Mid-Term Exam

ADM 4348 A & B

SPECIAL TOPICS IN FINANCIAL ACCOUNTING
November 4, 2018

Professor: Kevin Petit-Frère Duration: 180 minutes

Total marks: 162

Instructions
1. Non-programmable calculators are permitted, but you cannot share calculators.
2. Books and notes are not permitted.
3. Please do not ask the professor or the invigilator to explain or interpret questions.
State any assumptions you feel are necessary.
4. Write your answers in the booklet provided.
5. Hand back the signed examination copy with your exam booklet(s).

STUDENT NAME: __________________________________________

STUDENT # : ________________________

Statement of Academic Integrity

The School of Management does not condone academic fraud, an act by a student that may result
in a false academic evaluation of that student or of another student. Without limiting the
generality of this definition, academic fraud occurs when a student commits any of the following
offences: plagiarism or cheating of any kind, use of books, notes, mathematical tables,
dictionaries or other study aid unless an explicit written note to the contrary appears on the
exam, to have in his/her possession cameras, radios (radios with head sets), tape recorders,
pagers, cell phones, or any other communication device which has not been previously
authorized in writing.

Statement to be signed by the student:

I have read the text on academic integrity and I pledge not to have committed or attempted to
commit academic fraud in this examination.

Signed:____________________________________________________

Note: an examination copy or booklet without that signed statement will not be graded and will
receive a final exam grade of zero.

1
Question 1 (62 marks; 60 minutes)

WW Inc. is a dealer of high-end water treatment equipment. Kiki ltd. enters into a 5-year
agreement with WW Inc. to lease an industrial water purification system in order to help treat the
waste water that comes from its food processing plant. The CFO of Kiki was able to negotiate the
following terms for the lease:

• Annual payments of $300,000 starting on January 1, 2018

• An option to purchase the waste water system for $208,827 after 5 years, which will be
$30,000 lower than what the asset will be worth at the end of the lease term
• The initial direct costs on the deal amounted to $11,000 and were paid to a legal firm on
January 1, 2018
• Kiki ltd. will have exclusive use of the system and can direct its use throughout the lease
term
• The serial number of the system if XVC33MM
• The economic and useful lives of the asset at the time of signing this lease are both 6 years
at the end of which there will be a residual value of $80,000

You are the Accounting Manager of Kiki ltd. and are gathering the required information in order
to account for this contract in the books of the Company for the 2018 year. Kiki has a Year-End
of December 31. Due to previous financial difficulties, Kiki has a 25% incremental borrowing rate
but you know that WW inc. has set the equal annual rentals to ensure a 5% rate of return. Kiki and
WW are both publicly listed on the NYSE.

The collectability of the lease payments is not reasonably predictable and there are no important
uncertainties about any un-reimbursable costs that have not yet been incurred by the lessor. Kiki
uses the straight-line amortization for all the assets on its books.

Required

1. What classification would Kiki give to the lease? Analyze each criteria
a) If necessary, calculate the value of the right-of-use asset and the lease
obligation
b) If necessary, prepare the lease amortization schedule

2. Prepare all necessary journal entries related to the lease for the 2018 and 2019 year

3. Prepare a partial income statement, a partial balance sheet and a partial statement of cash
flows for 2019 showing the accounts and amounts related to the lease contract.

4. If we now assume the following:

• the fair market value of the waste water system on January 1, 2018 was
$1,527,407
• the initial cost of the water system when WW purchased it in 2017 was
$1,400,000

2
 • All the other facts of the exercise remain the same

a) What classification would WW Inc. (the lessor) give to the lease? Analyze each criteria
b) Prepare the journal entries for the 2018-year in WW’s books as they related to the lease

Clearly state any necessary assumption and provide all your calculations.

Question 2 (85 marks; 110 minutes)

LivingMyBestLife Ltd. (LMBL) is a construction Company that builds industrial facilities in
North America. They have a defined benefit pension plan for their employees in order to
incentivize them to stay with the Company as it is difficult to find a retain talent in that industry.
The plan was setup to provide the employees a steady stream of income upon retirement. This
stream of income would be based on a formula that takes into consideration the number of years
worked by the employee and the best 3 years of earnings of the employee. Due to some financial
difficulties, LMBL decided to reduce the income upon retirement for retirees by 10%. This has a
retrospective impact. It reduced the defined benefit obligation by $60,000 and was effective
August 1, 2018.

