Problem&Solution Part 1

2009

EntranceExaminationProblems& Solutions

Copyright

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CMA Ontario February 2009

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CMA Ontario 3

TABLE OF CONTENTS Page Number Problem No.

Topic Problem Solution

Performance Management (MA) MA1 Cost Classification & Behavior – MCQ P-11 S-381 MA2 Cost Classification & Behavior – SMA P-12 S-382 MA3 Cost Classification & Behavior – XDATA Limited P-13 S-383 MA4 Cost Classification & Behavior – Vettor Company P-14 S-384 MA5 Cost Estimation – High-Low Method – Alex Ltd. P-16 S-385 MA6 Manufacturing Cost – Crites Manufacturing P-17 S-386 MA7 Manufacturing Cost – Stoney Manufacturing P-18 S-387 MA8 Activity Based Costing – Madcap Manufacturing P-19 S-390 MA9 Activity Based Costing – Alaire Corporation P-20 S-392 MA10 Activity Based Costing – Johannes Incorporated P-23 S-395 MA11 Activity Based Costing – Uppervale Health Centre P-24 S-396 MA12 Job Order Costing – Redro Limited P-26 S-397 MA13 Job Order Costing – Tapem Limited P-27 S-398 MA14 Job Order Costing – Valani Corporation P-28 S-399 MA15 Job Order Costing – Devoe Company P-29 S-400 MA16 Job Order Costing – Duench Incorporated P-30 S-403 MA17 Job Order Costing – Eagleson Company P-32 S-404 MA18 Process Costing – Equivalent Units – ABC Co. P-34 S-406 MA19 Process Costing – Equivalent Units – Satarelli Corp. P-35 S-409 MA20 Process Costing – Equivalent Units – Tsizis Corp. P-36 S-411 MA21 Process Costing – Equivalent Units – Gagnon Co. P-37 S-413 MA22 Process Costing – Fortis Manufacturing Limited P-38 S-416 MA23 Process Costing – Transferred In, No Spoilage – MCI P-39 S-419 MA24 Process Costing - Transferred In Costs & Spoilage – Wargo P-40 S-426 MA25 Process Costing – Transferred In Costs & Spoilage – Jerdi’s P-41 S-428 MA26 Process Costing – Transferred In Costs and Spoilage - Rauz P-42 S-432 MA27 Process Costing Multiple Choice – Oma Inc. P-43 S-434 MA28 Process Costing – Normal & Abnormal Spoilage – Oil Lite P-44 S-436 MA29 Direct vs Absorption Costing – Broadcast Inc. P-45 S-439 MA30 Direct vs Absorption Costing – Aristotle Inc. P-46 S-441 MA31 Direct vs Absorption Costing – Hoeley Ltd. P-47 S-444 MA32 Direct vs Absorption Costing – HRL Inc. P-48 S-448 MA33 Direct vs. Absorption Costing – Oma Company P-49 S-451 MA34 Direct vs. Absorption Costing – Butron Company P-50 S-455 MA35 MA35 Problem: Direct vs. Absorption Costing – Northway

Corporation P-51 S-456

MA36 Joint Costing and Byproducts – Copper Co. P-53 S-457 MA37 Joint Costing & Sell or Process Further – Alcove Ltd. P-54 S-460 MA38 Sell or Process Further – Smits Ltd. P-56 S-464 MA39 Sell or Process Further – Luna Company P-57 S-465 MA40 Joint Costing – Roye Company P-59 S-466 MA41 Joint Costing – Mirza Inc. P-60 S-468

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MA42 Departmental Costing and Cost Allocation – Peters Ltd. P-61 S-469 MA43 Department Cost Allocation – Danny Ltd. P-62 S-471 MA44 Cash Budget – Splash Inc. P-63 S-474 MA45 Budgeting – City of Jimmytown P-64 S-476 MA46 Budgeting – Moore Company P-65 S-477 MA47 Budgeting – Storey Manufacturing Company P-66 S-478 MA48 Budgeting – Gowan Corporation P-68 S-480 MA49 Budgeting – Martin Company P-71 S-481 MA50 Flexible Budget Variances – Funnie Flexible Inc. P-72 S-482 MA51 Flexible Budget Variances – Appleby Inc. P-73 S-483 MA52 Variances – Copper Bottom Pot Company Ltd. P-74 S-484 MA53 Variances – Addy Company P-75 S-485 MA54 Variances – Andres Industries P-76 S-486 MA55 Variances – Brien Manufacturing Company P-77 S-487 MA56 Variances – Boutin Glass Works P-78 S-488 MA57 Variances – Ferguson Foundry Ltd. P-79 S-489 MA58 Variances, Break Even and Pricing – PFC P-82 S-495 MA59 Variance Analysis – F & G Inc. P-87 S-510 MA60 Variance Analysis – Trombone Ltd. P-88 S-513 MA61 Revenue Variances – New Look Jacket Inc. P-89 S-517 MA62 Revenue Variances – Sleepy Hollow Hotels, Ltd. P-90 S-519 MA63 Cost Volume Profit Analysis – ABC Company P-93 S-523 MA64 Cost Volume Profit Analysis – Konrad Inc. P-94 S-525 MA65 Cost Volume Profit Analysis – Excellent Textbook Co. P-95 S-526 MA66 Cost Volume Profit Analysis – Nixon Company P-96 S-527 MA67 Cost Volume Profit Analysis – All-Day Candy Co. P-97 S-528 MA68 Cost Volume Profit Analysis – Mistry Company P-98 S-529 MA69 Relevant Costing – Special Orders – CBA Inc. P-99 S-530 MA70 Relevant Costing – Special Orders – Kimco Inc. P-100 S-531 MA71 Relevant Costing – Special Orders – George Jackson P-101 S-532 MA72 Relevant Costing – Special Orders – Strutt Company P-102 S-533 MA73 Relevant Costing – Make or Buy – Todders Ltd. P-103 S-534 MA74 Relevant Costing – Make or Buy – Surtel Company P-104 S-535 MA75 Relevant Costing – Buying Decision – Tsui Company P-105 S-536 MA76 Relevant Costing – Drop a Product Line – Licnep Ltd. P-107 S-537 MA77 Relevant Costing – Drop a Product Line – Andres Co. P-108 S-538 MA78 CM Analysis and Scarce Resources – John’s Company P-109 S-539 MA79 CM Analysis and Scarce Resources – Paulie Limited P-110 S-540 MA80 CM Analysis and Scarce Resources – Ronson Electric P-111 S-541 MA81 CM Analysis and Scarce Resources – Lam Company P-112 S-542 MA82 Linear Programming – Tranta Company P-113 S-543 MA83 Linear Programming – XYZ Inc. P-114 S-544 MA84 Linear Programming – The Fluffy Toy Company P-115 S-545 MA85 Linear Programming – Harrington Corporation P-116 S-546 MA86 Linear Programming – Pools and Things Ltd. P-117 S-547 MA87 Decision Analysis under Uncertainty – Slick Ltd. P-119 S-551 MA88 Decision Analysis under Uncertainty – Dynaco Co. P-120 S-556

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MA89 Payoff Tables (Expected Values) & EVPI – Germain Ltd. P-121 S-558 MA90 Expected Values (Payoff Tables) – AMC Corporation P-122 S-560 MA91 Expected Values (Payoff Tables) & EVPI – Etam Inc. P-123 S-562 MA92 Expected Values (Payoff Tables) – HotDogs P-124 S-564 MA93 Expected Values (Payoff Tables) – Propeller Inc. P-125 S-565 MA94 Expected Values (Payoff Tables) – QTI Ltd. P-126 S-566 MA95 Expected Values (Payoff Tables) – The Elwood Co. P-127 S-567 MA96 Expected Values (Payoff Tables) – The Gallant Co. P-128 S-568 MA97 Expected Values (Payoff Tables) – The Finch Company P-129 S-569 MA98 Pricing – Katz Inc. P-130 S-570 MA99 Pricing – Classic Corporation P-131 S-571 Page Number Problem No.


Performance Measurement (ME) ME1 Transfer Pricing – The Whole Company P-133 S-573 ME2 Transfer Pricing – Diversified Liquid Products P-135 S-575 ME3 Transfer Pricing – West Industries P-138 S-577 ME4 Transfer Pricing – Parker Corporation P-140 S-578 ME5 Transfer Pricing – Canadian Motors International P-141 S-579 ME6 Transfer Pricing – Seagull Controls Limited P-147 S-584 ME7 ROI and RI – General P-153 S-590 ME8 ROI & RI – Osti Industries P-154 S-591 ME9 ROI & RI – Three Companies P-156 S-592 ME10 ROI & Residual Income – Bate Inc. P-157 S-595 ME11 ROI & Residual Income – Divisional Income P-158 S-596 Page Number Problem No.


Financial Reporting (FA) FA1 Conceptual Framework of Accounting P-159 S-597 FA2 Conceptual Framework – MCQ P-161 S-599 FA3 LT Contracts – Percentage of Completion – Del-Ray P-163 S-600 FA4 LT Contracts – Percentage of Completion – Babra Limited P-164 S-602 FA5 LT Contracts – Percentage of Completion – Big Co. P-165 S-605 FA6 LT Contracts – Percentage of Completion – Hong Inc. P-166 S-609 FA7 Long Term Contracts – Olcheski P-167 S-613 FA8 Financial Statements – MCQ P-168 S-615 FA9 Financial Statements – Martina Company P-170 S-616 FA10 Statement of Cash Flows – ARG Incorporated P-172 S-621 FA11 Discontinued Operations – Tenued Company P-175 S-623 FA12 Discontinued Operations – Big Blue Fish Company P-176 S-625 FA13 Discontinued Operations – Contin Limited P-177 S-626 FA14 Discontinued Operations & Unusual Items – Stapling Ltd. P-178 S-627 FA15 Accounting Policy Changes, Errors & Estimates – General P-179 S-628

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FA16 Accounting Changes – ABC Company P-180 S-631 FA17 Current Assets – Cash – Will’s Golf Shop P-181 S-632 FA18 Current Assets – A/R – Jurdi Company P-182 S-633 FA19 Current Assets – A/R – Webster Company P-183 S-634 FA20 Inventory – Hello Incorporated P-184 S-635 FA21 Inventory – BQI Limited P-185 S-639 FA22 Inventory – KCI Limited P-186 S-642 FA23 Inventory – STL Limited P-187 S-645 FA24 Inventory – Tripper Incorporated P-188 S-646 FA25 Inventory – Bog Box Store Incorporated P-189 S-647 FA26 Inventory Valuation – Trading Incorporated P-190 S-648 FA27 Inventory Valuation – Windsor Company P-191 S-649 FA28 Inventory Valuation - Schmitt Corporation P-192 S-650 FA29 Inventory Valuation – Udit Company P-193 S-651 FA30 Investment in Bonds – Various P-194 S-652 FA31 Long Term Investments – Bonds – A Company P-196 S-655 FA32 Investments – Available for Sale & Trading – Kumara P-197 S-657 FA33 Investments – Available for Sale & Trading – Chanio P-198 S-660 FA34 Investments – Available for Sale & Trading – Walshen P-199 S-663 FA35 Investments – Available for Sale & Trading – Maxe P-201 S-667 FA36 Investments: Acquisition of Shares – A Company P-202 S-670 FA37 Equity Investments – Equity Accounting – Sara Ltd. P-203 S-671 FA38 Equity Investments – Equity Accounting – JDL Inc. P-204 S-673 FA39 Equity Investments – Equity Accounting – Tec Ltd. P-205 S-675 FA40 Equity Investments – Equity Accounting – A Company P-206 S-677 FA41 Investments – Trading Securities – Tarsky P-207 S-679 FA42 Capital Assets – Able Limited P-208 S-680 FA43 Capital Assets – Alfaro Company P-209 S-681 FA44 Capital Assets – Berns Corp. P-210 S-682 FA45 Capital Assets – LaVoie Company P-212 S-683 FA46 Capital Assets – Linnay Company P-213 S-684 FA47 Leases – Zubinski Inc. P-214 S-685 FA48 Leases – Karen Company P-215 S-688 FA49 Leases – Badget Car Rental Limited P-217 S-691 FA50 Pensions – Pierce Incorporated P-218 S-694 FA51 Pensions – Charter Limited P-219 S-696 FA52 Pensions – Petra Limited P-220 S-698 FA53 Pensions – Vandoros Company P-221 S-700 FA54 Research & Development – Precent Inc. P-222 S-702 FA55 Earnings per Share – Charley Company P-223 S-703 FA56 Earnings per Share – Holten Company P-224 S-704 FA57 Earnings per Share – Totter Inc. P-225 S-706 FA58 Earnings per Share – Tratter Inc. P-226 S-708 FA59 Other Intangibles – Rafter Company P-227 S-711 FA60 Foreign Currency Transactions – Paulson Company P-228 S-712 FA61 Foreign Currency Transactions – Jamieson Corporation P-229 S-714 FA62 Foreign Currency Transactions – Hyder Corporation P-230 S-715

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FA63 Foreign Currency Hedging – Tratter Incorporated P-231 S-716 FA64 Foreign Currency Hedging – Bali’s Furniture Inc. P-233 S-731 FA65 Foreign Currency Hedging – Ostel orporation P-235 S-746 FA66 Foreign Currency Hedging – Tonawanda Incorporated P-237 S-764 FA67 Foreign Currency Hedging – Talahachi Limited P-239 S-776 FA68 Foreign Currency Translation – Carter Company P-241 S-778 FA69 Foreign Currency Translation – Renfril Limited P-243 S-791 FA70 Foreign Currency Translation – Manitoba Company P-245 S-795 FA71 Foreign Currency Translation – Botlen Incorporated P-247 S-802 FA72 Foreign Currency Translation – Alegria Incorporated P-249 S-808 FA73 Foreign Currency Translation – Treflac Limited P-251 S-816 FA74 Future Tax Asset/Liability – General P-253 S-817 FA75 Future Tax Asset/Liability – Waco Limited P-254 S-818 FA76 Future Tax Asset/Liability – Unip Limited P-255 S-820 FA77 Future Tax Asset/Liability – Tack Incorporated P-256 S-823 FA78 Future Tax Asset/Liability – Taron Incorporated P-257 S-825 FA79 Future Tax Asset/Liability – Torin Incorporated P-258 S-826 FA80 Future Tax Asset/Liability – Nguyen Company P-259 S-827 FA81 Note Payable – Nguyen Company P-261 S-835 FA82 Long Term Liabilities – Bonds – TGH Ltd. P-262 S-841 FA83 Long Term Liabilities – Bonds – Paolo Inc. P-263 S-843 FA84 Long Term Liabilities – Bonds – Shrivastava Company P-264 S-844 FA85 Long Term Liabilities – Bonds – Nasir Company P-265 S-846 FA86 Long Term Liabilities – Bonds – Huffman Corporation P-267 S-848 FA87 Long Term Liabilities – Bonds – Lovejoy Company P-268 S-849 FA88 Long Term Liabilities – Bonds – General P-269 S-850 FA89 Share Reacquisition and Retirement & Treasury Shares –

Igreda Inc. P-270 S-851

FA90 Segmented Reporting – Eciove Limited P-271 S-852 FA91 Segmented Reporting – Couven Incorporated P-272 S-854 FA92 Not for Profit Accounting – Street Helper Group P-273 S-856 FA93 Not for Profit Accounting – TCSMR P-275 S-859 FA94 Not for Profit Accounting – The Heritage Society P-276 S-860 FA95 Not for Profit Accounting – Primer Collegiate P-278 S-861 FA96 Not for Profit Accounting – Senior Citizen Help Centre P-279 S-862 FA97 Financial Statement Ratios – ARG Corporation P-280 S-863 FA98 Financial Statement Ratios – Kuehl Company P-282 S-864 Page Number Problem No.


Financial Management Corporate Finance (FMC) FMC1 Financial Managers – MCQ P-285 S-867 FMC2 Time Value of Money – MCQ P-287 S-868 FMC3 Time Value of Money – Retirement P-288 S-869 FMC4 Time Value of Money – Retirement P-289 S-870

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FMC5 Time Value of Money - Project P-290 S-871 FMC6 WACC - MCQ P-291 S-872 FMC7 WACC - JHM Corporation P-293 S-873 FMC8 Bonds - MCQ P-294 S-874 FMC9 Bonds - Real Estate Developer P-295 S-875 FMC10 Bonds P-296 S-876 FMC11 Capital Growth Model - Renfroe P-297 S-877 FMC12 NPV - Emithan Flying Company P-298 S-878 FMC13 NPV - Rockyford Co. P-299 S-879 FMC14 NPV - Balgava Company P-300 S-880 FMC15 NPV - S.W. Appliances Ltd. P-301 S-881 FMC16 Discounted Cash Flow and Special Order - Tratter Inc. P-307 S-884 FMC17 Net Present Value – Make or Buy - Tratter Incorporated P-309 S-886 FMC18 Capital Budgeting (DCF) - Retil Limited P-312 S-888 FMC19 Capital Budgeting (DCF) - Mister Donut P-313 S-889 FMC20 Capital Budgeting (DCF) - Luna Mining P-314 S-892 FMC21 Mergers & Acquisitions - MCQ P-316 S-894 FMC22 Business Valuation - Organizations A & B P-318 S-895 FMC23 Long Term Financing - MCQ P-319 S-896 FMC24 Forecasting - Howard Company P-320 S-897 FMC25 Long Term Financing - HWB Company P-321 S-898 FMC26 Short Term Financing - Trade Discounts P-322 S-899 FMC27 Long Term Financing - Rights P-323 S-900 FMC28 Financial Markets - MCQ P-324 S-901 FMC29 EOQ - English Bread Company P-326 S-902 FMC30 Short Term Financing - Zachariah Inc. P-327 S-903 FMC31 Leverage P-328 S-904 FMC32 Leverage P-329 S-905 FMC33 Leverage - Wasu Company P-330 S-906 FMC34 Capital Structure P-331 S-907 FMC35 Capital Structure P-332 S-908 FMC36 Capital Structure P-333 S-909 FMC37 Capital Structure - RR Company P-334 S-910 FMC38 Capital Structure - Simard Company P-335 S-911 FMC39 Financial Management - Corporate Finance MCQ P-336 S-912 Page Number Problem No.


Financial Management Tax (FMT) FMT1 Business Income - Bat Company P-359 S-931 FMT2 CCA - Tofu Inc. P-360 S-932 FMT3 CEC - Sprout Corporation P-361 S-933 FMT4 CCA - Blake Incorporated P-362 S-934 FMT5 CEC - Greenwood Limited P-363 S-935 FMT6 CCA - Ranger Incorporated P-364 S-936

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FMT7 CCA & Rental Income - Beta Corporation P-365 S-937 FMT8 Capital Gains - Magma Corporation P-366 S-938 FMT9 Taxable Income - Jermat Ltd. P-367 S-939 FMT10 Federal Tax Payable - Jeb Corporation Limited P-370 S-942 FMT11 Small Business Deduction - Botsal Inc. P-371 S-943 FMT12 Associated Corporations - Coco Inc. P-372 S-944 FMT13 Investment Tax Credit - Researchit Inc. P-373 S-945 FMT14 RDTOH - Peleluc Inc. P-374 S-946 FMT15 Taxable Income & Tax Payable - ABC Corporation P-375 S-947 Page Number Problem No.


Internal Control (IC) IC1 Internal Control - MCQ P-377 S-949

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MA1 Problem: Cost Classification & Behavior - MCQ

1. Consider a single hard copy of this study guide as a cost object. What would be the best three labels to classify the relation between this cost object and the following two costs of producing the cost object respectively: (1) the paper, and (2) the one-time fees paid to the authors (i.e., not royalties)?

a. (1) Direct cost, (2) Variable cost. b. (1) Variable cost, (2) Unavoidable cost. c. (1) Fixed cost, (2) Variable cost. d. (1) Direct cost, (2) Fixed cost. e. (1) Avoidable cost, (2) Variable cost.

2. Given that a cost has been already identified as a variable cost, which of the following

additional descriptions of that cost is incompatible with that identification? a. The cost, in total, does not change with changes in the volume of the cost driver. b. The cost can be traced directly to the cost object. c. The cost, in total, does change with changes in the volume of the cost driver. d. The cost cannot be traced directly to the cost object. e. The cost is not a prime cost.

3. The total direct labour cost of producing 100 units of Product X is $50.00. The direct

material cost of producing these 100 units is perfectly variable and the cost driver is the number of units produced. The cost of the direct material traced to each unit is $1.25. Indirect costs are completely fixed at $75.00 for the production of these 100 units. What are the total conversion costs for these 100 units of Product X?

a. $275.00 b. $250.00 c. $200.00 d. $175.00 e. $125.00

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MA2 Problem: Cost Classification & Behavior - SMA A portion of the costs incurred by business organizations is designated as direct labor cost. As used in practice, the term ‘direct labor cost’ has a wide variety of meanings. Unless the meaning intended in a given context is clear, misunderstanding and confusion are likely to ensue. If a user does not understand the elements included in direct labor cost, erroneous interpretations of the numbers may occur and could result in poor management decisions. The National Association of Accountants has issued Statement on Management Accounting (SMA) Number 4C, 'Definition and Measurement of Direct Labor Cost,’ to assist management accountants in dealing with problems that may arise in interpreting and understanding direct labor costs. Along with providing a conceptual definition of direct labor cost, this Statement describes how direct labor costs should be measured. Measurement of direct labor costs involves two aspects: (1) the quantity of labor effort that is to be included, that is, the types of hours or other units of time that are to be counted; and (2) the unit price by which each of these quantities is multiplied to arrive at a monetary cost. Required: a. Distinguish between direct labor and indirect labor. b. Explain why some nonproductive labor (e.g., coffee breaks, personal time) is treated as

direct labor while other nonproductive labor (e.g., downtime, training) is treated as indirect labor.

CMA, Adapted

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MA3 Problem: Cost Classification & Behavior – XDATA Limited The following information was available about supplies cost for the first four months of the year for XDATA Limited.

Month Production Volume

Supplies Cost

January 1,400 $ 5,400 February 3,200 14,200 March 1,200 6,200 April 3,000 14,800

1. Using the high-low method, an estimate of supplies cost at 2,000 units of production would be:

a. $9,200 b. $8,925 c. $13,950 d. $9,400 e. Inappropriate to determine from the information given.

2. Using the same data and the high-low method again, an estimate of supplies cost at 4,000 units of

production would be: a. $9,200 b. $8,925 c. $13,950 d. $9,400 e. Inappropriate to determine from the information given.

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MA4 Problem: Cost Classification & Behavior – Vettor Company The Vettor Company manufactures electrical components. Plant management has experienced difficulties with fluctuating monthly overhead costs. Management wants to be able to estimate overhead costs to plan its operations and its financial needs. A trade association publication reports that for companies manufacturing electrical components, overhead tends to vary with machine-hours. Monthly data were gathered on machine-hours and overhead costs for the past two years. There were no major changes in operations over this period of time. The raw data are as follows:

Month Machine- Overhead Number Hours Costs

1 20,000 $84,000 2 25,000 99,000 3 22,000 89,500 4 23,000 90,000 5 20,000 81,500 6 19,000 75,500 7 14,000 70,500 8 10,000 64,500 9 12,000 69,000 10 17,000 75,000 11 16,000 71,500 12 19,000 78,000 13 21,000 86,000 14 24,000 93,000 15 23,000 93,000 16 22,000 87,000 17 20,000 80,000 18 18,000 76,500 19 12,000 67,500 20 13,000 71,000 21 15,000 73,500 22 17,000 72,500 23 15,000 71,000 24 18,000 75,000

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These data were entered into Excel and a regression was run on the data. The following output was obtained:

R-square 0.91 t-value of the Independent Variable 15.00

Coefficients of the equation: Intercept 39,859 Independent variable (slope) 2.15

Required – a. Use the high-low method to estimate the overhead costs. b. Are the regression analysis results acceptable? c. Use the results of both the high-low method and the regression to prepare the cost estimation

equation and to prepare a cost estimate for 22,000 machine hours.

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MA5 Problem: Cost Estimation – High-Low Method – Alex Limited The following report for Alex Limited details direct labour costs and output levels for the twelve months ended December 31, 200X. Units Produced Direct

Labour Costs January 21,560 $336,336 February 19,710 300,975 March 24,300 346,275 April 23,190 320,022 May 18,690 256,980 June 18,460 258,440 July 18,420 257,880 August 16,120 256,120 September 17,950 278,225 October 31,040 450,080 November 26,190 390,231 December 23,430 325,677 Required: 1. Estimate the cost function using the high-low method.

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MA6 Problem: Manufacturing Cost– Crites Manufacturing The following information is available for the Crites Manufacturing Company for the year ended December 31, 20x5:

Sales $325,000

Work in process, January 1 19,000

Work in process, December 31 15,600

Direct materials inventory, January 1 21,400

Direct materials inventory, December 31 19,800

Finished goods inventory, January 36,700

Finished goods inventory, December 31 13,600

Direct materials purchased 32,400

Direct labour 52,000

Supervisory and indirect labour 27,300

Administrative salaries 43,000

Supplies and indirect materials 5,400

Heat, light, and power (70% for manufacturing plant) 31,600

Amortization (80% for manufacturing plant) 37,500

Property taxes (75% for manufacturing plant) 9,900

Administrative costs 10,950

Marketing costs 42,600 Required - Prepare an income statement with a supporting schedule of cost of goods manufactured.

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MA7 Problem: Manufacturing Cost – Stoney Manufacturing The following information pertains to Stoney Manufacturing for 20X6:

Direct labour $ 30,000 Sales 400,000 Selling expenses 50,000 Raw (Direct) materials on hand:

January 1 8,000

December 31 4,000 General and administrative expenses 18,000 Finished goods:

January 1 25,000

Work in process:

January 1 19,000

December 31 18,000 Direct material purchases 47,000 Depreciation: factory 20,000 Indirect labour 3,000 Indirect materials used 7,000 Marketing promotions 1,500 Factory taxes 11,000 Utilities 20,000 Courier costs (office) 900 Miscellaneous plant overhead 4,000 Plant repairs and maintenance 9,000 Customer service costs 3,000 Fire insurance: factory equipment 3,000 Materials handling costs 8,000

Additional Information: a. The gross profit margin is 73.25%

b. Depreciation is charged to production at 70%

c. Utilities are charged to production at 90%

Required: 1. Prepare a schedule of cost of goods manufactured for the year ended December 31. 2. Prepare a schedule of cost of goods sold. 3. Prepare an income statement for the year ended December 31.

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MA8 Problem: Activity Based Costing – Madcap Manufacturing

Mad Cap Manufacturing Co. produces 80 different types of hats and caps. Lately, sales and profits have been declining, although the overall market for hats and caps has actually been growing. The company has, in the past, used a job-order costing system for each production run. Under this system, factory overhead was allocated on the basis of direct labour hours. However, direct labour is now a relatively small part of production costs, as the company has automated its factory in the past two years.

You were hired as a consultant to the plant manager last November. You have analyzed the budgeted costs and activities for 20x7 and broken them down as follows:

Direct materials (100,000 meters) $75,000 Direct labour (10,000 hours) 160,000 Set-up costs (750 set-ups) 22,500 Maintenance (20,000 machine hours) 40,000 Production scheduling (500 batches) 7,500 Inspection (800 inspections) 16,000 Material handling (100,000 meters) 6,000 Depreciation (20,000 machine hours) 200,000 Power (20,000 machine hours) 8,000

The company has been asked to bid on an order for 1,000 caps with a special design. This order is forecast to require the following:

Direct materials 500 metersDirect labour 60 hoursSet-ups 2Inspections 2Machine hours 100 hours

The order would be produced in one production run (batch). The company normally sets its selling price at 40% above full manufacturing cost. Required - How much would Mad Cap Manufacturing Co. bid on this special order using direct labour hours to apply factory overhead?

Repeat requirement (1), but use ABC to apply the factory overhead.

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MA9 Problem: Activity Based Costing – Alaire Corporation Alaire Corporation manufactures several different types of printed circuit boards; however, two of the boards account for the majority of the company's sales. The first of these boards, a television circuit board, has been a standard in the industry for several years. The market for this type of board is competitive and, therefore, price sensitive. Alaire plans to sell 65,000 of the TV boards in 20x0 at a price of $150 per unit. The second high-volume product, a personal computer (PC) circuit board, is a recent addition to Alaire's product line. Because the PC board incorporates the latest technology, it can be sold at a premium price; the 20x0 plans include the sale of 40,000 PC boards at $300 per unit. Alaire's management group is meeting to discuss strategies for 20x0, and the current topic of conversation is how to spend the sales and promotion dollars for next year. The sales manager believes that the market share for the TV board could be expanded by concentrating Alaire's promotional efforts in this area. In response to this suggestion, the production manager said, "Why don't you go after a bigger market for the PC board? The cost sheets that I get show that the contribution from the PC board is more than double the contribution from the TV board. I know we get a premium price for the PC board; selling it should help overall profitability." Alaire uses a standard cost system, and the following data apply to the TV and PC boards.

TV Board PC Board Direct material $80 $140 Direct labor 1.5 hours 4 hours Machine time .5 hours 1.5 hours

Variable factory overhead is applied on the basis of direct labor hours. For 20x0, variable factory overhead is budgeted at $1,120,000, and direct labor hours are estimated at 280,000. The hourly rates for machine time and direct labor are $10 and $14, respectively. Alaire applies a material handling charge at 10 percent of material cost; this material handling charge is not included in variable factory overhead. Total 20x0 expenditures for material are budgeted at $10,600,000. Ed Welch, Alaire's controller, believes that before the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. As Welch explained to the group, "Activity-based costing integrates the cost of all activities, known as cost drivers, into individual product costs rather than including these costs in overhead pools." Welch has prepared the schedule shown below to help the management group understand this concept.

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Budgeted Cost Cost Driver Annual Activity for

Cost Driver Material overhead: Procurement $ 400,000 Number of parts 4,000,000 parts Production scheduling 220,000 Number of boards 110,000 boards Packaging and shipping 440,000 Number of boards 110,000 boards $1,060,000 Variable overhead: Machine set-up $ 446,000 Number of set-ups 278,750 set-ups Hazardous waste disposal 48,000 Pounds of waste 16,000 pounds Quality control 560,000 Number of inspections 160,000 inspections General supplies 66,000 Number of boards 110,000 boards $1,120,000 Manufacturing: Machine insertion $1,200,000 Number of parts 3,000,000 parts Manual insertion 4,000,000 Number of parts 1,000,000 parts Wave soldering 132,000 Number of boards 110,000 boards $5,332,000

Required per unit TV Board PC Board

Parts 25 55 Machine insertions 24 35 Manual insertions 1 20Machine set-ups 2 3Hazardous waste .02 lb. .35 lb.Inspections 1 2 "Using this information," Welch explained, "we can calculate an activity-based cost for each TV board and each PC board and then compare it to the standard cost we have been using. The only cost that remains the same for both cost methods is the cost of direct material. The cost drivers will replace the direct labor, machine time, and overhead costs in the standard cost."

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Required - a. Identify at least four general advantages that are associated with activity-based costing. b. On the basis of standard costs, calculate the total gross profit expected in 20x0 for Alaire

Corporation's 1. TV board. 2. PC board.

c. On the basis of activity-based costs, calculate the total gross profit expected in 20x0 for Alaire

Corporation's 1. TV board. 2. PC board.

d. Explain how the comparison of the results of the two costing methods may impact the decisions made

by Alaire Corporation's management group.

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MA10 Problem: Activity Based Costing – Johannes Incorporated Johannes Incorporated manufactures two types of mattresses, ‘premium’ and ‘regular’. There are two direct-cost categories, direct materials and direct manufacturing labour and three indirect-cost pools (activity cost pools). The three indirect (activity) cost pools are materials handling, cutting, and assembly. There are no other cost pools associated with production of the mattresses. Information related to the indirect (activity) cost pools is as follows:

Manufacturing Activity Area

Budgeted Costs for 20X7

Cost Driver Used as Allocation Base (or activity measure)

Cost Allocation Rate (or activity

rates) Materials-handling 1,120,000 Parts 1.40 Cutting 2,560,000 Parts 3.20 Assembly 2,240,000 Direct manufacturing

labour hours 28.00

Data for September 20X7 with respect to quantities, direct material, parts & labour are: Units

Produced Direct

Material Costs Number of

Parts Direct

Manufacturing Labour Hours

Regular 2,000 $624,000 40,000 6,000 Premium 500 210,000 20,000 2,000 The direct manufacturing labour rate is $25 per hour. There are no beginning or ending inventories. The upstream activities to manufacturing (research and design) and the downstream activities (marketing, distribution, logistics, and customer service) were budgeted per unit as follows: Upstream

activities Down Stream

activities Regular $40 $87 Premium $83 $104 Required: Compute the full product costs per unit for both the regular and premium mattress lines.

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MA11 Problem: Activity Based Costing – Uppervale Health Centre Uppervale Health Centre runs four programs: (1) alcoholic rehabilitation, (2) drug-addict rehabilitation, (3) children’s services, and (4) after-care (counseling and support of patients after release from a mental hospital). The Centre’s budget for 2005 follows: Professional salaries: 6 physicians x $100,000 $600,000 19 psychologists x $50,000 950,000 23 nurses x $25,000 575,000 $2,125,000Medical supplies 300,000General overhead (administrative salaries, rent, utilities, etc.) 1,275,000 $3,700,000 The staff completed surveys indicating the time devoted to each of the four programs. Employee allocations to individual programs are: Alcohol Drug Children After-care Total Employees Physicians -- 2 4 -- 6 Psychologists 6 4 -- 9 19 Nurses 4 6 4 9 23 Eighty (80) patients are in residence in the alcohol program, each staying about a half-year. Thus, the clinic provided 40 patient-years of service in the alcohol program. Similarly, 100 patients were involved in the drug program for about a half-year each. Thus, the clinic provided 50 patient-years of service in the drug program. The clinic provided 50 and 60 patient-years of service to Children’s Services and After-care respectively. Other information gathered by the Centre: 1. Administrative costs and consumption of medical supplies depend on the number of patients

in each department and the length of their stays (that is, patient-years). 2. Rent and Clinic Maintenance depends on the square metres of space occupied by each

program. 3. Laboratory service costs are driven by the number of laboratory tests performed. 4. General overhead costs consist of:

Rent and clinic maintenance $ 200,000 Administrative costs to manage patient charts, food, laundry 800,000 Laboratory services 275,000 1,275,000

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3. Other information about individual departments:

Alcohol Drug Children After-care Total Square metres of space occupied by each program

9,000 9,000 10,000 12,000 40,000

Number of patients 80 100 100 120 400Number of laboratory tests 400 1,400 3,000 700 5,500

REQUIRED 1a. Calculate the indirect-cost rates for medical supplies, rent and clinic maintenance,

administrative cost rate for patient charts, food, and laundry, and laboratory services using an activity-based costing approach.

b. What are the total costs of each program and the cost per patient-year using an activity-based costing approach?

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MA12 Problem: Job Order Costing – Redro Limited Redro Ltd. is a custom manufacturer and uses a job order costing system. Information relating to production for the month of August is as follows: Job orders completed $400,000 Cost of job orders shipped to customers $360,000 Selling price cost + 25% Direct materials issued $110,000 Beginning W-I-P $85,000 Direct labour $180,000 Direct labour hours 12,000 Actual manufacturing overhead $129,000 Beginning finished goods 0 Manufacturing overhead is applied based on direct labour hours. The manufacturing overhead rate is calculated at the beginning of the year. Estimated yearly manufacturing overhead is $2,400,000, and budgeted labour hours are 240,000. Required: 1. What is the balance in W-I-P with respect to applied overhead at the end of August? 2. What is the under- or overapplied overhead for the month of August (assume no under-

or overapplied balance carried forward)?

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MA13 Problem: Job Order Costing – Tapem Limited Tapem Ltd. has two departments, Department I and Department II. Tapem uses a job order system and applies manufacturing overhead to products on the basis of direct labour hours for Department I and machine hours for Department II. At the beginning of the year, Tapem Ltd. estimated the following:

Dept. I Dept. II Direct labour hours 26,000 8,000Machine hours 5,000 32,000Manufacturing overhead $403,000 $352,000

Job number 1368, which produced 65 units, required the following: Dept. I Dept. IIDirect materials $845 $468Direct labour $1,335 $132Direct labour hours 89 8Machine hours 4 96

At the end of the year, actual manufacturing overhead was $463,105 for Department I and $347,600 for Department II. In addition, actual direct labour hours and machine hours for Department I and II for the year are as follows: Dept. I Dept. IIDirect labour hours 28,510 8,200Machine hours 6,150 33,400

Required: 1. What is the overhead cost applied to job 1368? 2. What is the under- or overapplied manufacturing overhead for Department I and II for

the year?

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MA14 Problem: Job Order Costing – Valani Corporation The Valani Corporation manufactures made-to-order widgets and uses a normal job order cost costing system. During the month of August, the following jobs were worked on and the following costs incurred. Job A4 Job A5 Job A6 Job A7 TotalBalance in opening Work in Process $5,600 $7,800 -

- $13,400

Costs added during August -

Direct materials 10,000 20,000 $16,000 $4,000 50,000 Direct labour 5,000 4,000 3,000 1,500 13,500 Job status at end of August

Sold

CompleteIn FG

Inventory

CompleteIn FG

Inventory

In WIP

Inventory Valani’s controller budgeted total overhead costs to be $600,000 and budgeted direct labour cost to be $150,000. Overhead is allocated on the basis of direct labour cost. The company marks up their jobs at 40% over cost. There were no opening finished goods inventories. Required – Prepare all journal entries relative to these jobs for the month of August.

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MA15 Problem: Job Order Costing – Devoe Company The Devoe Company uses a job order costing system and started the 20x5 year with the following inventory balances:

Raw materials inventory $160,000 Work-in-process inventory 87,000 Finished goods inventory 265,000

The following transactions took place during 20x5: 1. Raw material purchases amounted to $450,000. 2. Raw materials issued to production were as follows:

Direct materials $475,000 Indirect materials 20,000

3. Direct labour hours incurred amounted to 19,500 at an average rate of $30. The company estimated total overhead to be $500,000 and direct labour hours incurred to be 20,000. The company allocates overhead on the basis of direct labour hours.

4. Total manufacturing overhead (exluding indirect materials) incurred was $485,000. 5. The work-in-process at December 31, 20x5 consisted of the following two jobs:

Job A650 Job A652 Direct materials $45,000 $26,500 Direct labour hours 560 125

6. Ending finished goods inventory totalled $247,000. Required – a. Prepare journal entries to record the above transactions. b. Prepare a schedule of cost of goods manufactured and cost of goods sold. c. Prepare the journal entry to dispose of over/under applied overhead on the following

assumptions: i. the balance is written off against cost of goods sold, and ii. the balance is prorated between the balances containing applied

overhead.

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MA16 Problem: Job Order Costing – Duench Incorporated Duench Inc., is a manufacturer of furnishings for infants and children. The company uses a normal job order costing system. Duench's WIP inventory at April 30, 20x4, consisted of the following jobs:

Job Number Items Units Accumulated Cost CBS1O2 Cribs 20,000 $ 900,000 PLPO86 Playpens 15,000 420,000 DRS 114 Dressers 25,000 250,000 $1,570,000

The company's finished goods inventory, using the FIFO method, consisted of five items:

Item Quantity And Unit Cost Accumulated Cost Cribs 7,500 units @ $64 each $ 480,000 Strollers 13,000 units @ $23 each 299,000 Carriages 11,200 units @ $102 each 1,142,400 Dressers 21,000 units @ $55 each 1,155,000 Playpens 19,400 units @ $35 each 679,000 $3,755,400

Duench applies factory overhead on the basis of direct labor hours. The company's factory overhead budget for the fiscal year ending May 31, 20x4, totaled $4,500,000, and the company plans to expend 600,000 direct labour hours during this period. Through the first 11 months of the year, a total of 555,000 direct labour hours were worked, and total factory overhead amounted to $4,273,500. At the end of April, the balance in Duench's raw materials inventory account, which includes both raw materials and purchased parts, was $668,000. Additions to and requisitions from raw materials inventory during the month of May included the following:

Raw Materials

Purchased Parts

Additions $242,000 $396,000 Requisitions: Job CBS102 51,000 104,000 Job PLP086 3,000 10,800 Job DRS 114 124,000 87,000 Job STRO77 (10,000 strollers) 2,000 81,000 Job CRGO98 (5,000 carriages) 65,000 187,000

During the month of May, Duench's factory payroll consisted of the following:

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Account Hours Cost CBS102 12,000 $122,400 PLP086 4,400 43,200 DRS114 19,500 200,500 STR077 3,500 30,000 CRG098 14,000 138,000 Indirect 3,000 29,400 Supervision 57,600 $621,100

The following are the jobs that were completed and the unit sales for the month of May:

Job number Items Quantity CBS102 Cribs 20,000 PLPO86 Playpens 15,000 STRO77 Strollers 10,000 CRGO98 Carriages 5,000

Items

Quantity Shipped

Cribs 17,500 Playpens 21,000 Strollers 14,000 Dressers 18,000 Carriages 6,000

Required - a. Describe when it is appropriate for a company to use a job order cost system. b. Calculate the dollar balance in Duench's WIP inventory account as of May

31, 20x4. c. Calculate the dollar amount related to the playpens in Duench 's finished

goods inventory as of May 31, 20x4. d. Explain the proper accounting treatment for over- or underapplied overhead balances

when using a job order cost system. (CMA adapted)

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MA17 Problem: Job Order Costing – Eagleson Company Eagleson Company employs a normal job order costing system. Manufacturing overhead is applied on the basis of machine hours using estimated manufacturing overhead costs of $1,200,000 and an estimated activity level of 80,000 machine hours. Eagleson's policy is to close the over/under application of manufacturing overhead to cost of goods sold. Operations for the year ended November 30, 20x5, have been completed, and all of the accounting entries have been made for the year except the application of manufacturing overhead to the jobs worked on during November, the transfer of costs from WIP to finished goods for the jobs completed in November, and the transfer of costs from finished goods to cost of goods sold for the jobs sold during November. Jobs N11-007, N11-013, and N11-015 were completed during November 20x5. All completed jobs except job N11-013 had been turned over to customers by the close of business on November 30, 20x5. Summarized data that have been accumulated from the accounting records as of October 31, 20x5, and for November 20x5, are as follows: WIP November 20x5 Activity Balance Direct Direct Machine Job # 10/3l/x5 Materials Labor Hours N11-007 $ 87,000 $ 1,500 $ 4,500 300 N11-013 55,000 4,000 12,000 1,000 N11-015 -0- 25,600 26,700 1,400 D12-002 -0- 37,900 20,000 2,500 D12-003 -0- 26,000 16,800 800 Totals $142,000 $95,000 80,000 6,000

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Activity November Through 20x5 Operating Activity Oct 31, 20x5 Activity Manufacturing overhead incurred Indirect materials $ 125,000 $ 9,000 Indirect labour 345,000 30,000 Utilities 245,000 22,000 Depreciation 385,000 35,000 Total incurred overhead $1,100,000 $96,000 Other items Material purchases* $965,000 $98,000 Direct labor costs $845,000 $80,000 Machine hours 73,000 6,000

Account balances at beginning of fiscal year Materials inventory* $105,000 Work-in-process inventory 60,000 Finished goods inventory 125,000

* Material purchases and materials inventory consist of both direct and indirect materials. The balance of the materials inventory account as of November 30, 20X5, is $85,000. Required - a. Eagleson Company uses a predetermined overhead rate to apply manufacturing overhead

to its jobs. When overhead is accounted for in this manner, there may be over- or underapplied overhead. 1. Explain why a business uses a predetermined overhead rate to apply

manufacturing overhead to its jobs. 2. How much manufacturing overhead would Eagleson have applied to jobs through

October 31, 20x5? 3. How much manufacturing overhead would Eagleson apply to jobs during

November 20x5? 4. Determine the amount by which the manufacturing overhead is over- or

underapplied as of November 30, 20x5. 5. Over- or underapplied overhead must be eliminated at the end of the accounting

period. Explain why Eagleson's method of closing over- or underapplied overhead to the cost of goods sold is acceptable in this case.

b. Determine the balance in Eagleson Company's finished goods inventory at November 30, 20x5.

c. Prepare a Schedule of Cost of Goods Manufactured for Eagleson Company for the year ended November 30, 20x5.

[CMA adapted]

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MA18 Problem: Process Costing – Equivalent Units – ABC Company Compute the equivalent units of production for each element of cost (material, labour, and overhead) in each of the following unrelated situations using (a) FIFO and (b) weighted average flow: A. Started 13,000 units into production; finished and transferred 10,000 units. There was no

beginning work-in-process. Ending work-in-process is 40% complete with respect to conversion costs (i.e., direct labor and overhead) and 100% complete with respect to direct materials.

B. Beginning work-in-process was 8,000 units, 100% complete with respect to materials and 25 % complete with respect to labor and overhead. Started 20,000 units into production; finished and transferred 22,000 units. The ending work-in-process is 80% complete with respect to materials and 70% complete with respect to conversion costs.

C. Beginning work-in-process was 6,000 units, 75% complete with respect to materials and

50% complete with respect to labor and overhead. Started 40,000 units into production; finished and transferred 30,000 units. The ending work-in-process is 25% complete with respect to materials and 30% complete with respect to conversion costs.

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MA19 Problem: Process Costing – Equivalent Units – Satarelli Corp. Sartarelli Corporation is a manufacturer that uses process costing to account for costs of production. Sartarelli manufactures a product in three separate departments: Moulding, Assembly, and Finishing. The following information was obtained for the Assembling Department for the month of June: Work in process, June 1 – 1,000 units made up of the following: Degree of Amount Completion Moulding department costs transferred in $32,000 100%

Costs added by the Assembly Department Direct materials 20,000 100 Direct labour 7,200 60 Manufacturing overhead 5,500 50

Work in process, June 1 $64,700 During the month of June, 5,000 units were transferred in from the Moulding Department at a cost of $160,000. The Assembly Department added the following $150,000 of costs:

Direct materials $ 96,000 Direct labour 36,000 Manufacturing overhead 18,000 $150,000

Four thousand units were completed and transferred to the Finishing Department. At June 30, 2,000 units were still in WIP. The degree of completion of WIP at June 30 was as follows:

Direct materials 90% Direct labour 70 Manufacturing overhead 35

Required – Calculate the cost of the units transferred out to the Finishing department and the value of the ending WIP assuming that the Sartarelli Company used (a) the weighted average method and (b) the FIFO method.

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MA20 Problem: Process Costing – Equivalent Units – Tsizis Corporation Tsizis Corporation makes a product called Turbulence in one department of the company. Direct materials are added at the beginning of the process. Labor and overhead are added continuously throughout the process. Spoilage, if any, occurs at the beginning of the process just after materials have been added but before any conversion costs have been incurred. The following information relates to production during November: 1. Work in process inventory, November 1 (4,000 kg. - 75 percent complete):

Direct materials $22,800 Direct labour 24,650 Manufacturing overhead 21,860

2. Direct materials:

Inventory, November 1 - 2,000 kg. $10,000 Purchases, November 3 - 10,000 kg. 51,000 Purchases, November 18 - 10,000 kg. 51,500 Sent to production during November - 16,000 kg.

