cma 2013 sampleentranceexam revised may 15 2013

8/13/2019 CMA 2013 SampleEntranceExam Revised May 15 2013

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2013 Sample

Entrance Examination

(Time Allowed: 4 hours)

Notes:

i) All answers must be indicated on the multiple-choice answer sheet. Work doneon the question paper and examination foolscap will NOTbe marked.

ii) Included in the examination envelope is a supplement consisting of formulae andtables. It is a standard supplement that may be useful for answering questions onthis paper.

iii) Examination materials must NOT BE REMOVED from the examinationwriting centre.All examination materials (i.e. answer sheet, used and unusedfoolscap sheets, envelope, supplement and question paper) must be submittedto the presiding officer before you leave the examination room.

Updated May 15, 2013


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2013 Sample Entrance Examination

TABLE OF CONTENTS

Examination:

Instructions ......................................................................................... 1

Questions ............................................................................................ 3

Solution:

Solutions ........................................................................................... 36

Supplement of Formulae......................................................................... 71

* This supplement is provided to all candidates with the examination.


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INSTRUCTIONS:

Use the multiple-choice answer sheet provided to record your answers to the questions.Be sure to enter your four-digit envelope number on the multiple-choice answer sheet.Select the BESTanswer for each of the following 100questions and record youranswer on the multiple-choice answer sheet by blackening the appropriate answerspace (i.e. oval) with a soft lead (HB) pencil. Answer all questions. Mark ONLY ONEANSWERfor each question.

Sample Question:

89. (-) Market research and public relations costs are

a) engineered variable costs.b) discretionary variable costs.c) committed fixed costs.d) discretionary fixed costs.

Assuming you select choice d) for your answer, you should blacken the d space online 89 in the ANSWERS area of the multiple-choice answer sheet as shown below:

89 a b c d

Question Weighting:

Your performance will be based on the total weighted value of the questions answeredcorrectly. Note that all questions are assigned the same weight, except for thosespecified with a plus (+) sign (i.e. has a higher weight) or minus (-) sign (i.e. has a lowerweight). In the above example, there is a minus sign at the beginning of the question,signifying that the question has a lower weighted value than the average question.

Singular Versus Plural Phrasing:

For simplicity of wording, all questions are phrased as though there is a single correctanswer, even when there are multiple correct answers. For example, the correct answerto a question that is worded, Which of the following is..., may be the choice that refersto two or more of the other choices, e.g. Both a) and b) above.


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Calculator Policy and Supplement

The following models of calculators are authorized for use on the Entrance Examination:

Texas Instruments TI BA II Plus (including the Professional model)Hewlett Packard HP 10bII+ (or HP 10bII)Sharp EL-738C (or EL-738)

The supplement accompanying the Entrance Examination contains present valuetables.


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Corporate Finance

1. (+) JK Inc. is considering the acquisition of IBA Inc. to expand its business. Throughthe acquisition, JK expects to benefit from IBAs cash flows before tax and interest of:

i) $180,000 per year for the first two years;ii) $240,000 per year from the fourth year into perpetuity;iii) $700,000 cash inflow at the end of the fifth year.

Assume that the cash flows occur at the end of each year, the tax rate is 35% for bothcompanies, and JKs after-tax required rate of return is 12%. What is the maximumamount that JK is willing to pay to acquire IBA (rounded to the nearest thousand)?

a) $2,125,000b) $1,381,000c) $1,989,000d) $1,756,000

2. Which of the following statements about preferred stock is NOT correct?

a) Preferred shareholders receive a dividend before the common shareholders areentitled to dividend.

b) Preferred shareholders generally do not have voting rights.c) Cash dividends paid to preferred shareholders are not an allowable deduction for

tax purposes.d) In case of bankruptcy, preferred shareholders have a claim on the companys

assets that ranks ahead of the common shareholders and bondholders.

3. KLN Co. plans to purchase new equipment in order to increase productivity of itsmanufacturing division and save repair costs that are required for the old equipment.

Old Equipment New EquipmentPurchase price $100,000 $200,000Salvage value today $30,000 n/aSalvage value in 5 years $5,000 $100,000Repairs immediately $9,000 n/a

Repairs at the end of 3 years $10,000 n/aAnnual operating costs $12,000 $10,000Annual revenue $70,000 $90,000Remaining life 5 years 5 years

Based on a cost of capital of 6%, assuming tax is not considered, what is the net


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4. Which of the following is most likely to increase shareholders wealth in the shortterm?

a) Stock dividendb) Stock splitc) Special dividendd) Reverse split

5. ARI Corp. has annual sales of $800,000 and cost of goods sold of $500,000 as ofDecember 31, Year 2. On January 1, Year 3, ARI Corp. announced that it willdecrease its days receivable from 28 days to 23 days and increase its days payable

from 20 days to 28 days.

ARI Corp. forecasts that its annual sales and cost of goods sold are increasing by 5%and 6% respectively in Year 3. How much additional cash will this change in policybring to the company in Year 3?

a) $11,507b) $23,123

c) $11,616d) $21,918

6. GS Bank is offering a certificate of deposit with a 12% quoted annual interest rate. Ifthe bank compounds the interest monthly and you deposit $150,000 into the certificateof deposit, what is the value after one year?

a) $168,000b) $168,540

c) $168,825d) $169,020

7. An investor purchased $70,000 worth of 10-year bonds with a coupon rate of 12% onDecember 31, Year 1, for $65,450. The interest payment dates are June 30 andDecember 31 each year. On July 1, Year 4, the investor decided to sell the bonds.These bonds currently yield 8% in the market. How much will the bonds sell for(rounded to the nearest hundred dollars)?

a) $70,000b) $112,000c) $84,000d) $124,600

8 (-) Which of the following is an example of a secondary market financial instrument?


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9. MAC Inc. is considering issuing preferred shares that have a market value of $120and a cumulative dividend of $8.50. The expected issue cost is $4.25 per share and is

tax-deductible. The current tax rate of MAC is 38%.

If the company issues the preferred shares, what is the percentage cost of thepreferred shares?

a) 7.24%b) 7.08%c) 4.49%d) 7.34%

10. Sandra is considering the purchase of stocks in the following three companies:

i) Company A a beta of 1.5, no dividend history and a current share price of$35.

ii) Company B $6.00 in annual dividends that will continue indefinitely and acurrent share price of $45.

iii) Company C $3.80 in current dividends that are expected to grow 1.5% per

year and a current share price of $38.

The current risk-free rate is 3% and the market return is 7.5%. Sandra would like anannual return of 12% on her investment. If taxes are not considered, which shares willmeet her expectation?

a) Company Ab) Company Bc) Company C

d) None of above

11. YSJ Inc. has the following financial information:

Current liabilities $1,500,000Total liabilities $8,500,000Preferred shares $3,000,000Common equity $10,000,000

The long-term debt consists of a single bond issue paying 6% interest annually. Theannual yield for similar bonds in the market is currently 8%. The current cost of thepreferred shares is 6% and the current cost of the common shares is 17%. Thecompanys tax rate is 37%. What is YSJs weighted average cost of capital (WACC)(rounded to the nearest tenth of a percent)?


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12. The shares of Sunshine Ltd. are currently trading at $54.65 per share and have a betaof 1.5. If the risk-free rate of return is 2.0% and the risk premium is 4.5%, what is the

expected rate of return on Sunshines shares?

a) 8.75%b) 6.75%c) 11.75%d) 5.75%

13. JYP Inc. is evaluating two projects and has gathered the following data about the twoprojects. JYP has a 10% required rate of return for both projects.

Project A Project BInitial costs $16,000 $20,000Project life 5 years 4 yearsCash flow $7,000 per year $7,500 per year

If the projects are mutually exclusive and taxes are ignored, the company should

a) accept Project A and reject Project B.b) reject Project A and accept Project B.c) accept both projects.d) reject both projects.

14. JM Ltd. has a single product that has a gross profit margin ratio of 60% per unit andhad total sales of $1,200,000 last year. JM has a degree of total leverage of 2.10 anda degree of operating leverage of 1.20 for the current year. If the earnings beforeinterest and tax (EBIT) were to increase by 15% this coming year, what would be the

expected percentage change in earnings per share (rounded to the nearest percent)?

a) 18%b) 32%c) 9%d) 26%


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15. XYZ Ltd. recently reported the following results at the end of Year 3.

Revenue $3,800,000EBIT $900,000Earnings per share $1.12Net assets $5,100,000Common shares outstanding 500,000

The book value of the net identifiable assets is equal to its fair market value. XYZ iscurrently trading at $12.67 per share in the market. XYZ expects its dividend to remainconstant indefinitely, and the required return on common shares is 6%. What is the

price-earnings multiple for XYZs stock?

a) 7.04b) 9.11c) 11.31d) 14.19

16. The financial markets often witness a target firm take a poison pill as a defensive

tactic against the hostile takeover attempt made by another firm. Which of thefollowing is an example of a target firm taking a poison pill?

a) Changing the target firms corporate charter such that a merger must receiveapproval from 80% of the target firms shareholders.

b) Repurchasing some of its shares at a substantial premium from the firm attemptingthe takeover.

c) Selling off the assets that originally made it a desirable takeover target.d) Issuing rights to current shareholders that entitle them to exchange their current

shares for those of the acquirer on a 2-for-1 basis in the case of a merger.

17. (-) Which of the following statements regarding systematic risk is correct?

i) Systematic risk is a risk that influences a large number of assets.ii) Systematic risk can be eliminated by diversification.iii) An assets systematic risk is measured by its variance of returns.iv) Beta coefficient measures how much systematic risk a particular asset has

relative to an average asset.

a) i), iii), iv)b) ii), iii), iv)c) i), iv)d) All of the above


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18. CapeSpencer Co. recently issued rights to raise financing. Its shares are currentlytrading for $30 per share on the TSE. An investor will require 4 rights plus the

subscription price of $24 to purchase one share. What is the value of one right?

a) $0b) $3.20c) $1.50d) $1.20

Financial Accounting

19. In Year 4, Brenda purchased several computers for $6,000. On December 31, Year 4,the computers had a book value of $4,300. On January 1, Year 5, Brenda donated thecomputers to Hill Charity, a not-for-profit organization, for no cost. At that time, thecomputers had a fair value of $5,000. Hill Charity had revenues of over $2,000,000 inYear 5. At what amount should Hill Charity record the computer assets, as atJanuary 1, Year 5?

a) $0b) $4,300c) $5,000d) $6,000


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23. RRE Inc. builds a department store in the city centre of SJ. The contract price of thejob is $50,000,000. Information about costs is as follows:

($000s) Year 1 Year 2 Year 3Costs incurred during the year $5,000 $19,000 $15,000Estimated costs to complete $35,000 $13,500 $0

The company uses the percentage of completion method to account for long-termconstruction contracts. How much profit will be recognized in Year 2?

a) $6,750,000

b) $8,000,000c) $10,231,000d) $12,500,000

24. On January 1, Year 2, YGO Inc. purchased 60,000 shares (45%) of the commonshares of DNO Inc. for $600,000. During Year 2, DNO declared and paid $150,000 ofcash dividends. On December 31, Year 2, the shares of DNO had a fair value of$11.50, and the company reported net income of $95,000 for the year.

Assuming YGO has significant influence over DNOs strategic polices, what would bethe balance in the investment in DNO at December 31, Year 2, on the books of YGO?

a) $710,250b) $665,250c) $642,750d) $575,250

25. Anne-Marie, an accountant, prepared the annual financial statements for TreetopCharity, a not-for-profit organization, for no cost. In the previous year, Treetop paid$2,000 for this service and would have paid $2,000 this year. Which is the correctmethod for recording this contribution?

a) Treetop must record the contribution at $2,000, since there is a fair value for thecontribution.

b) Treetop must record $0 for the contribution, since no money was exchanged.

c) Treetop may record the contribution at $2,000.d) Treetop may record the contribution at the price that Anne-Marie charges for herservice.


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26. (+) In January, Year 7, FRI Ltd. and END Ltd. decided to combine their operations intoone company, and FRI will acquire ENDs assets for $111,000 in cash. Thestatements of financial position of the two companies at the end of Year 6 were asfollows:

FRI Ltd. END Ltd.Current assets $140,000 $ 85,000Non-current assets 85,000 55,000

Total Assets $225,000 $140,000

Liabilities $15,000 $ 29,000Common stock 160,000 76,000Retained earnings 50,000 35,000

Total Liabilities and Equity $225,000 $140,000

The carrying values of all identifiable assets and liabilities equal their fair values. Afterthe acquisition, what would be the common stock balance for FRI?

a) $236,000b) $271,000c) $160,000d) $210,000

27. LLU Ltd., a publicly traded company, has estimated its warranty costs to be 0.5% ofsales and in Year 1 had $650,000 in sales. On January 1, Year 2, LLU had a warrantyliability credit of $1,900. At the end of Year 2, LLU found an error in the original

estimate, and the estimate should have been 0.4% of sales instead of 0.5%. Ignoringtaxes, what should the warranty liability be for Year 2 if sales were $700,000?

a) $2,800b) $4,700c) $5,350d) $4,050


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28. White Ltd. had the following financial results:

Year Taxable Income Income Tax Paid4 $50,000 $15,0005 $167,500 $50,2506 $40,000 $12,0007 $72,000 $21,6008 $55,000 $16,500

In Year 9, White had a taxable loss of $200,000. The tax rate has been 30% sinceYear 4. Assuming White is going to maximize its tax recovery in Year 9, what is the

tax loss carry back amount for Year 9?

a) $60,000b) $38,100c) $16,500d) $50,100

29. Bevtex Ltd. has a defined benefit pension plan for its employees. Various assumptions

go into determining the pension-related expense. The controller is attempting todetermine what impact, if any, there would be if certain assumptions were changed.The pension-related expenses would increase if there is an increase in the

a) number of retirees during the year.b) amount contributed to the pension plan during the year.c) market value of the pension plan assets.d) interest rate on the pension obligation.

30. On January 1, Year 1, RJC Ltd. started to use its new pipelines that the companyspent $1,000,000 to build. At that time, RJC estimated that the pipelines will be usedfor 25 years and retired at the end of 25 years. When the assets are retired, RJC isobligated to spend $200,000 to restore the sites to meet environmental regulations.On January 1, Year 16, the environmental regulations changed, and it was estimatedthat an additional $100,000 will be required to restore the sites.

Assuming the interest rate is 6% and the company uses the effective interest rate

method for measuring obligation, the liability related to the site restoration from thepipelines on December 31, Year 16, is (rounded to the nearest hundred)

a) $118,400.b) $177,600.c) $59,200.d) $300 000


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31. GMS Ltd. is a small manufacturing company. Its balance sheet at book value atDecember 31, Year 5, was as follows (in thousands):

Cash $ 45Accounts receivable 100Land 300Trucks (net) 170Equipment (net) 2,600Building (net) 1,085

Total Assets $4,300

Accounts payable $ 90Long-term note payable 2,700Mortgage payable 760Common shares 530Retained earnings 220

Total Liabilities and Shareholders Equity $4,300

GB Ltd., a medium-sized manufacturing company, required additional capacity inproduction in order to meet increasing demand, and it decided to acquire 100% ofGMS. At the time of the acquisition, GMS equipment was undervalued by $230,000while the building and trucks were overvalued by $140,000 and $50,000, respectively.GB paid $1,600,000 to purchase GMS. How much did GB pay for goodwill?

a) $750,000b) $810,000

c) $850,000d) $865,000

32. YG Ltd., a Canadian company, purchased merchandise from a US-based company onAugust 31, Year 2, for $100,000 USD. Payment is due on January 31, Year 3, in USdollars. YG has a September 30 year-end, and the relevant exchange rates for the USdollar were as follows:

August 31, Year 2 $1.00 USD = $1.25 CADSeptember 30, Year 2 $1.00 USD = $1.20 CADJanuary 31, Year 3 $1.00 USD = $1.32 CAD

For YG, these transactions resulted in a foreign currency transaction

a) loss/gain of $ 0 in Year 2 and loss of $7 000 in Year 3


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33. Prior to recording the December 31, Year 2, year-end adjusting entries for JK Inc., itsrevenues exceed expenses by $90,000. The following information was known atDecember 31, Year 2:

i) Sales of products amounting to $30,000 have not been billed or recorded yet.The cost of goods sold is 60% of the sale.

ii) Rent of $24,000 was paid on November 30, Year 2, in advance for six monthsfrom January to June, Year 3. The payment was expensed on November 30,Year 2.

iii) New equipment costing $10,000 with an estimated useful life of five years waspurchased on July 1, Year 2, and the amortization of the equipment has not yet

been recorded. The company uses straight line amortization for bookpurposes.

iv) The December, Year 2, bank reconciliation shows that the bank deductedinterest expense of $3,500 on a line of credit on December 31, Year 2, but thecompany recorded this amount on January 3, Year 3.

Assuming the company prepares financial statements only at year-end, what is itsoperating income for Year 2?

a) $121,500b) $139,500c) $120,500d) $97,500

34. IOL had the following results from its operating segments for the year endedDecember 31, Year 2 (in millions):

Segment RevenueOperating

Profit (Loss) AssetsA $83 $12 $249B $38 $11 $125C $9 $(4) $31D $8 $1 $29

Total $138 $20 $434

Based on the quantitative thresholds, which segments would be reported separately?

a) A and B only.b) B and C only.c) A, B and C only.d) All segments would be reported separately.


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35. Innov Ltd. started development of a new product in January, Year 8. In November,Year 8, Innov was preparing to begin selling the new product, but final testing of theproduct was unsuccessful; subsequently, the product could not be released for sale.Innov incurred the following costs for the new product in Year 8:

Materials to build a prototype $75,000Market feasibility study $20,000Testing materials $10,000

Advertising material $20,000

What amount of these costs can Innov capitalize in Year 8?

a) $0b) $105,000c) $125,000d) $85,000

36. In Year 1, Noel Mechanical sold an air conditioning (A/C) unit for $300,000, whichincluded a service agreement to maintain the A/C unit for 3 years starting in Year 2. If

sold separately, the A/C unit would have sold for $240,000 and the service agreementwould have sold for $80,000. The customer paid the full $300,000 in Year 1.

For Year 1, what amount would Noel recognize as deferred revenue if it uses the fairvalue method?

a) $75,000b) $0c) $80,000

d) $60,000

37. YN retail Ltd. uses the gross profit method to estimate ending inventory for its monthlyreports. Information for July, Year 2, follows:

Inventory, June 30, Year 2 $150,000Merchandise purchases $800,000Freight-in $30,000

Sales $1,400,000Purchase discounts $14,000Gross profit on sales based on historical data 45%

Using the gross profit method, inventory in July 31, Year 2, would be estimated to be

) $136 000


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38. SDG Inc. had the following activities during Year 1:

January 1 150,000 shares of common stock outstanding.April 1 Issued 30,000 shares of common stock.August 1 Issued 5% stock dividend.October 1 Issued 2,000, 12% bonds that are convertible into 20 shares

of common stock per bond.

