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CMA APRIL, 2019 SPECIAL EXAMINATION PROFESSIONAL LEVEL-II
SUBJECT: 201. ADVANCED FINANCIAL ACCOUNTING-I
Time: Three hours Full Marks: 100
All questions are to be attempted.
Show computations, where necessary.
Answer must be brief, relevant, neat and clean.
Start answering each question from a fresh sheet.
Q. No. 1
(a) TXY Company is a manufacturer and lessor of computer equipment. What should be the nature of its lease arrangements with lessees if the company wishes to account for its lease transactions as sales-type leases?
(b) SMX Leasing Company signs an agreement on January 1, 2015, to lease equipment to AXY.
The following information relates to this agreement.
(1) The term of the non-cancelable lease is 5 years with no renewal option. The equipment has an estimated economic life of 5 years.
(2) The fair value of the asset at January 1, 2015 is Tk.90,000.
(3) The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of Tk.7,000, none of which is guaranteed.
(4) AXY Company assumes direct responsibility for all executory costs, which include the following annual amounts: (1) Tk.900 to Frontier Insurance Company for insurance and (2) Tk.1,600 for property taxes.
(5) The agreement requires equal annual rental payments of Tk.20,541.11 to the lessor, beginning on January 1, 2015.
(6) The lessee’s incremental borrowing rate is 12%. The lessor’s implicit rate is 10% and is known to the lessee.
(7) AXY Company uses the straight-line depreciation method for all equipment.
(8) AXY uses reversing entries when appropriate.
Required:
(i) Prepare an amortization schedule that would be suitable for the lessee for the lease term.
(ii) Prepare all of the journal entries for the lessee for 2015 and 2016 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume the lessee’s annual accounting period ends on December 31.
[Marks: 5+(7+8) = 20]
Q. No. 2
The first audit of the books of Bruce Gingrich Company was made for the year ended December 31, 2015. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last 3 years. These items are:
(1) At the beginning of 2013, the company purchase a machine for $ 510,000 (salvage value of
$51,000) that had a useful life of 6 years. The bookkeeper used straight- line depreciation, but failed to deduct the salvage value in computing the depreciation base for the 3 years.
(2) At the end of 2014, the company failed to accrue sales salaries of $45,000.
(3) A tax lawsuit that involved the year 2013 was settled late in 2015. It was determined that the company owed an additional $85,000 in taxes related to 2013. The company did not record a liability in 2013 or 2014 because the possibility of loss was considered remote, and changed the $85,000 to a loss account in 2015.
(4) Gingrich Company purchased a copyright from another company early in 2013 for $45,000.
Gingrich had not authorized the copyright because its value had not diminished. The copyright has a useful life at purchase of 20 years.
(5) In 2015, the company changed its basis of inventory pricing from FIFO to LIFO. The cumulative effect of this change was to decrease net income by $71,000. The company debited this cumulative effect to Retained Earnings. LIFO was used in computing income for 2015.
Page 2 of 3 CMA APRIL, 2019 SPECIAL EXAMINATION
PROFESSIONAL LEVEL-II
SUBJECT: 201. ADVANCED FINANCIAL ACCOUNTING-I Q. No. 2(cont’d...)
(6) In 2015, the company wrote off $87,000 of inventory considered to be obsolete; the loss was charged directly to Retained Earnings.
Required:
Prepare the journal entries necessary in 2015 to correct the books, assuming that the books have not been closed. Disregard effect of correction on income tax.
[Marks: 20]
Q. No. 3
(a) Discuss and illustrate how a correction of an error in previously issued financial statements should be handled.
(b) State how each of the following items is reflected in the financial statements.
Change from FIFO to average-cost method for inventory valuation purposes.
Charge for failure to record depreciation in a previous period.
Litigation won in current year, related to prior period.
Change in realizability of certain receivables.
Write-off of receivables.
(c) Byrant Construction Company changed from the cost recovery to the percentage-of- completion method of accounting for long-term construction contracts during 2015. For tax purposes, the company employs the cost-recovery method and will continue this approach in the future. The information related to this change is as follows.
Year Pretax income from
Percentage of Completion Cost-Recovery Difference
2014 Tk.980,000 Tk.730,000 Tk.250,000
2015 900,000 480,000 420,000
Required:
(i) Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2015?
(ii) What entry (ies) are necessary to adjust the accounting records for the change in accounting policy?
[Marks: 4+5+(6+5) = 20]
Q. No. 4
(a) What is the nature of a sale on consignment? When is revenue recognized from a consignment sale?
(b) OMX Inc. started a four-year contract to build a dam. Activities commenced on February 1, 2010. The total contract price amounted to Tk.12,000,000, and it was estimated that the work would be completed at a total cost of Tk.9,500,000. In the construction agreement the customer agreed to accept increases in wage tariffs additional to the contract price.
The following information refers to contract activities for the financial year ending December 31, 2010:
1. Costs for the year:
Items Taka
Material 1,400,000
Labor 800,000
Operating overhead 150,000
Subcontractors 180,000
Page 3 of 3 CMA APRIL, 2019 SPECIAL EXAMINATION
PROFESSIONAL LEVEL-II
SUBJECT: 201. ADVANCED FINANCIAL ACCOUNTING-I Q. No. 4(cont’d...)
2. Current estimate of total contract costs indicates the following:
Materials will be Tk.180,000 higher than expected.
Total labor costs will be Tk.300,000 higher than expected. Of this amount, only Tk.240,000 will be the result of increased wage tariffs. The remainder will be caused by inefficiencies.
A savings of Tk.30,000 is expected on operating overhead.
3. During the current financial year the customer requested a variation to the original contract, and it was agreed that the contract price would be increased by Tk.900,000.
The total estimated cost of this extra work is Tk.750,000.
4. By the end of 2010, certificates issued by quantity surveyors indicated a 25% stage of completion.
Required: Determine the profit to date, based on:
(i) Option 1- contract costs in proportion to estimated contract costs.
(ii) Option 2- Percentage of the work certified.
[Marks: (5+15) = 20]
Q. No. 5
The following information is available for Swanson Corporation for 2013.
(1) Depreciation reported on the tax return exceeded depreciation reported on the income statement by $100,000. This difference will reverse in equal amounts of $25,000 over the years 2014-2017.
(2) Interest received on municipal bonds was $10,000
(3) Rent collected in advance on January 1, 2013, totaled $60,000 for a 3-year period. Of this amount, $40,000 was reported as unearned at December 31, for book purpose.
(4) The tax rates are 40% for 2013 and 35% for 2014 and subsequent years.
(5) Income taxes of $360,000 are due per the tax return for 2013.
(6) No deferred taxes existed at the beginning of 2013.
Required:
(i) Compute taxable income for 2013
(ii) Compute pretax financial income for 2013.
(iii) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2013 and 2014. Assume taxable income was $980,000 in 2014.
(iv) Prepare the income tax expense section of the income statement for 2013, beginning with
“Income before income taxes.”
[Marks: (3+5+7+5) = 20]
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