3. Direct labour costs - $103,350. 4. Manufacturing overhead costs - $93,340 5. Transferred out to finished goods inventory – 15,000 kg. 6. Work in process inventory, November 30, 3,000 kg., 33 1/3 percent complete as to

conversion costs. The FIFO method is used for both materials inventory valuation and for WIP inventories. The controller has determined that any spoilage in excess of 1,300 units is abnormal spoilage. Required – Calculate the cost of the units transferred out to finished goods inventory and the value of the ending WIP. Calculate the value of abnormal spoilage.

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MA21 Problem: Process Costing – Equivalent Units – Gagnon Company The Gagnon Manufacturing Company uses a process costing system for its three production departments: Initiation, Assembly, and Finishing. The following data is available for the Assembly department for the month of September: Opening WIP Units 15,000 Costs - Transferred-in $97,650 Direct materials 186,450 Conversion costs (60% complete) 77,670 Units transferred in from the Initiation Department 46,000 Units transferred out to the Finishing Department 48,500 Costs added during month Transferred-in $298,540 Direct materials 460,650 Conversion costs 382,956 Units in ending WIP (25% completed as to conversion costs) 9,000 The Assembly department adds direct materials when the process if 40% complete. Inspection takes place when the process is 75% complete at which time all spoiled units are detected. The engineering department has concluded that any spoiled units in excess of 1,500 for the month of September can be considered abnormal spoilage. Required – Calculate the cost of the units transferred out to finished goods inventory, the value of the ending WIP and the value of abnormal spoilage under (a) the FIFO method and (b) the weighted average method.

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MA22 Problem: Process Costing – Fortis Manufacturing Limited Fortis Manufacturing Ltd uses FIFO based process costing. Direct materials are added at the beginning of the production process and conversion costs are added evenly during production. Inspection occurs when production is 100% complete. Normal spoilage is 8% of good units completed and transferred out to finished goods during the period. There was both normal and abnormal spoilage during the period. Data for March is: Units Direct

Material Conversion

Costs WIP, beginning (25% complete) 4,000 $ 76,000 $11,000 Started 60,000 Good units completed & transferred out 52,000 WIP, ending (80% complete) 6,500 Current period costs $1,080,000 $617,000 Costs per equivalent unit for work done in March $18 $10 Required: Calculate the cost of: (a) Ending inventory (b) Goods transferred to finished goods inventory (c) Normal spoilage (d) Abnormal spoilage

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MA23 Problem: Process Costing – Transferred In, No Spoilage - MCI This is a straight forward problem which provides an overview of process costing, including transferred in costs. There are not any complicating factors such as spoilage. ABC Manufacturing Incorporated (“MCI”) uses a process costing system in each of its two departments. Once units have been processed in Department A, they are transferred to Department B for further processing. Material is applied at the beginning of the process in Department A and at 95% completion in Department B. Labour and overhead costs occur evenly throughout production in both Department A and B. In the current period beginning WIP in Department A was 200 units (65% completed). This inventory incurred direct material costs of $2000 and conversion costs of $6240. The beginning WIP in Department B was 400 units ( 90% complete). Department B’s beginning WIP cost $24800 for transfer in cost and $6000 in conversion. During the current period, in Department A 10000 units were started, 8000 units were transferred out of Department A to Department B, and ending WIP in Department A was 2200 units (75% complete). In Department B 8000 units were transferred in, 7000 units were transferred to finished goods, and ending WIP inventory was 1400 units (1000 units 75% completed and 400 units 95% completed). Costs incurred in each of the departments during the current period are: Department A Department B Material $120,400 $ 14,800 Labour and Overhead $476,000 $127,950

Required 1. Using first in first out (FIFO) costing methodology calculate for both Department A and B

the: Cost of goods transferred Cost of ending WIP

Round the cost per equivalent unit to four decimal places and round all other cost calculations to the nearest dollar.

2. Re-calculate part 1 using the weighted average costing methodology.

Round the cost per equivalent unit to four decimal places and round all other cost calculations to the nearest dollar.

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MA24 Problem: Process Costing - Transferred In Costs & Spoilage – Wargo Wargo Limited (“WL”) uses a process costing system in each of its two departments. Once units have been processed in Department A, they are transferred to Department B for further processing. Material is applied at the beginning of the process in Department A and at 96% completion in Department B. Labour and overhead costs occur evenly throughout production in both Department A and B. The units are inspected at 80% completion in Department A and at 95% completion in Department B. Normal spoilage is 2% for Dept A and 5% for Dept B. In the current period beginning WIP inventory in Department A was 25000 units (60% complete). This inventory incurred direct material costs of $97500 and conversion costs of $85000. The beginning WIP in Department B was 15000 units (90% completed). Department B’s beginning WIP cost $135900 in transferred in costs and $162,000 in conversion cost. During the current period, in Department A 175,000 units were started, 165,000 units were transferred out of Department A to Department B, and ending WIP in Department A was 30,000 units (75% completed). In Department B 160,000 units were transferred to finished goods, and ending WIP inventory was 10,000 units (50% completed). Costs incurred in each of the departments during the current period are: Department A Department B Material $612,500 $ 384,000 Labour and Overhead $970,750 $2,704,750

Required Using weighted average calculate for both Department A and B the: Cost of goods transferred Cost of ending WIP Spoiled units

Round the cost per equivalent unit to five decimal places and round all other cost calculations to the nearest dollar.

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MA25 Problem: Process Costing – Transferred In Costs and Spoilage – Jerdi’s Jerdi’s Manufacturing Limited (“JML”) uses process costing in each of its two manufacturing departments, Department A and Department B. Once units have been processed in Department A, they are transferred to Department B for finishing. Material is added at the beginning of the process in Department A and at 98% completion in Department B. Labour and overhead costs occur evenly throughout the process in both Department A and B. Normal spoilage is 5% of good units in Department A and 4% in Department B. The units are inspected at 90% completion in Department A and at 95% in Department B. In the current period beginning WIP in Department A was 4000 units (75% completed). This inventory incurred direct material costs of $42,000 and conversion costs of $21,000. The beginning WIP in Department B was 2500 units (70% complete). Department B’s beginning WIP cost consists of transferred in costs of $45,500 and conversion costs of $26,250 in. During the current period, in Department A 20,000 units were started, 19,000 units were transferred out of Department A to Department B, and ending WIP in Department A was 3,500 units (80% completed). In Department B, 17,500 units were transferred to finished goods, and ending WIP inventory was 3,000 units (85% completed). Costs incurred in each of the departments during the current period are: Department A Department

B Material $200,000 $42,875 Labour and Overhead $165,230 $271,250

Required: 1. Using FIFO calculate for both Department A and B the:

Cost of goods transferred Spoiled units Cost of Ending WIP

2. Using weighted average calculate for both Department A and B the:

Cost of goods transferred Spoiled units Cost of ending WIP

Round the cost per equivalent unit to five decimal places.

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MA26 Problem: Process Costing – Transferred In Costs and Spoilage - Rauz Rauz Incorporated (“RI”) uses process costing in each of its two manufacturing departments, Department A and Department B. Once units have been processed in Department A, they are transferred to Department B for finishing. Material is added at the beginning of the process in Department A and at 75% completion in Department B. Labour and overhead costs occur evenly throughout the process in both Department A and B. Normal spoilage is 5% of good units in Department A and 8% in Department B. The units are inspected at 85% completion in Department A and at 95% completion in Department B. In the current period beginning WIP in Department A was 3,100 units (70% complete). This inventory incurred direct material costs of $21,700 and conversion costs of $11,935. The beginning WIP in Department B was 4500 units ( 60% completed). Department B’s beginning WIP transferred in cost was $24,000 and $46,000 in conversion. During the current period, in Department A 64,400 units were started, 60,000 units were transferred out of Department A to Department B, and ending WIP in Department A was 4,000 units (35% completed). In Department B 60,000 units were transferred in and 52,000 units were transferred to finished goods, and ending WIP inventory was 6,500 units (80% completed). Costs incurred in each of the departments during the current period are: Department A Department

B Material $183,300 $1,080,000 Labour and Overhead $131,675 $617,000

Required Using FIFO costing method, calculate following for both Department A and B the: Costs of goods manufactured Spoiled units Cost of ending WIP

Round the cost per equivalent unit to five decimal places.

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MA27 Problem: Process Costing Multiple Choice – Oma Inc. Oma’s Inc. uses process costing, FIFO method, to cost its products. The following data is available for the month of November. Beginning work in process 3,000 units (75% complete for direct materials and 40% complete for conversion costs) Units completed and transferred to finished goods 14,000 units Ending work in process 1,000 units (35% complete for direct materials and 20% complete for conversion costs) Beginning work in process $100,500 Consisting of $40,500 for direct materials and $60,000 for conversion costs. Equivalent unit cost of direct materials for November $20.00 Equivalent unit cost of conversion for November $52.50 1. Direct material cost incurred during the current period is:

(a) $287,000 (b) $280,000 (c) $300,000 (d) $242,000 (e) $282,500

2. Conversion cost incurred during the current period is: (a) $735,000

(b) $682,500 (c) $742,500 (d) $787,500 (e) $745,500

3. Total cost of goods completed and transferred out is: (a) $907,000 (b) $898,000 (c) $1,007,500 (d) $1,025,000 (e) $1,087,500

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MA28 Problem: Process Costing – Normal and Abnormal Spoilage – Oil Lite Oil-Lite Ltd. uses actual costs and applies process cost accounting. The following data is available for the month of October. Beginning W-I-P 4,000 units (100% complete for direct materials and 50% complete for labour & overhead)

Beginning W-I-P $59,000 consisting of $48,000 for direct materials and $11,000 for labour & overhead

Good units completed and transferred out 20,000 units Ending W-I-P 3,000 units (100% complete for direct materials and 40% complete for labour and overhead) Direct material costs incurred during the month $262,600 Labour & conversion costs incurred during the month $121,800 Direct materials are added at the beginning of the process, and labour and overhead is applied throughout the process. Inspection occurs at the end of the process. Normal spoilage for the month was 700 units. Abnormal spoilage for the month was 500 units. The abnormal spoilage was due to a machine malfunction that occurred when the units were 80% complete for conversion. Required: 1. How many units were started during the month? 2. Under the FIFO method, what is: (a) the cost of the abnormal spoilage? (b) the value of ending W-I-P? (c) the number of equivalent units for both Direct Materials and conversion? (d) the cost of units completed and transferred out?

3. Answer 2. (a) through (d) using the weighted average method.

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MA29 Problem: Direct vs Absorption Costing – Broadcast Inc. Broadcast Inc. manufactures and sells a single product. Current year sales volume was 50,000 units at a selling price of $86 per unit. Direct material and direct labour amount to $28 per unit. Variable manufacturing overhead costs were $13 per unit plus fixed costs of $455,000 per year. There were no beginning inventories and 65,000 units were produced during the year. Variable selling, general and administrative costs were $4.50 per unit sold plus fixed costs of $765,000 for the year. REQUIRED:

(a) Prepare an absorption costing income statement for the year. (b) Prepare a contribution costing income statement for the year. (c) Reconcile the difference between the two statements, absorption and contribution, and

explain why net income is different between the two costing approaches.

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MA30 Problem: Direct vs Absorption Costing – Aristotle Inc. Aristotle Incorporated manufactures and sells a single product. Current year sales volume is 130,000 units at a selling price of $24 per unit. Aristotle Inc. uses a standard costing system. The standard cost of direct material and direct labour amount to $9 per unit. Variable manufacturing overhead costs were $3 per unit plus fixed costs of $405,000 per year. The standard level of production is 135,000 units per year. Beginning inventories were 12,000 units and 135,000 units were produced during the year. Variable selling, general and administrative costs were $2.20 per unit sold plus fixed cost of $156,000 for the year. The income tax rate is 40%. Assume that the standard cost is constant year over year. REQUIRED:

(a) Prepare an absorption costing income statement for the year. (b) Prepare a contribution costing income statement for the year. (c) Reconcile the difference between the two statements, absorption and contribution, and

explain why net income is different between the two costing approaches

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MA31 Problem: Direct vs Absorption Costing – Hoeley Ltd. Hoeley Limited manufactures and sells a single product. Hoeley Limited utilizes a standard costing system. Select information for the past year is: Sales volume 52,000 units Selling price $46 per unit Standard costs: Direct material and direct labour $14.25 per unit Budgeted manufacturing overhead $3.25 per unit plus fixed costs of $267,750 per year Budgeted level of production 59,500 units per year Beginning inventory 11,000 units Ending inventory 15,000 units Selling, general and administrative $2.30 per unit sold plus fixed costs $560,000 Income tax rate 40% Actual Production during year 56,000 Variances for variable manufacturing costs amounted to $6,924 unfavourable. Actual expenditures for fixed manufacturing costs were $257,300. There were no variances with respect to any of the selling, general and administrative costs. Standard costs are constant year over year. REQUIRED:

(a) Prepare an absorption costing income statement for the year. (b) Prepare a contribution costing income statement for the year. (c) Reconcile the difference between the absorption and contribution income statements.

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MA32 Problem: Direct vs Absorption Costing – HRL Inc. HRL Incorporated produces a single product and uses a standard absorption costing system. Standard costs for the current year, at an expected annual sales and production level of 144,000 units and at an expected selling price of $34, are as follows: Cost per

Unit Direct material $6.00Direct labour 5.50Variable manufacturing overhead 3.00Fixed manufacturing overhead 7.00Standard cost of manufacturing 21.50Variable selling expenses 1.50Fixed selling expenses 4.00Full cost per unit $27.00 Actual fixed monthly expenses $84,000 for manufacturing overhead and $48,000 for selling and administration. Production is budgeted to occur evenly throughout the year. Financial results for January are: Original

January Budget

January Actual

Sales (@ $34.00 per unit) $476,000 $340,000Standard cost of sales 144,000 215,000Gross profit at standard 332,000 125,000Production variances* -- 14,000Adjusted gross profit 346,000 139,000Selling and administration 69,000 63,000Income (loss) before tax $277,000 $76,000 * No spending or efficiency variances, only production volume/denominator variances. January sales, which were expected to be greater than normal, were in fact 4,000 units less than planned. There is no inventory on January 1. REQUIRED:

(a) Recalculate the actual net income for January using a contribution approach. Reconcile the difference between the two statements, absorption and contribution.

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MA33 Problem: Direct vs. Absorption Costing – Oma Company Oma Company uses a standard cost system. The following information represents Oma’s results for the year ended December 31, 20XX: Direct materials standard rate $5.00/unit Direct labour rate $12.00/hour Direct labour inputs per unit 3 hours Budgeted manufacturing fixed overhead at the beginning of the year $810,000 Fixed manufacturing overhead is applied on the basis of direct labour hours Estimated direct labour hours at the beginning of the year 540,000 Selling price $55.00/unit Variable selling & administration $1.50/unit Fixed selling & administration $450,000 Beginning finished goods inventory 50,000 units Cost of beginning finished goods inventory $2,400,000 Ending finished goods inventory 63,000 units Sales 160,000 units Actual fixed manufacturing overhead for the year $795,000 Variable overhead $2.50/unit Make the following assumptions: - over- or underapplied overhead is expensed to cost of sales - there were no price, spending, or efficiency variances - there were no beginning or ending W-I-P or direct materials inventory - Variable costs per unit are consistent year over year

Required: 1. What is the under- or overapplied overhead for the year? Show the components of the

under- or overapplied overhead. 2. Prepare an income statement using the direct costing approach. 3. Prepare an income statement using the absorption costing approach. 4. Explain the difference in the operating income calculated in part 2 and 3.

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MA34 Problem: Direct vs. Absorption Costing– Butron Company The Butron Company uses variable costing for internal management purposes and full-absorption costing for external reporting purposes. Thus, at the end of each year, financial information must be converted from variable costing to full-absorption costing for external reports. At the end of last year, management anticipated that sales would rise 20 percent this year. Therefore, production was increased from 20,000 units to 24,000 units. However, economic conditions kept sales volume at 20,000 units for both years. The following data pertain to the two years:

Last Year This Year

Selling price per unit $ 60 $ 60 Sales (units) 20,000 20,000 Beginning inventory (units) 2,000 2,000 Production (units) 20,000 24,000 Ending inventory (units) 2,000 6,000

Variable cost per unit for both years was composed of:

Labour $15.00 Materials 9.00 Variable overhead 6.00 $30.00

Estimated and actual fixed costs for each year were:

Production $180,000 Selling and administrative 200,000 $380,000

Required - a. Present the income statement based on variable costing for this year. b. Present the income statement based on full-absorption costing for this year. c. Explain the difference, if any, in the operating profit figures.

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MA35 Problem: Direct vs. Absorption Costing – Northway Corporation Northway Corporation is a manufacturer of a synthetic element. Jim Northway, president of the company, has been eager to get the operating results for the just completed fiscal year. He was surprised when the income statement revealed that income before taxes had dropped to $360,000 from $750,000 even though sales volume had increased 100,000 kilograms. This drop in net income had occurred even though Northway had implemented the following changes during the past 12 months to improve the profitability of the company: • In response to a 10% increase in production costs, the sales price of the company's product was

increased by 12%. This action took place on December 1, 20x3. • The management of the selling and administrative departments were given strict instructions to

spend no more in fiscal 20x4 than in fiscal 20x3. Northway's accounting department prepared and distributed to top management the comparative income statements presented below. The accounting staff also prepared related financial information in the accompanying schedule to assist management in evaluating the company's performance. Northway uses the FIFO inventory method for finished goods.

NORTHWAY CORPORATION Statements of Operating Income

for the years ended November 30, 20x3 and 20x4 ($000 omitted) 20x3 20x4

Sales revenue $9,000 $11,200 Cost of goods sold 6,750 9,340

Gross margin 2,250 1,860 Selling and administrative expenses 1,500 1,500

Operating Income $ 750 $ 360

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NORTHWAY CORPORATION Selected Operating and Financial Data

for 20x3 and 20x4 20x3 20x4

Sales price $ 10/kg $11.20/kg Material cost $1.50/kg $ 1.65/kg Direct labour cost $2.50/kg $ 2.75/kg Variable overhead cost $1.00/kg $ 1.10/kg Total fixed overhead costs $3,000,000 $3,300,000Selling and administrative costs (all fixed) $1,500,000 $1,500,000 Sales volume 900,000 kg 1,000,000 kg Beginning inventory 300,000 kg 600,000 kgUnits produced 1,200,000 kg 500,000 kg Required - a Explain to Jim Northway why Northway Corporation's operating income decreased in the current

fiscal year despite the sales price and sales volume increases. b A member of the Northway's accounting department has suggested that the company adopt

variable (direct) costing for internal reporting purposes. i. Prepare an operating income statement through income before taxes for the year ended

November 30, 20x4, for Northway Corporation using the variable (direct) costing method.

ii. Present a numerical reconciliation of the difference in operating income using the absorption costing method as currently employed by Northway and the variable (direct) costing method as proposed.

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MA36 Problem: Joint Costing and Byproducts – Copper Co. Copper Company mines one mineral, which is processed into three separate products, X, Y, and Z. Joint costs are $1,800,000. To complete X and Y, further processing is required at costs of $1,900,000 and $2,480,000 respectively. Product Z does not required further processing. The following production and sales information is available for the current year: Tonnes

Started Tonnes

Completed Tonnes

Sold Selling Price

after processing X 10,000 10,000 10,000 $1,190/ton Y 12,000 12,000 8,000 $1,540/ton Z 28,000 28,000 21,000 $1,170/ton

There is not any shrinkage during any part of the manufacturing process. Required: 1. Allocate the joint costs under the following methods:

a) Physical measure method (assume that the input is on a tonne basis and that for every one tonne started, the input is one tonne of raw material)

b) Sale Value (assume selling price per ton at split off is: $595 for X, $462 for Y and $1,170 for Z)

c) Net Realizable Value 2. Assume that there is a byproduct from production, which can be sold for a nominal

amount. One thousand tonnes of this byproduct was produced, and it can be sold for $30 per tonne. There are not any separable costs associated with this byproduct. Eight hundred tonnes were sold during the year. Explain the methods of accounting for this byproduct.

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MA37 Problem: Joint Costing and Sell or Process Further – Alcove Ltd. The Mantine Division of Canadian Alcov Ltd. produces two products: Mantine A (M-A) and Mantine B (M-B), and a by-product, Ceta, from a single material, Koron. Koron is placed in a centrifuge and separated into three intermediate products: K-1, K-2, and K-3. K-1 is processed further to produce Mantine A and K-2 is further processed to produce Mantine B. K-3 is packaged, with packaging costs totaling $3.50 per kilogram, and is sold as Ceta. Mantine production and sales statistics for March were as follows:

Produced (‘000s) Sold (‘000s) Selling Price K-1 4,000 kg K-2 2,000 kg K-3 (Ceta) 1,000 kg 950 kg $5.00/kg M-A 4,000 kg 4,010 kg $9.50/kg M-B 1,800 kg 1,90 kg $18.00/kg On March 1, the Mantine Division had inventories on hand of 100,000 kg of Mantine A valued at $720,000 and 150,000 kg of Mantine B valued at $2,175,000. The company uses a first-in, first-out (FIFO) cost flow assumption to determine inventory and cost of goods sold valuation. There is no waste, spoilage, evaporation, or shrinkage in any of the processes. Total costs (in thousands) of the Mantine processes for March were as follows:

Koron $10,000Centrifuge process 6,000M-A process 20,000M-B process 21,600Total $57,600

All finishing costs in the M-A and M-B processes are variable costs. Any units that are in progress for the month of March have not incurred any separable costs. Ceta is treated as a miscellaneous revenue item for income purposes. Any by-product inventory is carried at net realizable value. No joint costs are allocated to the by-product.

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Required: Using the net realizable value method to allocate joint costs, determine the amount that would be shown on the balance sheet or income statement for March for the following items: a) i) Cost of goods sold.

ii) Inventories for K-2, Ceta, M-A, and M-B. b)

i) Mantine Division has an offer from another company to buy all the K-1 it can produce at a price of $4.75 per kilogram. Should Mantine accept the offer? Show calculations.

ii) What is the minimum intermediate market price that Mantine should accept for K-

l? Why?

Source: CMA Adapted

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MA38 Problem: Sell or Process Further – Smits Ltd. Smits Chemicals Ltd. produces three chemicals, A, B and C. Processing begins with one substance, ogg. Subsequent processing occurs to produce B and C. A does not require further processing. Joint costs are $100,000. Other production and sales information is as follows:

Production Selling Price per tonne at Completion

Selling Price per tonne at

Split Off A 800 tonnes $50 $50.00B 600 tonnes $300 $200.00C 400 tonnes $420 $287.50

Further processing costs for B and C are $40,000 and $60,000 respectively. Required: 1. Should Smits sell at the split off point or process further?

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MA39 Problem: Sell or Process Further – Luna Company Luna Mining Company Inc. (LMC) develops mineral deposits in Canada’s north. During 20X3, the company removed 1,200,000 tons of ore from the mine; this level of production is expected to continue for the next twenty-five years. The process of extracting valuable minerals begins with the removal of ore from the ground and crushing it. The crushed ore is then ready to enter the refining process. The total cost of mining and crushing the ore amounts to $30.65 per tonne. In order to extract the usable minerals, the crushed ore is passed through three distinct processes: amalgamation, electrolysis and purification (see Exhibit 1). In the first stage, called amalgamation, mercury is added to the unrefined ore. The mercury combined with the valuable minerals forms a compound which is drawn off. This compound is then heated causing the mercury to vaporize leaving a residue which is 30% gold, 60% silver, and 10% platinum. One ounce of residue is obtained for every 3 tons of ore placed in the process. The vaporized mercury is condensed and reused the next day. The total cost of the amalgamation process is $13.51 per ounce of residue recovered. Each year the company must invest an additional $280,000.00 to replace mercury lost during the recovery process. The second process is called electrolysis. In this process, the residue from the amalgamation process is cast into thick slabs which are hung in large vats of acid. When an electric current is passed through the vat, pure gold is transferred to separate plates. When the gold plates and acid are removed from the vat, silver is recovered from the bottom of the vat. When the acid is filtered for reuse the next day, platinum is removed. The total cost of the electrolysis process is $9.60 per ounce of residue placed in the vat. At this point, the gold plates are 99.9% pure and can be sold on world markets. The current market price for gold is $400.00 per ounce but mine officials are aware that future prices may rise or fall from this level depending on the state of the world economy. During the past three months, the price has ranged from $350.00 to $420.00 per ounce. The silver can be sold after electrolysis for $4.60 per ounce or it can be further purified. Purification costs are $1.30 per ounce of pure silver, which can be sold for $6.00 per ounce (both the $6.00 and $4.60 prices have remained relatively stable during the past year and management expects no significant changes during the next year). This purification process reduces the volume of the silver product by 20%. The platinum can be sold after electrolysis for $430.00 per ounce or further purified and sold for $550.00 per ounce. Purification results in a 10% reduction in the volume of platinum. The total cost of purification is $48.60 per ounce of pure platinum.

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EXHIBIT 1

Luna Mining Company Inc. Summary of Mineral Processing

PROCESS

INPUT

OUTPUT

PROCESS COST

MARKET PRICE OF

OUTPUT 1. Amalgamation 3 tons ore

Mercury

1 oz. residue Mercury

$13.51/oz. of residue $280,000.00/year for Mercury

N/A N/A

2. Electrolysis 1 oz. residue .3 oz. pure gold .6 oz. raw silver .1 oz. raw platinum

$9.60/oz. of input $400.00/oz. pure gold $4.60/oz. raw silver $430.00/oz. raw platinum

3. Purification 1 oz. raw silver .8 oz. pure silver $1.30/oz. of output $6.00/oz. of pure silver

4. Purification 1 oz. raw platinum

.9 oz. pure platinum $48.60/oz. of output $550.00/oz. of pure platinum

Required:

1. Determine the optimal yearly production plan for the ore processed by LMC Inc.

(Source: CMA Adapted)

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MA40 Problem: Joint Costing – Roye Company Roye Manufacturing Company buys zeon for $0.80 a litre. At the end of distilling in Department 1, zeon splits off into three products: argon, xeon, and neon. Argon is sold at the split-off point, with no further processing; xeon and neon require further processing before they can be sold. Xeon is fused in Department 2, and neon is solidified in Department 3. The following is a summary of costs and other related data for the year ended December 31. Department Distilling

(1)Fusing

(2)Solidifying

(3)

Cost of zeon $96,000Direct labor 24,000 $45,000 $65,000Manufacturing overhead 20,000 1,000 54,000 Products

Argon Xeon Neon

Litres sold 15,000 30,000 45,000 Litres on hand at year-end 10,000 - 15,000 Sales in dollars $30,000 $96,000 $141,750 There were no beginning inventories on hand at January 1, and there was no zeon on hand at the end of the year on December 31. All litres on hand on December 31 were complete as to processing. Required – a. Assume that the Roye Manufacturing Company uses the net realizable value method for

allocating joint costs, calculate the cost of goods sold and the cost of ending inventories of each of the three products.

b. Assume that the Roye Manufacturing Company uses the physical units method for allocating joint costs, calculate the cost of goods sold and the cost of ending inventories of each of the three products.

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MA41 Problem: Joint Costing – Mirza Inc. Mirza Confectioners, Inc., makes a candy bar called Rey, which sells for $50 per kilogram. The manufacturing process also yields a product known as Nagu. Without further processing, Nagu sells for $0.10 per kg. With further processing, Nagu sells for $0.30 per kg. During the month of April, total joint manufacturing costs up to the point of separation consisted of the following charges to work-in-process inventory:

Direct materials $150,000 Direct labour 120,000 Factory overhead 30,000

Production for the month aggregated 394,000 kg. of Rey and 30,000 kg. of Nagu. To complete Nagu during the month of April and obtain a selling price of $0.30 per kg., further processing of Nagu during April would entail the following additional costs:

Direct materials $2,000 Direct labour 1,500 Factory overhead 500

Required – Prepare the April journal entries for Nagu, if Nagu is: a. Transferred as a by-product at sales value to the warehouse without further processing, with a

corresponding reduction of Rey's manufacturing costs. b Further processed as a by-product and transferred to the warehouse at net realizable value, with a

corresponding reduction of Rey's manufacturing costs. c Further processed and transferred to finished goods inventory, with joint costs being allocated

between Rey and Nagu on the basis of their net realizable value.

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MA42 Problem: Departmental Costing and Cost Allocation – Peters Ltd. The Peters Company Ltd. consists of four departments: Personnel and Purchasing, which are service departments; Machining and Painting, which are production departments. Budgeted data for the year consisted of the following:

Item Personnel Purchasing Machining Painting Overhead Costs $40,000 $35,000 $128,000 $48,000# of Employees 10 15 25 138Machine Hours 0 0 23,500 29Direct Labour Costs 0 0 $32,000 $147,000Purchase Requisitions 6 0 2,650 450

Required: a) Allocate the two service departments’ costs using the step-down allocation method, and

develop departmental overhead rates for each of the production departments using the most logical base for each department.

b) Calculate and give the journal entry to record the total amount of under- or over-applied

overhead for the company, assuming the following actual results for the year:

Machining Painting Overhead Costs $173,000 $78,540Direct Labour Costs $38,300 $139,750Machine Hours 24,150 29

c) Briefly discuss reasons for allocating service department costs. Source: CMA Adapted

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MA43 Problem: Department Cost Allocation – Danny Ltd. Danny Ltd. has three service departments, Corporate Wide Advertising, Legal, and Human Resources that are respectively allocated based on revenue, usage and number of employees. Allocation information regarding all of the departments is as follows:

Service Depts.

Operating Depts.

Advertising

Human

Resources

Legal

A

B

C

Total Revenue - - - $3,766,000 $4,635,000 $3,970,000 $12,371,000 Usage of legal services 5% 10% - 10% 30% 45% 100% Employees 16 22 12 140 175 35 400 Costs, before allocation $1,450,000 $1,885,000 $950,000 $2,690,000 $3,434,000 $2,835,000

Required: 1. Using the direct method, compute the costs allocated to the operating departments, A, B,

and C. 2. Using the step down method, compute the costs allocated to each operating department.

Assume that Human Resource costs are allocated to the advertising and legal departments, along with departments A, B and C and that subsequently legal costs are allocated to advertising and departments A, B, and C. Advertising is not allocated to any other service department.

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MA44 Problem: Cash Budget – Splash Inc. Splash Inc., a distributor of fashion items, normally collects its receivables 50% in month of sale, 30% the subsequent month and 18% in the third month. Historically, 2% is not collected (is a bad debt). Splash Inc. attempts to match its payments of payables closely to its receivables and pays for its purchases 40% in the month of purchase, 25% in the next month, and 35% in the third month. Sales during February, March and April were $150,000, $193,000 and $162,000 respectively. Purchases during these three months were $196,000, $178,000 and $225,000 for February, March and April. The company pays income tax instalments of $4,000 each month. Assuming the beginning balance of cash as at February 1 is $39,800, and the company wishes to maintain a cash balance of $30,000, prepare a cash budget for February, March and April. Splash Inc. has a line of credit available at a rate of 10%. Interest is paid when the loan is repaid. December and January sales were $240,000 and $182,000 respectively. December and January purchases were $210,000 and $180,000 respectively. Required: 1. Prepare a cash budget for February, March and April.

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MA45 Problem: Budgeting – City of Jimmytown The City of Jimmytown had the following sales of water for the last half of 20x9.

Month July August September October November December

Sales Revenue

$100,000 90,000

120,000 85,000

140,000 100,000

All sales are on credit. Historically, 50 percent is collected in the month of the sale, 35 percent during

the first month following the sale, and 15 percent in the second month following the sale. Cost of water averages 75 per cent of sales revenue. Water is purchased in month of sale. All

purchases are paid during the month following the purchase. Operating costs of $20,000 are paid each month. The September 1 cash balance is expected to be the minimum balance of $10,000. The minimum acceptable cash balance at the end of any month is $10,000. Money can be borrowed

from a local bank in increments of $1,000. (Do not include interest charges in your budget.) Required - Prepare monthly a cash budget for September, October, and November, 20x9, and an overall cash budget for the three months together.

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MA46 Problem: Budgeting – Moore Company The following performance report is for the bottling department Moore Company for the month ending December 31, 20x6.

Actual Budget Variance

Volume (units) 75,000 90,000

Manufacturing costs: Direct materials $156,000 $180,000 $24,000 (F) Direct labour 835,000 900,000 65,000 (F) Variable overhead 360,000 450,000 90,000 (F) Fixed overhead 60,000 54,000 6,000 (U) Total $1,411,000 $1,584,000 $173,000 (F) Required -

1. Evaluate the performance report. 2. Using a flexible budgeting approach, prepare a more appropriate

performance report (i.e., produce a flexible budget and indicate planning and flexible budget variances).

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MA47 Problem: Budgeting - Storey Manufacturing Company The Storey Manufacturing Company makes two basic products known as Cee and Dee. Data that have been assembled by the managers follow:

Cee Dee Requirements for finished unit: Raw material 1 10 kg 8 kg Raw material 2 4 kg Raw material 3 2 units 1 unit Direct labour 5 hours 8 hours Sales price $100 $150

Sales units 12,000 9,000 Estimated beginning inventory 400 150 Desired ending inventory 300 200

Raw Materials 1 2 3 Cost $2.00 per kg 2.50 per kg $0.50 per unit Estimated beginning inventory 3,000 1,500 1,000 Desired ending inventory 4,000 1,000 1,500 The direct labour wage rate is $4 per hour. Overhead is applied on the basis of direct labour hours. The tax rate is 40%. The budgeted sales level is divided into quarters. Storey estimated that 20% of the annual sales will be in the first quarter, 30% in the second, and 25% in the third and fourth quarters. The beginning inventory of finished products has the same cost per unit as the ending inventory. The work-in-process inventory is negligible.

Storey Manufacturing Company Sales Forecasts By Products 20x1

Cee Dee Total Units Dollars Units Dollars Dollars

First quarter 2,400 $ 240,000 1,800 $ 270,000 $ 510,000 Second quarter 3,600 360,000 2,700 405,000 765,000 Third quarter 3,000 300,000 2,250 337,500 637,500 Fourth quarter 3,000 300,000 2,250 337,500 637,500

Total 12,000 1,200,000 9,000 1,350,000 $2,550,000

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Factory Overhead Costs

Indirect materials $ 10,000 Miscellaneous supplies and tools 5,000 Indirect labour 40,000 Supervision 20,000 Payroll taxes and fringe benefits 75,000 Maintenance costs-fixed 20,000 Maintenance costs-variable 10,000 Depreciation 70,000 Heat, light and power – fixed 8,710 Heat, light and power – variable 5,090

$263,800

Selling And Administrative Expenses Advertising $ 60,000 Sales salaries 200,000 Travel and entertainment 60,000 Depreciation-warehouse 5,000 Office salaries 20,000 Executive salaries 250,000 Supplies 4,000 Depreciation-office 6,000

$605,000 Required - Prepare the following: a. Production budget. b. Direct materials purchase budget. c. Direct labour budget. d. Cost of goods sold budget. e. Budgeted income statement. Note: because you are given inventory values for the beginning and the end of the year, it is impossible to construct budgets by quarter. The budgets should be presented for the whole year.

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MA48 Problem: Budgeting - Gowan Corporation The Gowan Corporation manufactures and distributes wooden baseball bats. This is a seasonal business with a large portion of its sales occurring in late winter and early spring. The production schedule for the last quarter of the year is heavy in order to build up inventory to meet expected sales volume. The company experiences a temporary cash strain during this heavy production period. Payroll costs rise during the last quarter because overtime is scheduled to meet the increased production needs. Collections from customers are low because the fall season produces only modest sales. This year the company's concern is intensified because prices are increasing during the current inflationary period. In addition, the Sales Department forecasts sales of fewer than one million bats for the first time in three years. This decrease in sales appears to be caused by the popularity of aluminum bats. The cash account builds up during the first and second quarters as sales exceed production. The excess cash is invested in Treasury bills and other commercial paper. During the last half of the year, the temporary investments are liquidated to meet the cash needs. In the early years of the company, short-term borrowing was used to supplement the funds released by selling investments, but this has not been necessary in recent years. Because costs are higher this year, the treasurer asks for a forecast for December to judge if the $40,000 in temporary investments will be adequate to carry the company through the month with a minimum balance of $10,000. Should this amount ($40,000) be insufficient, she wants to begin negotiations for a short-term loan. The unit sales volume for the past two months and the estimate for the next four months are as follows:

October (actual) 70,000 November (actual) 50,000 December (estimated) 50,000 January (estimated) 90,000 February (estimated) 90,000 March (estimated) 120,000

The bats are sold for $5 each. All sales are made on account. Half of the accounts are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 10% in the second month following the sale. Customers who pay in the month of the sale receive a 2% cash discount. The production schedule for the six-month period beginning with October reflects the company's policy of maintaining a stable year-round work force by scheduling overtime to meet the following production schedules:

October (actual) 90,000 November (actual) 90,000 December (estimated) 90,000 January (estimated) 90,000 February (estimated) 100,000 March (estimated) 100,000

The bats are made from wooden blocks that cost $6 each. Ten bats can be produced from each block. The blocks are acquired one year in advance so they can be properly aged. Gowan pays the supplier one-

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twelfth of the cost of this material each month until the obligation is retired. The monthly payment is $60,000. The plant is normally scheduled for a 40-hour, five-day work week. During the busy production season, however, the work week may be increased to six 10-hour days. Workers can produce 7.5 bats per hour. Normal monthly output is 75,000 bats. Factory employees are paid $15 per hour for regular time and time and one-half for overtime. Other manufacturing costs include variable overhead of $0.30 per unit and annual fixed overhead of $280,000. Depreciation charges totaling $40,000 are included among the fixed overhead. Selling expenses include variable costs of $0.20 per unit and annual fixed costs of $60,000. Fixed administrative costs are $120,000 annually. All fixed costs are incurred uniformly throughout the year. The controller has accumulated the following additional information: 1. The balances of selected accounts as of November 30, 20x4, are as follows:

Cash $ 12,000 Marketable securities, at market value 40,000 Accounts receivable 96,000 Prepaid expenses 4,800 Accounts payable (arising from raw material purchases) 300,000 Accrued vacation pay 9,500 Equipment note payable 102,000 Accrued income taxes payable 50,000

2. Interest to be received from the company's temporary investments is estimated at $500 for

December. 3. Prepaid expenses of $3,600 will expire during December, and the balance of the prepaid account

is estimated at $4,200 for the end of December. 4. Gowan purchased new machinery in 20x4 as part of a plant modernization program. The

machinery was financed by a 24-month note of $144,000. The terms call for equal principal payments over the next 24 months with interest paid at the rate of 1% per month on the unpaid balance at the first of the month. The first payment was made on May 1, 20x4.

5. Old equipment, which has a book value of $8,000, is to be sold during December for $7,500. 6. Each month the company accrues $1,700 for vacation pay by charging Vacation Pay Expense and

crediting Accrued Vacation Pay. The plant closes for two weeks in June when all plant employees take a vacation.

7. Quarterly dividends of $0.20 per share will be paid on December 15 to stockholders of record.

Gowan Corporation has authorized 10,000 shares. The company has issued 7,500 shares, and 500 of these are classified as treasury stock.

8. The quarterly income taxes payment of $50,000 is due on December 15, 20x4.

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Required - Prepare a schedule that forecasts the cash position at December 31, 20x4. What action, if any, will be required to maintain a $10,000 cash balance?

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MA49 Problem: Budgeting - Martin Company The following forecasted variable costing income statement was prepared for Martin Company.

Sales $100,000 Variable costs 45,000 Contribution margin $55,000 Fixed costs 25,000 Net income $30,000

The President of Martin knows that there is uncertainty associated with all of these estimates. Currently, the pro forma statement represents the most likely outcome. The President, however, wants to conduct a sensitivity analysis to examine the worst case and best cases scenarios as well. After consultation with his managers, the following additional information was determined:

The worst case and best case scenarios for sales represent a +/- change of 25% of the most likely levels.

The worst case and best case scenarios for fixed costs represent a +/- change of 20% of the most likely levels.

Variable costs are always proportional to sales. The worst case for the behaviour of variable costs is that they climb to 60% of sales. The best case scenario for variable costs is that they fall to 40% of sales.

Required: Calculate the net income for Martin Company using all variables at their worst case levels. Repeat this process and calculate the net income with all variables assuming their best case levels. How likely do you think these ends points are?

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MA50 Problem: Flexible Budget Variances - Funnie Flexible Inc. Funnie Flexible Inc. has developed standard costs of $25.00 per unit for variable costs and budgeted annual fixed costs to be $210,000. The budgeted sales price per unit is $58.00, and at this price management estimated sales to be 15,000 units. Actual results were disappointing, as only 11,000 units were sold. Actual variable costs were $264,000 and fixed costs were $202,000. There was not any beginning or ending inventory. The actual average selling price per unit was $56.50. Required: 1. Compute the flexible budget variance, sales volume variance, and static budget variance.

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MA51 Problem: Flexible Budget Variances - Appleby Inc. The controller of Appleby Inc. created standards for variable costs for one of its products as follows: per unit Direct material $2.00 Direct labour 5.60 Variable overhead 1.25 At the beginning of the year, Appleby Inc. estimated the average selling price to be $15.00 per unit, and at this price estimated sales to be 70,000 units. Annual fixed costs were estimated to be $180,000. Subsequent to year end, the controller determined actual results to be sales of 75,000 units at an average price of $13.50 per unit. Total variable costs were $660,000 and total fixed costs were $192,000. There was no beginning or ending inventory. Required: 1. Calculate the flexible budget, sales volume and static budget variances.

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MA52 Problem: Variances - Copper Bottom Pot Company Ltd. The Copper Bottom Pot Company Ltd., (CBPC), manufactures only one product, called The Big Pot. The company uses a standard cost system and has established the following standards per unit of The Big Pot.

Standard Quantity Standard Price Standard Cost Direct materials 6.0 kilograms $14 per kilogram $84 Direct labour 1.5 hours $20 per hour $30 The following activities were recorded by CBPC for the production of The Big Pot in January 2000. The company produced 600 units during the month. A total of 4,000 kilograms of material were purchased at a cost of $52,000. On January 1, 2000, there was no beginning inventory of materials on hand; 200 kilograms of

materials remained in the warehouse unused at the end of the month. The company employs 12 persons to produce The Big Pot. In January, each worked an average of 65

hours at an average of $21 per hour. Required - a. For direct materials used in the production of The Big Pot:

i. Compute the direct materials purchase price variance and the direct materials usage variance.

ii. The direct materials were purchased from a new supplier who is anxious to enter into a long-term purchase contract. Would you recommend that the company sign the contract? Explain.

b. For the direct labour employed in the production of The Big Pot:

i. Compute the direct labour rate variance and the direct labour efficiency variance. ii. In the past, the 12 persons employed in the production of The Big

Pot consisted of 4 experienced workers and 8 inexperienced assistants. During January, the company experimented with shifting the labour mix to 6 experienced workers and 6 inexperienced assistants. Would you recommend that the new labour mix be continued? Explain.

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MA53 Problem: Variances – Addy Company Addy Company's direct labour costs are as follows:

Standard direct labour hours 30,000 Actual direct labour hours 29,000 Direct labour efficiency variance, favourable $4,000 Direct labour rate variance, favourable $5,800 Total gross wages $110,200

Required - a. What was Addy's standard direct labour rate? b. What was Addy's actual direct labour rate?

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MA54 Problem: Variances - Andres Industries Andres Industries employs a standard cost system. Andres has established the following standards for the prime costs of its Hunters' Bow product line: Standard Standard Standard Quantity Price CostDirect materials 8 kg $1.80/kg $14.40Direct labour 0.25 DLH $8.00/DLH 2.00 $16.40 During November, Andres purchased 160,000 kg of direct materials at a total cost of $304,000. The total factory wages for November were $42,000, 90% of which were for direct labour. Andres manufactured 19,000 Hunters' Bows during November using 142,500 kg of direct materials and 5,000 direct labour hours. Required - a. What was the direct materials purchase price variance for November? b. What was the direct materials usage variance for November? c. What was the direct labour rate variance for November? d. What was the direct labour efficiency variance for November?

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MA55 Problem: Variances - Brien Manufacturing Company Brien Manufacturing Company has a process cost accounting system. A monthly analysis compares actual results with both a monthly plan and a flexible budget. Standard direct labour rates used in the flexible budget are established at the time the annual plan is formulated and held constant for the entire year. Standard direct labour rates in effect for the fiscal year ending June 30 and standard hours allowed for the output in April are:

Standard Standard DLH Rate Per Hour Allowed For Output

Labour class III $8.00 500 Labour class II $7.00 500 Labour class I $5.00 500

The wage rates for each labour class increased on January 1 under the terms of a new union contract negotiated in December of the previous fiscal year. The standard wage rates were not revised to reflect the new contract. The actual direct labour hours worked and the actual direct labour rates per hour experienced for the month of April were:

Actual Direct Labour Actual Direct Rate Per Hour Labour Hours

Labour class III $8.50 550 Labour class II $7.50 650 Labour class I $5.40 375

Required - a. What is the total direct labour variance? b. What is the direct labour rate variance? c. What is the direct labour efficiency variance? d. What is the direct labour yield variance? (Round all standard prices to four decimal places.) e. What is the direct labour mix variance for April?

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MA56 Problem: Variances - Boutin Glass Works Boutin Glass Works' production budget for the year ended November 30, 20x4, in department C was based on 200,000 units. Each unit requires two standard hours of labour for completion. Total overhead was budgeted at $900,000 for the year, and the fixed overhead rate was estimated to be $3 per unit. Both fixed and variable overhead are applied to the product on the basis of direct labour hours. The actual data for the year ended November 30, 20x4, are as follows:

Actual production in units 198,000 Actual direct labour hours 440,000

Actual variable overhead $352,000Actual fixed overhead $575,000

Required - a. What were the standard hours allowed for actual production for the year ended November 30,

20x4? b. What was the VOH efficiency variance for the year? c. What was the VOH spending variance for the year? d. What was the FOH spending variance for the year? e. What was the FOH applied to Boutin's production for the year? f. What was the FOH production volume variance for the year?