Assuming the convertible bonds are dilutive, what is the weighted average number ofshares to be used in calculating diluted EPS?

a) 182,500b) 186,250c) 191,125d) 220,000

39. (-) The management discussion and analysis (MD&A) is best described as asupplement that

a) explains items in the financial statements.b) has a forward-looking orientation.c) attests as to whether the financial statements are free from material

misstatements.d) describes accounting policies used for the financial statements.

40. Rich Corp. adheres to IFRS and on January 1, Year 1, acquires 400,000 shares ofXYZ Ltd. at $25 per share. This represents 35% of XYZs common shares. OnDecember 31, Year 1, XYZ reports net income of $1,000,000, and the share price of

XYZ is $26 per share. Assuming Rich Corp. has significant influence over XYZ, whatamount should Rich Corp. report for investment income as a result of its ownership ofXYZ in Year 1?

a) $0b) $350,000c) $400,000d) $750,000

41. LSJ Inc. has a December 31 fiscal year-end. Based on past experience, 2% of LSJscredit sales are uncollectible. As at December 31, Year 1, the company had a creditbalance of $10,000 in the allowance for uncollectible accounts. Sales for Year 2 were$3,000,000, and 70% of the sales were credit sales. During Year 2, LSJ wrote off$12,000 of uncollectible accounts from sales in Year 1 and received $6,500 aspayment of an account receivable that had been written off as uncollectible in Year 1


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44. GBSJ Refining, a publicly traded company, has entered into an agreement with FPInc. to lease a specialized piece of equipment. Significant modification would berequired to make this equipment available to others after the lease has expired. Termsof the lease are as follows:

Lease term 8 yearsExpected life of the equipment 10 yearsImplicit interest rate 6%GBSJs borrowing rate 4%

Annual lease minimum payment $80,000 (made at the beginning of the year)Fair value of the equipment $600,000

Based on the information given, GBSJ would recognize the equipment in the first yearof the lease as

a) an operating lease of $80,000.b) a finance lease of $496,800.c) a finance lease of $526,600.d) a finance lease of $600,000.

45. TL Company purchased a machine with an estimated 6-year useful life on January 1,Year 12, for $12,000. TL Company incorrectly expensed this machine in Year 12, andthe error was discovered in Year 13. Assuming TL Company uses straight-linedepreciation and the Year 13 books are not closed, what would be the impact onretained earnings on December 31, Year 13, to correct this error?

a) No impact on retained earnings.b) Decrease retained earnings by $4,000.

c) Increase retained earnings by $8,000.d) Increase retained earnings by $10,000.

46. (+) Erin Company is a publicly traded company. The following information is availablefor Erin Companys defined benefit pension plan for Year 13:

Service costs $13,800Accrued benefit obligation, January 1, Year 13 $298,000

Fair value of plan assets, January 1, Year 13 $172,500Actual earnings on plan assets $25,000Post-retirement benefits paid $35,000Discount rate 9%Expected earnings on plan assets for Year 13 10%Cash paid into pension plan $75,000


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Internal Control

47. Which of the following is NOTa component of the audit risk model?

a) Inherent riskb) Detection riskc) Control riskd) Enterprise risk

48. The practice of preparing bank reconciliations every month is an example of a

a) detective control.b) preventative control.c) corrective control.d) compensating control.

49. The Board of Governors of Canadian University (CU) is addressing various riskmanagement issues. One issue of concern is the use of unlicensed, unauthorized or

pirated software on CU computers. Management was instructed to identify specificprograms to address the legal issues pertaining to the use of software governed bycopyright laws.

Which of the following would be LEASTlikely to support the Boards objectives?

a) Management develops and provides a policy to all employees that the use ofunauthorized or illegally copied software or data is not acceptable.

b) The IT department implements a program that tracks the expiry date of all software

licenses. Department managers must apply for renewal of existing licenses;otherwise, IT staff will remove the software from affected computers.

c) Department managers must keep an inventory of all software purchased, includinginformation such as the date of purchase, serial number, pertinent licenseinformation, and how outdated software is destroyed.

d) The IT department implements a program of unannounced annual software audits.At least annually, IT staff will examine each university computer to ensure allsoftware is authorized.

50. Which of the following is a requirement of the Sarbanes-Oxley Act? Companymanagement must

a) certify the accuracy and completeness of financial statements.b) describe material changes to internal controls.c) verify the existence of adequate internal controls


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51. In order for a fraud to be perpetrated, three conditions exist; these conditions aredescribed as the fraud triangle. Which of the following is true?

a) The primary tool used by internal audit to detect fraud is to identify risks indicatedby the fraud triangle.

b) Pressure on management to achieve financial targets is an example of a riskfactor that may lead to misappropriation of assets.

c) Appropriate controls are designed to remove the fraud factors in the fraud triangle.d) The components in the fraud triangle include pressures, opportunities and

rationalization.

52. The responsibility for establishing internal controls rests with the

a) internal auditor.b) external auditor.c) companys management.d) audit committee.

53. A strong accounting information and communication system will satisfy thetransaction-related audit objectives, which include the following EXCEPT

a) completeness.b) segregation of duties.c) classification.d) accuracy.

54. The primary responsibility of the external auditor is to

a) review an organization for efficiency and effectiveness.b) analyze controls to ensure operational performance in the future.c) recommend changes to procedures to improve operations.d) determine whether the financial statements are fairly presented.


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Management Accounting

55. Bird Ltd. has the following information for the past four quarters:

Quarter Maintenance Costs Machine-hours1 $120,500 1,2002 $132,000 1,5503 $118,750 1,2104 $126,200 1,445

Bird believes the cost driver is machine-hours. Using the high-low method, what is the

total estimated maintenance cost for the next quarter if it uses 1,300 machine-hours(rounded to the nearest hundred)?

a) $122,300b) $123,800c) $119,600d) $110,700

56. DIY Manufacturing Company produces two types of power lawn mowers, the basicand the self-propelled. Its master budget (based on expected sales) for the secondquarter is as follows:

Basic Self-Propelled TotalSales (units) 30,000 60,000 90,000Sales $6,000,000 $18,000,000 $24,000,000Variable expenses 2,400,000 8,100,000 10,500,000

Contribution margin $3,600,000 $ 9,900,000 $13,500,000Fixed operating expenses 7,200,000

Operating Income $ 6,300,000

DIYs income tax rate is 40%. Given the sales mix and expected sales of the basicmower and self-propelled mower in the master budget, what is DIYs margin of safetyratio for the second quarter (rounded to three decimal places)?

a) 0.467b) 0.875c) 0.481d) 0.929


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The following information pertains to questions 57 and 58.

On August 13, LRG Ltd. had a fire at its manufacturing plant that completely destroyed the plantand its contents. Fortunately, certain accounting records were kept in another building, andthose records revealed the following for the period from July 1 to August 13:

Direct materials purchased $360,000Work-in-process inventory, July 1 $640,000Direct materials, July 1 $24,000Finished goods, July 1 $82,000Indirect manufacturing costs $420,000

Sales $1,960,000Direct manufacturing labour 30% of conversion costsPrime costs $490,000Gross margin percentage based on sales 40%Cost of goods available for sale $1,500,000

The loss was fully covered by insurance, and the insurance company wants to know thehistorical cost of the inventories as part of negotiating a settlement.

57. What is the amount of finished goods inventory lost in the fire?

a) $100,000b) $324,000c) $242,000d) $406,000

58. What is the amount of work-in-process inventory lost in the fire?

a) $50,000b) $230,000c) $312,000d) $132,000

------------------------------------

59. Whale Ltd. manufactures chairs and earned a gross margin of $80,000 in May,Year 13. Its cost of goods manufactured in May was $120,000, and it had thefollowing inventory data:

May 1 May 31Work-in-process $110,000 $90,000


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60. (-) A target-pricing approach is best described as

a) setting a price that focuses management on achieving a specific cost.b) adding a desired markup to a predetermined cost to set a price.c) charging certain customers a different price.d) charging a higher price at peak demand periods.

61. Reed sells widgets for $100 each. The variable cost for each widget is $65, Reedsannual fixed costs are $125,000 and the tax rate is 30%. How many widgets doesReed need to sell to generate a net income of $140,000 (rounded up to the nearest

ten)?

a) 9,290b) 8,780c) 3,250d) 5,000

62. QC Ltd. sells three models of gizmos with a budgeted sales mix of 5:3:1 for the Entry,Regular and Premium models, respectively. Additional model information follows:

(per unit) Entry Regular PremiumSales price $50 $65 $90Variable costs $20 $30 $45

Assuming the same sales mix and ignoring taxes, if QCs total fixed costs are$600,000, how many units of the Regular model must be sold to break even?

a) 9,231b) 6,000c) 5,455d) 18,000


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63. The budgeted operating income for RST Ltd. for next year is as follows:

Sales 125,000 units @ $40 $5,000,000

Variable manufacturing costs $2,000,000Fixed manufacturing costs 1,250,000Sales commissions $2.60 per unit 325,000Fixed selling and administration expenses 950,000 4,525,000

Operating Income $ 475,000

Assume that a regular customer has asked RST to provide a quote for a special order

of 20,000 units. RST has sufficient capacity to fill the order and would be required topay only $8,000 in sales commissions for the order. If RST would like the specialorder to make a contribution to operating income of $48,000, the sales price per unitthat should be quoted to the customer for the special order is

a) $40.00.b) $20.20.c) $28.80.d) $18.80.


