Name: 

CAE has a very large machine used to move aircraft simulators around while they are being assembled. The machine cost $850,000 at the beginning of the 1999 fiscal year. It was expected to be useful for 10 years and to have a salvage value of only $30,000 as scrap at the end of its life.

(5 marks) Calculate the amortization on the machine for fiscal year 2001 on the double declining balance basis.

(5 marks) CAE actually uses straight-line amortization for the machine and incorporates salvage value. Calculate whether CAE’s net income for fiscal year 2001 was therefore higher or lower than it would have been if double declining balance amortization had been used for the machine.

A Northern Alberta company recently lost over $500,000 due to the fraud of a highly trusted employee. This amount was stolen over several years. The employee was the main contact with customers, writing up sales invoices and receipts for payments by customers, and kept the books (making entries to both the general ledger and the supporting accounts receivable details).

(4 marks) Specify two ways that this employee could have hidden the theft of cash.

1.
2.

(4 marks) Specify two mistakes the company made in its internal control for this situation.

1.
2.

(8 marks) Noolson Publishers sells textbooks to university bookstores on the usual terms in Canada – the bookstores pay wholesale price (selling to the students at retail) and any unsold copies can be returned to Noolson by the bookstore for a full refund. There are courses in various universities at all times of the year, so for Noolson this is a fairly continuous process of shipping out new books and receiving back some unsold ones.  What revenue recognition policy do you recommend Noolson use, and why is that appropriate?

Description of the revenue recognition policy you recommend:

Why your policy is appropriate:

(5 marks) Thinking about the various revenue recognition policies that Nooslon could choose, list Noolson’s balance sheet accounts that would be affected by the choice (would be different depending on the choice). You don’t need to explain your list, but if you list accounts that the marker judges to be irrelevant, you will lose marks for those, so you may add a very brief explanation for any account you think the marker might not expect.

(6 marks) In homework problem 7.19*, what would be the estimated collectible value of the accounts receivable at the end of the year if $11,293 had been written off instead of $8,293? Calculate or explain.

(6 marks) Write a journal entry to record the land sale in part d of homework problem 8.30*.

(6 marks) Refer to homework problem 9.4*, part b. Write a journal entry to record Frieda Inc.’s mortgage payments for next year.

(6 marks) Refer to homework problem 9.17*, part 1. Write one or two journal entries to record Henrik Inc.’s income taxes for 2002, using the data in part 1.

(9 marks) Referring to part 1 of problem 6.42, here are some results for 2001, only for the customers who were in the reward points plan.  These customers bought books for $462,000 and so earned 46,200 book point cents (10 book point cents for each dollar spent on books).  Customers redeemed 18,920 book points, thus getting free books that would have cost them $18,920 retail.  The company sells its books for 2.2 times cost, so it had paid $210,000 for the books sold to customers in the reward points plan and had paid $8,600 for the books given free.  The company uses a perpetual inventory system.
Write journal entries to record the following.  (If no entry is needed, explain briefly why not.)

The points earned by reward points plan customers when they bought books:

The redemption of book points for free books:

From the first week of this course, the “historical cost” basis of financial statements has been central. Later in the course, such as in textbook sections 8.2 on balance sheet valuation, 8.8-8.10 on amortization and gains and losses, 8.11 on intangible assets, and 9.3 on future income taxes, some doubt was raised about the value of historical information.

(6 marks) State three significant strengths of historical cost accounting.

1.
2.
3.

(6 marks) State three significant weaknesses of historical cost accounting.

1.
2.
3.

(5 marks) Think about the strengths and weaknesses, and suggest one significant change in financial accounting that you believe would address historical cost accounting’s weaknesses without eroding its strengths.  Explain why your suggestion does this.  (If you believe that no such change is possible, say so and explain why.)

(6 marks) Alberta Timber Ltd. (ATL) has been caught by the dispute between Canada and the U.S. over softwood lumber.  ATL exports lumber to the U.S., and has been required to pay a penalty to the U.S.  ATL has appealed the U.S. penalty and the president is hopeful that the company will get the money back some day.  In the meantime, an accounting method has to be chosen for the penalty paid.  The company’s chief accountant suggests that three accounting methods may be considered. They are to record the penalty paid as:
1. an expense; or
2. an account receivable; or
3. an intangible asset.
Which of the three proposed methods do you support? Why? (If you believe another method than one of those three should be used, describe it and explain why you support it.)
The method you support:

Why:

(6 marks) Savannah Winery Inc. (SWI) makes and sells red wine.  It ferments the grapes and bottles the wine, then leaves the wine in its cellars for several years to mature.  The wine is also sold over several years, starting after two or three years.  The better the wine, the more likely SWI is to keep it for five years or more because its value increases greatly if it is kept, and the poorer the wine, the more likely it is to be sold off soon before it gets worse.  SWI’s president states: “The wine inventory should be valued at market value, because the inventory is a major asset and if it is valued at cost, the company’s overall value is seriously understated.”  How should the wine inventory be valued?  Why?

The appropriate inventory valuation basis:

Why: