ca_exm_fa2_2010-03
CGA-CANADA
FINANCIAL ACCOUNTING: ASSETS [FA2] EXAMINATION
March 2010
Marks Time: 3 Hours 1
28 Question
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. For example, if the best answer for item (a)
is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will
not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations.
Note:
2 marks each
a. When companies prepare accrual-based financial statements rather than cash-based financial
statements, they are emphasizing which of the following assumptions, principles, or constraints?
1) Going concern principle
constraint
2) Materiality
principle
cost
3) Historical
4) Time period assumption
b. Which of the following qualitative characteristics of accounting information is most important if you
want reliable financial statement information?
ability
1) Predictive
value
2) Feedback
3) Verifiability
4) Timeliness
c. Kate is preparing adjusting journal entries for her company’s financial statements for the third quarter
ended September 30, 2009. Which of the following is not an example of an adjusting entry?
1) An entry to adjust the income summary account
2) An entry to adjust the prepaid insurance account
3) An entry to adjust the amortization expense account
4) An entry to adjust the interest expense account for a bank loan
d. On January 1, 2009, QT acquired a capital asset for $5,000 cash and an additional payment of $3,000
on January 1, 2010, plus accrued interest at 10% (the market rate of interest). On March 1, 2009, the
replacement cost of the capital asset is $11,000 and on July 1, 2009 its net realizable value is $12,000.
Which measurement method would be most appropriate for recording the capital asset?
1) On January 1, 2009 it should be recorded at the net present value of $7,727.
2) On January 1, 2009 it should be recorded at the historical cost of $8,000.
3) On March 1, 2009 it should be recorded at the replacement cost of $11,000.
4) On July 1, 2009 it should be recorded at the net realizable value of $12,000.
e. XG manufactures clothes for sale to retailers in Quebec. On January 1, 2009, XG invested $20,000 in
shares of a Canadian bank, which it classified as held-for-trading. On December 31, 2009, these shares
had a fair market value of $25,000. Where would this increase in value be reflected in the
shareholders’ equity section of XG’s balance sheet?
1) Retained
earnings
surplus
2) Contributed
3) Accumulated other comprehensive income
shares
4) Common
f. ACT is an acting school in Toronto, Ontario. On January 1, 2009, it issued bonds to help pay for a
new theatre for its productions. If the bonds were issued at a discount (as opposed to being issued at
face value), how would the discount affect ACT’s December 31, 2009 net income (or other
comprehensive income)?
1) It would have no impact on net income or comprehensive income.
2) It would decrease interest expense and increase net income.
3) It would affect other comprehensive income only.
4) It would increase interest expense and decrease net income.
g. Which of the following would not be shown net of tax on the statement of income, the statement of
comprehensive income, or the statement of retained earnings?
1) Changes in estimates
operations
2) Discontinued
items
3) Extraordinary
of
errors
4) Correction
Note:
Use the following information for parts (h) and (i).
ROY Construction Company (ROY) entered into a contract to build a new wing on a hospital for a price of
$2,500,000. Construction commenced on September 1, 2008, with a planned completion date of
December 31, 2010. A summary of the costs, billings, and collections is provided below:
2008 2009 2010 Costs incurred during year $ 500,000 $ 700,000 $ 1,100,000 Estimated costs to complete at year end 1,500,000 1,200,000 0
Billings during year 440,000 1,000,000 1,060,000
Cash collections during year 400,000 900,000 1,200,000
h. How much would the balance in accounts receivable be on the balance sheet of ROY at the end of
2009 if ROY uses the percentage-of-completion method?
1) $ 100,000
2) $ 140,000
3) $1,000,000
4) $1,400,000
i. How much would be the gross profit or loss to be recognized by ROY for the year ended
December 31, 2009 if ROY uses the percentage-of-completion method?
1) $100,000
loss
loss
2) $
75,000
profit
50,000
3) $
profit
4) $100,000
Use the following information for parts (j) and (k).
BRN has been selling video games for the last 10 years. Its best selling game is a mountain climbing virtual reality game called K2 that was introduced by its supplier on September 1, 2009. The following information pertains to inventory of K2 for September 2009:
September 2009 Units Unit Cost Opening inventory 0 n/a
Purchase #1 13,000 $20
Sale #1 (6,000)
Purchase #2 4,000 $22
Sale #2 (5,000)
Total 6,000
j. If BRN uses the perpetual first-in, first-out (FIFO) inventory system, what would be the cost of ending inventory for September 2009?
1) $120,000
2) $122,820
3) $126,000
4) $128,000
k. If BRN uses the weighted-average method for costing its periodic inventory, what would be the best estimate of cost of goods sold for September 2009?
1) $220,000
2) $223,650
3) $225,170
4) $230,000
l. What of the following is not true regarding goodwill?
1) Any negative goodwill should be allocated to reduce the values of identifiable monetary assets.
2) Goodwill is internally generated, but only recorded when purchased.
3) Goodwill should generally be evaluated for impairment annually.
4) Goodwill is the difference between the actual purchase price of an acquired business unit and the
fair value of identifiable net assets acquired.
Use the following information for parts (m) and (n).
The accounting information of FISH Company included the following for the year ended
December 31, 2009:
Accounts receivable, January 1, 2009 $ 125,000 Credit sales in 2009 1,400,000 Allowance for doubtful accounts, January 1, 2009 15,000 Cash collected on accounts receivable during 2009 1,350,000 m. Assume FISH estimates its allowance for doubtful accounts as being 10% of December 31, 2009 accounts receivable. What would be FISH’s bad debt expense for 2009?
1) $
1,500
2,500
2) $
3) $
9,500
4) $17,500
n. Assume FISH estimates its bad debt expense to be 1.5% of credit sales. If $8,000 of uncollectable accounts were written off during 2009, what would be the balance in FISH’s allowance for doubtful accounts on December 31, 2009?
1) $13,000
2) $15,625
3) $28,000
4) $36,000
The following is a partial trial balance for Venus Inc., a public company, for the year ended
December 31, 2009. Each item has its normal debit or credit balance, but the total does not net to $0 as it is
a partial trial balance.
Accounts receivable $ 130,000
Sales 1,000,000
Prepaid insurance 20,000
Equipment, net 1170,000 Sales returns and allowances 20,000
Accounts payable 75,000
Available-for-sale investments 2240,000
Common shares 3150,000 Deposits received from customers 15,000
Retained earnings, January 1, 2009 300,000
Discount on bonds payable 20,000
Cash 65,000
Inventory 4?