Cruise Ltd. has two support departments, A and B, and two production departments, Y and Z.Production is conducted in sequence from Y to Z. The distribution of actual service andproduction for December is as follows:

A B Y ZDepartment costs $120,000 $180,000 $630,000 $850,000Employees 3 8 50 60Maintenance hours 80 400 2,000 2,000

Allocation base(cost driver) Employees

Maintenancehours

Unitsproduced

Unitsproduced

64. Using the direct method of common cost allocation, what are the total production costs

for Department Y?

a) $762,665b) $774,915c) $774,545d) $780,000


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Orange Ltd. manufactures juice with two different ingredients: 100% of Ingredient A is added atthe beginning of the production process; 100% of Ingredient B is added when the juice is 60%complete. Conversion costs are added uniformly throughout the entire production process.

Quality testing is conducted at the 60% conversion point prior to adding Ingredient B. Rejectedunits at quality testing are accounted for as spoilage, and spoilage is included in equivalent unitsof output. Production data for May, Year 5, are as follows:

Work-in-process inventory, May 1 (20% converted) 40,250 units

Started in production 85,000 unitsCompleted production 90,000 unitsWork-in-process inventory, May 31 (80% converted) 34,950 units

68. (+) Assume Orange Ltd. uses a first-in, first-out (FIFO) process costing system. ForMay, what are the equivalent units of production for conversion costs?

a) 85,940

b) 109,910c) 110,090d) 150,160

69. (+) For May, direct material costs incurred and in beginning work-in-process inventorytotalled $220,000 for Ingredient A and $350,000 for Ingredient B. Using weighted-average, what is the cost per equivalent unit for Ingredient A and Ingredient B?

a) $2.59 and $2.80

b) $1.76 and $2.80c) $2.59 and $3.89d) $2.44 and $3.89

------------------------------

70. Normal costing is the method that allocates overhead costs by using the

a) estimated overhead allocation rate and the actual quantity of the allocation base.b) actual overhead allocation rate and the actual quantity of the allocation base.c) actual overhead allocation rate and the estimated quantity of the allocation base.d) estimated overhead allocation rate and the estimated quantity of the allocation

base.

71 A h d thl l f $612 000 ith f bl t ti b d t i f



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72. Mary is the manager of Division A, which makes widgets. Division A is classified as acost centre. Which of the following would be the most appropriate performance

measurement for Mary?

a) Residual income of Division A.b) Direct material costs of the widgets.c) Gross margin of the widgets.d) Return on assets of Division A.

The following information pertains to questions 73 and 74.HWW Inc. has a job-order costing system. The company uses predetermined overhead rates inapplying manufacturing overhead cost to individual jobs. The predetermined overhead rate inDepartment A is based on machine-hours, and the rate in Department B is based on directmaterials cost. The company has the following estimates for the year:

Department A BMachine-hours 50,000 68,000Direct labour-hours 45,000 60,000Direct materials cost $250,000 $220,000Direct labour cost $300,000 $280,000Manufacturing overhead cost $395,000 $455,000

Job 2013 was completed on May 31 with the following cost information:

Department A B

Machine-hours 500 550Direct materials cost $27,000 $20,000Direct labour cost $31,000 $32,000

73. What are the predetermined overhead rates for Department A and Department B?

a) $7.20 and 1.809b) $8.78 and 2.068

c) $7.20 and 1.625d) $7.90 and 2.068

74. Now assume the predetermined rate for Department A is $8 and for Department B,2.15. What is the total cost applied to Job 2013?



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75. OEM Company consists of several divisions. Each division operates as a profit centrewith full autonomy. Division B informed Division A that it has changed its transferpricing policy from variable-cost plus to full-cost plus pricing. Division A decided to

purchase component EX1 outside the company when Division B increased thetransfer price from $156 to $164 per unit. Information for Division A and Division Bwith respect to component EX1 is as follows:

Outside price for component EX1 $160Division As annual purchases 10,000 unitsDivision Bs variable manufacturing cost $120 per unitDivision Bs fixed manufacturing cost $1,000,000

Division Bs production capacity 50,000 unitsDivision Bs capacity utilization 100%

All units of component EX1 produced by Division B can be sold in the open market.Variable selling cost is $7 per unit for external sales. All other selling andadministrative costs are fixed, regardless of the customer. Division B will sellcomponent EX1 to external customers at the market price of $160 per unit.

Which of the following statements is true?

a) Division A purchases 10,000 units of component EX1 from the outside supplier ata price of $160, and the company saves $40,000 in costs.

b) Division B sells 10,000 units of component EX1 to Division A at $164, and thecompany income increases by $110,000.

c) Division A purchases 10,000 units of component EX1 from Division B becauseDivision B has idle capacity if Division A purchases the component externally.

d) Division A purchases 10,000 units of component EX1 from Division B, and the

company income increases by $70,000.


Maryville Company uses three types of chemicals in manufacturing lawn fertilizer. The standardamount of chemicals X, Y and Z used in manufacturing one bag of lawn fertilizer is 5 kg, 7 kgand 8 kg, respectively. The budgeted purchase prices of chemicals X, Y and Z are $1.00 per kg,

$0.40 per kg and $0.20 per kg, respectively.

Actual operating data for 20,000 bags of lawn fertilizer produced in May are as follows:

Input Quantity (kg) Input PriceChemical X 97,900 $1.05



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76. What is the direct materials efficiency (quantity) variance for all three chemicals intotal?

a) $15,320 unfavourableb) $3,933 unfavourablec) $11,120 unfavourabled) $4,720 unfavourable

77. Which of the following is true?

a) Direct materials price variance for Chemical X is favourable.

b) Direct materials mix variance for Chemical Y unfavourable.c) Direct materials yield variance for all three chemicals in total is unfavourable.d) All of the above.

------------------------------------

78. WCD Inc., a manufacturer of consumer products, has adopted the following cost-leadership strategy: achieve low costs relative to competitors through productivity andefficiency improvement, elimination of waste and tight cost controls. In designing a

balanced scorecard to measure the performance of the company, which of thefollowing objectives would be appropriate from the internal business perspective?

a) Develop advanced manufacturing capabilities to produce custom products.b) Reduce all inventory levels.c) Increase market share.d) Develop employee communication skills.

79. (+) TIH Ltd. has the following results for two of its divisions.

North Division Central DivisionRevenues $1,750,000 $2,900,000Operating income $450,000 $600,000

Average operating assets $1,950,000 $2,395,000Target rate of return 15% 18%

After analysis of these results, you conclude that the:

a) Central Division outperformed the North Division because it had a higher profitmargin.

b) North Division outperformed the Central Division because it required fewer assetsto achieve its targets.

c) North Division outperformed the Central Division because it generated a better



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p

80. RG Inc. operates as a decentralized multidivisional company. The West Divisionpurchases most of its assembly parts from the East Division, which currently hassufficient excess capacity to meet the West Divisions parts requirements. The East

Divisions incremental costs for manufacturing the parts are $50 per unit, and thecurrent market price is $90. Assuming the divisions are treated as profit centres, whichof the following statements is true?

a) The minimum transfer price the East Division is willing to accept on sales to theWest Division is $50.

b) The minimum transfer price the East Division is willing to accept on sales to theWest Division is $90.

c) The maximum transfer price the West Division is willing to pay on purchases fromthe East Division is $90.d) Both a) and c) above.


Petro Ltd. refines raw oil into several different products and in one month produces 50,000 unitsof Product A and 40,000 units of Product B. Each unit of A can be sold for $14 and each unit ofB can be sold for $20. The monthly joint costs are $600,000. All units produced are sold, andthere is no beginning inventory.

81. Using the sales value at split-off method, what are the joint allocation costs forProduct B (rounded to the nearest thousand)?

a) $280,000b) $353,000

c) $320,000d) $267,000

82. Using the physical measure method, what are the joint allocation costs for Product A(rounded to the nearest thousand)?

a) $333,000b) $267,000c) $280,000d) $353,000


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Lizas Flowers had the following unit sales results for February:

BudgetedSales

BudgetedContribution

MarginActualSales

ActualContribution

MarginRoses 5,500 $1.25 6,500 $1.15Tulips 6,500 $0.75 6,000 $0.80

86. What is the favourable sales-volume variance for roses?

a) $1,250b) $1,150c) $550d) $650

87. What is the favourable sales-mix variance (rounded to the nearest dollar)?

a) $123b) $250c) $385d) $500

------------------------------------

88. Glory Ltd. sells tires. In March it sold 5,000 tires and had an inventory of 3,500 tires onMarch 1. For April, budgeted sales are 5,250 tires and budgeted ending inventory is

3,000 tires. If there were 3,300 tires in inventory on March 31, how many tires shouldGlory purchase in April?

a) 4,950b) 8,250c) 4,450d) 1,750

89. If total sales volume variance is $2,100 unfavourable, total sales mix variance is $900favourable, and market share variance is $500 favourable, then the market sizevariance is

a) $2,500 unfavourable.b) $1,700 unfavourable.) $700 f bl



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90. XY Manufacturing Ltd. had the following inventory data for July, Year 14:

July 1 July 31

Direct materials $140,000 $135,000Work-in-process $40,000 $42,000Finished goods $65,000 $70,000

Actual costs incurred in July include direct materials purchases of $100,000, directlabour of $250,000 and manufacturing overhead of $125,000. What is the cost ofgoods manufactured for July using absorption costing?

a) $478,000b) $480,000c) $473,000d) $355,000

91. DHC Ltd. produces X, Y and Z through a joint production process. It can further refineall of Product X into X-Plus. The following information is available:

i) Selling price per unit of X-Plus

ii) Cost of the additional refining to produce X-Plusiii) Joint costs to produce Xiv) Selling price of X

Which of the above information is relevant to the decision to further refine Product X?

a) i) onlyb) i) and ii) only

c) iii) and iv) onlyd) i), ii) and iv) only

92. A company is considering the following projects:

J M VAnnual after-tax cash inflows $950,000 $1,000,000 $1,100,000Initial project cost $5,000,000 $5,000,000 $5,000,000Cost of capital 7% 10% 12%Project life 7 years 8 years 7 years

Based only on profitability index, which project(s) should the company invest in?

a) Only Jb) O l M



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Taxation

93. BG Ltd. is a large grocery store. Which of the following would be considered income

from property for BG?

a) Gross profit from sales of groceries.b) Dividends received from investments in bonds.c) Proceeds from a sale of a BG delivery truck.d) Rebate received from a supplier.

