Marks Time: 4 Hours Notes: 1. 2. 3. 4. 5. 6. 7. 30 All calculations must be shown in an orderly manner to obtain part marks. Round all calculations to the nearest dollar. Narratives for journal entries are not required unless specifically requested. Assume a December 31 fiscal year-end unless specifically stated otherwise. Assume all amounts are material unless directed otherwise. Assume all companies are public companies unless otherwise noted. Assume no companies use differential reporting unless otherwise noted. Question 1

Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note: 2 marks each Note: Use the following information to answer parts (a) and (b). On December 31, 2004, CHL Inc. purchased 70% of the common shares of WAC for $700,000.

On the date of acquisition, WAC’s shareholders’ equity was as follows: Preferred shares, 6%, cumulative with 3 years in arrears, callable at 102 Common shares, no par value, 20,000 shares outstanding Retained earnings Total $ 200,000 100,000 300,000 $ 600,000 Any purchase price discrepancy is allocated to land. During 2005, WAC reported net income of $150,000 and paid dividends of $100,000 in total to common and preferred shareholders. a. What will CHL report as investment income for 2005 on its nonconsolidated financial statements, assuming that it accounts for its investment in WAC under the cost method? ) 2) 3) 4) $ 36,400 $ 44,800 $ 70,000 $105,000 b. What will CHL report as investment income for 2005 on its nonconsolidated financial statements, assuming that it accounts for its investment in WAC under the equity method? 1) 2) 3) 4) $ 71,400 $ 79,800 $ 96,600 $105,000 Continued… EFA4D05 ©CGA-Canada, 2005 Page 1 of 10 c. RUP Co. has a 30% ownership interest in ERT Co. ,a joint venture. During 2005, ERT reported net income of $200,000 and paid a dividend of $150,000. RUP’s inventory includes goods purchased from ERT on which ERT had made a profit of $20,000.

Page 2 CGA practice exam Essay

What is the amount of income RUP should report on its investment in ERT for 2005 under theequity method? 1) 2) 3) 4) $40,000 $45,000 $54,000 $60,000 d. CD Ltd. owns 800 shares (80%) of LS Inc. The fair value of LS’s identifiable net assets is greater than their carrying value today and when CD purchased its 80% interest. Which of the following would result in a decrease in the purchase price discrepancy assigned to identifiable net assets? 1) 2) 3) 4) LS issues 100 new shares and CD purchases 60 of these new shares. LS issues 100 new shares and CD purchases 90 of these new shares.

LS retires 100 of its shares, 70 of which were purchased from CD. LS retires 100 of its shares, 80 of which were purchased from CD. Note: Use the following information to answer parts (e) and (f). On January 1, 2005, REV Company purchased 100% of the voting shares of STO Company for $500,000. On the date of acquisition, data related to equipment was as follows: Equipment REV Net book value for accounting purposes Undepreciated capital cost (UCC) for tax purposes Fair value STO $ 800,000 700,000 1,000,000 $ 600,000 550,000 700,000

The equipment is being amortized for accounting purposes on a straight-line basis. At the date of acquisition, the equipment for both companies had a remaining useful life of 5 years and no residual value. For tax purposes, CCA is calculated using a rate of 20%. Both companies pay income tax at the rate of 40%. e. Assume that this business combination is to be accounted for under the new-entity method. What is the carrying value of the equipment on the consolidated balance sheet at January 1, 2005? 1) 2) 3) 4) f. $1,400,000 $1,500,000 $1,600,000 $1,700,000

What amount will be reported for future income taxes related to the equipment on REV’s nonconsolidated balance sheet on December 31, 2005? 1) 2) 3) 4) $32,000 future income tax asset $32,000 future income tax liability $40,000 future income tax asset $40,000 future income tax liability Continued… EFA4D05 ©CGA-Canada, 2005 Page 2 of 10 Note: Use the following information to answer parts (g) to (i). In the fall of 2004, the city of Westra approved its budget of $10,000,000 for the construction of a new water treatment plant. Construction began in 2005.