An actuarial report is obtained from Mala LLP. It contains the following information:

a) Interest rate on obligations and expected return on assets is 15%

b) On January 1, 2017, the balance of the defined benefit obligation is $900,000 and the
pension fund assets total $780,000.
c) Throughout the year, employees earned pension benefits of $70,000 in 2017 and $80,000
in 2018
d) On March 1 of 2017 and 2018, the Company made contributions of $200,000 in 2017 and
$300,000 respectively to the plan.
e) Fair market value of the plan asset were $666,000 in 2017 and $650,000 in 2018
f) Defined benefit obligations were $723,000 in 2017 and $750,000 in 2018
g) Benefits that were paid throughout the year to retirees were $16,000 in 2017 and $18,000
in 2018

Required:

a) Prepare the schedules to reconcile the opening and closing balances of pension assets and
obligations for 2017 and 2018 (including the funding status).

b) For the years 2017 and 2018, show the individual components, which make up the pension
expense.

c) Record the journal entries for LMBL's pension in 2017 and 2018.

d) Determine the balance of the net defined benefit pension liability as at December 31, 2017
and 2018.
*****The term pension service cost refers to the present value of the
projected retirement benefits earned by plan participants in the
current period. 3
 e) Provide the effect of the pension on the comparative financial statements (SFP, P&L, SCF)
of LMBL for 2017 and 2018.

Question 3 (15 marks; 10 minutes)

The multiple-choice questions should be answered using the following information:
You have been tasked by the Controller to help with the interim financial reporting this period.
Nolimit Inc. is a publicly listed Company and has a fiscal year that ends December 31, 2017. The
company prepares its interim financial statement for the second quarter of 2017.
This is an excerpt of your discussion with the controller:
• The chief operating decision maker of the Company reviews all the segments below
regularly.
• Senior management wishes to present as few divisions as possible in the notes while being
compliant with IFRS requirements.
• The revenue figures below includes both the intercompany revenue and other income but
net income excludes depreciation.

The controller also provides you with the following information from the accounting system:
obligation
Intercompany Right-Of- under Net
Other income depreciation Revenue
revenue Use Assets finance income
lease
Subsidiary 1 7,000 6,000 12,500 114,000 12,000 16 140,000
Subsidiary 2 2,000 1,000 25,000 14,000 23,000 65,000 333,000
Subsidiary 3 3,000 45 2,300 145,000 21,000 22,000 430,000
Subsidiary 4 7,000 5,000 1,000 115,000 55,000 15,000 701,000
Subsidiary 5 1,000 33 6,000 97,000 1,000 9,000 30,000
Total 20,000 12,078 46,800 485,000 112,000 111,016 1,634,000

1. Which segments would not qualify based on the total revenue criteria?
a. 1,5
b. 1,2,3
c. 4,5
d. None of the above

2. Which segments would qualify under the net income/loss criteria?

a. All of them except # 1
b. All of them, except # 5
c. 5
d. None of the above

3. Which segments would qualify for total asset?

a. 1,5
4
 b. 2,5
c. 1,2,4,5
d. None of the above

4. Which minimum current and comparative periods should be presented for the statement
of financial position?
a. June 30, 2017 and December 31, 2016
b. 6 months for both ended June 30, 2017 and June 30, 2016
c. 3 and 6 months ended for both June 30, 2017 and June 30, 2016
d. None of the above

5. Which minimum current and comparative periods should be presented for the profit and
loss statement?
a. June 30, 2017 and December 31, 2016
b. 6 months for both ended June 30, 2017 and June 30, 2016
c. 3 and 6 months ended for both June 30, 2017 and June 30, 2016
d. June 30, 2017 and March 31, 2017

5
1654 'i'ilttt I iritti: u.f 1Iouc .t,

T'cg";!e t.4-2
PRESENT VALUE OF 1

(PRESENT VALUE OF A SINGLE SUM)