94. On July 1, Year 7, Michelle sold a piece of land for $300,000 that had an adjusted cost

base of $150,000. Michelle received payment of $150,000 on July 1, Year 7, and willreceive $150,000 on July 1, Year 8. Costs incurred to sell the land were $15,000.What is the minimum net taxable capital gain that Michelle could legitimately claim inYear 7?

a) $33,750b) $67,500c) $0d) $75,000

95. Gord Green is an employee of his wifes business that is operated as a proprietorship.He is paid an annual salary of $50,000 plus 10% vacation pay. Gord received a prizeof a weekend holiday valued at $1,000 for having the highest sales for the secondquarter. What is Gords employment income?

a) $51,000b) $55,000

c) $55,500d) $56,000

96. (+) RHM Ltd. had income for accounting purposes before taxes of $2,500,000 inYear 10. In calculating this amount, expenses included $325,000 for depreciation,$10,000 in charitable donations, $80,000 accounting loss on disposal of an asset, and$40,000 in entertainment expenses. The capital cost allowance claimed for Year 10 is$247,000. The companys net income for tax purposes for Year 10 is

a) $2,678,000.b) $2,668,000.c) $2,688,000.d) $2,532,000.



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97. A Class 8 asset (20% rate) was originally purchased on January 1, Year 1, at a cost of$125,000. During Year 12 the asset was disposed of for proceeds of $10,000. TheUCC balance on January 1, Year 12, was $15,000. This was the only asset remaining

in the pool. What is the impact of this transaction on the Year 12 taxable income?

a) A recapture of $5,000 will be added to taxable income.b) Capital cost allowance of $3,000 and a terminal loss of $5,000 may be deducted

against other taxable income.c) A terminal loss of $5,000 may be deducted against other taxable income.d) Capital cost allowance of $3,000 and a recapture of $5,000 will be added to

taxable income.

98. Willow Company qualifies for the small business deduction. At the end of Year 12,Willow had active business income of $330,000 and taxable income of $315,000.What is Willows small business deduction for Year 12?

a) $56,100b) $15,000c) $170,000d) $53,550

99. Which of the following would be considered a deemed disposition under theprovisions of the Income Tax Act?

a) Bill sells equipment to Joan and will receive payment in weekly installments.b) Jack exchanges a sofa for a bed with Jill.c) Ruth sells shares on the public stock exchange and earns a capital gain of $1,000.d) Sally starts a driver training school and uses her personal car entirely for

instruction.

100. A company paid $80,000 in Year 1 for a customer list. In calculating its taxable incomefor Year 1, what is the maximum deduction that it can claim relating to thisexpenditure?

a) $4,200b) $0c) $2,800

d) $5,600

End of Exam



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SOLUTIONS

1. Answer: b.

The maximum amount that JK Inc. is willing to pay is the present value of theincremental cash flows using a discount rate of 12%.

Years 1 to 2 present value of operating after-tax cash flows= $180,000 x (1-35%) x 1.690 = $197,730

Year 4 and beyond present value of operating after-tax cash flows brought back toend of Y3/beginning of Y4= [$240,000 x (1-35%)] / 0.12 x 0.712 = $925,600

Year 5 present value of operating after-tax cash inflows= [$700,000 x (1-35%)] x 0.567 = $257,985

Net present value = $197,730 + $925,600 + $257,985= $1,381,315 = $1,381,000 (rounded)

Choice a) Use before tax amount= ($180,000 x 1.690) + ($240,000 / 0.12 x 0.712) + ($700,000 x 0.567)= $304,200 + $1,424,000 + $396,900 = $2,125,100 = $2,125,000

Choice c) Does not use PV= ($180,000 x (1-35%) x 2) + ($240,000 x (1-35%) / 0.12) + (700,000 x(1-35%))= $234,000 + $1,300,000 + 455,000 = $1,989,000

Choice d) Does not use PV for $240,000= ($180,000 x (1-35%) x 1.690) + ($240,000 x (1-35%) / 0.12) + ($700,000x (1- 35%) x 0.567) = $197,730 + $1,300,000 + $257,985 = $1,755,715= $1,756,000

2. Answer: d.In the case of bankruptcy, the claim of the creditors on the companys assets takesprecedence over the claim of the preferred shareholders, and the claim of thepreferred shareholders takes precedence over the claim of the common shareholders.Therefore, bondholders have priority over preferred shareholders in a claim of theassets.

Choices a) and b) Both are the true statements of the preferred stock features.

Choice c) Preferred stock is a hybrid security, containing characteristics of both debtand common equity. Like common equity, cash dividends paid to preferredshareholders are not an allowable deduction for tax purposes; however,interests paid on debt are tax-deductible for the firm.



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3. Answer: b.

Year Cash Flow

PV

Factor

PV of Cash

FlowsBuy New EquipmentCost of new equipment 1 $(200,000) 1 $(200,000)Salvage value of old equipment 1 $30,000 1 $30,000Salvage value of new equipment 5 $100,000 0.747 $74,700

Annual operating costs 1-5 $(10,000) 4.212 $(42,120)Revenue 1-5 $90,000 4.212 $379,080Total $241,660

Keep Old EquipmentRepairs immediately 1 $(9,000) 1 $(9,000)Repairs at the end of 3 years 3 $(10,000) 0.84 $(8,400)

Annual operating costs 1-5 $(12,000) 4.212 $(50,544)Revenue 1-5 $70,000 4.212 $294,840Salvage value of old equipment 5 $5,000 0.747 $3,735Total $230,631

NPV in favour of buying new equipment $11,029

Choice a) Excludes salvage value of old equipment:= $11,029 - $30,000 = $(18,971)

Choice c) Excludes repairs at the end of 3 years:= $11,029 + $8,400 = $19,429

Choice d) Does not use present value factors for operating costs and revenue:Buy new equipment = -$200,000 + $30,000 + $74,700 - $50,000 +$450,000 = $304,700

Keep old equipment = -$9,000 - $8,400 - $60,000 + $3,735 + $350,000= $276,335NPV in favor of buying new equipment: $304,700 - $276,335 = $28,365

4. Answer: c.Special dividends are most likely to increase shareholders wealth because they areusually used to distribute the excess profits to shareholders after a period of unusuallyhigh earnings.

Choices a) and b) Stock dividends and stock splits are distribution of additional sharesto a firms shareholder. As a result, the number of shares will increase,and the price per share will decrease. Therefore, there is no impact onoverall shareholders wealth.

Choice d) Reverse splits are the opposite of stock splits. The number of outstanding



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5. Answer: b.

Additional cash saved is calculated as follows:

Annual A/R savings: [(28 days - 23 days) / 365 days] x ($800,000 x 1.05)= $11,506.85

Annual A/P savings: [(28 days - 20 days) / 365 days] x ($500,000 x 1.06)= $11,616.44

Additional cash savings in Year 3: $23,123.29

Choice a) Calculated by factoring solely the change in the days in A/R.Choice c) Calculated by factoring solely the change in the days in A/P.Choice d) Does not use increased amount of annual sales and cost of goods sold:

Annual A/R savings: [(28 days - 23 days) / 365 days] x $800,000= $10,958.9

Annual A/P savings: [(28 days - 20 days) / 365 days] x $500,000= $10,958.9Total savings in Year 3: $21,917.81

6. Answer: d.Effective annual rate (EAR) = [1+(Quoted rate/m)]m-1

Monthly compounding: [1 + (12%/12)]12 - 1 = 0.1268 = 12.68%;Total amount = $150,000 x 1.1268 = $169,020

Choice a) Stated/Quoted annual interest rate: 12%;Total amount = $150,0000 x 1.12 = $168,000

Choice b) Compound semi-annually: (1+12%/2)2 - 1 = 0.1236 = 12.36%;Total amount = $150,000 x 1.1236 = $168,540

Choice c) Compound quarterly: (1+12%/4)4 - 1 = 0.1255 = 12.55%;Total amount = $150,000 x 1.1255 = $168,825

7. Answer: c.The price of the bonds when the investor purchased them is not relevant to the currentmarket price. The current market value is equal to the present value of the future cashflow, using 13 periods at 4%: (N=13, i=4%, PMT=$4,200, FV=70,000)($70,000 x 0.601) + ($4,200 x 9.986) = $42,070 + $41,941.20 = $84,011.20= $84,000 (rounded)

Choice a) Uses the coupon rate: ($70,000 x 0.469) + ($4,200 x 8.853)= $32,830 + $37,182.60 = $70,012.60 = $70,000 (rounded)

Choice b) Does not use PV of the principal: $70,000 + ($4,200 x 9.986)= $111,941.20 = $112,000 (rounded)

Choice d) Uses the face value only: $70 000 + (13 x $4 200) = $124 600



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9. Answer: a.

The total cost of the preferred shares:

Par value: $ 120Issue cost: $ (2.63) $4.25 x (1 - 0.38)Net proceeds: $117.37

Dividend per share: $8.50Cost per share = $8.50/$117.37 = 7.24%

Choice b) Does not consider the issue cost: $8.50 / $120 = 7.08%Choice c) After-tax dividend is used for the calculation: $8.50 x (1 - 0.38) / $117.37

= 4.49%Choice d) No tax considered: $8.50 / ($120 - $4.25) = 7.34%

10. Answer: b.Company A = 3% + [1.5 x (7.5%-3%)] = 9.8%; this does not meet the expectation of

12%.Company B = $6.00/12% = $50; as the share price is $45, this meets the expectation.Company C = ($3.80x1.015)/(12%-1.5%) = $36.73; as the share price is $38, this

does not meet the expectation.

