Week 6 quiz

Question 1

Which of the following statements is TRUE?

a) A downside to a company becoming public is the loss of privacy of information regarding its financial position and results.
b) A company must be traded on a stock exchange in order to raise equity financing in Canada.
c) Auditors of public companies in Canada must be a member of the CPAB - Canadian Professional Accountants Board
d) If shareholders of a private company want to maintain control and ownership, the only way to finance expansion is through preferred shares with no voting rights.

Answer 1

Answer A is correct because this statement is true. Private companies only have to disclose financial information to tax authorities and key stakeholders (bank, shareholders), whereas a public company’s financial information is available to the general public and also to competitors.

Question 2

Wellington Inc. and Goodman Ltd. recently formed a new jointly controlled entity, Burton Co. The following terms outlined the agreement:

• Both entities have an equal 50% interest in Burton Co.
• Burton Co is a legally incorporated entity in Canada
• All products from Burton Co. are sold to independent 3rd parties
• The jointly controlled entity has a loan from a non-related 3rd party

Select which of the following statements are TRUE (IFRS)?

a) Wellington Inc. and Goodman Ltd should proportionally consolidate Burton Co. as it is a joint operation.
b) Wellington Inc and Goodman Ltd should equity account for Burton Co. as it is a joint venture
c) Wellington Inc and Goodman Ltd have an accounting policy choice to either equity account or proportionally consolidate Burton Co.
d) Wellington Inc and Goodman Ltd have the option to either equity account or account for its share of assets, and obligations for the liabilities of Burton

Answer 2

Answer B is correct because IFRS 11 requires that an entity account for any interest in a joint venture using the equity method of accounting.

Question 3

bond with a BBB rating is best described as:

a) A junk bond
b) An investment grade bond
c) A bond with a lower yield than an AA graded bond
d) Very highly speculative

Answer 3

B is correct

Question 4

A preferred share that gives the investor the right to sell the shares back to the issuer is best described as:

a) Retractable
b) Variable rate
c) Cumulative
d) Convertible

Answer 4

Answer A is correct because a retractable preferred share gives the holder the right to put the share to the issuer. A redeemable preferred share gives the right to the issuer to call the share.

Question 5

Which of the following should not affect an auditor’s judgment as to what is sufficient appropriate audit evidence?

a) Materiality
b) Inherent risk and control risk considerations
c) Complexity of the evidence and ease of obtaining the evidence
d) Internal control changes made as a result of the current year management letter

Answer 5

Answer D is correct because the auditor needs sufficient appropriate audit evidence to support the content of the auditor’s report. Changes in internal control may affect how to get evidence, but it does not influence the auditor’s decision about whether the evidence gathered is sufficient and appropriate.

Question 6

Sunnyside Manufacturing, a publicly traded company, has entered into an agreement with FP Inc. to lease a specialized piece of production equipment. Significant modification would be required to make this equipment available to others after the lease has expired. Terms of the lease are as follows
· Lease term 5 years
· Expected life of the equipment 8 years
· Implicit interest rate 8%
· Sunnyside’s borrowing rate 6%
· Annual lease payment $60,000 (made at the beginning of the year)
· Fair value of the equipment $400,000
· Leased asset reverts to the lessor at the end of the lease

Based on this, in the first year of the lease Sunnyside would account the production equipment as

a) An operating lease of $60,000.
b) A finance lease of $258,720.
c) A finance lease of $400,000.
d) A finance lease of $267,900.

Answer 6

Answer B is correct because Sunnyside is a public company and is therefore reporting using IFRS. Since this is specialized equipment, IFRS requires Sunnyside to record this as a finance lease, not an operating lease, AND to use the implicit interest rate, not the lower of the two rates. The value of the finance lease is the lower of fair value and the present value of the minimum lease payments. The PV of the minimum lease payments = $60,000 + $60,000(PVIFA, 4yrs, 8%) = $258,720. Since this is lower than the FV of $400,000, $258,720 is the amount to record for the lease.

Question 7

Carson Inc. spent $25,000 to successfully redesign the layout of its plant to improve efficiency by 3% over the remaining life of the facility. No new equipment or other expenditures were incurred. The CFO reviewed all costs and noted no research amounts, and believes all are development costs per IAS 38.

How should Carson record the $25,000?

a) Add it to the cost of the building as a betterment and amortize it over the remaining life of the building.
b) Record it as a specifically identifiable intangible asset if future benefit is likely and amortize it over the estimated period of benefit.
c) Expense it as a period cost.
d) Record it as goodwill since it improves the efficiency of the business.

Answer 7

Answer B is correct because the expenditure was successful in improving efficiency and the amount is reliably measurable. However, in reality, it may be difficult to estimate the period of future benefit

Question 8

On January 1, Year 1, ABC Inc. bought and received equipment from a U.S. supplier for $100,000 USD payable on March 1, Year 1. On January 1, immediately after receiving the supplier’s invoice, ABC entered into a 60-day forward exchange contract to purchase $100,000 USD for $105,000 CAD for delivery on March 1.

