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FALL 2013


**NOTE: This suggested solution does not include all possible answers, nor
does it include all the judgments that are involved in evaluating responses.

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Question 1 (18 marks)
Part I (9 marks)
The following situations suggest either an internal control strength or weakness. For
each situation, identify if it is a strength or a weakness and briefly explain your answer
a. All employees must take at least five days off in a row every year
(check one) ___√_____ Strength _________Weakness (1)
If an employee is doing something inappropriate (fraudulent or just in error), it
may be discovered once another person takes over their job. If they onl y take
off one or two days, their job probabl y doesn't get done by anyone else. If
they take a 5 day vacation, someone else will need to fill the position and that
increases the possibility that any unusual activities will be noticed (2 for
quality of discussion)
b. The person who signs the cheques does not review the documentation that tells
what the cheque is being issued for.
(check one) ________ Strength ___√______Weakness (1)
It is a control to have the person that signs the cheque review supporting
documentation to ensure that all elements of the payment are correct – that it
is payable to the appropriate party, that it is for an appropriate business
expenditure, and for the proper amount. If they don’t, it is possible for the
cheque preparer to make errors or fraudulent payments. (2 for quality of
c. The same employee that orders and receives merchandise is also responsible to
pay supplier invoices.
(check one) ________ Strength ____√_____Weakness (1)
The employee could order supplies for their own personal use and then pay
for it with company funds. Since they order and receive the goods nobody
else would know. If somebody else paid the invoice, they may notice if the
goods were not for the business and so would not pay the amount or
investigate further. Since the same employee also pays, it is easier for the
employee to keep the items and have the company pay. (2 for quality of

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Question 1, continued
Part II (9 marks)
The cash records of Bennett Corp. show the following:
1. The J une 30 bank reconciliation indicated that deposits in transit totalled $300.
During J uly, the general ledger account, Cash, shows deposits of $9,700, but the
bank statement indicates that only $9,540 in deposits were received during the
2. Bank charges for the month were $50. These have not been recorded in the
general ledger yet.
3. Four (4) cheques were outstanding totalling $1,490 at J uly 31.
4. On J uly 15, Bennett correctly wrote cheque #2743 to Supplier Inc. for $1,299.
The bank statement shows cheque #2743 clearing the bank on J uly 23 for
5. The balance reported on the bank statement at J uly 31 was $12,780.
a. Calculate the dollar amount of the deposits in transit at J uly 31. (4 marks)
Bank Deposits $9,540
Bank Deposits from June (300) (1)
Jul y Deposits 9,240 (1)
Per G/L 9,700 (1)
In Transit 460 (1)
b. Calculate the amount of cash that should be reported on Bennett’s J uly 31 balance
sheet. (5 marks)
Bank Balance $12,780
Deposits in Transit 460 (1 – includes it; 1 – adds it)
O/S Cheques (1,490) (1 – must be deducted)
Banks Error 700 (1 – includes it; 1 adds it)
1 mark was deducted for extra items included
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Comments on Question 1:
This was the best done question on the exam. Generally, the explanations in part
1 were well done. Those that understood how to determine the cash balance in
Part II b., did it correctl y. Many tried to approach this by adjusting the general
ledger balance, however, that information was not given. It was important to
remember that the “ adjusted bank balance” will equal the “ adjusted cash
balance” to solve this part.
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Question 2 (15 marks)
The following information has been taken from the general ledger of Wickham Inc. at
December 31.

Eighty percent (80%) of sales are on account; the remainder are cash sales. At
December 31, uncollectible accounts were estimated to be $125 based on an aging
i. What event or transaction requires a debit entry to the Allowance for Doubtful
Accounts account? What account is credited? (2 marks)
Write-off of an account (1)
Credit Accounts Receivable (1)

ii. Determine each of the missing amounts from the T-accounts above. There is space
to show your work on the next page, if needed. (8 marks)
(a) _3,025_(2 – correctl y adds T-acct) (d) _____125____(1 – must be correct)

(b) ________25__ (1 – must be 25) (e) _____28,125_(1 if 22,500; 2 if correct)

(c) _50_ (1 – must be correct based (f) _______50____ (1 – equal to c)

on answer in d)_

Beg. bal. (a) 100 Beg. bal.
22,500 25
23,000 (d)
(e) (f)
Accounts Receivable Doubtful Accounts
Sales Bad debt expense
Allowance for
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Question 2, continued

iii. Wickham requires that customers pay their accounts within 30 days of the invoice
date. Calculate the Collection Ratio for the period and comment on how well Wickham
is doing collecting their receivables. (5 marks)

= Average A/R
Credit Sales/365

= (3,025+2,500)/2 (2 marks- used 2,500 and whatever was in (a) above; 1
mark if ending amount onl y was used)
22,500/365 (1 mark – had to be correct, as credit sales was given (Dr to

= 44.8
On average there should be 30 days of sales in A/R when there is 45.
1 mark – compare result to the company policy of 30 days

Customers are taking more time to pay then they should be.
1 mark – correctl y concludes customers are taking more time to pay than they
should (if the ratio result was less than 30 then the conclusion had to be that
they were doing well in order to get this mark)

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Comments on Q2
Part I
This question was virtuall y identical to the homework question P8-3A, and so was
intended to be an easy question. The responses were, surprisingl y, very poorl y

Many students were able to recognize that a debit to the AFDA account required a
credit entry to A/R, but were unable to make that connection in determining the
amount to fill in for (b). This would generall y indicate that the material is being
memorized, but not understood.

