Economics and Business

Academic Year 2019-2020

Exam: Financial Accounting 1
Date and time of the exam: Example Exam

Duration of the exam: 3 hours

Identification:
You have to identify yourself using your certificate of registration (UvA-identification card) and a valid
proof of identity (passport, ID card) with a good resembling photograph. If you cannot identify yourself,
access to the exam may be denied.

If you are not correctly registered via SIS for the course component, your exam will not be marked and
registered.

Please write your name and student number on every sheet of paper you hand in.

Warning against fraud/cheating:

Students who are caught at any form of fraud/cheating will be punished.
Make sure that your mobile phone is switched off and put away in your briefcase/bag. This also applies for
other audio equipment, headphones, digital watches (e.g. I-watches) and other electronic devices. Your
briefcase/bag must be closed and placed on the floor beside your table.

Tools allowed:
Pencil, pen, eraser, dictionary, calculator

Bathroom visits:
During the exam it is only allowed to visit the bathroom after permission of the head invigilator.

Specific information on this exam:

This exam consists of two parts. The answers for each of the parts should be provided on separate answer
sheets. Specifically:
- Part I consists of 25 multiple choice questions. The answers should be provided on the multiple-
choice form (answer A corresponds to answer 1 on the form, B corresponds to 2, etc.). Do not forget
to also fill in your student number and version!
- Part II consists of 15 journal entries. The journal entries should be filled in on the Part II answer
sheet.

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 PART I
Multiple choice questions
(weight in determination of final exam grade: 50%)

Q1 What is the present value (rounded to whole euros) of €50,000, to be received exactly 6
years from now, if the discount rate is 3%?

a. €48,544
b. €41,874
c. €59,703
d. €50,000

Use the information about Bingeau Inc. below for Questions Q2 and Q3

The following data is available for the month of April 2018 for Bingeau Inc.:

Number of units Price per unit Total

Inventory
April 1 15,000 $7 €105,000
Purchases
April 11 15,000 $6 €90,000
April 24 20,000 $5 €100,000
Sales
April 18 20,000
April 30 25,000

Q2 If Bingeau Inc. uses a periodic inventory system and an average-cost inventory cost
assumption, the cost of the goods sold in April 2018 is:

a. $295,000
b. $270,000
c. $265,500
d. $255,800

Q3 I. If Bingeau Inc. uses the LIFO inventory cost assumption, the value of the ending
inventory will be the same under a perpetual inventory system and under a
periodic inventory system.
II. If Bingeau Inc. uses a perpetual inventory system, the value of the ending inventory
is higher if a LIFO inventory cost assumption is used than if a FIFO inventory cost
assumption is used.

a. I and II are both CORRECT.

b. I is CORRECT and II is INCORRECT.
c. I is INCORRECT and II is CORRECT.
d. I and II are both INCORRECT.

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Q4 Black Belt &Co. uses a perpetual inventory system. It recorded the following events
involving a recent purchase of merchandise:
- Received goods for $50,000, terms 2/10, n/30.
- Returned $1,000 of the shipment for credit.
- Paid $250 freight on the shipment.
- Paid the invoice within the discount period.
As a result of these events, the company’s inventory

a. increased by $48,020.
b. increased by $48,270.
c. increased by $48,265.
d. increased by $49,250.

Q5 On October 1, 2017, Boerhaave Printing Services installs a new printing press. The cost
of the press is €160,000. It has an estimated 5-year life and €40,000 residual value at the
end of its useful life. What is the book value of the printing press on the December 31,
2017, statement of financial position assuming that Boerhaave Printing Services uses
the double-declining-balance method of depreciation?

a. €144,000
b. €120,000
c. €104,000
d. €150,000

Q6 The balance of Allowance for Doubtful Accounts prior to making the adjusting entry to
record estimated uncollectible accounts

a. is relevant when using the percentage of receivables basis.

b. is relevant when using the percentage of sales basis.
c. is relevant to both bases of adjusting for uncollectible accounts.
d. will never show a debit balance at this stage in the accounting cycle.

