CMA 2013 SampleEntranceExam Revised May 15 2013

2013 Sample Entrance Examination
(Time Allowed: 4 hours) Notes: i) ii) All answers must be indicated on the multiple-choice answer sheet. Work done on the question paper and examination foolscap will NOT be marked. Included in the examination envelope is a supplement consisting of formulae and tables. It is a standard supplement that may be useful for answering questions on this paper. Examination materials must NOT BE REMOVED from the examination writing centre. All examination materials (i.e. answer sheet, used and unused foolscap sheets, envelope, supplement and question paper) must be submitted to the presiding officer before you leave the examination room.
iii)
Updated May 15, 2013
2013 The Society of Management Accountants of Canada. All rights reserved. / Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada. No part of this document may be reproduced in any form without the permission of the copyright holder.
TABLE OF CONTENTS
Examination: Instructions ......................................................................................... 1 Questions ............................................................................................ 3 Solution: Solutions ........................................................................................... 36 Supplement of Formulae ......................................................................... 71
* This supplement is provided to all candidates with the examination.
2013 The Society of Management Accountants of Canada. All rights reserved. / Registered Trade-Marks/Trade-Marks are owned by The Society of Management Accountants of Canada. No part of this document may be reproduced in any form without the permission of the copyright holder.
INSTRUCTIONS:
Use the multiple-choice answer sheet provided to record your answers to the questions. Be sure to enter your four-digit envelope number on the multiple-choice answer sheet. Select the BEST answer for each of the following 100 questions and record your answer on the multiple-choice answer sheet by blackening the appropriate answer space (i.e. oval) with a soft lead (HB) pencil. Answer all questions. Mark ONLY ONE ANSWER for each question. Sample Question: 89. (-) Market research and public relations costs are a) b) c) d) engineered variable costs. discretionary variable costs. committed fixed costs. discretionary fixed costs.
Assuming you select choice d) for your answer, you should blacken the d space on line 89 in the ANSWERS area of the multiple-choice answer sheet as shown below: 89 a b c d
Question Weighting: Your performance will be based on the total weighted value of the questions answered correctly. Note that all questions are assigned the same weight, except for those specified with a plus (+) sign (i.e. has a higher weight) or minus (-) sign (i.e. has a lower weight). In the above example, there is a minus sign at the beginning of the question, signifying that the question has a lower weighted value than the average question. Singular Versus Plural Phrasing: For simplicity of wording, all questions are phrased as though there is a single correct answer, even when there are multiple correct answers. For example, the correct answer to a question that is worded, Which of the following is..., may be the choice that refers to two or more of the other choices, e.g. Both a) and b) above.
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Calculator Policy and Supplement The following models of calculators are authorized for use on the Entrance Examination: Texas Instruments Hewlett Packard Sharp TI BA II Plus (including the Professional model) HP 10bII+ (or HP 10bII) EL-738C (or EL-738)
The supplement accompanying the Entrance Examination contains present value tables.
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Corporate Finance
1. (+) JK Inc. is considering the acquisition of IBA Inc. to expand its business. Through the acquisition, JK expects to benefit from IBAs cash flows before tax and interest of: i) $180,000 per year for the first two years; ii) $240,000 per year from the fourth year into perpetuity; iii) $700,000 cash inflow at the end of the fifth year. Assume that the cash flows occur at the end of each year, the tax rate is 35% for both companies, and JKs after-tax required rate of return is 12%. What is the maximum amount that JK is willing to pay to acquire IBA (rounded to the nearest thousand)? a) b) c) d) 2. $2,125,000 $1,381,000 $1,989,000 $1,756,000
Which of the following statements about preferred stock is NOT correct? a) Preferred shareholders receive a dividend before the common shareholders are entitled to dividend. b) Preferred shareholders generally do not have voting rights. c) Cash dividends paid to preferred shareholders are not an allowable deduction for tax purposes. d) In case of bankruptcy, preferred shareholders have a claim on the companys assets that ranks ahead of the common shareholders and bondholders.
3.
KLN Co. plans to purchase new equipment in order to increase productivity of its manufacturing division and save repair costs that are required for the old equipment. Purchase price Salvage value today Salvage value in 5 years Repairs immediately Repairs at the end of 3 years Annual operating costs Annual revenue Remaining life Old Equipment $100,000 $30,000 $5,000 $9,000 $10,000 $12,000 $70,000 5 years New Equipment $200,000 n/a $100,000 n/a n/a $10,000 $90,000 5 years
Based on a cost of capital of 6%, assuming tax is not considered, what is the net present value in favour of purchasing the new equipment? a) $(18,971) b) $11,029 c) $19,429 d) $28,365
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4.
Which of the following is most likely to increase shareholders wealth in the short term? a) b) c) d) Stock dividend Stock split Special dividend Reverse split
5.
ARI Corp. has annual sales of $800,000 and cost of goods sold of $500,000 as of December 31, Year 2. On January 1, Year 3, ARI Corp. announced that it will decrease its days receivable from 28 days to 23 days and increase its days payable from 20 days to 28 days. ARI Corp. forecasts that its annual sales and cost of goods sold are increasing by 5% and 6% respectively in Year 3. How much additional cash will this change in policy bring to the company in Year 3? a) b) c) d) $11,507 $23,123 $11,616 $21,918
6.
GS Bank is offering a certificate of deposit with a 12% quoted annual interest rate. If the bank compounds the interest monthly and you deposit $150,000 into the certificate of deposit, what is the value after one year? a) b) c) d) $168,000 $168,540 $168,825 $169,020
7.
An investor purchased $70,000 worth of 10-year bonds with a coupon rate of 12% on December 31, Year 1, for $65,450. The interest payment dates are June 30 and December 31 each year. On July 1, Year 4, the investor decided to sell the bonds. These bonds currently yield 8% in the market. How much will the bonds sell for (rounded to the nearest hundred dollars)? a) $70,000 b) $112,000 c) $84,000 d) $124,600
8.
(-) Which of the following is an example of a secondary market financial instrument? a) b) c) d) Publicly traded stocks on the stock exchange Initial public offering (IPO) stocks Seasoned offering Private placement
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9.
MAC Inc. is considering issuing preferred shares that have a market value of $120 and a cumulative dividend of $8.50. The expected issue cost is $4.25 per share and is tax-deductible. The current tax rate of MAC is 38%. If the company issues the preferred shares, what is the percentage cost of the preferred shares? a) b) c) d) 7.24% 7.08% 4.49% 7.34%
10.
Sandra is considering the purchase of stocks in the following three companies: i) Company A a beta of 1.5, no dividend history and a current share price of $35. ii) Company B $6.00 in annual dividends that will continue indefinitely and a current share price of $45. iii) Company C $3.80 in current dividends that are expected to grow 1.5% per year and a current share price of $38. The current risk-free rate is 3% and the market return is 7.5%. Sandra would like an annual return of 12% on her investment. If taxes are not considered, which shares will meet her expectation? a) b) c) d) Company A Company B Company C None of above
11.
YSJ Inc. has the following financial information: Current liabilities Total liabilities Preferred shares Common equity $1,500,000 $8,500,000 $3,000,000 $10,000,000
The long-term debt consists of a single bond issue paying 6% interest annually. The annual yield for similar bonds in the market is currently 8%. The current cost of the preferred shares is 6% and the current cost of the common shares is 17%. The companys tax rate is 37%. What is YSJs weighted average cost of capital (WACC) (rounded to the nearest tenth of a percent)? a) b) c) d) 10.7% 11.2% 12.2% 10.3%
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12.
The shares of Sunshine Ltd. are currently trading at $54.65 per share and have a beta of 1.5. If the risk-free rate of return is 2.0% and the risk premium is 4.5%, what is the expected rate of return on Sunshines shares? a) 8.75% b) 6.75% c) 11.75% d) 5.75%
13.
JYP Inc. is evaluating two projects and has gathered the following data about the two projects. JYP has a 10% required rate of return for both projects. Initial costs Project life Cash flow Project A $16,000 5 years $7,000 per year Project B $20,000 4 years $7,500 per year
If the projects are mutually exclusive and taxes are ignored, the company should a) b) c) d) 14. accept Project A and reject Project B. reject Project A and accept Project B. accept both projects. reject both projects.
JM Ltd. has a single product that has a gross profit margin ratio of 60% per unit and had total sales of $1,200,000 last year. JM has a degree of total leverage of 2.10 and a degree of operating leverage of 1.20 for the current year. If the earnings before interest and tax (EBIT) were to increase by 15% this coming year, what would be the expected percentage change in earnings per share (rounded to the nearest percent)? a) 18% b) 32% c) 9% d) 26%
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15.
XYZ Ltd. recently reported the following results at the end of Year 3. Revenue EBIT Earnings per share Net assets Common shares outstanding $3,800,000 $900,000 $1.12 $5,100,000 500,000
The book value of the net identifiable assets is equal to its fair market value. XYZ is currently trading at $12.67 per share in the market. XYZ expects its dividend to remain constant indefinitely, and the required return on common shares is 6%. What is the price-earnings multiple for XYZs stock? a) 7.04 b) 9.11 c) 11.31 d) 14.19 16. The financial markets often witness a target firm take a poison pill as a defensive tactic against the hostile takeover attempt made by another firm. Which of the following is an example of a target firm taking a poison pill? a) Changing the target firms corporate charter such that a merger must receive approval from 80% of the target firms shareholders. b) Repurchasing some of its shares at a substantial premium from the firm attempting the takeover. c) Selling off the assets that originally made it a desirable takeover target. d) Issuing rights to current shareholders that entitle them to exchange their current shares for those of the acquirer on a 2-for-1 basis in the case of a merger. 17. (-) Which of the following statements regarding systematic risk is correct? i) ii) iii) iv) a) b) c) d) Systematic risk is a risk that influences a large number of assets. Systematic risk can be eliminated by diversification. An assets systematic risk is measured by its variance of returns. Beta coefficient measures how much systematic risk a particular asset has relative to an average asset.
i), iii), iv) ii), iii), iv) i), iv) All of the above
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18.
CapeSpencer Co. recently issued rights to raise financing. Its shares are currently trading for $30 per share on the TSE. An investor will require 4 rights plus the subscription price of $24 to purchase one share. What is the value of one right? a) b) c) d) $0 $3.20 $1.50 $1.20
Financial Accounting
19. In Year 4, Brenda purchased several computers for $6,000. On December 31, Year 4, the computers had a book value of $4,300. On January 1, Year 5, Brenda donated the computers to Hill Charity, a not-for-profit organization, for no cost. At that time, the computers had a fair value of $5,000. Hill Charity had revenues of over $2,000,000 in Year 5. At what amount should Hill Charity record the computer assets, as at January 1, Year 5? a) b) c) d) $0 $4,300 $5,000 $6,000
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The following information pertains to questions 20 to 22.