11. Answer: b.After-tax cost of debt = 8% x (1 - 0.37) = 5%; Cost of preferred shares = 6%;Cost of common shares = 17%Total long-term debt (Total liability - Current liability) + Equity= $7M + $3M + $10M = $20MWACC = (5% x 7/20) + (6% x 3/20) + (17% x 10/20)

= 1.75% + 0.90% + 8.5% = 11.15% ~ 11.2%

Choice a) Uses total liability:WACC = (5% x 8.5/21.5) + (6% x 3/21.5) + (17% x 10/21.5)= 1.98% + 0.84% + 7.91% = 10.73% ~ 10.7%

Choice c) Ignores tax on debt:WACC = (8% x 7/20) + (6% x 3/20) + (17% x 10/20)= 2.80% + 0.90% + 8.5% = 12.20%

Choice d) Uses average of all three rates: (8+6+17)/3 = 10.33% ~ 10.3%

12. Answer: a.CAPM = Rf+ (Rm-Rf)

= 2.0% + 1.5(4.5%) = 8.75%

Choice b) Ignores risk-free rate:



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13. Answer: a.Mutually exclusive means that only one project in a set of possible projects can beaccepted and that the projects compete with each other. Therefore, the project with

the highest NPV should be accepted.

PV of Project A: ($7,000x3.791)=$26,537 (N=5, i=10%, CF=$7,000)NPV of Project A: $26,537-$16,000=$10,537

PV of Project B: ($7,500x3.170)=$23,775NPV of Project B: $23,775-$20,000=$3,775 (N=4, i=10%, CF=$7,500)

Choice b) Incorrectly compares NPV.Choice c) Accepts projects with positive NPVs considering the projects as

independent projects.Choice d) Incorrectly applies NPV concept.

14. Answer: d.Current Degree of Total Leverage (DTL)= Degree of Operating Leverage (DOL) x Degree of Financial Leverage (DFL)

DTL = DOL x DFL

2.10 = 1.20 x DFLDFL = 2.10 / 1.20 = 1.75

DFL = Percentage change in EPS/Percentage change in EBITTherefore, Percentage change in EPS = 1.75 x 15% = 26.25%

Choice a) Uses DOL x increase = 1.20 x 15% = 18%Choice b) Uses DTL x increase = 2.10 x 15% = 31.5% = 32% (rounded)Choice c) Uses gross profit margin % and increase = 60% x 15% = 9%

15. Answer: c.P/E ratio = Market Value per Share/Earnings per Share (EPS)$12.67/$1.12 = 11.31

Choice a) Uses EBIT to get EPS: $12.67/($900,000/500,000) = $12.67/$1.80 = 7.04Choice b) Uses book value: ($5,100,000/500,000)/$1.12 = $10.20/$1.12 = 9.11Choice d) Uses formula incorrectly: $1.12x$12.67 = 14.19

16. Answer: d.A poison pill is a financial device designed to make the target firms stock lessattractive to the acquirer. It entails issuing special securities to existing shareholdersthat entitle them to unusual rights and privileges (such as unusual voting rights,lucrative redemption features or generous conversion options) if the issuing firmbecomes the target of a takeover bid Choice d) is an example of such a financial



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17. Answer: c.i) and iv) are correct statements regarding systematic risks:

i) Systematic risk is a risk that influences a large number of assets. Becausesystematic risks have market-wide effects, they are also called market risks.

iv) The beta coefficient indicates how sensitive the return of a particular asset is withrespect to the general market condition and measures how much systematic risk aparticular asset has relative to an average asset (i.e. an average asset has a betaof 1).

Choices a), b) and d) ii) and iii) are not correct statements regarding systematicrisks:

ii) Unlike unsystematic risks, systematic risks cannot be eliminated by diversification.A systematic risk affects almost all assets to some degree; as a result, no matter howmany assets are put into a portfolio, the systematic risk cannot be eliminated.

iii) The variance is the average squared deviation between the actual return and theaverage total return of assets. It is a measure of total risks, which includes both

systematic and unsystematic risk.

18. Answer: d.Value of a right = ($30-$24)/(4+1) = $1.20

Choice a) This is correct if the market price of a share is less than the subscriptionprice of a share with four rights.

Choice b) Multiplies the cash required by the number of rights and divides by thecurrent value of the shares: ($24 x 4)/$30=$3.20

Choice c) Incorrectly uses the number of rights as a denominator: ($30-$24)/4=$1.5019. Answer: c.

Since Hill Charity earned over $2,000,000 (or a minimum average of $1,000,000 in thelast two years), it is not exempt from the capital assets rule. Therefore, the contributedcapital assets should be recorded at fair value.

20. Answer: b.

Current ratio = (cash + short-term investments + accounts receivable + inventory) /current liabilities = ($30+$2+$41+$34)/$60 = 1.78

Choice a) Uses quick ratio instead: ($30 + $41 + $2)/$60 = 1.21Choice c) Uses total assets and total liabilities: $238/$111 = 2.14Choice d) Uses total assets in numerator: $238/$60 = 3 96



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21. Answer: c.Times interest earned = Income before interest and taxes Interest= ($64+$47+$18)/$18 = 7.17 times

Choice a) Uses net income: $64/$18 = 3.55 timesChoice b) Uses net income before tax but after interest expense: ($64+$47)/$18

= 6.17 timesChoice d) Uses sales instead of income before interest and taxes: $300/$18

= 16.7 times

22. Answer: c.Accounts receivable turnover in days = 365/[Net sales/Average net accountsreceivable] or Average net accounts receivable/Net credit sales x 365 days= 365/{($300)/[($41 + $50)/2]} = 55.36 (55.3583) days

Choice a) Uses formula incorrectly: $300/{(365)/[($41 + $50)/2]}= 37.40 (37.397) days

Choice b) Uses Year 2 accounts receivable: 365/($300/$41) = 49.88 daysChoice d) Uses Year 1 accounts receivable: 365/[$300/$50] = 60.83 days

23. Answer: a.Expected Profit Calculation[Year 1]% of completion = $5,000/($5,000+$35,000) = 12.50%Expected profit = $50,000 - ($5,000+$35,000) = $10,000 x 12.50% = $1,250[Year 2]% of completion = ($5,000+$19,000)/($5,000+$19,000+$13,500) = 64%Expected profit = $50,000 - ($5,000+$19,000+$13,500) = $12,500 x 64% = $8,000$8,000 is cumulative profit to the end of Year 2$8,000 - $1,250 (the expected profit in Year 1) = $6,750

Choice b) Does not deduct the profit in Year 1 = $8,000Choice c) Uses only Year 2 cost information and ignores cost and profit in Year 1

% of completion = $19,000 / ($19,000+$13,500) = 58.46%Expected profit = $50,000 - ($19,000+$13,500) = $17,500 x 58.46%= $10,231

Choice d) No calculation for % of completion and no consideration about the profit

recognized in Year 1= $50,000 - ($5,000+$19,000+$13,500) = $12,500



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24. Answer: d.Since YGO Inc. has significant influence over DNO Inc., the investment must beaccounted for using the Equity Method.

The investment in DNO Inc.= $600,000 (initial) - 45% x $150,000 (dividends) + 45% x $95,000 (income)= $600,000 - $67,500 + $42,750 = $575,250

Choice a) The dividends are added instead of being deducted: $600,000 + $67,500+ $42,750 = $710,250

Choice b) The current value is used for initial investment: ($11.50 x 60,000) -$67,500 + $42,750 = $665,250

Choice c) The dividends are not considered: $600,000 + $42,750 = $642,750

25. Answer: c.HB 4410: An organization may choose to recognize contributions of materials andservices, but should do so only when a fair value can be reasonably estimated andwhen the materials and services are used in the normal course of the organization'soperations and would otherwise have been purchased.

26. Answer: c.

Since the combination is occurring with an exchange of cash the new balance sheetwill be:FRI Ltd.

Current assets ($140k+$85k-$111k) $114,000Non-current assets ($85k+$55k) 140,000

Total Assets $254,000

Liabilities ($15k+$29k) $ 44,000

Common stock (FRI Ltd.) 160,000Retained earnings (FRI Ltd.) 50,000

Total Liabilities and Equity $254,000

Choice a) Common stock of both companies = $160k + $76k = $236kChoice b) Common stock of both companies and END Ltd.s retained earnings

= $160k + $76k + $35k = $271k

Choice d) Uses total assets less liabilities of combined companies for common stock= $225 + $140 - $111 - $15 - $29 = $254 - $44 = $210k



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27. Answer: d.Warranty liability and warranty expense recorded in Year 1: $650,000 x 0.5% = $3,250Warranty liability balance at the end of Year 1 / beginning of Year 2: $1,900 Cr.

Warranty repairs incurred and recorded in Year 1: $3,250 - $1,900 = $1,350

Year 1 warranty liability with a correct estimate: $650,000 x 0.4% = $2,600Therefore, warranty liability was overstated by: $3,250 - $2,600 = $650The beginning warranty liability balance of Year 2 after adjustment is: $1,900 - $650= $1,250 Cr.

Year 2 warranty liability = $700,000 x 0.4% = $2,800 Cr.Year 2 ending balance = $2,800 + $1,250 = $4,050 Cr.