Q7 Smelly Fingers Inc. retires its $2,000,000 face value bonds at 105 on January 1,
following the payment of annual interest. The carrying value of the bonds at the
redemption date is $2,074,900. The entry to record the redemption will include a

a. credit of $25,100 to Loss on Bond Redemption.

b. debit of $25,100 to Loss on Bond Redemption.
c. credit of $2,074,900 to Bonds Payable.
d. debit of $2,000,000 to Bonds Payable.

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Q8 I. The safeguarding of assets is an objective of a company's system of internal
control.
II. A petty cash fund is generally established in order to pay relatively small
expenditures.

a. I and II are both CORRECT.

b. I is CORRECT and II is INCORRECT.
c. I is INCORRECT and II is CORRECT.
d. I and II are both INCORRECT.

Q9 The entire group of accounts maintained by a company is called the

a. financial statements
b. general journal
c. general ledger
d. trial balance

Q10 La Petite Mort SA had $375,000 of current assets and $150,000 of current liabilities
before borrowing $75,000 from the bank with a 3-month note payable. What effect did
the borrowing transaction have on La Petite Mort SA’s current ratio?

a. The ratio decreased.

b. The ratio increased.
c. The ratio remained unchanged.
d. The change in the current ratio cannot be determined.

Q11 I. If bonds are issued at a discount, the issuing corporation will pay a principal
amount less than the face amount of the bonds on the maturity date.
II. If bonds are issued at a premium, the interest expense recognized each year will be
greater than the contractual interest rate.

a. I and II are both CORRECT.

b. I is CORRECT and II is INCORRECT.
c. I is INCORRECT and II is CORRECT.
d. I and II are both INCORRECT.

Q12 In recording an accounting transaction in a double-entry bookkeeping system…

a. the number of accounts debited must be equal to the number of accounts credited.
b. there must always be entries made on both sides of the accounting equation.
c. the total amount debited must be equal to the total amount credited.
d. there are always only two accounts affected by any transaction.

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Q13 Shady Brook Winery Inc. has net income of $2,000,000 and paid dividends to ordinary
shareholders of $400,000 in 2017. The weighted average number of shares outstanding
in 2017 was 50,000 shares. Shady Brook Winery Inc. ordinary shares are selling for
$300 per share. Shady Brook Winery Inc.’s price-earnings ratio is

a. 4 times.
b. 6 times.
c. 7.5 times.
d. 9.4 times.

Q14 On December 8, 2017, VeMaCo NV buys a portfolio of shares for trading purposes for
a total price of €350,000. On the balance sheet date (December 31, 2017) the fair value
of the portfolio is €365,000. Which of the following statements is true?

a. On the balance sheet date, VemMaCo NV debits the account “Fair value adjustments – Non-
Trading” for €15,000.
b. On the balance sheet date, VemMaCo NV debits the account “Share Investments” for
€15,000.
c. On the balance sheet date, VemMaCo NV credits the account “Unrealized Gain or Loss -
Equity” for €15,000.
d. On the balance sheet date, VemMaCo NV credits the account “Unrealized Gain - Income”
for €15,000.

Q15 The annual per share dividend requirement of a 5%, $200 par value cumulative
preference share that was issued for $150 and currently trades for $200…

a. depends on the interest rate.

b. is $20
c. is $10
d. is $7.50

Q16 Which of the following accounts would be increased with a debit entry?

a. Interest Payable
b. Share Capital—Ordinary
c. Service Revenue
d. Dividends

Q17 Cauca, Inc. has 32 employees who work Monday through Friday each week; each
employee earns €150 per day and is paid every Friday. The end of the accounting
period is on a Wednesday. How much wages expense should Cauca accrue at the end of
the period?

a. € 14,400
b. € 9,600
c. € 24,000
d. € 19,200

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Q18 An accountant has debited an asset account for $1,000 and credited a liability account
for $500. What can be done to complete the recording of the transaction?

a. Debit another asset account for $500.

b. Debit an equity account for $500.
c. Credit a different asset account for $500.
d. Nothing further must be done.