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MA57 Problem: Variances – Ferguson Foundry Ltd. Mark Ferguson, the president of Ferguson Foundry Limited (FFL), sat in his office early on June 2, 20x5, reviewing the financial statements of FFL for the fiscal year ended May 3 1, 20x5. The results for the year were both a shock and a disappointment. Mr. Ferguson had called Carl Holitzner, CMA, an independent consultant, to meet him in his office. When Carl arrived, Mr. Ferguson described his concerns. "I don't know what went wrong last year. Everybody kept telling me that we were selling more woodstoves than we thought we would and I knew from attending the trade shows that the sales of woodstoves throughout the province were rising. When I saw the statements for last year, I couldn't believe the drop in profits. "This company began in 1905. My grandfather used to make farm implements and sled runners; my father produced mostly trailers. I've dabbled in a few product lines like sewer grates and staircase railings, but, for the last five years, we've concentrated solely on woodstoves. Sales were slow at first and there were many producers in the market. But we have a good sales force and things have been steadily improving for the last two years. In 20x4, we achieved record profits. "In addition to profits dropping, we have lost our management team. The sales manager took early retirement last month, the production manager is in the hospital for major surgery, and the accountant quit after we discussed the kind of information I felt he should be providing. He kept telling me that everything was running smoothly. Boy, was he wrong! "I called you here this morning because I need some help in understanding what went wrong last year. I want to be sure that similar mistakes are not made in the future. I'll be hiring some new people, but I need some answers quickly. Here is the statement of budgeted and actual results (Exhibit 1). I was also able to dig up a statement of standard costs (Exhibit 2) that was prepared last year plus some market and job-cost data which the accountant had prepared before he left (Exhibit 3). The standard costs are an accurate reflection of what it should cost to make either of the woodstove models." Required: Assume the role of Carl Holitzner and provide an explanation for FFL's lower than budgeted profit for the fiscal year ended May 31, 20x5. Support your explanation with a detailed variance analysis.

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Exhibit 1 Ferguson Foundry Limited

Static Budget and Actual Results For the Year Ended May 31, 20x5

Static Budget Basic Deluxe Total Sales volume (in units) 4,500 5,500 10,000

Sales revenue $1,350,000 $4,400,000 $5,750,000Variable costs Direct materials 315,000 1,045,000 1,360,000 Direct labor 405,000 1,320,000 1,725,000 Overhead 202,500 660,000 862,500 Selling and administration 67,500 220,000 287,500

990,000 3,245,000 4,235,000

Contribution margin $ 360,000 $1,155,000 l,515,000Fixed costs: Manufacturing 750,000 Selling and administration 132,500

882,500

Operating income $ 632,500 Actual Results Basic Deluxe TotalSales volume (in units) 7,200 4,800 12,000

Sales revenue $2,340,000 $3,360,000 $5,700,000 Variable costs Direct materials 860,000 820,800 1,306,800 Direct labor 748,800 1,190,400 1,939,200 Overhead 374,400 595,200 969,600 Selling and administration 108,000 192,000 300,000 1,717,200 2,798,400 4,515,600

Contribution margin $622,800 $ 561,600 1,184,400Fixed costs Manufacturing 780,000 Selling and administration 139,500 919,500

Operating income $264,900

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Exhibit 2 Ferguson Foundry Limited

Unit Cost Standards For the Year Ended May 31, 20x5

Basic Woodstove Deluxe Woodstove Direct materials: Standard quantity per unit 70 kg 190 kg Standard price per kilogram $1.00 $1.00 Direct labor: Standard quantity per unit 6 hrs. 16 hrs. Standard rate per hour $15.00 $15.00 Variable overhead: Standard quantity per unit 6 hrs. 16 hrs. Standard rate per hour $7.50 $7.50 Variable selling and administrative rate per unit $15.00 $40.00

Exhibit 3 Ferguson Foundry Limited Market and Job-Cost Data

for the Year Ended May 31, 20x5 Market Data: Expected total market sales of woodstoves 100,000 units Actual total market sales of woodstoves 133,333 units Summary of Job Cost Sheets: Basic Deluxe Total Units of woodstoves produced 7,200 4,800 12,000 Direct materials: Actual quantity used in kilograms 540,000 912,000 1,452,000 Actual price per kilogram $0.90

Direct labor: Actual direct labor hours worked 46,800 74,400 121,200 Actual rate per hour $16.00

Actual variable overhead allocated on the basis of direct labor hours $374,400 $595,200 $969,600

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MA58 Problem: Variances, Break Even and Pricing - PFC Peterborough Furniture Company (PFC) produces pine furniture. The company keeps its costs down by only producing two products: pine tables and pine chairs. The budget prepared for Year 7 was as follows:

Peterborough Furniture Company Master Budget

For the Year Ending December 31, Year 7 Pine Chair Pine Table Year Total Sales Revenue: Quantity 5,000 2,500 7,500Price $ 225 $ 485 Total Revenue $1,125,000 $1,212,500 $2,337,500 Cost of Goods Sold: Variable Costs: Direct material $200,000 $200,000 $400,000 Direct labour 500,000 200,000 700,000 Overhead 250,000 100,000 350,000 Total variable cost $950,000 $500,000 $1,450,000 Contribution margin $175,000 $712,500 $887,500 Fixed Cost: Manufacturing $550,000 Selling & administration 125,000 Total Fixed Costs $675,000 Net Income Before Taxes $212,500

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The unit prices and quantities used by PFC to construct this budget were as follows:

Pine Chair

Pine Table

Direct Material: Standard Quantity (Board Feet) 40 80 Standard Price/Board Foot x $ 1 x $ 1

Total $40 $80 Direct Labour: Standard Quantity (Hours) 10 8 Standard Rate/Hour x $ 10 x $ 10

Total $100 $ 80 Variable Overhead: Standard Quantity (Hours) 10 8 Standard Rate/Hour x $ 5 x $ 5

Total $50 $40

Total Unit Cost $190 $200 The labour employed in the plant was moderately skilled, with wages per hour varying among workers in the range of $6 to $14 per hour. Variable overhead includes indirect labour, sanding equipment, glue, small tools, and other assorted materials. It has been established that variable overhead varies directly with direct labor hours. Fixed costs (manufacturing and selling & administrative) are not applied to products. The actual amount of profit earned in Year 7 was only $54,165, much lower than budgeted. Although the number of pieces sold was greater than expected and the industry volume of unit sales had actually grown to about 99,817 pieces during the year, PFC’s income was lower than expected. Budgeted industry volume for the year was 93,750 pieces. Actual results are below:

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Peterborough Furniture Company Actual Results

For the Year Ending December 31, Year 7 Pine Chair Pine Table Year Total Sales Revenue: Quantity 5,985 2,200 8,185Price $ 235 $ 475 Total Revenue $1,406,475 $1,045,000 $2,451,475 Cost of Goods Sold Variable Costs: Direct material $245,385 $180,400 $425,785 Direct labour 658,350 165,000 823,350 Overhead 329,175 99,000 428,175 Total Variable Cost $1,232,910 $444,400 $1,677,310 Contribution Margin $173,565 $600,600 $774,165 Fixed Cost: Manufacturing $590,000 Selling & administration 130,000 Total Fixed Costs $720,000 Net Income Before Taxes $54,165 A new supplier of wood had been selected during the year. While some lower quality wood was obtained, the price per board foot was definitely better. Also, a new mill had opened up in town during the year. Mr. Odette was forced to increase his wages to keep his good workers. The following list of unit costs has been prepared by the PFC bookkeeper.

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Actual Costs for Year 7 per Unit

Pine Chair Pine Table Direct Material: Actual Quantity 45 90 Actual Price $0.91111 $0.91111 Total Actual $41.00 $82.00 Direct Labour: Actual Quantity 10.00 6.25 Actual Rate $11.00 $12.00 Total Actual $110.00 $75.00 Variable Overhead: Actual Quantity 10.00 6.25 Actual Rate $5.50 $7.20 Total Actual $55.00 $45.00 Total $206.00 $202.00

Required: a) Prepare a flexible budget report. b) Calculate the following cost variances for both the chairs and table: Direct material Direct labour Variable overhead Fixed manufacturing Fixed selling & administrative c) Calculate the following revenue variances: sales revenue price sales volume sales mix sales quantity market share market size (industry volume) d) Reconcile the total variances calculated in b) and c) to the master budget vs actual

variance.

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e) Assuming that the net assets, fixed manufacturing expenses, and fixed selling &

administrative expenses for Year 8 could be allocated to the products produced as follows, what should the price for a pine table and a pine chair be, using the return on assets method of pricing and full costing? Assume that the required return on assets is 10% for both products and use the actual costs incurred for Year 7.

Pine Chair Pine Table Fixed Manufacturing $220,000 $370,000 Fixed Selling & Administration $110,000 $20,000 Net Assets Employed $1,436,000 $1,012,000

f) Using the data in the master budget for Year 7, determine the breakeven point in unit

sales and dollar sales for PFC.

Source: CMA Adapted

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MA59 Problem: Variance Analysis - F & G Inc. The controller for F & G Inc. developed the following standards per unit: Input Required Standard Price or Rate Direct materials 2 kgs $2.90 per kg Direct labour 3.5 hours $12.50 per hour Manufacturing Overhead: Variable -- $2.20 per DLH Fixed -- $4.10 per DLH Normal volume for the month of August, based on historical results, was estimated to be 8,000 units. Actual production results for August was 8,800 units, using the following inputs: Direct materials purchased 18,000 kgs @ $2.60/kg Direct materials issued to production 19,800 kgs Direct labour 32,200 hours @ a total cost of $425,040 Actual manufacturing overhead Variable $68,360 Fixed $112,100 Required: 1. Calculate the following variances:

a) direct material price and quantity variance b) direct labour rate and efficiency variance c) variable overhead spending and efficiency variance d) under or overapplied fixed overhead, fixed flexible budget variance, and production volume variance

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MA60 Problem: Variance Analysis - Trombone Ltd. Trombone Ltd. (TL) uses standard costing. At the beginning of the year, TL budgeted variable overhead to be $341,000, based on total direct labour hours of 110,000. Total direct labour costs were estimated to be $1,485,000. Other standard information is as follows:

Direct material cost per kilogram $5.20 Direct material inputs required for each unit of output 3 kgs Direct labour inputs required for each unit of output 2.5 hours

During the month of October, actual results were: Units produced 5,680 Direct material purchased 19,060

The controller for TL calculated variances for October as follows:

Direct material efficiency variance $3,640 F Direct labour efficiency variance $4,995 U Variable overhead spending variance $2,167 F Actual fixed overhead cost $44,860 Total underapplied fixed overhead $3,680 Fixed overhead flexible budget variance $5,040 U

The unfavourable direct material price variance was $.40 per kilogram, and due to significant overtime premiums required due to a machine breakdown, actual direct labour costs exceeded budgeted costs by $1.25 per hour. Fixed overhead is applied based on direct labour hours. Required: 1. Calculate the following for the month of October

a) Actual price paid per kilogram of material b) Total direct material price variance c) Total kgs of direct material issued to production d) Actual total direct labour hours e) Total direct labour rate variance f) Flexible budget variance for direct labour g) Variable overhead efficiency variance h) Actual variable overhead costs i) Variable overhead flexible budget variance j) Fixed overhead rate k) Total budgeted fixed overhead for the month of October l) Fixed overhead production volume variance

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MA61 Problem: Revenue Variances - New Look Jacket Inc. New Look Jacket Inc. produces and sells two lines of jackets: nylon and leather. The market for nylon jackets is large and competitive, but the leather jacket market has traditionally been small with only a few competing manufacturers. The operating budget for NLJ for the year 20x7 was as follows: Nylon Leather Jackets Jackets Total Sales volume 95,000 5,000 100,000 Sales revenue $3,325,000 $750,000 $4,075,000

Total variable costs 2,161,250 517,500 2,678,750 Contribution margin $1,163,750 $232,500 $1,396,250 The actual results for the year 20x7 are as follows: Nylon Leather Jackets Jackets Total Sales volume 93,500 16,500 110,000 Sales revenue $3,366,000 $2,442,000 $5,808,000 Total variable costs 2,127,125 1,707,750 3,834,875 Contribution margin $1,238,875 $ 734,250 $1,973,125 Additional information is as follows: Nylon Jackets Leather Jackets Market size (units): 20x7 budget 475,000 12,500 20x7 actual 425,000 125,000 Required - Calculate all relevant revenue variances and comment on the performance of the marketing department.

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MA62 Problem: Revenue Variances - Sleepy Hollow Hotels, Ltd. Sleepy Hollow Hotels, Ltd. (SHHL) operates two hotels in the Metro region. Each hotel has two grades of rooms: standard and deluxe. SHHL has a total of 300 deluxe rooms and 700 standard rooms in the region. On June 17, 20x6, the: executive committee of SHHL met to review its second-quarter results. The following are excerpts from the meeting. Brian Grant, President: "Preliminary results from our second quarter indicate that Suzie Paquin, our new vice-president of sales, should be recognized for a job well done. It seems clear to me that our new incentive bonus program, consisting of a sales commission based on total sales in addition to a base salary, is working. As you will see in Exhibit 1, revenues exceeded those projected for the period. Overall occupancy was up slightly despite a decrease in the overall market demand. In particular, the market responded enthusiastically to our deluxe rooms, on which Suzie placed particular emphasis." Ann Tait, Controller: "Excuse me, Brian, but your description of last quarter's performance may be overly optimistic. There were several occasions when our regular customers had to be turned away because all deluxe rooms were occupied. Also, the contribution margins for both types of rooms were down. I'll need to prepare a variance analysis before I can make any conclusions." After the meeting, Brian Grant directed Ann Tait to do the following: 1. Analyze the second-quarter results, including a detailed variance analysis. Comment on the overall

performance of SHHL and explain the significance of the variances from budget. 2. Comment on the performance evaluation of Suzie Paquin, Vice-President of Sales. Required - As Arm Tait, the controller for Sleepy Hollow Hotels Ltd., prepare a report to the president, Brian Grant.

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Exhibit 1

Sleepy Hollow Hotels Ltd. Sales and Operating Data

For the Quarter Ended May 31, 20x6 A. Sales Revenue for 92 days in the Quarter: Budgeted revenue $8,721,600

Actual revenue 8,825,100

Revenue variance $ 103,500 F

B. Average Daily Occupancy Rates:

Standard Deluxe Total

# of Rooms % # of Rooms % # of Rooms %

Budgeted 490 70% 240 80% 730 73%

Actual 455 65% 285 95% 740 74%

C. Industry Data: Budget Actual Total average daily demand for hotel rooms in the region 14,600 rooms 13,455 rooms SHHL's market share 5% 5.5% D. Operating Budget: Standard Deluxe Daily room rate $120 $150

Variable costs per room per day 40 61

Contribution margin per unit $ 80 $ 89

Average daily number of rooms occupied 490 240

Total rooms for the quarter (92 days) 45,080 22,080

Fixed costs for the quarter $2,000,000 $1,500,000

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E. Actual Operating Results: Standard Deluxe Daily room rate $120 $145

Variable costs per room per day 41 63

Contribution margin per unit $ 79 $ 82

Average daily number of rooms occupied 455 285

Total rooms for the quarter (92 days) 41,860 26,220

Fixed costs for the quarter $2,000,000 $1,500,000

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MA63 Problem: Cost Volume Profit Analysis - ABC Company The following information pertains to ABC Company, and its product, Product A. Selling price per unit $45.00 Direct material cost per kg $2.00 Direct labour cost per unit $1.20 Variable overhead cost per unit $0.80 Material required per unit 2 kgs Other variable expenses per unit $0.60 Annual fixed costs: Advertising $15,000 Fixed manufacturing 60,000 Other fixed expenses 8,000 $83,000 Required: 1. What is the breakeven point in both units and sales dollars? 2. Assume ABC has a target net profit of $240,000 and has a tax rate of 40%. What is the

breakeven point in both units and sales dollars? 3. If ABC Company chose to discontinue advertising, and instead pay $3.00 per unit as a

commission, what would the breakeven point be, in both units and sales dollars?

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MA64 Problem: Cost Volume Profit Analysis – Konrad Inc. Konrad Inc. has three product lines, X, Y and Z. The contribution margin of X, Y and Z is $45, $25 and $28 respectively. Historically, the annual unit sales of X, Y, and Z have been 3000, 5000 and 1,000. Konrad’s annual fixed costs are $249,600. Required: 1. What is Konrad Inc.’s breakeven point in units, assuming the sales mix remains constant?

How many units of X, Y and Z need to be sold to breakeven?

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MA65 Problem: Cost Volume Profit Analysis – Excellent Textbook Company Excellent Text Book Company produces an accounting text that is used by many universities and colleges. The firm sells the book to bookstores at the price of $43.50 each. The costs of manufacturing and marketing the text at the company’s normal volume of 3,000 units per month are as follows:

Unit manufacturing costs: Variable materials $5.50 Variable labour 8.25 Variable overhead 4.20 Fixed overhead 6.60 Total unit manufacturing costs $24.55 Unit marketing cost: Variable 2.75 Fixed 7.70 Total unit marketing costs 10.45 Total unit costs $35.00

Required:

a. What is the break-even volume in units? In sales dollars? b. Market research indicates that monthly volume could increase to 3,500 units, which is well within

production capacity limitations, if the price were cut from $43.50 to $38.50 per unit. Would you recommend that this action be taken? Support your response by showing your calculations.

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MA66 Problem: Cost Volume Profit Analysis - Nixon Company The estimates made for Nixon Company, a one-product company, are as follows:

Nixon Company Projected Income Statement

For The Year Ended December 31, 1995

Sales revenue (100 units x $100 per unit) $10,000 Manufacturing cost of goods sold: Direct materials $1,400 Direct labour 1,500 Variable overhead 1,000 Fixed overhead 500 4,400 Gross margin 5,600 Selling and administrative expenses: Variable 1,100 Fixed 2,000 3,100 Operating income $ 2,500

Required: a. How many units of the product must Nixon sell to break even? b. What would be the operating income if projected units increased by 25%? c. What would dollar sales be at the breakeven point if fixed overhead increased by $1,700.

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MA67 Problem: Cost Volume Profit Analysis - All-Day Candy Company All-Day Candy Company is a wholesale distributor of candy. The company services grocery, convenience, and drug stores in a large metropolitan area. All-Day has achieved small but steady growth in sales over the past few years while candy prices have been increasing. The company is formulating its plans for the coming fiscal year. Following are the data used to project the current year's after-tax net income of $110,400. Average selling price $4.00 per box

Average variable costs: Cost of candy $2.00 per box Selling expenses 0.40 per box $2.40 per box Annual fixed costs: Selling $ 160,000 Administrative 280,000 $ 440,000 Expected annual sales volume (390,000 boxes) $1,560,000 Tax rate 40% Manufacturers of candy have announced that they will increase prices of their products an average of 15% in the coming year due to increases in raw materials (sugar, cocoa, peanuts, and so on) and labour costs. All-Day Candy Company expects that all other costs will remain at the same rates or levels as the current year. Required: a. How was the $110,400 net income figure calculated? b. What is All-Day Candy Company's breakeven in boxes of candy for the current year? c. What selling price per box must All-Day Candy Company charge to cover the 15% increase in

the cost of candy and still maintain the current CM ratio? d. What volume of sales in dollars must the All-Day Candy Company achieve in the coming year to

maintain the same net income after taxes as projected for the current year if the selling price of candy remains at $4 per box and the cost of candy increases 15%?

e. How many units would have to be sold next year to generate a net income equal to 10% of revenue?

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MA68 Problem: Cost Volume Profit Analysis - Mistry Company Mistry Company manufactures a line of electric garden tools that are sold in general hardware stores. The company's controller, Sylvia Harlow, has just received the sales forecast for the coming year for Mistry's three products: weeders, hedge clippers, and leaf blowers. Mistry has experienced considerable variations in sales volumes and variable costs over the past two years, and Harlow believes the forecast should be carefully evaluated from a CVP viewpoint. The preliminary budget information for 20x8 is presented as follows: Hedge Leaf Weeders Clippers Blowers

Unit sales 50,000 50,000 100,000 Unit selling price $28 $36 $48 Variable manufacturing cost per unit $13 $12 $25 Variable selling cost per unit $5 $4 $6 For 20x8, Mistry's fixed factory overhead is budgeted at $2,000,000, and the company's fixed selling and administrative expenses are forecasted to be $600,000. Mistry has an effective tax rate of 40%. Required: a. Determine Mistry Company's budgeted net income for 20x8. b. Assuming the sales mix remains as budgeted, determine how many units of each product Mistry

Company must sell in order to break even in 20x8. c. Determine the total dollar sales Mistry Company must sell in 20x8 in order to earn an aftertax net

income of $450,000. d. After preparing the original estimates, Mistry Company determined that its variable

manufacturing cost of leaf blowers would increase 20% and the variable selling cost of hedge clippers could be expected to increase $1 per unit. However, Mistry has decided not to change the selling price of either product. In addition, Mistry has learned that its leaf blower has been perceived as the best value on the market, and it can expect to sell three times as many leaf blowers as any other product. Under these circumstances, determine how many units of each product Mistry Company would have to sell in order to break even in 20x8.

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MA69 Problem: Relevant Costing – Special Orders - CBA Inc. CBA Inc., a manufacturer, has received a special request for 1,000 units of its’ product, widgets, at a price of $52.50 per unit. The normal selling price for widgets is $60.00 per unit. CBA Inc.’s annual capacity is 25,000 units, and its current sales are 22,000 units per annum. To analyze this special order, Jim Blum, the sales manager, gathered the following budgeted information:

Direct materials per unit $2.10 Direct labour per unit $1.75 Variable overhead per unit $0.96 Fixed manufacturing overhead per unit $1.10 Variable selling and administration per unit $10.96

The variable selling and administration costs per unit represent commissions, and would not be incurred on this order. Required: 1. Should CBA Inc. accept this special order? 2. Assume CBA Inc.’s annual sales are 25,000 units. Should CBA Inc. accept this special

order?

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MA70 Problem: Relevant Costing – Special Orders - Kimco Inc. Kimco Inc. produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 8,000 units per month is:

Direct materials $2.50 Direct labour 3.00 Variable overhead 0.50 Fixed overhead 4.25 Variable selling and administrative expense 1.50 Fixed selling and administrative expense 2.00

The normal selling price is $15 per unit. The company’s capacity is 10,000 units per month. An order has been received from an overseas source for 2,000 units at a price of $12 per unit. This order would not disturb regular sales.

Required: 1. If the order were accepted, by how much would monthly profits be increased or decreased? (The

order would not change the company’s total fixed costs.) 2. Assume that the company has 500 units of this product, which are inferior to the current model, left

over from last year. The units must be sold through regular channels at reduced prices. What unit cost figure is relevant for establishing a minimum selling price for these units? Explain.

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MA71 Problem: Relevant Costing – Special Orders - George Jackson George Jackson operates a small machine shop. He manufactures one standard product available from many other similar businesses, and he also manufactures products to customer order. His accountant prepared the following annual income statement:

Custom Standard Sales Sales Total

Sales $50,000 $25,000 $75,000

Material 10,000 8,000 18,000 Labour 20,000 9,000 29,000 Depreciation 6,300 3,600 9,900 Power 700 400 1,100 Rent 6,000 1,000 7,000 Heat and light 600 100 700 Other 400 900 1,300 44,000 23,000 67,000

$ 6,000 $ 2,000 $ 8,000 The depreciation charges are for machines used in the respective product lines. The power charge is apportioned on the estimate of power consumed. The rent is for the building space, which has been leased for 10 years at $7,000 per year. The rent and heat and light are apportioned to the product lines based on the amount of floor space occupied. All other costs are current fixed expenses identified with the product line incurring them. A valued custom parts customer has asked Jackson to manufacture 5,000 special units for him. Jackson is working at capacity and would have to give up some other business to take this order. He cannot renege on custom orders already agreed to, but he could reduce the output of his standard product by about one-half for one year while producing the specially requested custom part. The customer is willing to pay $7.00 for each part. The material cost will be about $2.00 per unit, and the labour will be $3.60 per unit. Jackson will have to spend $2,000 for a special device that will be discarded when the job is done. Required - What is the net gain or loss from the special order?

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MA72 Problem: Relevant Costing – Special Orders - Strutt Company Strutt Company, which manufactures robes, has enough idle capacity available to accept a special order of 10,000 robes at $8 a robe. A predicted income statement for the year without this special order is as follows:

Per Unit Total

Sales revenue $12.50 $1,250,000

Manufacturing costs: Variable 6.25 625,000 Fixed 1.75 175,000 8.00 800,000

Gross profit 4.50 450,000

Marketing costs: Variable 1.80 180,000 Fixed 1.45 145,000 3.25 325,000

Operating profit $ 1.25 $125,000 If the order is accepted, variable marketing costs on the special order would be reduced by 25 percent because all of the robes would be packed and shipped in one lot. However, if the offer is accepted, management estimates that it will lose sales of 2,000 robes at regular prices. Required – What is the net gain or loss from the special order?

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MA73 Problem: Relevant Costing – Make or Buy - Todders Ltd. Todders Ltd. currently purchases a part required in its manufacturing process for $17.00 per unit. In addition to the purchase price of $17.00, Todders Ltd. incurs ordering, receiving and inspection costs of $2.50/unit. Todders is considering making the part, and to that end has estimated costs per unit as follows:

Direct materials $5.75 / unit Direct labour $10.00 / unit Variable overhead $1.50 / unit Increase in fixed manufacturing overhead $30,000

Todders Ltd.’s annual requirement of this part is 30,000 units. Required: 1. Should Todders produce this unit or purchase externally? What is the net benefit to

Todders Ltd.?

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MA74 Problem: Relevant Costing – Make or Buy - Surtel Company When you completed your audit of the Surtel Company, management asked for your assistance in deciding whether to continue manufacturing a part or to buy it from an outside supplier. The part, which is named Faktron, is a component used in some of the finished products of the company. From your audit working papers and from further investigation, you develop the following data as being typical of the company's operations: • The annual requirement for Faktrons is 5,000 units. The lowest quotation from a supplier was $8

per unit. • Faktrons have been manufactured in the Precision Machinery Department. If Faktrons are

purchased from an outside supplier, certain machinery will be sold and would realize its net book value.

• Following are the total costs of the Precision Machinery Department during the year under audit

when 5,000 Faktrons were made:

Direct materials $67,500 Direct labour 50,000 Indirect labour 20,000 Light and heat 5,500 Power 3,000 Depreciation 10,000 Property taxes and insurance 8,000 Payroll taxes and other benefits 9,800 Other 5,000

• The following Precision Machinery Department costs apply to the manufacture of Faktrons:

direct materials, $17,500; direct labour, $28,000; indirect labor, $6,000; power, $300; other $500. The sale of the equipment used for Faktrons would reduce the following costs by the amounts indicated: depreciation, $2,000; property taxes and insurance, $1,000.

• The following additional Precision Machinery Department costs would be incurred if Faktrons

were purchased from an outside supplier: freight, $0.50 per unit; indirect labor for receiving, materials handling, inspection, $5,000. The cost of the purchased Faktrons would be considered a Precision Machinery Department cost.

Required - a. Prepare a schedule comparing the total costs of the Precision Machinery Department (1) when

Faktrons are made and (2) when Faktrons are bought from an outsider supplier. b. Discuss the considerations in addition to the cost factors that you would bring to the attention of

managers in assisting them in deciding whether to make or buy Faktrons. Include in your discussion the considerations that might be applied to the evaluation of the outside supplier.

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MA75 Problem: Relevant Costing – Buying Decision - Tsui Company Tsui Company needs a total of 125 tons of sheet steel, 50 tons of 2-inch width and 75 tons of 4-inch width, for a customer's job. Tsui can purchase the sheet steel in these widths directly from Jensteel Corporation, a steel manufacturer, or it can purchase sheet steel from Jensteel that is 24 inches wide and have it slit into the desired widths by Precut, Inc. Both vendors are local and have previously supplied materials to Tsui. Precut specializes in slitting sheet steel that is provided by a customer into any desired width. When negotiating a contract, Precut tells its customers that there is a scrap loss in the slitting operation, but that this loss has never exceeded 2.5% of input tons. Precut recommends that if a customer has a specific tonnage requirement, it should supply an adequate amount of steel to yield the desired quantity. Precut's charges for steel slitting are based on good output, not input handled. The 24-inch wide sheet steel is a regular stock item of Jensteel and can be shipped to Precut within five days after receipt of Tsui's purchase order. If Jensteel is to do the slitting, shipment to Tsui would be scheduled for 15 days after receipt of Tsui's purchase order. Precut has quoted delivery at 10 days after receipt of the sheet steel. In prior dealings, Tsui has found both Jensteel and Precut to be reliable vendors with high-quality products. Tsui has received the following price quotations from Jensteel and Precut:

Jensteel Corporation Rates

Size Gauge Quantity Cost Per Ton

2 inch 14 50 tons $210 4 inch 14 75 tons 200 24 inch 14 125 tons 180

Precut, Inc., Steel Slitting Rates

Price Per Ton Size Gauge Quantity Of Output

2 inch 14 50 tons $18 4 inch 14 75 tons 15

Freight And Handling Charges

Destination Cost Per Ton

Jensteel to Tsui $10.00 Jensteel to Precut 5.00 Precut to Tsui 7.50

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In addition, Precut has informed Tsui that if it purchases 100 output tons of each width, the per-ton slitting rates would be reduced 12%. Tsui knows that the same customer will be placing a new order in the near future for the same material and estimates it would have to store the additional tonnage for an average of two months at a carrying cost of $1.50 per month for each ton. There would be no change in Jensteel's prices for additional tons delivered to Precut. Required - a. Prepare an analysis that will show whether Tsui Company should:

1. Purchase the required slit steel directly from Jensteel Corporation. 2. Purchase the 24-inch wide sheet steel from Jensteel and have it slit by Precut into 50

output tons 2 inches wide and 75 output tons 4 inches wide. 3. Take advantage of Precut's reduced slitting rates by purchasing 100 output tons of each

width. b. Without prejudice to your answer to Requirement (a), present qualitative arguments why Tsui

Company may favour the purchase of the slit steel directly from Jensteel Corporation.

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MA76 Problem: Relevant Costing – Drop a Product Line - Licnep Ltd. Licnep Ltd. has three major product lines, soda, juice, and ice cream. Licnep is considering discontinuing producing ice cream because the divisional income statement indicates it is being sold at a loss. The most recent annual income statement is outlined below: Soda

(000’s) Juice

(000’s) Ice Cream

(000’s) Sales $48,330 $44,980 $26,230Variable costs 16,500 19,600 12,700Fixed costs 21,800 24,400 18,300Operating income $10,030 $ 980 ($4,770) The fixed costs include fixed costs directly attributable to each product line as well as allocated common costs. The portion of directly attributable fixed costs included in total fixed costs is 40% for soda, 75% for juice and 55% for ice cream. Required: 1. Should Licnep Ltd. discontinue making ice cream?

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MA77 Problem: Relevant Costing – Drop a Product Line - Andres Company Andres Company manufactures and sells three different products: Ex, Why, and Zee. Projected income statements by product line for the year are presented below: Ex Why Zee Total

Unit sales 10,000 500,000 125,000 635,000

Sales revenue $925,000 $1,000,000 $575,000 $2,500,000 Variable cost of units sold 285,000 350,000 150,000 785,000 Fixed cost of units sold 304,200 289,000 166,800 760,000

Gross margin 335,800 361,000 258,200 955,000 Variable nonmanufacturing costs 270,000 200,000 80,000 550,000 Fixed nonmanufacturing costs 125,800 136,000 78,200 340,000

Operating profit $(60,000) $ 25,000 $100,000 $ 65,000 Production costs are similar for all three products. Fixed non-manufacturing costs are allocated to products in proportion to revenues. The fixed cost of units sold is allocated to products by various allocation bases, such as square feet for factory rent and machine-hours for repairs. Andres management is concerned about the loss on product Ex and is considering two alternative courses of corrective action. Alternative A. Andres would lease some new machinery for the production of product Ex. Management expects that the new machinery would reduce variable production costs so that total variable costs (cost of units sold and non manufacturing costs) for product Ex would be 52 percent of product Ex revenues. The new machinery would increase total fixed costs allocated to product Ex from $430,000 to $480,000 per year. No additional fixed costs would be allocated to products Why or Zee. Alternative B. Andres would discontinue the manufacture of product Ex. Selling prices of products Why and Zee would remain constant. Management expects that product Zee production and revenues would increase by 50 percent. The machinery devoted to product Ex could be sold at scrap value that equals its removal costs. Removal of this machinery would reduce total fixed costs by $30,000 per year. The remaining fixed costs allocated to product Ex include $155,000 of rent expense per year. The space previously used for product Ex can be rented to an outside organization for $157,500 per year. Required – Prepare a schedule analyzing the effect of alternative A and alternative B on projected total operating profit.

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MA78 Problem: CM Analysis and Scarce Resources - John’s Company John’s Company has two products, X and Y. Both X and Y are produced on the same machine. The maximum operating capacity of the machine is 5,500 hours. X requires 3 hours of machine time, while Y requires 5 hours of machine time. Other information regarding X and Y:

X Y Selling price per unit $128.00 $98.00Direct materials per unit 6.00 3.50Direct labour per hour 15.00 15.00Variable manufacturing overhead per direct labour hour 5.50 6.60Predetermined fixed overhead rate per machine hour 4.00 4.00Variable selling & administrative $25.00 $20.00 Product X requires 2.5 direct labour hours and product Y requires 1.5 direct labour hours. Total fixed manufacturing costs for the year are $22,000. The demand for Product X is 600 units and the demand for Product Y is unlimited. Fixed selling and administration costs are $8,000. Required: 1. What is the optimum production quantity of Product X and Product Y?

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MA79 Problem: CM Analysis and Scarce Resources - Paulie Limited The controller of Paulie Limited provided the following data regarding product A and B. A B Selling price $11.30 $19.25Direct materials required per unit 2 kgs 3 kgsDirect material cost per kilo $1.00 $0.80Direct labour cost per hour $12.00 $12.00Direct labour hours required per unit .25 .75Machine hours required per unit 4.0 6.0Variable manufacturing overhead per unit $1.50 $1.75Annual demand 4,000 5,000 Other information is as follows: Total fixed selling & administrative costs are $ 19,380, allocated as follows: A: $ 7,880 B: 11,500 Total fixed manufacturing overhead for the year $660,000 Available machine hours 49,600 Required: 1. What is the optimum production quantity of Product A and B?

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MA80 Problem: CM Analysis and Scarce Resources - Ronson Electric Ronson Electric produces three products, X, Y, and Z. Cost and revenue characteristics of the three products are as follows (per unit):

Product X Product Y Product Z

Selling price $40 $40 $36Less: variable expenses Direct materials 15 5 10Labour and overhead 7 23 17Contribution margin $18 $12 $9Contribution margin ratio 45% 30% 25% Demand for the company’s products is very strong, with far more orders on hand each month than the company has raw material available to produce. The same kind of raw material is used in each product. The raw material costs $2.50 per kilogram, with a maximum of 5,000 kilograms available each month. Which orders would you advise the company to accept first, those for product X, Y, or Z? Which orders second? Third? Explain, and show your computations.

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MA81 Problem: CM Analysis and Scarce Resources - Lam Company Lam Company manufactures a line of carpeting that includes a commercial carpet and a residential carpet. Two grades of fiber-heavy-duty and regular-are used in manufacturing both types of carpeting. The mix of the two grades of fiber differs in each type of carpeting, with the commercial grade using a greater amount of heavy duty fiber. Lam will introduce a new line of carpeting in two months to replace the current line. The present fiber in stock will not be used in the new line. Management wants to exhaust the present stock of regular and heavy-duty fiber during the last month of production. Data regarding the current line of commercial and residential carpeting are as follows: Commercial Residential

Selling price per roll $1,000 $800

Production specifications per roll of carpet: Heavy-duty fiber 80 kg. 40 kg. Regular fiber 20 kg. 40 kg. Direct labour-hours 5 hours 5 hours

Standard cost per roll of carpet: Heavy-duty fiber ($3 per kg.) $240 $120 Regular fiber ($2 per lb.) 40 80 Direct labor ($30 per DLH) 150 150

Variable manufacturing overhead (60% of direct labour cost) 90 90 Fixed manufacturing overhead (120% of direct labour cost) 180 180 Total standard cost per roll $700 $620 Lam has 42,000 kg. of heavy-duty fiber and 20,000 kg. of regular fiber in stock. There are a maximum of 4,000 direct labour-hours available during the month. The labor force can work on either type of carpeting. Sufficient demand exists to sell 250 rolls of Commercial carpets and 500 rolls of Residential Carpets. Required – Calculate the number of rolls of commercial carpet and residential carpet Lam Company must manufacture during the last month of production to maximize overall profitability.

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MA82 Problem: Linear Programming - Tranta Company Tranta Company produces two products, A and B. Product A requires 10 hours of assembly time and 4 hours of finishing time. Product B requires 6 hours of assembly time and 3 hours of finishing time. Both Product A and B require 10 kilograms of direct material input. The available hours of assembly time and finishing time are 144 and 100 respectively. There are currently 16,000 kilograms of direct material available. Due to a strike by the only supplier of this material, no material can be purchased. The contribution margin on Product A is $450 per unit and the contribution margin on Product B is $375. Required: 1. Formulate the objective function and the constraints.

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MA83 Problem: Linear Programming – XYZ Inc. XYZ Inc. produces two products, X and Y. The following data is available regarding X and Y:

X Y Direct material required 3.5 kgs 2.0 kgs Direct labour required .75 hours .25 hours Machine 1 time required 1.50 hours .50 hours Machine 2 time required .50 hours .50 hours Contribution margin per unit $8.00 $5.00

The available capacity is as follows: Direct material 2,400 kgs Direct labour 800 hours Machine 1 hours 220 hours Machine 2 hours 244 hours Required: 1. Assuming XYZ Inc. wishes to maximize total contribution margin, prepare the linear

programming model to meet this objective.

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MA84 Problem: Linear Programming - The Fluffy Toy Company The Fluffy Toy Company makes two types of stuffed animals: Bob the Rat and Bob the Cat. The equipment in the plant is a highly automated, flexible manufacturing system. While both Bob the Rat and Bob the Cat are produced on this same machinery, the two use different settings. For the coming quarter, there is only 2000 machine hours available for production of the two stuffed animals. Fluffy would like to settle on the product mix that that would be the most advantageous for the organization. The following data apply to the manufacture of the two stuffed animals.

Bob the Rat Bob the Cat FMS machine hours per unit 1.00 0.50 Unit selling price $2.50 $3.00 Unit variable cost 1.50 2.25

Required - a. Assume the market will absorb as many of either product that the firm can manufacture.

Determine the product mix that maximizes profit. b. Assume that market conditions have changed. Now, Fluffy Toy can sell no more that 1,500 Bob

the Rat stuffed animals, and no more than 3,000 Bob the Cat stuffed animals. Formulate this problem as a linear programming problem. Produce the objective function and all supporting equations.

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MA85 Problem: Linear Programming - Harrington Corporation The Harrington Corporation manufactures and sells three products: anchor bolts (A), bearings (B), and casters (C). There are 150 direct labour hours available. Machine hour capacity allows 100 anchor bolts only; 50 bearings only; 40 casters only; or any combination of the three that does not exceed the capacity. Data associated with the products follow: Selling Variable Cost Fixed Cost Direct Labour Product Price Per Unit Per Unit Hours Per Unit

A $4.00 $1.00 $2.00 2 B 3.50 0.50 2.00 2 C 6.00 2.00 3.00 3 Required - a. Develop the objective function to maximize the total contribution margin from Harrington's three

products. b. Develop the direct labour hour constraint. c. Develop the machine hour constraint.

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MA86 Problem: Linear Programming - Pools and Things Ltd. Pools and Things Ltd. (PATL) currently manufactures swimming pools and pool-related accessories. Recently, a new division, incorporated as a wholly-owned subsidiary, was established under the name of Outdoor Furniture Ltd. (OFL). OFL will produce two types of lawn chairs, regular and lounge. OFL consists of two departments, each requiring specialized equipment and labour skills. Both types of chairs will require processing in each department. The necessary equipment has been purchased and the labour is being hired. Machine time and labour time will not be interchangeable between the two departments. Annual machine and labour time constraints for each department are as follows: Machine Hours Labour Hours Department 1 40,000 25,000 Department 2 35,000 20,000 Both the regular and lounge chairs are expected to have life cycles of five years with maximum annual sales demands of 32,000 regular chairs and 20,700 lounge chairs. Other available information for these chairs is as follows: Regular Lounge Chairs Chairs Selling price per unit $42 $79

Direct materials per unit $5 $8 Other variable production costs per unit (including labor and overhead) $20 $41

Variable selling costs $2 $3 Fixed production costs - allocated 50% to each product (excluding depreciation) $70,000 $70,000 Fixed administration costs per year - allocated 50% to each product (excluding bank loan interest) $130,000 $130,000

Machine time per unit: Department 1 1/2hour 1 hour Department 2 1/2hour 1 hour Direct labor time per unit: Department 1 1/2 hour 1/2 hour Department 2 1/4 hour 1/2 hour

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The beginning balance sheet of OFL consists of the following: - Cash in the amount of $100,000. - New production equipment costing $1,500,000 (straight-line depreciation, expected salvage value of

$300,000 at the end of 5 years). - Term loan from the bank in the amount of $1,200,000, requiring quarterly principal payments of

$90,000 plus interest, payable at the rate of 1.75% per quarter. - Common shares issued to PATL at a value of $400,000. Additional information is provided in Appendix 1. The controller of PATL, G. Johnson, has arranged an operating line of credit for OFL. The bank's terms are as follows: 1. A maximum of 85% of the projected accounts receivable balance at the end of each quarter will be

advanced by the bank. 2. Funds are to be advanced on the first day of a quarter and repaid on the last day of a quarter.

Advances and repayments must be in units of $10,000. 3. A minimum cash on hand balance of $25,000 must be maintained. 4. Interest will be based on an annual rate of 8% and will be payable at the end of each quarter, based on

the quarter's opening balance. 5. OFL must immediately submit to the bank the following information for OFL's first year of

operations: - a cash flow budget for each quarter - a pro-forma income statement for the year - a pro-forma year-end balance sheet.

EXHIBIT 1

Information Gathered by Brooks Cash Inflows: - Sales will occur evenly over the year. - 20% of cash from sales will be received in the month of sale, 70% in the following month and 8% in

the third month. - 2% of sales will be uncollectible. Cash Outflows: - Variable production and selling costs, excluding direct materials, will be paid in the month of

production. - Direct materials will be received on a just-in-time basis and will be paid 30 days after receipt. - Fixed production and administration costs will be paid evenly throughout the year. - No finished goods inventory will be maintained. - No income tax installment payments will be required during OFL's first year of operations. Other Data: - OFL's effective tax rate is 40%. - Assets are class 8 at a 20% CCA rate. - OFL uses the percentage of sales basis to estimate bad debts. Required - a. What is the objective function and the constraints in this problem? b. Assume that the linear program provides you with the following optimal solution: Regular Chairs – 30,000 Lounge Chairs – 20,000

Prepare a cash flow budget for the four quarters of the first year of operations. c. Prepare a budgeted income statement for the first year of operations. d. Prepare a budgeted balance sheet at the end of the first year of operations.

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MA87 Problem: Decision Analysis under Uncertainty – Slick Ltd. Slick Ltd. produces a product called Zap. The president of Slick Ltd. is currently attempting to decide on an appropriate selling price for each unit of Zap for the upcoming year. He realized that a higher price would naturally result in lower demand, but he also felt that the actual final demand would depend on whether the state of the economy next year is weak or strong. His situation is further complicated because he must purchase his entire materials requirement for next year’s production of Zaps in a single lot of either 200,000 units or 240,000 units, and the unit price of these materials will depend on the size of the lot he orders, 200,000 or 240,000. The sole supplier of the materials will accept no additional orders during the year. Therefore, if Slick Ltd. does not purchase enough materials to meet actual demand, some orders will be left unfilled. On the other hand, if more materials are purchased than are required to fill demand, the excess materials will become spoiled at the end of the year and Slick Ltd. will have to scrap the spoiled materials. The president has summarized the cost of materials data and his expected overall demand situation for the next year as follows:

Quantity of Materials Ordered Cost per Unit200,000 units $3.00 240,000 units 2.90

Note: each unit of Zap requires one unit of materials. Expected Demand for Zap: State of Economy Unit Selling Price Weak (p = .6) Strong (p = .4)

$5.25 180,000 200,000 $5.00 200,000 240,000

Required Determine the quantity of materials that should be ordered for next year’s production of Zap, and the selling price for one unit of Zap that will provide Slick Ltd. with the highest expected contribution next year. Assume that all other costs in the production of Zap remain constant regardless of the quantity produced. Show all supporting calculations. Source: CMA adapted

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MA88 Problem: Decision Analysis under Uncertainty - Dynaco Company The Dynaco Manufacturing Company produces a particular product from a process consisting of operations of 5 machines. The probability distribution of the number of machines which will break down in a week is as follows:

Number of machines that will Breakdown

Each Week Probability0 .10 1 .10 2 .20 3 .25 4 .30 5 .05

Every time one of the machines breaks down at the Dynaco Manufacturing Company, it requires 1, 2 or 3 hours to fix it according to the following probability distribution.

Repair Time (hours) Probability1 .30 2 .50 3 .20

Required: If it costs $72 per hour to repair a machine (which includes lost productivity) when it breaks down, determine the average weekly breakdown cost.

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MA89 Problem: Payoff Tables (Expected Values) & EVPI - Germain Ltd. Germain Industrial Products Ltd. manufactures and sells machine tools. Currently, Germain is considering whether to implement a computerized direct ordering service for its customers. The existing average contribution margin per order is $140 and Germain's total fixed costs are $26 million per year. The company believes that if it implements the new service without any loss of clients it could charge $10 more per order. The incremental costs of the ordering service would be $3 per order plus $1,500,000 per year to lease the required equipment. The marketing manager has estimated two probable levels of production and sales for the coming year. She believes that there is a 70% chance that Germain will have 200,000 orders and a 30% chance of having 300,000 orders. A marketing research firm has offered to do a survey that can determine, with certainty, which level of orders Germain will have in the coming year. The company executive has to decide how much (if anything) it should pay for the market research information. Required: a) Calculate the amount that Germain would be willing to pay (if anything) for the perfect

information about orders in the coming year. b) Explain the limitations of your method of analysis in part a).

Source: CMA Adapted

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MA90 Problem: Expected Values (Payoff Tables) - AMC Corporation AMC Corporation is introducing a new product, and must decide on a selling price. The variable cost per unit is $5.60. Senior management has narrowed the pricing alternatives to two choices: $14.50 or $8.20 per unit. Management estimates sales levels and the probability of attaining these levels as follows: Selling price of $8.20:

Units Probability 15,000 5%10,000 85%8,000 10%

Selling price of $14.50:

Units Probability 4,700 5%3,800 65%2,600 30%

As the volume levels noted above are in the relevant range, fixed costs remain constant regardless of the selling price chosen. Required: 1. Using a payoff table, calculate the optimal price AMC Corporation should charge. 2. Restate part 1 using a decision tree.

