CMA Accelerated Program

Examination # 2

SAMPLE

Duration - 4 hours

This examination has a total of 15 pages and consists of 6 questions. Ensure that you
have a complete examination paper before starting to answer the questions.

Name: Member # :

CMA Canada
Examination # 2

Question 1 - Multiple Choice (18 marks) (42 minutes)

Please enter the answers directly on the Scantron Form in pencil. The following
information needs to be entered on the form: name and member number (in the student
number field). Note that each question is worth 1.5 marks.

1. The IASB Framework outlines two underlying assumptions of financial statements.

These are:
Assumption 1
a) Accrual basis of accounting
b) Cash basis of accounting
c) Historical cost accounting
d) Fair value basis of measurement
Assumption 2
Going concern assumption
Insolvency assumption
Limited life concept
Perpetual life concept

2. Conn Corp. owns an office building and normally charges tenants $30 per square
foot per year for office space. Because the occupancy rate is low, Conn agreed to
lease 10,000 square feet to Hanson Co. at $12 per square foot for the first year of a
three-year operating lease. Rent for remaining years will be at the $30 rate. Hanson
moved into the building on January 1, 20x2, and paid the first year's rent in
advance. What amount of rental revenue should Conn report from Hanson in its
income statement for the year ended September 30, 20x2?
a) $ 90,000
b) $120,000
c) $180,000
d) $240,000

3. Zenk Co. wrote off obsolete inventory of $100,000 during 20x5. What was the
effect of this write-off on Zenk's ratio analysis?
a) Decrease in current ratio but not in quick ratio
b) Decrease in quick ratio but not in current ratio
c) Increase in current ratio but not in quick ratio
d) Increase in quick ratio but not in current ratio

4. Heath Co.'s current ratio is 4:1. Which of the following transactions would
normally increase its current ratio?
a) Purchasing inventory on account
b) Selling inventory on account
c) Collecting an account receivable
d) Purchasing machinery for cash

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5. On December 31, 20x8, Investment Incorporated had a portfolio of Fair Value

through OCI investments as follows:

Original Market
Quantity Description Cost Value
60 shares Heck Resources Incorporated $ 2,760 $ 2,475
90 shares Tell Canada Limited 1,890 2,070
$12,000 Bone Limited, 8% bonds 12,120 11,880
$ 16,770 $ 16,425

At what amount should the investments be reported on the balance sheet at

December 31, 20x8?
a) $16,245
b) $16,425
c) $16,770
d) $16,950

6. On January 1, 20x8, G Company sold property to J Company. There was no

established exchange price for the property, and J gave G a $100,000 non-interest
bearing note payable in five equal annual installments of $20,000, with the first
payment due December 31, 20x8. The prevailing rate of interest for a note of this
type is 12%. What should be the balance of the Notes Payable account on the books
of J at December 31, 20x8, after adjusting entries are made?
a) $ 100,000
b) $ 80,000
c) $ 72,100
d) $ 60,747

7. Ute Co. had the following capital structure during 20x8 and 20x9:

Preferred stock, $10 par, 4% cumulative,

25,000 shares issued and outstanding $ 250,000
Common stock, $5 par, 200,000 shares
issued and outstanding 1,000,000

Ute reported net income of $500,000 for the year ended December 31, 20x9. Ute
paid no preferred dividends during 20x8 and paid $16,000 in preferred dividends
during 20x9. In its December 31, 20x9 income statement, what amount should Ute
report as basic earnings per share?
a) $2.42
b) $2.45
c) $2.48
d) $2.50

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8. On January 2, 20x1, Cole Co. signed an eight-year noncancelable lease for a new
machine, requiring $15,000 annual payments at the beginning of each year. The
machine has a useful life of 12 years, with no salvage value. Title passes to Cole at
the lease expiration date. Cole uses straight-line depreciation for all of its plant
assets. Aggregate lease payments have a present value on January 2, 20x1, of
$108,000, based on an appropriate rate of interest. For 20x1, Cole should record
depreciation expense for the leased machine at
a) $0
b) $9,000
c) $13,500
d) $15,000

Use the following to answer questions 9 - 10:

Sophia Company's December 31 year-end financial statements contained the following

errors:
Dec. 31, 20x8 Dec. 31, 20x9
Ending inventory $1,500 understated $2,200 overstated
Amortization expense $400 understated

An insurance premium of $3,600 was prepaid in 20x8 covering the years 20x8, 20x9, and
20x10. The prepayment was recorded with a debit to insurance expense. In addition, on
December 31, 20x9, fully amortized machinery was sold for $1,900 cash, but the sale was
not recorded until 20x10. There were no other errors during 20x9 or 20x10 and no
corrections have been made for any of the errors. Ignore income tax considerations.

