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ACCT 202 Financial Accounting II Spring 2011 Midterm Exam
ACCT 202 Financial Accounting II Spring 2011 Midterm Exam
ACCT 202 Financial Accounting II Spring 2011 Midterm Exam
DEPARTMENT OF ACCOUNTING
This exam paper contains TEN (10) pages (including this cover page).
Instructions:
4. Write your name, student number, and lecture section number (L1: Tue & Thu
16:30-17:50; L2: Tue & Thu 13:30-14:50) on the cover of the answer booklet.
6. SHOW YOUR WORKINGS. If you do not show your workings, you may not
receive full credit for a correct answer and you will not receive any partial
credit for an incorrect answer.
8. Budget your time wisely. You have 120 minutes to get a maximum of 120
marks. On average, use 1 minute to get every 1 mark.
9. You may keep this exam paper. Answers to this exam will be released on
LMES tonight. Please report any problem in the answers immediately.
A. at completion of production.
B. at the point of sale.
C. when cash is received.
D. after all costs are recognized.
4. Which of the following are recognized each period under the cost-recovery
method?
A. Costs only.
B. Revenues only.
C. Both costs and revenues.
D. None of these.
A. No Effect Decrease
B. Increase Decrease
C. No Effect No Effect
D. Decrease No Effect
7. When the interest payment dates of a bond are May 1 and November 1, and a
bond issue is sold on June 1, the amount of cash received by the issuer will be
9. Which of the following is the proper way to report a contingent asset considered
probable?
A. As an asset.
B. As deferred revenue.
C. As a disclosure only.
D. No disclosure or accrual required.
A. $25,000.
B. $30,000.
C. $35,000.
D. $50,000.
A. $7,500.
B. $10,000.
C. $17,500.
D. $20,000.
A. $11,250.
B. $21,250.
C. $22,500.
D. $42,500.
13. Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior
year. The company has consulted with its attorney and determined that it is
possible that they may lose the case. The attorneys estimated that there is a
40% chance of losing. If this is the case, their attorney estimated that the
amount of any payment would be $500,000. What is the required journal entry
as a result of this litigation?
A. Debit Litigation Expense for $500,000 and credit Litigation liability for
$500,000.
B. No journal entry is required.
C. Debit Litigation Expense for $200,000 and credit Litigation Liability for
$200,000.
D. Debit Litigation Expense for $300,000 and credit Litigation Liability for
$300,000.
15. Dunn Trading Co. issued 2,500 ordinary shares. The shares have a $2 par
value and sold for $12 per share. Dunn incurred $3,000 to sell the shares
related to underwriting costs and legal fees. Dunn Trading Co. will record the
$3,000 as
Instructions: Start each question on a NEW page. You are suggested to spend
about the recommended time on each question.
December 25 You visited the store and saw a lot of TVs on display. All the
TVs on display were turned on and tuned to a local TV station
so that customers could see the picture quality of the TVs. You
decided to purchase one of the TVs on display. Although there
were new ones in the warehouse, you did not want a new one
because the one on display was selling at a substantial
discount. You paid the deposit by credit card.
December 31 The TV was removed from the store and sent back to the
warehouse. Prior to the removal, the shop still used the TV as a
display model.
January 2 The TV was delivered to you. You paid the balance by cash.
January 5 A technician came to your house to install the TV for you. The
installation involved connecting the TV to an electricity socket
and tuning for the TV channels.
REQUIRED:
What are the revenue recognition criteria in respect of this type of transaction?
Applying the facts to the criteria you identified, discuss when the shop should
recognize the revenue. If necessary, make any assumptions or state what additional
information you need.
(20 marks/minutes)
Explain how to determine the measurement basis (historical cost, amortized cost, or
fair value) of debt and equity investments. For investments that are accounted for at
fair value, indicate the accounting treatment of the “revaluation” gain or loss.
(15 marks/minutes)
On December 31, 2010, the fair value of the bonds was $97,000.
On December 31, 2011, the fair value of the bonds was $98,000.
On June 30, 2012, Company A sold the bonds for $99,000, plus accrued interest.
REQUIRED:
Assume that the bonds are accounted for using fair value as the measurement basis,
prepare all relevant journal entries relating to the bonds. Indicate the date to each
journal entry. Show your workings clearly.
(22 marks/minutes)
On December 31, 2010, the fair value of Security 1 was $110 and the fair value of
Security 2 was $95.
REQUIRED:
(15 marks/minutes)
During 2010, Company C started a construction job with a contract price of $1,000.
The job was completed in 2012. The following data pertain to the construction period.
REQUIRED:
(a) Compute the amount of gross profit (in terms of revenue minus expenses) to
be recognized in 2010, 2011 and 2012. Use the percentage-of-completion
method. Show your workings clearly.
(12 marks/minutes)
(6 marks/minutes)
SUGGESTED SOLUTIONS
Section A
1. B
2. D
3. C
4. C
5. A
6. A
7. D
8. D
9. C
10. D
11. D
12. D
13. B
14. A
15. C
Section B
These solutions contain the main points only. Further elaboration in your
answer is generally required. In addition, your mark depends on whether your
answer is clear and concise.
Revenue from the sale of goods should be recognized when all the following
conditions have been satisfied:
1. The enterprise has transferred to the buyer the significant risks and rewards of
ownership of the goods;
2. The enterprise retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold;
3. The amount of revenue can be measured reliably;
4. It is probable that the economic benefits associated with the transaction will flow
to the enterprise; and
5. The costs incurred or to be incurred in respect of the transaction can be
measured reliably.
When did significant risks and rewards of ownership transferred? Upon order
(Dec 25) or upon delivery (Jan 2)? Need to refer to contract to find out when the
risk of loss transferred to the buyer. Installation has no impact because it is a
simple installation.
Did the seller retain continuing managerial involvement or effective control over
the goods sold? May be a problem because the shop still used the TV as a
display model prior to its removal. Therefore, this condition was fulfilled on Dec
31.
The other conditions were not a problem.
Therefore, revenue should be recognized on Dec 31 or Jan 2, depends on when
the risk of loss was transferred to the buyer.
For debt investments, they are reported at amortized cost if the company has (1) a
business model whose objective is to hold assets in order to collect contractual cash
flows (“business model test”) and (2) the contractual terms of the financial asset
provide specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding (“contractual cash flow test”). Otherwise,
they are reported at fair value and any unrealized holding gain or loss is recorded in
the income statement.
For equity investments, they are generally recorded and reported at fair value. For
equity investment classified as trading, any unrealized holding gain or loss is
recorded in the income statement. For equity investment classified as non-trading,
any unrealized holding gain or loss is recorded in equity as other comprehensive
income (OCI).
Part (a)
Recognized in Recognized in
2010 To Date Prior Years Current Year
Revenue 300 300
Expenses 240 240
Gross profit 60 60
2011
Revenue 500 300 200
Expenses 700 240 460
Gross profit (200) 60 (260)
2012
Revenue 1000 500 500
Expenses 900 700 200
Gross profit 100 (200) 300
Part (b)
Cash 250
Accounts Receivable 250