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MA91 Problem: Payoff Tables (Expected Values) & EVPI - Etam Repap Inc. Etam Repap Inc. is considering rearranging its plant to increase efficiency. If the rearrangement is completely successful, anticipated operating costs will be $200,000 per annum. If the rearrangement is partially successful, anticipated operating costs are expected to be $310,000. If unsuccessful, operating costs are anticipated to be $510,000. The probability of complete success is 50%, partial success 30% and failure is 20%. If the company does not rearrange, operating costs will be $400,000. Required: 1. Prepare a payoff table (alternatives are rearrange or do not rearrange). 2. Restate requirement 1 in a decision tree format. 3. Etam Repap Inc. has an opportunity to hire a consultant who could predict the success

rate with certainty. How much should Etam be willing to pay for such a report?

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MA92 Problem: Expected Values (Payoff Tables) - HotDogs You own the rights to sell hot dogs at the local ballpark, The weather network predicts the probability of rain at 60% for the next game coming up tomorrow. You have to decide today whether you will set up your hot dog stand inside or outside. If you set up outside and it does not rain, you expect to sell 800 hot dogs, but if it rains you will only sell 200 hot dogs. If you set up inside and it does not rain you will sell 300 hot dogs; if it rains, you will sell 700 hot dogs. Each hot dog generates a contribution margin of $2.00. Required - a. Where should you set up, inside or outside? b. What is the most you would pay someone to predict (with 100% accuracy)

tomorrow’s weather? c. At what rain probability would you be indifferent between setting up inside

or outside?

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MA93 Problem: Expected Values (Payoff Tables) - Propeller Inc. A company, Propeller Inc., is considering three alternative machines to produce a new product. The cost structures (unit variable costs plus avoidable fixed costs) for the three machines are shown below. The selling price is unaffected by the machine used.

Single-purpose machine $0.60 + $20,000 Semiautomatic machine $0.40 + $50,000 Automatic machine $0.20 + $120,000

The demand for units of the new product is described by the following probability distribution:

Demand Probability 200,000 0.4 300,000 0.3 400,000 0.2 500,000 0.1

Required - Calculate expected demand. Calculate the expected costs of using the semiautomatic machine. Which machine should be selected?

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MA94 Problem: Expected Values (Payoff Tables) - QTI Ltd. Your client, QTI Ltd., wants your advice on which of two alternatives he should choose. One alternative is to sell an investment now for $10,000. Another alternative is to hold the investment three days, after which he can sell it for a certain selling price based on the following probabilities:

Selling Price Probability $ 5,000 0.4

8,000 0.2 12,000 0.3 30,000 0.1

Required - Would you recommend to sell the investment now or hold the investment for three days?

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MA95 Problem: Expected Values (Payoff Tables) - The Elwood Company The Elwood Company is considering hiring several new employees to handle an overload from a new contract. If the new people are not hired, there will be delays in contract work. The following payoff matrix has been prepared for analyzing whether new people are needed:

Hire New Do Not Hire People New People

Retain new customers $100,000 $75,000 Lose new customers 25,000 50,000

Based on past experience, the company expects to retain 75% of the new customers with no new hires. Required - Calculate the expected profit for the "no hire" decision.

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MA96 Problem: Expected Values (Payoff Tables) - The Gallant Company The Gallant Company manufactures a unique thermostat that yields dramatic cost savings from effective climatic control of large buildings. The efficiency of the thermostat is dependent upon the quality of a specialized thermocoupler. These thermocouplers are purchased from Braun Company for $15 each. Since early 20x3, an average of 10% of the thermocouplers purchased from Braun have not met Gallant's quality requirements. The number of unusable thermocouplers has ranged from 5% to 25% of the total number purchased and has resulted in failures to meet production schedules. In addition, Gallant has incurred additional costs to replace the defective units because the rejection rate of the units is within the range agreed upon in the contract. Gallant is considering a proposal to manufacture the thermocouplers. The company has the facilities and equipment to produce the components. The Engineering Department has designed a manufacturing system that will produce the thermocouplers with a defective rate of 4% of the number of units produced. The following schedule presents the engineer's estimates of the probabilities that different levels of variable manufacturing cost per thermocoupler will be incurred under this system. Additional annual fixed costs incurred by Gallant if it manufactures the thermocoupler will amount to $32,500.

Estimated Variable Manufacturing Cost Per Probability Of

Thermocoupler Unit Occurrence

$10 0.1 12 0.3 14 0.4 16 0.2

Gallant Company will need 18,000 thermocouplers to meet its annual demand requirements. Required – Prepare an expected value analysis to determine whether Gallant Company should manufacture the thermocouplers.

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MA97 Problem: Expected Values (Payoff Tables) - The Finch Company The Finch Company manufactures modular furniture for the home and uses a monthly variance system to control costs of the manufacturing departments. Peter Carter is the supervisor of the Assembly Department and is reviewing the monthly variance analysis for November:

Standard cost of production materials $275,000 Materials price variance -0- Materials quantity variance, unfavourable 19,000 $294,000

Carter has gathered the following information to assist him in deciding whether or not to investigate the unfavourable materials quantity variance: Estimated cost to investigate the variance $ 4,000

Estimated probability that the Assembly Department is operating properly 90%

If the Assembly Department is operating improperly:

Estimated cost to make the necessary changes $ 8,000

Estimated present value of future unfavourable variances that would be saved by making the necessary changes $40,000 Required - a. Recommend whether or not Finch Company should investigate the unfavourable materials

quantity variance. b. Peter Carter is uncertain about the probability estimate of 90% for proper operation of the

Assembly Department. Determine the probability estimate of the Assembly Department operating properly that would cause Collins to be indifferent between the two possible actions.

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MA98 Problem: Pricing - Katz Inc. Bob Katz, the owner of Katz, Inc., is preparing a bid on a job that requires $1,200 of direct materials, $600 of direct labour, and $250 of overhead. Bob normally applies a standard mark-up based on cost of goods sold to arrive at an initial bid price. He then adjusts the price as necessary in light of other factors (e.g., competitive pressures). Last year’s income statement is as follows:

Sales $100,000 Cost of goods sold 45,000 Gross margin 55,000 Selling and administrative expenses 24,500 Net income $ 30,500

Required - 1. Bill’s standard mark-up is unchanged from last year. Calculate it as

a percentage of sales. 2. What is Bob’s initial bid price?

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MA99 Problem: Pricing - Classic Corporation The following data relate to a year's budgeted activity (100,000 units) for Classic Corporation, a single-product company:

Per Unit

Selling price 5.00 Variable manufacturing costs 1.00 Variable marketing costs 2.00 Fixed manufacturing costs (based on 100,000 units) 0.25 Fixed marketing costs (based on 100,000 units) 0.65

Total fixed costs remain unchanged between 25,000 units and total capacity of 160,000 units. An order is received for 10,000 units to be used in an unrelated market. The sale would require production of 10,000 extra units. Required - What price per unit should be charged on the special order to increase operating profit by $15,000?

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ME1 Problem: Transfer Pricing – The Whole Company

The Whole Company is an integrated multidivisional manufacturing firm. Two of its divisions, Rod and Champ, are profit centres and their division managers have full responsibility for production and sales (both internal and external). Both the Rod and Champ division managers are evaluated by top management on the basis of total profit.

Rod Division is the exclusive producer of a special equipment component called Q-32. Since there is no outside competition for Q-32, the Rod division manager used the results of a market study together with statistical probability analysis to set the price at $450 per unit of Q- 32. At this price, the normal sales and production volume is 21,000 units per year; however, production capacity is 26,000 units per year. Standard production costs for one unit of Q- 32 based on normal production volume are as follows:

Direct Materials $175.00Direct Labor 75.00Variable Overhead 50.00Fixed Overhead 90.00Total Unit Production Costs $390.00

Champ Division produces machinery for several large customers on a contractual basis. It has recently been approached by a potential customer to produce a specially designed machine which would require one unit of Q-32 as its main component. The potential customer has indicated that it would be willing to sign a long-term contract for 10,400 units of the machine per year at a maximum price of $650 per unit. Although Champ Division has sufficient idle capacity to accommodate the production of this special machine, the division manager is not willing to accept the contract unless he can negotiate a reasonable transfer price with the Rod division manager for Q- 32. He has calculated that the unit costs to produce the special machine are as follows:

Direct Material other than Q 32 $100.00 Direct Laboor 50.00 Variable Overhead 35.00 Fixed Overhead 50.00 Total Unit Production Costs before transfer of Q 32 $235.00

REQUIRED: (a) What is the maximum unit transfer price that the Champ division manager should be willing to accept for Q-32 if he wishes to accept the contract for the special machine? Support your answer. (b) What is the minimum unit transfer price that the Rod division manager should be willing to accept for Q-32? Support your answer.

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(c) Assume that Rod Division would be able to sell its capacity of 26,000 units of Q-32 per year in the outside market if the selling price was reduced by 5%. From top management's point of view, evaluate, considering both quantitative and qualitative factors, whether Rod Division should lower it’s market price or transfer the required units of Q-32 to Champ Division. (d) Assume that top management has decided to impose a dual transfer pricing system for Q-32 which would satisfy the Rod division manager and encourage the Champ division manager to accept the contract for the special machine. Discuss the implications of this decision.

CMA adapted

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ME2 Problem: Transfer Pricing – Diversified Liquid Products Diversified Liquid Products (DLP) is a multi-divisional manufacturer of various liquid products. The divisions are autonomous segments with each division responsible for its own sales, cost of operations, and equipment acquisition. Divisional performance is evaluated annually based on ROI. Each division serves a different market. Because the markets and products of the divisions are so different, there have never been any transfers between divisions. The Consumer Division manufactures products purchased by individuals for household use. The division plans to introduce a new household-cleaning product called Sludge. Roberta Katz, the Consumer Division manager, has discussed the supply of the glass container for Sludge with Nathan Danielson of the Industrial Division. They both believe that a glass container currently made by the Industrial Division for packaging its product Lubri-Solve could be modified for use with Sludge. Consequently, Katz asked Danielson for a price for the glass containers. The following conversation took place about the price to be charged for the glass containers.

Danielson: “Roberta, we can make the necessary modifications to the glass container easily.

The specifications used in packaging Sludge are slightly different, so the raw materials should cost about 10 percent more than those used for the glass container for Lubri-Solve. However, the labour time should be the same because the glass container fabrication process is the same. I would price the glass container at our regular rate: full cost plus a 30 percent mark-up. According to my calculations, that would be $20.53 per glass container.”

Katz: “That’s higher than I expected, Nathan. I was thinking that a good price would be

your variable manufacturing cost. After all, your fixed costs will be incurred regardless of this job. In addition, I have received a quotation from one of the Consumer Division’s regular suppliers to provide us with the glass container at $19.00 each.”

Danielson: “Roberta, I am at capacity. By making the glass container for you, I have to cut

my production of Lubri-Solve. The labour time freed by not having to mix chemicals and package Lubri-Solve can be shifted to the production of Scrubo, our other product. I’d like to sell the glass containers to you at variable cost, but I have excess demand for both products. I don’t mind changing my product mix to Scrubo as long as I can continue to make the same ROI for my division. Here are my standard costs for the two products and a schedule of my manufacturing overhead.” (See Exhibits 1 and 2.)

Exhibit 1 – Industrial Division Standard Costs and Prices

Lubri-Solve Scrubo Direct materials:

Chemicals $7.35 $6.50

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Glass container 6.40 —Paper box (purchased) — 6.00

Direct Labour: Chemical mixing (0.5 hrs. @ $7.50/hr.) 3.75 3.75Glass container (0.5 hrs. @ $7.50/hr.) 3.75 —Packaging (0.5 hrs. @ $7.50/hr.) 3.75 3.75

Manufacturing overhead ($10.00/DLH) 15.00 10.00Total standard cost $40.00 $30.00Selling price (including 30% mark-up) $52.00 $39.00

Exhibit 2 – Industrial Division Manufacturing Overhead Budget

Overhead Item Description Amount Supplies Variable $370000Indirect labour Variable 375000Supervision Fixed 150000Power Variable 180000Heat and light Fixed 120000Property tax & insurance Fixed 130000Depreciation Fixed 1100000Employee benefits Variable 575000 Total overhead $3000000 Capacity in direct labour hours (DLH) 300000 Overhead rate per direct labour hour $10.00

Katz: “I guess I see your point, Nathan, but I don’t want to price myself out of the

market. In addition to pricing, I am also concerned about delivery. We’ll need the glass containers within two weeks of placing our order or we risk losing some important potential customers. Our outside supplier claims that they can meet our timing needs.”

Danielson: “Oh-oh. That lead-time is a bit short considering the production re-scheduling we

need to do. I can’t promise you a lead-time shorter than four weeks at the moment.”

Katz: “There’s quite a few issues that need to be addressed here, Nathan. As we have no previous experience in transferring goods between our divisions, I think we should speak with the controller at corporate headquarters before we can agree on a transfer price.”

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Required - Calculate the transfer price that satisfies Danielson’s ROI requirements.

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ME3 Problem: Transfer Pricing – West Industries West Industries is a highly decentralized corporation with independent operating divisions. Each division is evaluated and rewarded based on its total net income. One of the divisions, Visic, manufactures and sells air conditioners. It is projecting a sales forecast of 17,400 for next year. Another division, Weber, makes and sells compressors. Its projected income statement for next year follows:

Weber Division Pro Forma Income Statement

For Next Year

Per Unit TotalsSales revenues $100 $6400000

Less cost of goods sold: Direct materials 12 768000 Direct labour 8 512000 Variable overhead 10 640000 Fixed overhead 11 704000 41 2624000

Gross profit 59 3776000

Operating expenses: Variable selling expenses 6 384000 Fixed selling expenses 4 256000 Fixed administrative expenses 7 448000 Total operating expenses 17 1088000

Pretax net income $42 $2688000

Weber has the capacity to produce 75,000 compressors annually. Visic, currently purchasing from an outside source at $70, proposes that Weber transfer compressors to them at a transfer price of $50. The Visic manager justified the low bid based on some cost savings that should be realized if compressors are transferred. Because specifications for this compressor are slightly different from Weber's standard model, $1.50 per compressor of direct materials cost can be saved and no variable selling expenses will be incurred on compressors transferred. Required - a. Compute the estimated effect on Weber's net income if the 17,400 compressors are

transferred at $50 each.

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b. Determine whether it would be in West industries' best interests for Weber to transfer compressors at $50 each.

c. What is the minimum transfer price you would accept as the Weber manager?

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ME4 Problem: Transfer Pricing – Parker Corporation Parker Corporation has two divisions, Ajax and Defco. Both are profit centers. One of the products Ajax manufactures is electrical fitting 1726, which is protected under patent and, thus, is not available from any other source. Its variable costs are $4.25 per unit, and its normal sales price is $7.50. Defco has just been awarded an Air Force contract for the manufacture of a special brake unit. Because Defco was only operating at 50% capacity, it purposefully bid low to increase its chances of winning the contract in what, the manager believed, would be a very competitive process, due to the sagging state of the defense contracting and airline manufacturing industries. The brake's bid sheet shows: Purchased parts from outside vendors $22.50Ajax electrical fitting 1726 5.00Other variable costs 14.00Standard variable manufacturing and delivery costs 41.50Indirect cost markup for fixed factory overhead, administration costs, and profit 8.00Brake bid price $49.50

Required - a. Recommend whether or not Ajax should supply fitting 1726 to Defco. b. Discuss whether a transfer is in Parker's long-run economic interest.

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ME5 Problem: Transfer Pricing – Canadian Motors International Canadian Motors International (CMI) is an international company that is organized into three divisions, each of which is treated as an investment centre. Divisional performance evaluation and managerial bonuses are based on achieving a 12% divisional return on investment (ROI). Divisional ROI is calculated as pretax divisional income divided by divisional investment. See Exhibit 1 for a diagram showing the structure of CMI. Paul Sing, President of CMI, is very concerned about both divisional and overall corporate performance. The following discussion took place recently between Paul Sing and Erin Hunter, the new controller. Paul Sing, President: "I wonder if the growth we enjoyed in the early eighties was really worth it. Now that we're an international organization, I'm not sure what's going on in each of the divisions." Erin Hunter, Controller: "But you've laid out some ground rules for the divisional managers to work within. I heard you say this morning that they are supposed to act as independent business units and maximize divisional return on investments." Paul Sing, President: "I 've also instructed the divisional managers to buy from and sell to each other whenever possible and that the price for these internal transactions has to be set at 1.25 times full production cost. Every time I turn around, one of them is complaining about what the other divisions are doing." The Engine Division (ED) manufactures standard carburetor engines and fuel injected engines. The manufacturing process involves product design, machining of parts, assembly, and quality assurance. ED has developed a strong reputation based on product quality and the guarantee of complete customer satisfaction. Lately, CMI management has expressed some concerns regarding the overall profitability of ED given CMI's overall desired rate of return of 12% before taxes (the corporate tax rate in Canada is 40%). All of the carburetor engines produced by ED are sold to the Snowmobile Division (SD) of CMI. Information concerning the manufacture of the engines is provided in Exhibit 2. The manager of ED has been complaining that his division's ROI is decreasing as carburetor engine sales to SD increase. He has argued with Paul Sing that he should be allowed to increase the price of carburetor engines to $500 which is the market price for a similar engine. Alternatively, the ED manager has threatened to stop producing carburetor engines. Sales prospects for the fuel injected engine are virtually limitless at the current price of $600 per engine. The only restriction facing ED is an upper limit of 200,000 machine hours per year. The Snowmobile Division (SD) manufactures snowmobiles valued for their durability and performance. Information on the profitability of SD is shown in Exhibit 3. SD buys all of its carburetor engines from ED.

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Paul Sing has been pleased with the past performance of SD as sales and profits have continued to increase. He decided to ask the SD manager how a price increase in carburetor engines would affect sales. The reply was that snowmobile sales are price sensitive and the proposed increase in the price of engines from ED would require SD to increase the domestic price of the snowmobile to $3,400. This would cause the domestic sales volume to fall to 3,500 units per year. The SD manager also complained that ED's service has steadily decreased over the past year, causing delays in the production of snowmobiles, and if delivery times do not improve, some sales could be lost. The International Division (ID) of CMI is located in Sweden where the corporate tax rate is 30%. ID's only business activity is to sell snowmobiles imported from SD. ID pays a 20% import duty based on the transfer price. Customs officials in Sweden carefully monitor the invoices of imported manufactured goods to ensure that the goods are priced at "fair values". The government of Sweden considers any price between full production cost and 150% of full production cost to be within its definition of fair value. Information on ID is provided in Exhibit 4. While ID is only two years old, it has gained a significant market share in Sweden by following a penetration pricing strategy. All indications are that sales will continue to grow. In response to a recent inquiry by Paul Sing, ID's manager indicated that the proposed increase in the cost of a snowmobile from SD would lead him to increase the ID sales price by $300 per unit causing volumes to decline to 1,700 per year. At the end of their meeting, Paul Sing requested Erin Hunter to analyze the company's current situation, including the ED manager's two proposals, and recommend improvements. Specifically, he would like you to determine the impact of each proposal on the pretax income and return on investment for each division and the company as a whole along with the behavioral implications of these proposals. Paul Sing would also like a discussion of the relevant considerations in setting CMI's domestic and international transfer pricing policies. Other issues, such as organization structure, performance evaluation, the bonus system and improvement of the company's future profitability, are other concerns Paul Sing would like you to address. Required - As Erin Hunter, the new controller, prepare a report to Paul Sing, President of Canadian Motors International.

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EXHIBIT 1 Canadian Motors International

Canadian Motors International CMI

Engine Division (Canada)

ED

Snowmobile Division (Canada)

SD

International Division (Sweden)

ID

Carburetor Engines

Snowmobiles for Export

Fuel Injected Engines

in Canada Snowmobiles

in Canada Snowmobiles

In Sweden

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EXHIBIT 2 Engine Division

Carburetor Fuel Injected Total Per Per Engine Unit Total Unit Total Division

Volume (units) 6000 22000 28000

Revenue $400 $2400000 $600 $13200000 $15600000

Direct costs: Materials $150 $900000 $135 $2970000 3870000 Labor 70 420000 90 1980000 2400000 Production overhead - variable 45 270000 25 550000 820000 - fixed 55 330000 72 1584000 1914000 Variable selling & adm 10 60000 37 814000 874000

Total direct costs $330 $1980000 $359 $7898000 9878000

Fixed selling & admin. 4733000

Total costs 14611.000

Pre-tax divisional income $989000

Machine hours 4 24000 8 176000 200000 Divisional investment $11697000

Divisional ROI 8.5%

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EXHIBIT 3 Snowmobile Division

Per Unit Volume Total

Sales: Domestic $3300 4000 $13200000Sales: Transfers to ID $3610 2000 7220000

Total sales 6000 20420000

Direct materials (note) $1300 6000 7800000Direct labor 1200 6000 7200000Variable production overhead 100 6000 600000Fixed production overhead 288 5000 1728000Selling and administration: Variable 52 6000 312000Fixed 361 6000 2166000

Total costs $3301 19806000

Pre-tax divisional income $614000

Divisional investment $4083000

Divisional ROI 15.0% Note: Includes engines at $400 per engine.

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EXHIBIT 4 International Division (In Canadian Dollars)

Per Unit Total

Volume 2000

Revenue $4700 $9400000Cost of snowmobiles (note) 4332 8664000

Gross margin 368 736000

Selling and administration: Variable 47 94000Fixed 86 172000 133 266000

Pre-tax divisional income $235 $470000

Divisional investment $2379000

Divisional ROI 19.8% Note: As acquired from the Snowmobile Division at 125% of full production cost (rounded to the nearest dollar) plus 20% import duty on goods imported into Sweden.

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ME6 Problem: Transfer Pricing – Seagull Controls Limited Seagull Controls Limited manufactures small control units used in process control equipment. It has two operating divisions: the Component Division and the Device Division. The Component Division was set up originally as an autonomous cost centre with the mission of supplying a high quality control component, CTR1, to the Device Division where it is made part of a Precision Control Unit (PCU). The CTR1 component is designed specifically for the PCU and there is no immediate external market for the component. In 20x2, Seagull expanded and automated its manufacturing facilities. With the expansion, the Component Division had enough capacity not only to satisfy the internal requirements of the Device Division but also to accept a contract to produce a new control component, CTR2. The contract was for 25,000 units per year for 5 years. The Component Division has been treated as a profit centre since the commencement of production and sales of CTR2. Its performance evaluation is based on divisional net income before taxes, just like the Device Division. Since the CTR2 contract provided a net margin of 20%, the Component Division also demanded a transfer price for the CTR1 which would generate a 20% net margin. The Device Division had no choice but to accept this transfer price as it could not locate another supplier providing the same quality of the CTR1 as the Component Division. Exhibits 1 and 2 provide budgeted net margin data for the two divisions for 20x4. Dave Demski, manager of the Device Division, was concerned about the high transfer price of the CTR1 component as it was negatively affecting the division's net income before taxes. In late 20x3, Dave began investigating possible external sources of the CTR1 component at more reasonable prices. In January 20x4, Dave signed a contract with an external supplier for delivery of 10,000 units of the CTR1 component throughout the year at a price of $210 per unit starting in February 20x4. This would result in a savings of $900,000 for the Device Division when compared with the internal transfer price. Dave believed that the Component Division would not object as it could pursue an opportunity to supply another new component, JAFAR, to Apex Automotive. However, the 'contract Dave signed for CTR1 contained the following two options for Dave to make changes if necessary: 1) The contract could be canceled within 10 days of signing it at a penalty of 12% of the full

contract price. 2) The order quantity could be decreased, within 30 days of signing the contract, to 2,000 units

but at a lump sum cost of $100,000 to cover tooling costs in addition to the $210 per unit price.

When Carl Chevis, manager of the Component Division, heard of the contract, he was very upset. Carl, who has been with the company for many years, believed that the mission of the Component Division is to supply the high quality CTR1 component internally. Any other

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business, such as the sale of the new CTR2 component, is supplementary. He felt that Dave's actions would hurt the Component Division's net income before taxes for 20x4. Carl demanded to have a meeting with Lucie Lambert, President of Seagull Controls Limited, to discuss the matter. During the meeting, both Dave and Carl presented their cases to Lucie Lambert. Carl indicated that if the Device Division were to purchase the CTR1 components externally, it would cause considerable financial difficulties for the Component Division. Carl admitted that he was considering pursuing a potential contract with Apex Automotive to supply the JAFAR component. Apex is ordering several samples of 500 units of JAFAR from various potential suppliers in 20x4 for $700 per unit. If Apex prefers the quality of the Component Division's sample, Apex will order 8,000 units of JAFAR per year for 20x5 and 20x6 at $700 per unit. If Apex places this 2-year order, the efficiency of the Component Division's plant must be improved. Currently, a large portion of each shift is spent on complex process warmup and shutdown procedures. Increased efficiency can be achieved with continuous manufacturing. The plant can be converted to continuous operation by expanding plant operations from two 8-hour shifts to three 8-hour shifts and a capital investment of $2,000,000. This investment would be placed in the class 8 pool of assets with a 20% CCA rate for tax purposes, but would be depreciated on a straight-line basis over 2 years. The investment would have no salvage value any time after completing the expansion. The conversion to continuous operation requires complex adjustments and would take a year to implement. After implementation is complete, the plant's capacity will have doubled. Net margin information for the JAFAR order assuming plant expansion is provided in Exhibit 3. Carl indicated to Lucie that, with his high tech equipment, he will be able to produce a high quality JAFAR component and he feels there is a 75% chance of receiving the 2-year contract with Apex Automotive beginning in 20x5. Back in her office, Lucie felt confused about the conflict between Dave and Carl and wondered how things went wrong so fast. At the last retreat with the board of directors, the board clarified Seagull's mission statement: the company is committed to growing as quickly as possible into Canada's leading integrated manufacturer of small process control devices. It will do this by ensuring that it has the most innovative technology and the most flexible responses to customer delivery needs. Both managers expressed positively to the board that the performance evaluation system and the divisional programs give them the tools and motivation they need to increase sales of the PCU by 10% per year. Lucie asked Mario Mancini, the company controller, to analyze the situation and recommend the company's best course of action to resolve the conflicts between Dave and Carl and to enhance corporate growth. In his preliminary analysis, Mario decided to include the following in his report: 1. An analysis of the various sourcing options for the CTR1 component in 20x4.

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2. A net present value analysis of the opportunity to produce JAFAR for Apex Automotive. 3. A review of Seagull Controls Limited's management control system, including sourcing, performance evaluation and transfer pricing policies. 4. Recommendations to promote corporate growth. Required: As Mario Mancini, the company controller, prepare a report to Lucie Lambert, President of Seagull Controls Limited. Assume that the company's tax rate is 45% and its after-tax cost of capital is 12%.

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EXHIBIT 1

Seagull Controls Limited Component Division

Budgeted Production and Sales Data for CTR1 and CTR2 Components For the Year Ending December 31, 20x4

CTR1 CTR2 Component Component Production and sales (units) 14,000 25,000 Internal transfer price $300 External selling price $175 Cost per unit: Direct materials 54 22 Direct labour1 40 20 Factory overhead2 116 58 Selling3 - 10 General & administrative4 30 30 240 140 Net income before tax $ 60 $ 35 Net margin 20% 20% Notes: 1 The rate is $25 per direct labour hour for both types of components. 2 Factory overhead is applied on an actual machine hour basis. The variable overhead rate is

$28 per machine hour and the fixed overhead rate is $30 per machine hour, based on the practical capacity of 60,000 machine hours.

3 There are no selling expenses for internal transfers of the CTR1 component and selling expenses for the CTR2 component are 40% variable and 60% fixed.

4 The general and administrative expenses are fixed and are allocated to the two types of components on the basis of units transferred and sold.

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EXHIBIT 2

Seagull Controls Limited Device Division

Budgeted Production and Sales Data for Precision Control Unit (PCU) For the Year Ending December 31, 20x4

Precision Control Unit Production and sales (units)1 14,000 Selling price $820 Cost per unit: CTR1 component 300 Other direct materials 84 Direct labour2 72 Factory overhead3 140 Selling4 20 General & administrative5 122 738 Net income before tax $ 82 Net margin 10% Notes: 1 Budgeted sales volume for 20x4 reflects a 10% increase over the 20x3 sales volume. 2 The rate is $24 per direct labor hour. 3 Factory overhead is applied on an actual machine hour basis. The variable overhead rate is

$16 per machine hour and the fixed overhead rate is $12 per machine hour, based on the expected activity. Practical capacity of the plant is 100,000 machine hours.

4 The selling expenses for the Precision Control Unit (PCU) are 30% variable and 70% fixed. 5 The general and administrative expenses for the PCU are fixed.

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EXHIBIT 3

Seagull Controls Limited Component Division

Cost and Sales Data for 20x5 and 20x6 JAFAR Component Selling price $700 Cost per unit:1 Direct materials 200 Direct labour 100 Factory overhead 265 Selling (variable) 10 General & administrative 30 605

Net income before tax $ 95 Net margin 13.6% Note: 1 The direct labour and variable overhead rates are the same as those of the CTR1 and CTR2

components. The fixed factory overhead rate, including depreciation, for the Component Division would be reduced to $25 per machine hour based on the expanded practical capacity of 120,000 machine hours. Total fixed general and administrative expenses would be unaffected by the plant expansion but would continue to be allocated to the components at $30 per unit transferred or sold.

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ME7 Problem: ROI and RI - General Show how both return on investment (ROI) and residual income (RI) are computed and explain how each works. Discuss and compare the strengths and weaknesses of the measures for performance evaluation.

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ME8 Problem: ROI & RI – Osti Industries Osti Industries produces tool and die machinery for manufacturers. The company expanded vertically in 20x4 by acquiring one of its suppliers of alloy steel plates, Robertson Steel Company. In order to manage the two separate businesses, the operations of Robertson are reported separately as an investment center. Osti monitors its divisions on the basis of both unit contribution and return on average investment (ROl), with investment defined as average operating assets employed. Management bonuses are determined on ROl. All investments in operating assets are expected to earn a minimum return of 11% before income taxes. Robertson's cost of goods sold is considered to be entirely variable while the division's administrative expenses are not dependent on volume. Selling expenses are a mixed cost with 40% attributed to sales volume. Robertson's ROl has ranged from 11.8% to 14.7% since 20x4. During the fiscal year ended November 30, 20x9, Robertson contemplated a capital acquisition with an estimated ROI of 11.5%; however, division management decided against the investment because it believed that the investment would decrease Robertson's overall ROI. The 20x9 operating statement for Robertson follows. The division's operating assets employed were $15,750,000 at November 30, 20x9, a 5% increase over the 20x8 year-end balance.

Robertson Steel Division Operating Statement

For The Year Ended November 30, 20x9 ($000 Omitted)

Sales revenue $25000

Less expenses: Cost of goods sold $16500 Administrative expenses 3955 Selling expenses 2700 23155

Income from operations before income taxes $1845

Required - a. Calculate the unit contribution for Robertson Steel Division if 1,484,000 units were

produced and sold during the year ended November 30, 20x9. b. Calculate the following performance measures for 20x9 for the Robertson Steel Division:

1. Pretax return on average investment in operating assets employed (ROI). 2. Residual income (RI) calculated on the basis of average operating assets

employed.

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c. Explain why Robertson management would have been more likely to accept the contemplated capital acquisition if RI rather than ROl had been used as a performance measurement.

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ME9 Problem: ROI & RI – Three Companies The following partial information is available for three companies:

Company I

Company II

Company III

Sales $1,185,000 $3,690,000

Net income $159,975 $571,950

Average assets employed $4,500,000

Net income % (% of sales) 6.8%

Investment turnover 1.5

Return on investment 4.0% 8.0% Required: 1. Fill in the empty boxes.

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ME10 Problem: ROI & Residual Income- Bate Inc. One of the divisions of Bate Inc. sells widgets. This division has experienced the following average annual results based on the last three years: Total fixed costs $680,000 Variable costs $16.50 / unit Average sales per year 50,000 units Average assets employed $1,565,000 Average ROI 15% Required: 1. What selling price must be charged to ensure the division maintains its average ROI of

15%? 2. Assume that residual income is used to measure performance and that the minimum rate

of return required is 20%. What is the minimum selling price required to meet the minimum rate of return using residual income?

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ME11 Problem: ROI & Residual Income – Divisional Income The following two divisions, Division I and II, annual results are as follows:

Division I Division II Assets employed $1,000,000 $3,000,000Net income $180,000 $420,000

Required: 1. Calculate ROI for each division. 2. Calculate residual income assuming the minimum required rate of return is: a) 12% b) 15% c) 17%

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FA1 Problem: Conceptual Framework of Accounting - General Accounting involves the collection, summarization and reporting of financial information. Often the preparer of financial statements must use professional judgement to make decisions regarding identification, measurement and reporting of various financial statement items. The users of financial statements are and their objectives should guide financial reporting. These objectives, together with the consideration of the qualitative characteristics of accounting information determine the form and substance of the financial statements. The chart on the following page illustrates the conceptual framework of accounting theory. Preparers of financial statements must relate the framework to the situation and use their professional judgement to determine the accounting treatment of various financial statement items. Required: Discuss each of the following statements, with reference to the relevant components of the conceptual framework of accounting theory (see chart on following page). a) The freedom to change from one inventory costing method to another at will permits a

wide range of possible net income figures for a company over a given period, resulting in financial statements that are less meaningful.

b) Accounting attempts to serve many masters. This is not easy, because the needs of one

group may conflict with the needs of the others. c) Information that is objective (verifiable) may not be relevant to many decisions, and

information which is relevant may not be objective (verifiable). d) Issues of revenue and expense recognition should not be viewed in isolation from those

of asset and liability valuation. They are intrinsically related. Any determination that affects reported income will affect a related balance sheet account, and vice versa.

e) Accounts receivable net of bad debts, and the related revenues are not “accurately”

presented, but are “fairly” presented. f) Any public company, whose securities are traded in a public market or that is required to

file financial statements annually with a provincial securities commission, is required to disclose segmented information. Faced with excessive costs to gather and communicate information, multinationals and diversified enterprises argue that segmented information renders redundant the information contained in consolidated financial statements.

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A Conceptual Framework of Accounting

User Orientation Decision maker’s 1. Needs 2. Characteristics 3. Level of knowledge

User Objectives: 1. Performance evaluation (ability to earn income and generate a return on investment) 2. Cash Flow prediction (ability to generate cash flows to meet obligations) 3. Stewardship

Qualitative Characteristics 1. Primary qualities A. Relevance -Predictive value -Feedback value -Timeliness B. Reliability -Verifiability -Representational faithfulness -Neutrality -Conservatism 2. Secondary qualities A. Comparability B. Consistency

Assumptions 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity

Principles 1. Historical cost 2. Revenue recognition 3. Matching 4. Full disclosure

Constraints 1. Cost-benefit 2. Materiality 3. Industry Practice 4. Conservatism

Financial Statements

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FA2 Problem: Conceptual Framework - MCQ 1. Identify at least three major users of corporate financial information and indicate how they

might use the information in the financial statements. 2. Shareholders often find income statement information useful in:

a. Developing estimates of future cash flows for the entity. b. Determining the amount of long-term debt that has been assumed during the period. c. Cash receipts and disbursements for the period. d. Determining the amount of shares issued during the period.

3. Accounting information is useful if:

a. It is timely. b. It helps the user understand and evaluate past activities of the entity. c. It helps the user predict future cash flows and profitability. d. All of the above.

4. Which of the following items would not appear in an income statement?

a. Revenues. b. Losses. c. Expenses. d. Investments by owners.

5. Which of the following is not a qualitative characteristic of accounting information?

a. Relevance b. Understandability c. Liquidity d. Comparability

6. Reliable information has the following characteristics:

a. Representational faithfulness and neutrality. b. Relevance and materiality. c. Cost benefit and materiality. d. Timeliness and conservatism.

7. The concept of consistency means that:

a. Companies should report similar information over time in the same way. b. All companies should report information in the same way. c. All companies within the same industry should report information in the same way. d. Companies should report dissimilar information in the same way.

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8. In preparing a balance sheet, the valuation of most assets is based on:

a. Current cost. b. Historical cost. c. Net realizable value. d. Market value.

9. Materiality means:

a. Expenses are recognized in the same period as the revenues they helped to generate. b. An asset is of value to the company. c. An amount is significant enough to affect decision-making. d. The cost of producing information should be less than the benefits of producing it. e. All of the above.

10. The going-concern assumption means:

a. The company can sell its assets at their recorded book value. b. The company will continue in business for at least five years. c. The company will continue in business indefinitely. d. The company will use liquidation accounting.

11. What factors make the AcSB an effective standard-setting body?

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FA3 Problem: Long Term Contracts – Percentage of Completion - Del-Ray After a lengthy bidding process, Del-Ray Inc. was awarded a contract to build a condominium on March 1, 20X1. The estimated total cost to construct the building, including parking facilities was $10,250,000, and the scheduled completion date was June 30, 20X3. A condition of being awarded the $13,325,000 contract was the requirement to pay a penalty of $100,000, via a reduction in the contract amount of $13,325,000 if the contract was not completed on time (by June 30, 20X3). During 20X1 and 20X2 the construction was on schedule. However, during 20X3 Del-Ray Inc. experienced a labour shortage, which caused a seven week delay; the building was completed on August 24, 20X3. Data related to the construction period is as follows:

20X1 (in 000’s)

20X2 (in 000’s)

20X3 (in 000’s)

Costs incurred during the year, excluding penalties

$3,200 $4,650 $3,100

Estimated cost to complete 7,050 2,800 -Progress billings each year 2,400 4,000 6,825Cash collected each year 2,000 4,000 7,225 Required: 1. Using the percentage of completion method, compute the estimated gross profit to be

recognized each year. 2. Prepare journal entries for 20X1, 20X2, and 20X3 related to this contract.

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FA4 Problem: Long Term Contracts – Percentage of Completion - Babra Limited

Babra Limited (“BL”) entered a contract with Auger Company to build a manufacturing facility. It was estimated that it would take 3 years to complete the project and it was priced at $ 4.5 million. Details related to the contract are as follows (in 000’s): Year 1 Year 2 Year 3 Cost incurred during the year 1,232 1,466 1,110Estimated cost to complete 2,618 1,102 --Billings 1,000 1,250 2,250Collections during the year 950 1,100 2,450 BL uses percentage of completion method to account for long-term construction contracts. Required:

1. Calculate the profit that should be recognized each year. 2. Calculate the asset account balances for each of the 3 years. 3. Calculate the profit that should be reported each year if the company uses the completed

contract method.

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FA5 Problem: Long Term Contracts – Percentage of Completion - Big Construction Company

Big Construction Company (“BGC”) entered into a contract with the provincial government to construct a hospital. At the time of the contract it was estimated that it would take 3 years to complete the facility at a cost of $ 6,580,000. The contract was priced at $7,200,000. During the first year, BGC incurred $2,171,400 in construction costs related to the project and the estimated cost of completion was $ 4,408,600. In the second year, construction costs of $ 2,603,000 were incurred and estimated cost of completion was $ 2,685,600. In Year 3 the company incurred $1,525,600 to complete the project. Required:

1. Calculate the profit to be recognized in each year (year 1, 2 and 3) under the percentage of completion method.

2. If the company uses the completed contract method how much profit would be recognized at the end of year 1?

3. If the cost of project could not be reasonably estimated at the beginning of the project what method of accounting should BGC use?

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FA6 Problem: Long Term Contracts – Percentage of Completion - Hong Incorporated Hong Incorporated (“HI”) entered a contract with Zed Limited (“ZL”) to build a manufacturing plant. It was estimated that it would take 3 years to complete the project and it was priced at $ 2.1 million. Other financial information related to the contract is as follows. Year 1 Year 2 Year 3 Cost incurred during the year 340,000 54,800 1,105,200Estimated cost to complete 660,000 1,015,200 --Billings 700,000 700,000 700,000Collection during the year 500,000 650,000 950,000 HI uses the percentage of completion method to account for long-term construction contracts. Required:

1. Calculate the profit that should be recognized each year. 2. Calculate the asset account balances for each of the 3 years.

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FA7 Problem: Long Term Contracts - Olcheski The Olcheski Submarine Company signed a $800 million contract to build a nuclear submarine for the Canadian navy. Work on the contract started in 20x2 and is expected to end in 20x6. Financial data on the contract for the first four years is as follows (all data in millions): 20x2 20x3 20x4 20x5Costs incurred during year $100 $150 $250 $200Expected costs to complete 600 500 280 150Billings 70 140 260 150Collections 40 150 240 160 Required – a. For the year 20x2, prepare all journal entries relating to the contract. How would the

contract be presented on the balance sheet at the end of 20x2? b. For the years 20x3 through 20x5, calculate the gross profit or loss that will be recorded

on the contract each year.

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FA8 Problem: Financial Statements - MCQ

1. Which of the following events would not be considered an accounting transaction to be entered into the accounting system? a. Payment of fees to an advertising consultant. b. Purchase of advertising for a new product. c. Sales of a new product during the first month on the market. d. Tabulation of the results of a customer satisfaction survey.

2. The accounting cycle is:

a. The sequence of procedures used by a business to process economic information and to produce financial statements.

b. The length of time it takes to complete a set of financial statements after the books are closed.

c. A process that begins with adjusting entries and ends with the preparation of financial statements.

d. Applicable only to manual systems, not to electronic systems

3. The primary function of an account in the accounting system is to:

a. Identify the type of organisation. b. Determine at what point a transaction should be recorded. c. Accumulate accounting information. d. Store accounting transactions until they are classified.

4. The income statement format that lists all revenues together and all expenses together is called:

a. A standard income statement. b. A single-step income statement. c. A multiple-step income statement. d. An unclassified income statement.

5. Which of the following is shown net of income tax?

a. Income from financing activities. b. Income from discontinued operations. c. Income from unusual or infrequent events. d. Income from non-operating sources.

6. Investing activities are those that involve:

a. Non-current assets. b. Current assets. c. Long-term liabilities. d. Shareholders’ equity.

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7. What is the general purpose of the notes to the financial statements? Give three examples of typical note disclosure.

8. What is the primary limitation of general-purpose financial statements? 9. Indicate whether each of the following events immediately gives rise to an asset under

generally accepted accounting principles. If an asset is recognized, state the account title and the amount.

(a) An investment of $8,000 is made in a government bond. The bond will have a maturity value of $10,000 in three years. The firm intends to hold the bond to maturity.

(b) A cheque for $1,000 is sent to an insurance company for a two-year fire insurance policy in advance. (Consider from the standpoint of the firm issuing the cheque.)

(c) A cheque for $2,000 is written to obtain an option to purchase a tract of land. The price of the land is $50,500. (Consider from the standpoint of the firm issuing the cheque.)

(d) A baseball team signs a four-year employment agreement with its first baseman for $2,500,000 per year. The contract period begins next month. (Consider from the standpoint of the team.)

(e) A patent has been purchased from its creator for $60,000.

(f) A patent has been received on a new invention developed by a firm. Expenditures of $60,000 have been made to develop the patented invention.

(g) Notice has been received from a supplier that materials costing $5,000, with payment due in 30 days have been shipped by freight. The terms of sale are FOB destination.

10. 10. The purpose of amortization is to:

a. Measure the change in the value of an asset. b. Recognize that the asset is wearing out. c. Allocate the cost of the asset to the periods it is expected to benefit. d. Adjust the carrying value of the asset to its market value.

11. Which of the following statements is true? a. Dividends are presented on the income statement. b. Upper management declares dividends. c. Only the board of directors can declare dividends. d. Dividends must be paid in cash.

CMA Ontario P- 170

FA9 Problem: Financial Statements - Martina Company The unadjusted trial balance for Martina Company is presented for the year ended December 31, 20x5, along with some additional information. Debits CreditsCash $ 104,690 Accounts Receivable 195,550 Allowance for doubtful accounts $ 2,950 Inventory 289,776 Prepaid Expenses 30,376 Land 152,500 Building 445,938 Accumulated Amortization 96,812Equipment 320,700 Accumulated Amortization 117,500 Intangible Assets 26,960 Accounts Payable 162,876 Interest Payable 20,312 Taxes Payable 46,000 Bonds payable 481,500 Future income taxes 21,000Common Stock 250,000 Retained Earnings 107,758 Sales Revenue 3,329,440 Cost of Goods Sold 2,049,170 Amortization expense 85,000Selling expense 348,300 Administrative expense 451,188 Income tax expense 46,000Interest Expense 40,000 Dividends 50,000 $4,636,148 $4,636,148

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Additional Information Assume that all adjusting and correcting entries have been made except for the following items: 1. A sale in the amount of $9,100 and its related cost of goods sold was not recorded as of

December 31, 20x57. Martina sells its inventory at a 40% markup on cost and uses a perpetual inventory system.

2. Martina Company estimates bad debts to be equal to 0.25% of sales. 3. On December 28, 20x5, a letter was received from a trustee in bankruptcy informing us

that one of our customers has been released from bankruptcy and that we would not be receiving any money on the account owing. The amount owing from this client was $5,000 and is included in the accounts receivable balance at December 31, 20x5.

4. As of December 31, no accrual for electricity expense had been made. An electricity bill

for the warehouse for $5,000 was received January 15, 20x6, for electrical consumption from December 12, 20x5, through January 12, 20x6. The bill was paid on February 16, 20x6, and debited to administrative expenses at that time.

5. Martina Company purchased equipment on July 1, 20x5, for $35,000 cash. This amount

was debited to selling expenses. The equipment has an estimated useful life of ten years and a salvage value of $10,000. The company uses the double declining method of amortization.

6. Insurance was paid on January 31, 20x5, for $5,580 for the time

period of January 31, 20x5, through January 31, 20x6. The full amount was debited to administrative expenses at the time it was paid.

7. Wages for the time period of December 25, 20x5, through January 7, 20x6, were paid on

January 15, 20x6, in the amount of $8,000. 8. Total tax expense for 20x5 should be 34% of income before taxes. Required - a. Prepare adjusting and correcting entries for the additional information. b. Prepare the following financial statements for the year ending December 31, 20x5: i. An income statement. ii. A statement of changes in retained earnings. iii. A statement of financial position (balance sheet).

CMA Ontario P- 172

FA10 Problem: Statement of Cash Flows - ARG Incorporated Use the attached financial statements and the below additional information to prepare a Statement of Cash Flows using the direct method. Additional Information: On January 1, 20X7 the company sold its original land and building and purchased a new parcel of land, which also had a suitable building. The original land and building had a net book value of $324,000 at the time of sale. .