PI/F, , = r)-"
dr=(1+
{n)
periods 2% z',2% 3v" 4% 5% 6% gv, 9Y" lOYo 42%

1 .98039 .97561 .97087 .96156 .95238 .94540 .92593 .91743 .90909 .90090 .89286 .86957

2 .96117 .95181 .94260 .92456 ,90703 ,89000 .85734 .84168 .92645 ,81162 .79719 .75614

3 .94232 .92860 .91514 .889m .86384 .83962 .79383 .77218 ,75132 .73119 .71178 .65752

4 ,92385 .90595 .88919 ,85480 .a227Q .79209 .75503 .70e/: .68501 .65873 .63552 .57175

5 ,90583 .88385 .86261 .82193 .78353 .74726 ,68058 .04995 620.92 .59345 .56743 .49718

b .88797 .86230 .85748 .79031 .74622 .70496 .5a017 .59627 56M7 .53464 .50563 .43253

7 .87056 .94127 .81309 .7s992 ,71068 .66506 .58349 54703 .51316 ,48165 .45235 .57594

I .8s349 .82075 .78941 .73069 .67684 .62741 .5W27 .50187 .4.6651 .43393 .40388 .32690

I ,85676 .80073 .t6642 .70259 .6//,61 .59190 .50025 .46'043 .42410 .39092 .36051 .28p,26

10 .82035 .78120 .74N9 .67556 .61391 .55859 A5319 .42241 tR6qd \qJ1R .32197 .24719

11 .80426 .76214 .72242 .64958 .s8468 .52679 .42888 .38753 .35049 .31728 .28748 .21494

12 .78€49 .74356 .70138 .62460 ,55684 .49697 .39711 .35554 .31865 .28584 ,25668 .18691

.77303 .72542 .6809s.600s7 .s3032 .46884 .56770 .32618 .28966 .25751 .22917 .16253

14 .757ffi .70773 .66112.57748 .50507 !423A 34046 .29925 .?6333 .23199 .2W62 .14133

15 .74301 .59047 .&186 ,55526 .4€102 .41727. .31524 ,27454 .23939 ,20900 j8270 .12289

.16
.72Us .67362 .62317 ,53391 .45811 .59365 ,29189 .25187 .21763 .18829 .16342 .10687

17 .71416 _65720 .60502 .51337 .43630 .37136 .27027 .23107 ,19785 .16963 .14564 .09293

18 .70016 .U117 .58739 .49365 .41552 .35034 .25025 .21199 ,'17986 152e2 .13004 ,08081

'19 .68il3 .62553 57029 .47464 .39573 .330s1 ,23171 .19449 ,16351 .13768 .11611 ,07027

20 .67297 .61027 .55368 .45639 .37689 .31180 .21455 .178r''3 .1€64 .12403 .10367 .06110

.6s978 .59559 .53755 .43885 .35894 .29416 .19866 .16370 .13513 ,11174 .09256 .05315

.@6U .58086 .521A9 .42196 .34185 .27751 .18394 .15018 .12285 .10067 .08264 .@,620

23 ,63416 .56670 ,50669 .40573 .32557 .26180 17032 .13778 .11,168 .09069 .07379 .UO17

24 .62172 .ss288 ,49193 .39012 .31@7 .24698 .15770 12641 .10153 .08170 .06588 .03493

25 .609s5 .53939 .47761 .37s12 .29530 .zisoo l4ffi2 .11597 .09230 ,07361 .0s882 .05058

.597s8 .52623 ,46569 .36069 .24124 .21954 .13s20 .10639 .08391 .06631 ,0s252 .02642

27 .58586 .51540 .45019 .34682 .26755 .20737 .12319 .A9761 .07628 .05974 .04689 .02297

28 .57437 .50088 .43708 .55348 .25509 .19s63 .11591 .6955 ,06934 .05382 .u187 .01997

29 .5631'1 .48866 .42435 .32065 .24295 .18456 .10733 .08216 .06304 .04849 .03758 .01737