The building was completed on November 30, 2005, but none of the water treatment equipment had yet been installed. The city uses a fund accounting system and maintains separate funds for general operations and capital projects. It uses an encumbrance system to control operating and capital costs. The following table summarizes the financial activities related to the water treatment plant for the year ended December 31, 2005: Nature of Costs Engineering Building Equipment Total Budget Value of Purchase Orders Issued Value of Purchase Orders Outstanding Actual Cost of Work Completed Amount Paid on Work

Completed $ 2,000,000 5,000,000 3,000,000 $ 10,000,000 $ 2,100,000 5,200,000 2,860,000 $ 10,160,000 $ 200,000 0 2,860,000 $ 3,060,000 $ 1,800,000 5,350,000 0 $ 7,150,000 $ 1,500,000 4,815,000 0 $ 6,315,000 Purchase orders have been issued to cover all work required to complete the facility. The work has not yet commenced on the activities for which purchase orders are currently outstanding but work has been completed on all of the other purchase orders. All of the engineering work completed to date relates to the building. The outstanding engineering work relates to the water treatment equipment.

The building and equipment will be capitalized and amortized on a straight-line basis over 20 years for the building and 10 years for the equipment. g. What amount should be used to report the water treatment building at the end of December, 2005? 1) 2) 3) 4) $4,815,000 $5,350,000 $6,315,000 $7,150,000 h. How should the outstanding purchase order of $2,860,000 for the equipment be presented on the financial statements for the year ended December 31, 2005? 1) Offset the $2,860,000 encumbrance against the $2,860,000 estimated commitment and show no impact on the financial statements. ) $2,860,000 should be added to the cost of equipment. 3) $2,860,000 should be reported as a current liability. 4) $2,860,000 should be reported as an encumbrance expense on the income statement. i. Based on information available at this time, how much is the water treatment plant expected to cost once the equipment is installed and the plant is operational? 1) 2) 3) 4) $ 7,150,000 $ 9,375,000 $10,160,000 $10,210,000 Continued… EFA4D05 ©CGA-Canada, 2005 Page 3 of 10 Note: Use the following information to answer parts (j) to (l). KEL Transportation Inc. s a Canadian public company with its head office located in Kelowna, B. C. Its common shares are listed on both the Toronto and Tokyo stock exchanges. KEL has a wholly owned subsidiary in Japan. The subsidiary uses accounting principles consistent with Canadian GAAP except for one item. It amortizes its capital assets using rates allowed for income tax purposes, which has the effect of amortizing the assets over a period much shorter than the useful lives of the assets. Under Canadian GAAP, amortization expense for accounting purposes is based on the useful lives of the assets. . Which of the following would best satisfy the various international users of KEL’s financial statements? 1) Issuing consolidated financial statements prepared in accordance with U. S. GAAP and using the Canadian dollar as the reporting currency 2) Issuing consolidated financial statements prepared in accordance with Canadian GAAP and using the U. S. dollar as the reporting currency 3) Issuing consolidated financial statements prepared in accordance with Japanese GAAP and using the Canadian dollar as the reporting currency ) Issuing consolidated financial statements prepared in accordance with Japanese GAAP and using the U. S. dollar as the reporting currency k. Which objective of financial reporting would best support the accounting policy used by the Japanese subsidiary? 1) 2) 3) 4) l. Matching of expenses to revenue Management evaluation Income tax planning Adequate disclosure Which of the following financial statement concepts can be used primarily to support the adjustment on consolidation to report the capital assets according to Canadian GAAP? 1) 2) 3) 4) Measurement of assets at historical cost

Matching principle Revenue recognition principle Full disclosure principle m. On December 31, 2005, MS Company issued 10-year convertible bonds with a face value of $2,000,000 and a stated rate of 10%, paid semi-annually. The bonds are convertible at the investor’s option. The bonds were issued to provide an effective yield of 9% for proceeds of $2,130,080. If these bonds did not have a conversion feature, the company would have issued the bonds for $1,880,496 to yield 11%. Which of the following is true with respect to the reporting of this financial instrument? ) The liability portion of this financial instrument would be $2,130,080 at December 31, 2005 under the split accounting — incremental approach. 2) The liability portion of this financial instrument would be $2,000,000 at December 31, 2005 under the predominant component approach. 3) The interest expense for the first half of 2006 would be $95,854 under the predominant component approach. 4) The interest expense for the first half of 2006 would be $103,427 under the predominant component approach. Continued… EFA4D05 ©CGA-Canada, 2005 Page 4 of 10 Note: Use the following information to answer parts (n) and (o).