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ARG Incorporated Balance Sheet

as at December 31 20X8 20X7 Assets Current Cash $90,000 $18,000 Held for trading marketable securities (cost $30,000; 20X5 - $30,000) 48,600 54,000 Receivables 144,000 72,000 Inventory 90,000 117,000 372,600 261,000Fixed assets Land 180,000 144,000 Building 315,000 270,000 Equipment 216,000 162,000 Computer equipment under capital lease 45,000 - 756,000 576,000 Less: accumulated depreciation (90,000) (144,000) 666,000 432,000 $1,038000 $693,000Liabilities and Shareholder’s Equity Current Accounts payable $45,000 $72,000 Income taxes payable 32,400 27,000 Current portion of obligation under capital lease 7,200 - 84,600 99,000Long term Obligation under capital lease 28,800 -Bonds payable (net of discount of $5,400; 20X7 - $9,000) 174,600 171,000Future tax liability 81,000 72,000 284,400 243,000Common stock 270,000 90,000Retained earnings 399,600 261,000 954,000 594,000 $1,038000 $693,000

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ARG Incorporated Income Statement

for the year ended December 31, 20X8 Sales $1,200,000 Cost of sales 900,000 Gross profit 360,000 Expenses Selling and administrative 286,200 Fair value adjustment on trading securities 5,400 Depreciation 36,000 Interest – long-term 25,200 Interest – obligation under capital lease 7,200 Gain on sale of land and building (234,000) 126,000 Income before income taxes 234,000 Income taxes 54,000 Net income 180,000 Retained earnings, beginning of year 261,000 441,000 Dividends paid 41,400 Retained earnings, end of year $399,600

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FA11 Problem: Discontinued Operations - Tenued Company On June 1, Year 5, Tenued Company decided to discontinue the operations of its television cable services division. Even though the television cable services division is not a separate corporation, financially and operationally it is a separate operation. On August 4th, Year 5, Tenued closed a deal to sell the division to BuyUp Corporation. BuyUp will assume responsibility for the current liabilities (e.g. accounts payable and accrued liabilities) that pertain to the division. The facts pertaining to the sale are as follows:

Divisional assets; book values at June 1, Year 5 (cost of $1,322,000, less accumulated depreciation of $466,000) $856,000

Division assets, estimated fair values at June 1, Year 5 686,000Liabilities assumed by purchaser; fair value = book value 180,000Purchase price paid by BuyUp Corporation $560,000Division revenue:

January 1 – June 1, Year 5 800,000June 2 – August 4, Year 5 112,000

Division profit (before taxes): January 1 – June 1, Year 5 55,000June 2 – August 4, Year 5 10,000

Commission fee paid to the business brokerage that facilitated the sale 130,000Tenued Company marginal income tax rate 35%

On December 31, Year 5, Tenued’s year end, the after tax income from all operations, including the cable television services division, was $ 500,000. Required: 1. Calculate the earnings (loss) from discontinued operations that Tenued would report in

Year 5. 2. Explain what other disclosures and/or reclassifications are necessary in the Year 5

comparative financial statements and notes.

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FA12 Problem: Discontinued Operations - Big Blue Fish Company Big Blue Fish Company is a fish processing company that operates divisions in several types of fish, canned fish, fresh fish and frozen fish sticks. On August 10, 20X5, the Board of Directors voted to put the frozen fish stick division up for sale. The division's operating results had been declining for the past several years due to intense competition from foreign competitors. The Board hired a consulting firm to conduct a search for potential buyers. The consulting fee was to be 3.5% of the value of any sale transaction. By December 31, 20X5, the consulting firm had found a highly interested buyer for the frozen fish division, and serious negotiations were underway. The potential buyer was a US fish processor based in the northeastern US states; the company offered to buy the division for $6.53 million cash. On March 3, 20X6, after further negotiations with the potential buyer, the Big Blue Fish Company Board of Directors accepted an enhanced offer from the buyer to buy the division for $7.50 million. The transfer of ownership took place on March 31, 20X6. Big Blue Fish Company’s income tax rate is 30%. Other information is as follows (before tax, in millions of dollars):

August 10, 20X5 Dec 31, 20X5 Book Fair Value Value Fair Value Frozen fish division's net assets:

Current assets $1.10 1.05 1.00Property, plant, and equipment (net) 7.30 5.40 5.53Current liabilities .80 .80 .80

Net earnings (loss) of the frozen fish division,

January 1 to 31 December 31, 20X5 $0.60Net earnings (loss) of the frozen fish division,

January 1 to March 31, 20X6 $(0.25) Required: Calculate the dollar impact of the above events on discontinued operation reporting in the following order:

August 10, 20X5 December 31, 20X5 March 3, 20X6

CMA Ontario P- 177

FA13 Problem: Discontinued Operations - Contin Limited Contin Limited (“Contin”) has a June 30 fiscal year-end. Contin disposed of its computer processor manufacturing division on January 31, Year 3. The division had a net loss (after taxes) of $45,240,000 in Year 3, to the date of disposal. The division was sold for $570,720,000 in cash plus future licensing fees through June 30, Year 4, which were guaranteed to be $36,000,000. The minimum guaranteed licensing fees were included in the computation of the Year 3 gain on the sale of the division. Actual licensing fees received during the fiscal year ended Year 4 were $35,500,000. Excerpts from the May 31, Year 4 income statement are as follows:

($ millions) Year ended June 30 Year 4 Year 3 Earnings (loss) from continuing operations $ 110.2 $ 125.0 Discontinued operations: Gain on sale of discontinued operation

(net of incomes taxes of $1.4 in Year 4 and $40.80 in Year 3) 5.2 218.8

Net income (loss) $ 115.40 $ 343.80 Required: 1. Determine the net book value of the discontinued computer processing manufacturing

division at the date of disposal. 2. Why does Contin report a gain on the sale of the discontinued operation of $4,300,000 in

the year ending June 30, Year 4?

CMA Ontario P- 178

FA14 Problem: Discontinued Operations & Unusual Items - Stapling Limited In December 20X4, the Board of Directors of Stapling Limited approved a plan to curtail the development of the company's electronics products division. As a result, the company recognized an asset impairment loss before tax of $50,000,000. The electronics products division had incurred pre-tax losses of $25,000,000 in 20X3 and $18,000,000 in 20X4. In addition, during 20X4, the company retired an issue of bonds early. The bonds had a carrying value of $100,000,000 and were retired at an amount of $80,000,000, resulting in a pre-tax gain of $20,000,000. The company had never had a transaction like this previously. The tax rate on all the above items is the company’s average income tax rate of 35%. Assume that earnings from other sources, before income taxes, were $214,100,000 in 20X3 and $143,200,000 in 20X4. This does not include the bond retirement transaction. Required:

1. Comment on whether treating the gain on the bond retirement as an unusual item is appropriate.

2. Prepare the income statements for 20X3 and 20X4, beginning with income from

continuing operations.

CMA Ontario P- 179

FA15 Problem: Accounting Policy Changes, Errors & Estimates - General For each of the following items outline the impact of the change on the financial statements. In addition calculate the impact on the current year’s financial statements. Ignore the impact of taxes on all calculations.

1. Change in depreciation method: was straight-line, $ 600,000 proposed change to declining balance, $ 800,000 for the current year

2. Leasehold improvements:

leasehold improvements of $ 650,000 made three years ago, useful life estimated at

10 years, depreciation has been recognized for each of the past three years; no depreciation has been recognized in the current year

the leasehold improvements are now obsolete, and major renovations re planned for early next month. Useful life should have been four years, and not ten

3. Inventory error:

error in determination of the closing inventory, in the year end of two years ago,

discovered last week inventory as reported approximately $ 40,000 understated

4. Inventory:

proposed change is from FIFO to LIFO inventory valuation LIFO closing inventory value about $ 700,000 lower than FIFO for the current year LIFO opening inventory about $900,000 lower than FIFO for the current year other Canadian companies generally use FIFO

5. Doubtful accounts:

existing policy is to age receivables and estimate uncollectible portion based on past

experience proposed change is direct write-off as soon as they are deemed uncollectible tighter credit policy to be instituted immediately vice-president, administration, expects improved collections

CMA Ontario P- 180

FA16 Problem: Accounting Changes - ABC Company On January 1, 20X0 ABC Company purchased a processing machine to be used in its production facility located in Anytown. The machine cost $500,000, and was estimated to have a useful life of 10 years. The company believed the machine would be obsolete, and therefore unsalable at the end of ten years. The company uses straight line depreciation on all of its’ equipment. On January 1, 20X4, ABC Company’s plant manager concluded that the machine would be useful until December 31, 20X7, and could be sold at that time for $45,000. ABC Company’s year end is December 31. What is the net book value for this machine on December 31, 20X5? a) $300,000 b) $273,750 c) $172,500 d) $250,000 e) $210,000

CMA Ontario P- 181

FA17 Problem: Current Assets – Cash - Will’s Golf Shop The bank statement of Will’s Golf Shop indicated a balance of $15,670 at May 31, 20x3. The bank balance did not include a deposit of $4,300 made by Will on May 31. Total outstanding cheques as at May 31 totalled $7,650. In addition, the bank statement revealed the following: i) the bank statement included a cheque in the amount of $500 written out by another local

business – Jim the Undertaker, ii) service charges of $25 were charged by the bank, iii) cheque # 345 was recorded on the books in the amount of $4,546 was actually written out

for $4,456. This cheque was for golf supplies. The correct amount of the invoice was $4,456.

iv) a deposit made on May 26 included a cheque from a customer that was returned marked ‘Insufficient Funds’. The amount of the cheque was for $630. The bank charged a $10 fee for handling this returned cheque.

The May 31, 20x3 general ledger balance in the cash account was $13,395. Required – Prepare a bank reconciliation as at May 31 for Will’s Golf Shop and any adjusting entries required.

CMA Ontario P- 182

FA18 Problem: Current Assets – A/R - Jurdi Company The following are transactions affecting accounts receivable for the Jurdi Company during the year ended December 31, 20x5: Total Sales (all credit) $620,000 Cash collected on account (note that one half of customers took advantage of the trade discount 2/10, net 30) 589,050 Accounts receivable written off 5,450 Credit issued to customers for sales returns and allowances 14,500 Recoveries of accounts receivable written off as uncollectible in prior periods (not include in cash collected above) 3,400 The following balances were taken from the Balance Sheet dated December 31, 20x4: Accounts receivable $96,400Allowance for doubtful accounts 9,700 The Jurdi Company estimated bad debts to be equal to 0.5% of credit sales net of sales returns and allowances. Required – Calculate the Accounts Receivable and Allowance for Doubtful Accounts balance as at December 31, 20x5.

CMA Ontario P- 183

FA19 Problem: Current Assets – A/R - Webster Company The Webster Company uses the aging method to estimate the allowance for doubtful accounts. The following schedule of accounts receivable was prepared as at December 31, 20x6:

Age Balance % uncollectible

0-30 days $674,000 0.5%31-60 days 186,000 1.2%61-90 days 65,400 10%91-120 days 19,500 50%Over 120 Days 7,800 75% $952,700

The balance in the allowance for doubtful accounts at the beginning of the year was $31,150 (cr). The following transactions were recorded during the year:

Accounts receivable written off 34,500 Recoveries of accounts receivable written off as uncollectible in prior preriods

2,300

Required – Calculate the bad debt expense for the year 20x6.

CMA Ontario P- 184

FA20 Problem: Inventory - Hello Incorporated Using the below inventory records for Hello Incorporated, calculate the value of inventory as per the requirement below. Assume that the transactions occurred in the order given.

Transaction Units Unit Cost1. Beginning Inventory 30 $19.00 2. Purchase 45 $20.00 3. Sale 50 4. Purchase 50 $20.80 5. Sale 50 6. Purchase 50 $21.60

Required: 1. Calculate the cost of goods sold for the period and the ending inventory under each of the following methods:

1) Weighted Average Periodic 2) Weighted Average Perpetual 3) LIFO Periodic 4) FIFO Periodic 5) FIFO Perpetual 6) LIFO Perpetual

Round calculated per unit costs to two decimal places.

CMA Ontario P- 185

FA21 Problem: Inventory - BQI Limited Using the below inventory records for BQI Limited, calculate the value of inventory as per the requirement below. Assume that the transactions occurred in the order given.

Transaction Units Unit Cost Total Amount 1. Beginning Inventory 500 $6.00 $3,000 2. Purchase 600 $6.10 $3,660 3. Sale 900 4. Purchase 600 $6.20 $3,720 5. Sale 500 6. Purchase 400 $6.30 $2,520 7. Sale 300


1) Weighted Average Periodic 2) Weighted Average Perpetual 3) LIFO Periodic 4) LIFO Perpetual 5) FIFO Periodic 6) FIFO Perpetual


CMA Ontario P- 186

FA22 Problem: Inventory - KCI Limited Using the below inventory records for KCI Limited, calculate the value of inventory as per the requirement below. Assume that the transactions occurred in the order given.


1) Weighted Average Periodic 2) Weighted Average Perpetual 3) LIFO Periodic 4) LIFO Perpetual 5) FIFO Periodic 6) FIFO Perpetual


Transaction Units Unit Cost 1. Beginning Inventory 2000 $5.00 2. Purchase 18000 $5.20 3. Sale (@ $13 per unit) 7000 4. Purchase 6000 $5.50 5. Sale (@ $13.50 per unit) 16000 6. Purchase 3000 $6.00

CMA Ontario P- 187

FA23 Problem: Inventory - STL Limited Using the below inventory records for STL Limited, calculate the value of inventory as per the requirement below.

Cost Market Category 1 Item A $10,000 $9,000 Item B $40,000 $35,000 Item C $25,000 $33,000 Category 2 Item D $18,000 $16,500 Item E $20,000 $4,000 Item F $42,000 $42,000

Required: 1. Calculate the allowance to reduce inventory in three different ways that are justifiable.

CMA Ontario P- 188

FA24 Problem: Inventory - Tripper Incorporated The inventory records of Tripper Incorporated (“TI”) show the following information:

sales $315,000 (gross) return sales $5,000 (returned to stock) purchases $155,000 (gross) beginning inventory $100,000 freight-in $7,000 purchase returns and allowances $2,000

The gross margin last period was 35% of net sales and you anticipate that it will be 25% for the coming year end. Required: 1. Estimate the cost of inventory using the gross margin method under the two assumptions:

1) Using the gross margin last period (i.e. 35%) 2) Using the gross margin that you expect for year end (i.e. 25%)

CMA Ontario P- 189

FA25 Problem: Inventory - Bog Box Store Incorporated A retail store, Big Box Store Incorporated, values its inventory using the retail inventory method. The following inventory transactions occurred in June:

Cost Selling Price Beginning Inventory June 1 $53,800 $80,000 Markdowns $21,000 Markups $29,000 Markdown Cancellations $10,000 Markup Cancellations $9,000 Purchases $173,200 $223,600 Sales $250,000 Purchase returns and allowances $3,000 $3,600 Sales returns and allowances $10,000

Required: 1. Calculate the ending inventory value at cost using the retail inventory method.

CMA Ontario P- 190

FA26 Problem: Inventory Valuation - Trading Incorporated You have gathered the following information as at October 31 with respect to inventory of Trading Incorporated (“TI”), a distributer located close to Edmonton: Goods-in-transit, fob destination $86,000 Inventory received on consignment $114,000 Cost of inventory that must be discounted by 50% due to water damage from heavy rains that resulted in flooding part of the warehouse $18,000 Cost of inventory that was missing at the October 31 inventory count $8,000 Balance in inventory account prior to accounting for the above items $310,000 Required: 1. What inventory value should appear on the balance sheet: a) $484,000 b) $310,000 c) $293,000 d) $379,000 e) $284,000

CMA Ontario P- 191

FA27 Problem: Inventory Valuation - Windsor Company The Windsor Company has the following inventory transactions for item #A203 for the month of August: Date Units Unit CostAugust 1 Balance 1,000 $12.00 5 Purchase 200 12.20 8 Sale 600 10 Sale 400 13 Purchase 800 12.60 17 Sale 500 21 Purchase 800 13.00 Calculate Windsor’s ending inventory from the above inventory transactions assuming that Windsor uses: a. FIFO - Periodic b. Weighted Average - Periodic c. FIFO - Perpetual d. Moving Weighted Average – Perpetual

CMA Ontario P- 192

FA28 Problem: Inventory Valuation - Schmitt Corporation The Schmitt Corporation carries four items in inventory. The following data are available at December 31, 20x5: Units Cost Replacement

CostEstimated

Selling PriceSelling

Cost Normal

ProfitA301 2,500 $11.00 $10.50 $12.00 $1.80 $4.00A302 1,500 12.00 12.00 18.50 1.60 2.50A303 4,500 5.00 4.00 8.40 1.90 1.00A304 2,400 14.00 15.00 15.00 2.40 3.50 Required – Calculate the value of inventory and the journal entry (if any) to adjust the ending inventory value assuming that the company applies the lower of cost or market rule based on (a) individual inventory items and (b) aggregate inventory.

CMA Ontario P- 193

FA29 Problem: Inventory Valuation - Udit Company A fire destroyed the inventory of the Udit Company on October 16, 20x3. Data for the 20x2 fiscal year and for the year to data on 20x3 is as follows: Year ended

December 31, 20x2Period ended

October 16, 20x3Sales $5,000,000 $3,600,000Beginning inventory 840,000 850,000Purchases 4,300,000 2,800,000Ending inventory 850,000 ???? Required – Estimate the cost of the inventory destroyed on October 16, 20x3.

CMA Ontario P- 194

FA30 Problem: Investment in Bonds - Various Each of these independent situations requires calculation of various items related to bonds. These questions are designed to increase candidates speed in calculating bond valuations. Situation A ABC Company purchased bonds on July 1, 2006 with a face value of $100,000. These bonds are due in ten years. The stated annual rate is 6% per year, payable semi-annually on June 30 and December 31. The bonds were priced to yield 8%. What is the price ABC Company paid for the bond? Situation B On January 1, 2006, Bata Limited purchased bonds with a face amount of $500,000 and a stated interest rate of 10% per year. Interest is paid semi-annually, and the bonds mature December 31, 2015. The market rate is 12%. 1. Calculate the total bond discount or premium. 2. Calculate the unamortized discount or premium on December 31, 2007. Situation C On January 2, 2006, Centro Corporation purchased bonds with a face value of $500,000 and a coupon rate of 9%, and a maturity date of January 2, 2011. The bonds were priced at the market rate of 10%. Interest is paid annually. What is the net amount of the bond investment that should be presented on the balance sheet at Centro’s December 31, 2008 year end? Situation D On February 1, 2006, Delphi Limited issued 10% semi-annual, $1,000,000 par ten-year bonds, which were priced to yield 12%. Delphi reacquired these bonds at 97 of par on February 1, 2009 and retired them. What is Delphi’s gain or loss on the bond retirement?

CMA Ontario P- 195

Situation E Ebber Incorporated sold a $100,000 face value bond several years ago. It has a stated rate of 7%, paid annually, and when sold it was priced to yield 6%. On June 30, 2005, the carrying amount of the bond was $105,000. What amount of unamortized premium should Ebber report on its June 30, 2006 balance sheet? Situation F On January 1, 2006, Fodder Limited issued $100,000,000 zero coupon bonds, priced at a market yield of 10%. The bonds mature in 15 years. 1. What is the January 1, 2006 issue price of these zero coupon bonds 2. What is the interest amount that Fodder will record on these bonds in 2006? Situation G On January 1, 2005, Gatolina Limited issued $100 million 8% coupon bonds at par. Interest is paid semi-annually on June 30 and December 31. The bonds have a term of 12 years. On December 30, 2006, the bonds are trading at a market yield of 12% plus accrued interest. If Gatolina repurchased the entire $100 million at the market price on December 31, 2006, what would be the after tax gain or loss, assuming a 40% tax rate?

CMA Ontario P- 196

FA31 Problem: Long Term Investments – Bonds - A Company A Company purchased a bond during the year. Details of the investment are as follows: Face value $100,000 Interest rate per annum 6% Interest is paid semi-annually on June 30 and Dec. 31 Issue date January 1, 20X1 Maturity date December 31, 20X5 Date purchased June 30, 20X1 Effective interest yield 4% Accrued interest (paid to seller of bond) 0 Required: 1. Calculated the premium or discount on the bond. 2. Show the journal entries that would be recorded for 20X1 and 20X2. 3. What is the value of the unamortized discount or premium as at December 31, 20X2,

using the effective interest method. 4. How would the bond and related amounts be reported on the financial statements for the

year ended December 31, 20X2?

CMA Ontario P- 197

FA32 Problem: Investments – Available for Sale & Held for Trading - Kumara During 2005, Kumara Company (“Kumara”) purchased three securities, Analytics Limited (“Analytics”), Macabe Incorporated (“Macabe”) and Ranters Limited (“Ranters”). At December 31, 2005, the controller assembled the following information related to these three securities:

Investments # of shares Cost Fair Value

Analytics 2,000 $ 39,000 $18 per shareMacabe 5,000 $290,000 $63 per shareRanters 4,000 $170,000 $39 per share

In 2006, Kumara completed the following transactions: On March 10, sold all the Analytic shares for $24 per share. Brokerage fees on the sale were

$1,400. On June 15, purchased 1,500 Santos Limited (“Santos”) shares for $35 per share. Brokerage

fees on the purchase were $1,500. On December 31, 2006, the market value of Macabe, Ranters and Santos were $62, $43, and $31 respectively. Kumara has a December 31 year end, and follows a policy of expensing transaction costs as incurred.

Required 1. Calculate the balance in the investment account and the cumulative OCI as at December 31,

2005, assuming Kumara has classified its investments as a) held for trading b) available for sale

2. Calculate the total income impact for 2006, ignoring dividends for simplicity, assuming

Kumara has classified its investments as a) held for trading b) available for sale

CMA Ontario P- 198

FA33 Problem: Investments – Available for Sale & Held for Trading - Chanio Chanio Incorporated (“Chanio”) purchased the following investments in securities during 2005:

Investments # of shares Cost

Abba Incorporated (“Abba”) 1,300 $ 83,200 Boah Limited (“Boah”) 4,200 $105,000 Cera Limited (“Cera”) 3,000 $ 54,000

The combined transaction fees on all three of these purchases were $2,400. During 2005, dividends were received as follows: Abba $3,400, Boah $6,100, and Cera $2,430. The fair market values per share on December 31, 2005 were $61, $23, and $20 on Abba, Boah, and Cera respectively. During 2006, Chanio had the following securities transactions: On April 10, sold all the Abba shares for $60 per share. Brokerage fees on this sale were

$800. On July 8, purchased 1,500 Dante Incorporated (“Dante”) shares for $54 per share.

Brokerage commissions on this purchase were $900. During 2006, dividends were received as follows: Boah $5,500, Cera $1,800 and Dante $1,100. On December 31, 2006, the quoted market price per share for Boah, Cera and Dante were $26, $19, and $55 respectively. Chanio has a December 31 year end, and has a policy of expensing transaction costs related to the buying and selling of securities when incurred.

Required 1. Assuming Chanio classifies these investments as held for trading, calculate the income

impact, and the balance in the investment account for both 2005 and 2006. 2. Assuming Chanio classifies these investments as available for sale, calculate the income

impact, the balance in the investment account, and the balance in accumulated other comprehensive income for both 2005 and 2006.

Note to student: Although journal entries are not required, they are shown in the solution to enhance the learning process.

CMA Ontario P- 199

FA34 Problem: Investments – Available for Sale & Held for Trading - Walshen During 2005, Walshen Limited (“Walshen”) purchased the following securities: 4,000 shares of Grenwey Incorporated (“Grenwey”) at $45 per share; transaction costs were

1% of the gross purchase price. 3,200 shares of Hepsten Limited (“Hepsten”) at $35 per share; transaction costs were 1.5% of

the gross purchase price. 11,000 shares of Inglet Incorporated (“Inglet”) at $22 per share; transaction costs were 2% of

the gross purchase price. Dividends received in 2005 for Grenway, Hepsten and Inglet were $5,400, $3,400, and $9,600 respectively. On December 31, 2005 Walshen determined the fair values per share for Grenway, Hepsten and Inglet to be $40.00, $36.25, and $21.50 respectively. During 2006, Walshen completed the following transactions: sold all Grenwey shares at $48.00 per share; transaction costs were .8% of the gross selling

price. purchased 5,000 shares of Jetson Limited (“Jetson”) for $38 per share; transaction costs were

1% of the gross purchase price. Dividends received in 2006 were: Grenway $2,100 (received prior to sale), Hepsten $3,300, Inglet $9,000 and Jetson $4,000. On December 31, 2006 Walshen determined the fair values of Hepsten, Inglet, and Jetson were $32.00, $23.50, and $33.00 respectively. Walshen has a December 31 year end, and follows a policy of capitalizing transaction costs (i.e. transaction costs are adjusted against the cost of purchase r the proceeds from sale, as applicable). In 2007, Hepsten filed for bankruptcy protection, which caused the market value of its shares to fall to $1.85 per share. Walshen has determined that this decline is other-than-temporary (i.e. permanent).

CMA Ontario P- 200

Required 1. Prepare the journal entries for 2005 and 2006 for each of the transactions assuming that the

securities are designated as: a) held for trading b) available for sale

2. Calculate the investment account balance, income impact, and cumulative Other

Comprehensive Income for both 2005 and 2006 assuming the securities are designated as: a) held for trading b) available for sale

3. Prepare the journal entry for 2007 to reflect Hepsten’s decline in value assuming that the

investment was designated as: a) held for trading b) available for sale.

CMA Ontario P- 201

FA35 Problem: Investments – Available for Sale & Held for Trading - Maxe

The following select financial information related to Maxe Incorporated’s (“Maxe”) investment portfolio on December 31, 2005 was collected by Maxes’s controller:

Investments Cost FV

Lassify Incorporated (“Lass”) 3,000 × $11 per share $9 Mortimer Limited (“Mort”) 1,700 × $22 per share $20 Nankit Limited (“Nan”) 1,000 × $10 per share $13

All three of these investments were purchased during 2005. During 2006, the following transactions occurred: On April 25, Mortimer paid a dividend of $1.32 per share. On May 10, Maxe sold 500 shares of Nan for $12 per share. On July 12, Maxe purchased 250 more shares of Lass at $12.50 per share. On December 31, 2006, the market prices per share for Lass, Mort and Nan were $8.00, $23.00, and $15.00 respectively. During 2007, the following transactions occurred: On April 25, Mortimer paid a dividend of $1.38 per share. On June 2, Maxe sold the remaining Nan shares for $11 per share. On December 31, 2007, the market prices per share for Lass and Mort were $7.00 and $21.00 respectively. Maxe has a December 31 year end.

Required 1. Prepare journal entries for all the transactions occurring in 2006 and 2007 assuming Maxe

has designated the investments as: a) held for trading b) available for sale.

2. Prepare a summary of the investment account balance, income impact, and Accumulated

Other Comprehensive Income balance for 2006 and 2007 assuming Maxe has designated the investments as: a) held for trading b) available for sale.

CMA Ontario P- 202

FA36 Problem: Investments: Acquisition of Shares - A Company A Company Inc. has recently purchased 15,000 common shares of X Company Inc. for $25 per share. X Company has 100,000 common shares authorized and outstanding. X Company’s net income for the year was $460,000. X Company declared dividends at its year end, December 31, of $2.00 per share. These dividends were paid on January 20 of the following year. At December 31, A Company’s year end, the market value of X Company Inc.’s shares were $ 28.00 per share. Required:

1. What method should A Company Inc. use to account for this investment? What is the balance in the investment account as at December 31, A Company’s year end? What amounts should be reported on the income statement?

2. Assume that X Company Inc. has 60,000 common shares outstanding, and not 100,000. How would your answer to part 1 change?

CMA Ontario P- 203

FA37 Problem: Equity Investments – Equity Accounting - Sara Ltd. On June 30, 2006, Saras Limited (“Saras”) purchased 7,000 common shares of Tondil Incorporated (“Tond”) for $63.10 per share. Summary balance sheet balances, at book value, for Tond on June 30, 2006 were:

Assets not subject to amortization $ 528,000 Note 1 Assets subject to amortization 345,000 Note 2 873,000 Liabilities 86,000 Common shares (issued and outstanding 20,000) 360,000 Retained earnings 427,000 873,000 Note 1: Market value of assets not subject to amortization is $528,000. Note 2: Market value of assets subject to amortization is $425,000. The estimated remaining useful life of the assets subject to amortization is seven years. Saras has determined the most appropriate amortization policy is straight line. Tond earned a net income for the 2006 year of $ 102,600 and paid dividends on December 15, 2006 of $ 25,600. In December 2006, Tond recorded unrealized holding losses of $ 9,400 on it’s available for sale investment portfolio. This is the first year that Tond owned available for sale securities. No unrealized losses on available for sale securities were recognized before December 2006. In December 2006, Saras reviewed the value if goodwill related to Tond and determined that the value of the goodwill had declined to $ 100,000. Both Saras and Tond have December 31 year ends. Required 1. Determine the amount of goodwill purchased on June 30, 2006. 2. Assuming that Saras has significant influence over Tond, determine the income impact in

2006 of owning this investment, and determine the investment account balance as at December 31, 2006.

CMA Ontario P- 204

FA38 Problem: Equity Investments – Equity Accounting - JDL Inc. On April 1, 2006, JDL Incorporated (“JDL”) purchased 30,000 common shares of Kastonil Limited (“Kast”) for $568,800 cash. At the date of purchase, Kast’s controller provided JDL’s management team with the following balance sheet information: Book Value Market

Value Assets not subject to amortization $ 980,000 $1,126,000Assets subject to amortization 740,000 940,000 1,720,000 Liabilities $ 600,000 Common shares (100,000 shares issued and outstanding) 500,000 Retained earnings 620,000 1,720,000 The assets subject to amortization have a remaining useful life of five years. JDL has determined the most appropriate amortization policy is straight line. Kast’s net income was $136,600 for the year ended December 31, 2006. Kast declared and paid cash dividends of $1.05 per share on November 30, 2006. On December 31, 2006, Kast recognized unrealized holding losses of $ 3,620 on its available for sale securities investment. The available for sale securities were purchased by Kast on August 15, 2006. Prior to the purchase of these available for sale securities, Kast did not own any securities investments classified as available for sale. In December 2006, JDL’s management determined that the goodwill associated with the purchase of Kast declined in value to $ 95,000. JDL and Kast both have reporting dates of December 31. Required 1. Determine the amount of goodwill purchased on April 1, 2006. 2. Assuming that JDL has significant influence over Kast, determine the income impact in 2006

of owning this investment, and determine the investment account balance as at December 31, 2006.

CMA Ontario P- 205

FA39 Problem: Equity Investments – Equity Accounting - Tec Ltd. On January 1, 2006, Tec Limited (“Tec”) purchased 80,000 outstanding common shares of Pilcpo Incorporated (“Pilc”) for $4.35 per share. At that date, the balance sheet of Pilc showed the following book values: Assets not subject to amortization $ 447,000 Assets subject to amortization 814,000 Liabilities 200,000 Common shares (authorized, issued and outstanding 400,000) 400,000 Retained earnings 661,000 Market values on January 1, 2006 of select balance sheet accounts were: assets not subject to amortization is $515,000, assets subject to amortization $870,000, and liabilities $200,000. The assets subject to amortization have a remaining useful life of 4 years. Tec has determined that the straight line method for amortization is the most appropriate. Pilc earned a net income of $174,000 for the year ended December 31, 2006. Pilc declared and paid cash dividends of $78,300 during 2006. Pilc recognized unrealized gains for it’s available for sale investments in 2006 of $ 1,930. This is the first year that Pilc has owned securities classified as available for sale. When preparing the financial statements for the year ended December 31, 2006, Tec management reviewed the value of the goodwill related to its investment in Pilc and determined that it was impaired. The goodwill declined in value by 25%. Required 1. Determine the amount of goodwill purchased on January 1, 2006. 2. Assuming that Tec has significant influence over Pilc, determine the income impact in 2006 of

owning this investment, and determine the investment account balance as at December 31, 2006.

CMA Ontario P- 206

FA40 Problem: Equity Investments – Equity Accounting - A Company On July 1, 20X1 A Company purchased 30% of the outstanding voting shares of B Company. The purchase price was $65 per share. B Company has 700,000 voting shares authorized and outstanding. On July 1, 20X1 B Company’s net identifiable assets had a fair market value of $40,000,000. On July 1, 20X1, two of B Company’s machines, with book values of $600,000 and $800,000 respectively were appraised at $850,000 and $900,000 respectively. The remaining useful life on both of these machines was 4 years, with zero expected salvage value. B Company declared dividends on December 31, 20X1 of $6.50 per share and in 20X2 dividends declared were $5.00 per share. B Company’s net income for 20X1 and 20X2 was $5,953,000 and $ 5,650,000 respectively. A Company has no other investments. Required: 1. What amounts will appear in A Company’s investment account and in income for the

years ended December 31, 20X1 and December 31, 20X2?

CMA Ontario P- 207

FA41 Problem: Investments – Trading Securities - Tarsky The Tarsky Corporation provided you with the following information about the cost and market values of its short term investments at the end of the current fiscal year, December 31, 20x6. All of the securities were purchased in 20x6.

Cost

MarketValue

Available-for-sale securities A $30,000 $27,000B 21,000 25,000C 52,000 55,000 Held-for-trading securities D 35,000 42,000E 27,000 22,000

The following transactions occurred during 20x7: a) Security A was sold for $29,000. b) Security E was sold for $35,000. c) Security F was acquired as an available-for-sale security at a cost of $35,000, The market values of the securities as at December 31, 20x7 was as follows:

B $28,000C 45,000D 48,000F 42,000

Required – Prepare all journal entries (i) as at December 31, 20x6, (ii) for the year 20x7 and (iii) as at December 31, 20x7.

CMA Ontario P- 208

FA42 Problem: Capital Assets - Able Limited Able Limited purchased a parcel of land that contained an old building. As the building did not meet the company’s needs, the company razed the building and built a larger, more efficient building. The company incurred the following costs related to the land and building: purchase price of $210,000, consisting of $65,000 for the building and $145,000 for the land title registration $1,500 legal fees to negotiate the purchase of the land and building $2,100 razing of the old building $25,000 proceeds of sale of materials from the old building net of shipping costs $8,900 building construction costs $350,000 architect and engineer fees $15,000 building permits $1,800 legal representation to obtain building permits $3,000 Required: 1. The company should record the value of the land at: a) $227,600 b) $229,700 c) $164,700 d) $238,600 e) none of the above 2. The company should record the value of the building at: a) $434,800 b) $385,900 c) $369,800 d) $394,800 e) none of the above

CMA Ontario P- 209

FA43 Problem: Capital Assets - Alfaro Company During 20x6, the Alfaro Corporation purchased land with an existing building at a cost of $860,000. The land was valued at $780,000 with the difference allocated to the building. Alfaro demolished the existing building and began construction of a new office building for its own use. The following represent costs incurred during the construction of the building: • architect’s fees of $130,000 • interest of $130,000 on construction financing taken on March 1, 20x6 and repaid on

October 31, 20x6. • cost of $40,000 to demolish the existing building • proceeds on sale of materials from existing building = $8,000 • costs to move from current building to new one = $106,000 • payment of $15,000 of delinquent property taxes when the existing land and building

were purchased • land survey fees of $6,000 • cost to build new building = $1,200,000 • liability insurance during construction = $5,000 The land and building were purchased on March 1, 20x6. Construction of the new building started on April 1, 20x6 and was completed on October 31, 20x6. Required – a) Calculate the cost of the land and building. b) Assume that the company moved into the new building on December 1, 20x6 and that the

straight line method of amortization is used. Calculate the depreciation expense on the building for the year ended December 31, 20x6. Assume a useful life of 50 years and a salvage value of $200,000.

CMA Ontario P- 210

FA44 Problem: Capital Assets - Berns Corp. At December 31, 20x4, certain accounts included in the property, plant, and equipment section of Berns Corporation's balance sheet had the following balances:

Land $ 600,000 Buildings 1,300,000 Leasehold improvements 800,000 Machinery and equipment 1,600,000

During 20x5, the following transactions occurred: a. Land site number 101 was acquired for $3,000,000. Additionally, to acquire the land,

Berns paid a $180,000 commission to a real estate agent. Costs of $30,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for $16,000.

b. A second tract of land (site number 102) with a building was acquired for $600,000. The

closing statement indicated that the land value was $400,000 and the building value was $200,000. Shortly after acquisition, the building was demolished at a cost of $40,000. A new building was constructed for $300,000 plus the following costs:

Excavation fees $12,000 Architectural design fees 16,000 Building permit fee 4,000

The building was completed and occupied on September 30, 20x5. c. A third tract of land (site number 103) was acquired for $1,500,000 and was put on the

market for resale. d. Extensive work was done to a building occupied by Berns under a lease agreement that

expires on December 31, 20x14. The total cost of the work was $250,000, as follows: Estimated

Useful Cost Life (years) Painting of ceilings $ 10,000 1 Electrical work 90,000 10 Construction of extension to current working area 150,000 25 $250,000

The lessor paid half the costs incurred for the extension to the current working area.

e. During December 20x5, $120,000 was spent to improve leased office space. The related

lease will terminate on December 31, 20x8, and is not expected to be renewed.

CMA Ontario P- 211

Required – Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 20x5. a. Land. b. Buildings. c. Leasehold improvements. d. Machinery and equipment.

CMA Ontario P- 212

FA45 Problem: Capital Assets - LaVoie Company Lavoie Company's records show the following property acquisitions and disposals during the first two years of operations: Acquisition Estimated Disposals Cost of Useful Life Year ofYear Property (years) Acquisition Amount20x5 $50,000 10 20x6 20,000 10 20x5 Cost - $7,000 Proceeds - $4,000 The Lavoie Company’s capital asset policy is to depreciate assets for one-half year in the year of acquisition and in its year of disposal. Required - 1. Compute depreciation expense for 20x5 and for 20x6 and the balances of the property

and related accumulated depreciation accounts at the end of each year under the following depreciation methods. Show computations and round to the nearest dollar. a. Straight-line method. b. DDB method.

2. Prepare the journal entry to record the disposal of property in 20x6 under the straight-line method.

CMA Ontario P- 213

FA46 Problem: Capital Assets - Linnay Company The Linnay Company purchased a machine costing $500,000 on January 2, 20x1. The expected useful life of the machine is 8 years and the salvage value is expected to be $100,000. The company uses the double declining balance method of amortization. The Linnay Company has a December 31 year end. Required – Calculate the amortization on the equipment in the year 20x6.

CMA Ontario P- 214

FA47 Problem: Leases - Zubinski Inc. Zubinski Inc. entered into a 5 year lease agreement for equipment with a fair value of $155,000 on April 1, 20X1. Annual lease payments of $35,000 must be paid on March 31, of each year. The implicit rate in the lease is 7%, Zubinski Inc.’s incremental borrowing rate is 8%. The equipment’s useful life is 8 years. Zubinski Inc. depreciates using the declining balance method at a rate of 20% per year. The company’s year end is December 31. Zubinski Inc. will be responsible for all maintenance related to the leased equipment. Zubinski Inc. intends on returning the equipment at the end of the lease term. Required: 1. Determine whether this lease should be treated as a capital or operating lease. 2. Prepare the journal entries for 20X1 and 20X2 related to this transaction. 3. What amounts related to this lease would appear on the December 31, 20X2 balance

sheet?

CMA Ontario P- 215

FA48 Problem: Leases - Karen Company On December 31, 20x1, the Karen Company leased machinery from the Boyd Company. The equipment was manufactured by Boyd Company at a cost of $400,000. The normal selling price of the equipment if $560,000. The lease term is 6 years with the first payment due on December 31, 20x1. Additional information - Useful life of asset 8 yearsFair value of asset… At end of lease term $100,000 At end of useful life 40,000Karen Company's incremental borrowing rate 10% Annual executory costs (included in lease payments) $15,000 (these are for insurance and maintenance of the machinery) The Karen Company uses the straight-line method of amortization. Required - For each of the following independent parts, prepare the following: a. What lease payment will be required by Boyd Company. b. Explain why the lease would be classified as a capital lease. c. Prepare all journal entries for Karen Company for December 31, 20x1 and for the year

ended December 31, 20x2. d. Prepare all journal entries for Karen Company for the year ended December 31, 20x7. Part 1 - Assume that Karen Company has the option to purchase the machinery at the end of the lease term for $20,000. The rate implicit in the lease is 9% and is known to Karen Company. Part 2 - Assume that there is no purchase option (i.e. the asset reverts back to the lessor at the end of the lease term) and that the residual value of $100,000 is guaranteed by Karen Company. The rate implicit in the lease is 9% and is known to Karen Company. On December 31, 20x7 the asset is returned to the lessor and is immediately appraised by an independent evaluator. The evaluator assessed the market value of the equipment at $80,000.

CMA Ontario P- 216

Part 3 - Assume that there is no purchase option (i.e. the asset reverts back to the lessor at the end of the lease term) and that the residual value of $100,000 is unguaranteed by Karen Company. The rate implicit in the lease is 9% but is not known to Karen Company. Karen Company also does not know the fair value of the equipment.

CMA Ontario P- 217

FA49 Problem: Leases - Badget Car Rental Limited Badget Car Rental Limited (“BCRL”) leases fleets of cars to large corporations. The following information relates to a fleet of cars that BCRL leases to Tiner Incorporated (“TI”):

Annual leasing fee is $172,800 per year for four years; the lease payment is due at the beginning of each period, which is January 1

The lease is non-cancellable The fair value of the fleet of cars is $ 580,800 and the cost of the fleet to BCRL was

$528,000 The average economic life of the fleet of cars is 5 years BCRL’s average rate of return on its leased fleets is 13% At the end of the lease term, there is not expected to be any residual value. TI has leased cars from BCRL for the last twelve years, and during that time BCRL had

not experienced any collectability problems; BCRL does not expect any collectability problems in the future

There are not any un-reimbursable costs associated with the lease

BCRL’s year end is December 31. Required: 1. Apply the CICA handbook criteria to determine what type of lease this lease represents. 2. Prepare journal entries for the first two years of the lease. 3. Assume that the cost of the fleet to BCRL is $580,800. Prepare journal entries for the first

two years under this assumption.

CMA Ontario P- 218

FA50 Problem: Pensions - Pierce Incorporated Pierce Incorporated, a large company, offers its’ employees a defined benefit pension plan. The balances related to the pension plan as of January 1, 2008 are: Pension obligation, January 1 576,000 Plan assets, at market-related value 432,000 Unamortized past service cost 1,200,000 Unrecognized actuarial gain carried forward 36,000 Other data related to this pension for 2008 is as follows: The current service cost for the full year was $ 624,000. The expected rate of return on plan assets was 8%, while the actual return was $ 31,400. The expected period to full eligibility (EPFE) for employees participating in the pension plan is 15 years and the average remaining service period (ARSP) for these employees is 18 years. The interest rate used to determine the interest on the obligation was 9%. On December 31, 2008, the company paid $600,000 to the pension fund. Required: a. Calculate the pension expense amount for 2008. b. Show the journal entry(ies) to record the pension expense and the employer’s contribution for 2008. c. Calculate the accrued pension liability as of December 31, 2008. d. Reconcile the pension account for January 1, 2008 and December 31, 2008. .

CMA Ontario P- 219

FA51 Problem: Pensions - Charter Limited Charter Limited created a defined benefit pension plan for its employees on January 1, 2003. When the plan was created, the company’s actuary determined that the past service cost was $72,000 and the expected period to full eligibility (EPFE) was 9 years. Balances related to the pension plan as of January 1, 2008 are: Pension obligation, January 1 484,000 Plan assets, at market-related value 616,000 Unrecognized actuarial gain carried forward (average expected remaining service period, which is used to calculate the corridor test, is 12 years)

64,900

Other information for 2008 is as follows: Current service cost for the year $35,200 Additional actuarial gains (due to a revaluation of the pension obligation) $17,000

Pension benefits paid to retirees $110,000 Contribution to the pension fund $52,800 The discount rate on the pension obligation is 7% and the expected return on plan assets is 8.5%. The actual return on plan assets for the year was $ 61,500. When the pension plan was initiated, the company established a policy of amortizing unrecognized actuarial gains and losses. Required: a. Calculate the pension expense for 2008. b. Calculate the accrued pension liability or asset as at December 31, 2008. c. Reconcile the pension account for January 1, 2008 and December 31, 2008.

CMA Ontario P- 220

FA52 Problem: Pensions - Petra Limited On January 1, 2008, Petra Limited implemented a defined benefit pension plan. Petra’s actuary determined that the pension benefit obligation on January 1, 2008 was $1,386,000 for the employees’ past service, and that the expected period to full eligibility (EPFE) is 12 years. Upon initiation of the pension plan, January 1, 2008, Petra Limited contributed $480,000. The following information relates to the pension plan for 2008: Current service cost 180,000Pension benefit obligation as at December 31, as per actuarial valuation 1,651,000Plan assets as at December 31, at market related value 528,000Expected return on plan assets 8%Interest cost on the pension benefit obligation 7% Required: a. Calculate the pension expense for 2008. b Prepare all of the journal entries related to the pension plan for 2008. c. Reconcile the pension account for December 31, 2008.

CMA Ontario P- 221

FA53 Problem: Pensions - Vandoros Company The Vandoros Company adopted a defined benefit pension plan for its employees on December 31, 20x2. Because the plan provided retroactive benefits for employees, the projected benefit obligation created at that time amounted to $8,500,000. The expected period to full eligibility on December 31, 20x5 was 16 years. The company made a $4,000,000 funding payment to the pension plan trustee on December 31, 20x2. The following data is available for the years 20x3 to 20x5: 20x3 20x4 20x5 Current service cost $950,000 $1,100,000 $1,250,000 Interest rate on accrued benefits and fund assets

7% 7% 7%

Actual return on plan assets 325,000 1,100,000 (250,000) Annual funding payments to trustee 1,200,000 1,500,000 3,000,000 (made at the end of each year) Benefits paid to retirees 300,000 360,000 450,000 Changes in actuarial assumptions establishes a December 31, 20x4 projected benefit obligation of

10,670,000

EARSL 16 years 14 years 12 years Required – For each of the years (20x3 to 20x5), calculate the following: a. the ending balance of the Projected Benefit Obligation, b. the ending balance of the Plan Assets, c. the pension expense, d. the journal entry to record the pension expense, e. the ending balance in the Pension Account that would appear on the balance sheet, and f. a reconciliation of the plan’s funded status to the balance in the Pension Account at the

end of each year.

CMA Ontario P- 222

FA54 Problem: Research & Development - Precent Inc. Precent Inc. is a biotechnology company that develops and sells government regulated pharmaceutical products. Precent Inc. started out as a research project with six researchers at a world-renowned university. Initially, the research was funded through government grants. After the research project was complete, four of the original six researchers formed a company to further develop initial findings. The first few years were difficult due to cutbacks in government funding. Two years ago, Precent Inc. issued shares to the public. As Precent Inc.’s technology showed great promise, the public issue sold out very quickly. During the last fiscal year, Precent Inc. spent funds on the following activities: Laboratory research to discover new knowledge $6,890,000 with respect to gene therapy Product testing (final stage) $2,413,000 Market research $600,000 Development of prototypes $1,215,000 Interest $1,862,000 As Precent Inc. is a well known and solid company, it can obtain any financing it may require. Required:

1. Discuss how each of these costs should be treated for accounting purposes (according to GAAP). Also, discuss amortization of capitalized development costs.