Bonds payable, due January 1, 2013 250,000
Extraordinary gain — expropriation of land 25,000
Net income 5?
Additional information
1The equipment is net of accumulated amortization of $30,000.
2 The balance in the available-for-sale investments represents the original cost at the date of acquisition,
January 1, 2008. As of December 31, 2009, none of these investments had been sold and there were no
plans to sell them in 2010. The fair value of the investments was $180,000 on December 31, 2008 and
$190,000 on December 31, 2009. The decreases in value were not considered a permanent impairment.
3The Venus common shares have no par value; 80,000 shares are authorized and 50,000 shares have
been issued.
4During 2009, Venus changed from weighted-average cost (WAC) for its inventory to FIFO to conform
to industry practice. Inventory under WAC was $150,000 at the end of 2009 and $120,000 on
December 31, 2008. Inventory under FIFO was $160,000 at the end of 2009 and $140,000 on
December 31, 2008.
5Ignore income taxes for part (a) of this question. Because only a partial trial balance is provided, net
income cannot be directly calculated. It should be “plugged” to make the financial statements balance.
Required
10 a. Prepare a classified balance sheet as at December 31, 2009, in good form, using appropriate
terminology.
3 b. Ignore your answer to part (a) and assume that the tax rate has been 40% since Venus started
operations. Briefly describe how the change in inventory accounting policy from WAC to FIFO
(item #4 above) would be accounted for on the 2009 financial statements of Venus.
On January 1, 2009, ICO bought a new machine to help produce its products more efficiently. Because of
weak demand due to the current recession, the supplier offered the machine to ICO at a bargain, relative to
the list price of $80,000. ICO would still pay $80,000 on January 1, 2011, as long as ICO signed a note
payable to the supplier that paid interest of 2% on each December 31 that the loan was outstanding.
Because ICO usually pays 6% on its bank loans, it decided to accept this special offer. ICO also paid
$5,000 to have the machine installed and $2,000 for testing of the machine (the total of $7,000 was paid in
cash and all testing was completed by March 31, 2009, the date the machine was put into service). The
machine was expected to last 8 years with a residual value of $4,000. ICO uses the
double-declining-balance method to amortize its capital assets.
Required
Provide all journal entries required by ICO relating to the machine and the notes payable for 2009
(including adjusting journal entries at December 31, 2009).
4
13 Question
On January 1, 2009, KP started its retail operations and has just completed its first year of operations. KP’s
inexperienced bookkeeper has asked you for advice regarding the proper accounting treatment for the
following transactions:
1. On December 30, 2009, KP shipped 5 high-definition televisions to MJ. These televisions cost KP
$400 each on October 1, 2009 and they were sold to MJ at a price of $700 each, FOB shipping point.
The televisions arrived at MJ’s warehouse on January 3, 2010.
2. On February 1, 2009, KP purchased a home theatre system for $9,000 that it later sold to a client on
July 1, 2009 for the full list price of $13,000. To facilitate the sale, KP agreed to take a note receivable
and charge no interest for 3 years, with the $13,000 due on June 30, 2012, even though the market rate
of interest was 6%.
3. On December 15, 2009, KP introduced a new product to its stores, a Digital Video Converter (DVC),
that converts old-style recordings of movies and television shows to a digital format. To encourage
sales over the holiday season, KP advertised that if customers paid cash for their DVC and they were
not satisfied with it for any reason, the DVC could be returned for a full refund for up to 120 days
from the date of sale. On December 15, KP purchased 100 DVCs at a cost of $600 each and sold 80
for a cash price of $1,000 each between December 15 and December 31, 2009.
Required
2 a. It is now January 15, 2010. Provide all journal entries required for the month of December for the
televisions in item (1) above. KP uses a perpetual inventory system.
6 b. Provide all journal entries needed on July 1, 2009 and December 31, 2009 relating to the home theatre
system in item (2) above.
5 c. Briefly discuss how KP should account for the DVCs and provide all related December 2009 journal
entries.
After many years of working for a large corporation, a friend of yours recently started her own storage
business. On January 1, 2009, she acquired land and an old warehouse for $120,000, a bargain since the
land had an appraised value of $100,000 and the building had an appraised value of $50,000. The building
was expected to last 5 years with a residual value of $10,000, and your friend plans to use straight-line
amortization for all of her capital assets.
Required
5 a. Prepare the journal entry relating to the acquisition of the land and building, and any adjusting entry
required on December 31, 2009.
4 b. Explain how your answer to part a) would change if her intention was to immediately tear down the
existing warehouse at a cost of $5,000 and to replace it with a new prefabricated warehouse at a cost
of $60,000. The new warehouse would be delivered on April 1, 2009 and be ready for use by
customers on May 1, 2009. The prefabricated warehouse would last 20 years with no residual value.
Also, given the new assumption about tearing down the warehouse, briefly explain how your
recommendation would help to improve the quality of earnings.
Note:
You are not required to provide any journal entries for part (b).
3 c. Your friend does not really understand accounting, but she has many years of experience with the real
estate market. She anticipates that the prefabricated warehouse will go up in value by 10% per year for
each of the next 5 years. Therefore, she feels that no amortization is required for the next 5 years, but
she is willing to amortize the warehouse over 15 years starting in 2014. She said that “if anything, we
should be increasing the value of the warehouse each year, not decreasing it.” Indicate whether you
agree with her suggestion. Briefly explain whether this would be acceptable under Canadian GAAP,
using two financial statement concepts to support your answer.
6
12 Question
On March 31, 2009, GRW acquired 6,000 (30%) of the shares of PRM at a price of $14 per share. On
December 31, 2009, GRW’s year-end date, PRM paid a dividend of $1.50 per share and PRM reported net
income for the year of $36,000, which was earned evenly over the year. On December 31, 2009, the PRM
shares were trading at $16 per share on the Toronto Stock Exchange.
Required
3 a. Briefly explain, in one or two sentences each, under what circumstances you would account for the
PRM shares:
equity
method
the
i) Using
ii) As a held-for-trading investment
iii) As an available-for-sale investment
4 b. Assuming the investment in PRM was to be accounted for using the equity method, provide all journal
entries to be made by GRW on March 31 and December 31, 2009.
3 c. Assuming that the PRM shares were considered held-for-trading, provide any journal entries required
by GRW on December 31, 2009.