BUR Canada Ltd. is a wholesaler of fresh fruit and vegetables. It imports produce from around the world and sells it to retailers in Montreal and Toronto. On October 3, 2005, BUR received a shipment of fruit and nuts from Cyprus along with an invoice for 100,000 Cyprus pounds (CYP? ). The account is due in 90 days. On October 4, 2005, BUR entered into a forward contract to purchase Cyprus pounds on December 31, 2005 at a forward contract rate of CYP? 1 = $2. 76. The exchange rates were as follows: October 3 and October 4, 2005 Average for quarter 4, 2005 December 31, 2005 CYP? 1 = $2. 80 CYP? = $2. 77 CYP? 1 = $2. 71 n. At what amount should the purchase from Cyprus be reported on BUR’s Canadian dollar financial statements for the quarter ended December 31, 2005? 1) 2) 3) 4) $271,000 $276,000 $277,000 $280,000 o. What amount will be reported in income for foreign exchange gains/losses for the quarter ended December 31, 2005, assuming that the forward contract is designated as a fair value hedge of the pound-denominated payable? 1) 2) 3) 4) EFA4D05 $4,000 exchange gain $4,000 exchange loss $9,000 exchange gain $9,000 exchange loss ©CGA-Canada, 2005 Page 5 of 10 11 Question 2

On October 1, 2005, GOL Limited purchased 15% of the common shares of SIL Corp. for $100,000 cash. On December 31, 2005, GOL’s year end, the fair value of the investment in SIL was $109,000. SIL reported income of $20,000 for the quarter ended December 31, 2005 and $25,000 for the quarter ended March 31, 2006, and paid a dividend of $40,000 on February 14, 2006. On April 1, 2006, GOL sold the investment in SIL for $112,000. GOL has adopted the new Handbook section 3855, on Financial Instruments — Recognition and Measurement, and uses settlement-date accounting for its investments in financial assets where applicable.

Required Prepare all journal entries related to GOL’s investment in SIL, starting with the purchase of the shares and ending with the sale of the shares, under the following conditions: 6 5 26 a. GOL designates the equity investment as an available-for-sale investment. b. GOL designates the equity investment as a held-for-trading investment. Question 3 On December 31, 2001, PIE Company purchased 70% of the outstanding common shares of SKY Company for $2 million in cash. On that date, the shareholders’ equity of SKY totalled $1. 5 million and consisted of $1 million in common shares and $0. million in retained earnings. For the year ending December 31, 2005, the income statements for PIE and SKY were as follows: PIE $ 8,000,000 500,000 8,500,000 5,800,000 800,000 1,050,000 340,000 $ 510,000 Sales Interest and investment income Cost of goods sold Amortization expense Other expenses Income tax expense Net income SKY $ 5,000,000 100,000 5,100,000 3,500,000 630,000 570,000 160,000 $ 240,000 As at December 31, 2005, the condensed balance sheets for the two companies were as follows: PIE SKY Total assets $ 9,000,000 $ 5,500,000 Liabilities Common shares Retained earnings Total $ 5,000,000 2,100,000 ,900,000 $ 9,000,000 $ 3,800,000 1,000,000 700,000 $ 5,500,000 Additional information 1. On December 31, 2001, SKY owned a building with a fair value that was $200,000 greater than its carrying value. The building had an estimated remaining useful life of 14 years and was being amortized on a straight-line basis. 2. On December 31, 2001, SKY had inventory with a fair value that was $80,000 more than its carrying value. SKY uses the LIFO method of inventory valuation. SKY’s inventory increased in all years except for 2005, when it decreased to a level substantially below the inventory on hand at the end of 2001.

Accordingly, the inventory with the fair value excess at the date of acquisition was sold in 2005. Continued… EFA4D05 ©CGA-Canada, 2005 Page 6 of 10 3. Each year, goodwill is evaluated to determine if there has been a permanent impairment. Goodwill impairment was $50,000 in 2003, $40,000 in 2005, and zero in all other years since the date of acquisition. 4. On January 2, 2003, SKY sold a machine to PIE for $840,000. When SKY originally purchased the machine on January 1, 2001 for $1,000,000, it was estimated that its service life would be 10 years with no salvage value.