Choice a) Ignores Year 2 beginning balance: $2,800Choice b) Ignores adjustment: $2,800 + $1,900 = $4,700Choice c) Adds the adjustment:

Year 2 beginning balance: $1,900 + $650 = $2,550Year 2 ending balance: $2,800 + $2,550 = $5,350

28. Answer: d.

Tax loss carry backs can go back up to three years.Year Taxable Income Income Tax Recovery6 $40,000 $12,0007 $72,000 $21,6008 $55,000 $16,500

Total $167,000 $50,100

Choice a) Does not use the three-year rule and recovers additional tax from Year 5.

Year Taxable Income Income Tax Recovery5 $33,000 $9,9006 $40,000 $12,0007 $72,000 $21,6008 $55,000 $16,500

Total $200,000 $60,000Choice b) Recovers back only two years: $21,600 + $16,500 = $38,100Choice c) Recovers back only one year.



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29. Answer: d.The pension-related expense is increased by the interest cost accrued to employeeson the pension obligation. Therefore, increasing the interest rate would increase the

net interest cost and hence the pension-related expense.

Choice a) decreases the value of the pension plan assets and the accrued pensionbenefits (net defined benefit liability) by the same amount. There is noeffect on the pension-related expense.

Choice b) increases the value of the pension plan assets, indirectly reducing thepension-related expense for the year.

Choice c) would result in an actuarial gain from the pension fund assets. This gainwould either have no effect on the pension-related expense (if it is a small

amount), or would effectively decrease the pension-related expense underASPE. Under IFRS it would affect other comprehensive income, not anexpense account on the P&L.

30. Answer: b.Site restoration obligation at December 31, Year 16:

= $300,000 FV, n = 9 years, I = 6%)= ($200,000 + $100,000) x .592 = $177,600

Choice a) The additional ARO is not considered:= $200,000 FV, n=9, i=6%= $200,000x0.592=$118,400

Choice c) Only PV for the additional ARO:= $100,000 FV, n=9, i=6%= $100,000x0.592=$59,200

Choice d) No PV for all ARO:= $100,000+200,000

31. Answer: b.

Purchase Price $1,600,000- Net Assets Acquired $(750,000)= Purchase Price Discrepancy $850,0000

- FV Adjustments (-230,000+140,000+50,000) $(40,000)= Goodwill $810,000

Choice a) Uses retained earnings and common shares as goodwill:= $220 + $530 = $750

Choice c) Uses net identifiable assets at book value:Book value of the net identifiable assets = $4,300 - $3,550 = $750G d ill $1 600 $750 $850



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32. Answer: d.

YG Ltd. will record the transactions as follows:

Dr. Cr.August 31, Year 2Inventory (USD 100,000 x $1.25 CAD) 125,000

A/P 125,000September 30, Year 2

A/P ([$1.25 - $1.20] x USD 100,000) 5,000FX gain/loss 5,000

January 31, Year 3

A/P (125,000 - 5,000) 120,000FX gain/loss 12,000Cash ($1.32 x 100,000) 132,000

Choice a) Only considers the exchange rate at the time of payment:FX gain/loss = ($1.25 - $1.32) x USD 100,000 = -$7,000 in Year 3, no FXgain/loss in Year 2

Choice b) Only considers the exchange difference at time of payment:FX gain/loss = ($1.20 - $1.32) x USD 100,000 = -$12,000 in Year 3, no FX

gain/loss in Year 2Choice c) Uses initial exchange rate to compare the exchange rate at the time of

payment. FX gain/loss = ($1.25 - $1.32) x USD 100,000 = -$7,000 inYear 3= ($1.25 - $1.20) x 100,000 = $5,000 in Year 2

33. Answer: a.Operating income = $90,000 + $30,000 (accrued sales) - $18,000 (COGS)

+ $24,000 (prepaid rent for Year 3) - $1,000 (prorated amortization expense)- $3,500 (interest expense)= $121,500Prorated amortization = $10,000/5 = $2,000/year= $2,000 x = $1,000 for 6 months (July 1 to December 31, Year 2)

Choice b) COGS was not deducted:= $90,000 + $30,000 (accrued sales) + $24,000 (prepaid rent for Year 3)- $1,000 (amortization) - $3,500 (interest expense) = $139,500

Choice c) The amortization was calculated for the whole year:= $90,000 + $30,000 (accrued sales) - $18,000 (COGS) + $24,000(prepaid rent for Year 3) - $2,000 (amortization) - $3,500 (interestexpense) = $120,500

Choice d) The rent was not added back:$90 000 $30 000 ( d l ) $18 000 (COGS) $1 000



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34. Answer: c.IFRS 8 requires an entity to report financial and descriptive information about itsreportable segments. Reportable segments are operating segments or aggregations

of operating segments that meet specified criteria: [IFRS 8.13] its reported revenue, from both external customers and intersegment sales or

transfers, is 10 per cent or more of the combined revenue, internal and external, ofall operating segments; or

the absolute measure of its reported profit or loss is 10 per cent or more of thegreater, in absolute amount, of:o (i) the combined reported profit of all operating segments that did not report a

loss and (ii) the combined reported loss of all operating segments that reported aloss; or

its assets are 10 per cent or more of the combined assets of all operatingsegments.

Segment Revenue Operating Profit (Loss) AssetsA 60.1% O 12/24=50% O 57.3% OB 27.5% O 11/24=45.8% O 28.8% OC 6.5% X 4/24=16.7% O 7.1% XD 5.8% X 1/24=4.2% X 6.7% X

Total 100% 100%

Since segments A, B and C meet the quantitative thresholds, choice c) is the correctanswer.

Segment D does not meet the quantitative thresholds; therefore, choice d) is incorrect.

35. Answer: a.

Since Innov is unable to sell the new product, it cannot be recognized as an asset.Therefore, all costs must be expensed.

Choice b) Assumes all costs except advertising can be capitalized.Choice c) Assumes all costs can be capitalized.Choice d) Assumes materials to build and test can be capitalized.

36. Answer: a.It is necessary to apply the recognition criteria to the separately identifiable

components of a single transaction in order to reflect the substance of the transaction.Therefore, the revenue from the equipment should be recognized separately from theservice agreement. Using the fair value method:

Revenue from service agreement = $300,000 x [$80,000/($240,000 + $80,000)]$75 000


3 A


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37. Answer: c.Ending inventory = opening inv. + (purchases + freight - purchase discount) - cost ofgoods sold (COGS) = sales x (1 - gross profit)

COGS = $1.4M x 0.55 = $770,000Ending inventory = 150,000 + (800,000 + 30,000 - 14,000) - 770,000 = $196,000

Choice a) Deducts freight-in instead of adding it:Ending inventory = $150,000 + ($800,000 - $30,000 - $14,000) - $770,000= $136,000

Choice b) Freight and discount are not considered:Ending inventory = $150,000 + $800,000 - $770,000 = $180,000

Choice d) 45% is used for COGS instead of 1-45% (55%)

COGS = $1.4M x 0.45 = $630,000Ending inventory = $150,000 + ($800,000 + $30,000 - $14,000) - $630,000= $336,000

38. Answer: c.

Basic shares = {[150,000x(12/12)] + [30,000x(9/12)]} x 1.05 = 181,125Diluted shares = 181,125 + [40,000x(3/12)] = 191,125

Choice a) Does not consider retroactive treatment of stock dividend:Basic shares = [150,000x(12/12)] + [30,000x(9/12)] = 150,000 + 22,500 = 172,500Diluted shares = 172,500 + [40,000x(3/12)] = 182,500

Choice b) The stock dividend is weighted:Basic shares = [150,000x(12/12)] + [30,000x(9/12)] + [180,000x0.05x(5/12)]= 150,000 + 22,500 + 3,750 = 176,250Diluted shares = 176,250 + [40,000x(3/12)] = 186,250

Choice d) Does not use weighted average method:Basic shares = 150,000 + 30,000 = 180,000Diluted shares = 180,000 + 40,000 = 220,000

39. Answer: b.One of the disclosure principles in the Guidance on Preparation and Disclosure statesthat the MD&A should be forward-looking.

Choice a) This is an objective of the financial statement disclosure notes.Choice c) This is an objective of the auditors report.Choice d) This is contained in the financial statement disclosure notes.

40 Answer: b


41 A


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41. Answer: c.The allowance for uncollectible accounts:

$10,000 Beg.

Write-off $12,000 $6,500 Collection$42,000 Allownc. for Year 2*$46,500 Ending Bal.

* Credit sales = $3,000,000 x 70% x 2%

Choice a) The Year 1 written-off receivable that was collected in Year 2 is not addedback: $10,000 - $12,000 + $42,000 = $40,000

Choice b) Assumes the allowance equals only the allowance related to Year 2 sales:$42,000

Choice d) Written-off amount is not considered: $10,000 + $6,500 + $42,000= $58,500


42 Answer: b


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42. Answer: b.The amounts would be reported under Operating Activities on the Statement of CashFlows:

Net income earned $32,000Add back depreciation 25,000Add back loss on sale of capital asset 5,200Decrease in inventory 15,000Increase in accounts payable 26,000Increase in accounts receivable (56,000)

Increase (decrease) in cash from operating activities $47,200

Choice a) incorrectly deducts accounts payable and adds accounts receivable:

Net income earned $ 32,000Add back depreciation 25,000Add back loss on sale of capital asset 5,200Decrease in inventory 15,000Increase in accounts payable (26,000)

Increase in accounts receivable 56,000Increase (decrease) in cash from operating activities $107,200

Choice c) incorrectly includes all transactions as operating activities:

Net income earned $ 32,000Add back depreciation 25,000Add back loss on sale of capital asset 5,200

Decrease in inventory 15,000Increase in accounts payable 26,000Increase in accounts receivable (56,000)Retirement of long-term payable (27,800)Purchase of land (18,000)

Increase (decrease) in cash from operating activities $ 1,400

Choice d) incorrectly deducts loss on sale of machinery and the amortization:

Net income earned $ 32,000Deduct depreciation (25,000)Deduct loss on sale of capital asset (5,200)Decrease in inventory 15 000


43 Answer: a


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43. Answer: a.