Q19 The following informantion is available about Ragnarsson Axes & Hammers AS, a
merchandizing firm for 2018 (all amounts in thousands of Norwegian Krones):

Net Sales 104,000

Sales Returns and Allowances 14,000
Cost of Goods Sold 56,000
Operating Expenses 12,000
Beginning Inventory 20,000
Ending Inventory 60,000

What is the Net Income of Ragnarsson Axes & Hammers AS in 2018?

a. 12,000
b. 50,000
c. 36,000
d. 22,000

Use the information about Froom’s Pharmaceuticals Ltd. below to answer questions 20-25.

On the next page you find the Statements of Financial Position on 31-12-2016 and 31-12-2017 and
the Income Statement over 2017 for Froom’s Pharmaceuticals Ltd. (all amounts in £1,000).
Additional information about Froom’s Pharmaceuticals Ltd. (all amounts in £1,000):

1. A piece of Equipment that originally cost £320, and had net book value £228, was sold for
£241.
2. To replace this equipment, new equipment was purchased for a total amount of £560 cash.
3. A cash dividend of £120 was declared and paid during the year.
4. A bank loan of £200 was paid back on the due date. A new two-year bank loan of £620 was
received.
5. Ordinary Shares with a par value of £100 were issued. The cash receipts were £300.

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 Froom’s Pharmaceuticals Ltd Statements of Financial Position
2017 2016
Assets
Equipment (net of depreciation) 2,298 2,068
Merchandise inventory 1,200 800
Accounts receivable 920 640
Cash 10 80
Total Assets 4,428 3,588

Equity
Share Capital - Ordinary 1,400 1,300
Share Premium - Ordinary 400 200
Retained Earnings 1,330 1,150
Liabilities
Note payable 628 208
Income taxes payable 170 190
Accounts payable 500 540
Total Equity & Liabilities 4,428 3,588

Froom’s Pharmaceuticals Ltd 2017 Income Statement

Sales Revenue 3,000
Cost of Goods Sold (2,000)
Gross Profit 1,000
Operating expenses
Depreciation - Equipment (102)
Other operating expenses (391)
Total operating expenses: (493)
Income from operations 507
Other Income & Expenses
Gain on Disposal of Equipment 13
Interest Expense (20)
Income before Income Tax 500
Income Tax Expense (200)
Net Income 300

Q20 Suppose Froom’s Pharmaceuticals Ltd. prepares a cash flow statement for the year
2017 using the indirect method. When calculating the net cash flow from operations,
how much would be added to Net Income to account for depreciation expenses?

a. £102
b. £100
c. £0
d. £92

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Q21 Suppose Froom’s Pharmaceuticals Ltd. prepares a cash flow statement for the year
2017 using the indirect method. When calculating the net cash flow from operations,
how much would be added to - or deducted from - Net Income to account for the
change in merchandize inventory?

a. £400 added
b. £400 deducted
c. £2,000 added
d. £2,000 deducted

Q22 What is the net cash flow from financing activities?

a. - £319
b. £720
c. £920
d. £600

Q23 Assuming all accounts payable refer to amounts owed to suppliers of merchandise
and all merchandise is purchased on account, how much cash was paid to suppliers of
merchandise in 2017?

a. £2,440
b. £2,000
c. £2,040
d. £1,128

Q24 What is Asset Turnover in 2017?

a. 23.41%
b. 67.75%
c. 74.85%
d. 24.95%

Q25 What is the Return on Assets in 2017?

a. 7.49%
b. 1.23%
c. 10.00%
d. 24.95%

---- end of Part I ---

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 PART II
Journal Entries
(weight in determination of final exam grade: 50%)

TiTaToys Ltd. operates 32 toy stores in Ireland and the UK, as well as a webshop. The company uses
a perpetual inventory system and it uses the allowance method to account for doubtful accounts. Its
fiscal year follows the calendar year.

Below are nine transactions of TiTaToys Ltd. from the months of October - December 2017, and six
adjusting and closing entries that need to be made at the end of the year.