Part II
A number of responses used the A/R Turnover. This was surprising, as the
Collection Ratio was given to you on the formula sheet at the end of the exam.
Many people did not understand that “ average AR” means the average of the
opening amount and the ending amount.
There was also difficulty with what “ credit sales” are. These are the sales that are
recorded to accounts receivable, and so the amount was given in the Accounts
Receivable T-account.

I considered this question to be very straightforward, mostl y since this it was
pretty much from homework and because the Collection Ratio was given and
calculating it should be straightforward (3 marks were for calculating it; only 2 for
interpreting it). I expected this question would have the best mark. In fact, the
average on Question 2 was the lowest of all 4 questions.

That leads me to believe that homework is either not being done, or not
understood (with no follow up from students to gain that understanding). This is
a significant indicator for me when deciding on an appropriate average for the
exam overall.

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Question 3 (19 marks)
Part I (10 marks) Bingley Ltd. made several expenditures during the 2013 fiscal year,
including the following:
Amount Description
1. $60,000 Acquired a piece of land to be used as a building site for a new factory
2. $5,000 Costs to demolish a small building that was on the land to make way for
the new factory (materials recovered from the demolished
building were sold for $1,500)
3. $530,000 Construction costs of the building
4. $14,000 Insurance on the building. $9,000 was for the time the building was
being constructed; the remaining $5,000 was for the remainder of the
5. $30,000 Paving parking lot beside the building for staff parking
6. $80,000 Purchase of manufacturing equipment to be placed inside the building
7. $4,000 GST on equipment
8. $7,400 Major overhaul on existing equipment that was moved into the new
building which extended the useful life by 5 years.
9. $8,000 Replacement of windows that were broken due to an unhappy worker
during a labour dispute after the factory was in use.

The required is on the following page
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Question 3, continued
a. Determine the cost amount that would appear on the 2013 Statement of Financial
Position (Balance Sheet) for the following. (6 total)
Land Building Equipment
1. 60,000 (1/2) 3. 530,000 (1/2) 6. 80,000 (1)
2. 5,000 (1) 4. 9,000 (1) 8. 7,400 (1)
2. (1,500) (1)
$63,500 $539,000 $87,400

b. For any item that you did not include in part a, explain where the expenditure would
be reported in the 2013 financial statements. Be as specific as possible. (4)
4. $5,000 (1/2) – Insurance Expense or Operating expense or Prepaid insurance
5. 30,000 (1/2) – Land Improvements or Asset on Balance Sheet (1/2)
7. 4,000 (1/2) – GST Receivable (1/2)
9. 8,000 (1/2) – Repairs and Maintenance (1/2)
Must be more specific than just “ balance sheet” or “ income statement” for where
to report the amount

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Question 3, continued
Part II (9 marks)
Darcy Inc. purchased a machine on April 1, 2013 for $120,000. The machine is
expected to have an estimated residual value of $5,000 at the end of its 5 year life.
Although Darcy has a policy of using straight-line depreciation for machinery, the
company accountant neglected to follow policy and depreciated it in 2013 using the
double diminishing-balance method. Profit before income tax for the year ended
December 31, 2013 was $73,000 as the result of depreciating the machine incorrectly.
In the year of acquisition, Darcy records depreciation based on the number of months
the asset has been owned for the year.
Using the method of depreciation that company policy requires:
a. prepare the correcting entry and
b. determine the correct profit.
Ignore income tax but show your calculations
(1) (1) (1)
Depreciation Recorded: 120,000 x (1/5 x 2) x 9/12 = 36,000
Correct Depreciation: (120,000 – 5,000) x 9/12 = 17,250
(1) 18,750


Dr. Accumulated Depreciation 18,750
Cr. Depreciation Expense 18,750
(1) for correct accounts
(1) for correct debit/credit position

Net Income Before 73,000
Adjustments 18,750 (1 – adjusts for diff; 1 adds the amount)
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Comments on Question 3:
The biggest issues were in part 2. Many responses tried to adjust based on the
net book value rather than just depreciation expense. Since the error onl y
occurred in one year (the first year), it would have been slightl y easier to simpl y
compare the depreciation expense for the year, rather than taking an extra step to
calculate net book value.

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Question 4 (23 marks)
Part I (9 marks)
At the beginning of October 2013, Gardiner Co. had 8,500 units of inventory on hand
with a cost of $8.00 per unit.