There was no change in the estimated service life or salvage value at the time of the intercompany sale. 5. During 2005, PIE sold merchandise to SKY for $200,000, a price that includes a gross profit of $50,000. SKY resold 40% of this inventory during 2005 and realized a further gross profit of $35,000. The other 60% remains in SKY’s year-end inventory. On December 31, 2004, the inventories of SKY included merchandise purchased from PIE on which PIE had recognized a gross profit in the amount of $20,000. 6. During 2005, PIE declared and paid dividends of $400,000, and SKY declared and paid dividends of $150,000. . PIE accounts for its investment in SKY using the cost method. 8. Both companies pay income taxes at the rate of 40%. Ignore future income taxes when allocating and amortizing the purchase price discrepancy. Required 15 a. Prepare a consolidated income statement for 2005. Show your supporting calculations in good form. 3 b. Explain how cost of goods sold and noncontrolling interest on the consolidated income statements for 2002 and 2005 would change if SKY had used the FIFO method of inventory valuation. 8 c. EFA4D05 Now assume that PIE uses the equity method to account for its investment in SKY.

Calculate the balance in the investment account at December 31, 2005 on PIE’s nonconsolidated balance sheet. Show your supporting calculations. ©CGA-Canada, 2005 Page 7 of 10 17 Question 4 On December 31, 2003, BAR Inc. acquired 100% of the voting shares of LEY Limited for 1,392,000 Singapore dollars (SD). On the acquisition date, LEY had common shares of SD200,000 and retained earnings of SD340,000. LEY is located in Singapore. It manufacturers transistors. Approximately 80% of its sales are to companies in Canada. BAR assembles computers and office equipment in its manufacturing facility in Scarborough, Ontario.

BAR acquired LEY to secure a reliable source of transistors for use in its computers and office equipment. Most of LEY’s raw material and labour are purchased locally in Singapore. In order to satisfy the extra demand from BAR, LEY built a new manufacturing plant in Singapore in 2004. The plant was financed with a loan from BAR. The loan is denominated in Canadian dollars, is interest free, and is repayable in equal principal payments over 30 years commencing on December 31, 2005. The condensed closed trial balance of LEY for the year ending December 31, 2005 was as follows: Cash Accounts receivable

Inventory Property, plant and equipment Total debits SD 150,000 255,000 500,000 3,390,000 SD 4,295,000 Current monetary liabilities Long-term debt Common shares Retained earnings Accumulated amortization Total credits SD 815,000 1,550,000 200,000 890,000 840,000 SD 4,295,000 Additional information 1. The inventory was purchased uniformly over the last quarter of the year. 2. The manufacturing plant was completed on December 31, 2004 at a cost of SD1,600,000. It has an estimated useful life of 40 years with no anticipated salvage value. LEY uses the straight-line method to calculate amortization xpense. The other capital assets were purchased on January 29, 2001. 3. The changes in LEY’s shareholders’ equity for 2004 and 2005 were as follows: 2004 Net income Dividends paid 2005 SD 800,000 550,000 SD 900,000 600,000 The net income was earned evenly throughout the year, and the dividends were declared and paid on December 15 in each year. 4. The following schedule on the loan from BAR was provided by LEY’s accountant: Date December 31, 2004 December 31, 2005 December 31, 2005 Event Loan advanced by BAR Principal payment Balance outstanding C$ Rate SD $ 1,200,000 40,000 $ 1,160,000 . 75 0. 80 SD 1,600,000 50,000 SD 1,550,000 Continued… EFA4D05 ©CGA-Canada, 2005 Page 8 of 10 5. Foreign exchange rates were as follows: January 29, 2001 December 31, 2003 Average for 2004 Average for quarter 4 for 2004 December 15, 2004 December 31, 2004 Average for 2005 Average for quarter 4 for 2005 December 15, 2005 December 31, 2005 SD1 = C$0. 66 SD1 = C$0. 70 SD1 = C$0. 71 SD1 = C$0. 72 SD1 = C$0. 74 SD1 = C$0. 75 SD1 = C$0. 76 SD1 = C$0. 78 SD1 = C$0. 79 SD1 = C$0. 80 Required 4 a. 3 b. Prepare an adjusting entry to correct the translation of the long-term debt on LEY’s books. 0 16 c. Prepare an independent calculation of the cumulative exchange adjustment at December 31, 2004, using the current rate method. In preparation for the consolidation of LEY with BAR and after recording the adjusting entry from part (b), translate LEY’s balance sheet into Canadian dollars at December 31, 2005, using the temporal method. (For retained earnings, you do not need to prepare a detailed calculation. You can use a plug amount to make the balance sheet balance. ) Question 5 Fairchild Centre is a not-for-profit organization funded by government grants and private donations.