9. What is the total net effect of the errors on Sophias 20x9 net income?
a) Net income understated by $2,900.
b) Net income overstated by $1,500.
c) Net income overstated by $2,600.
d) Net income overstated by $3,000.

10. What is the total effect of the errors on the balance of Sophia's retained earnings at
December 31, 20x9?
a) Retained earnings understated by $2,000.
b) Retained earnings understated by $900.
c) Retained earnings understated by $500.
d) Retained earnings overstated by $700.

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11. On January 2, 20x6, Koerner Co. issued 10-year convertible bonds at 105. During
20x8, these bonds were converted into common shares having an aggregate value
equal to the total face amount of the bonds. At conversion, the market price of
Koerner's common shares was 50 percent above its average carrying value.

On January 2, 20x6, the cash proceeds from the issuance of the convertible bonds
should be reported as
a) contributed surplus for the entire proceeds.
b) contributed surplus for the portion of the proceeds attributable to the
conversion feature and as a liability for the balance.
c) a liability for the face amount of the bonds and contributed surplus for the
premium over the face amount.
d) a liability for the entire proceeds.

12. Below is the earnings history of McCain-Palin Inc.:

Tax Rate

2004 $ 500,000 38%

2005 900,000 38%
2006 300,000 40%
2007 800,000 40%
2008 (2,200,000) 42%
2009 600,000 44%

McCain-Palin have consulted you on the use of the loss and the recovery of taxes.
What should McCain-Palin report on their Statement of Financial Position for the
year ending 2008 assuming the entity elects to apply the loss to prior years and
believes it is probable that sufficient taxable income will be generated in the future
to absorb any loss carryforward. Tax rates were enacted in each year shown.

Income Taxes Deferred Tax

Receivable Asset
a) $858,000 $0
b) $924,000 $84,000
c) $968,000 $84,000
d) $782,000 $84,000

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Question 2 - Short Answers (20 marks) (48 minutes)

a. In preparing its cash flow statement for the year ended December 31, 20x9, Reve
Co. collected the following data:

Gain on sale of equipment $ (6,000)

Proceeds from sale of equipment 10,000
Purchase of A.S., Inc. bonds (par value $200,000) (180,000)
Amortization of bond discount 2,000
Dividends declared (45,000)
Dividends paid (38,000)
Proceeds from the issue of bonds 75,000

In its December 31, 20x9 statement of cash flows,

i. What amount should Reve report as net cash used in investing activities?
ii. What amount should Reve report as net cash provided by financing activities?
(4 marks)

b. Barbart Retail Sales Co. sells merchandise inventory at a gross profit of 30% of the
sales price. On June 4, 20x0, a flood destroyed the entire inventory. From the
accounting records, it was determined that beginning inventory was $187,000 and
purchases during the year before the flood totaled $613,000. Sales for the year
before the flood were $895,000. What would be the value of the inventory
destroyed? (3 marks)

c. Peters Corp.'s capital structure was as follows:

December 31
20x8 20x9
Outstanding shares of stock:
Common 110,000 110,000
Convertible preferred 10,000 10,000

During 20x9, Peters paid dividends of $3.00 per share on its preferred stock. The
preferred shares are convertible into 20,000 shares of common stock. Net income
for 20x9 was $850,000. Assume that the income tax rate is 30%. What is the diluted
earnings per share for 20x9? (3 marks)

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d. On December 31, 20x9, Day Co. leased a new machine from Parr with the
following pertinent information:

Lease term 6 years

Annual rental payable at beginning of each year $50,000
Useful life of machine 8 years
Purchase option at end of lease term $5,000
Market value at end of lease term $20,000
Market value at end of useful life $6,000
Implicit interest rate in lease 12%

The cost of the machine on Parr's accounting records is $375,500. What interest
expense will day report on the lease obligation for 20x10? (3 marks)

e. On January 1, 20x2, A Ltd. purchased a vehicle for $20,000 cash. A Ltd.'s fiscal
year end is December 31. At the time of acquisition, the vehicle was expected to
last five years and had an estimated residual value of $1,400. A Ltd. uses the
straight-line method to depreciate its vehicles. On January 1, 20x3, A Ltd. changed
the total estimated useful life of the vehicle from 5 years to 4 years and the
estimated residual value from $1,400 to $2,300. What depreciation expense would
A Ltd. report in 20x3? (3 marks)

f. The following information relates to L Company, a publicly accountable company.

for the year ended December 31, 20x7:

Plan assets Jan 1, 20x7 $890,000

Defined Benefit Obligation Jan 1, 20x7 750,000
Current service cost 140,000
Contribution to pension plan on December 31, 20x7 40,000
Yield on high quality corporate bonds 6%
Actual return on plan assets $60,000

What is the impact of the above on the Statement of Comprehensive income for the
year ended December 31, 20x7? (3 marks)

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g. ABC Inc. has acquired a 30% interest in XYZ Limited for $800,000. At the time of
the acquisition, the following adjustments to fair value were noted:

Inventory $50,000 higher than carrying FIFO, sold the
value following year

Property, plant $200,000 higher than carrying 10 years remaining life
and equipment value

Patent $100,000 higher than carrying 10 years remaining life
value

Bonds Payable $150,000 lower than carrying 6 years to maturity
value

At the time of the acquisition, Goodwill was measured at $50,000. In the first year
after the acquisition XYZ had income of $250,000 and paid an $80,000 dividend.
How much would ABC record as Earnings from an Associate in that year?
(4 marks)

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Question 3 (12 marks) (29 minutes)

Bosco Ltd. is an incorporated radio manufacturer. The following represents its income
statement for the year ended December 31, 20x4:

Revenues:
Sales $ 10,000,000
Interest income 2,000,000
Other 400 000 $ 12,400,000
Expenses:
Cost of goods sold $7,000,000
Depreciation 1,000,000
Advertising and promotion 1,600,000
Miscellaneous 1,400,000 11,000,000
Income before taxes 1,400,000
Income tax provision 560,000
Net income $ 840,000

Other information:

1. Undepreciated capital cost balances at the beginning of the year are as follows:
Class 8 (20% CCA rate) $2,500,000
Class 10 (30% CCA rate) $1,900,000
Class 43 (30% CCA rate) $150,000

Additions and proceeds on disposal were as follows:

Class 8 Class 10 Class 43

Additions $300,000 $250,000 -
Proceeds on disposal* 40,000 130,000 $250,000
Original cost of asset sold 200,000 100,000 500,000

* only one asset was disposed of in each class.

At December 31, 20x4, there were no assets left in Class 43.

The net accounting gain on disposal of depreciable assets amounted to $30,000

and is included in other revenues.

2. The miscellaneous expenses include $90,000 for meals at business meetings.

Other revenues include equity income of $50,000.

3. The company provides a two year warranty on its products. The company
estimates the warranty expense at 2% of sales. The warranty liability at January 1,
20x4 was $67,000 and at December 31, 20x4 was $104,000. The warranty
expense is included in miscellaneous expenses.

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4. The following information is available for the company's pension plan:

Pension Obligation, Jan 1, 20x4 $1,200,000

Pension Plan Assets, Jan 1, 20x4 800,000
Current service cost, 20x4 250,000
Payments to pension plan trustee, 20x4 200,000
Interest rate 8%

Required -

Calculate the taxable income as at December 31, 20x4, for Bosco Ltd.