CMA Ontario P- 223

FA55 Problem: Earnings per Share - Charley Company The Charley Company had 1,500,000 common shares outstanding on January 1, 20x6. The following transactions took place during 20x6: February 28, 20x6 Issued 200,000 common shares July 2, 20x6 Declared a 10% stock dividend August 15, 20x6 Issued 100,000 common shares November 1, 20x6 Re-acquired and cancelled 50,000 common shares. Required – Calculated the weighted average number of common shares to be used in the calculation of basic earnings per share.

CMA Ontario P- 224

FA56 Problem: Earnings per Share - Holten Company The Holten Company’s partial balance sheet as at December 31, 20x3 is as follows: Bonds payable, 8% coupon, maturity date Dec 31, 20x10, interest payment dates: Jun 30, Dec 31, issued when the YTM was 6%. Each $1,000 bond is convertible into 24 common shares. Conversion period = 20x6 to 20x10. The bonds have a face value of $20,000,000.

$22,256,800

Preferred shares, $7.50, 100,000 shares outstanding, cumulative, each share is convertible into 5 common shares. 9,500,000 Common shares, 1,500,000 shares outstanding 36,540,000 Additional Information – • the Holten Company’s tax rate is 40% and the effective interest rate method is used to

account for bond discounts/premiums. • the preferred share dividends were three years in arrears as at December 31, 20x3. On

December 12, 20x4 the preferred dividends were paid as well as a $0.50 per share dividend on common shares.

• 250,000 shares were issued on April 1, 20x4 • the company has two series of stock options outstanding:

- Series G: 150,000 options that expire on December 31, 20x6. Exercise price = $35

- Series H: 200,000 options that expire on December 31, 20x8. These options are exercisable any time after January 1, 20x6. Exercise price = $12.

• the average share price for the year was $25. • net income for the year ended December 31, 20x4 was $3,800,000 Required – Calculate Basic and Fully Diluted EPS.

CMA Ontario P- 225

FA57 Problem: Earnings per Share - Totter Inc. The following select financial information relates to Totter Incorporated (“TI”), a large public company. The December 31, 2007 balance sheet includes: Common shares issued and outstanding: 1,400,000 common shares issued and outstanding. Convertible debentures outstanding: 10,000 7% convertible debentures, maturing on

December 31, 2020. Each debenture was issued in the amount of $100 and is convertible a the rate of one debenture for 4 common shares.

Employee share options outstanding: 300,000 share options outstanding, each options has an exercise price of $18.

The following items occurred during 2008: Net income was $3,640,000. On April 1, 2008, the company declared a 3-for-1 stock split. All convertible securities

outstanding on that date were also adjusted to reflect the split. On May 31, 2008, the company issued 210,000 convertible preferred shares, which are

convertible at a rate of 1 preferred share for 3 common shares. The shares are cumulative and pay a yearly dividend of $1.26.

The Board of Directors determined that no dividends would be paid to common shareholders in 2008.

The company’s tax rate is 40%. The market value of the common shares, on an after split basis, averaged $7.20 for the year. Required Calculate basic and diluted earnings per share for 2008.

CMA Ontario P- 226

FA58 Problem: Earnings per Share - Tratter Inc.

The following select financial information relates to Tratter Incorporated (“TI”), a large public company. TI has a December 31 year end. The December 31, 2007 balance sheet includes: Common shares issued and outstanding: 2,100,000 common shares issued and outstanding. Convertible bonds outstanding: 5,600 convertible bonds, earning interest at 8.25% per

annum, maturing on December 31, 2011. Each bond was issued in the amount of $1000 and is convertible at the rate of one bond for 12 common shares.

Convertible cumulative preferred shares: 315,000 shares issued and outstanding; annual dividends are $ 2.40 per share and each preferred share can be converted into 3 common shares.

Employee share options outstanding: Two separate series of options were issued to employees. The first consists of 175,000 options outstanding with an exercise price of $ 63.00 and the second consists of 140,000 share options outstanding with an exercise price of $82.50.

The following items occurred during 2008: Net income was $5,600,000. On April 30, 2008, twenty five percent of the convertible bonds were converted into common shares. The preferred shares dividends were paid on June 30, 2008. The Board of Directors declared a common share dividend of $0.35 per share on April 15,

2008. The company’s tax rate is 40%. The common shares had an average annual market value of $70 per share for the year.

Required Calculate basic and diluted earnings per common share for 2008.

CMA Ontario P- 227

FA59 Problem: Other Intangibles - Rafter Company The Rafter Company spent $156,000 to apply for and obtain a patent for a new product at the beginning of 20x1. At that time, the patent had an estimated useful life of 17 years. At the beginning of 20x5, the company spent $40,000 in successfully defending the patent. On July 2, 20x6, the company purchased another patent for $80,000 that effectively extended the life of the original patent by three years. On December 31, 20x9, a competitor filed a patent that made the patent obsolete. Required – Calculate the balance in the patent account from 20x1 through 20x9.

CMA Ontario P- 228

FA60 Problem: Foreign Currency Transactions - Paulson Company On August 31, 20x5, the Paulson Corporation ordered equipment from a Belgian supplier. The price of the equipment is Euro150,000 and is payable 90 days after the equipment is received. On October 15, 20x5, the equipment is received. The Paulson Corporation has a December 31 year end. Relevant exchange rates are as follows:

October 15, 20x5 1Euro = $1.667 December 31, 20x5 1Euro = $1.672 January 15, 20x6 1Euro = $1.682 December 31, 20x5 15 day forward rate 1Euro = $1.673

Required – a. Assume that the transaction is unhedged, prepare all the journal entries to record this

transaction. Prepare the journal entries to record all aspects of the transaction. b. Assume that on October15, 20x5, the Paulson Corporation enters into a forward contract

to buy 150,000 Euros at the 90 day forward rate of 1 Euro = $1.669. Prepare the journal entries to record all aspects of the transaction.

c. Assume that the forward contract is entered into on August 31, 20x5 at the 135 day forward rate of 1 Euro = $1.671. Prepare the journal entries to record all aspects of the transaction.

CMA Ontario P- 229

FA61 Problem: Foreign Currency Transactions - Jamieson Corporation On September 30, 20x2, the Jamieson Corporation received an order to ship equipment to a US supplier. The price of the equipment is $US 250,000 and is payable 60 days after the equipment is received. On December 1, 20x2, the equipment is shipped. The Jamieson Corporation has a December 31 year end. Relevant exchange rates are as follows:

December 1, 20x2 $1US = $1.232 December 31, 20x2 $1US = $1.218 January 31, 20x3 $1US = $1.225

Required – a. Assume that the transaction is unhedged, prepare all the journal entries to record this

transaction. Prepare the journal entries to record all aspects of the transaction. b. Assume that a 60 day forward contract is entered into on December 1, 20x2 at the rate

$1US = $1.230. Prepare the journal entries to record all aspects of the transaction. Assume that the 30 day forward rate on December 31, 20x2 is $1US = $1.228.

CMA Ontario P- 230

FA62 Problem: Foreign Currency Transactions - Hyder Corporation On January 2, 20x5, the Hyder Corporation borrows SF 50,000,000 from the Swiss Commercial Bank. The loan is payable on December 31, 20x9 and bears interest of 5% payable every December 31. Relevant exchange rates are as follows:

January 2, 20x5 SF1 = $0.45 Average for 20x5 SF1 = $0.49 December 31, 20x5 SF1 = $0.56 Average for 20x6 SF1 = $0.55 December 31, 20x6 SF1 = $0.52

Required – Prepare the journal entries relative to this transaction for the years 20x5 and 20x6.

CMA Ontario P- 231

FA63 Problem: Foreign Currency Hedging - Tratter Incorporated Tratter Incorporated (“TI”) purchases used mining equipment to use in it’s Northern Canada mining operations. On October 31, Year 3, TI bought and received some used mining equipment from a bankrupt company in a foreign country, Bolonia, for 200,000 foreign currency (FC). The equipment has a useful life of ten years. TI amortizes capital assets on a straight line basis over their useful life. The invoice called for payment to be made on January 31, Year 4. On October 31, Year 3, TI entered into a forward contract with a bank to hedge the purchase by agreeing to buy FC200,000 on January 31, Year 4 at a rate of FC1 = C$2.65. On January 31, Year 4, TI settled the forward contract with the bank, and paid the supplier. Spot rates were as follows: October 31, Year 3 FC1 = C$2.70 December 31, Year 3 FC1 = C$2.60 January 31, Year 4 FC1 = C$2.57 On December 31, the forward rate for buying 200,000 FC for delivery on January 31 was FC$1.00 = C$2.63. TI has a December 31 year end. Required:

PART A – Hedge of an Existing Balance 1. Using fair value hedge accounting: (a) Calculate the income statement impact of the forward contract and the foreign

denominated A/P for Year 3 and Year 4.

(b) State the amount(s) associated with the forward contract that will be presented on the balance sheet in Year 3 and Year 4.

(c) Show the journal entries for Year 3 and Year 4 for assuming the forward journal entries are recorded on a net basis (hint: the journal entries will help provide the answer to part (a) and (b), so you may want to do this first).

2. Using cash flow hedge accounting: (a) Calculate the income statement impact of the forward contract and the foreign




3. Compare the income statement impact and the balance sheet account balances for Year 3 and

Year 4 under each approach.

4. If the accounts payable had not been hedged, what would the impact on income be for Year 3

and Year 4.

CMA Ontario P- 232

PART B – Hedge of a Firm Commitment

Assume the case facts have changed as follows: On September 30, Year 3, TI put in an order to purchase the used mining equipment for

200,000 FC. This order is considered a firm commitment. The used mining equipment is scheduled for delivery January 31 Year 4 and payment is

due upon delivery. On September 30, Year 3, TI entered a forward contract to receive 200,000 FC on

January 31, Year 4, which is the date that payment is due. On January 31, Year 4 the equipment was delivered as scheduled, and payment to the

seller was made. TI has a December 31 year end Relevant exchange rates are: Forward rate for

delivery on Jan 31, Year 4

Spot rate

September 30 Year 3 FC1 = C$2.6560 FC1 = C$2.7210 October 31 Year 3 FC1 = C$2.6450 FC1 = C$2.7000 December 31 Year 3 FC1 = C$2.5530 FC1 = C$2.6000 January 31 Year 4 -- FC1 = C$2.5700 Required: 1. Using fair value hedge accounting: (a) Prepare all journal entries to reflect this sequence of transactions.

Assume that the forward journal entries are recorded on a net basis.

(b) Provide a summary of the balance sheet and income statement account balances related to this transaction as at December 31, Year 3 (year end) and as at January 31, Year 4.

(c) Provide a schedule outlining the F/X to account for and how it was accounted for.

2. Using cash flow hedge accounting: (a) Prepare all journal entries to reflect this sequence of transactions.

Assume that the forward journal entries are recorded on a net basis.

(b) Provide a summary of the balance sheet and income statement account balances related to this transaction as at December 31, Year 3 (year end) and as at January 31, Year 4.

(c) Summarize the F/X to account for and how it was accounted for.

CMA Ontario P- 233

FA64 Problem: Foreign Currency Hedging - Bali’s Furniture Incorporated Bali’s Furniture Incorporated (“BFI”) exports furniture from its manufacturing facility in Prince George, British Columbia, to countries around the world. On October 31, Year 2, BFI sold and shipped furniture to a wholesaler in China for US$200,000. The invoice called for payment to be made on February 28, Year 3. On October 31, Year 2, BFI entered into a forward contract with a bank to hedge the existing monetary position by agreeing to sell US$200,000 on February 28, Year 3 at a rate of US$1.00 = C$1.26. On December 31, the forward rate to purchase US dollars for delivery on February 28 was C$1.25 for $1.00 US. On February 28, Year 3, BFI received payment from the Chinese customer and immediately settled the forward contract with the bank. Spot rates were as follows:

October 31, Year 2 US$1.00 = C$1.20 December 31, Year 2 US$1.00 = C$1.24 February 28, Year 3 US$1.00 = C$1.27

BFI’s year end is December 31.

Required: PART A – Hedge of an Existing Balance

1. Using fair value hedge accounting: (a) Calculate the income statement impact of the forward contract and the foreign

denominated Accounts Receivable for Year 2 and Year 3. (b) State the amount(s) associated with the forward contract that will be presented on

the balance sheet in Year 2 and Year 3. (c) Show the journal entries for Year 2 and Year 3 assuming the forward journal

entries are recorded on a net basis (hint: the journal entries will help provide the answer to part (a) and (b), so you may want to do this first).


denominated Accounts Receivable for Year 2 and Year 3. Assume straight line amortization.



3. Compare the income statement impact and balance sheet account balances for Year 2

and Year 3 under each approach. 4. If the accounts receivable had not been hedged, what would the impact on income be for

Year 3 and Year 4.

CMA Ontario P- 234

PART B – Hedge of a Firm Commitment which becomes an existing balance

Note to candidates: This is a complex problem that demonstrates hedging a firm commitment which becomes an existing balance. It is highly unlikely that the Entrance Examination will present an in-depth question of this nature. Should you choose to do this problem, focus on understanding the concepts, as opposed to the journal entries. Assume the case facts have changed as follows: BFI accepted the order form the wholesaler in China on October 31, Year 2, and signed a contract agreeing to ship the furniture on December 31. This order is considered a firm commitment. On December 31, Year 2, BFI shipped the furniture to the wholesaler in China

1. Using fair value hedge accounting: (a) Prepare all journal entries to reflect this sequence of transactions. Assume that

the forward journal entries are recorded on a net basis. (b) Provide a summary of the balance sheet and income statement account balances

related to this transaction as at December 31, Year 2, and February, Year 3. (c) Provide a schedule outlining the F/X to account for and how it was accounted

for. 2. Using cash flow hedge accounting: (a) Prepare all journal entries to reflect this sequence of transactions. Assume that

the forward journal entries are recorded on a net basis. (b) Provide a summary of the balance sheet and income statement account balances

related to this transaction as at December 31, Year 2, and February, Year 3. (c) Summarize the F/X to account for and how it was accounted for.

CMA Ontario P- 235

FA65 Problem: Foreign Currency Hedging - Ostel Corporation Ostel Corporation (“OC”), of Edmonton, Alberta, manufactures and sells cabinet-making equipment. On August 31, Year 3, OC sold equipment for US$80,000 to a retailer located in Minnesota, USA. The retailer provided a non-interest bearing note to OC, agreeing to pay the amount on August 31, Year 5.

On October 1, Year 3, OC negotiated a forward exchange contract to hedge the note receivable from the US retailer. The forward contract rate for delivery on August 31, Year 5 was US$1 = C$1.55.

Various exchange rates are:

Date Spot rate

Forward rate for delivery on August

31, Year 5

August 31, Year 3 US$1 = C$1.50October 1, Year 3 US$1 = C$1.56 US$1 = C$1.55December 31, Year 3 US$1 = C$1.60 US$1 = C$1.58 December 31, Year 4 US$1 = C$1.70 US$1 = C$1.66 August 31, Year 5 US$1 = C$1.75 -- OC has a December 31 year end.

PART A – Hedge of an Existing Balance 1. Using fair value hedge accounting: (a) Calculate the income statement impact of the forward contract and the foreign

denominated Note Receivable for Year 3, Year 4, and Year 5. (b) State the amount(s) associated with the forward contract that will be presented on the

balance sheet in Year 3, Year 4, and Year 5. (c) Show the journal entries for Year 3, Year 4, and Year 5 assuming the forward was

recorded on a net basis (hint: the journal entries will help provide the answer to part (a) and (b), so you may want to do this first).


denominated Note Receivable for Year 3, Year 4, and Year 5. (b) State the amount(s) associated with the forward contract that will be presented on the

balance sheet in Year 3, Year 4, and Year 5. (c) Show the journal entries for Year 3, Year 4, and Year 5 for assuming the forward

was recorded on a net basis (hint: the journal entries will help provide the answer to part (a) and (b), so you may want to do this first).

3. Compare the income statement impact and the balance sheet account balances for Year 3,

Year 4, and Year 5 under each approach. 4. Calculate the impact on income be for Year 3, Year 4, and Year 5 if the note receivable had

not been hedged.

CMA Ontario P- 236

PART B – Hedge of a Commitment which becomes a Balance Note to candidates: This is a complex problem that demonstrates hedging a firm commitment which becomes an existing balance. It is highly unlikely that the Entrance Examination will present an in-depth question of this nature. Should you choose to do this problem, focus on understanding the concepts, as opposed to the journal entries.

Assume the case facts have changed as follows: The US retailer put in an order for the equipment to OC on June 15, Year 3, with delivery

scheduled for August 31, Year 3 OC entered a forward contract on the date the order was placed, June 15, Year 3. At that

date the spot rate was US$1 = C$1.4845 and the forward rate was US$1 = C$1.5275 OC delivered the equipment as scheduled on August 31, Year 3. At that date (August 31,

Year 3) the forward rate was US$1 = C$1.5350 and the spot rate was US$1 = C$1.50. Required: 1. Using fair value hedge accounting: (a) Prepare all journal entries to reflect this sequence of transactions. Assume

that the forward contract is recorded on a net basis.

(b) Provide a summary of the balance sheet and income statement account balances related to this transaction as at December 31, Year 3, December 31, Year 4, and August 31, Year 5.

(c) Provide a schedule outlining the F/X to account for and how it was accounted for.

2. Using cash flow hedge accounting: (a) Prepare all journal entries to reflect this sequence of transactions. Assume


(b) Provide a summary of the balance sheet and income statement account balances related to this transaction as at December 31, Year 3, December 31, Year 4, and August 31, Year 5.

(c) Summarize the F/X to account for and how it was accounted for.

CMA Ontario P- 237

FA66 Problem: Foreign Currency Hedging - Tonawanda Incorporated Tonawanda Incorporated (“TI”), a Canadian company, imports goods from countries around the world for sale to retailers. On May 1, Year 2, TI purchased and received goods from a foreign supplier for foreign currency (“FC”) 600,000. The invoice called for payment to be made on September 30, Year 2. On May 1, Year 2, TI entered into a forward contract with a bank to hedge the purchase by agreeing to purchase FC 600,000 on September 30, Year 2 at a rate of FC1 = C$0.938. TI’s year-end is June 30. On September 30, Year 2, the forward contract was settled and the foreign supplier was paid. Spot rates were as follows: May 1, Year 2 FC1 = C$0.930 June 30, Year 2 FC1 = C$0.920 September 30, Year 2 FC1 = C$0.915 The forward rate on June 30, Year 2 to purchase FC600,000 for delivery on September 30 is FC$1.00 = C$0.924. PART A 1. Using fair value hedge accounting: (a) Calculate the income statement impact of the forward contract and the foreign



(c) Show the journal entries for Year 3 and Year 4 for assuming the forward was recorded on a net basis (hint: the journal entries will help provide the answer to part (a) and (b), so you may want to do this first).




(c) Show the journal entries for Year 3 and Year 4 for assuming the forward was recorded on a net basis (hint: the journal entries will help provide the answer to part (a) and (b), so you may want to do this first).

3. (a) Compare the income statement impact for Year 3 and Year 4 under each approach. (b) Compare the balance sheet account balances for Year 3 and Year 4 under each

approach.

4. Calculate the impact on income be for Year 3 and Year 4 if the accounts payable had not

been hedged.

CMA Ontario P- 238

PART B

Note to candidates: This is a complex problem that demonstrates hedging a firm commitment which becomes an existing balance. It is highly unlikely that the Entrance Examination will present an in-depth question of this nature. Should you choose to do this problem, focus on understanding the concepts, as opposed to the journal entries.

Assume the case facts have changed as follows: TI placed a purchase order for the goods with the foreign supplier on March 1, Year 2, with

the goods scheduled to arrive May 1, Year 2, and payment to be made on September 30, Year 2

TI entered a forward contract on March 1, Year 2 for delivery of 600,000 FC on September 30, Year 2 at a forward rate of C$.945 for $ 1.00 FC

The goods arrived on schedule, May 1, Year 2 TI paid the supplier on September 30, Year 2 TI’s year end is June 30 Relevant exchange rates:

SPOT

FORWARD RATES for delivery on

SEPT 30, YEAR 2

March 1, Year 2 FC1 = C .941 FC1 = C .945 May 1, Year 2 FC1 = C .930 FC1 = C .938 June 30, Year 2 FC1 = C .920 FC1 = C .924 September 30, Year 2 FC1 = C .915 -- Required: 1. Using fair value hedge accounting: (a) Prepare all journal entries to reflect this sequence of transactions. Assume


(b) Provide a summary of the balance sheet and income statement account balances related to this transaction as at June 30, Year 2 and September 30, Year 2.


that the forward contract is recorded on a net basis. Recall that the F/X related to the commitment is recorded directly against the resulting asset.

(b) Provide a summary of the balance sheet and income statement account balances related to this transaction as at June 30, Year 2 and September 30, Year 2.

CMA Ontario P- 239

FA67 Problem: Foreign Currency Hedging - Talahachi Limited Talahachi Limited (“TL”) is a Canadian farm equipment. TL sells its’ equipment to wholesalers located in both Canada and in other countries. On December 1, Year 1, TL sold and shipped equipment to a foreign customer, for foreign currency dollars $ 2,800,000 FC, with payment to be made January 31, Year 2. To hedge the receivable, TL entered a two month forward contract at a rate of FC $ 1.00 = $0.226 Canadian. Exchange rates during this period were: Spot rate Forward rate for delivery on January 31 December 1, Year 1 FC $ 1.00 = C$0.249 FC $ 1.00 = C$0.226 two month forward December 31, Year 1 FC $ 1.00 = C$0.233 FC $ 1.00 = C$0.222 one month forward January 31, Year 2 FC $ 1.00 = C$0.228 --- TL has a December 31 year end. PART A 1. Using fair value hedge accounting: (a) Calculate the income statement impact of the forward contract and the foreign


the balance sheet in Year 1 and Year 2. (c) Show the journal entries for Year 1 and Year 2 assuming the forward was recorded

on a net basis (hint: the journal entries will help provide the answer to part (a) and (b), so you may want to do this first).



the balance sheet in Year 1 and Year 2. (c) Show the journal entries for Year 1 and Year 2 for assuming the forward was

recorded on a net basis (hint: the journal entries will help provide the answer to part (a) and (b), so you may want to do this first).

3. Compare the income statement impact and the balance sheet account balances for Year 1

and Year 2 under each approach. 4. Calculate the impact on income be for Year 1 and Year 2 as if the accounts receivable had

not been hedged.

CMA Ontario P- 240

PART B

Assume the case facts have changed as follows: TL received the sales order from the foreign customer on September 1, Year 1 for the

equipment, with the equipment scheduled to be shipped December 1 and payment is to be made January 31, Year 2

TL entered a forward contract on the date the order was received, September 1, Year 1. At that date the spot rate was FC 1.00 = C $ .259 and the forward rate was FC$1 = C$ .247

TL shipped the equipment as scheduled on December 1, Year 1. At that date (December 1, Year 1) the forward rate was FC $ 1.00 = C$ .226 and the spot rate was FC$1 = C$ .249.

Relevant exchange rates are:

SPOT

FORWARD RATES for delivery on

January 31, YEAR 2

September 1, Year 1 FC1 = C .259 FC1 = C .247 December 1, Year 1 FC1 = C .249 FC1 = C .226 December 31, Year 1 FC1 = C .233 FC1 = C .222 January 31, Year 2 FC1 = C .228 -- Required: 1. Using fair value hedge accounting: (a) Prepare all journal entries to reflect this sequence of transactions. Assume


(b) Provide a summary of the balance sheet and income statement account balances related to this transaction for Year 1 and Year 2.



(b) Provide a summary of the balance sheet and income statement account balances related to this transaction for Year 1 and Year 2.

CMA Ontario P- 241

FA68 Problem: Foreign Currency Translation - Carter Company The Carter Company purchased 100% of the shares of the Frost Corporation of the UK on December 31, 20x3. The financial statements for the Frost Corporation are as follows:

Frost Corporation Balance Sheet

As at December 31… 20x5 20x4Cash $ 75,000 $ 60,000Accounts receivable 230,000 150,000Inventory 510,000 340,000Fixed Assets – net 1,350,000 1,500,000 $2,165,000 $2,050,000 Current Liabilities $ 65,000 $ 45,000Long-term debt 600,000 600,000Common stock 500,000 500,000Retained earnings 1,000,000 905,000 $2,165,000 $2,050,000

Frost Corporation Income Statement

For the year ended December 31, 20x5

Revenues $1,900,000 Cost of goods sold (1,100,000) Operating expenses (375,000) Amortization (150,000) Interest expense (40,000) Income tax expense (90,000) Net income $ 145,000

CMA Ontario P- 242

Additional Information – 1. Relevant exchange rates are as follows:

December 31, 20x3 1 £ = $2.17 November 30, 20x4 1 £ = $2.21 December 31, 20x4 1 £ = $2.27 Average – 20x4 1 £ = $2.20 November 30, 20x5 1 £ = $2.31 December 31, 20x5 1 £ = $2.35 Average – 20x5 1 £ = $2.29

2. The December 31, 20x4 inventories were purchased on average on November 30, 20x4

and the December 31, 20x5 inventories were purchased on average on November 30, 20x5.

3. Dividends are declared on December 31 of every year. 4. The 20x4 net income was $120,000 and the 20x4 dividends were $40,000. Required – a) Assume that Frost is an integrated subsidiary, prepare a translated income statement for

the years ended December 31, 20x5 and a translated balance sheet as at December 31, 20x5.

b) On the assumption that Frost is a self-sustaining subsidiary, prepare a translated income statement for the year ended December 31, 20x5 and a translated balance sheet as at December 31, 20x5.

CMA Ontario P- 243

FA69 Problem: Foreign Currency Translation - Renfril Limited Renfril Limited (“RL”), a Canadian company, purchased 70% of the outstanding common shares of Foreign Incorporated (“FI”), a company incorporated in and operating in, a foreign country, on December 31, 2005, for 4,200,000 foreign dollars (FD). For the year ended December 31, 2008, the income statement, stated in foreign dollars (“FD”) for FI was as follows: FD in 000’s Sales and other revenue 23,800 Cost of goods sold 11,200 Amortization expense 420 Other expenses 10,780 Net income 1,400 The comparative balance sheet in condensed form for FI , stated in foreign dollars (“FD”) was as follows: 2008 2007 FD FD in 000’s in 000’s Inventory (Note 1) 560 504 Property, plant and equipment — net (Note 2) 4,760 4,900 Monetary assets 6,720 6,356 12,040 11,760 Monetary liabilities 6,720 7,000 Non-monetary liabilities (Note 3) 546 476 Common shares 280 280 Retained earnings 4,494 4,004 12,040 11,760 Notes to the income statement: 1. The ending inventory for 2007 and 2008 was manufactured evenly throughout the last month of the respective year. The additions to inventory, sales and other revenue, and other expenses occurred evenly throughout the year. 2. The property, plant and equipment on hand at the end of 2005 had been purchased by FI on January 10, 2002. FI purchased new equipment on December 31, 2007 for a total cost of FD280,000 ($280,000 foreign dollars). The amortization on the new equipment in 2008 was FD14,000. There have been no other purchases or sales of capital assets since 2005.

CMA Ontario P- 244

3. The non-monetary liabilities represent obligations for FI to provide services over the next 12 months. The obligations arose evenly throughout the last 6 months of 2008. Other information pertaining to FI: A. Dividends were declared and paid on December 31, 2008. B. SI issued its common shares on January 2, 1997. After this date, no additional common shares were issued, nor were any shares redeemed or cancelled. C. Foreign exchange rates were as follows: FD$ CDN$ January 2, 1997 FD 1 = 0.90 C January 10, 2002 FD 1 = 0.75 C December 31, 2005 FD 1 = 0.72 C Average for 2007 FD 1 = 0.69 C Average for December 2007 FD 1 = 0.63 C December 31, 2007 FD 1 = 0.60 C Average for 2008 FD 1 = 0.54 C Average for July to December 2008 FD 1 = 0.51 C Average for December 2008 FD 1 = 0.48 C December 31, 2008 FD 1 = 0.45 C Required: 1. Determine the Canadian dollar amount for the following items on the financial statements for

the year ended December 31, 2008 under the temporal method:

i. Cost of goods sold ii. Amortization expense iii. Monetary assets iv. Non-monetary liabilities v. Translation gain/loss for 2008

2. Determine the Canadian dollar amount for the following items on the financial statements for

the year ended December 31, 2005 under the current rate method:

i. Other expenses ii. Inventory at end of year on Balance Sheet iii. Common shares iv. Change in cumulative exchange adjustment

CMA Ontario P- 245

FA70 Problem: Foreign Currency Translation - Manitoba Company On December 31, 2006, Manitoba Company of Winnipeg, Manitoba (“MAN”) acquired 60% of the outstanding shares of Harrop Company (“HARROP”), which is incorporated and operates in the country of Atlavinoria, Atlavinoria’s currency is the Atlav dollar (“AD”). The purchase price was $ 399,000 Canadian. On December 31, 2006, the fair values of Harrop’s assets and liabilities were equal to book value, except for equipment with a book value of AD200,000 and a fair value of AD262,500 (AD = Atlav dollar). HARROP’s balance sheet and income statement for 2007 were as follows:

HARROP COMPANY Balance Sheet

(in Atlav dollars) December 31

2007 December 31

2006 Cash 532,500 495,000 Accounts receivable 660,000 705,000 Inventory 1,125,000 900,000 Equipment, net 382,500 300,000 2,700,000 2,400,000 Accounts payable 450,000 375,000 Long-term debt 900,000 900,000 Common shares 600,000 600,000 Retained earnings 750,000 525,000 2,700,000 2,400,000

HARROP COMPANY Statement of Income and Retained Earnings (stated in AD)

for the year ended December 31, 2007 AD Sales 3,000,000 Cost of goods sold 1,800,000 Gross profit 1,200,000 Administrative expenses 367,500 Interest expense 90,000 Amortization 67,500 Income before income taxes 675,000 Income taxes 270,000 Net income 405,000 Retained earnings — January 1, 2007 525,000 Dividends (180,000)Retained earnings — December 31, 2007 750,000

CMA Ontario P- 246

Additional Information: Exchange rates: January 1, 2002 AD1 = C$0.65November 1, 2006 AD1 = C$0.58December 31, 2006/January 1, 2007 AD1 = C$0.56July 1, 2007 AD1 = C$0.55September 30, 2007 AD1 = C$0.52November 1, 2007 AD1 = C$0.54December 31, 2007 AD1 = C$0.50Average for 2007 AD1 = C$0.53 1. Harrop began operations on January 1, 2002. At that time, its balance sheet consisted of equipment with a cost of AD600,000 and common shares of AD600,000. 2. Harrop has not sold any of its equipment since it began operations. However, on July 1, 2007, it acquired AD150,000 of new equipment. All its equipment is amortized on a straight-line basis over 10 years, with amortization based on the number of months owned each year. 3. Sales and purchases occurred evenly over the year, except inventory as noted in point 4 below. 4. Harrop acquired all of its December 31, 2006 and 2007 inventory on November 1, 2006 and November 1, 2007, respectively. 5. Dividends were declared and paid on September 30, 2007. Required: 1. Assume that Harrop is an integrated subsidiary. Prepare a translated statement of income and retained earnings for the year ended December 31, 2007 using the temporal method, including a detailed calculation of the exchange gain or loss. 2. Assume that Harrop is a self-sustaining subsidiary. Translate the balance sheet and income statement for the 2007 year using the current rate method. Show the calculation for the cumulative translation adjustment. 3. (a) Prepare the journal entry on December 31, 2006 to reflect the acquisition.

(b) State how the investment would appear on MAN’s consolidated financial statements on the acquisition date.

(c) Indicate how the purchase price discrepancy would be accounted for under (i) temporal method (integrated) (ii) current rate method (self sustaining)

CMA Ontario P- 247

FA71 Problem: Foreign Currency Translation - Botlen Incorporated On December 31, 2002, Botlen Incorporated (“BOT”) acquired 90% of the voting shares of Alex Limited (“ALEX”) for 690,000 Euros(EU). On the acquisition date, the fair values of all of the identifiable assets and liabilities for ALEX was equal to their carrying values. ALEX’s main operations are located in France. It produces and sells fine French wine. Approximately 10% of ALEX’s sales are in France, another 15% of sales are made to BOT, and the remainder of its goods are sold throughout the world. BOT acquired its interest in ALEX to take advantage of ALEX’s worldwide distribution network. As a result, approximately 80% of BOT’s worldwide sales are distributed through ALEX’s distribution network. Most of ALEX’s wine is produced in France. ALEX has generated sufficient cash flows from operating activities to finance its operating and investing activities. The condensed trial balance of ALEX for the years ended December 31, 2005 and 2004 was as follows: 2005 2004 in EURO’s in EURO’s Accounts receivable 207,000 157,000 Inventory 266,000 215,000 Building — at cost 1,340,000 1,340,000 Equipment — at cost 460,000 360,000 Cost of goods sold 1,215,000 1,200,000 Amortization expense 145,000 125,000 Other expenses 471,000 475,000 Dividends paid 320,000 380,000 Total debits 4,424,000 4,252,000 Monetary liabilities 699,000 682,000 Common shares 600,000 600,000 Retained earnings, beginning 370,000 300,000 Sales 2,190,000 2,250,000 Accumulated amortization 565,000 420,000 Total credits 4,424,000 4,252,000 Other information 1. Sales, inventory purchases, and other expenses occurred evenly throughout the year. 2. The ending inventory for each year was purchased evenly in the last quarter of the year. 3. On January 1, 2005, equipment was purchased by ALEX for 100,000 Euro. It has an estimated useful life of 8 years and a salvage value of 5,000 Euro. ALEX uses the double-declining-balance method to calculate amortization expense. The other equipment and the building were acquired on January 1, 2002. No fixed assets have been sold since January 1, 2005.

CMA Ontario P- 248

4. The common shares were issued on January 1, 2002. No other common shares were issued. 5. The 2005 dividends were declared and paid on January 1, 2005, and the 2004 dividends were declared and paid on April 30, 2004. 6. All of the liabilities are monetary items. There are no non-monetary liabilities. 7. Historical information for 2003: net income was $ 433,333 EU and in 2003 dividends of $ 300,000 EU were declared and paid on December 31, 2003. 6. The exchange rates for the Euro and the Canadian dollar were as follows:

January 1, 2002 $1 = EU 0.50 December 31, 2002 $1 = EU 0.60 Average for the 2003 year $1 = EU 0.63 December 31, 2003 $1 = EU 0.65April 30, 2004 $1 = EU 0.66 Average for the 2004 fourth quarter $1 = EU 0.68 Average for the 2004 year $1 = EU 0.675 December 31, 2004/January 1, 2005 $1 = EU 0.70 December 31, 2005 $1 = EU 0.80 Average for 2005 $1 = EU 0.76 Average for the 2005 fourth quarter $1 = EU 0.79

Required: 1. Translate the income statement and balance sheet for 2005 under the temporal method. Include a detailed calculation of the foreign exchange gains or losses for 2005. 2. Translate the income statement and balance sheet for 2005 under the current rate method. Include a detailed calculation of the foreign exchange gain or loss on translation for the 2005 year, and a detailed calculation of the cumulative foreign exchange gain or loss up to December 31, 2005. For simplicity, ignore presentation of Other Comprehensive Income.

CMA Ontario P- 249

FA72 Problem: Foreign Currency Translation - Alegria Incorporated On December 31, 2003, Alegria Incorporated (“ALEGRIA”) acquired 100% of the voting shares of Singapore Limited (“SING”), a company incorporated in and operating in Singapore for 1,392,000 Singapore dollars (SD). On the acquisition date, SING had common shares of SD200,000 and retained earnings of SD340,000. The fair value of the net assets equaled the book value on the date of acquisition. SING manufacturers transistors. Approximately 80% of its sales are to companies in Canada. ALEGRIA assembles computers and office equipment in its manufacturing facility in Vancouver, British Columbia. ALEGRIA acquired SING to secure a reliable source of transistors for use in its computers and other office equipment. Most of SING’s raw material and labour are purchased locally in Singapore. In order to satisfy the extra demand from ALEGRIA, SING built a new manufacturing plant in Singapore in 2004. The plant was financed with a loan from ALEGRIA. 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. SING ‘s condensed closed trial balance for the year ending December 31, 2005 was as follows: in SD Cash SD 150,000 Accounts receivable 255,000 Inventory 500,000 Property, plant and equipment 3,390,000 Total debits SD 4,295,000 Accounts Payable SD 815,000 Long-term debt (Note 1) 1,550,000 Common shares 200,000 Retained earnings 890,000 Accumulated amortization 840,000 Total credits SD 4,295,000 Note 1: The long term debt consists of the loan from ALEGRIA to SING. The details related to this loan are as follows:

Date Event CAD$ Rate SD December 31, 2004 Loan advanced by ALEGRIA 1,200,000 0.75 1,600,000 December 31, 2005 Principal payment 40,000 0.80 50,000 December 31, 2005 Balance outstanding 1,160,000 1,550,000 This loan was recorded as such in both ALEGRIA’s financial statements and SING’s financial statements (i.e. ALEGRIA recorded a loan receivable and SING a loan payable).

CMA Ontario P- 250

Additional information: 1. Details related to inventory are: 2004 2005 Beginning inventory 380,000 SD Manufactured evenly

over last quarter of 2003 400,000 SD Manufactured evenly

over last quarter of 2004 Ending inventory 400,000 SD Manufactured evenly

over last quarter of 2004 500,000 SD Manufactured evenly

over last quarter of 2005 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. SING uses the straight-line method to calculate amortization expense. Amortization on the plant began in 2005. The other capital assets were purchased on January 29, 2001. 3. The changes in SING’s shareholders’ equity for 2004 and 2005 were as follows:

2004 2005 Net income SD 800,000 SD 900,000 Dividends paid 550,000 600,000

The net income was earned evenly throughout the year, and the dividends were declared and paid on December 15 in each year. 4. Foreign exchange rates were as follows:

January 29, 2001 SD1 = C$0.66 Average for quarter 4 for 2003 SD1 = C$0.68 December 31, 2003 SD1 = C$0.70 Average for 2004 SD1 = C$0.71 Average for quarter 4 for 2004 SD1 = C$0.72 December 15, 2004 SD1 = C$0.74 December 31, 2004 SD1 = C$0.75 Average for 2005 SD1 = C$0.76 Average for quarter 4 for 2005 SD1 = C$0.78 December 15, 2005 SD1 = C$0.79 December 31, 2005 SD1 = C$0.80

Required: 1. Comment on the accounting for the loan advanced to SING by ALEGRIA. If necessary,

calculate any adjustments to SING’s records. 2. After considering your answer to Part 1, translate the balance sheet for the year December

31, 2005 using the current rate method. Prepare an independent calculation of the foreign exchange translation adjustment as at December 31, 2004 and December 31, 2005

3. After considering your answer to Part 1, translate the balance sheet for the year December

31, 2005 using the temporal method. Show supporting calculations for the retained earnings balance and clearly indicate the translation gain or loss for 2005.

CMA Ontario P- 251

FA73 Problem: Foreign Currency Translation - Treflac Limited Treflac Limited (“TL”), a Canadian corporation, acquired 60% of Upper Serban Incorporated (“US”) on December 31, 2007, at a cost of C$2,520,000. The book values of US’s assets and liabilities were equal to fair values on the date of acquisition. The cargo trucks had a remaining useful life of 5 years on the date of acquisition and are being amortized on a straight-line basis, with no expected salvage value. The financial statements of US for the years ended December 31, 2007 and 2008 were as follows:

Upper Serban Incorporated Balance Sheets

(in US$) December 31,

2008 December 31,

2007 Cash $588,000 $532,000 Accounts receivable 868,000 938,000 Inventory 1,820,000 1,400,000 Note receivable, due December 31, 2011 280,000 Cargo trucks, net of accumulated amortization 1,204,000 770,000 $4,760,000 $3,640,000 Accounts payable $420,000 $504,000 Bonds payable 2,240,000 1,400,000 Common shares 840,000 840,000 Retained earnings 1,260,000 896,000 $4,760,000 $3,640,000

Upper Serban Incorporated Statements of Income and Retained Earnings

years ended December 31, 2008 and 2007 (in US$)

December 31, 2008

December 31, 2007

Sales and interest revenue $4,760,000 $4,200,000 Cost of goods sold $3,360,000 $3,388,000 Gross profit $1,400,000 $812,000 Administration expenses $299,600 $266,000 Bond interest expense $162,400 $112,000 Amortization $238,000 $154,000 Net income before taxes $700,000 $280,000 Income taxes $224,000 $89,600 Net income $476,000 $190,400 Retained earnings — January 1 $896,000 $789,600 Dividends ($112,000) ($84,000) Retained earnings — December 31 $1,260,000 $896,000

CMA Ontario P- 252

Additional Information 1. Exchange rates: January 1, 2005 US$1.00 = C$1.2900 January 1, 2007 US$1.00 = C$1.2825 March 31, 2007 US$1.00 = C$1.2750 Average for July 1 – December 31, 2007 US$1.00 = C$1.2600 December 31, 2007/January 1, 2008 US$1.00 = C$1.2375 March 31, 2008 US$1.00 = C$1.2300 Average for July 1 – December 31, 2008 US$1.00 = C$1.2225 December 31, 2008 US$1.00 = C$1.2000 Average for 2008 US$1.00 = C$1.2150 2. Inventories on hand at December 31, 2008and December 31, 2007were purchased evenly over the final 6 months of 2008 nd 2007 respectively. 3. US issued $1,400,000 of its bonds on January 1, 2005 and $840,000 on January 1, 2008. All bonds pay interest at 8% and mature on December 31, 2014. US declared and paid dividends of $84,000 and $112,000 on March 31, 2007 and March 31, 2008, respectively. 4. US leased its cargo trucks until January 1, 2007. On that date, it acquired 10 cargo trucks at a cost of US$924,000. On March 31, 2008, it acquired an additional 8 cargo trucks at a cost of US$672,000. All of US’s cargo trucks have an estimated useful life of 6 years from the date of acquisition, with no expected salvage value. None of the cargo trucks has been disposed of since January 1, 2007. 5. The notes receivable was received from one of US’s clients on March 31, 2008. It pays interest at 10% and is due on December 31, 2011. 6. All sales, purchases, and other expenses are incurred evenly throughout the year. Required: a. Assuming that US is an integrated foreign operation, translate each of the assets on US’s December 31, 2008 balance sheet into Canadian dollars. b. Assuming that US is a self-sustaining foreign operation, translate the liabilities and shareholders’ equity section of its December 31, 2008 balance sheet into Canadian dollars. Include a calculation of the cumulative translation adjustment.

CMA Ontario P- 253

FA74 Problem: Future Tax Asset/Liability - General For each of the following, state whether there is a taxable temporary difference, a deductible temporary difference, or a permanent difference and provide the amount. 1. A company uses LIFO to value its inventory. Under this basis, the ending inventory is valued

at $324,000. Using an average cost, the inventory is valued at $465,000. 2. A company was fined $241,000 for violating environmental legislation. These fines are not

tax deductible.

The fine was paid during the year, and was recorded as environmental expense.

3. A company has determined it must pay past service costs for its pensionable employees of $800,000. The company remits the entire amount during the current fiscal year. The amount of pension expense related to these past service costs that was recognized in the current fiscal year was $84,000.

4. A company has depreciable assets with an original cost of $1,250,000 and a net book value

of $792,000. The company’s depreciation for the current year is $196,000 and CCA for the current year is $211,000.

CMA Ontario P- 254

FA75 Problem: Future Tax Asset/Liability - Waco Limited The following information relates to Waco Limited’s (“WL”) fiscal year ended December 31, 20X8:

future tax liability account balance, January 1, 20X8 (calculated based on a tax rate of 42%)

302,400

Accounting income before tax 1,418,400 Depreciation included in accounting income 355,200 Meals and entertainment expense 38,880 Estimated warranty costs (accrued in the current year) 69,600 actual warranty expenditures for the current year 43,200 maximum capital cost allowance available 374,640

In 20X8, the government passed legislation enacting a tax increase to 44%. Required: 1. Prepare the current year’s tax journal entry. 2. Calculate the balance in the future tax asset/liability account and prepare the tax journal

entry to reflect the change in the income tax rate.

CMA Ontario P- 255

FA76 Problem: Future Tax Asset/Liability - Unip Limited Financial information related to Unip Limited’s (“UL”) 20X7 and 20X8 fiscal year is as follows: 20X7 20X8 Pretax operating income (loss) $2,368,800 ($1,032,000)Depreciation expense recorded $354,000 $307,200Maximum capital cost allowance available $528,000 $456,000 UL’s year end is December 31. Prior to 20X8, UL did not have any losses whatsoever. The future tax liability account at the beginning of 20X7 is $672,000. The tax rate in 20X7 and 20X8 is 40%. Required: 1. a) Prepare the tax entry for 20X7 and 20X8. Assume that UL claims the maximum CCA

in 20X8 and carries back the 20X8 loss to 20X7. b) What is the balance in the future tax asset/liability account on December 31, 20X8? 2. a) Prepare the 20X7 and 20X8 tax journal entries assuming the following:

in 20X8 UL does not claim any CCA the 20X8 loss is carried back to 20X7, any unused losses will be carried

forward; UL believes it is more likely than not (probability > 50%) that the unused loss carry-forward will be utilized in the future

the pretax operating loss in 20X8 is $3,432,000 when filing the 20X8 return, UL also re-files the 20X7 return to eliminate the

CCA claimed that year b) Under the assumptions in a), what is the balance in the future tax asset/liability

account on December 31, 20X8?

CMA Ontario P- 256

FA77 Problem: Future Tax Asset/Liability - Tack Incorporated The following information relates to Tack Incorporated’s (“TI”) fiscal years ended December 31, 2008, 2007, 2006: 2006 2007 2008 Purchases of depreciable assets $ 280,000 $ 2,520,000 $ — Pre-tax accounting income (loss) 0 (1,400,000) 56,000 Depreciation expense 30,000 150,000 300,000 Capital cost allowance claimed 30,000 0 0 Income tax rate applicable to each year 35% 37% 40% Other information pertaining to TI:

in 2007, TI management determined that it is more likely than not (probability > 50%) that any unused loss carry-forwards will be utilized in the future

in 2008, TI management determined that $210,000 of the loss carry-forward will never be utilized.

in 2008, TI utilized enough of the losses carried forward to ensure a taxable income of nil Required: Prepare the 2007 and 2008 income tax expense journal entries. Show all calculations.

CMA Ontario P- 257

FA78 Problem: Future Tax Asset/Liability - Taron Incorporated The following information has been extracted from Taron Incorporated’s (“TI”) financial records for the current fiscal year, which ended December 31: Undepreciated capital cost, January 1 1,200,000Plant & Equipment, net of accumulated amortization of $900,000 2,640,000Amortization expense for the current year 168,000Capital cost allowance claimed for the current year 36,000Pretax accounting income 1,440,000Capital gain on sale of investments included in accounting income 576,000Dividends received from taxable Canadian corporations (included in accounting income) 60,000

Other relevant information pertaining to TI:

The government decreased the tax rate for the current year to 35%; in all previous years the tax rate was 40%

Required: Prepare the income tax journal entry for the current year. Show all calculations.