It was established on January 1, 2005 to provide counseling services and a drop-in centre for single mothers. On January 1, 2005, the centre leased an old warehouse in the central part of Smallville for $2,000 per month. It carried out minor renovations in the warehouse to create a large open area for use as a play area for children and three offices for use by the executive director and counselors. The lease runs from January 1, 2005 to June 30, 2007. By that time, the centre hopes to move into new quarters that are more suitable for the activities carried out by the centre.

The following schedule summarizes the cash flows for the year ended December 31, 2005: Cash inflows Government grant for operating costs (Note 1) Donations from individuals with no restrictions Donations from individuals for rent of warehouse for 2. 5 years Donations from individuals for purchase of land (Note 3) Cash outflows Renovation of warehouse Salary of executive director (Note 4) Fees paid to counselors (Note 4) Rent paid for 2. 5 years Other operating expenses Cash, end of year $ 50,000 63,000 60,000 28,000 201,000 25,000 33,000 20,000 60,000 34,000 172,000 $ 29,000 Continued… EFA4D05 ©CGA-Canada, 2005 Page 9 of 10

Additional information 1. The provincial government agreed to provide an operating grant of $50,000 per year. In addition, the government has pledged to match contributions collected by the centre for the purchase of land for construction of a new complex for the centre. The maximum contribution by the government towards the purchase of the land is $100,000. 2. The centre has signed an agreement to purchase a property in the downtown area of Smallville for $225,000. There is an old house on the property, which is presently used as a rooming house. The closing date is anytime between July 1, 2006 and December 31, 2006.

The centre plans to demolish the existing house and build a new complex. 3. The centre has recently commenced a fundraising program to raise funds to purchase the land and construct a new building. So far, $28,000 has been raised from individuals towards the purchase of the land. In the new year, the centre will focus its efforts to solicit donations from businesses in the area. The provincial government will advance the funds promised under its pledge on the closing date for the purchase of the property. 4. All the people working for the centre are volunteers except for the executive director and the counselors.

The executive director receives a salary of $36,000 a year while the counselors bill the centre for professional services rendered based on the number of hours they work at the centre. The director has not yet received her salary for the month of December. One of the counselors received an advance of $1,000 in December 2005 for work to be performed in January 2006. 5. The centre wishes to use the deferral method of accounting for contributions and to segregate its net assets between restricted and unrestricted. It capitalizes the cost of capital assets and amortizes the capital assets over their useful lives. Required a. State the assumptions necessary to recognize the pledge contribution from the provincial government and prepare the journal entry to record the pledge, if applicable. 7 b. Prepare a statement of revenues and expenses for the centre for the year ended December 31, 2005. Show your supporting calculations and state your assumptions. 4 c. Prepare a statement of changes in net assets for the centre for the year ended December 31, 2005. END OF EXAMINATION 100 EFA4D05 ©CGA-Canada, 2005 Page 10 of 10 FINANCIAL ACCOUNTING 4 [FA4] EXAMINATION Before starting to write the examination, make sure that it is complete and hat there are no printing defects. This examination consists of 10 pages. There are 5 questions for a total of 100 marks. READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED. To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms. Glossary From David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer. Compare Contrast Criticize Define Describe Diagram Discuss Evaluate Explain Examine qualities or characteristics that resemble each other. Emphasize similarities, although differences may be mentioned.

Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between) Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons. Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes. Tell the whole story in narrative form. Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description.

This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors. This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. (Just stating your own ideas is not sufficient. ) Cite authorities. Cite advantages and limitations. In explanatory answers you must clarify the cause(s), or reasons(s). State the “how” and “why” of the subject. Give reasons for differences of opinions or of results. Illustrate Indicate

Interpret Justify List Outline Prove Relate Review State Summarize Trace Make clear by giving an example, e. g. , a figure, diagram or concrete example. Provide a short explanation. Translate, give examples of, solve, or comment on a subject, usually making a judgment on it. Prove or give reasons for decisions or conclusions. Present an itemized series or tabulation. Be concise. Point form is often acceptable. (Also Enumerate or Identify) This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details.