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Question 4 (14 marks) (34 minutes)

Snowden Corp. has the following differences between the carrying value and tax basis of
its assets and liabilities at the end of 20x3, its first year of operations:

Book Value Tax Basis

Machinery and equipment $800,000 $850,000

Estimated liability for warranties 400,000 0

Management believes the warranty liability will be fully settled by the end of 20x4. The
machinery and equipment was purchased for $1,000,000 and is being amortized over 4
years with expected residual value of 200,000. The CCA rate is 30%. The tax rate
enacted on June 30th of each year as follows:

20x3 34%
20x4 30%
20x5 30%

The company has net income before taxes of $1,000,000 in 20x3, $1,200,000 in 20x4 and
$1,350,000 in 20x5.

Required:

Calculate the provision for income taxes for the years 20x3 through 20x5 as well as the
balance sheet presentation of all deferred income tax amounts.

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Question 5 (14 marks) (34 minutes)

On December 31, 20x1, Pasco Company purchased 70% of the outstanding common
shares of Sasco Company for $2 million in cash. On that date, the shareholders equity of
Sasco totalled $1.5 million and consisted of $1 million in common shares and $0.5
million in retained earnings. For the year ending December 31, 20x5, the income
statements for Pasco and Sasco were as follows:
Pasco Sasco
Revenues $ 8,500,000 $ 5,100,000
Cost of goods sold 5,800,000 3,500,000
Amortization expense 800,000 630,000
Other expenses 1,050,000 570,000
Income tax expense 340,000 160,000
Profit $ 510,000 $ 240,000

As at December 31, 20x5, the condensed balance sheets for the two companies were as
follows:
Pasco Sasco
Current Assets $3,000,000 $2,000,000
Long-term assets 6,000,000 3,500,000
$ 9,000,000 $ 5,500,000

Liabilities $ 5,000,000 $ 3,800,000

Common shares 2,100,000 1,000,000
Retained earnings 1,900,000 700,000
$ 9,000,000 $ 5,500,000

Additional information
1. On December 31, 20x1, Sasco owned a building with a fair value that was
$200,000 greater than its carrying value. The building had an estimated remaining
useful life of 14 years and was being amortized on a straight-line basis.
2. Each year, goodwill is evaluated to determine if there has been a permanent
impairment. Goodwill impairment was $71,429 in 20x3, $57,143 in 20x5, and
zero in all other years since the date of acquisition.
3. During 20x5, Pasco declared and paid dividends of $400,000, and Sasco declared
and paid dividends of $150,000.

Required -
a. Calculate profit attributable to the equity holders of Pasco for the year ended
December 31, 20x5
b. Prepare a consolidated balance sheet as at December 31, 20x5. Show the details
of all your calculations.
c. Now assume that Pasco uses the equity method to account for its investment in
Sasco. Calculate the balance in the investment account at December 31, 20x5 on
Pascos nonconsolidated balance sheet. Show your supporting calculations.

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Question 6 (7 marks) (17 minutes)

The Harry Corporation ordered inventory from a US supplier on October 15, 20x5. The
inventory costing $US 200,000 was received on November 15, 20x5. The US supplier
required payment by February 15, 20x6. The Harry Corporation has a December 31 year
end.

The following rates are provided:

Spot October 15, 20x5 $1US = $1.22

November 15, 20x5 $1US = $1.18
December 31, 20x5 $1US = $1.13
February 15, 20x6 $1US = $1.00

Forward October 15, 20x5 (120 days) $1US = $1.05

November 15, 20x5 (90 days) $1US = $0.98
December 31, 20x5 (45 days) $1US = $0.95

Required

Prepare all journal entries with regards to this transaction assuming that a forward
contract is taken out on November 15, 20x5 in the amount of $US 200,000.

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Question 7 (15 marks) (36 minutes)

On December 31, 20x8, Kelly Corporation paid Euro 13 million for 100% of the
outstanding shares of Krugor Corporation of Germany. Krugors comparative balance
sheets and 20x9 income statement are as follows:

Balance Sheets
December 31
20x9 20x8
Current monetary assets EURO 10,780,000 EURO 9,600,000
Inventory 1,800,000 2,400,000
Plant assets 6,600,000 7,200,000
EURO 19,180,000 EURO 19,200,000