2 d. Assume that the CEO of GRW receives a bonus of 10% of net income each year. Briefly explain why
the CEO might prefer that the PRM shares be classified as held-for-trading rather than
available-for-sale for financial statement purposes.
The following is an unclassified balance sheet for Plato Limited of Whistler, British Columbia:
PLATO LIMITED
Balance Sheets
December 31, 2009 and 2008
2009 2008 Assets
Cash $ 75,000 $ 53,000
Accounts receivable 125,000 85,000
Inventory 110,000 98,000
Land 100,000 0
Machinery 390,000 310,000
(130,000) Accumulated amortization (160,000)
416,000
640,000 $
$
Liabilities and shareholders’ equity
Accounts payable $ 80,000 $ 41,000
Bonds payable 200,000 115,000
Common shares 160,000 110,000
150,000 Retained earnings 200,000
416,000
$
640,000 $ Additional information
1. Net income for 2009 was $75,000.
2. The addition to machinery was partly paid for by providing the supplier with 5,000 Plato common
shares, which had a fair value of $10 each at the date of issuance. There were no disposals of
machinery.
3. Cash dividends were declared and paid during the year.
4. Land was acquired during 2009 in anticipation of the Olympic Games in February 2010. Plato plans to
sell the land in 2010 after land prices increase.
Required
8 a. Prepare, in good form, a statement of cash flows for 2009, using the indirect method.
3 b. Briefly explain why a user of Plato’s financial statements might prefer a statement of cash flows
prepared using the direct method, rather than the indirect method used in part (a).
END OF EXAMINATION
100
FINANCIAL ACCOUNTING: ASSETS [FA2]
EXAMINATION
FA2
Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 8 pages and 2 pages of attachments. There are 7 questions for a total of 100 marks.
READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED.
To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms.
Glossary of Assessment Terms
Adapted from David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer.
Calculate Mathematically determine the
amount or number, showing
formulas used and steps taken. (Also
Compute).
Compare Examine qualities or characteristics
that resemble each other. Emphasize
similarities, although differences
may be mentioned.
Contrast Compare
by
observing
differences.
Stress the dissimilarities of qualities
or characteristics. (Also Distinguish
between)
Criticize Express your own judgment
concerning the topic or viewpoint in
question. Discuss both pros and
cons.
Define Clearly state the meaning of the
word or term. Relate the meaning
specifically to the way it is used in
the subject area under discussion.
Perhaps also show how the item
defined differs from items in other
classes.
Describe Provide detail on the relevant
characteristics, qualities, or events. Design Create an outcome (e.g., a plan or
program) that incorporates the
relevant issues and information. Determine Calculate or formulate a response
that considers the relevant
qualitative and quantitative factors. Diagram Give a drawing, chart, plan or
graphic answer. Usually you should
label a diagram. In some cases, add
a brief explanation or description.
(Also Draw)
Discuss This calls for the most complete and
detailed answer. Examine and
analyze carefully and present both
pros and cons. To discuss briefly
requires you to state in a few
sentences the critical factors. Evaluate This requires making an informed
judgment. Your judgment must be
shown to be based on knowledge and
information about the subject. (Just
stating your own ideas is not
sufficient.) Cite authorities. Cite
advantages and limitations. Explain In explanatory answers you must
clarify the cause(s), or reasons(s).
State the “how” and “why” of the
subject. Give reasons for differences
of opinions or of results.
Identify Distinguish and specify the important
issues, factors, or items, usually based
on an evaluation or analysis of a
scenario.
Illustrate Make clear by giving an example,
e.g., a figure, diagram or concrete
example.
Interpret Translate, give examples of, solve, or
comment on a subject, usually
making a judgment on it.
Justify Prove or give reasons for decisions or
conclusions.
List Present an itemized series or
tabulation. Be concise. Point form is
often acceptable.
Outline This is an organized description. Give
a general overview, stating main and
supporting ideas. Use headings and
sub-headings, usually in point form.
Omit minor details.
Prove Establish that something is true by
citing evidence or giving clear logical
reasons.
Recommend Propose an appropriate solution or
course of action based on an
evaluation or analysis of a scenario. Relate Show how things are connected with
each other or how one causes another,
correlates with another, or is like
another.
Review Examine a subject critically,
analyzing and commenting on the
important statements to be made
about it.
State Clearly provide a position based on
an evaluation, e.g., Agree/Disagree,
Correct/Incorrect, Yes/No. (Also
Indicate)
Summarize Give the main points or facts in
condensed form, like the summary of
a chapter, omitting details and
illustrations.
Trace In narrative form, describe progress,
development, or historical events
from some point of origin.