Establish that something is true by citing evidence or giving clear logical reasons. Show how things are connected with each other or how one causes another, correlates with another, or is like another. Examine a subject critically, analyzing and commenting on the important statements to be made about it. Present the main points in brief, clear sequence, usually omitting details, illustrations, or examples. Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations. In narrative form, describe progress, development, or historical events from ome point of origin. CGA-CANADA FINANCIAL ACCOUNTING 4 EXAMINATION December 2005 SUGGESTED SOLUTIONS Marks 30 Time: 4 Hours Question 1 Note: 2 marks each Sources/Calculations: a. 1) Topic 3. 3 (Level 1) 70% ? ($100,000 – 4 ? 6% ? $200,000) = $36,400 b. 3) Topic 6. 6 (Level 2) 70% ? ($150,000 – 6% ? $200,000) = $96,600 c. 3) Topic 6. 10 (Level 2) ($200,000 – $20,000) ? 30% = $54,000 d. 1) Topic 6. 4 (Level 1) e. 4) Topic 3. 4 (Level 1) $1,000,000 + $700,000 = $1,700,000 f. 2) Topic 2. 10 (Level 1) [($800,000 – 1/5 ? $800,000) – ($700,000 – 20% ? $700,000)] ? 40% = $32,000 g. 4) Topic 9. 5 (Level 2) 1,800,000 + $5,350,000 = $7,150,000 h. 1) Topic 10. 5 (Level 1) i. 4) Topic 10. 5 (Level 1) $7,150,000 + $3,060,000 = $10,210,000 j. 2) Topic 1. 6 (Level 2) k. 3) Topic 1. 2 (Level 2) l. 2) Topic 1. 3 (Level 2) m. 3) Topic 2. 3 (Level 2) 2,130,080 ? 9% ? 1/2 = $95,854 n. 4) Topic 7. 1 (Level 1) CYP? 100,000 ? 2. 80 = $280,000 o. 1) Topic 7. 3 (Level 1) CYP? 100,000 ? (2. 80 – 2. 76) = $4,000 SFA4D05 ©CGA-Canada, 2005 Page 1 of 6 11 Question 2 Source: Topics 2. 4, 2. 5 and 2. 7 (Levels 1 and 2) 6 a. October 1, 2005 Investment in SIL p>

Gain from appreciation SFA4D05 ©CGA-Canada, 2005 100,000 9,000 6,000 112,000 109,000 3,000 Page 2 of 6 26 Question 3 Source: Topics 3. 10, 4. 5, 4. 10, 5. 1-5. 5, and 5. 7-5. 9 (Level 1) 15 a. PIE COMPANY Consolidated Income Statement year ended December 31, 2005 (1) (1) Sales (8,000,000 + 5,000,000 – (k) 200,000) Interest and investment income (500,000 + 100,000 – (e) 105,000) (4) Cost of goods sold (5,800,000 + 3,500,000 – (k) 200,000 + (i) 30,000 – (j) 20,000 + (b) 56,000) Amortization expense (800,000 + 630,000 + (a) 10,000 – (g) 5,000) Impairment of goodwill (c)

Other expenses (1,050,000 + 570,000) Income tax expense (340,000 + 160,000 – (i) 12,000 + (j) 8,000 + (g) 2,000) Noncontrolling interest ([240,000 + (g) 3,000] ? 30%) Net income (2) (1) (1) (2) (3) $ 12,800,000 495,000 13,295,000 9,166,000 1,435,000 40,000 1,620,000 498,000 72,900 $ 463,100 3 b. Had SKY used FIFO instead of LIFO, the purchase price discrepancy for inventory would have been expensed as part of cost of goods sold in 2002 rather than 2005; that is, the cost of goods sold for 2002 would increase by $56,000 and cost of goods sold for 2005 would decrease by $56,000.

Noncontrolling interest is not affected by the purchase price discrepancy and would not change for either 2002 or 2005. 8 c. Investment in SKY (2) (2) Original cost of investment Cumulative differential amortization (d) Profit in ending inventory — net of tax (i) (1) SKY’s retained earnings, end of 2005 SKY’s retained earnings, at acquisition (2) (1) Unrealized gain on machine (end of 2005) — net of tax (h) Subtotal PIE’s share @ 70% $ 2,000,000 (186,000) (18,000) 1,796,000 $ 700,000 500,000 200,000 (15,000) $ 185,000 129,500 $ 1,925,500 Continued… SFA4D05 ©CGA-Canada, 2005 Page 3 of 6

