THE UNIVERSITY OF THE WEST INDIES

OPEN CAMPUS

SEMESTER I □ SEMESTER II □ SUPPLEMENTAL/SUMMER SCHOOL □

Examinations of April/May 2014

Course Code and Name Title: ACCT 2015 – INTERMEDIATE FINANCIAL

ACCOUNTING II

Date: Time:

Duration 2 Hrs. Paper No:

Materials required:
Answer booklet: Normal □ Special □
Not Required □
Calculator: Programmable □ Non Programmable □
(where applicable)
Multiple Choice Answer Sheets: Numerical □ Alphabetical □ Included □

Auxiliary/Other material(s) – Please specify:

……………………………………………………………………………………………………………
…………………………………………………………………………………………………………....

Candidates are permitted to bring the following items to their desks:

…………………………………………………………………………………………………………....

INSTRUCTIONS TO CANDIDATES: This paper has 7 pages and 5 questions.

YOU ARE REQUIRED TO ANSWER 3 QUESTIONS.

SECTION A HAS ONE COMPULSORY QUESTION WITH TWO PARTS. ANSWER BOTH
PARTS.

SECTION B HAS FOUR QUESTIONS, ANSWER ANY TWO (2) OF THESE QUESTIONS.

©The University of the West Indies Course Code 2014./……./……..

____________________________________________________________________________________
____

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY

INSTRUCTIONS: Each page must be signed by the FIRST AND SECOND EXAMINERS. Completed
forms should be handed to the Assistant Registrar (Examinations).

..................................... ............................................
First Examiner Second Examiner

Date: 2014./....../..... Date: 2014./..../....

 Page 2

SECTION A (ANSWER ALL QUESTIONS IN THIS SECTION)

QUESTION 1 – 20 MARKS

PART A (10 marks)

1. Miley Company sells computers for $1,500 each and also gives each customer a 2-year warranty
that requires the company to perform periodic services and to replace defective parts. During
2010, the

company sold 700 computers. Based on past experience, the company has estimated the total 2-year

warranty costs as $30 for parts and $60 for labor. (Assume sales all occur at December 31, 2010.)

In 2011, Miley incurred actual warranty costs relative to 2010 computer sales of $10,000 for parts and
$18,000 for labor.

Instructions
(a) Under the expense warranty treatment, give the entries to reflect the above transactions
(accrual method) for 2010 and 2011. (3 marks)

(b) Under the cash basis method, what are the Warranty Expense balances for 2010 and 2011?

(2 marks)

(c) How would the warranty liability be disclosed in the Statement of Financial Position? (2
marks)

2. On November 24, 2010, 26 passengers on Windsor Airlines Flight No. 901 were injured upon
landing

when the plane skidded off the runway. Personal injury suits for damages totaling $9,000,000 were
filed

on January 11, 2011 against the airline by 18 injured passengers. The airline carries no insurance.
Legal

counsel has studied each suit and advised Windsor that it can reasonably expect to pay 60% of the

©The University of the West Indies Course Code 2013./……./……..

____________________________________________________________________________________
____

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY

INSTRUCTIONS: Each page must be signed by the FIRST AND SECOND EXAMINERS. Completed
forms should be handed to the Assistant Registrar (Examinations).

..................................... ............................................
First Examiner Second Examiner

Date: 2013./....../..... Date: 2013./..../....

 Page 3
damages claimed. The financial statements for the year ended December 31, 2010 were authorized
for

issuance on February 27, 2011.

Instructions:

Prepare any disclosures and journal entries required by the airline in preparation of December 31,
2010

financial statements. (3 marks)

PART B (10 marks)

Bramwell Inc. began business on January 1, 2010. Its pretax financial income for the first 2 years was
as follows:

2010 $240,000
2011 560,000

The following items caused the only differences between pretax financial income and taxable income.

1. In 2010, the company collected $180,000 of rent; of this amount, $60,000 was earned in 2010; the
other

$120,000 will be earned equally over the 2011–2012 period. The full $180,000 was included in
taxable

income in 2010.
2. The company pays a $10,000 fine for pollution.
3. In 2011, the company terminated a top executive and agreed to $90,000 of severance pay. The
amount
will be paid $30,000 per year for 2011–2013. The 2011 payment was made. The $90,000 was
expensed
in 2011. For tax purposes, the severance pay is deductible as it is paid.

The enacted tax rates existing at December 31, 2010 are:

2010 30% 2012 40%

2011 35% 2013 40%

Instructions
(a) Determine taxable income for 2010 and 2011. (2 marks)

(b) Determine the deferred income taxes at the end of 2010, and prepare the journal entry to record
income
taxes for 2010. ( 3 marks)

©The University of the West Indies Course Code 2013./……./……..

____________________________________________________________________________________
____

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY

INSTRUCTIONS: Each page must be signed by the FIRST AND SECOND EXAMINERS. Completed
forms should be handed to the Assistant Registrar (Examinations).

..................................... ............................................
First Examiner Second Examiner

Date: 2013./....../..... Date: 2013./..../....

 Page 4

(c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2011. (1 mark)

(d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2011. (1 ½ mark)

(e) Compute the net deferred tax expense (benefit) for 2011. (1 mark)

(f) Prepare the journal entry to record income taxes for 2011. (1 ½ mark)

SECTION B HAS FOUR QUESTIONS, ANSWER ANY TWO (2) OF THESE QUESTIONS.

QUESTION 2 (20 MARKS)

1. Explain the procedures used by the lessee to account for a finance lease. (4 marks)

2. On January 1, 2011, Dereau Corp. signs a 10 year non-cancelable lease agreement to lease a storage
building from Flex Storage Company. The following information pertains to this lease agreement.

i. The agreement requires equal rental payments of $90,000 beginning on January 1, 2011.
ii. The fair value of the building on January 1, 2011 is $550,000.
iii. The building has an estimated economic life of 12 years, with an unguaranteed residual value of
$10,000. Dereau depreciates similar buildings on the straight line method.
iv. The lease is non-renewable. At the termination of the lease, the building reverts to the lessor.
v. Dereau’s incremental borrowing rate is 12% per year. It is impracticable to determine the lessor’s
implicit rate.
vi. The yearly rental payment includes $3,088.14 of executory costs related to taxes on the property.

Instructions

(a) What is the nature of the lease to Dereau Corporation? (2 marks)

(b) What is the present value of the minimum lease payments? (3 marks)

(c) Prepare a lease amortization table through to 2013. (4 marks)

(d) Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to
record the payments and expenses related to this lease for the years 2011 and 2012. (7 marks)
Dereau’s Corp. year end is December 31.

©The University of the West Indies Course Code 2013./……./……..

____________________________________________________________________________________
____

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY

INSTRUCTIONS: Each page must be signed by the FIRST AND SECOND EXAMINERS. Completed
forms should be handed to the Assistant Registrar (Examinations).

..................................... ............................................
First Examiner Second Examiner

Date: 2013./....../..... Date: 2013./..../....

 Page 5

QUESTION 3 (20 MARKS)

1. On January 1, 2011, McGee Co. had the following balances:

Defined benefit obligation $7,200,000
Fair value of plan assets 7,200,000

Other data related to the pension plan for 2011:

Service cost 315,000
Contributions to the plan 459,000
Benefits paid 450,000
Actual return on plan assets 432,000
Discount rate 9%
Expected rate of return 6%

Instructions
(a) Determine the defined benefit obligation at December 31, 2011. There are no net gains or losses.
(3 marks)

(b) Determine the fair value of plan assets at December 31, 2011. (3 marks)

(c) Calculate pension expense for 2011. (3 marks)

(d) Prepare the journal entry to record pension expense and the contributions for 2011. (3 marks)

2. Differentiate between a defined contribution pension plan and a defined benefit pension plan.
(4 marks)

3. Explain how the employer’s obligation differs between the two types of plans. (4 marks)

©The University of the West Indies Course Code 2013./……./……..

____________________________________________________________________________________
____

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY

INSTRUCTIONS: Each page must be signed by the FIRST AND SECOND EXAMINERS. Completed
forms should be handed to the Assistant Registrar (Examinations).

..................................... ............................................
First Examiner Second Examiner

Date: 2013./....../..... Date: 2013./..../....

