Practice Questions for BAAC 550

Question 1 Property, plant and equipment (15 marks, 15 minutes)

a) Explain the concept of depreciation. Include in your explanation one common

misconception regarding depreciation and its impact on the finances of a business.
(3 marks)

Depreciation is the allocation of the cost of an asset to the periods in which

revenue is derived from that asset.

It is not a valuation exercise; it does not set aside a fund of money to replace the
asset; it is not a cash expense.

b) Fraser River Drilling Co. purchased a machine on October 1, 2020 for $160,000.
Installation costs totaled $5,000 and the company’s annual general insurance policy
increased by $3,000 to cover the new asset. The machine has a $4,000 residual
value and an 8-year useful life. The company uses straight-line method of
depreciation.

Required:
i) Prepare all journal entries relating to the acquisition and depreciation of the
machine for 2020 and 2021. Provide all supporting calculations. (7 marks)

Cost of the asset is the purchase cost plus the installation costs. The insurance expense
is an operating expense.

Cost = 160,000 + 5,000

Straight-line depreciation = (165,000 – 4,000)/8 = $20,125 per year

As asset commenced operation in October only 3 months of amortization should be

claimed in 2012. (20,125*3/12) = 5,031 A full year is required in 2013.

Journal entries
Debit Credit
Machine 165,000

Cash 165,000

Depreciation expense 5,031

Accumulated depreciation 5,031

Depreciation expense 20,125

Accumulated depreciation 20,125

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Question 1 Property, plant and equipment continued

ii) On January 1, 2022, management determined that the total useful life of the asset
would be 12 years and its residual value would equal $2,000. Prepare the journal
entry to record depreciation for 2022. (5 marks)

Revised Depreciation

This is a change of estimate and needs to be applied prospectively.

Net book value at date of change = 165,000 - 5,031 - 20,125 = 139,844
New depreciation rate = (139,844 - 2,000)/ (12 - 1.25 一年又三個月) = 12,823
The revised total useful life is 12. Since 1.25 years has passed, the remaining
useful life is 10.75 years and revised annual depreciation is $12,823 per year.

Journal entry
Depreciation expense 12,823

Accumulated depreciation 12,823

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Question 2, Share Capital – No Par Value (14 marks Suggested time 15 minutes)

Sunset Corporation has the following account balances on January 1, 2020:

Preferred Shares, $5, cumulative, non-voting, 10,000 issued ............ $ 250,000
Common shares, unlimited number authorized, no par value, voting
shares, 150,000 issued ..................................................................... $1,500,000
Retained Earnings ............................................................................. $ 375,000

Common shareholders last received a dividend in December 2017. Sunset declared

no dividends in 2018 and 2019.

The following transactions take place during 2020:

Feb 15 – cash dividends declared and paid to preferred shareholders

Mar 1 – a $0.70 / share cash dividend is declared on common shares
Mar 15 – date of record
Mar 31 – date of payment
Jul 1 – 2-for-1 stock split
Aug 15– 10% stock dividend declared on common shares, share price is $12
Sept 15– date of issuance of stock dividend
Dec 31 – Net income of $375,000

Required:
Prepare all of the necessary journal entries to record the transactions and any closing entries
which are necessary on December 31, 2020. State “no entry required” for any dates for which
you have not needed to prepare a journal entry.

Feb 15 Dr Dividends declared – preferred shares……………… $150,000

Cr Cash…………………………………………………... $150,000
(dividend in arrears for 2018, 2019 and current year dividend
for 2020) (10,000 shares *3 年份的*5)
Mar 1 Dr. Dividends declared – common shares .......................... $105,000
Cr. Dividends payable .................................................
$105,000
(150,000 * 0.70)
Mar 15 no entry required

Mar 31 Dr. Dividends payable ........................................................ $105,000

Cr. Cash .....................................................................
$105,000

Jul 1 memo note only, (outstanding common shares have now doubled from 150,000 to
300,000)

Aug 15 Dr. Stock Dividends declared /RE......................................

