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10/19/2010 Blackboard Academic Suite Assignment 2 (Session 1 Fall) Course Schedule Course Modules Review and Practice Exam Preparation Resources Print Note: T his assignment refers to material addressed in Modules 1-6 and in your previous Financial Accounting courses. It is worth 100 marks. Prepare the answers to these assignment questions in Word and save them as one Word (.doc) document on your hard drive. See Submit assignments and quizzes for the recommended format and filename. When your file is complete and you are ready to submit it for marking, select your FA3 A ssignment Submission/Group Work area. For help, refer to the quick tutorial, Submitting your completed assignment. Suggested time to complete this assignment is 14-16 hours. Question 1 (60 marks) Computer question True North Corp. (TNC) offers oilfield operation services to the oil and gas industry in Alberta and Texas. TNC owns no natural resource properties itself, but assists in exploration activities through cementing and stimulation services. The company prepares its financial statements in accordance with PEGAAP. The company has prepared draft financial statements (Exhibit 1). However, some transactions during the year have not been properly reflected in the financial statements (Exhibit 2). Additional information on financial statement elements are provided in Exhibit 3. TNC is required, as part of its bond agreement, to maintain a minimum current ratio of 1:25 and a maximum debt-to-equity ratio of 1:5. (Debt in this ratio is defined as total liabilities.) Since a number of the transactions that have not been processed affect debt and/or equity, the CFO is concerned that these key financial targets continue to be met. Requirements: 1. Provide journal entries to account for the information provided in Exhibits 2 and 3. (35 marks) 2. Using Accpac, prepare the balance sheet, the statement of income and the statement of retained earnings. (15 marks) In Accpac, select FA3 Midterm Project, which is True North Corp. All data in Exhibit 1 is already recorded. a. Record the transactions from requirement 1 as journal entries in a batch. Post the batch. mycgaonline.org/.../frameset.jsp?tab_i... 1/6 10/19/2010 Blackboard Academic Suite b. Prepare the financial statements. For the report, use the following files: Balance sheet: quikbal3_fa3.xls Statement of income: quikinc2_fa3.xls Statement of retained earnings : re_state_fa3.xls c. Print each report into a file. 3. Evaluate the key financial targets and suggest action for the coming year if there are concerns. (10 marks) Note: All submissions must be in Word. If you are unsure how to export Excel or Accpac files to Word, please refer to "Use software in the course" located under the How to tab. Date all entries December 31, 2010. You should include an entry to reclassify the current portion of the lease liability as short-term. None of the adjustments mentioned alter income tax expense, income tax payable or future income tax. Round all adjustments to the nearest thousand. Note all amounts are given in thousands, except share volumes and per share amounts. Exhibit 1: True North Corp. draft financial statements for the year ended December 31, 2010 (in thousands) Balance sheet Assets Cash Accounts receivable Inventory Prepaid expenses and deposits Current assets $ 14,960 30,497 1,958 930 48,345 78,441 890 8,338 $136,014 Capital assets, net Intangible assets Suspense Total assets Liabilities Accounts payable and acc rued liabilities Inc ome tax payable Current bank loan Current liabilities Lease liability Long- term debt Premium Future inc ome tax Deferred pension obligation $23,496 1,600 12,100 37,196 30,000 1,210 31,210 6,900 620 Total liabilities 75,926 Shareholders' equity Preferred shares 5,100 mycgaonline.org/.../frameset.jsp?tab_i... 2/6 10/19/2010 Blackboard Academic Suite 11,050 788 450 42,700 60,088 Common shares Contributed c apital on c ommon stoc k retirement Stock options outstanding Retained earnings Total shareholders' equity T otal liabilities & shareholders' equity $136,014 Statement of income $146,560 Sales Expenses Operating Selling, general & admin Interest Amortization Loss (gain) on bond retirement Income before tax Income tax Net income 103,490 8,385 2,355 8,420 122,650 23,910 5,950 $17,960 Statement of retained earnings Retained earnings beginning of year Dividends: Preferred dividends Common share dividends Stock dividends Net inc ome (loss) for year Retained earnings end of year $27,965 0 (3,225) 0 17,960 $42,700 Exhibit 2: True North Corp. Outstanding transactions Note: Amounts are in thousands, except share volumes and per share amounts. 1. The $3,225 dividend recorded in the financial statements is not the common dividend, but rather the common and the preferred dividend combined. This dividend was declared and paid to the correct shareholders, but incorrectly recorded. The portion paid to preferred shareholders must be removed from the common dividend category and reclassified as a preferred dividend. 2. On October 1, 2010, 865,000 common shares were reacquired from a shareholder and retired. The $3,500 payment was debited to the suspense account, which now appears as an asset on the balance sheet. 3. On December 31, 2010, 15% of the $30,000 bond payable was retired for $4,838. This amount was debited to the suspense account, which now appears as an asset on the balance sheet. No other entry has been made for the bond retirement. All interest and premium amortization has been recorded to December 31, 2010 in the financial statements shown in Exhibit 1. 4. No adjustment has been made for compensation expense inherent in stock option plans. 