ACCO 310 FALL 2010

Solutions to final exam

Q 1 Solutions
1 C
2 A
3 D
4 D
5 A
6 B
7 B
8 D
9 A
1 A
0
1 D
1
1 C
2
1 C
3
1 D
4
1 B
5
1 B
6
1 B
7
1 B
8
1 B
9
2 B
0

Question 2
Rubric Very good Good Limited
understandin Understanding Understanding
g
The student identifies his role and the -The student -The student The student
primary users of the financial statements identifies his identifies his role does not
and their needs. role and and specifically achieve the
Identifies specific users- specifically discusses need for requirements
Potential future acquirer and their needs discusses gaap for “good
(understands repercussions for audit) need for gaap understanding”
Company needs to adhere to gaap to (why Understands that
obtain unqualified opinion important) accounting choices
Management bias is to overstate assets , affect financial
understate liabilities and increase income -The student results but does not
clearly discuss explicitly
Student remarks on or questions integrity understands
re bank issue that there are
choices to be
made within
gaap/ifrs and
that these
choices could
result in
material
differences to
reported
financial
 statement
amount(s)
which could
affect assets ,
liabilities and
net income and
ultimately sale
price of
business

Marks this section 8 5 2

2. The student discusses the financial Addresses Addresses at least 3 Does not meet
impact of the various issues and attempts most issues in issues ( including at the
to quantify sufficient least one of patent requirements
Gives options under IFRS where depth with infringement, waste for good
applicable good technical disposal sites, understanding
Concludes and makes recommendations knowledge Onkon-Lakerton but does
for treatment (supported) and discusses Student issue with at least attempt to
repercussions on f/s and potential sales demonstrates gaap level discuss some
price adequate knowledge and 2 of the issues
Provincial tax audit= 8 million$ potential knowledge of other issues
contingent liab- audit not yet complete, IFRS in issues superficially OR
etc discussed 4 in sufficient depth
Bank error- income overstated by $7.2 Student
million- treatment as revenue incorrect, attempts to
discuss ethics,etc quantify
Patent infringement- odd situation- is financial impact
this really a penalty payment (expense) , on income of
or are the shares an investment? or is lt the items
asset? discussed
how to value- share value an exchange
transaction? Lots of questions looking for
discussion of principles,
measurement issues, etc
waste disposal sites
question justification of length of
estimated lives and decrease in clean-up
costs- especially with planned sale- as
impact significant
question new consultants- objective?
Address use of 3 methods for
depreciation- discuss in light of IFRS
Locating and negotiating costs- should
be expensed as incurred/ discuss
Onkon-Lakerton discuss whether rev rec
criteria have been met- and whether
reliable estimation is present- amount, will
flow to entity, statge of completion of
transaction, costs incurred can be
measured, etc- must discuss performance
(no work done as yet)and IFRS
directives- should conclude rev rec is
premature
New cost accounting system
Results in adding to inventory the cost of
items previously expensed- effectively
this is a change in accounting policy-
discuss restatement

Marks this section 20 13 8

Total max marks 28 18 10

QUESTION 3 (14 marks)

1.

During 2010 (write-offs):

Allowance for doubt. accts 45,000

Accounts receivable 45,000

December 31, 2010:

Bad debt expense (1,000,000 x 4%) 40,000

Allow. for doubt. accts 40,000

December 31, 2010, accounts receivable disclosure:

Accounts Receivable (400,000 + 1,000,000 – 900,000 – 45,000) $455,000

Allow. for doubt. accts (20,000 - 45,000 + 40,000) (15,000)
Net Accounts Receivable $440,000

2.

During 2010 (write-offs):

Allowance for doubt. accts 45,000

Accounts receivable 45,000

December 31, 2010:

Bad debt expense (1,000,000 x 4%) 65,950

Allow. for doubt. accts 65,950

Ending gross accounts receivable $455,000

Desired allowance balance (455,000 x 9%) $40,950
Allowance balance before adjusting entry (20,000 – 45,000) (25,000)
Required increase to allowance account $65,950

December 31, 2010, accounts receivable disclosure:

Accounts Receivable (400,000 + 1,000,000 – 900,000 – 45,000) $455,000

Allow. for doubt. accts (20,000 - 45,000 + 65,950) (40,950)
Net Accounts Receivable $414,050

3.