Supporting calculations: Calculation of purchase discrepancy Cost of 70% of SKY Book value of SKY: Common shares Retained earnings $ 2,000,000 $ 1,000,000 500,000 $ 1,500,000 70% PIE’s ownership Purchase discrepancy Allocated as follows: Building $ 200,000 ? 70% Inventory 80,000 ? 70% Goodwill 1,050,000 950,000 140,000 56,000 $ 754,000 Purchase discrepancy amortization schedule Balance at Acquisition December 31, 2001 Amortization 2002-2004 Building (14 years) Inventory Goodwill Total $ 140,000 56,000 754,000 $ 950,000 $ 30,000 Intercompany dividends 2005 Balance at December 31, 2005 $ 10,000 6,000 40,000 $ 106,000 $ 100,000 0 664,000 $ 764,000 $150,000 ? 70% = $105,000 50,000 $ 80,000 (a) (b) (c) (d) (e) Unrealized profits in intercompany transactions: Before Tax Tax After Tax Proceed on sale Net book value of machine ($1,000,000 ? 8/10) Gain on sale of machine (SKY selling) Realized gain through usage — 2003 Realized gain through usage — 2004 Realized gain through usage — 2005 Unrealized gain, end of 2005 $ 840,000 800,000 40,000 5,000 5,000 5,000 $ 25,000 $ 16,000 2,000 2,000 2,000 $ 10,000 $ 24,000 3,000 3,000 3,000 $ 15,000 (g) (h) Ending inventory (PIE selling) ($50,000 ? 60%)

Beginning inventory (PIE selling) $ 30,000 20,000 $ 12,000 8,000 $ 18,000 12,000 (i) (j) Intercompany sales SFA4D05 $200,000 ©CGA-Canada, 2005 (f) (k) Page 4 of 6 17 Question 4 Source: Topics 7. 1 and 8. 3 (Level 1) 4 a. (1) (1) (1) SD Net assets, January 1, 2004 (a) Net income — 2004 Dividends — 2004 Net assets, December 31, 2004 Calculated Actual (b) Cumulative exchange adjustment (1) 3 Account Rate C$ SD 540,000 800,000 (550,000) 0. 70 0. 71 0. 74 $ 378,000 568,000 (407,000) SD 790,000 0. 75 539,000 592,500 $ 53,500 b. The long-term debt should have been translated to Singapore dollars using the current rate.

Long-term debt should be reported at $1,160,000 / 0. 80 = SD1,450,000 at the end of 2005. The adjusting entry would be: Long-term debt (1,550,000 – 1,450,000 Retained earnings — exchange gain for 2005 10 (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) c. Account SD 100,000 100,000 0. 80 0. 80 0. 78 $ 120,000 204,000 390,000 1,600,000 1,790,000 0. 75 0. 70 1,200,000 1,253,000 (40,000) (800,000) SD 3,455,000 Current monetary liabilities Long-term debt (1,550,000 – 100,000) Common shares Retained earnings (890,000 + 100,000)

C$ SD 150,000 255,000 500,000 Cash Accounts receivable Inventory Property, plant and equipment New plant Other (c) Accumulated amortization New plant (1,600,000 / 40) Other (d) Rate 0. 75 0. 70 (30,000) (560,000) $ 2,577,000 SD 815,000 1,450,000 200,000 990,000 SD 3,455,000 0. 80 0. 80 0. 70 plug $ 652,000 1,160,000 140,000 625,000 $ 2,577,000 Notes: a) b) c) d) SFA4D05 200,000 + 340,000 = 540,000 540,000 + 800,000 –550,000 = 790,000 3,390,000 – 1,600,000 = 1,790,000 840,000 – 40,000 = 800,000 ©CGA-Canada, 2005 Page 5 of 6 16 Question 5 Source: Topics 9. 2, 9. 3, 9. 4 and 10. (Level 1) 5 a. The pledge can be recognized as a receivable when it meets the following criteria: a) the amount to be received can be reasonably estimated; and b) ultimate collection is reasonably assured In this case, it is not certain how much the centre will collect from private individuals. Accordingly, it is not certain how much will be received from the provincial government. To be conservative, a receivable should only be recognized at this time for an amount equal to the funds already collected by the centre. The journal entry to record the pledge would be:

Pledge receivable Net assets restricted for land purchase 7 b. 28,000 28,000 FAIRCHILD CENTRE Statement of Revenues and Expenses year ended December 31, 2005 Revenues Operating grant from provincial government Donations from individuals — unrestricted Donations for rent of warehouse (12 months ? 2,000) (1) (1) (1) $ 50,000 63,000 24,000 137,000 Expenses Salary of executive director (33,000 + 3,000) Fees earned by counselors (20,000 – 1,000) Rent expense (12 months ? 2,000)