Selected data from JYK Inc.s financial statements are presented below (in thousands): Net sales Cost of goods sold Gross margin Depreciation expense Amortization of intangibles Other expenses Interest expense Income tax expense Net income Cash Short-term investments Accounts receivable (net) Inventory Property, plant and equipment (net) Intangible assets Total assets Current liabilities Total liabilities Common shares Retained earnings 20. (-) What is the current ratio for Year 2? a) b) c) d) 21. 1.21 1.78 2.14 3.96 Year 2 $300 80 220 45 2 44 18 47 $64 Year 2 $30 2 41 34 78 53 $238 60 111 80 $47 Year 1 $16 3 50 30 74 55 $228 50 152 70 $6
What is the times interest earned for Year 2? a) b) c) d) 3.55 times 6.17 times 7.17 times 16.7 times
22.
(-) What is the accounts receivable turnover in days (using 365 days) for Year 2? a) b) c) d) 37.40 days 49.88 days 55.36 days 60.83 days
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23.
RRE Inc. builds a department store in the city centre of SJ. The contract price of the job is $50,000,000. Information about costs is as follows: ($000s) Costs incurred during the year Estimated costs to complete Year 1 $5,000 $35,000 Year 2 $19,000 $13,500 Year 3 $15,000 $0
The company uses the percentage of completion method to account for long-term construction contracts. How much profit will be recognized in Year 2? a) $6,750,000 b) $8,000,000 c) $10,231,000 d) $12,500,000 24. On January 1, Year 2, YGO Inc. purchased 60,000 shares (45%) of the common shares of DNO Inc. for $600,000. During Year 2, DNO declared and paid $150,000 of cash dividends. On December 31, Year 2, the shares of DNO had a fair value of $11.50, and the company reported net income of $95,000 for the year. Assuming YGO has significant influence over DNOs strategic polices, what would be the balance in the investment in DNO at December 31, Year 2, on the books of YGO? a) b) c) d) 25. $710,250 $665,250 $642,750 $575,250
Anne-Marie, an accountant, prepared the annual financial statements for Treetop Charity, a not-for-profit organization, for no cost. In the previous year, Treetop paid $2,000 for this service and would have paid $2,000 this year. Which is the correct method for recording this contribution? a) Treetop must record the contribution at $2,000, since there is a fair value for the contribution. b) Treetop must record $0 for the contribution, since no money was exchanged. c) Treetop may record the contribution at $2,000. d) Treetop may record the contribution at the price that Anne-Marie charges for her service.
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26.
(+) In January, Year 7, FRI Ltd. and END Ltd. decided to combine their operations into one company, and FRI will acquire ENDs assets for $111,000 in cash. The statements of financial position of the two companies at the end of Year 6 were as follows: Current assets Non-current assets Total Assets Liabilities Common stock Retained earnings Total Liabilities and Equity FRI Ltd. $140,000 85,000 $225,000 $15,000 160,000 50,000 $225,000 END Ltd. $ 85,000 55,000 $140,000 $ 29,000 76,000 35,000 $140,000
The carrying values of all identifiable assets and liabilities equal their fair values. After the acquisition, what would be the common stock balance for FRI? a) b) c) d) 27. $236,000 $271,000 $160,000 $210,000
LLU Ltd., a publicly traded company, has estimated its warranty costs to be 0.5% of sales and in Year 1 had $650,000 in sales. On January 1, Year 2, LLU had a warranty liability credit of $1,900. At the end of Year 2, LLU found an error in the original estimate, and the estimate should have been 0.4% of sales instead of 0.5%. Ignoring taxes, what should the warranty liability be for Year 2 if sales were $700,000? a) b) c) d) $2,800 $4,700 $5,350 $4,050
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28.
White Ltd. had the following financial results: Year 4 5 6 7 8 Taxable Income $50,000 $167,500 $40,000 $72,000 $55,000 Income Tax Paid $15,000 $50,250 $12,000 $21,600 $16,500
In Year 9, White had a taxable loss of $200,000. The tax rate has been 30% since Year 4. Assuming White is going to maximize its tax recovery in Year 9, what is the tax loss carry back amount for Year 9? a) b) c) d) 29. $60,000 $38,100 $16,500 $50,100
Bevtex Ltd. has a defined benefit pension plan for its employees. Various assumptions go into determining the pension-related expense. The controller is attempting to determine what impact, if any, there would be if certain assumptions were changed. The pension-related expenses would increase if there is an increase in the a) b) c) d) number of retirees during the year. amount contributed to the pension plan during the year. market value of the pension plan assets. interest rate on the pension obligation.
30.
On January 1, Year 1, RJC Ltd. started to use its new pipelines that the company spent $1,000,000 to build. At that time, RJC estimated that the pipelines will be used for 25 years and retired at the end of 25 years. When the assets are retired, RJC is obligated to spend $200,000 to restore the sites to meet environmental regulations. On January 1, Year 16, the environmental regulations changed, and it was estimated that an additional $100,000 will be required to restore the sites. Assuming the interest rate is 6% and the company uses the effective interest rate method for measuring obligation, the liability related to the site restoration from the pipelines on December 31, Year 16, is (rounded to the nearest hundred) a) $118,400. b) $177,600. c) $59,200. d) $300,000.
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31.
GMS Ltd. is a small manufacturing company. Its balance sheet at book value at December 31, Year 5, was as follows (in thousands): Cash Accounts receivable Land Trucks (net) Equipment (net) Building (net) Total Assets Accounts payable Long-term note payable Mortgage payable Common shares Retained earnings Total Liabilities and Shareholders Equity $ 45 100 300 170 2,600 1,085
$4,300 $ 90 2,700 760 530 220
$4,300
GB Ltd., a medium-sized manufacturing company, required additional capacity in production in order to meet increasing demand, and it decided to acquire 100% of GMS. At the time of the acquisition, GMS equipment was undervalued by $230,000 while the building and trucks were overvalued by $140,000 and $50,000, respectively. GB paid $1,600,000 to purchase GMS. How much did GB pay for goodwill? a) b) c) d) 32. $750,000 $810,000 $850,000 $865,000
YG Ltd., a Canadian company, purchased merchandise from a US-based company on August 31, Year 2, for $100,000 USD. Payment is due on January 31, Year 3, in US dollars. YG has a September 30 year-end, and the relevant exchange rates for the US dollar were as follows: August 31, Year 2 September 30, Year 2 January 31, Year 3 $1.00 USD = $1.25 CAD $1.00 USD = $1.20 CAD $1.00 USD = $1.32 CAD
For YG, these transactions resulted in a foreign currency transaction a) b) c) d) loss/gain of $ 0 in Year 2 and loss of $7,000 in Year 3. loss/gain of $ 0 in Year 2 and loss of $12,000 in Year 3. gain of $5,000 in Year 2 and loss of $7,000 in Year 3. gain of $5,000 in Year 2 and loss of $12,000 in Year 3.
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33.
Prior to recording the December 31, Year 2, year-end adjusting entries for JK Inc., its revenues exceed expenses by $90,000. The following information was known at December 31, Year 2: i) Sales of products amounting to $30,000 have not been billed or recorded yet. The cost of goods sold is 60% of the sale. ii) Rent of $24,000 was paid on November 30, Year 2, in advance for six months from January to June, Year 3. The payment was expensed on November 30, Year 2. iii) New equipment costing $10,000 with an estimated useful life of five years was purchased on July 1, Year 2, and the amortization of the equipment has not yet been recorded. The company uses straight line amortization for book purposes. iv) The December, Year 2, bank reconciliation shows that the bank deducted interest expense of $3,500 on a line of credit on December 31, Year 2, but the company recorded this amount on January 3, Year 3. Assuming the company prepares financial statements only at year-end, what is its operating income for Year 2? a) $121,500 b) $139,500 c) $120,500 d) $97,500
34.
IOL had the following results from its operating segments for the year ended December 31, Year 2 (in millions): Segment A B C D Total Revenue $83 $38 $9 $8 $138 Operating Profit (Loss) $12 $11 $(4) $1 $20 Assets $249 $125 $31 $29 $434
Based on the quantitative thresholds, which segments would be reported separately? a) b) c) d) A and B only. B and C only. A, B and C only. All segments would be reported separately.
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35.
Innov Ltd. started development of a new product in January, Year 8. In November, Year 8, Innov was preparing to begin selling the new product, but final testing of the product was unsuccessful; subsequently, the product could not be released for sale. Innov incurred the following costs for the new product in Year 8: Materials to build a prototype Market feasibility study Testing materials Advertising material $75,000 $20,000 $10,000 $20,000
What amount of these costs can Innov capitalize in Year 8? a) $0 b) $105,000 c) $125,000 d) $85,000 36. In Year 1, Noel Mechanical sold an air conditioning (A/C) unit for $300,000, which included a service agreement to maintain the A/C unit for 3 years starting in Year 2. If sold separately, the A/C unit would have sold for $240,000 and the service agreement would have sold for $80,000. The customer paid the full $300,000 in Year 1. For Year 1, what amount would Noel recognize as deferred revenue if it uses the fair value method? a) $75,000 b) $0 c) $80,000 d) $60,000 37. YN retail Ltd. uses the gross profit method to estimate ending inventory for its monthly reports. Information for July, Year 2, follows: Inventory, June 30, Year 2 Merchandise purchases Freight-in Sales Purchase discounts Gross profit on sales based on historical data $150,000 $800,000 $30,000 $1,400,000 $14,000 45%
Using the gross profit method, inventory in July 31, Year 2, would be estimated to be a) b) c) d) $136,000. $180,000. $196,000. $336,000.
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38.
SDG Inc. had the following activities during Year 1: January 1 April 1 August 1 October 1 150,000 shares of common stock outstanding. Issued 30,000 shares of common stock. Issued 5% stock dividend. Issued 2,000, 12% bonds that are convertible into 20 shares of common stock per bond.
Assuming the convertible bonds are dilutive, what is the weighted average number of shares to be used in calculating diluted EPS? a) b) c) d) 39. 182,500 186,250 191,125 220,000
(-) The management discussion and analysis (MD&A) is best described as a supplement that a) explains items in the financial statements. b) has a forward-looking orientation. c) attests as to whether the financial statements are free from material misstatements. d) describes accounting policies used for the financial statements.
40.
Rich Corp. adheres to IFRS and on January 1, Year 1, acquires 400,000 shares of XYZ Ltd. at $25 per share. This represents 35% of XYZs common shares. On December 31, Year 1, XYZ reports net income of $1,000,000, and the share price of XYZ is $26 per share. Assuming Rich Corp. has significant influence over XYZ, what amount should Rich Corp. report for investment income as a result of its ownership of XYZ in Year 1? a) $0 b) $350,000 c) $400,000 d) $750,000
41.
LSJ Inc. has a December 31 fiscal year-end. Based on past experience, 2% of LSJs credit sales are uncollectible. As at December 31, Year 1, the company had a credit balance of $10,000 in the allowance for uncollectible accounts. Sales for Year 2 were $3,000,000, and 70% of the sales were credit sales. During Year 2, LSJ wrote off $12,000 of uncollectible accounts from sales in Year 1 and received $6,500 as payment of an account receivable that had been written off as uncollectible in Year 1. Using the percentage-of-sales method, what credit balance should LSJ report for the allowance for uncollectible accounts in its December 31, Year 2, balance sheet? a) b) c) d) $40,000 $42,000 $46,500 $58,500
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CMA Canada
42.
(+) Presented below are the transactions of Absolute Inc. that occurred during Year 10: i) ii) iii) iv) v) vi) vii) viii) A tract of land was purchased for $18,000 cash. Sold machinery for $42,200 and recorded a loss of $5,200. Long-term notes payable in the amount of $27,800 were paid off in cash. Inventory decreased from $110,000 to $95,000. Recorded net income of $32,000. Accounts payable increased by $26,000. Accounts receivable increased by $56,000. Recorded depreciation expense of $25,000.
What would be the net increase or decrease in cash from operating activities reported on the Statement of Cash Flows for the year ended December 31, Year 10? a) b) c) d) 43. $107,200 increase $47,200 increase $1,400 increase $13,200 decrease
(+) Cross Aid Charities (CAC) received the following in Year 5: i) ii) iii) iv) v) $6,000 of restricted donations for water and irrigation project; $30,000 of restricted donations for building clinics; $10,000 of restricted contributions for the acquisition of land; $18,000 of unrestricted grants for the general fund; and $20,000 of endowment contributions.
During Year 5, the following expenses were incurred: i) ii) $4,000 spent on water and irrigation project; and $17,000 spent on Year 5 general operating activities.
CAC uses the deferral method of accounting for contributions and does not set up a separate fund for restricted donations. What is the total amount that CAC should report as revenue in the statement of operations for Year 5? a) b) c) d) $22,000 $24,000 $52,000 $84,000
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44.
GBSJ Refining, a publicly traded company, has entered into an agreement with FP Inc. to lease a specialized piece of 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 Expected life of the equipment Implicit interest rate GBSJs borrowing rate Annual lease minimum payment Fair value of the equipment 8 years 10 years 6% 4% $80,000 (made at the beginning of the year) $600,000
Based on the information given, GBSJ would recognize the equipment in the first year of the lease as a) b) c) d) 45. an operating lease of $80,000. a finance lease of $496,800. a finance lease of $526,600. a finance lease of $600,000.
TL Company purchased a machine with an estimated 6-year useful life on January 1, Year 12, for $12,000. TL Company incorrectly expensed this machine in Year 12, and the error was discovered in Year 13. Assuming TL Company uses straight-line depreciation and the Year 13 books are not closed, what would be the impact on retained earnings on December 31, Year 13, to correct this error? a) b) c) d) No impact on retained earnings. Decrease retained earnings by $4,000. Increase retained earnings by $8,000. Increase retained earnings by $10,000.
46.
(+) Erin Company is a publicly traded company. The following information is available for Erin Companys defined benefit pension plan for Year 13: Service costs Accrued benefit obligation, January 1, Year 13 Fair value of plan assets, January 1, Year 13 Actual earnings on plan assets Post-retirement benefits paid Discount rate Expected earnings on plan assets for Year 13 Cash paid into pension plan What is the balance in pension assets on December 31, Year 13? a) b) c) d) $237,500 $229,750 $272,500 $398,000 $13,800 $298,000 $172,500 $25,000 $35,000 9% 10% $75,000
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Internal Control
47. Which of the following is NOT a component of the audit risk model? a) b) c) d) 48. Inherent risk Detection risk Control risk Enterprise risk
The practice of preparing bank reconciliations every month is an example of a a) b) c) d) detective control. preventative control. corrective control. compensating control.
49.
The Board of Governors of Canadian University (CU) is addressing various risk management issues. One issue of concern is the use of unlicensed, unauthorized or pirated software on CU computers. Management was instructed to identify specific programs to address the legal issues pertaining to the use of software governed by copyright laws. Which of the following would be LEAST likely to support the Boards objectives? a) Management develops and provides a policy to all employees that the use of unauthorized or illegally copied software or data is not acceptable. b) The IT department implements a program that tracks the expiry date of all software licenses. Department managers must apply for renewal of existing licenses; otherwise, IT staff will remove the software from affected computers. c) Department managers must keep an inventory of all software purchased, including information such as the date of purchase, serial number, pertinent license information, and how outdated software is destroyed. d) The IT department implements a program of unannounced annual software audits. At least annually, IT staff will examine each university computer to ensure all software is authorized.
50.
Which of the following is a requirement of the Sarbanes-Oxley Act? Company management must a) b) c) d) certify the accuracy and completeness of financial statements. describe material changes to internal controls. verify the existence of adequate internal controls. all of the above.
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51.
In order for a fraud to be perpetrated, three conditions exist; these conditions are described as the fraud triangle. Which of the following is true? a) The primary tool used by internal audit to detect fraud is to identify risks indicated by the fraud triangle. b) Pressure on management to achieve financial targets is an example of a risk factor that may lead to misappropriation of assets. c) Appropriate controls are designed to remove the fraud factors in the fraud triangle. d) The components in the fraud triangle include pressures, opportunities and rationalization.
52.
The responsibility for establishing internal controls rests with the a) b) c) d) internal auditor. external auditor. companys management. audit committee.
53.
A strong accounting information and communication system will satisfy the transaction-related audit objectives, which include the following EXCEPT a) b) c) d) completeness. segregation of duties. classification. accuracy.
54.
The primary responsibility of the external auditor is to a) b) c) d) review an organization for efficiency and effectiveness. analyze controls to ensure operational performance in the future. recommend changes to procedures to improve operations. determine whether the financial statements are fairly presented.
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Management Accounting
55. Bird Ltd. has the following information for the past four quarters: Quarter 1 2 3 4 Maintenance Costs $120,500 $132,000 $118,750 $126,200 Machine-hours 1,200 1,550 1,210 1,445
Bird believes the cost driver is machine-hours. Using the high-low method, what is the total estimated maintenance cost for the next quarter if it uses 1,300 machine-hours (rounded to the nearest hundred)? a) b) c) d) 56. $122,300 $123,800 $119,600 $110,700
DIY Manufacturing Company produces two types of power lawn mowers, the basic and the self-propelled. Its master budget (based on expected sales) for the second quarter is as follows: Sales (units) Sales Variable expenses Contribution margin Fixed operating expenses Operating Income Basic 30,000 $6,000,000 2,400,000 $3,600,000 Self-Propelled 60,000 $18,000,000 8,100,000 $ 9,900,000 Total 90,000 $24,000,000 10,500,000 $13,500,000 7,200,000 $ 6,300,000
DIYs income tax rate is 40%. Given the sales mix and expected sales of the basic mower and self-propelled mower in the master budget, what is DIYs margin of safety ratio for the second quarter (rounded to three decimal places)? a) b) c) d) 0.467 0.875 0.481 0.929
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The following information pertains to questions 57 and 58.

On August 13, LRG Ltd. had a fire at its manufacturing plant that completely destroyed the plant and its contents. Fortunately, certain accounting records were kept in another building, and those records revealed the following for the period from July 1 to August 13: Direct materials purchased Work-in-process inventory, July 1 Direct materials, July 1 Finished goods, July 1 Indirect manufacturing costs Sales Direct manufacturing labour Prime costs Gross margin percentage based on sales Cost of goods available for sale $360,000 $640,000 $24,000 $82,000 $420,000 $1,960,000 30% of conversion costs $490,000 40% $1,500,000
The loss was fully covered by insurance, and the insurance company wants to know the historical cost of the inventories as part of negotiating a settlement. 57. What is the amount of finished goods inventory lost in the fire? a) b) c) d) 58. $100,000 $324,000 $242,000 $406,000
What is the amount of work-in-process inventory lost in the fire? a) $50,000 b) $230,000 c) $312,000 d) $132,000
-----------------------------------59. Whale Ltd. manufactures chairs and earned a gross margin of $80,000 in May, Year 13. Its cost of goods manufactured in May was $120,000, and it had the following inventory data: Work-in-process Finished goods What was the revenue for May, Year 13? a) b) c) d) $200,000 $210,000 $190,000 $230,000 May 1 $110,000 $80,000 May 31 $90,000 $70,000
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60.
(-) A target-pricing approach is best described as a) b) c) d) setting a price that focuses management on achieving a specific cost. adding a desired markup to a predetermined cost to set a price. charging certain customers a different price. charging a higher price at peak demand periods.
61.
Reed sells widgets for $100 each. The variable cost for each widget is $65, Reeds annual fixed costs are $125,000 and the tax rate is 30%. How many widgets does Reed need to sell to generate a net income of $140,000 (rounded up to the nearest ten)? a) b) c) d) 9,290 8,780 3,250 5,000
62.
QC Ltd. sells three models of gizmos with a budgeted sales mix of 5:3:1 for the Entry, Regular and Premium models, respectively. Additional model information follows: (per unit) Sales price Variable costs Entry $50 $20 Regular $65 $30 Premium $90 $45
Assuming the same sales mix and ignoring taxes, if QCs total fixed costs are $600,000, how many units of the Regular model must be sold to break even? a) b) c) d) 9,231 6,000 5,455 18,000
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63.
The budgeted operating income for RST Ltd. for next year is as follows: Sales 125,000 units @ $40 Variable manufacturing costs Fixed manufacturing costs Sales commissions $2.60 per unit Fixed selling and administration expenses Operating Income $5,000,000 $2,000,000 1,250,000 325,000 950,000
4,525,000 $ 475,000
Assume that a regular customer has asked RST to provide a quote for a special order of 20,000 units. RST has sufficient capacity to fill the order and would be required to pay only $8,000 in sales commissions for the order. If RST would like the special order to make a contribution to operating income of $48,000, the sales price per unit that should be quoted to the customer for the special order is a) b) c) d) $40.00. $20.20. $28.80. $18.80.