Current liabilities EURO 1,900,000 EURO 2,400,000

Bonds payable, due Dec 31, 20x13 4,800,000 4,800,000
Common stock 5,000,000 5,000,000
Retained earnings 7,480,000 7,000,000
EURO 19,180,000 EURO 19,200,000

Income Statement
For the year ended December 31, 20x9
Sales EURO 6,000,000
Cost of goods sold -4,440,000
Depreciation -600,000
Other expenses -360,000
Net income EURO 600,000

Other Information

1. Exchange rates

Dec 31, 20x8 EURO 1 = C$0.52

Sep 30, 20x9 EURO 1 = C$0.62
Dec 31, 20x9 EURO 1 = C$0.65
Average for 20x9 EURO 1 = C$0.58

2. Krugor company declared and paid dividends totaling EURO 120,000 on

September 30, 20x9.

3. The inventories on hand on December 31, 20x8 were purchased when the exchange
rate was EURO 1 = $0.50.

4. The plant assets were purchased when the exchange rate was EURO 1 = $0.40. The
common stock was issued when the exchange rate was EURO 1 = $0.45.

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5. The inventories on hand on December 31, 20x9 were purchased when the exchange
rate was EURO 1 = C$0.63

Required

(a) Assuming that Krugors functional currency is the Canadian Dollar, prepare a
translated statement of income for the year ended 20x9.
(b) Assuming that Krugors functional currency is the Euro, prepare a translated
balance sheet as at December 31, 20x9. Show calculations for all amounts (i.e. do
not 'plug' any number).

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Examination 2
SOLUTION

Question 1

1. a

2. c [($12 x 10,000 x 1 year) + ($30 x 10,000 x 2 years)] x 9/36 = $180,000

3. a Inventory is not included in the calculation of the quick ratio.

4. b

5. b

6. d N = 4, I = 12, PMT = 20,000, Solve for PV = 60,747

7. b ($500,000 - 10,000) 200,000 = $2.45

8. b $108,000 12 years = $9,000

9. d $1,500 (o) + $2,200 (o) + $1,200 (o) $1,900 (u) = $3,000 (o)

The opening inventory is understated by $1,500, then COGS is understated by

$1,500 and income is overstated by $1,500. If ending inventory is O/S by
$2,000, then COGS is U/S and income is O/S. Net overstatement of $1,500 +
2,200 = 3,700 for inventory. The insurance error causes income to be O/S by
1,200 and the gain on the on machinery causes income to be U/S by $1,900.
Net effect = 3,700 O/S + 1,200 O/S + 1,900 U/S = 3,000 O/S

10. c $400 (o) + $2,200 (o) $1,200 (u) $1,900 (u) = $500 (u).

11. b

12. d (900,000*.38) + (300,000*.40) + (800,000*.4) = $782,000

200,000 * .42 = $84,000

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Question 2

a. i. Proceeds from sale of equipment $10,000

Purchase of A.S., Inc. bonds (180,000)
($170,000)

ii. Dividends paid (38,000)

Proceeds from the issue of bonds 75,000
$37,000

b. Cost of goods sold = $895,000 x 70% = 626,500

Ending inventory = $613,000 Purchases + 187,000 Op Inv - 626,500 COGS
= $173,500

c. Basic EPS = (850,000 - 30,000) 110,000 = 7.45

Impact of preferred share conversion: $30,000 20,000 = 1.50
Diluted EPS: 850,000 130,000 = $6.54

d. [BGN] N=6, I = 12, PMT = 50,000, FV = 5,000

Solve for PV = $232,772
Interest expense in 20x10 = ($232,772 - 50,000) x 12% = $21,933

e. 20x2 depreciation = ($20,000 - $1,400)/5 = $3,720

20x3 depreciation = ($20,000 - $2,300 - $3,720)/3 = $4,660

f. In profit and loss

Service cost $140,000
Net interest benefit ($890,000 750,000) x 6% (8,400)
In other comprehensive income
Remeasurement on plan assets: ($890,000 x 6%) 60,000 6,600
$138,200

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g. XYZ Income $250,000

Amortization of PPD
Inventory (50,000)
PPE: $200,000 / 10 years (20,000)
Patent: $100,000 / 10 years (10,000)
Bonds: $150,000 / 6 years (25,000)
145,000
x 30%
$43,500