 Page 6

QUESTION 4 (20 MARKS)

1. Foley Corporation has the following capital structure at the beginning of the year:

Share capital—preference 6%, $50 par value, 20,000 shares authorized,

6,000 shares issued and outstanding $ 300,000
Share capital—ordinary, $10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding 400,000
Share premium—ordinary 110,000
Retained earnings 440,000
Total equity $1,250,000

Instructions
(a) Record the following transactions which occurred consecutively (show all calculations).
1. A total cash dividend of $90,000 was declared and payable to shareholders of record. Record
dividends payable on ordinary and preference shares in separate accounts. (3 marks)
2. A 10% ordinary share dividend was declared. The average fair value of the ordinary shares is
$18 a share. (5 marks)
3. Assume that net income for the year was $150,000 (record the closing entry) and the board of
directors appropriated $70,000 of retained earnings for plant expansion. (4 marks)

(b) Construct the equity section incorporating all the above information. (6 marks)

2. Explain the difference between the proportional method and the incremental method of allocating
the
proceeds of lump-sum sales of share capital. (2 marks)

©The University of the West Indies Course Code 2013./……./……..

____________________________________________________________________________________
____

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY

INSTRUCTIONS: Each page must be signed by the FIRST AND SECOND EXAMINERS. Completed
forms should be handed to the Assistant Registrar (Examinations).

..................................... ............................................
First Examiner Second Examiner

Date: 2013./....../..... Date: 2013./..../....

 Page 7

QUESTION 5 (20 MARKS)

1. On June 1, 2009, Triton Company and Wisdom Company merged to form T.W. Inc. A total of 800,000
shares were issued to complete the merger. The new corporation reports on a calendar year basis.

On April 1, 2011, the company issued an additional 600,000 shares for cash. All 1,400,000 shares were
outstanding on December 31, 2011.

T.W. Inc. also issued $600,000 of 20 year, 8% convertible bonds at par on July 1, 2011. Each $1,000 bond
converts to 40 ordinary shares a any interest date. None of the bonds have been converted to date. The interest
expense on the liability component of convertible bonds for 2011 was $30,000.

T.W. Inc. is preparing its annual report for the fiscal year ending December 31, 2011. The annual report will
show earnings per share figures based upon a reported after tax net income of $1,540,000. The tax rate is 40%.

Instructions

Determine the following for 2011:

(a) The number of shares to be used for calculating Basic earnings per share. (3 marks)

(b) The number of shares to be used for calculating Diluted earnings per share. (4 marks)

(c) The earnings figure to be used for calculating the Basic earnings per share. (1 mark)

(d) The earnings figure to be used for calculating the Diluted earnings per share. (3 marks)

(e) Basic earnings per share for 2011. (1 mark)

(f) Diluted earnings per share for 2011. (1 mark)

2. Below are two unrelated transactions, present the entry(ies) necessary to record each transaction.
(7 marks)

©The University of the West Indies Course Code 2013./……./……..

____________________________________________________________________________________
____

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY

INSTRUCTIONS: Each page must be signed by the FIRST AND SECOND EXAMINERS. Completed
forms should be handed to the Assistant Registrar (Examinations).

..................................... ............................................
First Examiner Second Examiner

Date: 2013./....../..... Date: 2013./..../....

 Page 8
(a) Fennel corp. issued $10,000,000 par value 10% convertible bonds at 99. If the bonds had not been
convertible, the
company’s investment banker determines that they would have been sold at 95.

(b) Lexine Company issued $10,000,000 par value 10% bonds at 98. One share warrant was issued with each
$100 par value bond. At the time of issuance the warrants were selling for 44. The net present value of the
bonds without the warrants was $9,600,000.

©The University of the West Indies Course Code 2013./……./……..

____________________________________________________________________________________
____

DO NOT WRITE OR TYPE ON THE BACK OF THIS SHEET: USE ONE SIDE ONLY

INSTRUCTIONS: Each page must be signed by the FIRST AND SECOND EXAMINERS. Completed
forms should be handed to the Assistant Registrar (Examinations).

..................................... ............................................
First Examiner Second Examiner

Date: 2013./....../..... Date: 2013./..../....