Cruise Ltd. has two support departments, A and B, and two production departments, Y and Z. Production is conducted in sequence from Y to Z. The distribution of actual service and production for December is as follows: Department costs Employees Maintenance hours Allocation base (cost driver) 64. A $120,000 3 80 Employees B $180,000 8 400 Maintenance hours Y $630,000 50 2,000 Units produced Z $850,000 60 2,000 Units produced
Using the direct method of common cost allocation, what are the total production costs for Department Y? a) b) c) d) $762,665 $774,915 $774,545 $780,000
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65.
Using the step-down method of common cost allocation and assuming the costs of Department A are allocated first, what are the total production costs for Department Z? a) $1,005,085 b) $996,533 c) $940,000 d) $945,454
-----------------------------------66. The Leather Division is transferring 12,000 units of leather to the Stitching Division. Costing from the Leather Division is as follows: Direct material Direct labour Variable overhead Variable selling and administration Total variable costs Fixed overhead Fixed selling and administration Total fixed costs Total Costs Selling price per unit $150,000 36,000 24,000 60,000 $270,000 165,000 $ 65,000 230,000 $500,000 $80
There was no beginning or ending inventory in the Leather Division. Based on absorption costing, the 12,000 units of leather would be transferred at a total cost of a) b) c) d) 67. $351,000. $435,000. $375,000. $500,000.
A manufacturer had sales of $1,000,000. Its cost of goods sold was $600,000, of which 85% were variable costs and 15% were fixed costs. What was the companys contribution margin? a) b) c) d) $490,000 $400,000 $910,000 $600,000
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Orange Ltd. manufactures juice with two different ingredients: 100% of Ingredient A is added at the beginning of the production process; 100% of Ingredient B is added when the juice is 60% complete. Conversion costs are added uniformly throughout the entire production process. Quality testing is conducted at the 60% conversion point prior to adding Ingredient B. Rejected units at quality testing are accounted for as spoilage, and spoilage is included in equivalent units of output. Production data for May, Year 5, are as follows: Work-in-process inventory, May 1 (20% converted) Started in production Completed production Work-in-process inventory, May 31 (80% converted) 68. 40,250 units 85,000 units 90,000 units 34,950 units
(+) Assume Orange Ltd. uses a first-in, first-out (FIFO) process costing system. For May, what are the equivalent units of production for conversion costs? a) 85,940 b) 109,910 c) 110,090 d) 150,160
69.
(+) For May, direct material costs incurred and in beginning work-in-process inventory totalled $220,000 for Ingredient A and $350,000 for Ingredient B. Using weightedaverage, what is the cost per equivalent unit for Ingredient A and Ingredient B? a) b) c) d) $2.59 and $2.80 $1.76 and $2.80 $2.59 and $3.89 $2.44 and $3.89
-----------------------------70. Normal costing is the method that allocates overhead costs by using the a) b) c) d) 71. estimated overhead allocation rate and the actual quantity of the allocation base. actual overhead allocation rate and the actual quantity of the allocation base. actual overhead allocation rate and the estimated quantity of the allocation base. estimated overhead allocation rate and the estimated quantity of the allocation base.
A company had monthly sales of $612,000 with a favourable static-budget variance of $50,000 and a favourable selling-price variance of $10,000. If the sales-volume variance was $60,000 favourable, what was the flexible-budget variance? a) b) c) d) $70,000 favourable $100,000 favourable $20,000 unfavourable $10,000 unfavourable
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72.
Mary is the manager of Division A, which makes widgets. Division A is classified as a cost centre. Which of the following would be the most appropriate performance measurement for Mary? a) b) c) d) Residual income of Division A. Direct material costs of the widgets. Gross margin of the widgets. Return on assets of Division A.

HWW Inc. has a job-order costing system. The company uses predetermined overhead rates in applying manufacturing overhead cost to individual jobs. The predetermined overhead rate in Department A is based on machine-hours, and the rate in Department B is based on direct materials cost. The company has the following estimates for the year: Department Machine-hours Direct labour-hours Direct materials cost Direct labour cost Manufacturing overhead cost A 50,000 45,000 $250,000 $300,000 $395,000 B 68,000 60,000 $220,000 $280,000 $455,000
Job 2013 was completed on May 31 with the following cost information: Department Machine-hours Direct materials cost Direct labour cost 73. A 500 $27,000 $31,000 B 550 $20,000 $32,000
What are the predetermined overhead rates for Department A and Department B? a) b) c) d) $7.20 and 1.809 $8.78 and 2.068 $7.20 and 1.625 $7.90 and 2.068
74.
Now assume the predetermined rate for Department A is $8 and for Department B, 2.15. What is the total cost applied to Job 2013? a) b) c) d) $105,000 $172,450 $157,000 $118,400
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75.
OEM Company consists of several divisions. Each division operates as a profit centre with full autonomy. Division B informed Division A that it has changed its transfer pricing policy from variable-cost plus to full-cost plus pricing. Division A decided to purchase component EX1 outside the company when Division B increased the transfer price from $156 to $164 per unit. Information for Division A and Division B with respect to component EX1 is as follows: Outside price for component EX1 Division As annual purchases Division Bs variable manufacturing cost Division Bs fixed manufacturing cost Division Bs production capacity Division Bs capacity utilization $160 10,000 units $120 per unit $1,000,000 50,000 units 100%
All units of component EX1 produced by Division B can be sold in the open market. Variable selling cost is $7 per unit for external sales. All other selling and administrative costs are fixed, regardless of the customer. Division B will sell component EX1 to external customers at the market price of $160 per unit. Which of the following statements is true? a) Division A purchases 10,000 units of component EX1 from the outside supplier at a price of $160, and the company saves $40,000 in costs. b) Division B sells 10,000 units of component EX1 to Division A at $164, and the company income increases by $110,000. c) Division A purchases 10,000 units of component EX1 from Division B because Division B has idle capacity if Division A purchases the component externally. d) Division A purchases 10,000 units of component EX1 from Division B, and the company income increases by $70,000.

Maryville Company uses three types of chemicals in manufacturing lawn fertilizer. The standard amount of chemicals X, Y and Z used in manufacturing one bag of lawn fertilizer is 5 kg, 7 kg and 8 kg, respectively. The budgeted purchase prices of chemicals X, Y and Z are $1.00 per kg, $0.40 per kg and $0.20 per kg, respectively. Actual operating data for 20,000 bags of lawn fertilizer produced in May are as follows: Chemical X Chemical Y Chemical Z Input Quantity (kg) 97,900 132,000 210,100 Input Price $1.05 $0.36 $0.18
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76.
What is the direct materials efficiency (quantity) variance for all three chemicals in total? a) b) c) d) $15,320 unfavourable $3,933 unfavourable $11,120 unfavourable $4,720 unfavourable
77.
Which of the following is true? a) b) c) d) Direct materials price variance for Chemical X is favourable. Direct materials mix variance for Chemical Y unfavourable. Direct materials yield variance for all three chemicals in total is unfavourable. All of the above.
-----------------------------------78. WCD Inc., a manufacturer of consumer products, has adopted the following costleadership strategy: achieve low costs relative to competitors through productivity and efficiency improvement, elimination of waste and tight cost controls. In designing a balanced scorecard to measure the performance of the company, which of the following objectives would be appropriate from the internal business perspective? a) b) c) d) 79. Develop advanced manufacturing capabilities to produce custom products. Reduce all inventory levels. Increase market share. Develop employee communication skills.
(+) TIH Ltd. has the following results for two of its divisions. Revenues Operating income Average operating assets Target rate of return North Division $1,750,000 $450,000 $1,950,000 15% Central Division $2,900,000 $600,000 $2,395,000 18%
After analysis of these results, you conclude that the: a) Central Division outperformed the North Division because it had a higher profit margin. b) North Division outperformed the Central Division because it required fewer assets to achieve its targets. c) North Division outperformed the Central Division because it generated a better return on investment and residual income. d) Central Division outperformed the North Division because it generated a better return on investment and residual income.
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80.
RG Inc. operates as a decentralized multidivisional company. The West Division purchases most of its assembly parts from the East Division, which currently has sufficient excess capacity to meet the West Divisions parts requirements. The East Divisions incremental costs for manufacturing the parts are $50 per unit, and the current market price is $90. Assuming the divisions are treated as profit centres, which of the following statements is true? a) The minimum transfer price the East Division is willing to accept on sales to the West Division is $50. b) The minimum transfer price the East Division is willing to accept on sales to the West Division is $90. c) The maximum transfer price the West Division is willing to pay on purchases from the East Division is $90. d) Both a) and c) above.