Purchases during the month of October were:
October 4 4,500 units @ $8.05 =36,225
14 1,600 units @ $7.85 =12,560
22 7,000 units @ $8.10 =56,700
30 3,600 units @ $8.25 =29,700
16,700 units
Sales for the month were:
October 3 3,750 units
16 7,900 units
27 8,300 units
19,950 units
a. Calculate cost of goods sold for October assuming Gardiner uses a periodic system
and a weighted average cost policy. (4)
Opening $8.00 x 8,500 = 68,000 (1)
Purchases 135,185 (1)
203,185 / (8,500 + 16,700) (1)
= 25,200
Average = $8.06 x 19,950 units sold = $160,855 or 160,797
Rounding differences are acceptable
b. Calculate ending inventory at October 31 assuming Gardiner uses a perpetual
inventory system and a FIFO (first in, first out) costing policy (5)
Ending Inventory Uni ts = 8,500 + 16,700 – 19,950 = 5,250
(1) (1)
3,600 @ $8.25 = 29,700

(5,250 – 3,600)
= 1,650 @ $8.10 = 13,365
(1) (1) $43,065
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Question 4, continued
Part II (14 marks)
The following amounts represent the value of ending inventory for Austen Ltd. using
different inventory methods. The company started operations on J anuary 1, 2011.


Average (at cost)

FIFO (at cost)
Net Realizable
December 31, 2011 $ 65,000 $60,000 $62,000
December 31, 2012 90,000 147,000 169,000
December 31, 2013 150,000 121,000 110,000

a. For 2011, is the cost of items purchased for resale increasing or decreasing during
the year? Explain. (3 marks)

In FIFO assume last purchased items are in inventory. (1)
Since FIFO inventory is lower, it indicates the newest items are less expensive

This indicates costs are decreasing. (1)

b. Determine which of the two costing methods would show the highest net income for
2012. Explain. (3 marks)

We don’t know amounts of goods purchased but under FIFO much more of cost
goes to inventory, (1)
meaning less to COGS. (1)
Therefore, FIFO gives the highest income. (1)

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Question 4, continued
For the remainder of this question, assume Austen uses the FIFO costing policy:

c. Assume goods available for sale in 2013 were $1,580,000. Calculate the Inventory
Turnover ratio for the year. (3 marks)

(1) (1)
1,580,000 – 110,000 = 1,470,000 COGS

(147,000 + 110,000) = 11.4
2 (1 – calc’s using average; end inv consistent with above)

Since NRV was lower than cost, inventory would be reduced to NRV and that
would be the amount of ending inventory

d. In February 2014, while cleaning out his desk, Tim, the inventory manager
discovered a page listing several inventory items from the December 2012 inventory
count. Tim brought the page to you, the accounting manager. Upon further
investigation, you determined that the items listed on this page had not been included in
the 2012 ending inventory. Ending inventory in 2012 should have been $165,000, not
$147,000 as reported.

Up until 2012, managers received bonuses based on a percentage of net income but
the program ended in 2013. Upon discovering the error, Tim commented to you,
“Thank goodness this only impacted inventory and not net income so our bonuses were
not affected.” Do you agree with Tim’s comment? Why or why not? Would your
response be different if the bonus plan continued into 2013? Explain. (5 marks)
Disagree with Tim’s comment (1 mark)
The error did impact net income. Understating inventory also understated net
income in 2012 (1 mark) meaning less bonus was paid (1 mark)
If bonus had continued into 2013:
This error would be corrected in 2013 so more bonus would have been paid in
2013 to offset the error of 2012. (2 mark)

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Comments on Question 4:
The calculations in Part I were generall y very well done. However, a number of
responses prepared an entire chart to track all the inventory movements –
particularly for part b. It is these sorts of approaches that make exams feel much
more time pressured than they actuall y are.
Part II
Part a was generall y well done. The biggest issue with part b was that many
students explained that FIFO would give the highest net income and proceeded to
explain it was because cheaper items are assumed to be sold first, resulting in a
lower COGS. That is onl y true if prices are increasing. In order to be given credit
for that sort of explanation, the response also had to explain how one knew
prices were increasing. Students were expected to specificall y respond to the
information given, not to speak in general terms.
Part d – many students recognized that a misstatement in inventory in 2012
would have impacted net income. Fewer students correctly understood that the
error would have resulted in a lower than deserved bonus. Few students went on
to explain that had the bonus continued in 2013, the problem would have been
corrected (although managers would have had to have waited an extra year to get
the bonus, and there was a possibility not all managers would have been the
same in both years).
This was not an ethics question in any way. Many approached it that way. The
scenario clearl y stated that he found the page while cleaning his desk and took it
to someone to see what it was and how it had or had not been dealt with,
indicating he was not deliberatel y trying to hide anything. Be careful not to read
into things beyond what is told to you.