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CGA-CANADA

FINANCIAL ACCOUNTING 4 EXAMINATION


December 2005
Marks

Time: 4 Hours

Notes:
1.
2.
3.
4.
5.
6.
7.

30

All calculations must be shown in an orderly manner to obtain part marks.


Round all calculations to the nearest dollar.
Narratives for journal entries are not required unless specifically requested.
Assume a December 31 fiscal year-end unless specifically stated otherwise.
Assume all amounts are material unless directed otherwise.
Assume all companies are public companies unless otherwise noted.
Assume no companies use differential reporting unless otherwise noted.

Question 1
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

Note:
Use the following information to answer parts (a) and (b).

On December 31, 2004, CHL Inc. purchased 70% of the common shares of WAC for $700,000. On the
date of acquisition, WACs shareholders equity was as follows:
Preferred shares, 6%, cumulative with 3 years in arrears, callable at 102
Common shares, no par value, 20,000 shares outstanding
Retained earnings
Total

$ 200,000
100,000
300,000
$ 600,000

Any purchase price discrepancy is allocated to land. During 2005, WAC reported net income of $150,000
and paid dividends of $100,000 in total to common and preferred shareholders.
a.

What will CHL report as investment income for 2005 on its nonconsolidated financial statements,
assuming that it accounts for its investment in WAC under the cost method?
1)
2)
3)
4)

$ 36,400
$ 44,800
$ 70,000
$105,000

b. What will CHL report as investment income for 2005 on its nonconsolidated financial statements,
assuming that it accounts for its investment in WAC under the equity method?
1)
2)
3)
4)

$ 71,400
$ 79,800
$ 96,600
$105,000
Continued...

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c.

RUP Co. has a 30% ownership interest in ERT Co., a joint venture. During 2005, ERT reported net
income of $200,000 and paid a dividend of $150,000. RUPs inventory includes goods purchased
from ERT on which ERT had made a profit of $20,000. What is the amount of income RUP should
report on its investment in ERT for 2005 under the equity method?
1)
2)
3)
4)

$40,000
$45,000
$54,000
$60,000

d. CD Ltd. owns 800 shares (80%) of LS Inc. The fair value of LSs identifiable net assets is greater than
their carrying value today and when CD purchased its 80% interest. Which of the following would
result in a decrease in the purchase price discrepancy assigned to identifiable net assets?
1)
2)
3)
4)

LS issues 100 new shares and CD purchases 60 of these new shares.


LS issues 100 new shares and CD purchases 90 of these new shares.
LS retires 100 of its shares, 70 of which were purchased from CD.
LS retires 100 of its shares, 80 of which were purchased from CD.

Note:
Use the following information to answer parts (e) and (f).

On January 1, 2005, REV Company purchased 100% of the voting shares of STO Company for $500,000.
On the date of acquisition, data related to equipment was as follows:
Equipment
Net book value for accounting purposes
Undepreciated capital cost (UCC) for tax purposes
Fair value

REV

STO

$ 800,000
700,000
1,000,000

$ 600,000
550,000
700,000

The equipment is being amortized for accounting purposes on a straight-line basis. At the date of
acquisition, the equipment for both companies had a remaining useful life of 5 years and no residual value.
For tax purposes, CCA is calculated using a rate of 20%. Both companies pay income tax at the rate of
40%.
e.

Assume that this business combination is to be accounted for under the new-entity method. What is
the carrying value of the equipment on the consolidated balance sheet at January 1, 2005?
1)
2)
3)
4)

f.

$1,400,000
$1,500,000
$1,600,000
$1,700,000

What amount will be reported for future income taxes related to the equipment on REVs
nonconsolidated balance sheet on December 31, 2005?
1)
2)
3)
4)

$32,000 future income tax asset


$32,000 future income tax liability
$40,000 future income tax asset
$40,000 future income tax liability

Continued...
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Note:
Use the following information to answer parts (g) to (i).

In the fall of 2004, the city of Westra approved its budget of $10,000,000 for the construction of a new
water treatment plant. Construction began in 2005. The building was completed on November 30, 2005,
but none of the water treatment equipment had yet been installed. The city uses a fund accounting system
and maintains separate funds for general operations and capital projects. It uses an encumbrance system to
control operating and capital costs.
The following table summarizes the financial activities related to the water treatment plant for the year
ended December 31, 2005:
Nature
of Costs
Engineering
Building
Equipment
Total

Budget

Value of
Purchase Orders
Issued

Value of
Purchase Orders
Outstanding

Actual Cost
of Work
Completed

Amount Paid
on Work
Completed

$ 2,000,000
5,000,000
3,000,000
$ 10,000,000

$ 2,100,000
5,200,000
2,860,000
$ 10,160,000

$ 200,000
0
2,860,000
$ 3,060,000

$ 1,800,000
5,350,000
0
$ 7,150,000

$ 1,500,000
4,815,000
0
$ 6,315,000

Purchase orders have been issued to cover all work required to complete the facility. The work has not yet
commenced on the activities for which purchase orders are currently outstanding but work has been
completed on all of the other purchase orders. All of the engineering work completed to date relates to the
building. The outstanding engineering work relates to the water treatment equipment. The building and
equipment will be capitalized and amortized on a straight-line basis over 20 years for the building and
10 years for the equipment.
g. What amount should be used to report the water treatment building at the end of December, 2005?
1)
2)
3)
4)

$4,815,000
$5,350,000
$6,315,000
$7,150,000

h. How should the outstanding purchase order of $2,860,000 for the equipment be presented on the
financial statements for the year ended December 31, 2005?
1) Offset the $2,860,000 encumbrance against the $2,860,000 estimated commitment and show no
impact on the financial statements.
2) $2,860,000 should be added to the cost of equipment.
3) $2,860,000 should be reported as a current liability.
4) $2,860,000 should be reported as an encumbrance expense on the income statement.
i.

Based on information available at this time, how much is the water treatment plant expected to cost
once the equipment is installed and the plant is operational?
1)
2)
3)
4)

$ 7,150,000
$ 9,375,000
$10,160,000
$10,210,000

Continued...
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Note:
Use the following information to answer parts (j) to (l).

KEL Transportation Inc. is a Canadian public company with its head office located in Kelowna, B.C. Its
common shares are listed on both the Toronto and Tokyo stock exchanges. KEL has a wholly owned
subsidiary in Japan. The subsidiary uses accounting principles consistent with Canadian GAAP except for
one item. It amortizes its capital assets using rates allowed for income tax purposes, which has the effect
of amortizing the assets over a period much shorter than the useful lives of the assets. Under Canadian
GAAP, amortization expense for accounting purposes is based on the useful lives of the assets.
j.

Which of the following would best satisfy the various international users of KELs financial
statements?
1) Issuing consolidated financial statements prepared in accordance with U.S. GAAP and using the
Canadian dollar as the reporting currency
2) Issuing consolidated financial statements prepared in accordance with Canadian GAAP and using
the U.S. dollar as the reporting currency
3) Issuing consolidated financial statements prepared in accordance with Japanese GAAP and using
the Canadian dollar as the reporting currency
4) Issuing consolidated financial statements prepared in accordance with Japanese GAAP and using
the U.S. dollar as the reporting currency

k. Which objective of financial reporting would best support the accounting policy used by the Japanese
subsidiary?
1)
2)
3)
4)
l.

Matching of expenses to revenue


Management evaluation
Income tax planning
Adequate disclosure

Which of the following financial statement concepts can be used primarily to support the adjustment
on consolidation to report the capital assets according to Canadian GAAP?
1)
2)
3)
4)

Measurement of assets at historical cost


Matching principle
Revenue recognition principle
Full disclosure principle

m. On December 31, 2005, MS Company issued 10-year convertible bonds with a face value of
$2,000,000 and a stated rate of 10%, paid semi-annually. The bonds are convertible at the investors
option. The bonds were issued to provide an effective yield of 9% for proceeds of $2,130,080. If these
bonds did not have a conversion feature, the company would have issued the bonds for $1,880,496 to
yield 11%. Which of the following is true with respect to the reporting of this financial instrument?
1) The liability portion of this financial instrument would be $2,130,080 at December 31, 2005 under
the split accounting incremental approach.
2) The liability portion of this financial instrument would be $2,000,000 at December 31, 2005 under
the predominant component approach.
3) The interest expense for the first half of 2006 would be $95,854 under the predominant
component approach.
4) The interest expense for the first half of 2006 would be $103,427 under the predominant
component approach.

Continued...
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Note:
Use the following information to answer parts (n) and (o).

BUR Canada Ltd. is a wholesaler of fresh fruit and vegetables. It imports produce from around the world
and sells it to retailers in Montreal and Toronto. On October 3, 2005, BUR received a shipment of fruit
and nuts from Cyprus along with an invoice for 100,000 Cyprus pounds (CYP). The account is due in
90 days. On October 4, 2005, BUR entered into a forward contract to purchase Cyprus pounds on
December 31, 2005 at a forward contract rate of CYP1 = $2.76.
The exchange rates were as follows:
October 3 and October 4, 2005
Average for quarter 4, 2005
December 31, 2005

CYP1 = $2.80
CYP1 = $2.77
CYP1 = $2.71

n. At what amount should the purchase from Cyprus be reported on BURs Canadian dollar financial
statements for the quarter ended December 31, 2005?
1)
2)
3)
4)

$271,000
$276,000
$277,000
$280,000

o. What amount will be reported in income for foreign exchange gains/losses for the quarter ended
December 31, 2005, assuming that the forward contract is designated as a fair value hedge of the
pound-denominated payable?
1)
2)
3)
4)

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$4,000 exchange gain


$4,000 exchange loss
$9,000 exchange gain
$9,000 exchange loss

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11

Question 2
On October 1, 2005, GOL Limited purchased 15% of the common shares of SIL Corp. for $100,000 cash.
On December 31, 2005, GOLs year end, the fair value of the investment in SIL was $109,000. SIL
reported income of $20,000 for the quarter ended December 31, 2005 and $25,000 for the quarter ended
March 31, 2006, and paid a dividend of $40,000 on February 14, 2006. On April 1, 2006, GOL sold the
investment in SIL for $112,000. GOL has adopted the new Handbook section 3855, on Financial
Instruments Recognition and Measurement, and uses settlement-date accounting for its investments in
financial assets where applicable.
Required
Prepare all journal entries related to GOLs investment in SIL, starting with the purchase of the shares and
ending with the sale of the shares, under the following conditions:

26

a.

GOL designates the equity investment as an available-for-sale investment.

b. GOL designates the equity investment as a held-for-trading investment.


Question 3
On December 31, 2001, PIE Company purchased 70% of the outstanding common shares of
SKY Company for $2 million in cash. On that date, the shareholders equity of SKY totalled $1.5 million
and consisted of $1 million in common shares and $0.5 million in retained earnings.
For the year ending December 31, 2005, the income statements for PIE and SKY were as follows:

Sales
Interest and investment income
Cost of goods sold
Amortization expense
Other expenses
Income tax expense
Net income

PIE

SKY

$ 8,000,000
500,000
8,500,000
5,800,000
800,000
1,050,000
340,000
$ 510,000

$ 5,000,000
100,000
5,100,000
3,500,000
630,000
570,000
160,000
$ 240,000

As at December 31, 2005, the condensed balance sheets for the two companies were as follows:
PIE

SKY

Total assets

$ 9,000,000

$ 5,500,000

Liabilities
Common shares
Retained earnings
Total

$ 5,000,000
2,100,000
1,900,000
$ 9,000,000

$ 3,800,000
1,000,000
700,000
$ 5,500,000

Additional information
1. On December 31, 2001, SKY owned a building with a fair value that was $200,000 greater than its
carrying value. The building had an estimated remaining useful life of 14 years and was being
amortized on a straight-line basis.
2. On December 31, 2001, SKY had inventory with a fair value that was $80,000 more than its carrying
value. SKY uses the LIFO method of inventory valuation. SKYs inventory increased in all years
except for 2005, when it decreased to a level substantially below the inventory on hand at the end of
2001. Accordingly, the inventory with the fair value excess at the date of acquisition was sold in 2005.
Continued...
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3. Each year, goodwill is evaluated to determine if there has been a permanent impairment. Goodwill
impairment was $50,000 in 2003, $40,000 in 2005, and zero in all other years since the date of
acquisition.
4. On January 2, 2003, SKY sold a machine to PIE for $840,000. When SKY originally purchased the
machine on January 1, 2001 for $1,000,000, it was estimated that its service life would be 10 years
with no salvage value. There was no change in the estimated service life or salvage value at the time
of the intercompany sale.
5. During 2005, PIE sold merchandise to SKY for $200,000, a price that includes a gross profit of
$50,000. SKY resold 40% of this inventory during 2005 and realized a further gross profit of $35,000.
The other 60% remains in SKYs year-end inventory. On December 31, 2004, the inventories of SKY
included merchandise purchased from PIE on which PIE had recognized a gross profit in the amount
of $20,000.
6. During 2005, PIE declared and paid dividends of $400,000, and SKY declared and paid dividends of
$150,000.
7. PIE accounts for its investment in SKY using the cost method.
8. Both companies pay income taxes at the rate of 40%. Ignore future income taxes when allocating and
amortizing the purchase price discrepancy.
Required
15

a.

Prepare a consolidated income statement for 2005. Show your supporting calculations in good form.

b. Explain how cost of goods sold and noncontrolling interest on the consolidated income statements for
2002 and 2005 would change if SKY had used the FIFO method of inventory valuation.

c.

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Now assume that PIE uses the equity method to account for its investment in SKY. Calculate the
balance in the investment account at December 31, 2005 on PIEs nonconsolidated balance sheet.
Show your supporting calculations.

CGA-Canada, 2005

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17

Question 4
On December 31, 2003, BAR Inc. acquired 100% of the voting shares of LEY Limited for 1,392,000
Singapore dollars (SD). On the acquisition date, LEY had common shares of SD200,000 and retained
earnings of SD340,000.
LEY is located in Singapore. It manufacturers transistors. Approximately 80% of its sales are to
companies in Canada. BAR assembles computers and office equipment in its manufacturing facility in
Scarborough, Ontario. BAR acquired LEY to secure a reliable source of transistors for use in its computers
and office equipment. Most of LEYs raw material and labour are purchased locally in Singapore. In order
to satisfy the extra demand from BAR, LEY built a new manufacturing plant in Singapore in 2004. The
plant was financed with a loan from BAR. The loan is denominated in Canadian dollars, is interest free,
and is repayable in equal principal payments over 30 years commencing on December 31, 2005.
The condensed closed trial balance of LEY for the year ending December 31, 2005 was as follows:
Cash
Accounts receivable
Inventory
Property, plant and equipment
Total debits

SD

150,000
255,000
500,000
3,390,000
SD 4,295,000

Current monetary liabilities


Long-term debt
Common shares
Retained earnings
Accumulated amortization
Total credits

SD

815,000
1,550,000
200,000
890,000
840,000
SD 4,295,000

Additional information
1. The inventory was purchased uniformly over the last quarter of the year.
2. The manufacturing plant was completed on December 31, 2004 at a cost of SD1,600,000. It has an
estimated useful life of 40 years with no anticipated salvage value. LEY uses the straight-line method
to calculate amortization expense. The other capital assets were purchased on January 29, 2001.
3. The changes in LEYs shareholders equity for 2004 and 2005 were as follows:
2004
Net income
Dividends paid

2005

SD 800,000
550,000

SD 900,000
600,000

The net income was earned evenly throughout the year, and the dividends were declared and paid on
December 15 in each year.
4. The following schedule on the loan from BAR was provided by LEYs accountant:
Date
December 31, 2004
December 31, 2005
December 31, 2005

Event
Loan advanced by BAR
Principal payment
Balance outstanding

C$

Rate

SD

$ 1,200,000
40,000
$ 1,160,000

0.75
0.80

SD 1,600,000
50,000
SD 1,550,000

Continued...
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5. Foreign exchange rates were as follows:


January 29, 2001
December 31, 2003
Average for 2004
Average for quarter 4 for 2004
December 15, 2004
December 31, 2004
Average for 2005
Average for quarter 4 for 2005
December 15, 2005
December 31, 2005

SD1 = C$0.66
SD1 = C$0.70
SD1 = C$0.71
SD1 = C$0.72
SD1 = C$0.74
SD1 = C$0.75
SD1 = C$0.76
SD1 = C$0.78
SD1 = C$0.79
SD1 = C$0.80

Required
4

a.

b. Prepare an adjusting entry to correct the translation of the long-term debt on LEYs books.

10

16

c.

Prepare an independent calculation of the cumulative exchange adjustment at December 31, 2004,
using the current rate method.

In preparation for the consolidation of LEY with BAR and after recording the adjusting entry from
part (b), translate LEYs balance sheet into Canadian dollars at December 31, 2005, using the
temporal method. (For retained earnings, you do not need to prepare a detailed calculation. You can
use a plug amount to make the balance sheet balance.)

Question 5
Fairchild Centre is a not-for-profit organization funded by government grants and private donations. It was
established on January 1, 2005 to provide counseling services and a drop-in centre for single mothers.
On January 1, 2005, the centre leased an old warehouse in the central part of Smallville for $2,000 per
month. It carried out minor renovations in the warehouse to create a large open area for use as a play area
for children and three offices for use by the executive director and counselors. The lease runs from
January 1, 2005 to June 30, 2007. By that time, the centre hopes to move into new quarters that are more
suitable for the activities carried out by the centre.
The following schedule summarizes the cash flows for the year ended December 31, 2005:
Cash inflows
Government grant for operating costs (Note 1)
Donations from individuals with no restrictions
Donations from individuals for rent of warehouse for 2.5 years
Donations from individuals for purchase of land (Note 3)
Cash outflows
Renovation of warehouse
Salary of executive director (Note 4)
Fees paid to counselors (Note 4)
Rent paid for 2.5 years
Other operating expenses
Cash, end of year

$ 50,000
63,000
60,000
28,000
201,000
25,000
33,000
20,000
60,000
34,000
172,000
$ 29,000

Continued...
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Additional information
1. The provincial government agreed to provide an operating grant of $50,000 per year. In addition, the
government has pledged to match contributions collected by the centre for the purchase of land for
construction of a new complex for the centre. The maximum contribution by the government towards
the purchase of the land is $100,000.
2. The centre has signed an agreement to purchase a property in the downtown area of Smallville for
$225,000. There is an old house on the property, which is presently used as a rooming house. The
closing date is anytime between July 1, 2006 and December 31, 2006. The centre plans to demolish
the existing house and build a new complex.
3. The centre has recently commenced a fundraising program to raise funds to purchase the land and
construct a new building. So far, $28,000 has been raised from individuals towards the purchase of the
land. In the new year, the centre will focus its efforts to solicit donations from businesses in the area.
The provincial government will advance the funds promised under its pledge on the closing date for
the purchase of the property.
4. All the people working for the centre are volunteers except for the executive director and the
counselors. The executive director receives a salary of $36,000 a year while the counselors bill the
centre for professional services rendered based on the number of hours they work at the centre. The
director has not yet received her salary for the month of December. One of the counselors received an
advance of $1,000 in December 2005 for work to be performed in January 2006.
5. The centre wishes to use the deferral method of accounting for contributions and to segregate its net
assets between restricted and unrestricted. It capitalizes the cost of capital assets and amortizes the
capital assets over their useful lives.
Required
5

a.

State the assumptions necessary to recognize the pledge contribution from the provincial government
and prepare the journal entry to record the pledge, if applicable.

b. Prepare a statement of revenues and expenses for the centre for the year ended December 31, 2005.
Show your supporting calculations and state your assumptions.

c.

Prepare a statement of changes in net assets for the centre for the year ended December 31, 2005.

END OF EXAMINATION
100

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CGA-Canada, 2005

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FINANCIAL ACCOUNTING 4 [FA4]


EXAMINATION
Before starting to write the examination, make sure that it is complete and that there are no
printing defects. This examination consists of 10 pages. There are 5 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
From David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996).
Copyright David Palmer.
Compare

Contrast

Criticize

Define

Describe
Diagram

Discuss

Evaluate

Explain

Examine qualities or characteristics that


resemble each other. Emphasize similarities,
although differences may be mentioned.
Compare by observing differences. Stress
the dissimilarities of qualities or
characteristics. (Also Distinguish between)
Express your own judgment concerning the
topic or viewpoint in question. Discuss both
pros and cons.
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.
Tell the whole story in narrative form.
Give a drawing, chart, plan or graphic
answer. Usually you should label a diagram.
In some cases, add a brief explanation or
description.
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.
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.
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.

Illustrate
Indicate
Interpret

Justify
List

Outline

Prove
Relate

Review

State

Summarize

Trace

Make clear by giving an example, e.g., a


figure, diagram or concrete example.
Provide a short explanation.
Translate, give examples of, solve, or
comment on a subject, usually making a
judgment on it.
Prove or give reasons for decisions or
conclusions.
Present an itemized series or tabulation.
Be concise. Point form is often
acceptable. (Also Enumerate or Identify)
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.
Establish that something is true by citing
evidence or giving clear logical reasons.
Show how things are connected with each
other or how one causes another,
correlates with another, or is like another.
Examine a subject critically, analyzing
and commenting on the important
statements to be made about it.
Present the main points in brief, clear
sequence, usually omitting details,
illustrations, or examples.
Give the main points or facts in condensed
form, like the summary of a chapter,
omitting details and illustrations.
In narrative form, describe progress,
development, or historical events from
some point of origin.

CGA-CANADA
FINANCIAL ACCOUNTING 4 EXAMINATION
December 2005
SUGGESTED SOLUTIONS
Marks
30

Time: 4 Hours
Question 1
Note:
2 marks each

Sources/Calculations:
a.

1) Topic 3.3 (Level 1)


70% ($100,000 4 6% $200,000) = $36,400

b. 3) Topic 6.6 (Level 2)


70% ($150,000 6% $200,000) = $96,600
c.

3) Topic 6.10 (Level 2)


($200,000 $20,000) 30% = $54,000

d. 1) Topic 6.4 (Level 1)


e.

4) Topic 3.4 (Level 1)


$1,000,000 + $700,000 = $1,700,000

f.

2) Topic 2.10 (Level 1)


[($800,000 1/5 $800,000) ($700,000 20% $700,000)] 40% = $32,000

g. 4) Topic 9.5 (Level 2)


$1,800,000 + $5,350,000 = $7,150,000
h. 1) Topic 10.5 (Level 1)
i.

4) Topic 10.5 (Level 1)


$7,150,000 + $3,060,000 = $10,210,000

j.

2) Topic 1.6 (Level 2)

k. 3) Topic 1.2 (Level 2)


l.

2) Topic 1.3 (Level 2)

m. 3) Topic 2.3 (Level 2)


2,130,080 9% 1/2 = $95,854
n. 4) Topic 7.1 (Level 1)
CYP100,000 2.80 = $280,000
o. 1) Topic 7.3 (Level 1)
CYP100,000 (2.80 2.76) = $4,000
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11

Question 2
Source: Topics 2.4, 2.5 and 2.7 (Levels 1 and 2)
6

a.

October 1, 2005
Investment in SIL ...............................................................................
Cash .............................................................................................

100,000

December 31, 2005


Investment in SIL (109,000 100,000)..............................................
Other comprehensive income ......................................................

9,000

February 14, 2006


Cash (15% 40,000)..........................................................................
Dividend income .........................................................................

6,000

April 1, 2006
Cash....................................................................................................
Investment in SIL ........................................................................
Other comprehensive income ......................................................
Other comprehensive income .............................................................
Gain from appreciation................................................................
5

9,000

6,000

112,000
109,000
3,000
12,000
12,000

b. October 1, 2005
Investment in SIL ...............................................................................
Cash .............................................................................................

100,000

December 31, 2005


Investment in SIL (109,000 100,000)..............................................
Gain from appreciation................................................................

9,000

February 14, 2006


Cash (15% 40,000)..........................................................................
Dividend income .........................................................................

6,000

April 1, 2006
Cash....................................................................................................
Investment in SIL ........................................................................
Gain from appreciation................................................................

SFA4D05

100,000

CGA-Canada, 2005

100,000

9,000

6,000

112,000
109,000
3,000

Page 2 of 6

26

Question 3
Source: Topics 3.10, 4.5, 4.10, 5.1-5.5, and 5.7-5.9 (Level 1)
15

a.

PIE COMPANY
Consolidated Income Statement
year ended December 31, 2005

(1)
(1)

Sales (8,000,000 + 5,000,000 (k) 200,000)


Interest and investment income (500,000 + 100,000 (e) 105,000)

(4)

Cost of goods sold


(5,800,000 + 3,500,000 (k) 200,000 + (i) 30,000 (j) 20,000 + (b) 56,000)
Amortization expense (800,000 + 630,000 + (a) 10,000 (g) 5,000)
Impairment of goodwill (c)
Other expenses (1,050,000 + 570,000)
Income tax expense (340,000 + 160,000 (i) 12,000 + (j) 8,000 + (g) 2,000)
Noncontrolling interest ([240,000 + (g) 3,000] 30%)
Net income

(2)
(1)
(1)
(2)
(3)

$ 12,800,000
495,000
13,295,000
9,166,000
1,435,000
40,000
1,620,000
498,000
72,900
$ 463,100

b. Had SKY used FIFO instead of LIFO, the purchase price discrepancy for inventory would have been
expensed as part of cost of goods sold in 2002 rather than 2005; that is, the cost of goods sold for 2002
would increase by $56,000 and cost of goods sold for 2005 would decrease by $56,000.
Noncontrolling interest is not affected by the purchase price discrepancy and would not change for
either 2002 or 2005.

c.

Investment in SKY

(2)
(2)

Original cost of investment


Cumulative differential amortization (d)
Profit in ending inventory net of tax (i)

(1)

SKYs retained earnings, end of 2005


SKYs retained earnings, at acquisition

(2)
(1)

Unrealized gain on machine (end of 2005) net of tax (h)


Subtotal
PIEs share @ 70%

$ 2,000,000
(186,000)
(18,000)
1,796,000
$ 700,000
500,000
200,000
(15,000)
$ 185,000
129,500
$ 1,925,500

Continued...
SFA4D05

CGA-Canada, 2005

Page 3 of 6

Supporting calculations:
Calculation of purchase discrepancy
Cost of 70% of SKY
Book value of SKY:
Common shares
Retained earnings

$ 2,000,000
$ 1,000,000
500,000
$ 1,500,000
70%

PIEs ownership
Purchase discrepancy
Allocated as follows:
Building
$ 200,000 70%
Inventory
80,000 70%
Goodwill

1,050,000
950,000
140,000
56,000
$ 754,000

Purchase discrepancy amortization schedule


Balance at
Acquisition
December 31, 2001

Amortization
2002-2004

Building (14 years)


Inventory
Goodwill
Total

$ 140,000
56,000
754,000
$ 950,000

$ 30,000

Intercompany dividends

$150,000 70% = $105,000

50,000
$ 80,000

2005

Balance at
December 31, 2005

$ 10,000
56,000
40,000
$ 106,000

$ 100,000
0
664,000
$ 764,000

(a)
(b)
(c)
(d)
(e)

Unrealized profits in intercompany transactions:


Before
Tax

Tax

After
Tax

Proceed on sale
Net book value of machine ($1,000,000 8/10)
Gain on sale of machine (SKY selling)
Realized gain through usage 2003
Realized gain through usage 2004
Realized gain through usage 2005
Unrealized gain, end of 2005

$ 840,000
800,000
40,000
5,000
5,000
5,000
$ 25,000

$ 16,000
2,000
2,000
2,000
$ 10,000

$ 24,000
3,000
3,000
3,000
$ 15,000

(g)
(h)

Ending inventory (PIE selling) ($50,000 60%)


Beginning inventory (PIE selling)

$ 30,000
20,000

$ 12,000
8,000

$ 18,000
12,000

(i)
(j)

Intercompany sales

SFA4D05

$200,000

CGA-Canada, 2005

(f)

(k)

Page 4 of 6

17

Question 4
Source: Topics 7.1 and 8.3 (Level 1)
4

a.

(1)
(1)
(1)

Net assets, January 1, 2004 (a)


Net income 2004
Dividends 2004
Net assets, December 31, 2004
Calculated
Actual (b)
Cumulative exchange adjustment

(1)
3

Account

SD

Rate

C$

SD 540,000
800,000
(550,000)

0.70
0.71
0.74

$ 378,000
568,000
(407,000)

SD 790,000

0.75

539,000
592,500
$ 53,500

b. The long-term debt should have been translated to Singapore dollars using the current rate. Long-term
debt should be reported at $1,160,000 / 0.80 = SD1,450,000 at the end of 2005. The adjusting entry
would be:
Long-term debt (1,550,000 1,450,000)............................................
Retained earnings exchange gain for 2005 .............................

10
(1)
(1)
(1)
(1)
(1)
(1)
(1)

(1)
(1)
(1)

c.

Account

SD

Cash
Accounts receivable
Inventory
Property, plant and equipment
New plant
Other (c)
Accumulated amortization
New plant (1,600,000 / 40)
Other (d)

Current monetary liabilities


Long-term debt (1,550,000 100,000)
Common shares
Retained earnings (890,000 + 100,000)

100,000
100,000
Rate

C$

SD 150,000
255,000
500,000

0.80
0.80
0.78

$ 120,000
204,000
390,000

1,600,000
1,790,000

0.75
0.70

1,200,000
1,253,000

(40,000)
(800,000)
SD 3,455,000

0.75
0.70

(30,000)
(560,000)
$ 2,577,000

SD 815,000
1,450,000
200,000
990,000
SD 3,455,000

0.80
0.80
0.70
plug

$ 652,000
1,160,000
140,000
625,000
$ 2,577,000

Notes:
a)
b)
c)
d)

SFA4D05

200,000 + 340,000 = 540,000


540,000 + 800,000 550,000 = 790,000
3,390,000 1,600,000 = 1,790,000
840,000 40,000 = 800,000

CGA-Canada, 2005

Page 5 of 6

16

Question 5
Source: Topics 9.2, 9.3, 9.4 and 10.6 (Level 1)
5

a.

The pledge can be recognized as a receivable when it meets the following criteria:
a) the amount to be received can be reasonably estimated; and
b) ultimate collection is reasonably assured
In this case, it is not certain how much the centre will collect from private individuals. Accordingly, it
is not certain how much will be received from the provincial government. To be conservative, a
receivable should only be recognized at this time for an amount equal to the funds already collected by
the centre.
The journal entry to record the pledge would be:
Pledge receivable................................................................................
Net assets restricted for land purchase.........................................

b.

28,000
28,000

FAIRCHILD CENTRE
Statement of Revenues and Expenses
year ended December 31, 2005
Revenues
Operating grant from provincial government
Donations from individuals unrestricted
Donations for rent of warehouse (12 months 2,000)

(1)
(1)
(1)

$ 50,000
63,000
24,000
137,000

Expenses
Salary of executive director (33,000 + 3,000)
Fees earned by counselors (20,000 1,000)
Rent expense (12 months 2,000)
Amortization of leasehold improvements (25,000 12/30)
Other operating expenses

(1)
(1)
(1)
(1)

36,000
19,000
24,000
10,000
34,000
123,000
$ 14,000

Excess of revenues over expenses


4

c.

FAIRCHILD CENTRE
Statement of Changes in Net Assets
year ended December 31, 2005
Net assets
Restricted for
Land purchase

(1)
(1)
(1)
(1)

Balance, beginning of year


Contributions for purchase of land
Pledge for purchase of land
Excess of revenues over expenses
Balance, end of year

0
28,000
28,000
0
$ 56,000

Unrestricted
Net Assets
$

14,000
$ 14,000

Total
$

0
28,000
28,000
14,000
$ 70,000

END OF SOLUTIONS
100

SFA4D05

CGA-Canada, 2005

Page 6 of 6

CGA-CANADA
FINANCIAL ACCOUNTING 4 EXAMINATION
December 2005
EXAMINERS COMMENTS

General Comments
The overall results on this examination were unsatisfactory. In general, performance was satisfactory on
accounting for investments, the mechanics of consolidation, and the translation of foreign operations.
Performance was unsatisfactory on the multiple-choice questions and accounting for not-for-profit
organizations.
Many candidates did not properly integrate the statement of revenues and expenses with the statement of
changes in net assets for the not-for-profit organization. It is important that candidates understand the
interrelationships of financial statements.
It appeared that some candidates lacked an understanding of the concepts and principles supporting
accounting practices, such as accounting for contributions for a not-for-profit organization and eliminating
unrealized profits in intercompany transactions for consolidated financial statements. Candidates should
ensure that they understand accounting procedures in terms of basic principles and concepts.
In several cases, it appeared that the candidate had not read the question carefully and, as a result, did not
correctly answer the question. For example, in the foreign currency question (Question 4), many
candidates calculated the cumulative exchange adjustment for 2005 rather than 2004.

Specific Comments
Question 1 Multiple choice (Levels 1 and 2)
This question consisted of 15 multiple-choice questions on various topics and learning objectives. The
overall results were unsatisfactory. Candidates had the most difficulty with parts (a) (cost method when a
subsidiary has preferred shares), (b) (equity method when a subsidiary has preferred shares), (g) (GAAP
for the public sector), (l) (financial statement concepts), and (m) (financial instruments). These errors
indicate a lack of understanding of the economic substance of selected transactions and the basic principles
supporting accounting practices. Candidates need to first understand the underlying substance of business
transactions and then try to understand the accounting for these transactions.
Question 2 Accounting for investments (Levels 1 and 2)
The overall results on this question were satisfactory. Those with a good understanding of the new
accounting requirements did quite well on this question; however, those without a good understanding of
the new requirements had difficulty. Most candidates correctly determined the journal entry to record the
purchase of the investment in SIL shares. However, many candidates did not properly account for the
receipt of dividends because they credited Investment in SIL rather than Dividend income. For
part (a), many candidates did not correctly account for Other comprehensive income at the end of 2005
or at the date of sale of the investment. Similarly, for part (b), many candidates did not correctly account
for the unrealized gain from appreciation at the end of 2005 and the related impact of this unrealized gain
from appreciation on the final gain from appreciation at the date of sale of the investment.
Accounting for available-for-sale and held-for-trading securities is relatively new in Canada (and in FA4)
and should be studied carefully.

Continued
CGA-Canada, 2005

Question 3 Consolidations (Level 1)


The results on this question were satisfactory. The common errors were as follows:

Incorrectly calculating the effect of the gain on the sale of the machine on consolidated amortization
expense, consolidated income tax expense, and on the investment account under the equity method
Incorrectly adjusting for realized profits from beginning inventory when calculating the investment
account under the equity method
Adding rather than subtracting (and vice versa) the adjustments for unrealized profits when calculating
cost of goods sold
Not adjusting for the after-tax realized gain (through usage) of the machine when calculating
noncontrolling interest on the consolidated income statement. Also, adjusting for unrealized profit in
beginning and ending inventory when calculating noncontrolling interest on the consolidated income
statement. Because these sales were downstream, they would have had no effect on noncontrolling
interest.
Not understanding the impact on noncontrolling interest and not differentiating between 2002 and
2005 when explaining the impact of changing from LIFO to FIFO for the amortization of the purchase
discrepancy related to inventory

These errors indicate a lack of understanding of the interrelationships of financial statement items such as
inventory, income taxes, and noncontrolling interest. The latter, accounting for noncontrolling interest, is
particularly complex and continues to be an area of difficulty for candidates.
Question 4 Foreign currency translation (Level 1)
The results on this question were satisfactory. The common errors were as follows:

Calculating the exchange adjustment for 2005 rather than 2004 and not correctly calculating the net
assets exposed to exchange fluctuations at the beginning of 2004
Not translating the Canadian dollar value of the loan into Singapore dollars at the current rate
Translating the capital assets at the rate when those assets were purchased by the subsidiary rather
than the rate when the parent purchased the subsidiary

These errors indicate a lack of understanding of the accounting concepts supporting the temporal method.
It is also possible that some candidates did not read the question carefully.
Question 5 Accounting for not-for-profit organizations (Level 1)
The results on this question were unsatisfactory.
In part (a), most candidates correctly stated the assumptions necessary to recognize a pledge contribution
but credited deferred contributions rather than net assets when recognizing the pledge. Since land will
never be reported as an expense, the contributions for the land should never be reported as revenue on the
statement of revenues and expenses, but rather should be reported as a direct credit to net assets.
The common errors in part (b) were as follows:

Expensing the entire cost of the leasehold improvements rather than amortizing these costs over the
expected term for the rented premises
Recording 25 months rather than 12 months of rental revenue and expense

In part (c), many candidates prepared an entire balance sheet rather than a statement of changes in net
assets. Of those candidates who did prepare a statement of changes in net assets, many candidates did not
segregate the net assets between restricted and unrestricted.
The errors in this question indicate a lack of understanding of the difference between a pledge receivable
(an asset) and a contribution (revenue, deferred revenue or net assets), and a lack of understanding of the
statement of changes in net assets.

FA4D05

CGA-Canada, 2005