Petro Ltd. refines raw oil into several different products and in one month produces 50,000 units of Product A and 40,000 units of Product B. Each unit of A can be sold for $14 and each unit of B can be sold for $20. The monthly joint costs are $600,000. All units produced are sold, and there is no beginning inventory. 81. Using the sales value at split-off method, what are the joint allocation costs for Product B (rounded to the nearest thousand)? a) b) c) d) 82. $280,000 $353,000 $320,000 $267,000
Using the physical measure method, what are the joint allocation costs for Product A (rounded to the nearest thousand)? a) b) c) d) $333,000 $267,000 $280,000 $353,000
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83.
A company has the following unit production data for June: Work-in-process inventory, June 1 Started in production Completed production Work-in-process inventory, June 30 118,000 254,500 251,500 111,950
The company expects normal spoilage of 2% of completed goods. What is the abnormal spoilage for June? a) b) c) d) 84. 5,030 3,000 4,020 9,050
(-) For a manufacturing company, which of the following statements is true? a) b) c) d) Wages paid to manufacturing labour are period costs. Salaries paid to the sales manager are product costs. Wages paid to the receptionist in the human resources office are period costs. Stationery and supplies used by the bookkeeping clerk in the accounting office are product costs.
85.
A company has the following quarterly sales information: Cash sales Credit sales Q1 (Actual) $150,000 $325,000 Q2 (Budgeted) $175,000 $330,000
60% of credit sales are collected in the quarter of the sale, and remaining credit sales are collected in the quarter after that. The company expects 3% of credit sales to be uncollectable. What is the budgeted cash received in Q2? a) b) c) d) $318,160 $503,000 $367,060 $493,160
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Lizas Flowers had the following unit sales results for February: Budgeted Sales 5,500 6,500 Budgeted Contribution Margin $1.25 $0.75 Actual Sales 6,500 6,000 Actual Contribution Margin $1.15 $0.80
Roses Tulips 86.
What is the favourable sales-volume variance for roses? a) $1,250 b) $1,150 c) $550 d) $650
87.
What is the favourable sales-mix variance (rounded to the nearest dollar)? a) b) c) d) $123 $250 $385 $500
-----------------------------------88. Glory Ltd. sells tires. In March it sold 5,000 tires and had an inventory of 3,500 tires on March 1. For April, budgeted sales are 5,250 tires and budgeted ending inventory is 3,000 tires. If there were 3,300 tires in inventory on March 31, how many tires should Glory purchase in April? a) b) c) d) 89. 4,950 8,250 4,450 1,750
If total sales volume variance is $2,100 unfavourable, total sales mix variance is $900 favourable, and market share variance is $500 favourable, then the market size variance is a) b) c) d) $2,500 unfavourable. $1,700 unfavourable. $700 unfavourable. $3,500 unfavourable.
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90.
XY Manufacturing Ltd. had the following inventory data for July, Year 14: Direct materials Work-in-process Finished goods July 1 $140,000 $40,000 $65,000 July 31 $135,000 $42,000 $70,000
Actual costs incurred in July include direct materials purchases of $100,000, direct labour of $250,000 and manufacturing overhead of $125,000. What is the cost of goods manufactured for July using absorption costing? a) b) c) d) 91. $478,000 $480,000 $473,000 $355,000
DHC Ltd. produces X, Y and Z through a joint production process. It can further refine all of Product X into X-Plus. The following information is available: i) ii) iii) iv) Selling price per unit of X-Plus Cost of the additional refining to produce X-Plus Joint costs to produce X Selling price of X
Which of the above information is relevant to the decision to further refine Product X? a) b) c) d) 92. i) only i) and ii) only iii) and iv) only i), ii) and iv) only
A company is considering the following projects: Annual after-tax cash inflows Initial project cost Cost of capital Project life J $950,000 $5,000,000 7% 7 years M $1,000,000 $5,000,000 10% 8 years V $1,100,000 $5,000,000 12% 7 years
Based only on profitability index, which project(s) should the company invest in? a) b) c) d) Only J Only M Only V All three projects
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Taxation
93. BG Ltd. is a large grocery store. Which of the following would be considered income from property for BG? a) b) c) d) 94. Gross profit from sales of groceries. Dividends received from investments in bonds. Proceeds from a sale of a BG delivery truck. Rebate received from a supplier.
On July 1, Year 7, Michelle sold a piece of land for $300,000 that had an adjusted cost base of $150,000. Michelle received payment of $150,000 on July 1, Year 7, and will receive $150,000 on July 1, Year 8. Costs incurred to sell the land were $15,000. What is the minimum net taxable capital gain that Michelle could legitimately claim in Year 7? a) $33,750 b) $67,500 c) $0 d) $75,000
95.
Gord Green is an employee of his wifes business that is operated as a proprietorship. He is paid an annual salary of $50,000 plus 10% vacation pay. Gord received a prize of a weekend holiday valued at $1,000 for having the highest sales for the second quarter. What is Gords employment income? a) b) c) d) $51,000 $55,000 $55,500 $56,000
96.
(+) RHM Ltd. had income for accounting purposes before taxes of $2,500,000 in Year 10. In calculating this amount, expenses included $325,000 for depreciation, $10,000 in charitable donations, $80,000 accounting loss on disposal of an asset, and $40,000 in entertainment expenses. The capital cost allowance claimed for Year 10 is $247,000. The companys net income for tax purposes for Year 10 is a) b) c) d) $2,678,000. $2,668,000. $2,688,000. $2,532,000.
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97.
A Class 8 asset (20% rate) was originally purchased on January 1, Year 1, at a cost of $125,000. During Year 12 the asset was disposed of for proceeds of $10,000. The UCC balance on January 1, Year 12, was $15,000. This was the only asset remaining in the pool. What is the impact of this transaction on the Year 12 taxable income? a) A recapture of $5,000 will be added to taxable income. b) Capital cost allowance of $3,000 and a terminal loss of $5,000 may be deducted against other taxable income. c) A terminal loss of $5,000 may be deducted against other taxable income. d) Capital cost allowance of $3,000 and a recapture of $5,000 will be added to taxable income.
98.
Willow Company qualifies for the small business deduction. At the end of Year 12, Willow had active business income of $330,000 and taxable income of $315,000. What is Willows small business deduction for Year 12? a) $56,100 b) $15,000 c) $170,000 d) $53,550
99.
Which of the following would be considered a deemed disposition under the provisions of the Income Tax Act? a) b) c) d) Bill sells equipment to Joan and will receive payment in weekly installments. Jack exchanges a sofa for a bed with Jill. Ruth sells shares on the public stock exchange and earns a capital gain of $1,000. Sally starts a driver training school and uses her personal car entirely for instruction.
100.
A company paid $80,000 in Year 1 for a customer list. In calculating its taxable income for Year 1, what is the maximum deduction that it can claim relating to this expenditure? a) $4,200 b) $0 c) $2,800 d) $5,600
End of Exam
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SOLUTIONS
1. Answer: b. The maximum amount that JK Inc. is willing to pay is the present value of the incremental cash flows using a discount rate of 12%. Years 1 to 2 present value of operating after-tax cash flows = $180,000 x (1-35%) x 1.690 = $197,730 Year 4 and beyond present value of operating after-tax cash flows brought back to end of Y3/beginning of Y4 = [$240,000 x (1-35%)] / 0.12 x 0.712 = $925,600 Year 5 present value of operating after-tax cash inflows = [$700,000 x (1-35%)] x 0.567 = $257,985 Net present value = $197,730 + $925,600 + $257,985 = $1,381,315 = $1,381,000 (rounded) Choice a) Use before tax amount = ($180,000 x 1.690) + ($240,000 / 0.12 x 0.712) + ($700,000 x 0.567) = $304,200 + $1,424,000 + $396,900 = $2,125,100 = $2,125,000 Choice c) Does not use PV = ($180,000 x (1-35%) x 2) + ($240,000 x (1-35%) / 0.12) + (700,000 x (1-35%)) = $234,000 + $1,300,000 + 455,000 = $1,989,000 Choice d) Does not use PV for $240,000 = ($180,000 x (1-35%) x 1.690) + ($240,000 x (1-35%) / 0.12) + ($700,000 x (1- 35%) x 0.567) = $197,730 + $1,300,000 + $257,985 = $1,755,715 = $1,756,000 2. Answer: d. In the case of bankruptcy, the claim of the creditors on the companys assets takes precedence over the claim of the preferred shareholders, and the claim of the preferred shareholders takes precedence over the claim of the common shareholders. Therefore, bondholders have priority over preferred shareholders in a claim of the assets. Choices a) and b) Both are the true statements of the preferred stock features. Choice c) Preferred stock is a hybrid security, containing characteristics of both debt and common equity. Like common equity, cash dividends paid to preferred shareholders are not an allowable deduction for tax purposes; however, interests paid on debt are tax-deductible for the firm.
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3.
Answer: b. Year Buy New Equipment Cost of new equipment Salvage value of old equipment Salvage value of new equipment Annual operating costs Revenue Total 1 1 5 1-5 1-5 Cash Flow $(200,000) $30,000 $100,000 $(10,000) $90,000 PV Factor 1 1 0.747 4.212 4.212 PV of Cash Flows $(200,000) $30,000 $74,700 $(42,120) $379,080 $241,660 $(9,000) $(8,400) $(50,544) $294,840 $3,735 $230,631 $11,029
Keep Old Equipment Repairs immediately 1 Repairs at the end of 3 years 3 Annual operating costs 1-5 Revenue 1-5 Salvage value of old equipment 5 Total NPV in favour of buying new equipment
$(9,000) $(10,000) $(12,000) $70,000 $5,000
1 0.84 4.212 4.212 0.747
Choice a) Excludes salvage value of old equipment: = $11,029 - $30,000 = $(18,971) Choice c) Excludes repairs at the end of 3 years: = $11,029 + $8,400 = $19,429 Choice d) Does not use present value factors for operating costs and revenue: Buy new equipment = -$200,000 + $30,000 + $74,700 - $50,000 + $450,000 = $304,700 Keep old equipment = -$9,000 - $8,400 - $60,000 + $3,735 + $350,000 = $276,335 NPV in favor of buying new equipment: $304,700 - $276,335 = $28,365 4. Answer: c. Special dividends are most likely to increase shareholders wealth because they are usually used to distribute the excess profits to shareholders after a period of unusually high earnings. Choices a) and b) Stock dividends and stock splits are distribution of additional shares to a firms shareholder. As a result, the number of shares will increase, and the price per share will decrease. Therefore, there is no impact on overall shareholders wealth. Choice d) Reverse splits are the opposite of stock splits. The number of outstanding shares is reduced by issuing the new shares in exchange for old shares. Because the number of shares is reduced, the price per share will increase; therefore, this will likely have no impact on overall shareholders wealth.
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5.
Answer: b. Additional cash saved is calculated as follows: Annual A/R savings: [(28 days - 23 days) / 365 days] x ($800,000 x 1.05) = $11,506.85 Annual A/P savings: [(28 days - 20 days) / 365 days] x ($500,000 x 1.06) = $11,616.44 Additional cash savings in Year 3: $23,123.29 Choice a) Calculated by factoring solely the change in the days in A/R. Choice c) Calculated by factoring solely the change in the days in A/P. Choice d) Does not use increased amount of annual sales and cost of goods sold: Annual A/R savings: [(28 days - 23 days) / 365 days] x $800,000 = $10,958.9 Annual A/P savings: [(28 days - 20 days) / 365 days] x $500,000 = $10,958.9 Total savings in Year 3: $21,917.81
6.
Answer: d. Effective annual rate (EAR) = [1+(Quoted rate/m)]m-1 Monthly compounding: [1 + (12%/12)]12 - 1 = 0.1268 = 12.68%; Total amount = $150,000 x 1.1268 = $169,020 Choice a) Stated/Quoted annual interest rate: 12%; Total amount = $150,0000 x 1.12 = $168,000 Choice b) Compound semi-annually: (1+12%/2)2 - 1 = 0.1236 = 12.36%; Total amount = $150,000 x 1.1236 = $168,540 Choice c) Compound quarterly: (1+12%/4)4 - 1 = 0.1255 = 12.55%; Total amount = $150,000 x 1.1255 = $168,825
7.
Answer: c. The price of the bonds when the investor purchased them is not relevant to the current market price. The current market value is equal to the present value of the future cash flow, using 13 periods at 4%: (N=13, i=4%, PMT=$4,200, FV=70,000) ($70,000 x 0.601) + ($4,200 x 9.986) = $42,070 + $41,941.20 = $84,011.20 = $84,000 (rounded) Choice a) Uses the coupon rate: ($70,000 x 0.469) + ($4,200 x 8.853) = $32,830 + $37,182.60 = $70,012.60 = $70,000 (rounded) Choice b) Does not use PV of the principal: $70,000 + ($4,200 x 9.986) = $111,941.20 = $112,000 (rounded) Choice d) Uses the face value only: $70,000 + (13 x $4,200) = $124,600
8.
Answer: a. Secondary market: Market in which already issued securities are traded among investors. Choices b) to d) are examples of primary market instruments.
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9.
Answer: a. The total cost of the preferred shares: Par value: $ 120 Issue cost: $ (2.63) $4.25 x (1 - 0.38) Net proceeds: $117.37 Dividend per share: $8.50 Cost per share = $8.50/$117.37 = 7.24% Choice b) Does not consider the issue cost: $8.50 / $120 = 7.08% Choice c) After-tax dividend is used for the calculation: $8.50 x (1 - 0.38) / $117.37 = 4.49% Choice d) No tax considered: $8.50 / ($120 - $4.25) = 7.34%
10.
Answer: b. Company A = 3% + [1.5 x (7.5%-3%)] = 9.8%; this does not meet the expectation of 12%. Company B = $6.00/12% = $50; as the share price is $45, this meets the expectation. Company C = ($3.80x1.015)/(12%-1.5%) = $36.73; as the share price is $38, this does not meet the expectation. Answer: b. After-tax cost of debt = 8% x (1 - 0.37) = 5%; Cost of preferred shares = 6%; Cost of common shares = 17% Total long-term debt (Total liability - Current liability) + Equity = $7M + $3M + $10M = $20M WACC = (5% x 7/20) + (6% x 3/20) + (17% x 10/20) = 1.75% + 0.90% + 8.5% = 11.15% ~ 11.2% Choice a) Uses total liability: WACC = (5% x 8.5/21.5) + (6% x 3/21.5) + (17% x 10/21.5) = 1.98% + 0.84% + 7.91% = 10.73% ~ 10.7% Choice c) Ignores tax on debt: WACC = (8% x 7/20) + (6% x 3/20) + (17% x 10/20) = 2.80% + 0.90% + 8.5% = 12.20% Choice d) Uses average of all three rates: (8+6+17)/3 = 10.33% ~ 10.3%
11.
12.
Answer: a. CAPM = Rf + (Rm-Rf) = 2.0% + 1.5(4.5%) = 8.75% Choice b) Ignores risk-free rate: = 1.5(4.5%) = 6.75% Choice c) Calculation was done by adding together the risk premium and Rf: = 2.0% + 1.5(4.5% + 2.0%) = 11.75% Choice d) The risk premium was treated as market return: = 2.0% + 1.5(4.5% - 2.0%) = 5.75%
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13.
Answer: a. Mutually exclusive means that only one project in a set of possible projects can be accepted and that the projects compete with each other. Therefore, the project with the highest NPV should be accepted. PV of Project A: ($7,000x3.791)=$26,537 (N=5, i=10%, CF=$7,000) NPV of Project A: $26,537-$16,000=$10,537 PV of Project B: ($7,500x3.170)=$23,775 NPV of Project B: $23,775-$20,000=$3,775 (N=4, i=10%, CF=$7,500) Choice b) Incorrectly compares NPV. Choice c) Accepts projects with positive NPVs considering the projects as independent projects. Choice d) Incorrectly applies NPV concept.
14.
Answer: d. Current Degree of Total Leverage (DTL) = Degree of Operating Leverage (DOL) x Degree of Financial Leverage (DFL) DTL = DOL x DFL 2.10 = 1.20 x DFL DFL = 2.10 / 1.20 = 1.75 DFL = Percentage change in EPS/Percentage change in EBIT Therefore, Percentage change in EPS = 1.75 x 15% = 26.25% Choice a) Uses DOL x increase = 1.20 x 15% = 18% Choice b) Uses DTL x increase = 2.10 x 15% = 31.5% = 32% (rounded) Choice c) Uses gross profit margin % and increase = 60% x 15% = 9%
15.
Answer: c. P/E ratio = Market Value per Share/Earnings per Share (EPS) $12.67/$1.12 = 11.31 Choice a) Uses EBIT to get EPS: $12.67/($900,000/500,000) = $12.67/$1.80 = 7.04 Choice b) Uses book value: ($5,100,000/500,000)/$1.12 = $10.20/$1.12 = 9.11 Choice d) Uses formula incorrectly: $1.12x$12.67 = 14.19
16.
Answer: d. A poison pill is a financial device designed to make the target firms stock less attractive to the acquirer. It entails issuing special securities to existing shareholders that entitle them to unusual rights and privileges (such as unusual voting rights, lucrative redemption features or generous conversion options) if the issuing firm becomes the target of a takeover bid. Choice d) is an example of such a financial device. Choice a) Choice b) Choice c) This is an example of a supermajority amendment. This is an example of greenmail. This is an example of crown jewels.