Table 1
Present Value of $1
n
i)
(11+
Period
1%2%3%4%5%
6%7%8%9%10%11%12%13%14%15%16%18%20%1.9901.9804.9709.9615.9524.9434.9346.9259.9174.9091.9009.8929.8850.8772.8696.8621.8475.83332.9803.9612.9426.9246.9070.8900.8734.8573.8417.8264.8116.7972.7831.7695.7561.7432.7182.69443.9706.9423.9151.8890.8638.8396.8163.7938.7722.7513.7312.7118.6931.6750.6575.6407.6086.57874.9610.9238.8885.8548.8227.7921.7629.7350.7084.6830.6587.6355.6133.5921.5718.5523.5158.48235.9515.9057.8626.8219.7835.7473.7130.6806.6499.6209.5935.5674.5428.5194.4972.4761.4371.40196.9420.8880.8375.7903.7462.7050.6663.6302.5963.5645.5346.5066.4803.4556.4323.4104.3704.33497.9327.8706.8131.7599.7107.6651.6227.5835.5470.5132.4817.4523.4251.3996.3759.3538.3139.27918.9235.8535.7894.7307.6768.6274.5820.5403.5019.4665.4339.4039.3762.3506.3269.3050.2660.23269.9143.8368.7664.7026.6446.5919.5439.5002.4604.4241.3909.3606.3329.3075.2843.2630.2255.193810.9053.8203.7441.6756.6139.5584.5083.4632.4224.3855.3522.3220.2946.2697.2472.2267.1911.161511.8963.8043.7224.6496.5847.5268.4751.4289.3875.3505.3173.2875.2607.2366.2149.1954.1619.134612.8874.7885.7014.6246.5568.4970.4440.3971.3555.3186.2858.2567.2307.2076.1869.1685.1372.112213.8787.7730.6810.6006.5303.4688.4150.3677.3262.2897.2575.2292.2042.1821.1625.1452.1163.093514.8700.7579.6611.5775.5051.4423.3878.3405.2992.2633.2320.2046.1807.1597.1413.1252.0985.077915.8613.7430.6419.5553.4810.4173.3624.3152.2745.2394.2090.1827.1599.1401.1229.1079.0835.064916.8528.7284.6232.5339.4581.3936.3387.2919.2519.2176.1883.1631.1415.1229.1069.0930.0708.054117.8444.7142.6050.5134.4363.3714.3166.2703.2311.1978.1696.1456.1252.1078.0929.0802.0600.045118.8360.7002.5874.4936.4155.3503.2959.2502.2120.1799.1528.1300.1108.0946.0808.0691.0508.037619.8277.6864.5703.4746.3957.3305.2765.2317.1945.1635.1377.1161.0981.0829.0703.0596.0431.031320.8195.6730.5537.4564.3769.3118.2584.2145.1784.1486.1240.1037.0868.0728.0611.0514.0365.026121.8114.6598.5375.4388.3589.2942.2415.1987.1637.1351.1117.0926.0768.0638.0531.0443.0309.021722.8034.6468.5219.4220.3418.2775.2257.1839.1502.1228.1007.0826.0680.0560.0462.0382.0262.018123.7954.6342.5067.4057.3256.2618.2109.1703.1378.1117.0907.0738.0601.0491.0402.0329.0222.015124.7876.6217.4919.3901.3101.2470.1971.1577.1264.1015.0817.0659.0532.0431.0349.0284.0188.012625.7798.6095.4776.3751.2953.2330.1842.1460.1160.0923.0736.0588.0471.0378.0304.0245.0160.010530.7419.5521.4120.3083.2314.1741.1314.0994.0754.0573.0437.0334.0256.0196.0151.0116.0070.004240.6717.4529.3066.2083.1420.0972.0668.0460.0318.0221.0154.0107.0075.0053.0037.0026.0013.000750
.6080
.3715
.2281
.1407
.0872
.0543
.0339
.0213
.0134
.0085
.0054
.0035
.0022
.0014
.0009
.0006
.0003
.0001
Table 2 Present Value of an Annuity of $1 Per Period for n Periods
i
)i 1(1n
?+? Number of Periods
1%2%3%4%5%6%7%8%9%10%11%12%13%14%15%16%18%20%1.9901.9804.9709.9615.9524.9434.9346.9259.9174.9091.9009.8929.8850.8772.8696.8621.8475.83332 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257 1.6052 1.5656 1.52783 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832 2.2459 2.1743 2.10654 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550 2.7982 2.6901 2.58875 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522 3.2743 3.1272 2.99066 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.2305 4.1114 3.9975 3.8887 3.7845 3.6847 3.4976 3.32557 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604 4.0386 3.8115 3.604687.65177.32557.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 5.1461 4.9676 4.7988 4.6389 4.4873 4.3436 4.0776 3.837298.56608.16227.78617.43537.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.5370 5.3282 5.1317 4.9464 4.7716 4.6065 4.3030 4.0310109.47138.98268.53028.11097.72177.36017.0236 6.7101 6.4177 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188 4.8332 4.4941 4.19251110.36769.78689.25268.76058.30647.88697.49877.1390 6.8052 6.4951 6.2065 5.9377 5.6869 5.4527 5.2337 5.0286 4.6560 4.32711211.255110.57539.95409.38518.86338.38387.94277.53617.1607 6.8137 6.4924 6.1944 5.9176 5.6603 5.4206 5.1971 4.7932 4.43921312.133711.348410.63509.98569.39368.85278.35777.90387.48697.1034 6.7499 6.4235 6.1218 5.8424 5.5831 5.3423 4.9095 4.53271413.003712.106211.296110.56319.89869.29508.74558.24427.78627.3667 6.9819 6.6282 6.3025 6.0021 5.7245 5.4675 5.0081 4.61061513.865112.849311.937911.118410.37979.71229.10798.55958.06077.60617.1909 6.8109 6.4624 6.1422 5.8474 5.5755 5.0916 4.67551614.717913.577712.561111.652310.837810.10599.44668.85148.31267.82377.3792 6.9740 6.6039 6.2651 5.9542 5.6685 5.1624 4.72961715.562314.291913.166112.165711.274110.47739.76329.12168.54368.02167.54887.1196 6.7291 6.3729 6.0472 5.7487 5.2223 4.77461816.398314.992013.753512.659311.689610.827610.05919.37198.75568.20147.70167.2497 6.8399 6.4674 6.1280 5.8178 5.2732 4.81221917.226015.678514.323813.133912.085311.158110.33569.60368.95018.36497.83937.3658 6.9380 6.5504 6.1982 5.8775 5.3162 