Intermediate

Financial Reporting 2 (IF2)

Sample Final Exam
Questions

(note that this comprises of sample exam questions only and is not to be
construed as a full sample exam nor is it necessarily representative of what
the actual exam might look like)

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

SAMPLE FINAL EXAM QUESTIONS

Section I - Short Answer Question

Ensure that all calculations are done to four decimal places.

1. (6 marks – 14 minutes)

Sunshine Valley Lodge prepares its financial statements in accordance with IFRS. It issued
40,000 at-the-money stock options (the exercise price was the same as the current market
price) to its management team on January 1, 20X5. These options vest on December 31,
20X6. Sunshine Valley’s share price was $13 on the grant date and $17 on the vesting
date. Estimates of the fair value of the options showed that they were worth $3 on the grant
date and $4 on the vesting date. At December 31, 20X5, management estimated that 90%
of the options would vest. On the vesting date, a total of 37,500 options vested and all of
these were exercised on January 1, 20X7. Sunshine Valley has a December 31 year-end. (
6 marks)

Required:
Record the journal entries to record the compensation expense and the exercise of the
stock options.

2. (3 marks – 7 minutes)

Scarpetta Ltd., a publicly traded company, sells medical equipment. One of their pieces of
equipment, the Stryker saw, is sold with a 1 year warranty. Scarpetta services the warranty
itself and based on historical experience, it is probable that they will incur an expense as a
result of the warranty. Traditionally, Scarpetta sees 10% of saws come back with $100
worth of warranty work, 15% of saws come back with $150 worth of warranty work, 5% of
saws come back with $400 worth of warranty work and the remaining 70% do not require
any warranty work. Scarpetta sold 25,000 saws this year.

Required:
Explain why the warranty qualifies as a provision and calculate the value of the provision
Scarpetta needs to book for the warranty on the saws for the current year?
(3 marks)

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

3. (6 marks – 14 minutes)

Quitzau Fishing Corporation has a pension plans for its employees. The plan is a defined
benefit pension plan for its unionized employees for a number of years. Pertinent details of
the plan follow:

Defined benefit obligation as at January 1, 20X4 $2,000,000

Plan assets (at market value) as at January 1, 20X4 1,800,000
Yield on high quality corporate bonds 4%
Current service cost for the year ended December 31, 20X4 300,000
Plan amendment causing an improvement to the plan, December 31, 20X4 500,000
Gain due to change in actuarial assumptions during 20X4 25,000
Actual return on plan assets for 20X4 40,000
Funds paid by Quitzau Fishing to the pension trustee on December 31, 20X4 400,000

Required:
Prepare the journal entries for the defined benefit pension plan for 20X4. (6 marks)

4. (5 marks – 12 minutes)

King Brew is a beverage company reporting under ASPE. King Brew started
manufacturing a gluten free beer in 2010. The gluten free beer is made using the same
type of equipment as King Brew’s regular beers, but to avoid contamination, the equipment
for the gluten free beer is used exclusively for the production of the gluten free beer.

Machinery with a total cost of $525,000 was purchased in January 2010 and straight-line
depreciation over 12 years was taken in accordance with King Brew’s equipment
depreciation policy.

During 2014, the plant engineer indicated that due to the different process and ingredients
used in the production, the machinery for the gluten free beer would likely only last 10
years.

Required:

Explain to King Brew’s management how to account for this situation. Support your
conclusion with appropriate references to the theory and prepare the journal entry at
December 31st, 2014 to account for the depreciation. No journal entries with regards to
depreciation have been booked in 2014.

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

5. (9 marks – 22 minutes)

On February 1, 2012, Leonardo Inc. issued $400,000, 6% bonds. The bonds were dated
February 1, 2012, and interest is payable semi-annually on February 1st and August 1st with
the bonds maturing on February 1, 2022. At the time of issuance, the market rate for
similar bonds was 6.6%. The bonds are callable at 102.

On August 1, 2012, Leonardo paid the semi-annual interest and recorded the amortization
of the discount, using the effective interest rate method.

On February 1, 2013, Leonardo paid the semi-annual interest and recorded amortization of
the discount.

On February 2, 2013, the company purchased $240,000 of the bonds at the call price.

Leonardo is a publicaly accountable entity and has a December 31 year end.

Required:
Prepare journal entries to record the transactions relating to the bonds of Leonardo Inc. for
the period Febriary 1, 2012 to February 2, 2013. Show supporting computations when
applicable and round to the nearest dollar. (9 marks)

6. (8 marks – 19 minutes)

On December 31, 20X4, the Alden Corporation, a publicly accountable entity, leased a
heavy excavating machine from the Garrison Excavating Company. The first lease payment
was made on December 31, 20X4. The terms of the lease are as follows:

Fair value of equipment $850,000

Lease term 8 years
Economic life of excavator 12 years
Residual value at end of lease term (guaranteed) 50,000
Rate implicit in the lease (known to Alden) 6%
Alden’s incremental borrowing rate 7%
Lease payment (includes $5,000 for insurance) $129,367

Alden accounts for the lease and non-lease components of the contract separately.