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17.
Answer: c. i) and iv) are correct statements regarding systematic risks: i) Systematic risk is a risk that influences a large number of assets. Because systematic risks have market-wide effects, they are also called market risks. iv) The beta coefficient indicates how sensitive the return of a particular asset is with respect to the general market condition and measures how much systematic risk a particular asset has relative to an average asset (i.e. an average asset has a beta of 1). Choices a), b) and d) ii) and iii) are not correct statements regarding systematic risks: ii) Unlike unsystematic risks, systematic risks cannot be eliminated by diversification. A systematic risk affects almost all assets to some degree; as a result, no matter how many assets are put into a portfolio, the systematic risk cannot be eliminated. iii) The variance is the average squared deviation between the actual return and the average total return of assets. It is a measure of total risks, which includes both systematic and unsystematic risk.
18.
Answer: d. Value of a right = ($30-$24)/(4+1) = $1.20 Choice a) This is correct if the market price of a share is less than the subscription price of a share with four rights. Choice b) Multiplies the cash required by the number of rights and divides by the current value of the shares: ($24 x 4)/$30=$3.20 Choice c) Incorrectly uses the number of rights as a denominator: ($30-$24)/4=$1.50
19.
Answer: c. Since Hill Charity earned over $2,000,000 (or a minimum average of $1,000,000 in the last two years), it is not exempt from the capital assets rule. Therefore, the contributed capital assets should be recorded at fair value. Answer: b. Current ratio = (cash + short-term investments + accounts receivable + inventory) / current liabilities = ($30+$2+$41+$34)/$60 = 1.78 Choice a) Uses quick ratio instead: ($30 + $41 + $2)/$60 = 1.21 Choice c) Uses total assets and total liabilities: $238/$111 = 2.14 Choice d) Uses total assets in numerator: $238/$60 = 3.96
20.
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21.
Answer: c. Times interest earned = Income before interest and taxes Interest = ($64+$47+$18)/$18 = 7.17 times Choice a) Uses net income: $64/$18 = 3.55 times Choice b) Uses net income before tax but after interest expense: ($64+$47)/$18 = 6.17 times Choice d) Uses sales instead of income before interest and taxes: $300/$18 = 16.7 times
22.
Answer: c. Accounts receivable turnover in days = 365/[Net sales/Average net accounts receivable] or Average net accounts receivable/Net credit sales x 365 days = 365/{($300)/[($41 + $50)/2]} = 55.36 (55.3583) days Choice a) Uses formula incorrectly: $300/{(365)/[($41 + $50)/2]} = 37.40 (37.397) days Choice b) Uses Year 2 accounts receivable: 365/($300/$41) = 49.88 days Choice d) Uses Year 1 accounts receivable: 365/[$300/$50] = 60.83 days
23.
Answer: a. Expected Profit Calculation [Year 1] % of completion = $5,000/($5,000+$35,000) = 12.50% Expected profit = $50,000 - ($5,000+$35,000) = $10,000 x 12.50% = $1,250 [Year 2] % of completion = ($5,000+$19,000)/($5,000+$19,000+$13,500) = 64% Expected profit = $50,000 - ($5,000+$19,000+$13,500) = $12,500 x 64% = $8,000 $8,000 is cumulative profit to the end of Year 2 $8,000 - $1,250 (the expected profit in Year 1) = $6,750 Choice b) Does not deduct the profit in Year 1 = $8,000 Choice c) Uses only Year 2 cost information and ignores cost and profit in Year 1 % of completion = $19,000 / ($19,000+$13,500) = 58.46% Expected profit = $50,000 - ($19,000+$13,500) = $17,500 x 58.46% = $10,231 Choice d) No calculation for % of completion and no consideration about the profit recognized in Year 1 = $50,000 - ($5,000+$19,000+$13,500) = $12,500
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24.
Answer: d. Since YGO Inc. has significant influence over DNO Inc., the investment must be accounted for using the Equity Method. The investment in DNO Inc. = $600,000 (initial) - 45% x $150,000 (dividends) + 45% x $95,000 (income) = $600,000 - $67,500 + $42,750 = $575,250 Choice a) The dividends are added instead of being deducted: $600,000 + $67,500 + $42,750 = $710,250 Choice b) The current value is used for initial investment: ($11.50 x 60,000) $67,500 + $42,750 = $665,250 Choice c) The dividends are not considered: $600,000 + $42,750 = $642,750
25.
Answer: c. HB 4410: An organization may choose to recognize contributions of materials and services, but should do so only when a fair value can be reasonably estimated and when the materials and services are used in the normal course of the organization's operations and would otherwise have been purchased. Answer: c. Since the combination is occurring with an exchange of cash the new balance sheet will be: FRI Ltd. Current assets ($140k+$85k-$111k) $114,000 Non-current assets ($85k+$55k) 140,000 Total Assets Liabilities ($15k+$29k) Common stock (FRI Ltd.) Retained earnings (FRI Ltd.) Total Liabilities and Equity $254,000 $ 44,000 160,000 50,000 $254,000
26.
Choice a) Common stock of both companies = $160k + $76k = $236k Choice b) Common stock of both companies and END Ltd.s retained earnings = $160k + $76k + $35k = $271k Choice d) Uses total assets less liabilities of combined companies for common stock = $225 + $140 - $111 - $15 - $29 = $254 - $44 = $210k
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27.
Answer: d. Warranty liability and warranty expense recorded in Year 1: $650,000 x 0.5% = $3,250 Warranty liability balance at the end of Year 1 / beginning of Year 2: $1,900 Cr. Warranty repairs incurred and recorded in Year 1: $3,250 - $1,900 = $1,350 Year 1 warranty liability with a correct estimate: $650,000 x 0.4% = $2,600 Therefore, warranty liability was overstated by: $3,250 - $2,600 = $650 The beginning warranty liability balance of Year 2 after adjustment is: $1,900 - $650 = $1,250 Cr. Year 2 warranty liability = $700,000 x 0.4% = $2,800 Cr. Year 2 ending balance = $2,800 + $1,250 = $4,050 Cr. Choice a) Ignores Year 2 beginning balance: $2,800 Choice b) Ignores adjustment: $2,800 + $1,900 = $4,700 Choice c) Adds the adjustment: Year 2 beginning balance: $1,900 + $650 = $2,550 Year 2 ending balance: $2,800 + $2,550 = $5,350
28.
Answer: d. Tax loss carry backs can go back up to three years. Year Taxable Income Income Tax Recovery 6 $40,000 $12,000 7 $72,000 $21,600 8 $55,000 $16,500 Total $167,000 $50,100 Choice a) Does not use the three-year rule and recovers additional tax from Year 5. Year Taxable Income Income Tax Recovery 5 $33,000 $9,900 6 $40,000 $12,000 7 $72,000 $21,600 8 $55,000 $16,500 Total $200,000 $60,000 Choice b) Recovers back only two years: $21,600 + $16,500 = $38,100 Choice c) Recovers back only one year.
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29.
Answer: d. The pension-related expense is increased by the interest cost accrued to employees on the pension obligation. Therefore, increasing the interest rate would increase the net interest cost and hence the pension-related expense. Choice a) decreases the value of the pension plan assets and the accrued pension benefits (net defined benefit liability) by the same amount. There is no effect on the pension-related expense. Choice b) increases the value of the pension plan assets, indirectly reducing the pension-related expense for the year. Choice c) would result in an actuarial gain from the pension fund assets. This gain would either have no effect on the pension-related expense (if it is a small amount), or would effectively decrease the pension-related expense under ASPE. Under IFRS it would affect other comprehensive income, not an expense account on the P&L.
30.
Answer: b. Site restoration obligation at December 31, Year 16: = $300,000 FV, n = 9 years, I = 6%) = ($200,000 + $100,000) x .592 = $177,600 Choice a) The additional ARO is not considered: = $200,000 FV, n=9, i=6% = $200,000x0.592=$118,400 Choice c) Only PV for the additional ARO: = $100,000 FV, n=9, i=6% = $100,000x0.592=$59,200 Choice d) No PV for all ARO: = $100,000+200,000
31.
Answer: b. Purchase Price - Net Assets Acquired = Purchase Price Discrepancy - FV Adjustments (-230,000+140,000+50,000) = Goodwill $1,600,000 $(750,000) $850,0000 $(40,000) $810,000
Choice a) Uses retained earnings and common shares as goodwill: = $220 + $530 = $750 Choice c) Uses net identifiable assets at book value: Book value of the net identifiable assets = $4,300 - $3,550 = $750 Goodwill = $1,600 - $750 = $850 Choice d) Uses long-term assets and liabilities only: = ($300 + $120 + $2,830 + $945) - ($2,700 + $760) = $735 Goodwill = $1,600 - $735 = $865
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32.
Answer: d. YG Ltd. will record the transactions as follows: Dr. August 31, Year 2 Inventory (USD 100,000 x $1.25 CAD) A/P September 30, Year 2 A/P ([$1.25 - $1.20] x USD 100,000) FX gain/loss January 31, Year 3 A/P (125,000 - 5,000) FX gain/loss Cash ($1.32 x 100,000) 125,000 125,000 5,000 5,000 120,000 12,000 132,000 Cr.
Choice a) Only considers the exchange rate at the time of payment: FX gain/loss = ($1.25 - $1.32) x USD 100,000 = -$7,000 in Year 3, no FX gain/loss in Year 2 Choice b) Only considers the exchange difference at time of payment: FX gain/loss = ($1.20 - $1.32) x USD 100,000 = -$12,000 in Year 3, no FX gain/loss in Year 2 Choice c) Uses initial exchange rate to compare the exchange rate at the time of payment. FX gain/loss = ($1.25 - $1.32) x USD 100,000 = -$7,000 in Year 3 = ($1.25 - $1.20) x 100,000 = $5,000 in Year 2 33. Answer: a. Operating income = $90,000 + $30,000 (accrued sales) - $18,000 (COGS) + $24,000 (prepaid rent for Year 3) - $1,000 (prorated amortization expense) - $3,500 (interest expense) = $121,500 Prorated amortization = $10,000/5 = $2,000/year = $2,000 x = $1,000 for 6 months (July 1 to December 31, Year 2) Choice b) COGS was not deducted: = $90,000 + $30,000 (accrued sales) + $24,000 (prepaid rent for Year 3) - $1,000 (amortization) - $3,500 (interest expense) = $139,500 Choice c) The amortization was calculated for the whole year: = $90,000 + $30,000 (accrued sales) - $18,000 (COGS) + $24,000 (prepaid rent for Year 3) - $2,000 (amortization) - $3,500 (interest expense) = $120,500 Choice d) The rent was not added back: = $90,000 + $30,000 (accrued sales) - $18,000 (COGS) - $1,000 (amortization) - $3,500 (interest expense) = $97,500
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34.
Answer: c. IFRS 8 requires an entity to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria: [IFRS 8.13] its reported revenue, from both external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments; or the absolute measure of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of: o (i) the combined reported profit of all operating segments that did not report a loss and (ii) the combined reported loss of all operating segments that reported a loss; or its assets are 10 per cent or more of the combined assets of all operating segments. Segment A B C D Total Revenue 60.1% O 27.5% O 6.5% X 5.8% X 100% Operating Profit (Loss) 12/24=50% O 11/24=45.8% O 4/24=16.7% O 1/24=4.2% X Assets 57.3% O 28.8% O 7.1% X 6.7% X 100%
Since segments A, B and C meet the quantitative thresholds, choice c) is the correct answer. Segment D does not meet the quantitative thresholds; therefore, choice d) is incorrect. 35. Answer: a. Since Innov is unable to sell the new product, it cannot be recognized as an asset. Therefore, all costs must be expensed. Choice b) Assumes all costs except advertising can be capitalized. Choice c) Assumes all costs can be capitalized. Choice d) Assumes materials to build and test can be capitalized. 36. Answer: a. It is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. Therefore, the revenue from the equipment should be recognized separately from the service agreement. Using the fair value method: Revenue from service agreement = $300,000 x [$80,000/($240,000 + $80,000)] = $75,000 Choice b) Assumes nothing is deferred. Choice c) Assumes fair value of the service contract is deferred. Choice d) Assumes the difference is deferred: $300,000 - $240,000 = $60,000
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37.
Answer: c. Ending inventory = opening inv. + (purchases + freight - purchase discount) - cost of goods sold (COGS) = sales x (1 - gross profit) COGS = $1.4M x 0.55 = $770,000 Ending inventory = 150,000 + (800,000 + 30,000 - 14,000) - 770,000 = $196,000 Choice a) Deducts freight-in instead of adding it: Ending inventory = $150,000 + ($800,000 - $30,000 - $14,000) - $770,000 = $136,000 Choice b) Freight and discount are not considered: Ending inventory = $150,000 + $800,000 - $770,000 = $180,000 Choice d) 45% is used for COGS instead of 1-45% (55%) COGS = $1.4M x 0.45 = $630,000 Ending inventory = $150,000 + ($800,000 + $30,000 - $14,000) - $630,000 = $336,000
38.
Answer: c. Basic shares = {[150,000x(12/12)] + [30,000x(9/12)]} x 1.05 = 181,125 Diluted shares = 181,125 + [40,000x(3/12)] = 191,125 Choice a) Does not consider retroactive treatment of stock dividend: Basic shares = [150,000x(12/12)] + [30,000x(9/12)] = 150,000 + 22,500 = 172,500 Diluted shares = 172,500 + [40,000x(3/12)] = 182,500 Choice b) The stock dividend is weighted: Basic shares = [150,000x(12/12)] + [30,000x(9/12)] + [180,000x0.05x(5/12)] = 150,000 + 22,500 + 3,750 = 176,250 Diluted shares = 176,250 + [40,000x(3/12)] = 186,250 Choice d) Does not use weighted average method: Basic shares = 150,000 + 30,000 = 180,000 Diluted shares = 180,000 + 40,000 = 220,000
39.
Answer: b. One of the disclosure principles in the Guidance on Preparation and Disclosure states that the MD&A should be forward-looking. Choice a) This is an objective of the financial statement disclosure notes. Choice c) This is an objective of the auditors report. Choice d) This is contained in the financial statement disclosure notes.
40.
Answer: b. Rich Corp. must use the equity method. Investment income = 35% of XYZs net income = $350,000 Choice a) Assumes nothing is reported since nothing has been received or sold. Choice c) Uses the difference in share price: ($26 - $25) x 400,000 shares = $400,000 Choice d) Sums up the 35% of net income plus change in stock price.
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41.
Answer: c. The allowance for uncollectible accounts: $10,000 Write-off $12,000 $6,500 $42,000 $46,500 * Credit sales = $3,000,000 x 70% x 2%
Beg. Collection Allownc. for Year 2* Ending Bal.
Choice a) The Year 1 written-off receivable that was collected in Year 2 is not added back: $10,000 - $12,000 + $42,000 = $40,000 Choice b) Assumes the allowance equals only the allowance related to Year 2 sales: $42,000 Choice d) Written-off amount is not considered: $10,000 + $6,500 + $42,000 = $58,500
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42.
Answer: b. The amounts would be reported under Operating Activities on the Statement of Cash Flows: Net income earned Add back depreciation Add back loss on sale of capital asset Decrease in inventory Increase in accounts payable Increase in accounts receivable Increase (decrease) in cash from operating activities $32,000 25,000 5,200 15,000 26,000 (56,000) $47,200
Choice a) incorrectly deducts accounts payable and adds accounts receivable: Net income earned Add back depreciation Add back loss on sale of capital asset Decrease in inventory Increase in accounts payable Increase in accounts receivable Increase (decrease) in cash from operating activities $ 32,000 25,000 5,200 15,000 (26,000) 56,000 $107,200
Choice c) incorrectly includes all transactions as operating activities: Net income earned Add back depreciation Add back loss on sale of capital asset Decrease in inventory Increase in accounts payable Increase in accounts receivable Retirement of long-term payable Purchase of land Increase (decrease) in cash from operating activities $ 32,000 25,000 5,200 15,000 26,000 (56,000) (27,800) (18,000) $ 1,400
Choice d) incorrectly deducts loss on sale of machinery and the amortization: Net income earned Deduct depreciation Deduct loss on sale of capital asset Decrease in inventory Increase in accounts payable Increase in accounts receivable Increase (decrease) in cash from operating activities $ 32,000 (25,000) (5,200) 15,000 26,000 (56,000) $(13,200)
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43.
