remainder promised in February, 2001.
(Note: construction is expected to commence in October 2001.)
iii) $600,000 cash, which was invested on July 1, 2000 in long-term Government of
Canada bonds, with 10% interest to be paid semi-annually on December 31 and June 30.
The $600,000 donation was given with the stipulation that it be invested in interest
bearing securities with the principal to be maintained by Zak, although interest earned on
the securities is not restricted.
Required
6 a. Briefly explain how each of the three donations should be accounted for using fund
accounting. In particular, should each of the donations be recognized as revenue for the
year ended December 31, 2000? If yes, in which fund(s) would the revenue be recognized
(including interest earned in fiscal 2000 on the bonds purchased with the $600,000
donation)? Note: Do not prepare journal entries.
4 b. If Zak used the deferral method of accounting instead of using fund accounting, how
would this change the requirements for accounting for the $50,000 and $600,000
donations?
5 c. Despite the recent donations from its former director, Zak is increasingly faced with
severe budgetary constraints. Zak is considering implementing encumbrance accounting
in the coming year.
i) Briefly describe the process of encumbrance accounting.
ii) Briefly describe how encumbrance accounting might serve as a device to help control
spending when it is used in conjunction with a formal budgeting system.
Solution:
a.i) The $30,000 donation would be considered unrestricted and would be recorded as
revenue in the general fund in fiscal 2000.
ii) The $50,000 donation would be recorded as revenue in the capital fund, assuming that
the receivable of $15,000 is considered fully collectible.
iii) The $600,000 donation would be recorded as revenue in the endowment fund. Interest
on the $600,000 of bonds would be recorded as revenue in the general fund.
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b. The $50,000 donation, considered restricted, would be recorded as a deferred
contribution in 2000 (assuming that the receivable of $15,000 is considered fully
collectible). The contribution would be recognized in revenue on the same basis as the
related expense (that is, the amortization of the contribution would be recognized in
revenue on the same basis as the amortization of the building).
The $600,000 donation would be recorded in the statement of changes in net assets (that
is, as an increase in net assets, not as revenue). Interest on the $600,000 of bonds would
be recorded as revenue as it is earned.
c. i) With encumbrance accounting, entries are made in the accounting records as
purchase orders for goods and services are issued. The amounts recorded represent
estimates of the actual costs to be incurred. When the goods and services are received, the
original entry to record the encumbrance is reversed and the cost of the goods or services
is recorded. Outstanding encumbrances are not reflected as elements of financial
statements, but should be disclosed if material.
ii) Encumbrance accounting can serve as a device to control spending because it shows
that the spending has occurred when a purchase order is issued, rather than when the
goods or services are received or paid for. This helps to prevent the issuance of purchase
orders when there are insufficient funds remaining in the budget.
Question 2 (13 marks)
The OPI Care Centre is a not-for-profit organization funded by government grants and
private donations. It prepares its annual financial statements using the deferral method of
accounting for contributions, and it uses only the operations fund to account for all
activities. It uses an encumbrance system as a means of controlling expenditures.
Required: The following summarizes some of the transactions that were made in 2001.
In accordance with the requirements of the CICA Handbook, prepare the journal entries
necessary to reflect the transactions.
a. The founding member of OPI contributed $100,000 on the condition that the principal
amount be invested in marketable securities and that only the income earned from the
investment be spent on operations.
b. During the year, purchase orders were issued to cover the budgeted cost of $1,400,000
for goods and contracted services.
c. During the year, a public campaign was held to raise funds for daily operations for the
current year. Cash of $800,000 was collected, and pledges for an additional $100,000
were received by the end of the year. It is estimated that approximately 95% of these
pledges will be collected early in the new year.
d. The provincial government pledged $600,000 for the year to cover operating costs and
an additional $1,000,000 to purchase equipment and furniture. All of the grant money
was received by the end of the year, except for the last $50,000 to cover operating costs
for December.
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e. OPI used the $1,000,000 received from the provincial government to purchase
equipment and furniture for the care facility. The amortization of these assets amounted
to $100,000 for the year. A purchase order had not been issued for this purchase.
f. Invoices totaling $1,450,000 were received for goods and contracted services. Of these
invoices, 90% were paid by the end of the fiscal year. Purchase orders in the amount of
$1,375,000 had been issued for these services.
Solution: (Note mark allocation to the left of the JE)
1 a. Cash or marketable securities ................................................................ 100,000
Net assets ........................................................................................
100,000
2 b. Encumbrances........................................................................................ 1,400,000
Estimated commitments.................................................................. 1,400,000
2 c. Cash ....................................................................................................... 800,000
Pledge receivable ...................................................................................100,000
Allow. For Pledge receivable ................................................................
5,000
Donation revenue............................................................................
895,000
2 d. Cash .................................................................................................... 1,550,000
Grant receivable..................................................................................... 50,000
Deferred revenue............................................................................. 1,000,000
Grant revenue..................................................................................
600,000
1 e. Equipment and furniture .....................................................................1,000,000
Cash................................................................................................ 1,000,000
1 Amortization expense ............................................................................ 100,000
Accumulated amortization .............................................................. 100,000
1 Deferred revenue ................................................................................... 100,000
Revenue .......................................................................................... 100,000
2 f. Goods and services expense ............................................................1,450,000
Cash................................................................................................ 1,305,000
Accounts payable ............................................................................ 145,000
1 Estimated commitments.......................................................................1,375,000
Encumbrances................................................................................. 1,375,000
GOOD LUCK on your exam!!!
Barbara 
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