Required:
a) Alden expects to return the asset to the Garrison at the end of the lease term at a fair
value of $20,000. Prepare the journal entries on the books of Alden for 20X4 and 20X5.
b) Assume now that the Alden is a private company subject to ASPE. Determine if this is a
capital or an operating lease for Alden

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

7. (6 marks – 14 minutes)

On August 31, 20X5, an entity provides a stock option grant to its executives. A total of
200,000 stock options are provided with an exercise price of $20. The fair value of each option
is estimated at $3.20 each. The vesting period ends on August 31, 20X7 and the exercise
period ends on August 31, 20X8. The executives must remain in the employment of the entity
at August 31, 20X7 for the options to vest. The entity has a December 31 year end.

Estimates of the total number of options vesting are as follows:

December 31, 20X5 75%

December 31, 20X6 80%

On August 31, 20X7, a total of 156,000 options actually vested. On this date 85,000 options
were exercised when the stock price was $35. On August 31, 20X8, the remaining options
were exercised when the stock price was $28.

Required –

Prepare all journal entries for the period 20X5 to 20X8.

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

Section II - Long Answer Questions

Ensure that all calculations are done to four decimal places.

1. (11 marks – 26 minutes)

The Cowsills Company had the following excerpts from its Statement of Financial Position as
at December 31, 20x5:

Bonds, 7%, each $1,000 bond is convertible into 25 common

shares $10,000,000

Common Shares, 2,000,000 shares issued and outstanding 25,000,000

Preferred Shares, $5, 100,000 shares issued and outstanding,

cumulative, each preferred share is convertible into 4
common shares 9,500,000

Additional Information –

• there are 60,000 stock options outstanding with an exercise price of $15

• 200,000 common shares were issued on February 28, 20x6 and 50,000 common
shares were repurchased on October 31, 20x6.

• the average market price of shares for 20x6 was $22

• the dividends on the preferred shares were 2 years in arrears at December 31, 20x5.
During 20x6, Cowsills declared total dividends of $2,500,000.

• the net income for the year was $4,800,000

• the tax rate is 30%

Required:
a) Calculate the Basic Earnings per Share for the year ended December 31, 20x6.
b) Calculate the Diluted Earnings per Share for the year ended December 31, 20x6.

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

2. (13 marks – 31 minutes)

The Springfield Corporation’s deferred income tax balance at December 31, 20x3 was
computed as follows:

On the difference between net book value and undepreciated capital cost $300,000 cr.
On warranty liabiltity 105,000 dr.
On loss carryforward 60,000 dr.
$135,000 cr.

The tax rate in effect at December 31, 20x3 was 30%. The tax rate in effect for the year ended
December 31, 20x4 is 28%. The tax rate in effect for the year 20x5 (enacted at the end of
20x4) is 25%.

The following information is available for the year ended Decembet 31, 20x4:

• net income before taxes amounted to $1,700,000.

• depreciation expense incurred was $350,000 and capital cost allowance was $475,000.

• one asset with a net book value of $56,000 and an original cost of $120,000 was
disposed for proceeds of $65,000.

• the warranty liability increased by $35,000.

• dividends received form taxable Canadian corporations amounted to $65,000 during

20x4.

• the net book value of the assets at December 31, 20x3 was $3,600,000.

Required:
a) Calculate the current portion of income tax expense.
b) Calculate the deferred portion of income tax expense.

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

Section III: Multiple-Choice Questions

Ensure that all calculations are done to four decimal places. Please select the best answer for
each of the questions below.

1. From 20X3 to 20X5, Bumping Banjos Inc. earned taxable income of $100,000, $200,000,
and $50,000, respectively. The tax rate for 20X3 and 20X4 was 28% increasing to 30% in
20X5 and 20X6. It is now the end of 20X6 and the company incurs a loss of $400,000 for
both tax purposes and accounting purposes. Bumping Banjo elects to carryback the loss to
the fullest extent possible and carryforward the balance. The company’s management
believes that it is probable that it will use the losses carried forward within the allowable
carryforward period.

The journal entry to record 20X6’s income tax expense would include which of the following
pertaining to the loss carryback?

a) A debit to the deferred income tax asset account for $15,000

b) A debit to the income tax receivable account for $99,000
c) A debit to the income tax receivable account for $105,000
d) A debit to the income tax receivable account for $114,000

2. Under IFRS, which of the following, which occurred subsequent to year-end but before the
financial statements were authorized for issue, would be a non-adjusting event after the
reporting period?

a) ABC Co. is named in a lawsuit at its year-end and has recorded a provision of
$750,000. The lawsuit was subsequently settled for $350,000.
b) A major customer of Receivables Ltd. declares bankruptcy subsequent to year-end,
resulting in an uncollectible receivable of $125,000.
c) Telecom Inc. management receives annual bonuses based on year-end results which
were accrued at $1.4 million at year-end. Subsequently, the bonuses were paid out at
$1.6 million.
d) Investors Inc. has $2.5 million in investments at its year-end. Subsequently, the fair
value of the investments declines to $2.0 million.