Spot exchange rates:
January 1 $1 USD = $1.04 CAD
March 1 $1 USD = $1.06 CAD

60-day forward rates:
January 1 $1 USD = $1.05 CAD
March 1 $1 USD = $1.09 CAD

Ignoring the time value of money, when the forward contract is settled on March 1, of the total foreign exchange loss recorded will be:

a) $2,000 CAD loss
b) $1,000 CAD loss
c) $3,000 CAD loss
d) $5,000 CAD loss

Answer 8

Answer B is correct because the loss on the hedge is the difference between the spot rate on the settlement date and forward exchange rates when the forward contract is entered into.
On January 1, Debit equipment $104,000 and credit AP $104,000 ($100,000 x 1.04).
On March 1, update the AP to the new spot rate of $1.06, so that AP at the current rate is $106,000, requiring adjustment of Debit FX loss $2,000 and credit AP $2,000
Record the payment of AP, Debit AP $106,000, credit Cash $105,000 (as locked in with the spot rate), and credit FX gain $1,000.
As a result there is a total net loss of $1,000 ($2,000 loss, $1,000 gain).

Question 9

On January 1, 20X1, Tree Inc. purchased call options to purchase 2,000 shares of Rock Ltd. with a strike price of $50. The total cost of the options was $1,000. On December 31, Year 1, the shares of Rock Ltd. were trading at $47 per share and the options were trading for $200. The options expire at the end of 20X2. Tree Inc. adheres to IFRS, and the options are not hedging instruments. On December 31, 20X1, how would these options be reflected on Tree’s statement of financial position?

a) As an asset of $1,000.
b) As a liability of $6,000.
c) As an asset of $200.
d) They would be expensed and appear on the income statement.

Answer 9

Answer C is correct because this choice values these options at the fair value of the option at the balance sheet date. Any adjustment to the carry value would be presented as a loss in the income statement.

Question 10

KR Ltd. has agreed to lease a piece of equipment for $15,000 per year over seven years with the first payment due January 1, 20X5. The economic life of the equipment is eight years. The interest rate implicit in the lease contract is 4% and the fair value of the equipment on January 1, 20X5, is $99,000.

What amount should WC Ltd. record on the balance sheet for this lease on January 1, 20X5?

a) $99,000
b) $90,030
c) $93,630
d) $0 since this is an operating lease

Answer 10

Answer C is correct because this is a finance lease since the lease term is a major part of the economic life. Under IAS17: the value recorded is equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. The PV of lease payments: $15,000 + $15,000(PVIFA, 6yrs, 4%) = 15,000 + 15,000(5.242) = $93,630. The PV of lease payments is less than the fair value of equipment. Therefore, the lease is recorded as a $93,630 asset.

Question 11

A Canadian exporting company wishes to reduce the risk of the Canadian dollar dropping in value relative to the foreign currency (FC) of its customers. However, it wants to retain the flexibility to benefit from any possible future increases in value of the Canadian dollar relative to the FC. Which of the following strategies should the company use with respect to the FC?

a) Buy a forward contract.
b) Buy FC.
c) Buy an option.
d) Buy either FC or an option because each will equally mitigate risk.

Answer 11

Answer C is correct because buying an option gives the buyer the opportunity, but not the obligation, to buy FC at a given price in the future. If the Canadian dollar increases in value, the company can let the option expire. The cost of this flexibility is the cost of purchasing the option.

Question 12

Which one of the following accounting treatments for inventory is appropriate?

a) Telco Phones is creating their first batch of cell phones and the entire fiscal year has been geared towards production only. It is planning on using either the LIFO or weighted-average methods to account for their inventory for the first fiscal year and beyond.
b) PA Corp had $20,000 in inventory as at December 31, 20X1. In May 20X2, PA Corp wrote down their inventory to its net realizable value of $13,000. In June 20X2, the inventory was back in favour, resulting in a new net realizable value of $26,000. PA Corp reversed the inventory impairment loss, and recorded inventory at the new value of $26,000.
c) Auto Pro Ltd. had an abnormal amount of wasted material during their production of certain transmissions. Auto Pro Ltd. included these abnormal costs into inventory because management believes that the cost of the goods will still be recovered by future sales.
d) During fiscal 20X1, LR Corp wrote down their inventory to a net realizable value of $30,000. The original cost of the inventory was $40,000. In June 20X2, the inventory was back in favour, resulting in a new net realizable value of $45,000. LR Corp reversed the inventory impairment loss recorded in fiscal 20X1 and recorded the inventory cost at $40,000.

Answer 12

nswer D is correct because IAS 2-Inventory allows for the reversal of a write-down in a subsequent period if the net realizable value of the inventory increases, but not above the original cost. In this case, inventory with an original cost of $40,000 was written down to $30,000 (loss of $10,000). Once conditions changed, the inventory had a new NRV of $45,000 but LT correctly recorded the inventory at its original cost.

Question 13

Under IFRS, intangible assets that may be capitalized include:

a) Internally generated goodwill
b) Internally developed brands
c) Overhead costs related to development activities
d) Borrowing costs related to research activities

Answer 13

Answer C is correct because this cost is eligible for capitalization. It has future benefit and can be distinguished from other costs and appropriately measured.