30 .55207 .47674 .41199 .50832 .23138 .17411 .09958 .07537 .05731 .04368 .05558 .01510

31 .s41?5 .46511 .39999 .29646 .22036 .16425 .09202 .06915 .05210 .0593s .02980 .015',13

32 .53065 .45377 .38834 .28506 .20987 .15496 .08520 .06344 .u736 .05545 .u2661 .u142
35 .s2023 .M270 37703 .27409 .19987 34619 ,07889 .05820 .04306 ,03194 .m376 .00991

34 .51005 .43191 ,36604 .26355 .19035 .13791 .0730s .05540 .03914 .02878 .u)121 .00864

,50005 .42137 .35538 .25342 .18129 ,15011 .06763 .04899 .03558 .V2592 .01894 .w754

36 .4%22 .41109 .34503 .24367 .17266 .12274 .06262 .04494 ,03235 .92335 .01691 .00555

17 .48061 .40107 .33498 .23430 .16444 .14579 .05799 .u123 .0294r .gl104 .01510 .00568

38 .47119 .59128 .32523 .22529 .15661 .10924 .05369 .03783 .02674 ,01896 .01348 .00494

59 .46195 .38174 .51575 .21662 .14915 .10306 .c/;971 .03470 .u2430 .01708 .o12U .w429

40 .45289 .37243 ,50656 .20829 ,14205 .09722 .04603 .03184 .02210 .01538 .01075 ,w373
 '
l-l itt' ! ir I tr'' r;,t' 3 l,t;t,:"1' r657

Tchle A-S
PRESENT VALUE OF AN ANNUITY DUE OF 1

1_ _ 1

t1L:)tl
PVF-.1D =l+---! -l--
i

(n)

oeriods 21t2Vo 3V" 8% 9o/" 10% 11% 12% 150/o

1 1.00000 1.00000 1.00000 1.00000 1.00000 1.0@00 1.00000 1.@000 1.0@00 1.00000 1.00000 1.00000
2 1,98039 1.97561 1.97c€7 1.96154 ,1.95238 1343& 1.92593 1.91743 1.90909 1.90090 1.89285 1.86957
3 2,94156 2.92742 2,91347 2.88609 2.85941 2.83539 2.78526 2.75911 2.73554 2.71252 2.6900s 2.62571
4 3,88388 3.856m 3.82861 5.77509 3.7232s 3.67301 357710 3,53130 5.48685 3.44371 5.40183 3.28323
5 4.80773 4.76197 4.71710 4,62990 4.5459s 4.46s11 4.31213 4.23972 4.16986 4.10245 4.03735 3.85498

6 5.71346 5.64583 5.57971 5.45182 5,32948 5.?1236 4.99271 4.88965 4.79079 4.69590 4.6U78 4.35216
7 6_60143 6.5@15 6.41719 6.24214 6,07569 5s1732 5.62288 5.48592 5,35526 5.23054 5.',t1141 4.7e/48
I 7.47199 7.54939 7.%A28 7,00205 6.78637 6.58258 6.20637 6,03295 5.868/2 5.71220 s.56376 5.16c/.2
9 8.52548 8.17014 8.01969 7.73274 7.46321 7.2A979 6.74664 6.53482 6.33493 6.14612 5.96764 s.48732
10 9.16224 8.97087 8.78611 8.43533 8.10782 7.80169 7.24689 6.99525 6.75902 6.53705 632925 5.77158

11 9.98259 9.75206 9.55020 9.11090 8.72173 8.36009 7.71cf,8 7.41766 7.1M57 6.88923 6,65m2 6.01877
1) 10.78685 10.51421 10.25262 9.76048 9,30641 8.88687 8.13896 7.80519 7.49506 7 ,20652 6.93770 6.23371
11.57534 11.25776 10.95400 10,38507 9.86325 9.38384 8.s3608 8,16073 7.81569 7.49236 7.19437 6.42062
14 12.34837 11.98319,11.63496 10.98565 10.39357 9.85268 8.90378 8.48690 8.10336 7.74987 7.42355 6.58315
15 13.1625 12.69091 12.29607 11,56312,10.89864 10.29498 9.24424 8.78615 9.36669 7.981A7 7.62817 6.72448