4.84352018.045616.351414.877513.590312.462211.469910.59409.81819.12858.51367.96337.46947.0248 6.6231 6.2593 5.9288 5.3527 4.86962118.857017.011215.415014.029212.821211.764110.835510.01689.29228.64878.07517.56207.1016 6.6870 6.3125 5.9731 5.3837 4.89132219.660417.658015.936914.451113.163012.041611.061210.20079.44248.77158.17577.64467.1695 6.7429 6.3587 6.0113 5.4099 4.90942320.455818.292216.443614.856813.488612.303411.272210.37119.58028.88328.26647.71847.2297 6.7921 6.3988 6.0442 5.4321 4.92452421.243418.913916.935515.247013.798612.550411.469310.52889.70668.98478.34817.78437.2829 6.8351 6.4338 6.0726 5.4509 4.93712522.023219.523517.413115.622114.093912.783411.653610.67489.82269.07708.42177.84317.3300 6.8729 6.4641 6.0971 5.4669 4.94763025.807722.396519.600417.292015.372513.764812.409011.257810.27379.42698.69388.05527.49577.0027 6.5660 6.1772 5.5168 4.97894032.834727.355523.114819.792817.159115.046313.331711.924610.75749.77918.95118.24387.63447.1050 6.6418 6.2335 5.5482 4.996650
39.1961
31.4236
25.7298
21.4822
18.2559
15.7619
13.8007
12.2335
10.9617
9.9148
9.0417
8.3045
7.6752
7.1327
6.6605
6.2463
5.5541
4.9995
Table 3 Future Value of $1 at the End of n Periods n)i
1(+
Period1%2%3%4%5%6%7%8%9%10%11%12%13%14%15%16%18%20%
1 1.0100 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000 1.1100 1.1200 1.1300 1.1400 1.1500 1.1600 1.1800 1.2000
2 1.0201 1.0404 1.0609 1.0816 1.1025 1.1236 1.1449 1.1664 1.1881 1.2100 1.2321 1.2544 1.2769 1.2996 1.3225 1.3456 1.3924 1.4400
3 1.0303 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250 1.2597 1.2950 1.3310 1.3676 1.4049 1.4429 1.4815 1.5209 1.5609 1.6430 1.7280
4 1.0406 1.0824 1.125
5 1.1699 1.2155 1.2625 1.3108 1.3605 1.411
6 1.4641 1.5181 1.5735 1.6305 1.6890 1.7490 1.8106 1.9388 2.0736
5 1.0510 1.1041 1.1593 1.2167 1.2763 1.3382 1.402
6 1.4693 1.5386 1.6105 1.6851 1.7623 1.8424 1.9254 2.0114 2.1003 2.2878 2.4883
6 1.0615 1.1262 1.1941 1.2653 1.3401 1.4185 1.500
7 1.5869 1.6771 1.7716 1.8704 1.973
8 2.0820 2.1950 2.3131 2.4364 2.6996 2.9860
7 1.0721 1.1487 1.2299 1.3159 1.4071 1.5036 1.6058 1.7138 1.8280 1.9487 2.0762 2.2107 2.3526 2.5023 2.6600 2.8262 3.1855 3.5832
8 1.0829 1.1717 1.2668 1.3686 1.4775 1.5938 1.7182 1.8509 1.9926 2.1436 2.3045 2.4760 2.6584 2.8526 3.0590 3.2784 3.7589 4.2998
9 1.0937 1.1951 1.3048 1.4233 1.5513 1.6895 1.8385 1.9990 2.1719 2.3579 2.5580 2.7731 3.0040 3.2519 3.5179 3.8030 4.4355 5.1598
10 1.1046 1.2190 1.3439 1.4802 1.6289 1.7908 1.9672 2.1589 2.3674 2.5937 2.8394 3.1058 3.3946 3.7072 4.0456 4.4114 5.2338 6.1917
11 1.1157 1.2434 1.3842 1.5395 1.7103 1.8983 2.1049 2.3316 2.5804 2.8531 3.1518 3.4785 3.8359 4.2262 4.6524 5.1173 6.17597.4301
12 1.1268 1.2682 1.4258 1.6010 1.7959 2.0122 2.2522 2.5182 2.8127 3.1384 3.4985 3.8960 4.3345 4.8179 5.3503 5.93607.28768.9161
13 1.1381 1.2936 1.4685 1.6651 1.8856 2.1329 2.4098 2.7196 3.0658 3.4523 3.8833 4.3635 4.8980 5.4924 6.1528 6.88588.599410.6993
14 1.1495 1.3195 1.5126 1.7317 1.9799 2.2609 2.5785 2.9372 3.3417 3.7975 4.3104 4.8871 5.5348 6.26137.07577.987510.147212.8392
15 1.1610 1.3459 1.5580 1.8009 2.0789 2.3966 2.7590 3.1722 3.6425 4.1772 4.7846 5.4736 6.25437.13798.13719.265511.973715.4070
16 1.1726 1.3728 1.6047 1.8730 2.1829 2.5404 2.9522 3.4259 3.9703 4.5950 5.3109 6.13047.06738.13729.357610.748014.129018.4884
17 1.1843 1.4002 1.6528 1.9479 2.2920 2.6928 3.1588 3.7000 4.3276 5.0545 5.8951 6.86607.98619.276510.761312.467716.672222.1861
18 1.1961 1.4282 1.7024 2.0258 2.4066 2.8543 3.3799 3.9960 4.7171 5.5599 6.54367.69009.024310.575212.375514.462519.673326.6233
19 1.2081 1.4568 1.7535 2.1068 2.5270 3.0256 3.6165 4.3157 5.1417 6.11597.26338.612810.197412.055714.231816.776523.214431.9480
20 1.2202 1.4859 1.8061 2.1911 2.6533 3.2071 3.8697 4.6610 5.6044 6.72758.06239.646311.523113.743516.366519.460827.393038.3376
21 1.2324 1.5157 1.8603 2.2788 2.7860 3.3996 4.1406 5.0338 6.10887.40028.949210.803813.021115.667618.821522.574532.323846.0051
22 1.2447 1.5460 1.9161 2.3699 2.9253 3.6035 4.4304 5.4365 6.65868.14039.933612.100314.713817.861021.644726.186438.142155.2061
23 1.2572 1.5769 1.9736 2.4647 3.0715 3.8197 4.7405 5.87157.25798.954311.026313.552316.626620.361624.891530.376245.007666.2474
24 1.2697 1.6084 2.0328 2.5633 3.2251 4.0489 5.0724 6.34127.91119.849712.239215.178618.788123.212228.625235.236453.109079.4968
25 1.2824 1.6406 2.0938 2.6658 3.3864 4.2919 5.4274 6.84858.623110.834713.585517.000121.230526.461932.919040.874262.668695.3962
30 1.3478 1.8114 2.4273 3.2434 4.3219 5.74357.612310.062713.267717.449422.892329.959939.115950.950266.211885.8499143.3706237.3763
40 1.4889 2.2080 3.2620 4.80107.040010.285714.974521.724531.409445.259365.000993.0510132.7816188.8835267.8635378.7212750.37831469.7716
50 1.6446 2.6916 4.38397.106711.467418.420229.457046.901674.3575117.3909184.5648289.0022450.7359700.23301083.65741670.70403927.35709100.4382
Table 4 Sum of an Annuity of $1 Per Period for n Periods
i 1
)i
1(n?
