Assignment 5 Flashcards
Steep Slopes Development Inc. purchased a property (land and building) for $1,135,000 five years ago. The building is expected to
have a useful life of 25 years, after which it will be have a salvage value of $15,000. Depreciation expense on the income statement using the straight line method is $17,000.
Question 4
What was the purchase price of the building and the land, respectively?
- $340,000; $795,000
- $440,000; $695,000
- $425,000; $710,000
- There is insufficient information given to determine the cost of both the building and the land.
Correct Answer: 2
Option (2) is correct because the purchase price of the building is $440,000 and the purchase price of the land is $695,000. To determine the original purchase price of the building, the original estimated or economic life of 25 years must be used.
Cost - Salvage Value (if any) Annual Depreciation Expense =
Estimated Remaining Life (in years)
Re-arranging this equation, we get:
Purchase price = Cost= (Annual Depreciation Expense × Estimated Economic Life) + Salvage Value
= ($17,000 × 25) + $15,000
= $440,000
The original purchase price of the building was $440,000. Therefore, the cost of the land is $695,000 ($1,135,000 – $440,000).
Options (1) and (3) are incorrect because they do not show the correct purchase prices of the building and the land.
Option (4) is incorrect because there is sufficient information available to determine these costs.
Question 7
Marini is in the business of buying stationary directly from the manufacturer and then reselling to retailers. Which one of the following transactions is MOST likely to violate the Generally Accepted Accounting Principles (GAAP)?
- Marini buys three months’ worth of cleaning supplies in March and expenses the total amount.
- Marini buys 30 boxes of pens in June and expenses the total amount before they are resold.
- Marini buys a printer for the office and expenses it according to its expected useful life.
- Marini buys annual insurance for the business and expenses the cost over the entire year.
Correct Answer: 2
Option (2) is correct because Marini is violating the matching principle: expenses directly associated with particular revenues should be recognized in the same period in which the revenue is recognized. Marini is in the business of supplying stationary to retailers; the pens are inventory and the expense should be matched with the revenue earned upon their sale.
Option (1) is incorrect because it applies the materiality principle: relatively low-cost item, such as cleaning supplies, that are used up over several months may be expensed immediately.
Options (3) and (4) are incorrect because they apply the matching principle, which allocates the cost of the assets that benefit the business for more than one accounting period.
Question 8
A limited partnership is formed between two general partners and three limited partners. All five partners contribute $85,000 to the
partnership. A creditor obtains a judgment against the limited partnership for $2,100,000. What is the maximum amount, beyond
their initial investment, that any one limited partner could be personally liable to the creditor for?
- $0
- $85,000
- $700,000
- $2,100,000
Correct Answer: 1
Option (1) is correct because the form of organization is a limited partnership, where the limited partners do not take part in the day-to-day operations of the partnership, therefore their personal liability is limited to the amount paid into, or agreed to pay into partnership.
Options (2), (3), and (4) are incorrect because they do not show the maximum amount that a limited partner may be held personally liable for beyond their initial investment.
Question 10
Which of the following statements regarding accounting is TRUE?
- Net income reported on the income statement is the same as taxable income that is reported on the income tax return.
- Land is a depreciable asset.
- Depreciation is not a deductible expense in computing taxable income.
- The straight line method of depreciation estimates the physical life of the asset.
Correct Answer: 3
Option (3) is correct because it is a true statement. Option (1) is incorrect because taxable income on the income tax return is derived using capital cost allowance (CCA), whereas depreciation expense is used to derive net income on the income statement; depreciation expense and CCA may differ.
Option (2) is incorrect because land is not a depreciable asset. Option (4) is incorrect because straight line depreciation estimates the economic life of the asset, meaning how many years the asset will benefit the enterprise, not its physical life.
Question 11
Which of the following statements regarding forms of business organizations is TRUE?
- A limited partnership (LP) is a variation of a general partnership where all partners are actively involved in management and are jointly and severally liable.
- A limited liability partnership (LLP) requires that limited partners are passive investors only, who cannot be involved in the management of the firm.
- A corporation can never cease to exist.
- A corporation has the ability to defer income taxes for the owners by keeping profits in the form of retained earnings.
Correct Answer: 4
Option (4) is correct because when a corporation earns profits, the directors can choose to distribute the income to the shareholders in the form of dividends or choose to keep the profits invested in the company in the form of retained earnings.