16 13.84926 13.38138 12.93794 12j1839 11.37966 10.71225 9.55948 9,06069 8.60608 8,19087 7,81086 6.U737
14.57771 14.055@ 13.56110 12.65230 11.83777 11.10590 9.85137 9,31256 8.82371 8.37916 7.97399 6ss424
18 15.29187 14.71220 14.16612 13.16567 12.274n7 y.47726 1A.n164 9.54363 9,m155 8,54879 8,11963 7.W716
19 15.99203 15.35336 14.75351 '13,65930 12.68959 11.82760 10.37189 9,75563 s.2a141 8.70162 8.24967 7.12797
20 16.67846 15.97889 15.32380 44.13394 13.A8fi2 12.15812 10.60350 9.95012 936492 8,83929 8,56578 7.19823

21 17.35143 16.s8916 15.87747 14.59053 13,46221 12.46992 10.81815 10.12855 9.s1356 8.96333 8.46944 7.25933
22 18.01121 173U55,16.41502 15.02916 13.92115 12.76408 11.01680 10.29224 9.64869 9.07507 8,56200 7.31246
23 18.65805 17.76541 16.93692 15.45112 14.153@ 15.04158 11.2@74 10.44243 9.77154 9.17574 8.6446s 7.35866
24 19.2922A 18.33211 17.44361 15.85684 44.48857 13.30358 1137$6 10.5W21 9.88322 9,266/3 8,71U3 7.398U
19.91393 r8.88499 17.93554 16.24696 14.798e4 ,15.55036 11.52876 10.70661 9.98474 9.54814 8.7U32 7.43377
'E

26 20.s2346 19.42438 18.4131s 16,62208 15.09394 13.78336 11.67478 10.92255 10.07704 9.42174 8.84314 7.4U15
27 21.121M 19.95061 18.87584 16.98277 15.57519 14.W317 11.80998 10.92857 10,16095 9.48806 8,89566 7.49056
2g 21.74690 2036401 19.32703 17.32959 15.64303 14.21055 11.93518 11.02653 10.23722 9.54780 8.94255 7,51353
29 22.28127 20.96489 19.76411 17.66306 15.89813 14.40616 12.05108 11j1613 10,50657 9.60162 a ooAAa 7 (z?c4
30 22.84438 21.45555 20,18845 17.98371 16.14107 14.5W72 12.158/.1 11.19828 10.56961 9.65011 9.02181 7.55088

31 23.59646 21,93029 29.6W44 18.292A3 rc37245 14.76481 1225778 11.27365 10.42691 9.69379 9.05518 7,56598
32 23.93770 22.39541 21.cff,43 18.58849 16.59281 14.92909 12.34980 11,34280 $.4790a 9.73315 9.08499 7.57911
53 24.46833 22.tg;918 ij.SWt 18.873s5 16.80268 15-08404 12.43500 11/&24 10.52638 9.76860 9,11159 7,59055
34 24.98856 23.29188 21.76579 19.14765 17.00255 1523023 12.51389 11.46444 10.56943 9.80054 9.43535 7.5m46
35 25.49859 23.72379 22.1318/ 19.41120 17.192eo 1s.36814 12.58693 11.51784 10.608s8 9.A2532 9,15656 7,60910

25.99862 24.14516 22.4a722 '19.66461 17.37419 15.49825 12.65457 1,1.566S2 10.64416 9,85524 9.17550 7.61661
37 26.48884 24.55625 22.83225 19.90828 17.54685 15.62099 12.71719 11,61176 10.67651 9.87859 9.19241 7.62314
38 26.96945 24.95732 23.16724 20j4258 a7.71129 15.7367A 12.71548 11.65299 10,70592 9.89963 9.2Q751 7.62882
39 27.44064 25.34860 23.49246 20.367A6 17.86789 15.84602 12.82887 11.69032 10,75265 9.918s9 9.22099 7.6337s
40 27.90259 25.73034 23.90822 20.58448 18,01704 15.949A7 12,87858 11.72552 10.75697 9,93567 9.23305 7.65805