+
Number
of
Periods1%2%3%4%5%6%7%8%9%10%11%12%13%14%15%16%18%20%
1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
2 2.0100 2.0200 2.0300 2.0400 2.0500 2.0600 2.0700 2.0800 2.0900 2.1000 2.1100 2.1200 2.1300 2.1400 2.1500 2.1600 2.1800 2.2000
3 3.0301 3.060
4 3.0909 3.1216 3.152
5 3.183
6 3.2149 3.2464 3.2781 3.3100 3.3421 3.3744 3.4069 3.4396 3.4725 3.5056 3.5724 3.6400
4 4.0604 4.1216 4.1836 4.246
5 4.3101 4.374
6 4.4399 4.5061 4.5731 4.6410 4.709
7 4.7793 4.849
8 4.9211 4.9934 5.0665 5.2154 5.3680
5 5.1010 5.2040 5.3091 5.4163 5.525
6 5.6371 5.750
7 5.8666 5.9847 6.1051 6.227
8 6.3528 6.4803 6.6101 6.7424 6.87717.15427.4416
6 6.1520 6.3081 6.4684 6.6330 6.8019 6.97537.15337.33597.52337.71567.91298.11528.32278.53558.75378.97759.44209.9299
77.21357.43437.66257.89838.14208.39388.65408.92289.20049.48729.783310.089010.404710.730511.066811.413912.141512.9159
88.28578.58308.89239.21429.54919.897510.259810.636611.028511.435911.859412.299712.757313.232813.726814.240115.327016.4991
99.36859.754610.159110.582811.026611.491311.978012.487613.021013.579514.164014.775715.415716.085316.785817.518519.085920.7989
1010.462210.949711.463912.006112.577913.180813.816414.486615.192915.937416.722017.548718.419719.337320.303721.321523.521325.9587 1111.566812.168712.807813.486414.206814.971615.783616.645517.560318.531219.561420.654621.814323.044524.349325.732928.755132.1504 1212.682513.412114.192015.025815.917116.869917.888518.977120.140721.384322.713224.133125.650227.270729.001730.850234.931139.5805 1313.809314.680315.617816.626817.713018.882120.140621.495322.953424.522726.211628.029129.984732.088734.351936.786242.218748.4966 1414.947415.973917.086318.291919.598621.015122.550524.214926.019227.975030.094932.392634.882737.581140.504743.672050.818059.1959 1516.096917.293418.598920.023621.578623.276025.129027.152129.360931.772534.405437.279740.417543.842447.580451.659560.965372.0351 1617.257918.639320.156921.824523.657525.672527.888130.324333.003435.949739.189942.753346.671750.980455.717560.925072.939087.4421 1718.430420.012121.761623.697525.840428.212930.840233.750236.973740.544744.500848.883753.739159.117665.075171.673087.0680105.9306 1819.614721.412323.414425.645428.132430.905733.999037.450241.301345.599250.395955.749761.725168.394175.836484.1407103.7403128.1167 1920.810922.840625.116927.671230.539033.760037.379041.446346.018551.159156.939563.439770.749478.969288.211898.6032123.4135154.7400 2022.019024.297426.870429.778133.066036.785640.995545.762051.160157.275064.202872.052480.946891.0249102.4436115.3797146.6280186.6880 2123.239225.783328.676531.969235.719339.992744.865250.422956.764564.002572.265181.698792.4699104.7684118.8101134.8405174.0210225.0256 2224.471627.299030.536834.248038.505243.392349.005755.456862.873371.402781.214392.5026105.4910120.4360137.6316157.4150206.3448271.0307 2325.716328.845032.452936.617941.430546.995853.436160.893369.531979.543091.1479104.6029120.2048138.2970159.2764183.6014244.4868326.2369 2426.973530.421934.426539.082644.502050.815658.176766.764876.789888.4973102.1742118.1552136.8315158.6586184.1678213.9776289.4945392.4842 2528.243232.030336.459341.645947.727154.864563.249073.105984.700998.3471114.4133133.3339155.6196181.8708212.7930249.2140342.6035471.9811 3034.784940.568147.575456.084966.438879.058294.4608113.2832136.3075164.4940199.0209241.3327293.1992356.7868434.7451530.3117790.94801181.8816 4048.886460.402075.401395.0255120.7998154.7620199.6351259.0565337.8824442.5926581.8261767.09141013.70421342.02511779.09032360.75724163.21307343.8578 5064.463284.5794112.7969152.6671209.3480290.3359406.5289573.7702815.08361163.90851668.77122400.01823459.50714994.52137217.716310435.648821813.093745497.1908
CGA-CANADA
FINANCIAL ACCOUNTING: ASSETS [FA2] EXAMINATION
March 2010
SUGGESTED SOLUTIONS
Marks Time: 3 Hours 1
28 Question
Note:
2 marks each
Sources/Calculations:
a. 4) Topic 1.3 (Level 1)
b. 3) Topic 1.3 (Level 1)
c. 1) Topic 1.7 (Level 1)
d. 2) Topic 1.5 (Level 1)
e. 1) Topic 2.10 (Level 1)
f. 4) Topic 4.6 (Level 1)
g. 1) Topic 2.2 (Level 1)
h. 2) Topic 4.4 (Level 1)
$440,000 + $1,000,000 – $400,000 – $900,000 = $140,000
i. 2) Topic 4.4 (Level 1)
($500,000 + $700,000) / ($500,000 + $700,000 + $1,200,000) × ($2,500,000 – $2,400,000)
= $50,000
$50,000 – [$500,000 / ($500,000 + $1,500,000) × ($2,500,000 – $2,000,000)] = $(75,000) j. 4) Topics 7.2 and 7.3 (Level 1)
(4,000 × $22) + (2,000 × $20) = $128,000
k. 3) Topics 7.2 and 7.3 (Level 1)
[(13,000 × $20) + (4,000 × $22)] / (13,000 + 4,000) = $20.47 × 11,000 = $225,170 l. 1) Topic 9.4 (Level 1)
m. 2) Topic 6.4 (Level 1)
($125,000 + $1,400,000 – $1,350,000) × 10% – $15,000 = $2,500
n. 3) Topic 6.4 (Level 1)
$15,000 + ($1,400,000 × 1.5%) – $8,000 = $28,000
Source: Topics 2.7, 2.10, and 8.4 (Level 1)
10 a. VENUS COMPANY
(1) Balance Sheet
as at December 31, 2009
Assets
assets
Current
65,000
(1/2) Cash $
receivable 130,000
(1/2) Accounts
(1) Inventory 160,000
insurance 20,000
(1/2) Prepaid
375,000
assets
Long-term
190,000 (1) Available-for-sale
investments Machinery 200,000
170,000
(1) Accumulated
amortization (30,000)
735,000
$
Liabilities and shareholders’ equity
liabilities
Current
(1/2) Accounts
75,000
payable $
(1/2) Unearned revenue (or customer deposits) 15,000
90,000
Long-term liabilities
(1/2) Bonds payable, due January 1, 2013 250,000
(1/2) Discount on bonds payable (20,000)
230,000
320,000
equity
Shareholders’
(1) Common shares, 80,000 shares authorized, 50,000 issued 150,000
earnings 315,000
(1/2) Retained
265,000
(1) Accumulated
other
(loss) (50,000)
income
comprehensive
735,000
$
3 b. The change in accounting policy relating to the inventory of Venus should be accounted for
retrospectively; that is, by adjusting current and prior period financial statements of Venus, including
opening retained earnings of the earliest year presented. The effect of the change would go through the
statement of retained earnings on a net of tax basis.