Question 14

VB Ltd. has agreed to lease a piece of equipment for $15,000 per year over 10 years with the first payment due January 1, Year 10. At the end of the lease, the equipment will have a market value of $20,000 and VB Ltd. can purchase the equipment for $8,000. The interest rate implicit in the lease contract is 4% and the fair value of the equipment is $115,000. According to IAS 17, what asset amount should VB Ltd. record for this lease on January 1, Year 10?

a) $131,933
b) $115,000
c) $107,000
d) $121,665

Answer 14

Answer B is correct because the value recorded is the lower of fair value or PV of minimum lease payments. The PV of minimum lease payments: $15,000 + $15,000 (PVIFA, 9 yrs, 4%) + $8,000 (PVIFA, 10 yrs, 4%) = $131,933. Therefore, the lease is recorded as a $115,000 asset.

Question 15

The IFRS criteria to determine if development costs can be capitalized include which of the following?

a) The intangible asset is likely feasible.

b) The desire to use or sell the intangible asset.
c) Reliable and measurable expenditures attributable to the intangible asset.

d) Adequate and available resources to launch the development.

Answer 15

Answer C is correct because the entity must be able to correctly attribute the expenditures on the asset.

Question 16

HUL Ltd. owns 10,000 shares of ML Company. To minimize market risk and hedge its investment, HUL purchased an option to sell the ML shares. Three months later, HUL sold the ML shares for a gain. Hedge accounting is used to account for the option. How should the option be recorded at the time the shares of ML were sold?

a) Since there was a gain, the option does not need to be recorded.
b) The option remains in Other Comprehensive Income.
c) The option is only recorded at the time of purchase.
d) The loss on the option is recorded at the same time as the sale of the ML shares.

Answer 16

Answer D is correct because the gain/loss on a hedge is recorded in net income at the same time that the gain/loss on the item being hedged is recognized.

Question 17

Assume you are employed as the chief accountant for DrawPro Inc., a computer software company. The company was developing a new software program called Graphics Tool. At the end of the year, the director of research estimated that $1 million was spent during the year for the Graphics Tool program. He asked you to reduce his expenses by capitalizing $1 million as development costs. Prior to capitalizing the development costs, which of the following questions would NOT be considered in ensuring that your statements would be in accordance with IFRS guidance?

a) Has the future market for Graphics Tool been clearly defined?
b) Is the Graphics Tool program technology feasible?
c) Are the costs related to research activities or development activities?
d) How soon will the Graphics Tool program be ready to begin marketing?

Answer 17

Answer D is correct because the criteria for capitalization do not include the time horizon on the eventual marketing of the asset.

Question 18

ased on the following information, calculate the ending balance in inventory:
Opening inventory
$415,875
Purchases - lumber
$350,750
Purchases - nails
$16,250
Purchases - tools & equipment
$125,350
Total sales
$750,825
Mark-up on goods
30%

Answer 18

C is correct. Answer A is incorrect because this calculation incorrectly includes the tools and equipment which are capital assets, not inventory [(415,875 + 350,750 + 16,250 + 125,350) - (750,825/1.3)].

Question 19

Inventory price testing resulted in total errors of $984. The Inventory balance is $2,586,412 and the total sample selected for testing amounted to $543,225. Total items greater than $5,000 were $27,885. These are considered for separate testing due to their value. Assuming materiality is $7,500, what is the error to be posted as a correcting entry?

a) $4,885
b) $4,685
c) $4,939
d) $984

Answer 19

Answer A is correct because (Total Error/Total Representative Sample)Total Representative Population = (984/(543,225-27,885))(2,586,412-27,885) = 4,885

Question 20

Which of the following is not a criterion CRA considers in assessing if an individual is an employee or a contractor?

a) Who determines the method of payment?
b) Who controls how the work is done?
c) Who owns the tools necessary to complete the work?
d) Who the risk of profit or loss rests with?

Answer 20

Answer A is correct because who determines the method of payment is not a factor used to determine the relationship because an employee or contractor can be paid in cash, services, kind, etc.

Question 21

John Lee died on December 1, 20X0. He was self-employed at the time of his death. The latest date that his final return can be filed is:

a) April 30, 20X1
b) June 1, 20X1
c) December 1, 20X1
d) June 15, 20X1

Answer 21

D is correct. Answer A is incorrect because the final return must be filed by the later of 6 months after the date of death and the normal filing deadline for the deceased for the year of death.

Question 22

A bank loans officer is reading the management discussion and analysis (MD&A) section of the annual report of a client. The MD&A is intended to provide:

a) Management’s representations on the financial statements.
b) Management’s statement of responsibility for the annual report.
c) Management’s assertions on social responsibility.
d) Management’s analysis of the past and future of the company.

Answer 22

Answer D is correct because the purpose of the MD&A, as stated by the Canadian Securities Administrators, is: “… to give a reader the ability to look at the issuer through the eyes of management by providing both a historical and prospective analysis of the business of the issuer.”