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Question 3

Net income before taxes $1,400,000

Add: Depreciation $1,000,000
Warranty expense (10,000,000 x 2%) 200,000
Pension expense (Note 1) 282,000
Non deductible portion of entertainment expenses:
$90,000 x 1/2 45,000
Taxable capital gain: $30,000 x 1/2 15,000 1,542,000
Less: CCA (Note 2) 1,018,500
Warranty costs incurred (Note 3) 163,000
Gain on disposal of fixed assets 30,000
Pension payments to trustee 200,000
Equity income 50,000 -1,461,500
Taxable income $1,480,500

Note 1 - Pension expense

Current service cost $250,000
Interest on pension obligation: $1,200,000 x 8% 96,000
Interest on plan assets: $800,000 x 8% -64,000
$282,000

Note 2 - CCA
Class 8 Class 10 Class 43
UCC - beginning $2,500,000 $1,900,000 $150,000
Additions 300,000 250,000
Lesser of cost or proceeds -40,000 -100,000 -250,000
CCA/Recapture 526,000 592,500 -100,000

Note 3 - Warranty Costs Incurred:

$67,000 Opening Warranty Liability + 200,000 Warranty Expense - 104,000 Ending Warranty Liability
= $163,000

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Question 4

Calculation of Current Portion of Income Tax Expense -

20x3 20x4 20x5

Net income before taxes $1,000,000 $1,200,000 $1,350,000
Timing differences -
Depreciation 200,000 200,000 200,000
CCA -150,000 -255,000 -178,500

Warranty expense 400,000

Warranty costs incurred -400,000
Taxable income $1,450,000 $745,000 $1,371,500
x 34% x 30% x 30%
$493,000 $223,500 $411,450

DIT Account - end 20x3

NBV/UCC Difference: (800,000 - 850,000) x 34% $ 17,000 Dr.
Warranty liability: 400,000 x 34% 136,000 Dr.
DIT account, end 20x3
= DIT portion of income tax expense (credit) $153,000

DIT Account - end 20x4

NBV/UCC Difference
NBV: $800,000 - 200,000 $600,000
UCC: 850,000 - 255,000 595,000
5,000
DIT Account, end 20x4 x 30% 1,500 Cr.
Less DIT Account - end 20x3 153,000 Dr
DIT portion of income tax expense (debit) 154,500

DIT Account - end 20x5

NBV/UCC Difference
NBV: $600,000 - 200,000 400,000
UCC: 595,000 - 178,500 416,500
16,500
x 30% 4,950 Dr.
Less DIT Account - end 20x4 1,500 Cr.
DIT portion of income tax expense (credit) 6,450

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Partial Income Statements

20x3 20x4 20x5
Net income before taxes $1,000,000 $1,200,000 $1,350,000
Provision for income taxes
Current 493,000 223,500 411,450
Deferred -153,000 154,500 -6,450
340,000 378,000 405,000

Net Income $660,000 $822,000 $945,000

Partial Balance Sheets

Non Current Assets

Deferred Income Taxes $153,000 $4,950

Long-term liabilities
Deferred Income Taxes $1,500

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Question 5

a. Purchase price imputed at 100%: $2,000,000 / 0.70 $2,857,143

Net assets acquired 1,500,000
Acquisition differential 1,357,143
Allocation Building 200,000
Goodwill $1,157,143

Acquisition Differential Amortization Schedule -

Balance Amortization Balance

Dec 31, x1 x2 x4 x5 Dec 31, x5
Building $200,000 $(42,858) $(14,286) $142,856
Goodwill 1,157,143 (71,429) (57,143) 1,028,571
$1,357,143 $(114,287) $(71,429) $1,171,427

Pasco Profit $510,000

Less dividends: $150,000 x 70% (105,000)
Sascos net income $240,000
Amortization of acquisition differential (71,429)
168,571
x 70% 118,000
Profit attributable to the equity holders of Pasco $523,000

b. Current assets ($3,000,000 + 2,000,000) $5,000,000

Long-term assets ($6,000,000 + 3,500,000
2,000,000 Investment in Sasco + 1,171,427 PPD - Building & Goodwill) 8,671,427
Liabilities ($5,000,000 + 3,800,000) (8,800,000)
Common stock (2,100,000)
Retained earnings (schedule) (1,909,999)
Noncontrolling Interest (1,700,000 + 1,171,427) x 30% (861,428)