January 1 – March 31, 2009
...................................................................................................................
81,133
1 Machine
Discount on notes payable....................................................................................... 5,867
.................................................................................................................. 7,000 1Cash
................................................................................................... 80,000 payable
1Notes
PV6%, 2 years) + ($80,000 × 2% × PVA6%, 2 years) + $5,000 + $2,000 = $81,133
2 ($80,000
×
December 31, 2009
2Amortization expense [$81,133 × (1/8 × 2) × 9/12] ................................................ 15,212
1Accumulated amortization ............................................................................... 15,212
1Interest expense [($80,000 – $5,867) × 6%] ........................................................... 4,448
× 2%) ........................................................................................ 1,600 ($80,000
1Cash
1Discount on notes payable ................................................................................ 2,848 4
13 Question
Source: Topics 4.1, 4.2, 5.3, and 7.2 (Level 1)
2 a.
December 30, 2009
receivable (or cash) .......................................................................... 3,500 (1/2) Accounts
........................................................................................................... 3,500 (1/2) Sales
(1/2) Cost
goods
sold ............................................................................................ 2,000
of
(1/2) Inventory.................................................................................................... 2,000 July 1, 2009
6 b.
............................................................................................... 10,915 (1/2) Notes
receivable
PV6%, 3 years) .................................................................... 10,915
×
($13,000
(11/2) Sales
goods
sold ............................................................................................ 9,000 (1/2) Cost
of
(1/2) Inventory.................................................................................................... 9,000
December 31, 2009
(327)
receivable
(1) Notes
($10,915 × 6% × 6/12) (327)
revenue
(2) Interest
5 c.
(2)Because KP has no history of product returns for DVCs, it will not be possible to predict the level of
returns under the “full refund” policy. Therefore, revenue recognition should be delayed until the
120-day return period expires. In the meantime, any cash received is recorded as unearned revenue
and the DVCs would remain in inventory.
2009
December
15,
.......................................................................................................... 60,000 (1/2) Inventory
(1/2) Accounts
payable
....................................................................................... 60,000
December 15 – 31, 2009
80,000
..................................................................................................................
(1) Cash
...................................................................................... 80,000
(1) Unearned
revenue
5 a.
January 1, 2009
+ $50,000) × $120,000] ............................................ 80,000
[$100,000/($100,000
(1) Land
($120,000 – $80,000) ............................................................................ 40,000
(1) Building
............................................................................................................... 120,000
(1) Cash
December
2009
31,
(11/2) Amortization expense [($40,000 – $10,000) / 5] .................................................. 6,000
amortization ............................................................................. 6,000 (1/2) Accumulated
4 b. If she planned to tear down the existing building, then the cost of the old warehouse and the cost of
tearing down the old warehouse would both be capitalized for a total of $125,000 as cost of “land.”
The new building would be capitalized at a cost of $60,000 and it would start to be amortized on
May 1, 2009, when it is put into use by the company. Amortization expense would only be $2,000 for
2009 ($60,000 / 20 × 8 / 12 = $2,000).
Since the plan is to tear down the old warehouse, my recommendation would improve the quality of
earnings because the cost of the old warehouse would be capitalized as part of the cost of land. This
would represent faithfully the company’s plans and would not lead to an ongoing amortization charge
for an old warehouse that has no continuing benefit to the company.
3 c. I disagree with the suggestion to not amortize the building for the next 5 years as it would not be
acceptable under Canadian GAAP. Amortization represents an allocation of cost, not a valuation
technique, and it serves to match the cost of the building to the period of benefit (20 years). Also,
under Canadian GAAP you cannot increase the carrying value of the building each year as this would
violate the historical cost principle.
Note:
Other opinions are acceptable if adequately supported.
Source: Topics 8.4, 8.5, and 8.8 (Level 1)
3 a.
(1)i) The PRM shares would be accounted for using the equity method if GRW had significant
influence over PRM, as evidenced by factors such as representation on PRM’s board of directors. (1) ii) The PRM shares would be accounted for as held-for-trading investments if GRW intended to sell
the PRM shares in the near term and/or designated the shares as held-for-trading.
(1) iii) The PRM shares would be considered available-for-sale if they were not accounted for using
equity accounting and were not designated as held-for-trading.
4 b.
March 31, 2009
(1) Investment in PRM (6,000 × $14) ........................................................................ 84,000
.............................................................................................................. 84,000 Cash.
December 31, 2009
............................................................................................... 8,100
PRM
(1) Investment
in
(1) Investment income ($36,000 × 30% × 9/12) ................................................. 8,100
× $1.50) ............................................................................................ 9,000
(6,000
Cash
........................................................................................ 9,000
PRM
(1) Investment
in
December 31, 2009
3 c.
...................................................................................................................... 9,000 Cash
(1) Investment
(6,000 × $1.50) ............................................................... 9,000
income
PRM
............................................................................................... 12,000
in
(1) Investment
gain
[($16 – $14) × 6,000] ............................................. 12,000
holding
(1) Unrealized
2 d. If the PRM shares were classified as available-for-sale (AFS) instead of held-for-trading, the
unrealized gain on sale would be part of other comprehensive income, rather than regular net income.
Therefore, the second journal entry in part c) would be as follows:
Note:
You are not required to show the following journal entry as part of your solution.
...........................................................................................
PRM
12,000
in
Investment
.................................................................... 12,000
income
Other
comprehensive
If the CEO’s bonus was based on net income (not other comprehensive income), the bonus would be
lower if the shares were classified as AFS. Therefore, the CEO would prefer the held-for-trading
method because it would generate a higher bonus.
Source: Topics 3.2 and 3.3 (Level 1)
8 a.