Answer: a. Restricted contributions Match revenues to expenses for the period; revenues to be used against expenses for future periods should be deferred. Recognize $4,000 of restricted contributions for water and irrigation project as the expense was incurred in Y5. Restricted contributions for expenses for future periods are deferred and recognized as revenue in the same periods as related expenses incurred. Since expenses for the building clinics are not incurred in Y5, the revenue is not recognized in the current period. If the restricted contribution is for capital, revenue is recognized to correspond with amortization. However, if the capital asset is not subject to amortization, there will be no expenses to match against. Therefore, restricted capital asset contributions of this type are reflected in the statement of changes in net assets in the same manner of endowment contributions. Unrestricted contributions are reported as revenue in the period received or receivable because there are no particular related expenses associated with them. Therefore $18,000 of unrestricted grants for the general fund should be recognized in the current period. Endowment contributions are not shown in the statement of operations but are reflected in the statement of changes in net assets. It is because endowment contributions will not have related expenses. Therefore, for Year 5, revenue = $4,000 + $18,000 = $22,000. Choice b) Recognizes the entire amount of contributions for water and irrigation project: $6,000 + $18,000 = $24,000 Choice c) Incorrectly recognizes restricted fund for land and endowment as revenue: $4,000 + $10,000 + $18,000 + $20,000 = $52,000 Choice d) Recognizes all the contributions: $6,000 + $30,000 + $10,000 + $18,000 + $20,000 = $84,000
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44.
Answer: c. Under IFRS, GBSJ Refining should record this as a finance lease and not an operating lease because the leased asset is specialized, so that, without major modification, it is of use only to GBSJ. Also, the lease term is long enough that the lease will receive substantially all of the benefits that are expected to be derived from using the leased property over its life (i.e. the lease term is for the major part of the economic life of the asset even if title is not transferred). The implicit interest rate is used, and not the lower of the two rates, as IFRS specifies that the discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine. The value of the finance lease is the lower of fair value and the present value of the minimum lease payments. PV of the minimum lease payments = $80,000 + ($80,000 x 5.582) = $526,560 = $526,600 (rounded) Since this is lower than the FV of $600,000, $526,560 is what should be recorded for the lease. Choice a) Mistakenly assumes an operating lease. Choice b) Ignores the fact that the payment is made in the beginning of the year: $80,000 x 6.210 = $496,800 Choice d) Uses the fair value as the amount to capitalize: $600,000
45.
Answer: d. The entry to correct this error is shown below: Machinery Amortization expense (Year 13) Retained earnings Accumulated depreciation (2 years x $12,000 / 6 years )
$12,000 $2,000 $10,000 $4,000
Since the Year 13 books are still open, amortization expense should be recorded for Year 13, and therefore, retained earnings increase by $10,000. Choice a) This is an incorrect statement the retained earnings will be impacted by the error correction. Choice b) Incorrectly assumes that impact on retained earnings is the same amount as the adjustment on accumulated depreciation (2 years x $12,000 / 6 years = $4,000). Choice c) Incorrectly estimates the impact on retained earnings by assuming Year 13 books are closed: Machinery $12,000 Retained earnings $8,000 Accumulated depreciation (2 years x $12,000 / 6 years) $4,000
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46.
Answer: a. Pension assets on December 31, Year 13: Opening balance in plan assets (Jan. 1, Y13) Actual earnings on plan assets Post-retirement benefits paid Cash paid into pension plan Ending balance in plan assets (Dec. 31, Y13)
$172,500 $25,000 $(35,000) $75,000 $237,500
Choice b) Incorrectly uses the expected earning rates to calculate the balance: $172,500 + $17,250 - $35,000 + $75,000 = $229,750 Choice c) Excludes benefit paid: $172,500 + $25,000 + $75,000 = $272,500 Choice d) Incorrectly uses raw data: $298,000 + $25,000 + $75,000 = $398,000 47. Answer: d. The audit risk model = inherent risk x detection risk x control risk. Enterprise risk is not a component of the model. Answer: a. Unauthorized cheques and withdrawals, and previously unrecorded deposits would be caught during the bank reconciliation process. The bank reconciliation process serves to catch or detect these errors. Choice b) The bank reconciliation process does nothing to ensure that unauthorized bank transactions do not occur. Choice c) While unauthorized bank transactions would be caught during the reconciliation process, it does nothing to correct or reverse the unauthorized transaction. The detection of this error, however, would signal a need to correct the companys books through a journal entry. Choice d) Compensating controls entail redundancy and segregation of duties. No reference is made to either of these in the question. 49. Answer: c. The inventory list is insufficient because it cannot stop the installation of unauthorized software. Even if a department knows what software is legal, CU is still liable for any unauthorized software on its computers. In addition, all software purchases should be made through the IT department, not directly by user departments. Choices a), b) and d) would all contribute to making the culture at the university one that does not tolerate illegal software or copyright infringement. 50. Answer: d. All of the listed are requirements under the Sarbanes-Oxley Act (SOX).
48.
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51.
Answer: d. The three factors are incentive/pressures, opportunities and attitudes/rationalization. Choice a) This is false identifying the risk factors may help prevent or deter fraud, but would not be helpful in detection. Choice b) This is false this is an example that may lead to fraudulent financial reporting. Choice c) This is false controls may remove opportunity, but incentive and rationalization are personal circumstances and values.
52. 53.
Answer: c. Management has the responsibility to establish and maintain internal controls. Answer: b. The transaction-related audit objectives are occurrence, completeness, accuracy, classification and cutoff. Segregation of duties is not an objective but a control activity. Answer: d. The external auditor conducts an audit to attest that the financial statements of the auditee are fairly presented and stated in accordance with specified accounting principles. Answer: b. Variable cost: ($132,000 - $120,500) / (1,550 - 1,200) = $11,500/350 = $32.857 Total costs = fixed costs + variable costs At high: $132,000 = FC + $32.857 x 1,550 FC = $132,000 - $50,928.35 = $81,071.65 ~ $81,072 Similarly at low: $120,500 = FC + $32.857 x 1,200 FC = $81,071.60 ~ $81,072 Next quarter: Total costs = $81,072 + ($32.857 x 1,300) = $123,786.10 ~ $123,800 Choice a) Uses third quarter for the low. Variable cost: ($132,000 - $118,750) / (1,550 - 1,210) = $13,250/340 = $38.971 Fixed cost: $132,000 - ($38.971 x 1,550) = 71,594.95 ~ $71,595 Next quarter: $71,595 + ($38.971 x 1,300) = $122,257.30 ~ $122,300 Choice c) Uses an average of maintenance cost per machine-hour. $497,450 / 5,405 = $92.035/machine-hour Next quarter: 1,300 x $92.035 = $119,645.70 ~ $119,600 Choice d) Assumes all costs are variable and uses the high. $132,000/1,550 x 1,300 = $110,709 ~ $110,700
54.
55.
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56.
Answer: a. Contribution margin ratio Breakeven sales Margin of safety ratio
= $13,500,000 / $24,000,000 = 0.5625 = $7,200,000 / 0.5625 = $12,800,000 = ($24,000,000 - $12,800,000) / $24,000,000 = 0.467
Choice b) Uses the wrong denominator. Margin of safety ratio = ($24,000,000 - $12,800,000) / $12,800,000 = 0.875 Choice c) Contribution margin per package with two basic and one self-propelled = ($3,600,000 / 30,000 units x 2 + $9,900,000 / 60,000 units x 1) = $405 Contribution margin ratio = $405 / ($6,000,000 / 30,000 units x 2 + $18,000,000 / 60,000 units x 1) = 0.5786 Breakeven sales = $7,200,000 / 0.5786 = $12,444,444 Margin of safety ratio = ($24,000,000 - $12,444,444) / $24,000,000 = 0.481 Choice d) Calculates the same incorrect breakeven figure as in choice c) and uses the wrong denominator. Margin of safety ratio = ($24,000,000 - $12,444,444) / $12,444,444 = 0.929 57. Answer: b. Sales - CGS = Gross margin (40% of sales), where CGS = cost of goods sold CGS = 60% of sales CGS = 60% x $1,960,000 = $1,176,000 Finished goods inventory, August 13 = cost of goods available for sale - CGS = $1,500,000 - $1,176,000 = $324,000 Choice a) Miscalculates CGS as: CGS = sales / 140% CGS = $1,960,000 / 140% = $1,400,000 Finished goods inventory, August 13 = $1,500,000 - $1,400,000 = $100,000 Choice c) Subtracts beginning inventory: CGS = 60% of sales CGS = 60% x $1,960,000 = $1,176,000 Finished goods inventory, August 13 = cost of goods available for sale - CGS - finished goods inventory, July 1 = $1,500,000 - $1,176,000 - $82,000 = $242,000 Choice d) Adds July 1 inventory Finished goods inventory, August 13 = cost of goods available for sale - CGS + finished goods inventory, July 1 = $1,500,000 - $1,176,000 + $82,000 = $406,000
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58.
Answer: d. Let OH = indirect manufacturing costs Cost of goods completed = Cost of goods available for sale - Finished goods inventory, July 1 = $1,500,000 - $82,000 = $1,418,000 Work-in-process inventory, August 13 = Work-in-process inventory, July 1 + Prime costs + OH - Cost of goods completed = $640,000 + $490,000 + $420,000 - $1,418,000 = $132,000 Choice a) Work-in-process inventory, August 13 = Work-in-process inventory, July 1 + Prime costs + OH - Cost of goods available for sale = $640,000 + $490,000 + $420,000 - $1,500,000 = $50,000 Choice b) Direct labour (DL) = 30% CC DL = 30% (DL + OH), then 70% DL = 30% OH DL = (30% / 70%) x $420,000 = $180,000 Work-in-process inventory, August 13 = Work-in-process inventory, July 1 + Prime costs + DL + OH - Cost of goods available for sale = $640,000 + $490,000 + $180,000 + $420,000 - $1,500,000 = $230,000 Choice c) Cost of goods completed: = Cost of goods available for sale - Finished goods inventory, July 1 = $1,500,000 - $82,000 = $1,418,000 Work-in-process inventory, August 13 = Work-in-process inventory, July 1 + Prime costs + DL + OH - Cost of goods completed = $640,000 + $490,000 + $180,000 + $420,000 - $1,418,000 = $312,000
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59.
Answer: b. Finished goods, beginning Cost of goods manufactured Finished goods, ending Cost of goods sold Add: gross margin Revenues $ 80,000 120,000 (70,000) 130,000 80,000 $210,000
Choice a) Adds cost of goods manufactured with gross margin. Choice c) Adds ending inventory and subtracts beginning. Finished goods, beginning $ (80,000) Cost of goods manufactured 120,000 Finished goods, ending 70,000 Cost of goods sold 110,000 Add: gross margin 80,000 Revenues $190,000 Choice d) Includes WIP. Finished goods, beginning Cost of goods manufactured Finished goods, ending WIP, beginning WIP, ending Cost of goods sold Add: gross margin Revenues 60. $ 80,000 120,000 (70,000) 110,000 (90,000) 150,000 80,000 $230,000
Answer: a. This is the most appropriate description of target pricing. Choice b) This is a description of cost-plus pricing. Choice c) This is a description of price discrimination. Choice d) This is a description of peak-load pricing.
61.
Answer: a. Contribution margin per widget: $100 - $65 = $35 Target revenue = $125,000 + [$140,000 / (1 - 30%)] = $325,000 Units sold = $325,000/$35 = 9,285.7 ~ 9,290 Choice b) Miscalculates tax: $125,000 + [$140,000 x (1 + 30%)] = $307,000 Units sold = $307,000 / $35 = 8,771 ~ 8,780 Choice c) Ignores variable costs: $325,000 / $100 = 3,250 Choice d) Uses variable costs instead of contribution margin: $325,000 / $65 = 5,000
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62.
Answer: b. Contribution margin per unit: Per Unit Sales price Variable costs Contribution margin
Entry $50 $20 $30
Regular $65 $30 $35
Premium $90 $45 $45
Weighted Average Contribution Margin per Unit: ($30 x 5/9) + ($35 x 3/9) + ($45 x1/9) = $33.333 per unit Total Breakeven unit = $600,000 / $33.333 = 18,000 unit Regular model units at Breakeven point = 18,000 x (3/(5+3+1)) = 6,000 units Choice a) Considers only Regular model sales price: $600,000/$65 = 9,230.77 Choice c) Ignores sales mix: $600,000 / ($30 + $35 + $45) = 5454.55 Choice d) Incorrectly uses total breakeven units: 18,000 units. 63. Answer: d. RST Ltd. has sufficient capacity to fill the order; therefore, there are no opportunity costs. Desired contribution margin = $48,000/20,000 units = $2.40/unit Variable costs = ($2,000,000/125,000 units) + ($8,000/20,000 units) = $16.00 + $0.40 = $16.40 Therefore, the sales price should be $16.40 + $2.40 = $18.80 per unit. Choice a) Choice b) $40.00 is the regular sales price per unit. Regular sales price less fixed manufacturing costs less fixed selling and administrative costs less sales commissions saved: = $40.00 - [($1,250,000 + $950,000)/125,000 units] - ($2.60 - $0.40) = $40.00 - $17.60 - $2.20 = $20.20 Includes all the manufacturing costs: = ($2,000,000 + $1,250,000)/125,000 units + $0.40 + $2.40 = $26.00 + $0.40 + $2.40 = $28.80
Choice c)
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64.
Answer: c. Direct production costs in Y Service costs allocated to Y from: A ($120,000 x 50/110) B ($180,000 x 2,000/4,000) Total services costs allocated Total production costs in Y Choice a) Includes the other service department in denominator Direct production costs in Y Service costs allocated to Y from: A ($120,000 x 50/118) B ($180,000 x 2,000/4,400) Total services costs allocated Total production costs in Y Choice b) Uses step-down method Direct production costs in Y Service costs allocated to Y from: A ($120,000 x 50/118) B ([$180,000 + (8/118 x $120K)] x 2K/4K) Total services costs allocated Total production costs in Y Choice d) Uses maintenance hours as cost driver for both A and B Direct production costs in Y Service costs allocated to Y from: A ($120,000 x 2,000/4,000) B ($180,000 x 2,000/4,000) Total services costs allocated Total production costs in Y
$630,000 $ 54,545 90,000 144,545 $774,545 $630,000 $ 50,847 81,818 132,665 $762,665 $630,000 $ 50,847 94,068 144,915 $774,915 $630,000 $ 60,000 90,000 150,000 $780,000
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65.
Answer: a. Costs allocated to B from A: $120,000 x 8/118 = $8,136 Direct production costs in Z Costs allocated to Z from B: ($180,000 + $8,136) x 2,000/4,000 Costs allocated to Z from A: ($120,000 x 60/118) Total production costs in Z Choice b) Includes the Department B hours in denominator: Direct production costs in Z Costs allocated to Z from B: ($180,000 + $8,136) x 2K/4,400 Costs allocated to Z from A Total production costs in Z Choice c) Misses costs from Department A: Direct production costs in Z Costs allocated to Z from B: $180,000 x 2,000/4,000 Total production costs in Z Choice d) Uses wrong denominator to calculate costs from A to B: $120,000 x 400/4,400 = $10,909 Direct production costs in Z Costs allocated to Z from B: ($180,000 + $10,909) x 2K/4K Total production costs in Z $ 850,000 94,068 61,017 $1,005,085 $850,000 85,516 61,017 $996,533 $850,000 90,000 $940,000
$850,000 95,454 $945,454
66.
Answer: c. Absorption cost for one lot in 000s = $150 + $36 + $24 + $165 = $375,000 Choice a) Excludes variable overhead. Choice b) Includes variable selling and admin in costing. Choice d) Includes variable and fixed selling and admin in costing.
67.
Answer: a. Contribution margin = sales less variable costs $1,000,000 - ($600,000 x 85%) = $490,000 Choice b) Uses gross margin: $1,000,000 - $600,000 = $400,000 Choice c) Deducts fixed costs: $1,000,000 - ($600,000 x 15%) = $910,000 Choice d) Uses cost of goods sold.
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68.
Answer: c. Beginning WIP (20% converted) Units started and completed1 Spoiled units2 (60% converted) Ending WIP (80% converted) Total Units Accounted For
1 2
Units 40,250 49,750 300 34,950 125,250
CC 32,200 49,750 180 27,960 110,090
Units started and completed = 85,000 - 34,950 - 300 = 49,750 Spoiled units: 40,250 + 85,000 - 90,000 - 34,950 = 300 Units 40,250 49,750 300 34,950 125,250 CC 8,050 49,750 180 27,960 85,940
Choice a) Multiplies beginning WIP by 20%: Beginning WIP (20% converted) Units started and completed Spoiled units Ending WIP (80% converted) Total Units Accounted For Choice b) Ignores spoiled units: Beginning WIP (20% converted) Units started and completed Ending WIP (80% converted) Total Units Accounted For Units 40,250 49,750 34,950 CC 32,200 49,750 27,960 109,910
Choice d) Assumes completed units are 100% converted this period and ignores spoiled units: Units CC Beginning WIP (20% converted) 40,250 32,200 Units started and completed 90,000 90,000 Ending WIP (80% converted) 34,950 27,960 Total Units Accounted For 150,160
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69.
Answer: b. Equivalent units of work done in May: Beginning WIP (20% converted) Units started and completed Spoiled units Ending WIP (80% converted) Total Units Accounted For Units 40,250 49,750 300 34,950 125,250 A 40,250 49,750 300 34,950 125,250 B 40,250 49,750 0 34,950 124,950