CMA Ontario P- 258

FA79 Problem: Future Tax Asset/Liability - Torin Incorporated Select financial information for Torin Incorporated (“TI”), a Canadian corporation, is as follows: 2005 2006 2007 2008 Income before tax $ 144,000 $ 216,000 $ (480,000) $ 192,000Amortization expense 192,000 192,000 192,000 192,000Capital cost allowance claimed 192,000 384,000 0 240,000Tax rate applicable to each year 35% 38% 40% 40%

Other information pertaining to TI:

TI began operations January 1, 2005 and has a December 31 year end The original cost of the fixed assets purchased was $960,000 and no additional fixed

assets have been purchased since the company began operations In 2007, management decided that it would carry back the losses to 2005 and 2006, and

would carry any remainder forward; management has determined that it is more likely than not (probability > 50%) that any unused loss carry-forwards will be utilized in the future

Required: Prepare the income tax journal entries for the years 2007 and 2008. Show all calculations.

CMA Ontario P- 259

FA80 Problem: Future Tax Asset/Liability - Nguyen Company The Nguyen Company was formed on January 2, 20x1. Selected financial data for the first five years of the company’s operations is provided below. 20x1 20x2 20x3 20x4 20x5 Net income (loss) before taxes

$500,000 $850,000 $1,100,000 ($2,500,000) $450,000

Capital Assets (CCA rate = 40%)

Additions 1,000,000 200,000 300,000 250,000 150,000 Amortization 100,000 120,000 140,000 150,000 200,000 Disposals Original cost 100,000 150,000 200,000 100,000 Proceeds 70,000 115,000 260,000 70,000 Net book value 80,000 100,000 160,000 50,000 Warranty expense 30,000 55,000 60,000 50,000 Warranty costs incurred 10,000 30,000 40,000 70,000 Dividends received from taxable Canadian corporations

20,000

15,000

-

30,000

Club dues 5,000 6,000 Entertainment expenses 30,000 20,000 Tax rate 40% 40% 38% 37% 37% It is the company’s policy to elect to carry back any operating losses to the maximum extent possible. The company does not allow capital cost allowance to increase a loss for tax purposes. The company’s management expect that it is more likely than not that any loss carryforwards will be used up within the seven year limit. In 20x5, the following additional transactions took place: • bonds were issued on January 2, 20x5 with the following characteristics:

Face value $10,000,000 Coupon rate 6.6% YTM 6% Maturity 10 years Coupon payment dates June 30, Dec 31

The company uses the effective interest rate method to amortize any premiums or

discounts. Note: for tax purposes, any amortization of discounts/premiums is not deductible/taxable.

In the year the bonds are refunded, the total discount is deductible and the total premium is taxable.

CMA Ontario P- 260

• deferred development costs of $150,000 were incurred during the year - these costs were capitalized for financial accounting purposes but are fully deductible for tax purposes in the year incurred.

The tax rates were enacted in the current year (i.e. the 20x3 tax rate was not known in 20x2). Required – For each year, calculate the current and future portion of the income tax expense. Prepare the bottom part of the income statement starting with ‘Net Income before Taxes’. Show how future income taxes would appear on the balance sheet.

CMA Ontario P- 261

FA81 Problem: Note Payable - Nguyen Company On January 2, 20x1, the Harry Company acquired a truck with a list price of $500,000. The Harry Company's incremental borrowing rate is 8%. Assume that the truck manufacturer is offering Harry the following terms (each situation is independent). For each of the terms, prepare the journal entries for the life of the note. Assume a December 31 year end. a) Harry Company has to make equal annual payments of principal and interest over five

years. Payments are due on December 31 of every year. The interest rate charged is 10%. b) Harry Company pays the $500,000 in three years. No interest is charged on the note. c) Harry Company pays the $500,000 in three years. Interest of 3% is charged on the note

payable on December 31 of every year. d) Harry Company pays $100,000 on the principal at the end of every year. No interest is

charged. e) Harry Company pays $100,000 on the principal at the end of every year. Interest of 4% is

charged on the balance. f) Harry Company has to make equal annual payments of principal and interest over five

years. The interest rate charged is 4%.

CMA Ontario P- 262

FA82 Problem: Long Term Liabilities – Bonds - TGH Ltd. On January 1, 20X1, TGH Ltd. sold 10% bonds with a maturity value of $100,000. These bonds provide the bondholders with a yield of 12%. The bonds mature December 31, 20X5. Interest is payable on June 30 and December 31 each year. The company accounts for bond discounts/premiums using the effective interest basis. Required: 1. Prepare the following journal entries: a) at date of bond issue b) the interest payment and discount/premium amortization for 20X1 c) the interest payment and discount/premium amortization for 20X3

CMA Ontario P- 263

FA83 Problem: Long Term Liabilities – Bonds - Paolo Inc. Paolo Inc. sold a new issue of 12% bonds with a maturity value of $100,000 for $107,732. The bonds were sold on January 1, 20X1 and mature December 31, 20X5. Interest is payable semi-annually on June 30 and December 31. The effective interest rate is 10%. Required: 1. What would the interest expense and premium amortization be for 20X1 and 20X2 using

the effective interest method?

CMA Ontario P- 264

FA84 Problem: Long Term Liabilities – Bonds - Shrivastava Company On March 1, 20x2 the Shrivastava Company issued bonds dated January 2, 20x2 with the following characteristics:

Face value $20,000,000 Coupon rate 7.6% Yield to maturity 8% Coupon payment dates Jun 30, Dec 31 Maturity 15 years

The Shrivastava Company’s year end is December 31. Required – a. Assuming that the Shrivastava Company uses the effective interest method, i. Prepare all journal entries relating to this bond issue for the year

20x2. ii. Assume that on July 2, 20x8, the company redeems one half of the

bond issue on the open market at 98. Prepare the journal entry on July 2, 20x8. b. Repeat the above requirements on the assumption that the straight line method is used.

CMA Ontario P- 265

FA85 Problem: Long Term Liabilities – Bonds - Nasir Company The Nasir Company's shareholders' equity as at December 31, 20x5 was as follows:

Preferred Stock, $5, cumulative, 100,000 shares issued and outstanding (Note 1)

$10,000,000

Contributed Surplus, unexpired stock options (Note 2) 500,000Common Stock, 1,500,000 shares outstanding 23,250,000Retained earnings 46,700,000 $80,440,000

Note 1 - The dividends on preferred shares have not been paid for the year 20x4 and 20x5. Note 2 - 200,000 stock options were issued to the company's executive on January 1, 20x3 and were for service provided for the period January 1, 20x3 to December 31, 20X5. An option market model put the value of the options at $500,000 on January 1, 20x3 and this value was accrued to compensation expense in 20x3 and 20x4. The executives can convert their stock options during the year 20x6. The exercise price is $12 per option. The following transactions occurred during the year ended December 31, 20x6. January 15, 20x6 120,000 stock options were exercised February 20, 20x6 500,000 common shares are issued at $18 June 30, 20x6 300,000 common shares are issued at $20 August 23, 20x6 The company repurchases and cancels 50,000 common shares at

$15.00 October 15, 20x6 40,000 stock options were exercised October 31, 20x6 The company repurchases and cancels 30,000 common shares at

$16.75 November 15, 20x6 The board of directors declares a $1.00 dividend to common

shareholders and the required dividend to preferred shareholders (20x4 to 20x6). The dividend is payable on December 15, 20x6.

December 31, 20x6 The board of directors declares a 10% stock dividend to common

shareholders. On announcement of the stock dividend, the stock price adjusted downwards, as expected. The stock price prior to the stock dividend announcement was $10 per share.

December 31, 20x6 The net income for the year was $5,600,000.

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December 31, 20x6 The remaining stock options expired. Required - a) Prepare the journal entries to record the 20x6 transactions. b) Prepare the Shareholders' Equity section as at December 31, 20x6.

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FA86 Problem: Long Term Liabilities – Bonds - Huffman Corporation The Huffman Corporation adopted an executive stock option plan for its key executives on January 2, 20x4. A total of 300,000 stock options were issued at an exercise price of $12.50. Exercise of the stock options was contingent on the executives' service for the years 20x4 through 20x6 and were exercisable during the year ended December 31, 20x7. A stock option valuation model puts the value of the stock options at $252,000. The following events occurred during the years 20x4 - 20x7: July 6, 20x5 An executive left the company and forfeited her 40,000 stock

options. October 31, 20x6 Another executive left - 25,000 options were forfeited. January 15, 20x7 180,000 stock options were exercised. December 31, 20x7 The remaining stock options expired. Required - Prepare the journal entries for all transactions affecting the stock option plan for the years 20x4 to 20x7.

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FA87 Problem: Long Term Liabilities – Bonds - Lovejoy Company The Lovejoy Company issued $10,000,000, 7.5%, 10 year convertible bonds on March 31, 20x2. The bonds were issued at par. Financial analysts determined that the yield to maturity on similar risk bonds was 8%. Coupon payment dates are June 30 and December 31. The company’s year end is December 31. The bond indenture stipulates that if bondholders convert their bonds between interest payment dates, the company will pay the bondholders a prorata amount of coupon. Assume that the effective interest rate method is used. Required – a) Prepare all journal entries relative to this bond issue for the year 20x2. b) On November 1, 20x6, 40% of the bondholders decide to convert their bonds into

common shares. Prepare the entry to record the conversion.

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FA88 Problem: Long Term Liabilities – Bonds - General The stated interest rate for a bond is 10% and the effective rate is 9%. This bond is sold at: a) a premium b) a discount c) par d) none of the above

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FA89 Problem: Share Reacquisition and Retirement & Treasury Shares - Igreda Inc. Igreda Inc. has 100,000 no par value common shares outstanding that were issued at $35.00 per share. On October 10, 20X1, the company reacquired 10,000 shares at $56.00 per share, and immediately cancelled these shares. Igreda Inc. is incorporated under the CBCA. Required: 1. How would Igreda Inc. record this reacquisition? 2. a) Assuming these shares are held as treasury shares, what would be the journal entry to

record this transaction? b) What would the balance sheet presentation be, assuming the shares reacquired were

held as treasury shares? Retained earnings are $1,060,000. 3. Ignoring requirement 2, assume that Igreda Inc. reacquired and cancelled an additional

10,000 shares at $30.00 per share on July 10, 20X2. What is the entry to record this transaction?

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FA90 Problem: Segmented Reporting - Eciove Limited Information on the various operating segments of Eciove Limted (“Eciove”), a public company, is provided below. Assume that the operating segments are reportable as per the CICA Handbook; that is, they are components of the company that meet the following criteria:

1. That engage in business activities from which it may earn revenues and show expenses 2. Whose operating results are regularly reviewed by the enterprise’s chief operating

Decision maker to make decisions about resources to be allocated to the segment and assess its performance

3. For which discrete information is available Financial information with respect to identified operating segments for Eciove is as follows:

Revenues Segment Profit (Loss) Assets External Intersegment

1 ($ 243,771) $ 685,103 $ Nil $ Nil 2 207,928 519,161 249,587 $ 9,266 3 381,202 350,849 870,512 Nil 4 (403,160) 647,173 647,304 60,277 5 80,861 196,760 95,371 18,531 6 132,843 597,391 241,471 Nil 7 92,412 410,114 387,571 78,758 8 (1,120,408) 1,329,906 734,558 396,108 9 (801,631) 952,981 501,204 Nil Total ($ 1,673,724) $ 5,689,436 $ 3,727,577 $ 562,891

The total revenue reported on the external financial statements by Eciove is equal to the $3,727,577 total shown for the six identified operating segments (intersegment revenues are eliminated in the externally reported financial statements – one segment records revenue, while the other records an expense; these amounts are eliminated when preparing externally reported financial statements). Required: Apply the segmented reporting criteria and determine which segments are reportable.

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FA91 Problem: Segmented Reporting - Couven Incorporated Information on the various operating segments of Couven Incorporated (“Couven”), a public company, is provided below. Assume that the operating segments are reportable as per the CICA Handbook; that is, they are components of the company that meet the following criteria:

1. that engage in business activities from which it may earn revenues and show expenses 2. whose operating results are regularly reviewed by the enterprise’s chief operating

decision maker to make decisions about resources to be allocated to the segment and assess its performance

3. for which discrete information is available Financial information with respect to identified operating segments for Couven is as follows:

Revenues Segment Profit (Loss) Assets External Inter-segment

1 $ 84,549 $ 140,562 $ 175,000 Nil 2 421,537 853,875 658,943 $ 210,659 3 128,476 136,452 253,960 Nil 4 54,298 123,569 189,467 Nil 5 524,986 85,000 785,698 145,632 6 116,534 115,078 195,687 Nil

Totals $ 1,330,380 $ 1,454,536 $ 2,258,755 $ 356,291 The total revenue reported on the external financial statements by Couven is equal to the $2,258,755 in total for all six identified operating segments (inter-segment revenues are eliminated in the externally reported financial statements – one segment records revenue, while the other records an expense; these amounts are eliminated when preparing externally reported financial statements). Required: Apply the segmented reporting criteria and determine which segments are reportable.

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FA92 Problem: Not for Profit Accounting - Street Helper Group On January 1, 20X8, the Street Helper Group (“SHG”) was established as a not for profit. It provides temporary shelter to children who do not have a home, up to the age of 18 years for the child. It also operates a soup kitchen, that is open to all people in need. The finding to start the not for profit was provided by the Government of Canada. The government provided a grant in the amount of $ 650,000, with the following stipulations: firstly, it must be held as an endowment, and secondly the income earned from the endowment is restricted to activities related to sheltering homeless children (i.e. it can not be used for soup kitchen activities). In 20X8, the income earned on the endowment was $ 113,750. SHG also receives donations from both corporations and individuals. During 20X8, SHG received donations from these sources totaling $1,805,775. These donations are used for both sheltering homeless children and the soup kitchen. The Board of Directors determines the amount of funds to spend on each activity, sheltering homeless children and the soup kitchen. At year end there was an additional $62,300 in donations receivable. Management of SHG believes that approximately $50,000 of the amount receivable will actually be collected. In November 20X8, senior management at a very large Canadian corporation toured the temporary shelter, and was so impressed, that a contribution of $ 500,000 was received from the corporation. The contribution is restricted to sheltering activities only. Since this donation is restricted, is is accounted for as a restricted fund contribution. SHG leases office space at a cost of $4,200 per month. The office space is used for activities related to both the soup kitchen and the shelter. The cost of the space is attributable to both the soup kitchen and the shelter on a 50-50 basis. In addition to the lease, SHG incurred the following expenses during the year: Soup Kitchen Shelter ActivitiesSalaries $120,000 $255,000Cost of food and beverages 302,500 -Insurance 7,500 21,000Other expenses 72,500 82,500 Other information related to SHG for 20X8:

SHG has a December 31 year end. Accounts payable on December 31 are $ 84,250, consisting of $30,250 for the soup

kitchen and $54,000 related to the shelter. These amounts are recorded in the general fund.

Of the $500,000 received from the large Canadian corporation, the following amounts were spent on shelter activities: salaries $ 125,000; insurance $ 20,000; other expenses $ 5,000 [total of $150,000].

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Required: PART A: For the year ended December 31, 20X8, Prepare a Statement of Operations and Fund Balances and a Statement of Financial Position. Assume that SHG uses fund accounting with three separate funds, an endowment fund, restricted fund for shelter activities, and a general fund. PART B: Assume SHG does not use fund accounting. Prepare a Statement of Operations and Fund Balances. (Hint: the deferral method must be used when a NPO does not report on a fund accounting basis).

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FA93 Problem: Not for Profit Accounting - TCSMR The following items are select transactions of The Canadian Society for Medical Research (TCSMR) a registered not for profit agency: office equipment costing $8,210 was purchased a total of $560,000 was pledged, and of this $532,000 was collected historically, 3% of total pledges is uncollectible the society received free television time, which had a fair market value of $26,000 investment income earned on the endowment fund totaled $39,412. Endowment fund

earnings are unrestricted. total depreciation for the year is $36,000 pledges restricted for specified medical research totaled $300,000. Of this, $290,000 was

received. TCSMR expects to collect 100% of the remaining balance. The Canadian Society for Medical Research uses the restricted fund method and has three funds: an operating fund, a capital fund, and an endowment fund. Required: Prepare journal entries for each of these transactions. Indicate which fund will be used for each transaction. Assume the television time would have been purchased if not donated.

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FA94 Problem: Not for Profit Accounting - The Heritage Society The Heritage Society (“THS”) is a not-for-profit organization that lobbies for the conservation of historical buildings. For the 20X8 year, management at THS developed a budget for the first time, and integrated the budget amounts into its records. On December 15, 20X7, the board of directors of THS approved the following budget for the year ending December 31, 20X8:

Revenue Provincial government grant $ 1,120,000Fundraising 560,000Investment income 56,000 1,736,000Expenses Salaries 980,000Advertising 280,000Administration 224,000Rent 108,000Other 70,000 1,662,000Budgeted surplus $ 74,000

During the 20X8 year, the following occurred: 1. The Provincial government grant was received in full. 2. Investment income in the amount of $42,000 was earned. 3. Monthly rent in the amount of $9,000 per month was paid. 4. Actual advertising costs were $238,000 and administration costs were $313,600. 5. Fundraising campaigns raised $630,000, all of which was collected. 6. Salaries of $980,000 were paid for the year. An additional $36,000 of salaries owed for 20X8 were accrued on December 31, 20X8, and paid during early 20X9. 7. Other expenses incurred during the year were $78,400. Of this amount $56,000 was paid; the remainder had not yet been paid as of December 31, 20X8.

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Required: a. Prepare the journal entry(ies) to record the budgeted amounts in the records. b. Assume that THS doest use budgetary accounting and uses encumbrance accounting. Under this assumption (i.e. using encumbrance accounting), prepare the journal entry(ies) for the following events in 20X9. These 20X9 events are not part of any of the 20X8 events described on the previous page.

During 20X8, purchase orders in the amount of $266,000 related to advertising were issued.

During 20X8 the actual amount related to advertising was $ 252,000.

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FA95 Problem: Not for Profit Accounting - Primer Collegiate Primer Collegiate (“PC’) is a children’s school that has not-for-profit status. During 20X8, a wealthy alumnus donated $1,250,000 to PC for the purpose of creating a scholarship fund for needy students. As a stipulation of the donation, the donor requires that the principal amount must be invested in highly secure government and/or corporate bonds. Only the interest on the fund can be used to provide scholarships. For the year ended December 31, 20X8, the following occurred with respect to the scholarship fund:

the fund earned interest of $87,500 scholarships in an amount of $58,000 were awarded to needy students

In addition to the scholarship, another wealthy alumnus donated computer equipment that had a fair value of $ 78,000 on January 1, 20X8. The computer equipment’s useful life is three years, with no residual value at the end of three years. If the computer equipment had not been donated, PC would have purchased it. PC has a policy of capitalizing and amortizing donated capital assets on a straight line basis. Required a. With respect to the scholarship fund, prepare journal entries under the following assumptions: i) The deferral method is used. Assume that there is not a separate endowment fund for the scholarship. ii) The restricted fund method is used. Assume that PC uses a separate endowment fund for the scholarship. b. Prepare all journal entries for the donated computer equipment. Assume that PC uses the deferral method and does not have a separate fund for the donated equipment.

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FA96 Problem: Not for Profit Accounting - Senior Citizen Help Centre The Senior Citizen Help Centre, a not for profit organization located in Assinine City uses encumbrances as a budgetary control tool. Required: 1. Which of the following statements, if any, are true? a) the encumbrance reserve account is credited when a purchase requisition is made b) the encumbrance reserve account is debited when a purchase requisition is made c) the estimated commitments payable account is debited when a purchase requisition is

made d) when an organization records an encumbrance, it has a legal obligation to pay for the

good or service e) none of the above

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FA97 Problem: Financial Statement Ratios - ARG Corporation Using the attached financial statements, calculate the ratios as per requirement 1. Required: 1. Calculate the following ratios:

(a) current ratio (b) quick ratio (c) accounts receivable turnover (d) inventory turnover for 20X8 (e) return on assets, before tax (f) profit margin ratio (g) gross profit percentage (h) asset turnover (i) long term debt to equity (j) interest coverage

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ARG Corporation for the years ended December 31

20X8 20X7

Balance Sheet

Assets Cash $ 7,778 $ - Accounts receivable 275,083 492,271Inventory 429,271 339,773Capital assets (net of accumulated amotization) 879,743 571,399 $1,591,875 $1,403,444Liabilities and Shareholder’s Equity Bank overdraft $ - $184,196Accounts payable 345,474 398,819Current portion of long-term debt 10,706 6,021Long-term debt 834,215 502,198Share capital 295,943 295,943Retained earnings 105,536 16,267 $1,591,875 $1,403,444

Income Statement Sales $918,306 $804,208Cost of goods sold 453,960 421,002 464,346 383,206Depreciation 158,353 122,292Selling and administration 164,560 160,600Interest on long-term debt 67,185 54,999Other 28,211 53,843Income (loss) before taxes 246,037 (8,528)Income taxes (recovery) (43,232) (47,810)Net income $89,269 $39,281

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FA98 Problem: Financial Statement Ratios - Kuehl Company The comparative financial statements for the Kuehl Company are as follows.

Kuehl Company Balance Sheets

as at December 31 … 20x5 20x4 20x3ASSETS

Current Assets

Cash $12,000 $34,000 $25,000 Accounts receivable 275,000 220,000 200,000 Inventory 425,000 340,000 350,000 712,000 594,000 575,000 Fixed Assets – net 1,450,000 1,420,000 1,300,000 $2,162,000 $2,014,000 $1,875,000 LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities $379,000 $371,000 350,000Long-term debt 920,000 850,000 800,000

1,299,000 1,221,000 1,150,000Shareholders’ Equity Common stock 300,000 300,000 300,000 Retained earnings 563,000 493,000 425,000 863,000 793,000 725,000 $2,162,000 $2,014,000 $1,875,000

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Kuehl Company Income Statements

for the year ended December 31 … 20x5 20x4Sales $2,300,000 $1,900,000Cost of goods sold 1,400,000 1,200,000

Gross margin 900,000 700,000Operating expenses 550,000 400,000Depreciation expense 120,000 100,000

Operating Income 230,000 200,000Interest expense 60,000 50,000Net income before taxes 170,000 150,000Income taxes 60,000 52,000

Net income $110,000 $98,000 Required – Prepare a full financial statement analysis for 20x4 and 20x5 for Kuehl Company.

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FMC1 Problem: Financial Managers - MCQ 1. Financial managers have an obligation to undertake some specific activities in the

financial management of the organization. Which of the following best describes these activities? a. Investing and financing b. Investing, financing and funds management c. Financing only d. Liquidity management e. None of the above describe the activities.

2. Treasury management has been added to the traditional roles of the financial manager. Which of the following best describes the functions of treasury management? a. Development of strategies for capital formation b. Planning tax strategies and ensuring compliance in all jurisdictions c. Analysis and interpretation of economic events and their impact on capital

formation d. Cash and funds management activities e. All of the above

3. The Chief Financial Officer (CFO) of the organization has a number of duties to fulfil within the organization. Which of the following is not one of those duties? a. Financial forecasting and planning b. Investment and financing decisions for the organization c. Decisions about suppliers and trade credit terms d. Interaction with capital suppliers and capital markets e. Co-ordination with other, non-financial parts of the organization

4. The financial management goal of the organization is defined as which of the following? a. maximization of profits b. maximization of corporate wealth c. maximization of shareholder wealth d. b. or c. depending on where you live in the world e. none of the above

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5. There are some operational difficulties in maximizing wealth, whether defined as shareholder wealth or corporate wealth. What are the primary difficulties facing the organization in maximizing wealth? a. Valuation of shares is difficult and often inaccurate. b. The point of view with respect to wealth, that is whose point of view to take, is

not clear, leading to conflicting points of view on valuation of wealth. c. Agency issues cause conflicts in valuation of organizations. d. a. and b. are both true. e. All of a., b., and c. are true.

6. Often there are stakeholders other than shareholders and managers that have an impact on organizations. For example political, social and environmental rules can have an impact on the organization. How should financial managers react to these rules? a. Financial managers should do the minimum to meet the requirements of the rules. b. It is incumbent on financial managers to follow not only the letter of the law but

the spirit as well. Therefore, financial managers should go beyond the rules to be “good corporate citizens”.

c. All investments in projects to meet these rules should be considered and evaluated just like any other project requiring capital. Only if the NPV is positive should the project be undertaken.

d. The first consideration should be shareholder wealth, and all such decisions should be considered in the light of this concept.

e. Either a. or b. is possible.

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FMC2 Problem: Time Value of Money - MCQ 1. When a loan of $100,000 is taken from a lender, an agreement is reached that it will be

paid in five equal annual instalments, with an effective interest rate of 8% per annum, beginning in one year. What is the amount of the annual payment? a. $24,389 b. $25,709 c. $25,046 d. $23,191 e. $21,631

2. A loan of $50,000 is to be repaid in equal monthly instalments over 24 months in the amount of $2,353.67. What is the effective annual interest rate on this loan? a. 12% b. 13% c. 12.5% d. 12.7% e. 12.8%

3. An organization has earnings of $5 per share, and 1,000,000 shares outstanding. When

all earnings are paid out as dividends and shareholders require a 15% yield on their investment, what is the value of a share?

a. $30 b. $33.33 c. $36 d. $45 e. $50

4. Assuming the same data as in question 3, if investments are available in the next period requiring that no dividends be paid, at what point are shareholders indifferent as to whether they receive dividends or not? Assume that dividends will be resumed as before in subsequent years.

a. The investments must yield at least the WACC. b. The investments must have long term growth potential. c. The NPV of the investments must be positive at 10%. d. The investments must yield an IRR of 15%. e. None of the above is true.

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FMC3 Problem: Time Value of Money - Retirement Assume that you wish to retire in 30 years from now, and that you will want at least $5,000 per month to live on. To work this out roughly, you decide to assume a $60,000 annual income, received at the beginning of the year, instead. You assume an interest rate of 6% per annum on your investments both before and after retirement. What is the amount that you will have to put away at the end of each year to reach this goal, assuming that you will live 20 years after retirement?

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FMC4 Problem: Time Value of Money - Retirement You have just inherited a large sum of money and you are trying to determine how much you should save for retirement and how much you can spend now. For retirement you will deposit today (January 1, 2000) a lump sum in a bank account paying 10 percent compounded annually. You don't plan on touching this deposit until you retire in five years (January 1, 2005), and you plan on living for 20 additional years and you expect to die on December 31, 2024. During your retirement you would like to receive income of $50,000 per year to be received the first day of each year, with the first payment on January 1, 2005, and the last payment on January l, 2024. Complicating this objective is your desire to have one final three-year vacation during which time you'd like to play golf in Europe. To finance this you want to receive $250,000 on January 1, 2021 and nothing on January 1, 2022, and January 1, 2023, as you will be away. In addition, after you die (December 31, 2024), you would like to have a total of $1,000,000 to leave to your children. Required - How much must you deposit in the bank at 10 percent on January 1, 2000, in order to achieve your goal?

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FMC5 Problem: Time Value of Money - Project A project will generate cash flows of $2,500,000 next year. These cash flows will grow at a rate of 6% per year for 20 years. What is the value of this project if you require a return of 14%?

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FMC6 Problem: WACC - MCQ 1. A firm is trying to estimate its cost of equity capital using two standard models, the

dividend growth model and the CAPM. At the moment, the CAPM approach has provided a value of 13% and the dividend growth approach has provided an estimate of 11%. Which of these two values is correct and why? a. The CAPM approach is correct because it uses market driven factors in the

calculations. b. The dividend growth approach is correct because it is based upon firm specific

information, which is likely to be more reliable. c. Neither approach may be correct. If they were correct, then they would be

approximately the same. Since they differ, it is possible that both are wrong. d. Both approaches could be correct. They are based on different assumptions, and

consequently they are likely to differ because of their differing assumptions. Since the cost of equity is uncertain, either approach could be used.

e. An average of these two values would be the most appropriate as it would capture the best of both estimates.

2. An organization has decided to estimate its cost of equity capital from the dividend

growth model. The following data is known: Expected dividend = $3.30 Anticipated growth rate = 6% Required yield on the market portfolio = 12% Risk free rate = 5.5% Organizational beta = 1.6 Stock price as of today = $30

What is the best estimate of the cost of equity? a. 17% b. 15.9% c. 16.45% d. 11% e. 12%

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3. An organization wishes to estimate its weighted-average cost of capital (WACC) from

the following information. Expected market portfolio return = 12% Risk free rate = 6% Dividend expected = $2 Stock price = $24 Beta value = .9 Expected growth rate = 3% Current yield on debt = 7% before tax Expected marginal tax rate = 40% Preferred share yield = 6% Approximate proportions desired in the capital structure: Debt = .4 Preferred = .1 Common = .5

What is the best estimate of the WACC? a. 7.95% b. 7.98% c. 8% d. 11.4% e. Either a. or b. is correct.

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FMC7 Problem: WACC - JHM Corporation Given the following information, what is JHM Corporation's weighted average cost of capital? Common Stock 2,000,000 shares outstanding Market price = $30 per share ß = 0.90 Preferred shares 100,000 shares outstanding, par value $100 Each share is currently selling for $125 Annual dividend per preferred share = $10 Bonds 25,000 bonds outstanding $1,000 face value for every bond 8% semi-annual coupon, YTM = 10% 10 years to maturity Rm 13% Risk-free rate 6% Tax rate 34%

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FMC8 Problem: Bonds - MCQ 1. A bond, with a face value of $1,000 is selling to yield 8% per annum, compounded semi-

annually. The coupons are payable semi-annually, as well, in the amount of $50. If there are six years to maturity, then what should the current market price of the bond be? a. $1,000.00 b. $1,093.85 c. $1,081.15 d. $1,092.49 e. None of the above

2. The following information is known about the Teall Corporation. It had a dividend last

year of $2.25 per share. Its expected return, based on investor requirements, is 12%. The long run growth rate is expected to be 7%. The expected market return is 10%. What should the approximate value of its share price be in the marketplace? a. $45 b. $32.14 c. $48.20 d. $80.33 e. $120.50

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FMC9 Problem: Bonds - Real Estate Developer A real estate developer has a $100 million bond issue with sinking fund payments required annually every six months, to coincide with interest payments of 9%, payable semi-annually. If the sinking fund payments are to be used to retire the bonds at the maturity date in 10 years, and the funds are to be invested in Government of Canada bonds with 8% coupons payable semi-annually, what amount must be put aside every six months to achieve this goal?

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FMC10 Problem: Bonds You just purchased a bond with a face value of $100,000, a coupon rate of 8% (paid semi-annually), 15 years remaining to maturity at a yield to maturity of 10%. a. How much have you paid for this bond? b. Assume that you sell the bonds in six months (the day after receiving the next coupon

payment) at a yield to maturity of 8%. What was your income and capital gain return on this bond?

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FMC11 Problem: Capital Growth Model - Renfroe a. N = 30, I = 5, PMT = 4,000, FV = 100,000 Solve for PV = $84,628 b. You will sell the bond for $100,000 since the coupon rate = YTM. Income yield = $4,000 / 84,628 = 4.7% Capital gain yield = ($100,000 – 84,628) / 84,628 = $15,372 / 84,628 = 18.2%

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FMC12 Problem: NPV - Emithan Flying Company The Emithan Flying Company (EFC), a small, chartered airline, is reviewing a new capital investment in a computer to upgrade their maintenance facilities. The initial total cash outlay for the system is estimated at $100,000 and includes all hardware, software, and installation. The portion of the total cost that is for the software is $20,000. The salvage value of the system is expected to be $10,000. EFC believes that use of the new system can lead to operational savings of $30,000 per year over the current manual system. The capital cost allowance (CCA) class for the computer hardware is Class 10 (30%) and for the software is Class 12 (100%). The firm also has other assets in these classes. The firm’s tax rate is 40% and their cost of capital is 12%. The useful life is 8 years. Required – Compute the NPV of the new system.

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FMC13 Problem: NPV - Rockyford Co. Rockyford Co. must replace some machinery. The machinery has a book value of $5,000 and its disposal price is $0. One possible alternative is to invest in new machinery that would cost $40,000. The new machinery would produce annual operating savings of $12,500 and would have a useful life of 5 years. The terminal value of the new machinery would have a salvage value of $0. The investment of new machinery would require an additional investment in working capital of $3,000 which would increase by 10% a year. If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new machinery would take place on January 1, 20x6. Rockyford is subject to a 40% income tax rate. Rockyford plans to finance the new machinery partially through debt by taking out a loan of $30,000 requiring annual payments of $8,117.11. The following is the loan amortization schedule: Date Payment Interest Principal Balance Jan 1, 20x6 30,000.00 Dec 31, 20x6 8,117.11 3,300.00 4,817.11 25,182.89 Dec 31, 20x7 8,117.11 2,770.12 5,346.99 19,835.90 Dec 31, 20x8 8,117.11 2,181.95 5,935.16 13,900.74 Dec 31, 20x9 8,117.11 1,529.08 6,588.03 7,312.71 Dec 31, 20x10 8,117.11 804.40 7,312.71 - The new machinery would belong to a special class for purposes of calculating capital cost allowance. This special class allows the fast write-off of equipment over two years on the straight line basis and is subject to the half rate rule, i.e. the machinery would be depreciated 25% in the first year, 50% in the second and 25% in the third. The company's weighted average cost of capital is 12%. Required Calculate the net present value of this proposal.

CMA Ontario P- 300

FMC14 Problem: NPV - Balgava Company Balgava Company plans to replace an old piece of equipment that is obsolete and expected to be unreliable under the stress of daily operations. The equipment is fully depreciated and will have no salvage value. One piece of equipment being considered would provide annual cash savings of $7,000 before income taxes. The equipment would cost $18,000 and would be depreciated on the straight line basis for both book and tax purposes. It would have no salvage value at the end of five years. The company is subject to a 40% tax rate and has a 14% weighed average cost of capital. Assume all operating revenues and expenses occur at the end of the year. Required - a. Calculate the aftertax payback period. b. Calculate the aftertax NPV. c. Calculate the aftertax PI. d. Calculate the aftertax IRR.

CMA Ontario P- 301

FMC15 Problem: NPV - S.W. Appliances Ltd. S.W. Appliances Ltd. (SWA) is a Canadian manufacturer of appliances for the household and commercial markets. SWA markets its products in both Canada and the United States. Over the past 20 years, SWA expanded its operations by acquiring smaller appliance manufacturing companies. In 20x0, SWA operated ten divisions with combined sales of just under $1 billion. Each of the ten divisions is regarded as an investment centre. Managers of each division are responsible for achieving a target divisional return on assets (ROA) of 30%. Divisional ROA is calculated by dividing divisional income (i.e., income before interest, taxes, bonuses and head office administration) by divisional assets (i.e., working capital plus net fixed assets). Divisions that meet or exceed the target ROA are awarded a bonus. The bonus is calculated as 2% of divisional assets for meeting the target plus an additional 1% for each five percentage points of divisional ROA in excess of the 30% target (e.g., 2% for ROA of 30% to 34%, 3% for ROA of 35% to 39%, 4% for ROA of 40% to 45%, etc.). Divisional managers are responsible for distributing the bonus. Most divisional managers distribute the bonus to all divisional employees based on their salary or wage levels. Although the divisions usually achieved the target ROA, the overall corporate profit had steadily declined over the past few years to the point that the corporate after-tax ROA for 20x0 was only 8%. In early January 20x1, the president of SWA called a meeting of his executive committee to discuss short and long-term corporate strategy. President: Corporate ROA has decreased for three years in a row now. When we set up the divisional target a few years ago, I thought that the overall corporate ROA would be at least 12% as long as the average divisional ROA exceeded 30%. Why has the corporate ROA decreased when the average divisional ROA has been greater than 30% in each of the last three years? Controller: My preliminary investigation reveals that some of the older divisions are achieving ROA's of over 40% and that overall interest expenses and total bonuses have increased significantly during the past three years. We should consider charging the divisions for interest and bonuses. We cannot afford to continue paying large bonuses when overall profitability is declining. President: Is there anything else that is causing our declining profitability? VP Marketing: Our market share has been declining steadily. Sales have increased an average of only 5% per year over the past five years while the total appliance market has expanded at a rate of about 10% per year. Divisional managers report that their product quality and pricing are competitive, but their production throughput is too slow to satisfy some of their major customers despite having plenty of available capacity. Some very large accounts have been lost because our divisions could not deliver orders within 10 days of the order being placed.

CMA Ontario P- 302

VP Manufacturing: I've met with divisional managers as well. Most of them feel that production throughput would be vastly improved if their labor-intensive operations were replaced with automated systems. However, they know that the increased asset base will make it close to impossible to achieve the target ROA and, therefore, they would lose their bonuses despite increasing sales and productivity. For example, the Refrigerator division manager and I studied the feasibility of replacing his existing equipment with fully automated, computer controlled equipment (see Exhibit 1). Once the study was complete, the Refrigerator division manager indicated that he would rather live with the current system unless he were guaranteed in writing to receive a bonus of at least 2% of divisional assets. Controller: I've also looked at the possibility of automating all of the divisions' manufacturing processes. It would cost about $30,000,000 which we'd have to raise externally, and now is not the best time to do this. Interest rates are at a peak and our debt:equity ratio would more than double. Currently, our debt:equity ratio is slightly below the industry average. Also, automation will change our fixed:variable cost structure making the company more vulnerable to short-term fluctuations. A project of this magnitude would have to cover a minimum after-tax cost of capital of 12%. President: Well, something has to be done. We've tried in the past to replace old equipment with new equipment without changing the labor-intensive operations despite the protests of divisional managers, but we only accomplished manufacturing cost savings for a short period of time and overall profit growth did not improve. I think it's time to call in a consultant to evaluate our situation. We'll meet again next week to review the consultant's report. Immediately after the meeting, the president contracted Lee Roberts, a management consultant, to review SWA's situation and to provide recommendations to improve overall company profitability. The president particularly requested the following: 1. a calculation of the incremental bonus for the Refrigerator division for each of the next three

years assuming that it automates its operations and that the bonus system remains unchanged (i.e., difference in bonus using the current equipment versus using the automated equipment).

2. a net present value analysis of replacing the Refrigerator division's current equipment with fully automated, computer controlled equipment. As a first step, Lee obtained from the controller projected divisional asset data for the Refrigerator division for the next three years (see Exhibit 2).

CMA Ontario P- 303

REQUIRED: As Lee Roberts, prepare a report to the president of S.W. Appliances Ltd. Your report should include all the information requested by SWA's president as well as any other information or recommendations you feel may be necessary for the future health of the company.

EXHIBIT 1

Feasibility Study for Automating the Refrigerator Division Benefits of Automating 1. The average production time for a single refrigerator (i.e., throughput time) would be

reduced from 14 days to three days resulting in a $2,000,000 reduction in average inventory levels.

2. Quality and cost control would be improved resulting in a reduction of variable costs from 79% of sales to 62% of sales.

3. Complete production scheduling flexibility would result in faster delivery to customers. 4. Better quality control and customer service would result in the expected sales growth

increasing from 8% per year to 20% per year for the next three years. 5. By automating now, the Refrigerator division would be the first in its industry to do so,

giving it a competitive advantage. Costs of Automating 1. Fixed production overhead costs (other than depreciation) would increase to $15,000,000 per

year. 2. Severance pay of $3,300,000 would have to be paid in 20x1, but would be amortized over

three years. 3. Capital costs and related information would be as follows: New equipment - capital cost $50,000,000 - disposal value at end of 3 years $20,000,000 Current equipment - disposal value now $3,000,000 - disposal value 3 years from now NIL Capital cost allowance rate for current and new equipment 20% Corporate effective income-tax rate 40%

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S.W. Appliances Ltd. - Refrigerator Division Budgeted 20x1 Divisional Income Statements

(in '000s) Current Automated System System Sales - 20x0 $100,000 $100,000 Percentage increase in 20x1 8% 20% Sales - 20x1 108,000 120,000 Direct materials 47,520 50,400 Direct labor 27,000 6,000 Variable overhead 5,400 12,000 Variable selling & admin. 5,400 6,000 Total variable costs 85,320 74,400 Contribution margin 22,680 45,600 Depreciation - building 500 500 - equipment 1,000 10,000 Other fixed production costs 4,000 15,000 Severance - 1,100 Fixed selling & admin 8,000 8,000 Total fixed costs 13,500 34,600 Divisional income $ 9,180 $ 11,000 Divisional assets $ 21,240 $ 59,800 Divisional return on assets 43.2% 18.4% Divisional bonus $850 NIL

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EXHIBIT 2 S.W. Appliances Ltd. - Refrigerator Division

Projected Divisional Assets As at December 31 (in '000s)

Current System

20x1 20x2 20x3 Cash $ 6,000 $ 6,000 $ 6,000 Accounts receivable 10,800 11,664 12,597 Inventory 5,000 5,000 5,000 Current assets 21,800 22,664 23,597 Current liabilities (7,560) (8,165) (8,818) Working capital 14,240 14,499 14,779 Building 10,000 10,000 10,000 Accumulated depreciation - bldg. (5,000) (5,500) (6,000) Equipment 15,000 15,000 15,000 Accumulated depreciation - equip. (13,000) (14,000) (15,000) Net fixed assets 7,000 5,500 4,000 Divisional assets $21,240 $19,999 $18,779

Automated System 20x1 20x2 20x3 Cash $ 6,000 $ 6,000 $ 6,000 Accounts receivable 12,000 14,400 17,280 Inventory 3,000 3,000 3,000 Current assets 21,000 23,400 26,280 Current liabilities (8,400) (10,080) (12,096) Working capital 12,600 13,320 14,184 Building 10,000 10,000 10,000 Accumulated depreciation - bldg. (5,000) (5,500) (6,000) Equipment 50,000 50,000 50,000 Accumulated depreciation - equip. (10,000) (20,000) (30,000) Deferred severance 3,300 3,300 3,300 Amortization - severance (1,100) (2,200) (3,300) Net fixed assets 47,200 35,600 24,000 Divisional assets $59,800 $48,920 $38,184

CMA Ontario P- 306

NOTES: 1. Under both systems, a minimum cash balance of $6 million should be maintained. 2. Average accounts receivable amount to 10% of sales and average current liabilities amount

to 7% of sales. 3. Depreciation and amortization are calculated on a straight-line basis.

CMA Ontario P- 307

FMC16 Problem: Discounted Cash Flow and Special Order - Tratter Inc. Tratter Incorporated (“TI’) sells units of a product to retailers, who sell it to the final consumer. The selling price is $22.40 per unit. In recent years TI has been operating at the capacity of the equipment, which is approximately 700,000 units per year. The costs of producing the units is as follows:

Per unit

Material $5.60 Direct labour 4.48 Factory overheads:

Variable 1.68 Allocated fixed 1.12

Equipment depreciation .42 Selling, delivery and administration .56 Total cost per unit $13.86

The selling, delivery and administration costs are specific to the units (i.e. are directly related to the units) and are variable. The equipment used to produce the units is old, and will have to be replaced within the next few years. Its book value is $364,000, although it could be sold on the open market for $42,000. A major retailer that is not a regular customer has approached TI and made a special offer to buy 920,000 units per year for at least four years. These units would be identical to the regular line, except that the packaging would bear the retailers logo and trademark. The retail chain proposes a price of $14.00 per unit. Since TI does not have the capacity to produce the additional units (the proposed special order of 920,000 units) for the large chain store, TI would have to buy new equipment to have the capacity to accept the special order. TI is considering replacing the old equipment with new equipment, which will triple the capacity of the old equipment. The additional capacity would provide sufficient capacity for both the special order and for regular production.

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Information related to the new equipment is as follows: the greater efficiency of the machine would result in a 10% savings in material cost and

25% savings in labour cost. Variable overhead is applied based on direct labour dollars, and with the new equipment

the cost structure relationship between direct labour and variable overhead will not change.

Depreciation, would increase from $.42 per unit to $1.12 per unit There would also be the added cost of the interest on the loan to buy the equipment. The fixed overhead allocation would increase because the allocation is based partially on

the cost of the equipment in use. The selling, delivery and administration cost is less per unit on the special order of

920,000 units by half, but the selling and administration cost of the regular units would not change with the new equipment.

The interest cost is 12% per annum on the $8,960,000 loan that would be required to purchase the new equipment. This loan would be a bank loan, and would have a five year term.

The total cost of the new equipment is $11,200,000. TI's cost of capital is 14% before income tax.

Required Perform the necessary calculations to determine whether TI should accept the special order of 920,000 additional units per year.

CMA Ontario P- 309

FMC17 Problem: Net Present Value – Make or Buy - Tratter Incorporated You work for Tratter Incorporated (“TI”) and are considering three alternatives to replace an outdated machine: (1) building a general purpose machine (2) buying a special purpose machine, which has more features than a general purpose machine (3) buying a general purpose machine Information related to these three separate alternatives is as follows. Alternative 1: Building a General Purpose Machine The machine can be built by the company without affecting current production and revenue producing activity. The machine is estimated to have a useful life of five years and will not have any salvage value at the end of the five years. Costs to build the machine are estimated as follows:

Material and parts $ 132,000Direct labour (DL$) 216,000Variable overhead (50% of DL$) 108,000Fixed overhead (25% of DL$) 54,000 $510,000

Alternative 2: Buy a Special Purpose Machine The special features related to this new machine mean that the company could accept new contracts that it would not have been able to accept with the old machine. This machine requires only one operator, and output per hour increases 25% from the current output per hour. Maintenance costs are also reduced significantly. However, the special features will require extensive training for the operators. The operators will need to spend 26 weeks at the supplier’s location to learn how to operate the equipment. While the company’s operators are being trained, the supplier will provide an operator to run the new equipment. This operator is to be paid the same amount as the current operators (paid by TI). The cost of travel and lodging for the operators while they are receiving training at the supplier’s location, which is located 2000 kilometres away from TI’s facilities, is $ 3000 per week Canadian. The machine cost is $1,500,000, and the supplier guarantees the salvage value of $60,000 at the end of five years. It is available immediately.

CMA Ontario P- 310

The machine cost is $625,000, and the supplier guarantees the salvage value of $25,000 at the end of five years. It is available immediately. Alternative 3: Buy a general purpose machine The price of this machine is $700,000 and costs associated with this machine are the same as the general purpose machine built by the company ( same as alternative 1). However, the salvage value of the machine is much less, and is estimated to be $15,000 in five years time. This machine is available immediately.

Other information is as follows: The current machine has no salvage value and its book value is zero The discount rate before taxes is 8% Additional cost and revenue information for each alternative is provided in the attached

exhibit. Required Determine which alternative is best for the company using NPV. Ignore taxes and the CCA tax shield in your answer. For alternative # 1 assume that the machine would be available immediately (i.e. that there are not any months it be discounted for the time it takes to build the machine.