During 2011 (write-off):

Allowance for doubt. accts 13,000

Accounts receivable 13,000

During 2011 (collection):

Accounts receivable 10,000

A llowance for doubt. accts 10,000

Cash 10,000
Accounts receivable 10,000

Q4 SOLUTION 22 marks

Part A- 13 marks
 Costs to date $801,000
Less materials on job site (51,000)
$750,000

Costs Incurred to Date

—————————— = Percentage of Completion
Total Estimated Costs

$750,000
————— = 50%
$1,500,000

(b)
50% × $2,000,000 = $1,000,000
Costs incurred 750,000
Gross Profit $ 250,000

(c)
Construction Expense 750,000
Construction in Process 250,000
Revenue from Long-term Project 1,000,000

(d) 4 marks
Current Asset
Cash $980,000
Accounts receivable $135,000 ($1,115,000 – $980,000)
Current Liability
Billings in excess of contract costs and
recognized profit $115,000 ($1,115,000 – $1,000,000)

(e)

Total loss reported in 2010

Contract price $2,000,000

Estimated cost to complete 2,050,000
Amount of loss to be reported $ (50,000)
Part B
1. If the provision allows for a general right of return it will likely be appropriate to recognize the sale as long as the amount
of returns can be reasonably estimated. Furthermore, the ability of the vendor to receive the proceeds of the transaction
in cash is subject to varying degrees of uncertainty. (3 marks)

2. The students should be discussing the notion that collectability should be reasonably assured, and in this case it was not.
The earnings approach is current GAAP and IFRS. It is primarily an income statement approach and revenues are
recognized when performance is achieved which means: risks and rewards are transferred and/or the earnings process is
substantially complete; measurability is reasonably assured; collectability is reasonably assured.

3. The students should bring up the notion of legal title.

The legal title has changed hands on Jan 8, 2010 since that is when the seller has turned over the goods to the buyer.
Thus revenue should be recognized in 2011, not 2010.
Q 5 SOLUTION

Part A – (10 marks)

Net Sales $798,000

Opening Inventory $ 45,000

Net purchases1 464,300
Cost of goods available for sale 509,300

Gross Margin ($798,000 × .51) 406,980

Cost of Goods Sold ($798,000 – $406,980) $391,020

Ending Inventory ($509,300 – $391,020) $118,280

1$459,500 + $7,000 – $2,200 = $464,300

At Cost At Retail
Goods available for sale:
Beginning inventory $ 45,000 $ 80,000
Purchases 459,500 850,000
Purchase returns (2,200) (4,000)
Freight on purchases 7,000
Additional markups 9,000
Additional markup cancellations (5,000)
Markdowns (7,000)
Markdown cancellations 3,000
Total goods available for sale $509,300 926,000

Cost ratio = $509,300 ÷ ($926,000 + $7,000 – $3,000) = .548

Deduct:
Sales $800,000
Less: Sales returns (2,000)
Net sales (798,000)
Ending inventory (at retail) $128,000

Ending inventory (at cost) $128,000 × .548 70,144

Cost of goods sold ($509,300 – $70,144) $439,156

3.

The retail sales method is likely to be more accurate as it uses the actual mark-up for the current year, not last year.
Part B (6 marks)
Case A (3 marks)

1. Company policy is unacceptable.

2. The company is recording goods at cost, but has not recognized the adverse purchase commitment agreement. In 2009,
a loss on the purchase agreement of $35,000 should have been recognized, followed by a recovery of $20,000 in 2010. The
goods should be recorded at $660,000, their current value at date of purchase.
3. Income and retained earnings are overstated in 2009 and liabilities are understated. Inventory is overstated in 2010.

Case B (3 marks)
1. Company policy is unacceptable.
2. Inventory cost is $61,000, not $66,000.
3. Inventory is overstated in the B/S and income is overstated in the I/S