Amortization of leasehold improvements (25,000 ? 12/30) Other operating expenses (1) (1) (1) (1) 36,000 19,000 24,000 10,000 34,000 123,000 $ 14,000 Excess of revenues over expenses 4 c. FAIRCHILD CENTRE Statement of Changes in Net Assets year ended December 31, 2005 Net assets Restricted for Land purchase (1) (1) (1) (1) Balance, beginning of year Contributions for purchase of land Pledge for purchase of land Excess of revenues over expenses Balance, end of year $ 0 28,000 28,000 0 $ 56,000 Unrestricted Net Assets $ 0 14,000 $ 14,000 Total $ 0 28,000 28,000 14,000 $ 70,000 END OF SOLUTIONS 100 SFA4D05 CGA-Canada, 2005 Page 6 of 6 CGA-CANADA FINANCIAL ACCOUNTING 4 EXAMINATION December 2005 EXAMINER’S COMMENTS General Comments The overall results on this examination were unsatisfactory. In general, performance was satisfactory on accounting for investments, the mechanics of consolidation, and the translation of foreign operations. Performance was unsatisfactory on the multiple-choice questions and accounting for not-for-profit organizations. Many candidates did not properly integrate the statement of revenues and expenses with the statement of changes in net assets for the not-for-profit organization.

It is important that candidates understand the interrelationships of financial statements. It appeared that some candidates lacked an understanding of the concepts and principles supporting accounting practices, such as accounting for contributions for a not-for-profit organization and eliminating unrealized profits in intercompany transactions for consolidated financial statements. Candidates should ensure that they understand accounting procedures in terms of basic principles and concepts. In several cases, it appeared that the candidate had not read the question carefully and, as a result, did not correctly answer the question.

For example, in the foreign currency question (Question 4), many candidates calculated the cumulative exchange adjustment for 2005 rather than 2004. Specific Comments Question 1 Multiple choice (Levels 1 and 2) This question consisted of 15 multiple-choice questions on various topics and learning objectives. The overall results were unsatisfactory. Candidates had the most difficulty with parts (a) (cost method when a subsidiary has preferred shares), (b) (equity method when a subsidiary has preferred shares), (g) (GAAP for the public sector), (l) (financial statement concepts), and (m) (financial instruments).

These errors indicate a lack of understanding of the economic substance of selected transactions and the basic principles supporting accounting practices. Candidates need to first understand the underlying substance of business transactions and then try to understand the accounting for these transactions. Question 2 Accounting for investments (Levels 1 and 2) The overall results on this question were satisfactory.

Those with a good understanding of the new accounting requirements did quite well on this question; however, those without a good understanding of the new requirements had difficulty. Most candidates correctly determined the journal entry to record the purchase of the investment in SIL shares. However, many candidates did not properly account for the receipt of dividends because they credited “Investment in SIL” rather than “Dividend income”. For part (a), many candidates did not correctly account for “Other comprehensive income” at the end of 2005 or at the date of sale of the investment.

Similarly, for part (b), many candidates did not correctly account for the unrealized gain from appreciation at the end of 2005 and the related impact of this unrealized gain from appreciation on the final gain from appreciation at the date of sale of the investment. Accounting for available-for-sale and held-for-trading securities is relatively new in Canada (and in FA4) and should be studied carefully. Continued… ©CGA-Canada, 2005 Question 3 Consolidations (Level 1) The results on this question were satisfactory. The common errors were as follows: • • • • •

Incorrectly calculating the effect of the gain on the sale of the machine on consolidated amortization expense, consolidated income tax expense, and on the investment account under the equity method Incorrectly adjusting for realized profits from beginning inventory when calculating the investment account under the equity method Adding rather than subtracting (and vice versa) the adjustments for unrealized profits when calculating cost of goods sold Not adjusting for the after-tax realized gain (through usage) of the machine when calculating noncontrolling interest on the consolidated income statement.

Also, adjusting for unrealized profit in beginning and ending inventory when calculating noncontrolling interest on the consolidated income statement. Because these sales were “downstream,” they would have had no effect on noncontrolling interest. Not understanding the impact on noncontrolling interest and not differentiating between 2002 and 2005 when explaining the impact of changing from LIFO to FIFO for the amortization of the purchase discrepancy related to inventory These errors indicate a lack of understanding of the interrelationships of financial statement items such as inventory, income taxes, and

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