Question:
Provide correct journal entries for these transactions, adjustments and closings.
Use “Dr.” and “Cr” and tabs for credit entries to clearly distinguish debit and credit entries (see
example on the answer sheet). Use only accounts listed in the chart of accounts below. Note: some of
the accounts in the chart may not be used at all.

Chart of accounts (in alphabetical order)

Accounts Payable Inventory
Accounts Receivable Loss on Disposal of Plant Assets
Accumulated Depreciation – Equipment Notes Receivable
Accumulated Depreciation – Truck Supplies
Accumulated Other Comprehensive Income Supplies Expense
Allowance for Doubtful Accounts Ordinary Share Dividends Distributable
Bad Debt Expense Prepaid Insurance
Bonds Payable Purchases
Cash Retained Earnings
Cost of Goods Sold Salaries and Wages Expense
Depreciation Expense - Equipment Salaries and Wages Payable
Depreciation Expense - Truck Sales Discounts
Dividend Revenue Sales Revenue
Dividends Payable Service Charge Expense
Equipment Share Capital - Ordinary
Fair Value Adjustment – Non-Trading Share Dividends
Freight-in Share Investments
Freight-out Share Premium - Ordinary
Gain on Disposal of Plant Assets Share Premium - Treasury
Impairment loss Treasury Shares
Income Summary Truck
Interest Expense Unearned Revenue
Interest Payable Unrealized Gain - Income
Interest Receivable Unrealized Gain or Loss - Equity
Insurance Expense Unrealized Loss - Income

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Transactions
1. On 02-10, 25 wooden toy trains were purchased on account from Rudolf AG for €1,500, FOB
Shipping Point, terms 2/20, n/40. The freight costs of €25 are paid in cash to the transportation
firm.
2. On 15-10, a K3 microphone set is sold in the North Dublin store for €55 cash. The inventory
cost of the microphone is €20.
3. On 01-11 the firm issues a five-year bond with stated interest 5% and a total face value of
€2,000,000 and raises a total amount of €1,800,000.
4. On 05-11, the €1,500 invoice of Rudolf AG (see transaction #1) is paid.
5. On 08-11, the company declares a 1% share dividend on its 880,000 ordinary shares
outstanding. The par value is €25 per share and on the date of the declaration the shares are
trading for €50 per share. The new shares will be issued on 20-12.
6. On 16-11 the firm uses cash raised with the bond issue (transaction #3) to repurchase 20,000 of
its €25 par value shares in the open market for an average price of €52 per share.
7. On 19-11, an account receivable of €89 is written off.
8. On 01-12 an independent auditor determines the fair value of TiTaToys’ computer system to be
€200,000. The computer system was bought on December 1, 2015 for €600,000. The computer
system is depreciated in 10 years using the straight-line method, assuming a residual value of
€25,000. Accumulated depreciation for the computer system on 01-12-2017 is €115,000.
9. On 20-12, the shares for the share dividend (see transaction #5) are issued.

Adjusting and closing entries

10. A journal entry needs to be made to recognize the bad debt expense for 2017. TiTaToys uses
the percentage of receivables method to determine the bad debt expense. On December 31, it
estimates the total amount that will become uncollectable to be €98,500. The current balance on
the account “Allowance for Doubtful Accounts” is €45,200 credit. Write-offs of accounts
receivable during 2017 amounted to €71,000.
11. Interest for a one-year 5% note payable of €24,000 with due date August 31, 2018 needs to be
accrued. Until now, no interest on this note payable has been recognized.
12. On 31-12, the fair value of the company’s non-trading securities portfolio is €100,000. The
original cost of the non-trading securities was €80,000 and the current balance on the Fair
Value Adjustment – Non-Trading account is €30,000 credit. This balance needs to be adjusted.
13. The depreciation for 2017 of for a company truck, purchased on July 1, 2016 at a cost of
€30,000 needs to be recorded. The company estimated that the truck will have a life time of
four years and a residual value of €2,000. The truck is depreciated using the straight-line
method.
14. The Sales Revenue account, which has credit value of €6,435,000 needs to be closed.
15. The Income Summary account, which has a €250,000 credit balance, needs to be closed.

---- end of Part II and of the exam ---

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