Cost per EU of A: $220,000/125,250 = $1.76 Cost per EU of B: $350,000/124,950 = $2.80 Choice a) Excludes beginning WIP in calculation for A: A Beginning WIP (20% converted) Units started and completed Spoiled units Ending WIP (80% converted) Total Units Accounted For Cost per EU of A: $220,000/85,000 = $2.59 0 49,750 300 34,950 85,000
Choice c) Excludes beginning WIP in calculation for A and ignores ending WIP for B: B Beginning WIP (20% converted) 40,250 Units started and completed 49,750 Spoiled units 0 Ending WIP (80% converted) 0 Total Units Accounted For Cost per EU of B: $350,000/90,000 = $3.89 Choice d) Uses units completed as denominator: Cost per EU of A: $220,000/90,000 = $2.44 Cost per EU of B: $350,000/90,000 = $3.89 70. Answer: a. Normal costing uses the estimated overhead allocation rate and the actual quantity of the allocation base. Answer: d. Static-budget variance = flexible-budget variance + sales-volume variance Flexible-budget variance = $50,000(F) - $60,000(F) = $10,000(U) Choice a) Uses selling-price variance + sales-volume variance = $70,000 Choice b) Uses sales-volume variance + static-budget variance = $110,000 Choice c) Includes selling-price: $50,000(F) - ($60,000(F) + $10,000(F)) = $20,000(U) 90,000
71.
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72.
Answer: b. A cost centre manager is responsible for controlling and reporting costs only. Direct material costs would be a typical cost that needs to be monitored and controlled. Choice a) Since Mary is not responsible for sales, residual income is not a meaningful measurement. Choice c) Since Mary is not responsible for sales, gross margin is not a meaningful measurement. Choice d) Not a reasonable measurement since Mary does not control investment.
73.
Answer: d. Estimated departmental overhead/estimated driver for department: A: $395,000/50,000 machine-hours = $7.90/machine-hour B: $455,000/$220,000 = 2.068 times direct material cost Choice a) Uses estimated total overhead and drivers for both departments: $395,000+$455,000/50,000+68,000 machine-hours=$7.20/machine-hour $395,000+$455,000/$250,000+$220,000=1.809 times direct material cost Choice b) Uses direct labour hours for A: $395,000/45,000=$8.78/machine-hour Choice c) Uses estimated total overhead and drivers for A: $395,000+$455,000/50,000+68,000 machine-hours=$7.20/machine-hour Uses direct labour costs for B: $455,000/$280,000=1.625
74.
Answer: c. Department A overhead: $8 x 500 = Department B overhead: 2.15 x $20,000 = Direct materials: $27,000 + $20,000 = Direct labour cost: $31,000 + $32,000 = Total cost Choice a) Misses direct materials and labour for department B: $4,000 + $43,000 + $27,000 + $31,000 = $105,000 Choice b) Mixes up cost drivers: Department A overhead: 2.15 x $27,000 = Department B overhead: $8 x 550 = Direct materials: $27,000 + $20,000 = Direct labour cost: $31,000 + $32,000 = Total cost Choice d) Uses machine-hours for both departments: Department A overhead: $8 x 500 = Department B overhead: $8 x 550 = Direct materials: $27,000 + $20,000 = Direct labour cost: $31,000 + $32,000 = Total cost
4,000 43,000 47,000 63,000 $157,000
$ 58,050 4,400 47,000 63,000 $172,450 4,000 4,400 47,000 63,000 $118,400 $
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75.
Answer: d. From the companys perspective, when all 50,000 units of component EX1 are sold at $160 to external customers: Contribution margin from sales of 50,000 units $1,650,000 [$160 - ($120 + $7)] x 50,000 units Cost of purchasing 10,000 units from external supplier 1,600,000 $160 x 10,000 units Net contribution $ 50,000 From the companys perspective, when 40,000 units of component EX1 are sold at $160 to external customers and 10,000 units supplied to Division A: Contribution margin from sales of 40,000 units $1,320,000 [$160 - ($120 + $7)] x 40,000 units Incremental costs of supplying 10,000 units to Division A 1,200,000 $120 x 10,000 units Net contribution $ 120,000 Division A should purchase 10,000 units from Division B at $164 because there is an increase in income of $70,000 for the company as a whole. Choice a) There is a cost saving of $40,000 [($164 - $160) x 10,000 units] to Division A if Division A purchased the 10,000 units from an external supplier. The statement is FALSE because costs for the company are unchanged. 50,000 units are still produced at the same cost. Choice b) There is an increase in income of $110,000 {[$164 - ($160-$7)] x 10,000 units} to Division B if Division B sold the 10,000 units to Division A. The statement is FALSE. Choice c) There is no idle capacity in Division B when Division A purchased the 10,000 units from an external supplier because Division B can sell all units produced, i.e. 50,000 units, in the market. The statement is FALSE.
76.
Answer: d. Chemical X $1.00 x (97,900 - 5 x 20,000) = $2,100 favourable Chemical Y $0.40 x (132,000 - 7 x 20,000) = $3,200 favourable Chemical Z $0.20 x (210,100 - 8 x 20,000) = $10,020 unfavourable Total direct materials quantity variance = $4,720 unfavourable Choice a) Mistakes all three as unfavourable: ($2,100 + $3,200 + $10,020) = $15,320 Choice b) Uses actual prices: X: $1.05 x (97,900 - 5 x 20,000) = $2,205 favourable Y: $0.36 x (132,000 - 7 x 20,000) = $2,880 favourable Z: $0.18 x (210,100 - 8 x 20,000) = $9,018 unfavourable Total direct materials quantity variance = $3,933 unfavourable Choice c) Mistakes Y as unfavourable: (-$2,100 + $3,200 + $10,020) = $11,120
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77.
Answer: c. Since the actual total amount of direct materials used (97,900 kg + 132,000 kg + 210,100 kg = 440,000 kg) is greater than the standard total amount of direct materials allowed for actual production (20 kg x 20,000 bags = 400,000 kg), direct materials yield variance for all three chemicals in total is unfavourable. Choice a) Direct materials price variance for Chemical X is unfavourable because actual purchase price ($1.05) is greater than budgeted purchase price ($1.00). Choice b) Direct materials mix variance for Chemical Y is favourable because actual mix (132,000/440,000 = 0.30) is less than budgeted mix (7/20 = 0.35).
78.
Answer: b. Reducing inventory levels, through initiatives such as just-in-time management, supply chain management and process re-engineering, will reduce carrying costs and increase process efficiencies. This is an appropriate objective from the internal business perspective. Choices a) and c) would be appropriate objectives for a company with a product differentiation strategy. Choice c) is appropriate from the customer perspective, and choice d) is appropriate from the learning and growth perspective.
79.
Answer: d. North $450,000/$1,950,000 = 23% $450,000 - ($1,950,000 x 15%) RI = $157,500 Profit Margin $450,000/$1,750,000 = 26% ROI Central $600,000/$2,395,000 = 25% $600,000 - ($2,395,000 x 18%) = $168,900 $600,000/$2,900,000 = 21%
Choice a) North had the better profit margin. Choice b) Amount of assets is not a convincing performance measurement. Choice c) Central had the better ROI and RI. 80. Answer: d. Since the East Division has excess capacity, there is no opportunity cost for transferring the motors to the West Division up to full capacity. Thus, the minimum transfer price acceptable to the East Division is the incremental costs for manufacturing the motors, $50 per motor (choice a). If the East Division were operating at full capacity, there would be opportunity costs associated with transferring to the West Division, and the minimum acceptable transfer price would be $90. On the other hand, since the West Division can purchase the motors for $90 in the market, this is the maximum transfer price the West Division is willing to pay (choice c). Since choices a) and c) are both correct and choice b) is incorrect, the correct answer is choice d).
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81.
Answer: c. Sales value at split-off Weighting Cost allocation A 50,000 x $14 = $700,000 700/1,500 = 46.67% 46.67% x $600,000 = $280,000 B 40,000 x $20 = $800,000 800/1,500 = 53.33% 53.33% x $600,000 = $320,000
Choice a) Uses Product A. Choice b) Uses selling price: [$20/($20+$14)] x $600,000 = $352,941 ~ $353,000 Choice d) Uses physical units: [40,000/(40,000+50,000)] x $600,000 = $266,666 ~ $267,000 82. Answer: a. Weighting Cost allocation A 50,000/90,000 = 55.56% 55.56% x $600,000 = $333,333 B 40,000/90,000 = 44.44% 44.44% x $600,000 = $266,667
Choice b) Uses Product B. Choice c) Uses sales value: (700/1,500) x $600,000 = $280,000 Choice d) Uses selling price: [$20/($20+$14)] x $600,000 = $352,941 ~ $353,000 83. Answer: c. Normal spoilage: 2% x 251,500 = 5,030 Total spoiled units: 118,000 + 254,500 - 251,500 - 111,950 = 9,050 Abnormal spoilage: 9,050 - 5,030 = 4,020 Choice a) Uses normal spoilage units. Choice b) Miscalculates spoiled units: 254,500 - 251,500 = 3,000 Choice d) Uses total spoiled units. 84. Answer: c. Costs that cannot be directly traced to the production of a product are period costs, such as salaries, wages, stationery and supplies related to the sales, human resources and accounting functions. Costs related to production are product costs. Therefore, only choice c) is true.
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85.
Answer: d. From Q1: $325,000 x (1-3%) x (1-60%) = $126,100 From Q2: $330,000 x (1-3%) x 60% + $175,000 = $367,060 Total cash collected: $493,160 Choice a) Misses cash sales and uncollectable in Q2: From Q1: $325,000 x (1-3%) x (1-60%) = $126,100 From Q2: $330,000 x (1-3%) x 60% = $192,060 Total cash collected: $318,160 Choice b) Misses the uncollectable: From Q1: $325,000 x (1-60%) = $130,000 From Q2: $330,000 x 60% + $175,000 = $373,000 Total cash collected: $503,000 Choice c) Ignores Q1: $175,000 + ($330,000 x (1-3%) x 60%) = $367,060
86.
Answer: a. Variance = (6,500 - 5,500) x $1.25 = $1,250 favourable Choice b) Uses actual contribution margin: (6,500 - 5,500) x $1.15 = $1,150 Choice c) Uses the contribution margin variance and budgeted sales: ($1.25 - $1.15) x 5,500 = $550 Choice d) Uses the contribution margin variance and actual sales: ($1.25 - $1.15) x 6,500 = $650
87.
Answer: c. Roses: 12,500 x (6,500/12,500 - 5,500/12,000) x $1.25 = 12,500 x (52% - 45.83%) x $1.25 = $963.55(F) Tulips: 12,500 x (6,000/12,500 - 6,500/12,000) x $0.75 = 12,500 x (48% - 54.17%) x $0.75 = $578.44(U) Variance = $963.55(F) - $578.44(U) = $385.11(F) ~ $385 Choice a) Uses budgeted units sold: Roses: 5,500 x (52% - 45.83%) x $1.25 = $424.19(F) Tulips: 6,500 x (48% - 54.17%) x $0.75 = $300.79(U) Variance = $123.40 ~ $123(F) Choice b) Uses actual contribution margin: Roses: 12,500 x (52% - 45.83%) x $1.15 = $866.94(F) Tulips: 12,500 x (48% - 54.17%) x $0.80 = $617(U) Variance = $249.94 ~ $250(F) Choice d) Uses total difference times average contribution margin: [(6,500 + 6,000) - (5,500 + 6,500)] x ($1.25 + $0.75)/2 = $500(F)
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88.
Answer: a. April sales April ending inventory Total required Less: opening inventory Budgeted purchase Choice b) Ignores opening inventory.
5,250 3,000 8,250 3,300 4,950
Choice c) Uses March opening inventory for April opening inventory: April sales 5,250 April ending inventory 3,000 Total required 8,250 Less: opening inventory 3,500 Budgeted purchase 4,450 Choice d) Misses ending inventory: Total required Less: opening inventory Budgeted purchase 89. Answer: d. Sales volume variance Sales mix variance Sales quantity variance Market share variance Market size variance Choice a) Sales volume variance Sales mix variance Sales quantity variance Market share variance Market size variance Choice b) Sales volume variance Sales mix variance Sales quantity variance Market share variance Market size variance Choice c) Sales volume variance Sales mix variance Sales quantity variance Market share variance Market size variance 5,250 3,500 1,750 $2,100 + 900 $3,000 + 500 $3,500 $2,100 + 900 $3,000 - 500 $2,500 $2,100 - 900 $1,200 - 500 $1,700 $2,100 - 900 $1,200 + 500 $ 700 unfavourable favourable unfavourable favourable unfavourable unfavourable favourable unfavourable favourable unfavourable unfavourable favourable unfavourable favourable unfavourable unfavourable favourable unfavourable favourable unfavourable
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90.
Answer: a. Direct material used ($140,000 + $100,000 - $135,000) Direct labour Manufacturing overhead Beginning WIP Ending WIP Cost of goods manufactured Choice b) Ignores work-in-process. Choice c) Includes finished goods: Direct material used Direct labour Manufacturing overhead Beginning WIP Ending WIP Beginning finished goods Ending finished goods Cost of goods manufactured $105,000 250,000 125,000 40,000 (42,000) 65,000 (70,000) $473,000
$105,000 250,000 125,000 40,000 (42,000) $478,000
Choice d) Considers only direct materials and direct labour. 91. Answer: d. Item iii) is not relevant because it is the same whether or not X is further refined into X-Plus. Answer: d. Profitability index = PVcash inflows / PVcash outflows Project J = 950,000(5.389)/5,000,000 = 1.024 Project M = 1,000,000(5.335)/5,000,000 = 1.067 Project V = 1,100,000(4.564)/5,000,000 = 1.00408 Since all projects have a profitability index greater than 1, the company should invest in all projects. 93. Answer: b. Income from property is passive income from invested capital. This typically includes income like royalties, rent, interest and dividends. Choice a) This would be classified as income from business. Choice c) This would be classified as a disposal of depreciable property which may generate terminal loss or recapture (elements of business income) and/or a capital gain or loss. Choice d) This would be classified as income from business.
92.
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94.
Answer: a. Capital gain = (net proceeds less ACB) = ($300,000 - $15,000) - $150,000 = $135,000 Capital gains reserve is the lesser of: the reasonable reserve = $150,000/$300,000 x $135,000 = $67,500; and the statutory reserve = 1/5 x (4 - the number of preceding tax years ending after the disposition) x capital gains = 4/5 x $135,000 = $108,000. For Year 7 the minimum net taxable capital gain: (capital gain less deferred portion) x 50% = ($135,000 - $67,500) x 50% = $33,750 Choice b) Assumes no deferral available: $135,000 x 50% = $67,500 Choice c) Assumes all capital gains can be deferred to Year 8. Choice d) Misses selling fees and deferral: $150,000 x 50% = $75,000
95.
Answer: d. This is the salary of $50,000 plus vacation pay of 10% = $5,000 plus prize of $1,000. The vacation pay and prize are included in employment. The prize is based on performance and for this reason is considered remuneration. Choice a) Adds only the prize and not the vacation pay to the salary. Choice b) Incorrectly excludes the $1,000 prize. Choice c) Incorrectly treats the first $500 of the prize as exempt the $500 is an administrative limit, not an exemption.
96.
Answer: c. Accounting income for Year 10 Add: amortization expense Add: accounting loss Add: charitable donations Non-deductible portion of entertainment ($40,000 x .5) Deduct: CCA Net income for tax purposes
$2,500,000 325,000 80,000 10,000 20,000 (247,000) $2,688,000
Choice a) Includes charitable donation, which is deductible in the calculation of taxable income but not net income for tax purposes. Choice b) Neglects to adjust for non-deductible portion of entertainment expense. Choice d) Adds CCA and deducts depreciation. 97. Answer: c. When the last depreciable asset in a class is disposed of and a positive balance remains, that balance may be deducted as a terminal loss against other taxable income. No CCA is claimed in the year of disposition for Class 8 assets. $15,000 - $10,000 = $5,000 Choice a) Assumes the positive balance results in a recapture to be added back. Choice b) Incorrectly deducts CCA in Year 12. Choice d) Incorrectly deducts CCA in Year 12 and assumes a recapture.
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98.
Answer: d. Small business deduction = 17% x the lesser of active business income and taxable income = 17% x $315,000 = $53,550 Choice a) Uses active business income: 17% x $330,000 = $56,100 Choice b) Takes the difference: $330,000 - $315,000 = $15,000 Choice c) Uses the difference between the limit and active business income: $500,000 - $330,000 = $170,000
99.
Answer: d. A deemed disposition occurs when property is disposed of even though there are no proceeds of disposition. The use of Sallys car changed from personal to business, which is a deemed disposition. Answer: a. 75% of the expenditure is added to the Cumulative Eligible Capital and the deduction is 7%: ($80,000 x 75% x 7%) = $4,200 Choice b) Assumes that the customer list is not deductible. Choice c) Uses a half-year rule applied to entire expenditure: $80,000 x 7% x 50% = $2,800 Choice d) Applies 7% rate to entire expenditure. Neglects the 75% that is eligible: $80,000 x 7% = $5,600
100.
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Supplement of Formulae and Present Value Tables Formulae