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

3. Carmell Real Estate issued the following bonds to Marsh Investments in 2007:
• Total Par Value: $400,000
• Coupon Rate: 4.5%
• Market Rate at time of issuance: 5%
• Issue Date: June 30th, 2007
• Maturity: June 30th, 2017
• Coupon payment dates: June 30 and Dec 31
• Reacquisition price: 1.01 of par value

On July 1st, 2014, Carmell Real Estate decided to repurchase the bonds from Marsh
Investments as they had extra cash on hand.

As a result of the early repayment of the debt, Carmell should book the following loss on
redemption:

a) $4,000
b) $5,508
c) $9,508
d) No loss should be booked.

4. Which of the following is one of the key differences between ASPE and IFRS in
calculating the minimum lease payments in accounting for leases?

a) Under IFRS, the lessee must use the incremental borrowing rate of the lease.
b) Under ASPE, the lessee can choose which interest rate to use.
c) Under IFRS, the lessee should use the implicit lease interest rate if known,
otherwise the incremental borrowing rate of the lease is used.
d) Under ASPE, the lessee must use the higher of the implicit lease interest rate or
the incremental borrowing rate of the lease.

5. RTQ Company has decided to change its inventory accounting policy from first-in, first-
out (FIFO) to average cost to be more consistent with industry standards. The result is
that ending inventory for 20x2 and 20x1 would be $5,000 and $3,000 lower,
respectively. RTQ uses a perpetual inventory system. Which of the following would be
included in the journal entry to record the change in 20x2 before the books are closed?
(Ignore income taxes.)

a) Debit to inventory $5,000

b) Credit to inventory $8,000
c) Credit to retained earnings $8,000
d) Debit to retained earnings $3,000

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

6. The Casey Company has the following capital structure as at December

31, 20x4:

Preferred shares, $5 annual dividend,

cumulative, 150,000 shares outstanding $1,500,000
Common shares, 1,200,000 shares
outstanding 20,000,000

The preferred share dividends were last paid in December 20x1. At the end
of December 31, 20x5 the company declared a dividend of $4,000,000.
How much of the dividend will be received by the common shareholders?
a) $0
b) $1,000,000
c) $1,750,000
d) $4,000,000

7. In November and December 20x6, Lowe Co., a newly organized magazine

publisher, received $60,000 for 1,000 three-year subscriptions at $20 per
year, starting with the January 20x7 issue. Lowe included the entire
$60,000 in its 20x6 income tax return (i.e. taxes were paid on the $60,000).
The tax rate for 20x6 was 40%. At the end of 20x7, the government
enacted a change in the tax rate to 36% effective for the 20x7 tax year.
What is the amount of deferred tax expense for 20x7 related to the
subscriptions revenues?
a) $7,200 dr.
b) $7,200 cr.
c) $9,600 dr.
d) $9,600 cr.

8. Nat Ltd. issued $15,000,000 of 10 year bonds on January 2, 20x4. The

bonds pay interest semi-annually on June 30 and December 31. The
coupon rate is 10% and the yield-to-maturity on the date of issue was 8%.
On July 2, 20x8 the bonds were retired at 105. What is the gain on
retirement of the bonds?
a) $259,912
b) $347,689
c) $365,300
d) $466,634

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

9. Your company is being sued by a customer for $300,000. Your company is

actively defending the lawsuit. The company lawyers are certain the claim
can be settled for $150,000 within the next 2 years. It is probable the plaintiff
(the customer) will accept such an offer. How much should be accrued in
the current year for the lawsuit?
a) $0
b) $150,000
c) $225,000
d) $300,000

10. On the cash flow statement, a company reported that it paid $400,000 to its
pension plan. On the balance sheet, its deferred pension liability decreased
by $15,000. What is the amount of pension expense that would be reported
on its income statement?
a) $ 15,000
b) $385,000
c) $400,000
d) $415,000

11. A company changed the estimated useful life for its vehicles. How should
this change be reported?
a) Prospectively
b) Retrospectively
c) Currently
d) All inclusively

12. A firm sells products with a 2-year warranty. Based on industry experience,
the firm expects to incur warranty costs equal to 2% of sales. Sales were
$40,000 and $50,000 in 20X7 and 20X8 respectively. The firm spent $700 in
20X7 and $900 in 20X8 to repair goods covered by the warranty. On
January 1, 20X7, the firm’s opening warranty liability was $600. What is the
balance in the warranty liability account on January 1, 2009?
a) $600
b) $700
c) $800
d) $900

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IF2 – Intermediate Financial Reporting 2 Sample Exam Questions

13. MMX Corporation changed its revenue recognition policy from completed-
contract to percentage-of-completion. Which of the following best describes
how this change should be applied?
a) Prospectively, with no restatement of retained earnings or prior year’s
figures
b) Retrospectively, without restatement of prior year’s figures
c) Retrospectively, with restatement of prior year’s figures
d) Note disclosure only

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