Option (1) is incorrect because limited partnerships (LPs) are not a form of general partnership in that they include both passive and active partners, with their risk of liability defined by their involvement within the partnership.
Option (2) is incorrect because a limited liability partnership (LLP) allows each limited partner to be active and to be involved in managerial decision making. Only limited partners in a limited partnership (LP) are required to be passive investors.
Option (3) is incorrect because a company can cease to exist if it is terminated by the shareholders.
Question 12
Cardinal Limited has three shareholders: Asviny and Bassam each own 40% of the shares while Ciara owns the remaining 20%. The retained earnings as at December 31, 20X1 were $120,000. No dividend payments or withdrawals by shareholders were made between December 31, 20X1 and December 31, 20X2. The shareholders’ equity section of the balance sheet as at December 31, 20X2 of Cardinal Limited is as follows:
Shareholders’ Equity
Shares $300,000
Retained Earnings $185,000
Cardinal Limited decided to distribute some of its 20X2 net income between the shareholders in proportion to the amount of shares they owned. Asviny and Bassam each received $26,000 in dividends before tax. If Ciara’s personal tax rate is 30%, how much will her after-tax share of the net income distributed at December 31, 20X2 be? Assume that there is no dividend tax credit.
- $9,100
- $13,000
- $6,000
- $2,600
Correct Answer: 1
Option (1) is correct because Ciara’s after-tax share of net income distributed on December 31, 20X2 is $9,100. There are two ways to calculate this. First, consider that Asviny and Bassam each received 40% of the net income, dividends distributed ($26,000 × 2).
Thus, the total net income distributed was $65,000 ($52,000/0.80). Since Ciara receives 20% of the total net income distributed or $13,000 ($65,000 × 0.20), her after‑tax share of the net income distributed is $9,100 ($13,000 × (1 – 0.3)).
The total net income distributed could also have been found by determining the increase in retained earnings from 20X0 to 20X1 ($185,000 – $120,000 = $65,000).
Ciara’s after‑tax net income would then be found as above. Option (2) is incorrect because
$13,000 is Ciara’s share of the total net income distributed before taxes. Options (3) and (4) are incorrect because they are not
the after-tax share of net income distributed to Ciara
Question 13
On January 1, 20X1, Nian’s Strollers Ltd. purchased $80,000 worth of baby strollers, which were to be sold to customers. On December 31, 20X2, Nian still had 35% of the strollers left in inventory. Calculate the cost of goods sold (COGS) expense for
income statement purposes for 20X1 and 20X2. Assume 40% of the strollers were sold in 20X1 and 60% of the strollers were
sold in 20X2.
- $7,280 in 20X1, $10,920 in 20X2
- $20,800 in 20X1, $31,200 in 20X2
- $31,200 in 20X1, $20,800 in 20X2
- $10,920 in 20X1, $7,280 in 20X2
Correct Answer: 2
Option (2) is correct because the cost of goods sold in 20X1 is $20,800 and the cost of goods sold in 20X2 is $31,200. The
stroller inventory purchases should be allocated using the matching principle, which states expenses are matched with the revenue they generate. Thus, if 35% of the stroller inventory remain at the end of 20X2, the amount sold is $52,000 (65% × $80,000) and is allocated to the two years accordingly: $20,800 (40% × $52,000) for 20X1 and $31,200 (60% × $52,000) for 20X2.
Options (1), (3), and (4) are incorrect because they do not show the correct cost of goods sold in 20X1 and 20X2.
Question 14
Upsilon Company Ltd. purchased new machinery at a total cost of $600,000. Management estimates that the machinery will last for 20 years, after which it will have no salvage value. The CCA rate applied to the machinery is 4%. When the company disposes of the machinery 20 years later, what will be the deduction for capital cost allowance on the company’s tax return?
- $20,000
- $0
- $5,000
- $10,000
Correct Answer: 2
Option (2) is correct because following the final year rule, CCA cannot be claimed for an asset in the year of disposition, even if the asset is owned for the majority of the year, therefore the deduction for capital cost allowance will be $0. Options (1), (3), and (4) are therefore incorrect.
Question 15
One year ago, Prestige Company Ltd. purchased a new factory at a total cost of $1,500,000 (for the land and the building). The
owner, Prescott, estimates that the factory will last for 35 years, at which time the salvage value will be $10,000. The CCA rate applied to the building is 4%. It is now the year end and Prescott must prepare the company’s tax returns. If the income statement has a depreciation expense of $18,750 (using the straight line depreciation method), what is the building’s capital cost allowance for the first year?