1. CAPITAL STRUCTURE a) After-Tax Marginal Cost of Debt:
kb = k(1 T) or
where b)
(1 T)I F
k = interest rate; T = corporate tax rate; I = annual interest payment on debt; F = face value of debt
Cost of Preferred Shares:

kp = Dp NPp
where c)
Dp = stated annual dividend payment on shares; NPp = net proceeds on preferred share issue
Cost of Common Equity: i) Cost of Common Shares (Capitalization of Dividends with Constant Growth Rate):
ke = D 1 +g NP e
where ii)
D1 = dividend expected for period 1; NPe = net proceeds on common share issue; g = annual long-term dividend growth rate
Cost of Retained Earnings:

kre = re = D 1 +g P e
where
Pe = market price of a share; re = expected return on common equity
CMA Canada
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iii)
Capital Asset Pricing Model:

Rj = Rf + j Rm Rf
where d)
Rj = expected rate of return on security j; Rf = risk-free rate; Rm = expected return for the market portfolio j = beta coefficient for security j (measure of systematic risk)
Weighted Average Cost of Capital:

B P E k = kb + kp + ke V V V
where
B = amount of debt outstanding; P = amount of preferred shares outstanding; E = amount of common equity outstanding V = B + P + E = total value of firm
2.
PRESENT VALUE OF TAX SHIELD FOR AMORTIZABLE ASSETS a) Present Value of Total Tax Shield from CCA for a New Asset Present Value = b)
CTd 2 + k CdT 1 + 0.5k = (d + k ) 2(1 + k ) (d + k ) 1 + k
Present Value of Total Tax Shield from CCA for an Asset that is Not Newly Acquired
dT Present Value = UCC d +k

c) Present Value of Total Tax Shield Lost From Salvage Present Value =
Sn Sn dT dT or , depending on cash flow assumptions n n 1 (1 + k ) d + k (1 + k ) d + k
Notation for above formulae: C = net initial investment; UCC = undepreciated capital cost of asset; Sn = salvage value of asset realized at end of year n; T = corporate tax rate; k = discount rate or time value of money; d = maximum rate of capital cost allowance; n = total life of investment
CMA Canada
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Table 1 Present Value of One Dollar Due at the End of n Years

P= 1
(1+ i) n
13% 0.885 .783 .693 .613 .543 .480 .425 .376 .333 .295 .261 .231 .204 .181 .160 .142 .125 .111 .098 .087 .077 .068 .060 .053 .047 14% 0.877 .769 .675 .592 .519 .456 .400 .351 .308 .270 .237 .208 .182 .160 .140 .123 .108 .095 .083 .073 .064 .056 .049 .043 .038 15% 0.870 .756 .658 .572 .497 .432 .376 .327 .284 .247 .215 .187 .163 .141 .123 .107 .093 .081 .070 .061 .053 .046 .040 .035 .030 16% 0.862 .743 .641 .552 .476 .410 .354 .305 .263 .227 .195 .168 .145 .125 .108 .093 .080 .069 .060 .051 .044 .038 .033 .028 .024 17% 0.855 .731 .624 .534 .456 .390 .333 .285 .243 .208 .178 .152 .130 .111 .095 .081 .069 .059 .051 .043 .037 .032 .027 .023 .020 18% 0.847 .718 .609 .516 .437 .370 .314 .266 .225 .191 .162 .137 .116 .099 .084 .071 .060 .051 .043 .037 .031 .026 .022 .019 .016 19% 0.840 .706 .593 .499 .419 .352 .296 .249 .209 .176 .148 .124 .104 .088 .074 .062 .052 .044 .037 .031 .026 .022 .018 .015 .013 20% 0.833 .694 .579 .482 .402 .335 .279 .233 .194 .162 .135 .112 .093 .078 .065 .054 .045 .038 .031 .026 .022 .018 .015 .013 .010 21% 0.826 .683 .564 .467 .386 .319 .263 .218 .180 .149 .123 .102 .084 .069 .057 .047 .039 .032 .027 .022 .018 .015 .012 .010 .009 22% 0.820 .672 .551 .451 .370 .303 .249 .204 .167 .137 .112 .092 .075 .062 .051 .042 .034 .028 .023 .019 .015 .013 .010 .008 .007 23% 0.813 .661 .537 .437 .355 .289 .235 .191 .155 .126 .103 .083 .068 .055 .045 .036 .030 .024 .020 .016 .013 .011 .009 .007 .006 24% 0.806 .650 .524 .423 .341 .275 .222 .179 .144 .116 .094 .076 .061 .049 .040 .032 .026 .021 .017 .014 .011 .009 .007 .006 .005 25% 0.800 .640 .512 .410 .328 .262 .210 .168 .134 .107 .086 .069 .055 .044 .035 .028 .023 .018 .014 .012 .009 .007 .006 .005 .004
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
1% 0.990 .980 .971 .961 .951 .942 .933 .923 .914 .905 .896 .887 .879 .870 .861 .853 .844 .836 .828 .820 .811 .803 .795 .788 .780
2% 0.980 .961 .942 .924 .906 .888 .871 .853 .837 .820 .804 .788 .773 .758 .743 .728 .714 .700 .686 .673 .660 .647 .634 .622 .610
3% 0.971 .943 .915 .888 .863 .837 .813 .789 .766 .744 .722 .701 .681 .661 .642 .623 .605 .587 .570 .554 .538 .522 .507 .492 .478
4% 0.962 .925 .889 .855 .822 .790 .760 .731 .703 .676 .650 .625 .601 .577 .555 .534 .513 .494 .475 .456 .439 .422 .406 .390 .375
5% 0.952 .907 .864 .823 .784 .746 .711 .677 .645 .614 .585 .557 .530 .505 .481 .458 .436 .416 .396 .377 .359 .342 .326 .310 .295
6% 0.943 .890 .840 .792 .747 .705 .665 .627 .592 .558 .527 .497 .469 .442 .417 .394 .371 .350 .331 .312 .294 .278 .262 .247 .233
7% 0.935 .873 .816 .763 .713 .666 .623 .582 .544 .508 .475 .444 .415 .388 .362 .339 .317 .296 .277 .258 .242 .226 .211 .197 .184
8% 0.926 .857 .794 .735 .681 .630 .583 .540 .500 .463 .429 .397 .368 .340 .315 .292 .270 .250 .232 .215 .199 .184 .170 .158 .146
9% 0.917 .842 .772 .708 .650 .596 .547 .502 .460 .422 .388 .356 .326 .299 .275 .252 .231 .212 .194 .178 .164 .150 .138 .126 .116
10% 0.909 .826 .751 .683 .621 .564 .513 .467 .424 .386 .350 .319 .290 .263 .239 .218 .198 .180 .164 .149 .135 .123 .112 .102 .092
11% 0.901 .812 .731 .659 .593 .535 .482 .434 .391 .352 .317 .286 .258 .232 .209 .188 .170 .153 .138 .124 .112 .101 .091 .082 .074
12% 0.893 .797 .712 .636 .567 .507 .452 .404 .361 .322 .287 .257 .229 .205 .183 .163 .146 .130 .116 .104 .093 .083 .074 .066 .059
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Table 2 Present Value of One Dollar per Year n Years at i%

1 1 1+ i n ) ( P n= i
n 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
1% 0.990 1.970 2.941 3.902 4.854 5.796 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865 14.718 15.562 16.398 17.226 18.046 18.857 19.661 20.456 21.244 22.023
2% 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.678 16.351 17.011 17.658 18.292 18.914 19.523
3% 0.971 1.914 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.753 14.324 14.877 15.415 15.937 16.444 16.936 17.413
4% 0.962 1.886 2.775 3.630 4.452 5.242 6.002 6.733 7.435 8.111 8.760 9.385 9.986 10.563 11.118 11.652 12.166 12.659 13.134 13.590 14.029 14.451 14.857 15.247 15.622
5% 0.952 1.859 2.723 3.547 4.330 5.076 5.786 6.463 7.108 7.722 8.306 8.863 9.394 9.899 10.380 10.838 11.274 11.690 12.085 12.462 12.821 13.163 13.489 13.799 14.094
6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360 7.887 8.384 8.853 9.295 9.712 10.106 10.477 10.828 11.158 11.470 11.764 12.042 12.303 12.550 12.783
7% 0.935 1.808 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 10.336 10.594 10.836 11.061 11.272 11.469 11.654
8% 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.224 8.560 8.851 9.122 9.372 9.604 9.818 10.017 10.201 10.371 10.529 10.675
9% 0.917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.061 8.313 8.544 8.756 8.950 9.129 9.292 9.442 9.580 9.707 9.823
10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606 7.824 8.022 8.201 8.365 8.514 8.649 8.772 8.883 8.985 9.077
11% 0.901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7.702 7.839 7.963 8.075 8.176 8.266 8.348 8.422
12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469 7.562 7.645 7.718 7.784 7.843
13% 0.885 1.668 2.361 2.975 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.303 6.462 6.604 6.729 6.840 6.938 7.025 7.102 7.170 7.230 7.283 7.330
14% 0.877 1.647 2.322 2.914 3.433 3.889 4.288 4.639 4.946 5.216 5.453 5.660 5.842 6.002 6.142 6.265 6.373 6.467 6.550 6.623 6.687 6.743 6.792 6.835 6.873
15% 0.870 1.626 2.283 2.855 3.352 3.785 4.160 4.487 4.772 5.019 5.234 5.421 5.583 5.725 5.847 5.954 6.047 6.128 6.198 6.259 6.313 6.359 6.399 6.434 6.464
16% 0.862 1.605 2.246 2.798 3.274 3.685 4.039 4.344 4.607 4.833 5.029 5.197 5.342 5.468 5.576 5.669 5.749 5.818 5.878 5.929 5.973 6.011 6.044 6.073 6.097
17% 0.855 1.585 2.210 2.743 3.199 3.589 3.922 4.207 4.451 4.659 4.836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.585 5.628 5.665 5.696 5.723 5.747 5.766
18% 0.848 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 5.384 5.410 5.432 5.451 5.467
19% 0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.487 4.611 4.715 4.802 4.876 4.938 4.990 5.033 5.070 5.101 5.127 5.149 5.167 5.182 5.195
20% 0.833 1.528 2.107 2.589 2.991 3.326 3.605 3.837 4.031 4.193 4.327 4.439 4.533 4.611 4.676 4.730 4.775 4.812 4.844 4.870 4.891 4.909 4.925 4.937 4.948
21% 0.826 1.510 2.074 2.540 2.926 3.245 3.508 3.726 3.905 4.054 4.177 4.279 4.362 4.432 4.489 4.536 4.576 4.608 4.635 4.657 4.675 4.690 4.703 4.713 4.721
22% 0.820 1.492 2.042 2.494 2.864 3.167 3.416 3.619 3.786 3.923 4.035 4.127 4.203 4.265 4.315 4.357 4.391 4.419 4.442 4.460 4.476 4.488 4.499 4.507 4.514
23% 0.813 1.474 2.011 2.448 2.804 3.092 3.327 3.518 3.673 3.799 3.902 3.985 4.053 4.108 4.153 4.189 4.219 4.243 4.263 4.279 4.292 4.302 4.311 4.318 4.323
24% 0.807 1.457 1.981 2.404 2.745 3.021 3.242 3.421 3.566 3.682 3.776 3.851 3.912 3.962 4.001 4.033 4.059 4.080 4.097 4.110 4.121 4.130 4.137 4.143 4.147
25% 0.800 1.440 1.952 2.362 2.689 2.951 3.161 3.329 3.463 3.571 3.656 3.725 3.780 3.824 3.859 3.887 3.910 3.928 3.942 3.954 3.963 3.971 3.976 3.981 3.985
CMA Canada
Page 75

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2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

The following information pertains to questions 20 to 22.

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

$4,300 $ 90 2,700 760 530 220

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

The following information pertains to questions 57 and 58.

2013 Sample Entrance Examination

2013 Sample Entrance Examination

The following information pertains to questions 64 and 65.

2013 Sample Entrance Examination

2013 Sample Entrance Examination

The following information pertains to questions 68 and 69.

2013 Sample Entrance Examination

The following information pertains to questions 73 and 74.

2013 Sample Entrance Examination

The following information pertains to questions 76 and 77.

2013 Sample Entrance Examination

2013 Sample Entrance Examination

The following information pertains to questions 81 and 82.

2013 Sample Entrance Examination

2013 Sample Entrance Examination

The following information pertains to questions 86 and 87.

Roses Tulips 86.

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

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2013 Sample Entrance Examination

$(9,000) $(10,000) $(12,000) $70,000 $5,000

1 0.84 4.212 4.212 0.747

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination

2013 Sample Entrance Examination