(1) PLATO LIMITED
Statement of Cash Flows
year ended December 31, 2009
activities
Operating
income $ 75,000 (1/2) Net
Add (deduct) items not requiring outlay of cash:
–
$130,000) 30,000
expense
($160,000
(1) Amortization
receivable (40,000) accounts
in
(1/2) Increase
inventory (12,000) (1/2) Increase
in
payable 39,000
accounts
(1/2) Increase
in
92,000 Investing activities
(1/2) Purchase of land (100,000)
(1) Purchase of machinery [$390,000 – $310,000 – (5,000 × $10)] (30,000)
(130,000) Financing activities
(1) Payment of dividends ($150,000 + $75,000 – $200,000) (25,000)
bonds 85,000 of
(1/2) Issuance
60,000
Net increase in cash 22,000
2009 53,000
1,
January
Cash,
(1) Cash, December 31, 2009 $ 75,000
3 b. A user of Plato’s financial statements might prefer a statement of cash flows (SCF) prepared using the
direct approach because it is clearer and it is easier to follow the information flow. For example, no
adjustment would be required for amortization expense on the face of the SCF as it is a non-cash item.
Also, the categories of “cash received from customers” and “cash paid to suppliers” might be more
useful than the changes in balance sheet items shown using the indirect approach.
END OF SOLUTIONS 100
CGA-CANADA
FINANCIAL ACCOUNTING: ASSETS [FA2] EXAMINATION
March 2010
EXAMINER’S COMMENTS
General Comments
The results on this examination were unsatisfactory . However, the average was similar to prior
examinations. In general, students performed satisfactorily on Questions 1 (multiple choice), 2 (balance
sheet), and 3 (capital assets). However, students performed unsatisfactorily on Questions 4 (revenue
recognition), 5 (capital assets and accounting assumptions), 6 (investments), and 7 (statement of cash
flows). Most students showed their supporting calculations in good form.
It appeared that some students lacked an understanding of the concepts and principles supporting
accounting practices, such as those relating to the criteria for revenue recognition. Students should ensure
they understand all accounting procedures in terms of basic principles and concepts. Furthermore, students
need to understand which accounting methods to apply given the circumstances presented (for example,
when and how to account for an investment as held-for-trading vs. available-for-sale).
Some of the common errors in this examination were made by students in previous examinations and were
noted in the examiners’ comments for these previous examinations (such as difficulties with present value
calculations and revenue recognition). Students should carefully review prior examinations and examiners’
comments to prepare for the FA2 examination.
In several cases, it appeared that students had some difficulty with the qualitative components of the
March 2010 examination. Students should ensure that they become more accustomed to this style of
question, as it has increased in importance for FA2 examinations. Also, it appeared that some students had
not read the question carefully and, as a result, did not answer what was asked. For example, for Question
6 (a), some students presented a detailed recap of how to use the three investment accounting methods,
rather than describing “under what circumstances you would account for the (investments)” using the
various investment accounting methods.
Specific Comments
Question 1 Multiple-choice questions (Levels 1 and 2)
The overall results on this series of multiple-choice questions were satisfactory. The questions addressed a
wide variety of topics and learning objectives. Parts (c) (adjusting journal entries), (h) (revenue
recognition), and (j) and (k) (inventory) were usually answered correctly. Parts (d) (capital assets), (f)
(expense recognition), and (i) (revenue recognition) caused the most difficulty. The results on the other
questions were average.
Question 2 Balance sheet (Level 1)
The results on this question were satisfactory. Specific learning objectives tested included financial
statement preparation and accounting for available-for-sale investments.
Most students correctly provided the financial statement presentation for current assets and liabilities,
capital assets, and common shares. However, many had difficulty determining how (or whether) to reflect
changes in fair value of available-for-sale investments on the balance sheet.
Common errors were as follows:
?Not including an amount for accumulated other comprehensive income as part of the financial statement
presentation
?Not properly showing the discount on bonds payable as part of long-term liabilities
?Not noting that a change in accounting policy should be adjusted retroactively to retained earnings (on a
net-of-tax basis)
Students need to better understand financial statement presentation for investments under the new CICA Handbook requirements. This continues to be a major area of weakness in FA2.
Question 3 Accounting for capital assets and computing present values (Levels 1 and 2) The results on this question were satisfactory. The learning objectives tested included those relating to determining the cost of capital assets and computing present values.
Many students did not properly calculate the amount to be included as “Machine” in ICO’s capital assets section (for part (a)), and some incorrectly assumed that no present value calculation was required. Many students adequately prepared the journal entry relating to the acquisition and amortization of the
equipment, but most did not properly provide the related adjusting journal entry to accrue interest expense.
Also, for amortization of the machine, a common error was not to prorate the calculation to take into account that the machine was purchased with only nine months remaining in the fiscal year.
Question 4 Revenue recognition (Level 1)
The results on this question were unsatisfactory. Specific learning objectives tested included revenue recognition concepts including revenue recognition at delivery, and related expense recognition.
Most students correctly accounted for the sale of HD TVs in part (a) of the question, including removal of the related inventory from the accounts. However, many students had difficulty with the discussion of revenue recognition in part (c) of the question. Common errors were as follows:
?Not correctly discussing the impact of the lack of past experience regarding the sale of DVCs in part (c) ?Not correctly calculating the present value of the note receivable in part (b)
?Not accruing interest revenue on the note receivable in part (b)
Students need to better understand revenue recognition principles, and would likely benefit from increased practice with discussion-style questions.
Question 5 Capital assets and discussion of financial statement concepts (Levels 1 and 2) The results on this question were unsatisfactory. The learning objectives tested included those relating to determining the cost of capital assets, computing amortization expense, and evaluating accounting
practices.
Most students properly allocated the cost of the initial acquisition between land and building in part (a) of the question, but many students did not adequately discuss how the answer would change if the building was immediately replaced with a new warehouse (for example, not noting that the cost of the old building and the demolition costs would be charged to land). In addition, students had particular difficulty in
discussing how proper accounting would help to improve the quality of earnings of the company. For part
(c), most students noted that not charging amortization would be a violation of Canadian GAAP, but many
did not adequately discuss the financial statement concepts in support of their answer.
Question 6 Accounting for investments (Level 1)
The results on this question were unsatisfactory. The learning objectives tested included accounting for held-for-trading investments, significant influence investments, and available-for-sale investments.
Most students properly prepared the journal entry for the acquisition of the PRM investment in part (b), and the related journal entries as of December 31, 2009 for the investment. However, many students had difficulty determining whether (and how) to reflect changes in fair value of investments in the company’s books of account via journal entries under equity accounting versus held-for-trading accounting.