5. Pension expense has been recorded in these financial statements as the $3,200 payment made to the pension trustee. Of the workers involved in the pension plan, 80% are operating staff, while 20% are in the selling, general, and administrative categories. mycgaonline.org/.../frameset.jsp?tab_i... 3/6 10/19/2010 Blackboard Academic Suite 6. On December 31, 2010, TNC entered into a long-term lease agreement to lease certain operating equipment with a fair value of $7,500. Lease payments were due each December 31, and the first payment was made on December 31, 2010. The first payment was debited to rent expense (an operating expense) and no other adjustment for the lease has been recorded. Exhibit 3: True North Corp. Additional information Note: Amounts are in thousands, except share volumes and per share amounts. 1. Lease obligation The lease obligation is a 15-year financing lease with annual payments each December 31 of $720. Assets were acquired on December 31, 2010 but will be placed in use in January 2011. The implicit rate is 6%. The current portion of the lease is the principal portion of the payment due December 31, 2011, and should be removed from the long-term lease liability and be recorded with "current bank loan" in an adjusting journal entry. 2. Share information Preferred shares $4 cumulative no-par preferred shares; 76,000 shares outstanding since early in 2009. No dividend was declared or paid in 2009. Common shares No-par common shares outstanding at the beginning of 2010, 3,576,000 shares. 865,000 common shares were retired on October 31, 2010. 3. O utstanding stock options The balance in the stock options outstanding account represents 4 years' accrual of the value of stock options granted in the past. These options vest at the end of 2012. No accrual has yet been made in 2010 for these options. New stock options were granted in 2010 that were exerciseable, and also vest, immediately. These options were valued at $265.5 using the Black-Scholes option pricing model. All stock options are held by senior administrative staff. 4. Pension information According to a recent actuarial evaluation: Pension assets, opening Actual return Contribution rec eived Payments made to pensioners $15,267 1,010 3,200 __(695) $18,782 Pension obligation, opening Current servic e cost Interest Payments made to pensioners $19,200 2,670 960 __(695) $22,135 At the beginning of 2010, there was an unamortized past service cost in the amount of $3,500, mycgaonline.org/.../frameset.jsp?tab_i... 4/6 10/19/2010 Blackboard Academic Suite and a small balance of unrecognized experience gains and loss. True North uses the corridor method, and no amortization of the experience gain or loss is needed in 2010. The vesting period is 10 years, and expected earnings on fund assets are 4.5%. Question 2 (20 marks) Case analysis question Case 13-3, text, pages 814-816. For guidance on cases analysis for FA3, refer to Module 1 and "Analyze a case" in the Resources section. Required Perform the following tasks for this case: 1. Provide an overall assessment of the corporate financial reporting objectives. (3 marks) 2. Provide an assessment of the independent accountant's ethical responsibilities and dilemma in the case situation. (3 marks) 3. Analyze the issues and provide recommendations as to the appropriate accounting treatment. Begin this segment with a list of the issues. (14 marks) Question 3 (20 marks) Provisions are liabilities with some uncertainty attached, such as warranties or lawsuits. Companies must provide a change statement for provisions (opening balance, reconciled to closing balance). Accounting policy information may be contained in two or more disclosure notes for the topic: in the summary of significant accounting policies and in a specific note dealing with the provision. Required: 1. Identify a set of IFRS-compliant financial statements and provide information in items 1 to 4 in the table below (3 marks) 2. Extract and copy note disclosure related to a provision in items 5 and 6 in the table below. (3 marks) 3. Interpret the information contained therein using your own words in item 7 in the table below. That is, describe the meaning of each line item in the change statement. Also describe accounting policy and additional information. (14 marks) Length is limited to 500 words excluding the disclosure notes themselves. Complete and submit only the table below. To locate IFRS financial statements, you will likely identify a European (or Australian) company. Any set of IFRS-compliant annual financial statements may be used for course work; click here for a list with a few suggestions. mycgaonline.org/.../frameset.jsp?tab_i... 5/6 10/19/2010 Blackboard Academic Suite A nnual financial statements must be used, not quarterly or interim financial statements Most companies post their financial statements in their annual reports or as separate documents in a portion of their website labelled investor relations, corporate information, or shareholder information. Y our extracts must be from the financial statements themselves, and not the management explanation or analysis sections DO NOT submit the entire set of financial statements; extract the relevant information. To take an extract from a PDF document: 1. Right click and hold the clicker down; move the mouse to highlight the entire SCF content. Hold down the "CRTL" key and then hit the letter "C." 2. Return to your solution Word document and hold the "CRTL" key, then hit the "V" key. This will copy the material with no spacing, which is acceptable for this submission. Alternatively, you may use the snapshot tool in Adobe. Requirement Response 1. Name of c ompany and year- end date 2. Website URL for the financ ial statements 3. Date accessed 4. Excerpt from the financial statements that proves use of IFRS; either a line from the audit report or the signific ant accounting policies 5. Excerpt from significant ac counting polic ies disclosure note (often note 2 or note 1) that explains policy for provisions 6. Disc losure note related to one spec ific provision; the continuity sc hedule (opening balance, list of changes for the year, and c losing balance) plus any other explanation provided 7. Student description of the information provided, including an explanation of each change in the account during the year, ac counting polic y and additional disclosure. Limit is 500 words; add lines as needed. 100 mycgaonline.org/.../frameset.jsp?tab_i... 6/6