Connsolidated Retained Earnings Dec 31, 20x5:

Pasco R/E, Dec 31, 20x5 $1,900,000
Sasco R/E, Dec 31, 20x5 $700,000
Sasco R/E at acquisition 500,000
Post acquisition increase 200,000
Amort PPD ($114,287 + 71,429) (185,716)
14,284
x 70% 9,999
$1,909,999

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Examination # 2

c. Initial investment $2,000,000

Sasco R/E, Dec 31, 20x5 $700,000
Sasco R/E at acquisition 500,000
Post acquisition increase 200,000
Amort PPD ($114,287 + 71,429) (185,716)
14,284
x 70% 9,999
$2,009,999

Alternatively -

Sascos Net Assets $1,700,000

Unamortized PPD 1,171,427
2,871,427
x 70%
$2,009,999

CMA Accelerated Program Page 23

Examination # 2

Question 6

Nov 15, 20x5 Inventory $236,000

Accounts Payable $236,000
$US200,000 x $1.18

Dec 31, 20x5 Accounts Payable 10,000

FX Gains/Losses 10,000
Adjust A/P to $US200,000 x $1.13
= $226,000

FX Gains/Losses 6,000
Forward Contract 6,000

Forward Contract Market Value, Nov 15

$US200,000 x $0.98 $196,000 dr.
Forward Contract Market Value, Dec 31
$US200,000 x $0.95 190,000 dr.
FX Loss $6,000

Feb 15, 20x6 Accounts Payable 226,000

Forward Contract 6,000
FX Gains/Losses 36,000
Cash 196,000

CMA Accelerated Program Page 24

Examination # 2

Question 7

Part (a)

Translation Gain on Net Monetary Assets

EURO Rate $CAN

Net monetary assets - Jan 1, 20x9 2,400,000 .52 1,248,000
Sales 6,000,000 .58 3,480,000
Purchases (3,840,000) .58 (2,227,200)
Other expenses (360,000) .58 (208,800)
Dividends (120,000) .62 (74,400)
Net monetary assets - Dec 31, 20x9 4,080,000 2,217,600
4,080,000 .65 2,652,000
Translation Gain $ 434,400

Translated Income Statement

Dec 31, 20x9

EURO Rate $CAN

Sales 6,000,000 .58 3,480,000
Cost of sales (Schedule) (4,440,000) - (2,341,200)
Depreciation expense (600,000) .52 (312,000)
Other expenses (360,000) .58 (208,800)
Translation gain 434,400
Net income 600,000 1,052,400

Cost of Sales
EURO Rate $CAN
Inventory, Jan 1, 20x9 2,400,000 .52 1,248,000
Purchases 3,840,000 .58 2,227,200
Inventory , Dec 31, 20x9 (1,800,000) .63 (1,134,000)
4,440,000 $2,341,200

CMA Accelerated Program Page 25

Examination # 2

Part (b)

Cumulative Translation Adjustment - December 31, 20x9

EURO Rate $CAN

Net assets - beginning 12,000,000 0.52 6,240,000
Net income 600,000 0.58 348,000
Dividends (120,000) 0.62 (74,400)
Net assets - ending 12,480,000 6,513,600
Translated 12,480,000 0.65 8,112,000
1,598,400

Retained Earnings - December 31, 20x9

EURO Rate $CAN

Retained earnings - beginning 7,000,000 0.52 3,640,000
Net income 600,000 0.58 348,000
Dividends (120,000) 0.62 (74,400)
Retained earnings - ending 7,480,000 3,913,600

Translated Balance Sheet - December 31, 20x9

EURO Rate $CAN

Net assets 12,480,000 0.65 8,112,000
Common stock (5,000,000) 0.52 (2,600,000)
Retained earnings (7,480,000 - (3,913,600)
Cumulative translation adjustment (1,598,400)

CMA Accelerated Program Page 26