Exam Questions - end of this file) Chapter 1 1. Award: 100.00 po...

Modern Advanced Accounting in Canada, 10e Murray Hilton, Darrell Herauf (Connect Exam Questions)

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Chapter 1 1.

Award: 100.00 points

Selected financial information from the financial statements of Gravelbourg Ltd. for Years 5 through 7 is as follows:   Year 5 Year 6 Year 7 Income before interest and taxes $ 111,000$ 122,000$ 141,000 Net income 36,100 56,000 76,000 Current assets 531,000 571,000 606,000 Total assets 1,570,000 1,415,000 1,660,000 Current liabilities 392,000 445,000 505,000 Total liabilities 1,105,000 1,145,000 1,365,000 Shareholders' equity 465,000 270,000 295,000 

Required:

(a) Calculate the current ratio, debt-to-equity ratio, return on average assets, and return on average equity for Year 6 and Year 7. (Round the final answers for all the ratios to two decimal places. Omit % sign in your response.)   Year 6Year 7 Current ratio1.28 ± 0.011.20 ± 0.01 Debt to equity4.24 ± 0.014.63 ± 0.01 Return on average assets8.17 ± 0.01 %9.17 ± 0.01 % Return on average equity15.24 ± 0.01 % 26.90 ± 0.01 %  (b) This part of the question is not part of your Connect assignment.

Explanation:   

Year 6  Current ratioCurrent assets $571,000

 = 1.28 

$6  Current liabilities $445,000 $5 Debt-to-equityTotal liabilities $1,145,000

 = 4.24 

$1,3 

Equity $270,000 $2 Return on average assetsIncome before interest & taxes $122,000

 = 8.17% 

$1  Average assets ($1,570,000 + $1,415,000) / 2  ($1,415,000 Return on average equityNet income $56,000

 = 15.24% 

$7  Average equity ($465,000 + $270,000) / 2 ($270,000 References

WorksheetLearning Objective: 01-04

Analyze and interpret financial statements to assess the impact of different accounting methods on key financial statement ratios. 2 / 4

 2.

Award: 10.00 points

    Selected financial information (in 000s) from the financial statements of Moosomin Ltd. for Years 6 and 7 is as follows:    Year 6 Year 7 Sales revenue$ 1,530$ 1,630 Cost of goods sold  785  935 Other expenses  470  340 Net income  275  355 Current assets  560  600 Total assets 1,780  1,870 Total liabilities 1,200  1,110 Shareholders' equity  580  760  

Required:

(a) Convert Moosomin’s financial statements for both Year 6 and Year 7 into common-sized financial statements using (Input all amounts as positive values. Round the final answers to the nearest whole percent. Omit % sign in your response.)   (i) Vertical analysis   Financial Statements  Year 6Year 7 Sales revenue 100 % 100 % Cost of goods sold 51 % 57 % Other expenses 31 % 21 % Net income 18 %

22 ± 1

% Current assets 31 % 32 % Total assets 100 % 100 % Total liabilities 67 % 59 % Shareholders' equity 33 % 41 %   (ii) Horizontal analysis   Financial Statements  Year 6Year 7 Sales revenue 100 % 107 % Cost of goods sold 100 % 119 % Other expenses 100 % 72 % Net income 100 % 129 % Current assets 100 % 107 % Total assets 100 % 105 % Total liabilities 100 % 93 % Shareholders' equity 100 % 131 %   (b) Identify three financial statement items (other than net income) that seem to be the most peculiar relative to expectations. (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)   Sales revenue Cost of goods sold Other expenses Current assets Total assets Total liabilities Shareholders' equity  

Explanation:

(b) The three financial statement items that seem most peculiar relative to expectations are:

• Other expenses declined when revenue increased and now represent only 21% of sales compared to 31% of sales in Year 6.
• Total liabilities declined by 7% even though sales increased by 7% and now represent only 59% of total assets compared to 67% in Year 6.
• Shareholders’ equity increased by 31% even though sales only increased by 7% and now represent 41% of total assets compared to only 33% in Year 6.

References

WorksheetLearning Objective: 01-04

Analyze and interpret financial statements to assess the impact of different accounting methods on key financial statement ratios.