- $18,750
- $13,325
- $9,375
- $19,375
Correct Answer: 2
Option (2) is correct. The calculation for the building’s capital cost allowance for the first year is as follows:
Total cost of building + land = $1,500,000
Life of building = 35 years
Annual depreciation using the straight line method of depreciation = $18,750
Building’s share of cost = 35 × $18,750 + $10,000 = $666,250
Capital Cost Allowance = (0.04 × $666,250) × 0.5 = $13,325
Options (1), (3), and (4) are incorrect because they do not show the correct capital cost allowance for the building in its first year.
THE NEXT TWO (2) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION:
DOODLEBUGGY COMPANY LTD.
BALANCE SHEET
As at December 31, 20XX
ASSETS
Current Assets:
Cash ?
Accounts Receivable $72,000
Merchandise Inventory $57,000
Total Current Assets $173,000
Non-Current Assets:
Land $422,000
Machinery ?
Accumulated Depreciation ($95,000)
Total Non-Current Assets ?
TOTAL ASSETS $992,000
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable – Merchandise $82,000
Accounts Payable – Office Supplies $14,000
Salaries Payable $47,000
Total Current Liabilities $143,000
Non-Current Liabilities:
Bonds Payable $400,000
Total Liabilities $543,000
Shareholders’ Equity:
Share Capital ($15 par value) ?
Retained Earnings $149,000
Total Shareholders’ Equity ?
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ?
Question 16
Based on the balance sheet provided, what is the value of Doodlebuggy Company’s cash, machinery, and total non-current assets?
- Cash = $44,000, machinery = $422,000, total non-current assets = $992,000
- Cash = $44,000, machinery = $492,000, total non-current assets = $819,000
- Cash = $173,000, machinery = $492,000, total non-current assets = $422,000
- Cash = $992,000, machinery = $95,000, total non-current assets = $173,000
Correct Answer: 2
Option (2) is correct because the value is Doodlebuggy Company’s cash is $44,000, the value of its machinery is $492,000, and its total non-current assets are $819,000.
Cash is calculated as follows:
Cash = total current assets − merchandise inventory − accounts receivable
Cash = $173,000 − $57,000 − $72,000
Cash = $44,000
Machinery is calculated as follows:
Machinery = total non-current assets – accumulated depreciation – land
Machinery = $819,000 + $95,000 – $422,000
Machinery = $492,000
Total non-current assets is calculated as follows:
Total non-current assets = total assets − total current assets
Total non-current assets = $992,000 − $173,000
Total non-current assets = $819,000
Option (1) is incorrect because the stated amounts for machinery and total non-current assets are incorrect.
Option (3) is incorrect because the stated amounts for cash and total non-current assets are incorrect. Option (4) is incorrect because the stated amounts for cash, machinery, and total non-current assets are incorrect.
THE NEXT TWO (2) QUESTIONS ARE BASED ON THE FOLLOWING INFORMATION:
DOODLEBUGGY COMPANY LTD.
BALANCE SHEET
As at December 31, 20XX
ASSETS
Current Assets:
Cash ?
Accounts Receivable $72,000
Merchandise Inventory $57,000
Total Current Assets $173,000
Non-Current Assets:
Land $422,000
Machinery ?
Accumulated Depreciation ($95,000)
Total Non-Current Assets ?
TOTAL ASSETS $992,000
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable – Merchandise $82,000
Accounts Payable – Office Supplies $14,000
Salaries Payable $47,000
Total Current Liabilities $143,000
Non-Current Liabilities:
Bonds Payable $400,000
Total Liabilities $543,000
Shareholders’ Equity:
Share Capital ($15 par value) ?
Retained Earnings $149,000
Total Shareholders’ Equity ?
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ?
Question 17
Based on the balance sheet provided, what is the value of Doodlebuggy Company’s share capital, total shareholders’ equity, and total liabilities and shareholders’ equity?
- Share capital = $300,000, total shareholders’ equity = $449,000, total liabilities and shareholders’ equity = $543,000
- Share capital = $235,000, total shareholders’ equity = $308,000, total liabilities and shareholders’ equity = $543,000
- Share capital = $300,000, total shareholders’ equity = $449,000, total liabilities and shareholders’ equity = $992,000
- Share capital = $260,000, total shareholders’ equity = $570,000, total liabilities and shareholders’ equity = $992,000
Correct Answer: 3
Option (3) is correct because the value of Doodlebuggy Company’s share capital is $300,000, its total shareholders’ equity is $449,000, and its total liability and shareholders’ equity is $992,000.