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Cost and Revenue Information on an Annual Basis1 Alt. 1 Alt. 2 Alt. 3 Build

General Purpose

Equipment

Buy Special Purpose

Equipment

Buy General Purpose

Equipment Supervisor (fixed cost) $ 48,000 $ 48,000 $ 48,000 Operators:

- required 2 1 2 - wages and benefits $28.00/hour $28.00/hour $28.00/hour- standard hours per year per operator, no overtime

2,000 2,000 2,000

Insurance $ 7,200 $ 12,000 $ 7,200 Maintenance 62,400 28,800 62,400 Capacity (sales)2 468,000 585,000 468,000 Direct Materials 46,800 46,800 46,800 Variable Overhead 50% of DL$ 50% of DL$ 50% of DL$ Fixed Overhead (including dep'n) 25% of DL$ 25% of DL$ 25% of DL$ Depreciation Method 5 years 5 years 5 years straight line straight line straight line

1 Assumes single shift operation will continue. 2 The 25% increase in productivity is assumed to result in a 25% increase in sales.

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FMC18 Problem: Capital Budgeting (DCF) - Retil Limited Retil Ltd. is considering purchasing a machine for $350,000. Retil Ltd. estimates it can save $58,000 per year for the next seven years due to increased efficiency resulting from using this machine. In addition, the machine is capable of producing a new product. Retil Ltd. estimates the operating income from this new product to be $11,000 per year for the next 7 years. At the end of 7 years, Retil Ltd. estimates the machine can be sold for $50,000. However, the machine will require major maintenance at the end of year 4 which is estimated to cost $12,600. The machine has a useful life of 12 years, and Retil Ltd. intends on depreciating the machine using the straight line method. The machine is eligible for a CCA tax deduction at 30%. Retil Ltd.’s minimum desired after tax rate of return is 14%. Since Retil Ltd. is not a CCPC, Retil Ltd. is subject to a 40% tax rate. Required: 1. Should Retil Ltd. purchase the machine?

CMA Ontario P- 313

FMC19 Problem: Capital Budgeting (DCF) - Mister Donut Mister Donut Inc. must replace its current donut machines, and has a choice of two different machines: Machine A Machine B Cost of machines $180,000 $220,000Annual maintenance cost of machine 14,000 12,000Useful life of machines 8 years 11 yearsCCA rate 30% 30%Savage value at end of 8 and 11 years respectively $60,000 $75,000Yearly savings due to purchasing new machines $38,000 $56,000 Mister Donut Inc.’s minimum pretax desired rate of return is 20%. Mister Donut Inc. is subject to a tax rate of 40%. Required: 1. Which machine should be purchased?

CMA Ontario P- 314

FMC20 Problem: Capital Budgeting (DCF) - Luna Mining Luna Mining Company Inc. (LMC) was incorporated to develop mineral deposits in Canada’s north. In 19X2, the company discovered a promising quartz ore body in the Northwest Territories just outside the town of Carlsbad. Preliminary sampling indicated high concentrations of several valuable minerals including gold, silver, and platinum. In 20X1, the mine shaft was constructed along with a processing plant and administrative offices. The development of the mine led to the economic revival of the town of Carlsbad. During 20X1, twenty new homes, a sixty-unit trailer park and several new businesses were established. Mining and processing operations began in January 20X2 and have continued without interruption since that date. During 20X3, the company removed 1,200,000 tons of ore from the mine; this level of production is expected to continue for the next twenty-five years. Overall, the company hopes to earn a 15% pretax profit on sales although this has not been met in recent years. The cost of transporting personnel and materials between Carlsbad and the closest railway link during the summer months has become prohibitive. Furthermore, the northern isolation of Carlsbad has resulted in a high turnover of production and administrative personnel. During the winter, food and supplies are brought to the mine and the town of Carlsbad from the town of Fargo on a winter road built over the frozen tundra and lakes. Fargo is LMC’s closest link to a railway line. Once the supply trucks are emptied, processed minerals are loaded for shipment to outside markets. The total cost of winter road transportation was $3,000,000.00 in 20X3. This cost was split equally between LMC and the residents of Carlsbad. During the spring, summer and fall periods, all shipments between Fargo and the mine site have to be made by float plane and helicopter. LMC spent a total of $5,500,000.00 on these flights during 20X3. No figures were available on summer transportation expenditures for local businesses and residents. The high cost of transporting supplies and personnel to the mine site and getting processed minerals to the outside market is of great concern to the management of LMC. They are now considering the option of building a railroad from Carlsbad to Fargo. Preliminary studies have indicated that construction of the railroad would cost $75,000,000.00 and that a train (engine, box cars, caboose, and a passenger car) would cost an additional $15,000,000.00. With the railroad, LMC would be able to charge the residents of Carlsbad for freight and passenger fares for trips to and from Fargo. It is estimated that the revenue collected from freight and passenger fares would amount to $570,000.00 per year. The operating and maintenance costs (not including interest and depreciation) for the railroad would be $240,000.00 and $140,000.00 per year respectively. LMC expects the railroad and train to last for 25 years with no salvage value at the end of that time. Money to finance the purchase of the train and construction of the railroad would be borrowed at a rate of 10% per annum (post tax). The capital cost allowance for the railroad and train are set at 4% and 10% respectively and LMC would depreciate the fixed assets for financial reporting purposes using the straight-line method. Management believes that the railroad would eliminate the need for summer air freight and winter roads between Carlsbad and Fargo. Also, administrative costs ($1,250,000.00 in 20X3) would be reduced by 25% because LMC would no longer have to pay large isolation bonuses to key personnel. The effective corporate tax rate is 40%

CMA Ontario P- 315

If construction were to begin in the summer of 20X4, the railway would be ready for use by January 20X5. Before such a railroad could be built, LMC would have to obtain permission from the Territorial government and the town councils of Carlsbad and Fargo. It appears that there may exist some opposition to this proposal from some members of the councils and various levels of government. Everyone is concerned about the impact of the railroad on the caribou calving grounds. On the other hand, it appears that building the railroad would create new employment opportunities in both towns and stimulate growth throughout the region. LMC has petitioned the federal government for a 50% subsidy to offset the costs of building the railroad and buying the train. Early indications are that this request may be approved if approval is obtained from all other concerned parties. Should the subsidy be granted, LMC would receive all revenue and incur all operating and maintenance costs of the railroad and train. However, only the cost of the railroad and train after the subsidy would be subject to depreciation and capital cost allowance. Required: 1. Analyze the economic feasibility of building the railroad. (Source: CMA Adapted)

CMA Ontario P- 316

FMC21 Problem: Mergers & Acquisitions - MCQ 1. In a merger or acquisition, there are significant, tax implications for the

shareholders of both the acquired and the acquiring organizations. What is likely to cause these tax consequences for the shareholders of the acquired organization? a. An acquisition that involves acquiring stock or assets is generally taxable for the

acquiring organization but does not affect the acquired organization. b. An acquisition that involves payment with debt securities or cash has the

possibility of creating tax consequences for the shareholders of the acquired organization.

c. An acquisition that involves a merger or amalgamation of two firms has significant tax consequences for the acquired organization.

d. The exchange of shares in an acquisition has severe tax consequences for the acquired organization’s previous owners.

e. There are no tax consequences for either the acquired organization or the acquiring organization if they are both Canadian.

2. Which of the following statements best represents the differences among horizontal,

vertical and conglomerate acquisitions. a. Horizontal acquisitions involve similar types of organizations, while

conglomerate acquisitions do not. Vertical acquisitions involve acquisitions of foreign organizations in the same lines of business.

b. Vertical acquisitions involve extending the organization’s ownership to suppliers or distributors of its products and services or to other parts of the production or distribution process. Conglomerate acquisitions involve related businesses, while horizontal acquisitions involve unrelated organizations.

c. Conglomerate acquisitions involve the acquisitions of unrelated businesses, while horizontal acquisitions involve acquiring organizations in the same or closely related lines of business. Vertical acquisitions involve a combination of a horizontal and conglomerate acquisitions at the same time.

d. Conglomerate acquisitions involve the acquisitions of unrelated businesses, while horizontal acquisitions involve acquiring organizations in the same or closely related lines of business. Vertical acquisitions involve extending the organization’s ownership to suppliers or distributors of its products and services or to other parts of the production or distribution process.

e. None of the above statements is a true representation.

CMA Ontario P- 317

3. Two all equity firms are combining. Firm A has total earnings of $2 million, shares outstanding of 1 million, and a share price of $30. Firm B has total earnings of $1 million, shares outstanding of 1 million and a price per share of $20. Firm A is offering Firm B’s shareholders a total of 500,000 of its shares for all of Firm B’s shares. This will be a friendly amalgamation, and the value of the combined organization after the amalgamation will be $55 million. What will be the price per share, EPS, and P/E ratio for the combined organization? a. Price = $25, EPS = $1.50, P/E ratio = 16.67 b. Price = $30, EPS = $2, P/E ratio = 15 c. Price = $20, EPS = $1, P/E ratio = 20 d. Price = $36.67, EPS = $2, P/E ratio = 18.33 e. These calculations are not possible with the information provided.

4. A number of possible sources of gains exist in the event of synergies from acquisitions.

What are these possible sources of gains? Select the most appropriate items from the following list. a. Revenue enhancement b. Cost reduction c. Tax gains d. Both a. and b. e. All of a., b. and c.

5. The principles of business valuation involve consideration of many different aspects of

the acquired and acquiring firms. Of the following items, which are most likely to be significant in the valuation process? a. Risk and growth prospects b. Historical information about and locations of the organizations involved c. Management efficiency and capabilities d. Both a. and c. e. All of the above

CMA Ontario P- 318

FMC22 Problem: Business Valuation - Organizations A & B The following information is available with respect to Organizations A and B, as they consider merging in a friendly amalgamation.

Organization A Organization B Market value of assets $10 million $12 million Market value of debt $2 million $6 million Earnings (latest year) $500,000 $400,000 Price/Earnings Ratio 24 30 Expected cash flows (Next year) $900,000 $750,000 Expected Yield 12% 16% Expected Growth Rate Of Cash Flows 6% 1% Provide an estimate of the market value of the assets of the combined organization, the estimated value using the earnings method, and the estimated value of the expected future cash flows. Assume no synergies are available. What is the likely range of values of the combined organization?

CMA Ontario P- 319

FMC23 Problem: Long Term Financing - MCQ 1. There are a number of advantages to going public in an initial public offering (IPO).

These advantages include which of the following?

a. Shareholder diversification b. Increased liquidity c. An established value for the firm d. Only a. and b. e. All of a., b. and c.

2. Which of the following are disadvantages of going public?

a. Disclosure requirements b. Prevention of self-dealing c. Thin trading of shares d. Increased costs e. All of the above.

3. In the small organization, the primary source of funds is:

a. Chartered banks. b. Trade credit. c. Commercial paper. d. Government subsidies. e. Both a. and b.

CMA Ontario P- 320

FMC24 Problem: Forecasting - Howard Company Given the following information about the Howard Company, estimate its expected financing needs in the next fiscal period.

Sales 4,000 Current Assets 600 Cost of Sales 3,200 Fixed Assets 2,600 Operating Income 800 Total Assets 3,200 Taxes (40%) 320 Net Income 480 Current Liabilities 400 Dividends Paid 240 Long-term Debt 1,000 Owners’ Equity 1,800 Total Liabilities and Owners’ Equity 3,200

Sales growth is expected to be 15%, and the percentage of sales method* is used to forecast financing needs. The dividend pay out ratio is expected be the same in the next period. Tax rates will not change, and the fixed assets are being used at full capacity.

* cost of sales, current assets, fixed assets and current liabilities will grow at the same rate as the increase in sales

CMA Ontario P- 321

FMC25 Problem: Long Term Financing - HWB Company The HWB Company has the following ratios applicable to its income statements and balance sheets:

Assets/Sales 1.2 Liabilities/Sales 0.6 Profit Margin 12% Dividend Pay Out Ratio 60% Most Recent Year’s Sales $100 million

What is the maximum sales growth that can be achieved without resorting to an increase in long-term debt, assuming that these ratios will remain constant?

CMA Ontario P- 322

FMC26 Problem: Short Term Financing - Trade Discounts What is the cost of not taking a discount if the terms of payment are as follows? a. 3/15, net 60 b. 2/10, net 30 Which is better from the point of view of the trade credit grantor, and why?

CMA Ontario P- 323

FMC27 Problem: Long Term Financing - Rights A firm has the opportunity to issue a rights-offering to provide $30 million for some urgently needed computer technology upgrades. The current share price is $40, and 5 million shares are outstanding. If the price per share in the rights offering will be $30, what is the value of a right and the ex rights price of the shares?

CMA Ontario P- 324

FMC28 Problem: Financial Markets - MCQ 1. Financial markets depend on market efficiency and arbitrage to develop accurate

valuations for securities. How, if at all, do these concepts assist in valuation of securities? a. Market efficiency implies the inclusion of all relevant information in security

prices, and arbitrage is just another way of saying that the law of one price applies to security pricing, so that the same or similar securities have essentially equal prices in different markets or market segments.

b. Market efficiency is not necessary for security pricing, but arbitrage is necessary for prices to be equal in different markets or market segments where the same or similar securities are sold.

c. Market efficiency is likely to exist in a complete sense in financial markets, and arbitrage is not necessary.

d. If market efficiency exists, then arbitrage is implied in the concept of efficiency, and the two are really the same concept. Therefore, market efficiency is all that is needed.

e. Neither market efficiency nor arbitrage is necessary for accurate and reliable security valuation.

2. The financial markets consist of many components, including money markets, capital markets, primary and secondary markets, and derivative securities markets. What differentiates the derivative securities markets from the other components of the financial markets? a. Derivative securities markets are markets where speculators take uncovered

positions in various options, futures or swaps to provide liquidity for the derivative securities markets.

b. Derivative securities markets are markets where the securities are derived from various underlying securities. Thus, they do not supply additional capital to the financial markets, but provide risk reduction tools for financial managers.

c. Derivative securities markets provide specialised forms of capital for organizations, which would not be available in the conventional financial markets around the world.

d. Derivative securities markets are international in scope, and they involve large, international banks and other financial institutions.

e. Derivative securities markets in Canada are centred in Montreal, and they provide Canadian organizations access to a number of exotic sources of additional capital by connecting with other derivative securities markets around the world.

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3. Options, forward contracts, and futures contracts differ in some rather important ways. What are these differences? a. Options provide a right but not an obligation, while both forward contracts and

futures contracts are obligations. b. Options provide the right to buy (call option) or to sell (put option) a security or

commodity, while forward contracts and futures contracts lock in prices on commodities or securities, for future delivery.

c. A long forward or futures position is like a call option, while a short forward or futures position is like a put option, except that the option is a right but not an obligation.

d. The holder of the option always exercises the option; but forward contracts and futures contracts are usually settled before their expiry dates in cash.

e. All of a., b. and c. are true.

4. Compute the required return on the following security using the security market line (SML). The security has a beta of 1.2. The risk free rate is 6%, and the expected return on the market portfolio is 12%. What is the estimated required return? a. 12% b. 14.4% c. 13.2% d. 20.4% e. It cannot be computed from the information given.

5. A number of methods are used to measure the risk of a security. One of the most common is to the look at the dispersion of its return. What measures of dispersion are commonly used to measure portfolio risk? a. standard deviation b. variance c. coefficient of variation d. variance and covariance e. all of the above

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FMC29 Problem: EOQ - English Bread Company The English Bread Company buys 5.2 million tonnes of wheat annually. The wheat is purchased in multiples of 10,000 tonnes. Ordering costs, including removal costs, are $8,000 per order. Annual carrying costs are 2% of the purchase price per tonne of $250. A safety stock of 150,000 tonnes is maintained. Delivery takes 4 weeks. Compute the economic order quantity (EOQ) and the level of inventory at which an order should take place to prevent drawing down the safety stock.

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FMC30 Problem: Short Term Financing - Zachariah Inc. Zachariah Inc. is proposing a change in its credit policy that would relax credit terms from the existing terms of 1/10, net 30 to 2/20, net 40 in the hopes of securing new sales. The following information is available:

New sales level (all credit) $12,000,000 Original sales level (all credit) $10,000,000 Contribution margin ratio 40% Percent bad debt losses on new sales level 4% Percent bad debt losses on original sales level 3% New average collection period 26 days Original average collection period 15 days WACC 10% Cost of goods sold as a percentage of sales 70% Inventory turnover on new sales level 7 Inventory turnover on original sales level 5 Tax rate 40%

What is the net annual benefit of changing to the new credit policy?

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FMC31 Problem: Leverage An organization is a single product firm selling a product at $20 per unit, with fixed costs of operations of $1 million and variable costs per unit of $10. The firm is paying $500,000 of interest charges on its debt. Compute the degree of operating leverage and the degree of financial leverage and the degree of combined leverage for this organization for a sales level of 200,000 units. What does the value of the degree of combined leverage imply about the increase in the earnings per share if total sales increase?

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FMC32 Problem: Leverage

An organization has the option of financing an expansion project with one of the following three alternatives:

a. debt financing at 8% in the amount of $20 million b. common share financing to net $20 per share, with the issue of 1,000,000 new

shares, to add to the 1.5 million existing shares c. preferred share financing at 6% in the amount of $20 million.

The organization has no existing debt, and it expects operating earnings before taxes to be $4.3 million in the next year. Taxes are 40% on income. For each of the three alternatives, what is the estimated EPS? Which is the best alternative? If the operating income decreased to $1.3 million, would this have any impact on the decision?

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FMC33 Problem: Leverage - Wasu Company The Wasu Company’s statement of income for the year ended December 31, 20x6 is as follows:

Sales $2,000,000Variable costs 1,200,000Contribution margin 800,000Fixed costs 350,000Operating Income 450,000Interest expense 150,000Net income before taxes 300,000Income taxes 90,000Net income $210,000

Required – a. Calculate the Wasu Company’s (i) degree of operating leverage, (ii) degree of financial

leverage and (iii) degree of total leverage. b. Assume that sales for the year 20x7 are expected to increase by 15%

over 20x6. Prepare a projected statement of income for 20x7 and explain how the calculation in part (a) relate to the increased numbers in your projected statement of income.

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FMC34 Problem: Capital Structure It is often said that a firm should select its optimal capital structure and maintain it. How is the optimal capital structure defined and under what conditions would it exist? a. The optimal capital structure is one that maximizes shareholder wealth, and it exists when

there are no taxes, transaction costs or other frictions in the financial markets. b. The optimal capital structure is the one that minimises the weighted- average cost of

capital (WACC), and it exists when the cost of equity capital is estimated with the Capital Asset Pricing Model (CAPM).

c. The optimal capital structure is the one that minimises the WACC, and it exists when the tax advantages of debt are maximized and when the costs of financial distress are not significant.

d. The optimal capital structure does not exist for an organization, and there are no conditions under which it will exist.

e. The optimal capital structure depends on the cultural environment, and as such it exists only when all of the various stakeholders agree that it exists.

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FMC35 Problem: Capital Structure The market value of a firm with $500,000 of debt is $1,700,000. EBIT are expected to be a perpetuity. The pretax interest rate on debt is 10 percent. The company is in the 40-percent tax bracket. If the company was 100-percent equity financed, the equityholders would require a 20-percent return. a. What would the value of the firm be if it was financed entirely with equity? b. What is the net income to the shareholders of this levered firm?

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FMC36 Problem: Capital Structure An all-equity firm is subject to a 40-percent corporate tax rate. Its equityholders require a 20-percent return. The firm's initial market value is $3,500,000, and there are 175,000 shares outstanding. The firm issues $1 million of bonds at 10 percent and uses the proceeds to repurchase common stock. Assume there is no change in the costs of financial distress for the firm.According to MM, what is the new market value of the equity of the firm?

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FMC37 Problem: Capital Structure - RR Company RR Company, an all-equity firm, generates perpetual earnings before interest and taxes (EBIT) of $2.5 million per year. RR's after-tax, all-equity discount rate is 20 percent. The company's tax rate is 40 percent. a. What is the value of RR? b. If RRadjusts its capital structure to include $600,000 of debt, what is the value of the

firm? c. Explain any difference in your answers. d. What assumptions are you making when you are valuing Streiber?

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FMC38 Problem: Capital Structure - Simard Company The Simard Company has perpetual EBIT of $4 million per year. The after-tax, all- equity discount rate r0 is 15 percent. The company's tax rate is 40 percent. The cost of debt capital is 10 percent, and Nikko has $10 million of debt in its capital structure. a. What is Simard's value? b. What is Simard's WACC? c. What is Simard's cost of equity?

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FMC39 Problem: Financial Management - Corporate Finance MCQ 1. Which of the following is NOT accurate?

A. To calculate the expected risk premium one needs to compute the expected return on the risky asset and the certain return on the risk free asset

B. The risk premium is the difference between the return on a risky asset and on the market portfolio

C. The expected return on an asset is equal to the sum of the possible returns multiplied by their probabilities

D. Comparison of two different risky assets is often made easier by computing the expected return on each

E. Expected returns depend on the expected states of the economy and their associated probabilities

2. Which of the following is NOT true about computing expected portfolio return and variance?

A. You need to calculate the weight of each asset relative to the total portfolio to compute the portfolio return, but not to compute the portfolio variance

B. Portfolio return can be calculated with the expected return and weight of each asset C. You can use the portfolio return to help compute the portfolio variance D. The portfolio return and variance are dependent on the possible states of nature E. The portfolio variance is not generally a weighted average of the variances of the assets

in the portfolio 3. If the actual return on an investment is equal to the expected return, then it is likely that:

A. when investors estimated the expected return they incorrectly weighed all of the information that they believed would bear on the investment.

B. interest rates changed unexpectedly after the expected return was computed. C. even though the expected return was incorrect, the normal return was estimated

accurately. D. some anticipated information about the investment was revealed after the expected return

was computed. E. investors used all relevant information that was available when computing the expected

return.

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4. Diversification works because: I. unsystematic risk exists. II. grouping stocks into a portfolio guarantees a positive return on investment. III. market risk can be reduced if not eliminated. A. I only B. II only C. III only D. II and III only E. I, II, and III

5. Which of the following is another description for systematic risk?

A. Unique risk B. Market risk C. Company specific risk D. Diversifiable risk E. Asset risk

6. Which of the following statements regarding beta is NOT true?

A. It is a measure of systematic risk B. A beta that is less than one represents lower systematic risk than a beta greater than one C. Generally speaking, the higher the beta the higher the expected return D. A beta of one indicates an asset is totally risk free E. The risk premium of an asset will increase if the beta of that asset increases

7. The CAPM shows that the expected return for a particular asset depends on:

I. the amount of unsystematic risk. II. the reward for accepting systematic risk. III. the pure time value of money. IV. the amount of systematic risk.

A. I only B. II on1y C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

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8. The appropriate discount rate on a new capital investment is

I. the minimum expected rate of return the investment must earn to be accepted. II. the cost of capital. III. the rate of return capital investments of similar risk earn in the market. IV. the internal rate of return on the project. A. II only B. III only C. I, II, and III only D. I, II and IV only E. I, II, III, and IV

9. You are looking at two different stocks. Cara Limited has a beta of 1.25 and Smith

Incorporated has a beta of .95. Which statement is true about these investments?

A. Cara Limited is a better addition to your portfolio B. Smith Incorporated is a better addition to your portfolio C. The expected return on Cara Limited will be the lower of the two D. The expected return on Smith Incorporated will be the higher of the two E. The stock in Smith Incorporated has a lower risk premium than Cara Limited.

10. Which of the following would be included in unsystematic risk?

I. Lower trade deficit than expected II. Higher GDP than expected III. IBM, a public company, has lower sales than expected A. I only B. II only C. III only D. I and II only E. I, II, and III

11. Which of the following would be included in systematic risk?

I. Higher than expected research and development costs for a pharmaceutical comapny II. Lower interest rates than expected III. Lower sales than expected for a retail chain store A. I only B. II only C. III only D. I and III only E. I, II, and III

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12. Which of the following would increase a company's systematic risk?

I. The company increases its debt to equity ratio. II. Higher interest rates than expected. III. The company's CEO is unexpectedly killed in an automobile accident. A. I only B. II only C. III only D. I and II only E. I, II, and III

13. All else being equal, actions or events that cause a company’s returns to be more highly

correlated with the changes in the economy will (increase/decrease/not affect) the company's systematic risk.

A. increase B. decrease C. not affect

14. Which of the following pairs of terms are synonymous?

I. Unsystematic risk and diversifiable risk II. Market risk and nondiversifiable risk III. Total risk and beta A. I only B. II only C. III only D. I and II only E. I, II, and III

15. No matter how many risky assets a person invests in, _____________ risk can never be

eliminated. I. unsystematic II. market III. systematic IV. nondiversifiable A. I only B. II only C. III only D. IV only E. II, III and IV only

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16. An asset's systematic risk is measured by its:

A. standard deviation of returns B. expected return C. variance of returns D. unexpected component of returns E. beta

17. What is the expected return on asset A if it has a beta of 1.3, the expected market return is

14%, and the risk-free rate is 6%?

A. 7.8% B. 9.0% C. 14.0% D. 15.0% E. 16.4%

18. What is the expected market return if the expected return on asset A is 16% and the risk-free

rate is 7%? Asset A has a beta of .9.

A. 9% B. 10% C. 14% D. 17% E. 20%

19. Asset A has an expected return of 18% and a beta of 1.4. The expected market return is 14%. What is the risk-free rate?

A. 0.6% B. 1.2% C. 3.0% D. 4.0% E. 6.0%

20. Asset A has an expected return of 15% and a beta of .95. The risk-free rate is 5%. What is the

market risk premium?

A. 1.72% B. 8.75% C. 10.53% D. 12.00% E. 13.57% 21. Using the information below, which security has the greatest expected return?

Standard Deviation Beta Security X 35% 1.75 Security Y 68% 1.06 Security Z 24% 1.22

The risk premium is positive on security X, Y and Z.

A. Security Y, because it has the largest standard deviation B. Security X, because it has the largest beta coefficient C. Security Z, because it has the smallest standard deviation but a large beta coefficient D. It is not possible to determine, given the information provided

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22. Suppose you purchase a zero coupon bond for $664.08 that has a face value of $1,000, and matures in eight years. What is the implicit interest, in dollars, paid in the first year of the bond’s life?

A. $34.86 B. $38.84 C. $44.55 D. $45.01 E. $52.50

23. Prime Incorporated intends on issuing ten 15-year, $1,000 zero-coupon bonds. If each bond has a yield of 10%, how much will Prime Incorporated receive when the bonds are issued? Ignore issuance and flotation costs.

A. $ 1,200.00 B. $ 1,827.00 C. $ 2,393.92 D. $ 8,880.00 E. $10,000.00

24. What is the yield-to-maturity on a 15-year, $1,000, zero coupon bond, that currently has a market value of $375.39?

A. 4.40% B. 5.60% C. 5.97% D. 6.75% E. 7.32% 25. When the shares in a public company lose value as a result of the company issuing additional

shares, the shareholders in the company have suffered from ________________.

A. a rights offering B. indirect issuance costs C. dilution D. ex rights E. excessive spread

26. An arrangement between a bank and a business that allows the business to periodically

borrow up to a pre-specified limit, without specified repayment terms for the principal, is a:

A. long-term loan commitment. B. operating line of credit. C. compensating balance. D. field warehouse financing. E. credit guarantee

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27. Which of the following is NOT true?

A. A line of credit is an agreement under which a firm is authorized to borrow up to a specified amount

B. A secured line of credit does not have any collateral requirements C. In a factoring arrangement, the default risk on the accounts remains with the seller of the

accounts receivable D. A compensating balance requirement tied to a loan arrangement raises the effective

interest rate the borrower must pay on the loan E. As a business owner and regular short-term borrower, it would generally be more

comfortable to have an operating line of credit than a collateralized mortgage 28. A company is experiencing short-term cash flow problems. The easiest means to resolve this

problem is:

A. applying for a line of credit. B. drawing on an existing, unused line of credit. C. issuing new long-term bonds. D. drawing on their good credit rating to apply for a short-term unsecured loan. E. drawing on their good credit rating to apply for a secured loan.

29. Abril Limited, a large company, is attempting to do things: 1) raise badly needed cash, and

2) reduce the level of its accounts receivable. Which of the following options would best meet both of these needs simultaneously?

A. obtaining an unsecured short-term loan. B. assigning its receivables on a short-term loan. C. factoring its receivables. D. applying for a line of credit. E. securing any short-term credit with an inventory lien.

30. A large company with a strong credit rating needs to borrow money for the next 90-180 days.

The company would likely obtain the best interest rate by:

A. obtaining an unsecured line of credit. B. factoring its receivables. C. issuing commercial paper. D. obtaining a loan secured by its inventory. E. issuing long term bonds

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31. Which of the following is a source of cash?

I. Issuing commercial paper II. Reducing accounts payable III. Factoring accounts receivable IV. Selling inventory on credit

A. I only B. III only C. I and III only D. II and III only E. I, III and IV only

32. Which of the following is a use of cash?

I. Increasing accounts payable II. Factoring accounts receivable III. Reduction of inventory that results from increased sales IV. Retiring short-term loans A. I only B. IV only C. I and IV only D. II and III only E. III and IV only

33. A company is preparing a short-term financial plan. Which of the following questions would

the firm most likely NOT consider when creating the plan?

A. How much cash should be kept on hand B. Should the company cancel and redeem its outstanding bonds C. How much short-term borrowing should be employed D. How much credit should be extended to customers E. Whether the company should the firm issue commercial paper or apply for a short-term

bank loan

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34. Assuming a beginning current ratio higher than 1.0, which of the following activities will

decrease net working capital? I. Sale of inventory (at book value) on credit II. Using cash to pay off short-term note III. Selling marketable securities in order to pay dividends

A. I only B. II only C. I and II only D. I, II, and III E. III only

35. The period of time required for the firm to acquire inventory, sell the finished goods, and

collect the accounts receivable is called the:

A. accounts receivable period B. inventory period C. accounts payable period D. cash cycle E. operating cycle

36. ____________ fall with increases in the level of inventory, while ____________ increase

with increases in the level of inventory.

A. Carrying costs; shortage costs B. Shortage costs; carrying costs C. Carrying costs; stock out D. Shortage costs; order

37. Tyler Limited needs to raise cash quickly. The CFO has arranged for Tyler Limited to sell receivables with a face value of $1,000,000 to Canada Bank Group for $940,000, payable immediately. Under the agreement, Canada Bank Group is responsible for collecting the receivables. This is an example of:

A. assignment of receivables B. a line-of-credit security arrangement C. a conventional factoring arrangement D. a maturity factoring arrangement E. an assigned factoring arrangement

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38. Your company purchased a piece of land seven years ago for $150,000 and subsequently incurred $75,000 in improvements. The current book value of the property is $225,000. There are three options for the future use of the land: 1) the land can be sold today for $375,000; 2) the land can be leased to another party on a long-term basis; or 3) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?

A. The present book value of $225,000 B. The sales price of $375,000 C. The sales price of $375,000 less the book value of the improvements since they will be

destroyed anyway D. Whichever amount represents the greatest opportunity cost, that is, the best alternative

use you must forgo in order to build the factory E. The property should be valued at zero since it is a sunk cost

39. A capital investment which results in the company “breaking even” financially is an

investment which meets which of the following: I. Accounting rate of return = Return on Equity II. Net Present Value = 0 III. Net income = 0 IV. Debt to equity ratio = 1.0

A. I only B. II only C. I, III, and IV only D. III only E. I, II, III,

40. A machine costs $60, and requires $35 in maintenance for each year of its 3-year life. After 3

years, this machine will be replaced. Suppose that the machine is depreciable on a straight-line basis over its three-year life to a salvage value of $15. It will be sold for $15 after 3 years. Assuming a tax rate of 34% and a discount rate of 14%, what is the NPV for the machine?

A. -$113.63 B. -$126.27 C. -$131.15 D. -$98.63 E. -$103.51

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41. Your company currently sells regular furniture. The Controller has asked you to analyze introducing a new line of high end furniture. Which of the following are relevant costs? I. $200,000 spent on Research and Development last year on high end furniture. II. Land you already own, but which may be used for the project, which has a market

value of $700,000. III. $300,000 drop in sales of regular furniture if oversized rackets are introduced.

A. I only B. II only C. III only D. I and III only E. II and III only

42. Which of the following is a valid reason for leasing?

A. Taxes may be reduced by leasing B. Off-balance sheet financing for operating leases C. May result in higher income D. It can provide 100% financing E. All of the above are valid reasons for leasing

43. Which of the following is NOT a benefit of leasing?

A. Taxes may be reduced by leasing B. Reduces future obsolescence risk for the leased asset C. Leasing may encumber fewer assets than borrowing D. Leasing is an alternative method to obtain financing E. A capital lease increases the debt to equity ratio

44. In terms of riskiness, lease cash flows are most similar to the lessee’s cash flows attributable

to _____________.

A. unit sales B. net income C. employee labour costs D. common equity financing E. debt financing

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45. Which of the following is the relevant rate for evaluating a lease from the viewpoint of the lessee?

A. The cost of issuing new common stock B. The pre-tax cost of issuing debt C. The after-tax cost of issuing debt D. The firm's cost of capital E. The cost of retained earnings

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Use the information below to answer questions 46 to 50. You work for a golf course, Sunny Golf Limited, that is considering leasing a fleet of golf carts to carry golfers around the golf course. These carts qualify for a 40% CCA rate. Because of their heavy use, they have no value after 5 years. The carts could be leased for $12,000 per year for five years or purchased now for $48,000. Further, a 10% pretax cost of capital and a 40% tax rate is applicable to all parties involved in the lease. Assume the purchase and lease payments are made at the beginning of the year (@ T=0, T=1, etc.) and CCA tax shield is taken at the end of each year. 46. Given the above information, should you lease or buy? For this question only, ignore the CCA half year rule.

A. Lease, it saves you $372. B. Buy, it saves you $15,954. C. Buy, it saves you $8,052. D. Buy, it saves you $372. E. Lease or buy, it doesn't matter. Because of taxes, they are the same.

47. If Sunny Golf Limited decided to lease, what are the cash flows in the first year (T=0) and

the fifth year (T=4)? first year fifth year A 36,960 -5,949 B. 37,179 -5,949 C. 36,960 -4,073 D. 37,179 -4,073 E. 36,960 4,073

48. What would the lease payments have to be for both the lessee and the lessor to be indifferent

to the lease?

A. $11,200 B. $11,861 C. $12,800 D. $14,954 E. $17,917 49. Assuming Sunny Golf Limited pays no taxes, what are the cash flows for Sunny Golf

Limited in the first year (T=0) and fourth year (T=3)?

first year fourth year A -$48,000 $0 B. $48,000 $0 C. $36,000 $0 D. $36,960 $1,992 E. -$36,960 $1,992

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50. Assuming Sunny Golf Limited pays no taxes, at what lease payment would the lease begin to

be profitable for Sunny Golf Limited?

A. $9,455 B. $11,511 C. $11,833 D. $12,265 E. $13,993 ============ 51. You work for a laundry delivery service that is considering leasing a fleet of trucks. These

trucks qualify for a 40% CCA rate. Because of their heavy use, they have no value after 5 years. You could lease them for $5,700 per year for five years or purchase them now for $22,500. Further, a 10% pretax cost of capital and a 30% tax rate is applicable to all parties involved in the lease. Assume the first payment was made at T=0. Should you lease or buy?

A. Lease, it saves you $561 B. Buy, it saves you $8,250 C. Buy, it saves you $562 D. Lease, it saves you $8,250 E. Lease or buy, it doesn't matter. Because of taxes, they are the same.

52. Which of the following is NOT accurate regarding the dividend growth model approach to

estimating the cost of equity capital?

A. A key advantage to this model is its low degree of complexity B. The results from this model are not sensitive to changes in the dividend growth rate C. One method of estimating future growth rates is the use of historical growth rates D. The model works particularly well for companies who maintain a reasonably steady

growth in dividends E. This model does not explicitly consider risk

53. A company that uses its WACC as a hurdle rate without considering the risk involved in a investments will

I. tend to become riskier over time. II. tend to accept unprofitable projects over time. III. likely see its WACC rise over time. IV. tend to accept projects with risks lower than those of existing operations.

A. I and II only B. II and III only C. I, II and III only D. I, II and IV only E. II, III and IV only

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54. When a company estimates the cost of capital for each of its divisions for the first time, it

will likely find

A. that the divisions are being rewarded for decreasing their risk. B. that higher earning divisions will be less risky than the lower earning divisions. C. that a low earning division will be ignored in capital allocation even though it tends to

maintain lower levels of risk. D. that its divisions are of basically the same risk. E. that the highest divisional cost of capital will approximately equal the firm's overall cost

of capital. 55. Which of the following are potential problems associated with the use of the dividend growth

model to compute the cost of equity? I. The estimated cost of equity is sensitive to the estimated dividend growth rate. II. The approach does not explicitly consider risk. III. The approach requires one to assume that the dividend growth rate will remain

constant.

A. I only B. III only C. II only D. I and III only E. I, II and III

56. Big Money Limited’s common stock is currently selling for $37.86 per share. You expect the

next dividend to be $5.30 per share. If the company has a dividend growth rate of 6%, what is its cost of equity?

A. 12.50% B. 13.40% C. 16.75% D. 18.50% E. 20.00%

57. Treasury bills currently have a return of 8%. The market risk premium is 9%. If Firm A has a

Beta of 1.35, what is its cost of equity?

A. 4.78% B. 9.42% C. 12.78% D. 20.15% E. 20.78% 58. EDI Institute sold a 20-year bond issue 8 years ago. It pays a 10% annual coupon and has a

$1,000 face value. If the current price per bond is $1,110.17, what is the cost of debt?

A. 8.0% B. 8.6% C. 9.0% D. 10.0% E. 10.5%

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59. Weiller LImited has preferred stock outstanding which pays a dividend of $4 per share a

year. The current price is $50.00 per share. What is its cost of preferred equity?

A. 8.0% B. 9.0% C. 10.0% D. 11. 0% E. 12.5% Use the information below to answer question 60 and 61. Johanson Manufacturing is considering an investment in new manufacturing equipment. The equipment costs $200,000 and will provide annual after-tax inflows of $40,000 at the end of each of the next 7 years. The firm's debt-to-total assets ratio is 50%, its cost of equity is 14% and its pre-tax cost of debt is 8%. The firm's tax rate is 40%. Assume the project is of approximately the same risk as the firm. 60. What is the weighted average cost of capital?

A. 11.0% B. 9.4% C. 8.6% D. 7.4% E. 6.0%

61. What is the NPV of the proposed project?

A. $ 80,000 B. $ 64,117 C. -$ 1,356 D. -$ 23,232 E. -$ 65,726

========= 62. A company is considering a project that will generate perpetual cash flows of $30,000 per

year beginning next year. The project has the same risk as the firm's overall operations and must be financed externally. Equity costs 16% and debt costs 7%. The firm's debt/equity ratio is 1.5. What is the most the firm could pay for the project and still earn its required return?

A. $275,027 B. $283,019 C. $302,539 D. $303,216 E. $1,250,000

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63. Which of the following is accurate regarding financial leverage?

A. Whenever a company’s debt increases faster than its equity, financial leverage decreases B. Leverage is most beneficial when EBIT is relatively low C. Increasing financial leverage will always increase the ROE and EPS of stockholder D. The level of financial leverage that produces the highest firm value is the one most

beneficial to shareholders E. All of the above are accurate

64. Which of the following statements regarding leverage is/are correct? I. The ultimate effect of leverage depends on the firm’s EBIT II. If things go poorly for the firm, leverage provides an even greater return to

shareholders, as measured by ROE and EPS, than would be possible with no leverage III. As a firm levers up, shareholders are exposed to more and more risk IV. The benefits of leverage will not be as great in a firm with substantial accumulated

losses or other types of tax shields as for a firm without many tax shields

A. I and III only B. I and IV only C. III and IV only D. I, III, and IV only E. I, II, III, and IV

65. When choosing a capital structure, the objective of the firm should be to

A. choose the one that maximizes the current value of the stock B. choose the one that minimizes the value of the firm C. choose the one that maximizes the firm's WACC D. choose the one that results in the greatest possible interest tax shield E. choose any capital structure since capital structure is always irrelevant

66. The target capital structure is the debt-to-equity ratio which

I. minimizes the value of the firm II. minimizes the firm's weighted average cost of capital III. maximizes the market price of the firm's common stock IV. maximizes earnings per share A. I only B. II and III only C. III only D. I and IV only E. I, II and III only

CMA Ontario P- 353

67. Which of the following statements is/are true regarding corporate borrowing?

I. Increasing financial leverage increases the sensitivity of EPS and ROE to changes in EBIT

II. The effect of financial leverage depends on the company's EBIT -- leverage is favorable when EBIT is relatively high, and leverage is unfavorable when EBIT is relatively low.

III. High leverage magnifies the returns to shareholders (as measured by ROE).

A. I only B. II only C. III only D. I and II only E. I, II and III

68. The required return on the assets of Kamil Limited is 10%. Debt cost is 6% before-tax for

Kamil Limited. Assuming a capital structure of 50% debt and 50% equity, what is the cost of equity? The tax rate is 34%.

A. 10.0% B. 12.6% C. 15.1% D. 16.0% E. 18.7%

69. Williams Limited has expected EBIT of $1,110, debt with a face and market value of $3,000

paying a 7% annual coupon, and an unlevered cost of capital of 14%. If the tax rate is 34%, what is the value of the firm?

A. $3,718 B. $5,309 C. $6,253 D. $7,572 E. $9,089

70. An unlevered firm has a net income after tax of $660,000. The unlevered cost of capital is

15% and the corporate tax rate is 34%. What is the value of this firm?

A. $1,000,000 B. $2,266,667 C. $3,333,333 D. $4,400,000 E. $8,000,000

71. McKenzie Incorporated has expected EBIT of $3,300, debt with a face and market value of

$4,000 paying a 9% annual coupon, and an unlevered cost of capital of 12%. If the tax rate is 39%, what is the value of the equity of McKenzie Incorporated?

A. $ 9,335 B. $14,335 C. $18,335 D. $22,245 E. $25,625

CMA Ontario P- 354

72. A firm's marketable securities account is presently comprised of l-year corporate bonds and

3-month Treasury Bills. If the firm chooses to shift its policy and invest 100% in T-Bills, it would likely reduce the _____________ of its marketable securities portfolio. I. maturity risk II. marketability risk III. taxability IV. default risk A. I and II only B. II and IV only C. I, II, and III only D. II, III and IV only E. I, II, III and IV

73. Which of the following is true regarding opportunity costs and the size of the cash balance

held by a firm?

A. There is no relationship between cash balances and opportunity costs B. The higher the cash balance, the lower the opportunity cost C. If a firm can reduce its collection float, opportunity costs will fall and the optimal cash

balance for the firm will be increased D. The higher the cash balance, the higher the opportunity costs in terms of the interest

income that could be earned in the next best use E. If a firm can reduce its collection float, opportunity costs will rise and the optimal cash

balance for the firm will be decreased 74. A manager using the EOQ model can compute ___________ to account for delivery times.

A. carrying costs B. safety stocks C. restocking costs D. reorder points E. theft losses

CMA Ontario P- 355

75. Reorder costs for inventory units at cows at Gregko Limited are $500 and carrying costs are $25. What is the optimal reorder quantity?

A. 50 B. 100 C. 125 D. 500 E. Not enough information to calculate

76. Reorder costs for cows at Sasasha Incorporated are $900, carrying costs are $54 and unit

sales are 7,500. What is the optimal reorder quantity?

A. 125 B. 141 C. 447 D. 500 E. Not enough information to calculate

CMA Ontario P- 356

Use the information below to answer question 77 to 82. Krohl Limited maintains an average inventory of 1,000 units. The carrying cost per unit per year is estimated to be $1.00. Krohl Limited places an order for 500 units on the first of each month and the order cost is $4.00. What are the total carrying costs under the current system? 77. What are the total carrying costs under the current system?

A. $ 500 B. $ 600 C. $ 700 D. $ 800 E. $1,000

78. What are the total restocking costs under the current system?

A. $ 25 B. $ 48 C. $ 95 D. $140 E. $198 79. What is the economic order quantity (EOQ)? (Round to the nearest whole number.)

A. 110 units B. 219 units C. 312 units D. 401 units E. 500 units

80. What is the average inventory using the EOQ?

A. 110 units B. 219 units C. 312 units D. 401 units E. 500 units

81. What are the total carrying costs using the EOQ?

A. $ 24 B. $ 55 C. $110 D. $225 E. $335 82. What are the total restocking costs using the EOQ?

A. $110 B. $145 C. $190 D. $340 E. $680 =========

CMA Ontario P- 357

83. You will take delivery of a U.S. Dollar 60 days from today but you want to lock in the price now. _______________ is the price of this transaction today.

A. The cross-rate B. The spot exchange rate C. The forward exchange rate D. The London Interbank Offer Rate E. The swap rate

84. An agreement to trade currencies based on the exchange rate today for settlement within two

business days is called a _____________.

A. backward trade B. forward trade C. futures trade D. triangle arbitrage transaction E. spot trade

85. According to today’s exchange rate information posted on the Bank of Canada website, you

can exchange $1.00 Canadian for 2 Eurodollars today. Thus, the ___________ is .50 Eurodollars.

A. backward rate B. forward rate C. futures rate D. triangle rate E. spot rate

86. According to today’s exchange rate information posted on the Bank of Canada website, the

spot exchange rate for the Eurodollar is Euro 1.00 = $.83 Canadian. The six-month forward exchange rate is Eurodollar 1.00 = $.67 Canadian. Which statement below is true? I. The Eurodollar is selling at a discount relative to the Canadian dollar. II. The Eurodollar is selling at a premium relative to the Canadian dollar. III. The dollar is selling at a discount relative to the Eurodollar. IV. The dollar is selling at a premium relative to the Eurodollar. A. I only B. II and IV only C. and III only D. I and IV only E. II and III only

CMA Ontario P- 358

87. According to today’s exchange rate information posted on the Bank of Canada website, the spot exchange rate for the Eurodollar is Euro 1.00 = $0.81 Canadian. The six-month forward exchange rate is Eurodollar 1.00 = $0.95 Canadian. Which statement below is true? I. The Eurodollar is selling at a discount relative to the Canadian dollar. II. The Eurodollar is selling at a premium relative to the Canadian dollar. III. The Canadian dollar is selling at a discount relative to the Eurodollar. IV. The Canadian dollar is selling at a premium relative to the Eurodollar.

A. I only B. II and IV only C. I and III only D. I and IV only E. II and III only

88. The 60-day forward rate for Japanese Yen is YEN 112.16 per $1.00 Canadian. The spot rate

is YEN 103.9 per $1.00 Canadian. In 60 days you expect to receive YEN500,000. If you agree to a forward contract, how many Canadian dollars will you receive in 60 days?

A. $4,458 B. $4,812 C. $5,312 D. $51,950,000 E. $56,080,000

Problem&Solution Part 1

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