Restricted contributions Match revenues to expenses for the period; revenues to be

used against expenses for future periods should be deferred.

Recognize $4,000 of restricted contributions for water and irrigation project as theexpense was incurred in Y5.

Restricted contributions for expenses for future periods are deferred and recognizedas revenue in the same periods as related expenses incurred. Since expenses for thebuilding clinics are not incurred in Y5, the revenue is not recognized in the currentperiod.

If the restricted contribution is for capital, revenue is recognized to correspond withamortization. However, if the capital asset is not subject to amortization, there will beno expenses to match against. Therefore, restricted capital asset contributions of thistype are reflected in the statement of changes in net assets in the same manner ofendowment contributions.

Unrestricted contributions are reported as revenue in the period received or receivable

because there are no particular related expenses associated with them. Therefore$18,000 of unrestricted grants for the general fund should be recognized in the currentperiod.

Endowment contributions are not shown in the statement of operations but arereflected in the statement of changes in net assets. It is because endowmentcontributions will not have related expenses.

Therefore, for Year 5, revenue = $4,000 + $18,000 = $22,000.

Choice b) Recognizes the entire amount of contributions for water and irrigationproject: $6,000 + $18,000 = $24,000

Choice c) Incorrectly recognizes restricted fund for land and endowment as revenue:$4,000 + $10,000 + $18,000 + $20,000 = $52,000

Choice d) Recognizes all the contributions: $6,000 + $30,000 + $10,000 + $18,000+ $20,000 = $84,000


44 Answer: c


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44. Answer: c.Under IFRS, GBSJ Refining should record this as a finance lease and not anoperating lease because the leased asset is specialized, so that, without major

modification, it is of use only to GBSJ. Also, the lease term is long enough that thelease will receive substantially all of the benefits that are expected to be derived fromusing the leased property over its life (i.e. the lease term is for the major part of theeconomic life of the asset even if title is not transferred). The implicit interest rate isused, and not the lower of the two rates, as IFRS specifies that the discount rate to beused in calculating the present value of the minimum lease payments is the interestrate implicit in the lease, if this is practicable to determine.

The value of the finance lease is the lower of fair value and the present value of the

minimum lease payments.

PV of the minimum lease payments = $80,000 + ($80,000 x 5.582) = $526,560= $526,600 (rounded)

Since this is lower than the FV of $600,000, $526,560 is what should be recorded forthe lease.

Choice a) Mistakenly assumes an operating lease.Choice b) Ignores the fact that the payment is made in the beginning of the year:$80,000 x 6.210 = $496,800

Choice d) Uses the fair value as the amount to capitalize: $600,000

45. Answer: d.The entry to correct this error is shown below:Machinery $12,000

Amortization expense (Year 13) $2,000

Retained earnings $10,000Accumulated depreciation (2 years x $12,000 / 6 years ) $4,000

Since the Year 13 books are still open, amortization expense should be recorded forYear 13, and therefore, retained earnings increase by $10,000.

Choice a) This is an incorrect statement the retained earnings will be impacted bythe error correction.

Choice b) Incorrectly assumes that impact on retained earnings is the same amountas the adjustment on accumulated depreciation (2 years x $12,000 /6 years = $4,000).

Choice c) Incorrectly estimates the impact on retained earnings by assumingYear 13 books are closed:Machinery $12 000


46. Answer: a.


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46. Answer: a.Pension assets on December 31, Year 13:Opening balance in plan assets (Jan. 1, Y13) $172,500

Actual earnings on plan assets $25,000Post-retirement benefits paid $(35,000)Cash paid into pension plan $75,000Ending balance in plan assets (Dec. 31, Y13) $237,500

Choice b) Incorrectly uses the expected earning rates to calculate the balance:$172,500 + $17,250 - $35,000 + $75,000 = $229,750

Choice c) Excludes benefit paid: $172,500 + $25,000 + $75,000 = $272,500Choice d) Incorrectly uses raw data: $298,000 + $25,000 + $75,000 = $398,000

47. Answer: d.The audit risk model = inherent risk x detection risk x control risk. Enterprise risk is nota component of the model.

48. Answer: a.Unauthorized cheques and withdrawals, and previously unrecorded deposits would becaught during the bank reconciliation process. The bank reconciliation process serves

to catch or detect these errors.

Choice b) The bank reconciliation process does nothing to ensure that unauthorizedbank transactions do not occur.

Choice c) While unauthorized bank transactions would be caught during thereconciliation process, it does nothing to correct or reverse theunauthorized transaction. The detection of this error, however, wouldsignal a need to correct the companys books through a journal entry.

Choice d) Compensating controls entail redundancy and segregation of duties. Noreference is made to either of these in the question.

49. Answer: c.The inventory list is insufficient because it cannot stop the installation of unauthorizedsoftware. Even if a department knows what software is legal, CU is still liable for anyunauthorized software on its computers. In addition, all software purchases should bemade through the IT department, not directly by user departments.

Choices a), b) and d) would all contribute to making the culture at the university onethat does not tolerate illegal software or copyright infringement.

50. Answer: d.All of the listed are requirements under the Sarbanes-Oxley Act (SOX).


51. Answer: d.


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The three factors are incentive/pressures, opportunities and attitudes/rationalization.

Choice a) This is false identifying the risk factors may help prevent or deter fraud,but would not be helpful in detection.Choice b) This is false this is an example that may lead to fraudulent financial

reporting.Choice c) This is false controls may remove opportunity, but incentive and

rationalization are personal circumstances and values.

52. Answer: c.Management has the responsibility to establish and maintain internal controls.

53. Answer: b.The transaction-related audit objectives are occurrence, completeness, accuracy,classification and cutoff. Segregation of duties is not an objective but a control activity.

54. Answer: d.The external auditor conducts an audit to attest that the financial statements of theauditee are fairly presented and stated in accordance with specified accounting

principles.

55. Answer: b.Variable cost: ($132,000 - $120,500) / (1,550 - 1,200) = $11,500/350 = $32.857

Total costs = fixed costs + variable costsAt high:$132,000 = FC + $32.857 x 1,550FC = $132,000 - $50,928.35 = $81,071.65 ~ $81,072

Similarly at low:$120,500 = FC + $32.857 x 1,200FC = $81,071.60 ~ $81,072

Next quarter:Total costs = $81,072 + ($32.857 x 1,300)= $123,786.10 ~ $123,800

Choice a) Uses third quarter for the low.Variable cost: ($132,000 - $118,750) / (1,550 - 1,210) = $13,250/340= $38.971Fixed cost: $132,000 - ($38.971 x 1,550) = 71,594.95 ~ $71,595Next quarter: $71 595 + ($38 971 x 1 300) = $122 257 30 ~ $122 300


56. Answer: a.


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Contribution margin ratio = $13,500,000 / $24,000,000 = 0.5625Breakeven sales = $7,200,000 / 0.5625 = $12,800,000Margin of safety ratio = ($24,000,000 - $12,800,000) / $24,000,000 = 0.467

Choice b) Uses the wrong denominator.Margin of safety ratio = ($24,000,000 - $12,800,000) / $12,800,000= 0.875

Choice c) Contribution margin per package with two basic and one self-propelled= ($3,600,000 / 30,000 units x 2 + $9,900,000 / 60,000 units x 1) = $405Contribution margin ratio= $405 / ($6,000,000 / 30,000 units x 2 + $18,000,000 / 60,000 units x 1)

= 0.5786Breakeven sales = $7,200,000 / 0.5786 = $12,444,444Margin of safety ratio = ($24,000,000 - $12,444,444) / $24,000,000= 0.481

Choice d) Calculates the same incorrect breakeven figure as in choice c) and usesthe wrong denominator.Margin of safety ratio = ($24,000,000 - $12,444,444) / $12,444,444 = 0.929

57. Answer: b.Sales - CGS = Gross margin (40% of sales), where CGS = cost of goods soldCGS = 60% of salesCGS = 60% x $1,960,000

= $1,176,000Finished goods inventory, August 13= cost of goods available for sale - CGS = $1,500,000 - $1,176,000 = $324,000

Choice a) Miscalculates CGS as: CGS = sales / 140%

CGS = $1,960,000 / 140% = $1,400,000Finished goods inventory, August 13 = $1,500,000 - $1,400,000= $100,000

Choice c) Subtracts beginning inventory: CGS = 60% of salesCGS = 60% x $1,960,000 = $1,176,000Finished goods inventory, August 13= cost of goods available for sale - CGS - finished goods inventory, July 1= $1,500,000 - $1,176,000 - $82,000 = $242,000

Choice d) Adds July 1 inventoryFinished goods inventory, August 13= cost of goods available for sale - CGS + finished goods inventory, July 1= $1,500,000 - $1,176,000 + $82,000 = $406,000


58. Answer: d.


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Let OH = indirect manufacturing costsCost of goods completed= Cost of goods available for sale - Finished goods inventory, July 1

= $1,500,000 - $82,000= $1,418,000

Work-in-process inventory, August 13= Work-in-process inventory, July 1 + Prime costs + OH - Cost of goodscompleted= $640,000 + $490,000 + $420,000 - $1,418,000= $132,000

Choice a) Work-in-process inventory, August 13= Work-in-process inventory, July 1 + Prime costs + OH - Cost of go

cma 2013 sampleentranceexam revised may 15 2013

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