Share capital is calculated as follows:
Share capital = total shareholders’ equity – retained earnings
Share capital = $449,000 – $149,000
Share capital = $300,000
Total shareholders’ equity is calculated as follows:
Total shareholders’ equity = total liabilities and shareholders’ equity – total liabilities
Total shareholders’ equity = $992,000 – $543,000
Total shareholders’ equity = $449,000
Total liabilities and shareholders’ equity is calculated as follows:
Total liabilities and shareholders’ equity = total assets
Total liabilities and shareholders’ equity = $992,000
Option (1) is incorrect because total liabilities and shareholders’ equity is incorrectly stated.
Option (2) is incorrect because share capital, total shareholders’ equity, and total liabilities and shareholders’ equity are incorrectly stated.
Option (4) is incorrect because share capital and total shareholders’ equity are incorrectly statement
Question 18
Which one of the following is NOT an asset in the balance sheet statement?
- Inventory
- Prepaid expenses
- Accumulated depreciation
- Shares in another company
Correct Answer: 3
Option (3) is correct because although accumulated depreciation appears under the assets on the balance sheet, it is not an asset; rather it is a contra asset account, meaning it represents the amount of depreciation or cost allocated to the asset to date.
By accumulating depreciation separately in a contra account rather than deducting it directly from the asset account, it allows users to identify the original book value of the asset.
Option (1) is incorrect because inventory is considered to be an asset, since it is easily converted to cash.
Option (2) is incorrect because prepaid expenses are considered to be an asset, since they have yet to be consumed and represent a benefit to the company.
Option (4) is incorrect because shares in another company are considered to be an asset, since they can easily be converted to cash.
Question 19
Which of the following statements regarding corporations is TRUE?
- Since 2011, a publicly traded company reports the asset value on the balance sheet at fair market value rather than
depreciated cost. - The directors are primarily liable to the shareholders.
- Shareholders own the assets of the corporation.
- Since 2011, a company whose shares are traded on a stock exchange is likely to use the Generally Accepted
Accounting Principles (GAAP) when reporting its assets in its financial statements.
Correct Answer: 1
Option (1) is correct because it is a true statement.
Option (2) is incorrect because directors manage free from shareholder interference (Canada Business Corporation Act) and are primarily liable to the corporation, acting much like an agent to their principle.
Option (3) is incorrect because shareholders do not own the assets of the company; they own the shares and the rights
and obligations that go with the ownership of the shares.
Option (4) is incorrect because since 2011, it is mandatory for a publicly traded company to use the International Financial Reporting Standard (IFRS), not GAAP, in preparing their financial statements and this requires that asset values on the balance sheet are reported at fair market value rather than depreciated cost.
Question 20
At year end, Daisy was pleased with her operation (Daisy’s Garden Supplies) having sold 36,000 units at $36 per unit, earning a total sales revenue of $1,296,000. However, before she can celebrate, she needs to know what she owes to Canada Revenue Agency (CRA). The inventory account indicates a beginning inventory of $50,000, 36,000 units produced at a cost of $9 for the period, and a closing inventory balance of $185,000. In producing this revenue, interest expenses of $45,000 and operating expenses of $112,000 were incurred. If the corporation’s after-tax net income is $785,000, what is the income tax expense recorded for the period? Assume that the aforementioned expenses are the only expenses incurred during this period.
- $205,000
- $165,000
- $155,000
- $119,00
Correct Answer: 2
Option (2) is correct because Daisy’s Garden Supplies produced and sold 36,000 units at a cost of $9 each, resulting in a
recorded tax expense of $165,000. The calculations are shown as follows:
Beginning Inventory 50,000
Purchases ($9 × 36,000) 324,000
– Ending Inventory (185,000)
= Cost of Goods Sold $189,000
Revenue ($36 x 36,000) $1,296,000
Expenses:
Interest payments 45,000
Operating expenses 112,000
Cost of goods sold 189,000
Income tax expense ?
= After Tax Net Income $785,000
Revenue – (Expenses) – After Tax Net Income = Income Tax Expense
$1,296,000 – ($45,000 + $112,000 + $189,000) – $785,000 = $165,000
Options (1), (3), and (4) are incorrect because they do not show the correct income tax expense amount
