BUSI 2001 Intermediate Accounting 1

TEST 2 Sample Questions

Question 1

(4 marks)

(8 minutes)

Lipsik, Ltd. decided on January 1, 20x8 to discontinue its plastic-making division. The
division, considered a reportable segment, was sold on June 1, 20x8. On January 1,
20x8, the carrying value of the assets were $800,000 and the estimated fair value was
$560,000. Costs to sell were expected to be 8% of the selling price. The operating loss of
the division from January 1, to May 30, 20x8 amounted to $220,000. Assuming a tax
rate of 40%, what amount should be reported on Lipsik, Ltd.'s income statement for the
year ended December 31, 20x8 under the caption "discontinued operations"?

Question 2

(8 marks)

(16 minutes)

The Shevel Company, a publicly accountable entity, self constructed an asset in 20x3.
Construction began on March 1, 20x3 and ended on December 31, 20x3 when the asset
was put in productive use. The investments in the construction of the asset are as follows:
Date
March 1, 20x3
May 15, 20x3
August 31, 20x3
December 31, 20x3

Expenditure
$2,000,000
1,600,000
3,500,000
1,500,000

In addition, the company has general borrowings as follows:

$25,000,000, 6% bank loan outstanding all year, and

$30,000,000, 4% face value bonds.

In addition, the company borrowed $2,000,000 on March 1, 20x3 for the purposes of
financing this project. The interest rate charged on this loan was 7%.
Calculate the interest capitalized to the cost of the asset at December 31, 20x3.

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Question 3

(14 marks)

(28 minutes)

The Stark Company had the following investments at December 31, 20x4:

Lannister Cororation
Targaryen Company
Baratheon Inc.

Original
Cost

Carrying
Value

Fair
Value

$ 350,000
600,000
200,000
$1,150,000

$ 290,000
670,000
220,000
$1,180,000

$ 250,000
800,000
180,000
$1,230,000

During 20x5, the following transactions took place:

April 2, 20x5

The shares of Lannister Corporation were sold for $220,000 less

$3,500 in brokerage fees.

Sep 30, 20x5

Shares in the Tyrell Corp. were purchased for $400,000 plus

$12,000 in brokerage fees.

At December 31, 20x5, the fair value of the investments were:

Targaryen Company
Baratheon Inc.
Tyrell Corp,

$ 860,000
110,000
475,000
$1,445,000

Stark classifies all their investments as fair value through other comprehensive income.
Required
a)
b)
c)
d)
e)

Prepare the journal entry for the fair value adjustment at December 31, 20x4.
Prepare the journal entries to record the sale of Lannister.
Prepare the journal entry to record the purchase of Tyrell.
Prepare the journal entry for the fair value adjustment at December 31, 20x5.
Calculate the balance in the Accumulated OCI account at December 31, 20x5 and
show the proof of the ending balance.

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Question 4

(14 marks)

(28 minutes)

The Harris Construction Company signed a contract for the construction of an office
building for a total contract price of $7,500,000. Data on the project is as follows:

Costs incurred during the year

Expected costs to complete
Billings
Cash collections

20x1
$2,000,000
4,500,000
4,000,000
3,500,000

20x2
$4,000,000
2,800,000
-0500,000

20x3
3,000,000
-03,500,000
2,500,000

Harris uses an input method to calculate percentage of completion. This contract qualifies
for revenue recognition on a continuous basis.
Required
a)
b)
c)

For each year, calculate the amount of revenues, expenses and profit/loss realized
on this contract.
Write all journal entries for the year 20x1. How will the contract be classified on
the balance sheet at December 31, 20x1?
Assume now that Harris used an output method for measuring percentage of
completion and determined that the percentage of completion was 25% and 70%
for 20x1 and 20x2 respectively. Also assume the expected costs to complete at the
end of 20x2 were estimated to be $1,000,000. What would the contract expenses
be in 20x2?

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SOLUTION
Question 1 4 marks
Carrying value of assets
NRV: $560,000 x .92
Impairment loss
Operating loss
Loss from discontinued operations pre-tax

$800,000
515,200
284,800
220,000
504,800

2
1

x .6
Loss from discontinued operations post-tax

$302,880

Question 2 8 marks
Average investment in asset Mar 1: $2,000,000 x 10/12
May 15: $1,600,000 x 7.5/12
Aug 31: $3,500,000 x 4/12
2 marks

Capitalization rate =
(1,500,000* + 1,200,000**) / (25,000,000 + 30,000,000)
= 4.91%
* $25,000,000 x 6%

$1,666,667
1,000,000
1,166,667
$3,833,334

2 marks

** $30,000,000 x 4%

Borrowing costs capitalized to asset:

On asset specific borrowing: $2,000,000 x 10/12 x 7%
= $1,666,667 x 7%
On general borrowings: ($3,833,334 1,666,667) x 4.91%

2
2

$116,667
106,383
$223,050

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Question 3 14 marks
a)

FVTOCI Investments
OCI Gain on FVTOCI Investments

$50,000
$50,000

1 mark

b)

Cash ($220,000 3,500)

OCI Loss on FVTOCI Investments
FVTOCI Investments

216,500
33,500
250,000

2 marks

Retained earnings
A*OCI

133,500
133,500

2 marks

c)

FVTOCI Investments
Cash

412,000
412,000

1 mark

d)

FVTOCI Investments
OCI Gain on FVTOCI Investments

53,000
53,000

3 marks

Targaryen Company
Baratheon Inc.
Tyrell Corp,

e)

Balance, beginning of year

FV Adjustment on sale of Lannister
Transfer of realized loss on Lannister
FV Adjustment at year end
Balance, end of year

Carrying
Value

Fair
Value

$ 800,000
180,000
412,000
$1,392,000

$ 860,000
110,000
475,000
$1,445,000
$80,000 cr.

33,500
133,500
53,000
$233,000 cr.

2 marks

Targaryen Company
Baratheon Inc.
Tyrell Corp,

Original
Cost

Fair
Value

$600,000
200,000
412,000
$1,212,000

$ 860,000
110,000
475,000
$1,445,000

Difference between the original cost and fair value = $233,000

3 marks

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Question 4 14 marks
a)

20x1 % of completion = 2/6.5

1 mark

Revenues: $7,500,000 x 2/6.5

Contract expense
Profit

$2,307,692
2,000,000
$ 307,692

Revenues: $7,500,000 x (6/8.8 2/6.5)

Contract expense
Loss (1,300,000 + 307,692)

$2,805,944
4,413,636
($1,607,692)

20x3:
Revenues: $7,500,000 x (1 6/8.8)
Contract expense
Loss (3,000,000 2,800,000)

$2,286,364
2.486,364
($ 200,000)

20x2 % of completion = 6/8.8

b)

CIP
Miscellaneous accounts

1 mark

1.5

$2,000,000
$2,000,000

0.5 marks

AR
Billings

4,000,000
4,000,000

0.5 marks

Cash
AR

3,500,000
3,500,000

0.5 marks

Contract expenses
CIP
Revenues

2,000,000
307,692
2,307,692

1 mark

Current liabilities
Billings in excess of CIP
c)

Total expected costs to end of 20x2: $7,000,000 x 70%

Less costs realized to end of 20x1: $6,500,000 x 25%

$1,692,308

$4,900,000
1,625,000
$3,275,000

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