  3 / 4

 3.

Award: 10.00 points

    Fast Ltd. is a public company that prepares its consolidated financial statements in accordance with IFRS. Its net income in Year 2 was $216,000, and shareholders’ equity at December 31, Year 2, was $1,960,000.  Mr. Lombardi, the major shareholder, has made an offer to buy out the other shareholders, delist the company, and take it private. Thereafter, the company will report under ASPE. You have identified the following two areas in which Fast’s accounting principles differ between IFRS and ASPE. 

• Fast incurred research and development costs of $516,000 in Year 1. Thirty percent of these costs were related to development activities that met the

criteria for capitalization as an intangible asset. The newly developed product was brought to market in January, Year 2 and is expected to generate sales revenue for 10 years.

• Fast acquired equipment at the beginning of Year 1 at a cost of $132,000. The equipment has a five-year life with no expected residual value and is

depreciated on a straight-line basis. At December 31, Year 1, Fast compiled the following information related to this equipment:  

Expected future cash flows from use of the equipment$108,000 Present value of expected future cash flows from use of the equipment 91,000 Net realizable value 88,000  

Required:

(a) Determine the amount at which Fast should report each of the following on its balance sheet at December 31, Year 2, using (1) IFRS and (2) ASPE.Ignore the possibility of any additional impairment or reversal of impairment loss at the end of Year 2. Assume that Fast wants to minimize net income.(Leave no cells blank - be certain to enter "0" wherever required. Omit $ sign in your response.)   (i) Research and development  

 IFRS ASPE

R&D @ Dec 31, Yr 2$

139,320

$

(ii) Equipment   

 IFRS ASPE

Equipment @ Dec 31, Yr 2 $

68,250

$

79,200

  (b) Prepare a reconciliation of net income for Year 2 and shareholders’ equity at December 31, Year 2, under IFRS to an ASPE basis. (Omit $ sign in your response.)       Net Income Year 2 under ASPE$

227,830

S/E @ Dec 31, Year 2 under ASPE$

1,831,630

Explanation:

(a)(i)

Development costs @ Dec 31, Yr 2 (IFRS):

$516,000 × 0.30 – ($516,000 × 0.30)/10 = $139,320 – only development costs are capitalized. (IAS 38.57)  

Development costs @ Dec 31, Yr 2 (ASPE):

R&D costs are expensed in Year 1 under ASPE in order to minimize net income.  (a)(ii)

Equipment @ Dec 31, Yr 2 (IFRS):

Under IFRS (IAS 36), an asset is impaired at the end of Year 1 if the carrying amount of $105,600 ($132,000 – $132,000/5 years) exceeds the higher of assets value in use (discounted cash flows = $91,000 at Dec 31, Yr 1) and its FV less costs to dispose ($88,000). If impaired, the asset is written down to its value in use.  The balance at Dec 31, Yr 2 is therefore determined using the $91,000 value in use at Dec 31, Yr 1 less one year of depreciation ($91,000/4 =

$22,750).

Equipment @ Dec 31, Yr 2 (ASPE):

Under ASPE, there is no indicator of impairment if the undiscounted cash flows from its use ($108,000) are greater than the carrying amount, $105,600, at Dec 31, Yr 1.  The balance under ASPE at Dec 31, Yr 2 is therefore $132,000 less two years of depreciation ($26,400 per year).  (b)

Net Income Year 2 under IFRS$216,000 

Less: additional depreciation under ASPE ($26,400 – $22,750) (3,650)

Add: development cost amortization, not recognized under ASPE 15,480 

Net Income Year 2 under ASPE$227,830   

S/E Dec 31 Year 2 under IFRS$1,960,000 

Less: development cost not capitalized under ASPE (139,320)

additional depreciation under ASPE ($26,400 – $22,750) (3,650)

Add: impairment on equipment not recognized in Year 1 under ASPE 14,600 

S/E @ Dec 31, Year 2 under ASPE$1,831,630  References

WorksheetLearning Objective: 01-02

Describe how accounting standards in Canada are tailored to different types of organizations.

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