$360,000
(10% * 300,000 shares * $12/ share)
Cr. Stock dividend issuable ......................................... $360,000
Sep 15 Dr. Stock dividend issuable ................................................ $360,000
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 Cr. Common shares .................................................... $360,000
Question 2, Share Capital No Par Value continued

Dec 31 Dr. Income Summary ......................................................... $375,000

Cr. Retained Earnings ................................................. $375,000
(Close out income for the year)

Dr. Retained Earnings ........................................................ $ 105,000

Cr. Dividends declared—Common Shares. ................. $105,000

Dr. Retained Earnings ........................................................ $ 360,000

Cr. Stock Dividends declared. ..................................... $360,000

(Close out dividends declared – if you recorded the initial entry to retained earnings then
there would be no need to record these last two entries)

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Question 3, Share Capital with Par Value (14 marks Suggested time 20 minutes)

P11.4 (LO 3, 4), AP On January 1, 2022, Geffrey Corporation had the following

stockholders’ equity accounts.
Common Stock ($20 par value, 60,000 shares issued $1,200,000
and
outstanding)
Paid-in Capital in Excess of Par—Common Stock 200,000
Retained Earnings 600,000
During the year, the following transactions occurred.
Feb. 1 Declared a $1 cash dividend per share to stockholders of
record on February 15, payable March 1.
Mar 1 Paid the dividend declared in February.
.
Apr. 1 Announced a 2-for-1 stock split. Prior to the split, the
market price per share was $36.
July 1 Declared a 10% stock dividend to stockholders of record on
July 15, distributable July 31. On July 1, the market price of
the stock was $13 per share.
  3 Issued the shares for the stock dividend.
1
Dec. 1 Declared a $0.50 per share dividend to stockholders of
record on December 15, payable January 5, 2023.
  3 Determined that net income for the year was $350,000.
1
Instructions
Journalize the transactions and the closing entries for net income and dividends.

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 PROBLEM 11.4A

(a) Feb.  1 Cash Dividends (60,000 × $1)..........................................  60,000

Dividends Payable.................................................  60,000

Mar.  1 Dividends Payable............................................................  60,000

Cash........................................................................  60,000

Apr.  1 Memo—two-for-one stock split

  increases number of shares to
  120,000 = (60,000 × 2) and reduces
  par value to $10 per share.

July  1 Stock Dividends (12,000 × $13)....................................... 156,000

Common Stock Dividends
  Distributable (12,000 × $10)................................ 120,000
Paid-in Capital in Excess of
  Par—Common Stock
  (12,000 × $3)......................................................... 36,000

31 Common Stock Dividends

  Distributable................................................................... 120,000
Common Stock...................................................... 120,000

Dec.  1 Cash Dividends (132,000 × $.50)..................................... 66,000

Dividends Payable................................................. 66,000

31 Income Summary............................................................. 350,000

Retained Earnings................................................. 350,000

Retained Earnings............................................................ 156,000

Stock Dividends..................................................... 156,000

Retained Earnings ($60,000 + $66,000)........................... 126,000

Cash Dividends...................................................... 126,000

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Question 4 Review of Financial Statements Find Errors

Due to the sudden resignation of the accountant at Mason’s Mechanics Inc., the sales manager
had prepared the annual financial statements, shown below:

Mason’s Mechanics Inc.

Statement of Income
December 31, 2017

Sales Revenue................................................................... $326,000

Cost of goods sold.............................................................. $ 182,000
Gross Profit........................................................................ 144,000
Operating expenses:
Salaries & Wages expense......................................... $24,600
Rent expense 24,000
Prepaid rent (should be in assets)................................... 3,600
Dividends (should be in balance sheet) . 5,000
Accumulated Depreciation........................................... 28,400
Supplies expense........................................................ 2,100 269,700
Earnings before taxes........................................................ $56,300
Income tax expense........................................................... 26,000
Net income......................................................................... $30,300

Mason’s Mechanics Inc.

Statement of Changes in Equity
For the Year Ended December 31, 2017

Retained earnings, January 1, 2017................................... $138,200

Add: Net income................................................................. 30,300
Retained earnings, December 31, 2017............................. $168,500

Mason’s Mechanics Inc.

Statement of Financial Position= balance sheet
For Year Ended December 31, 2017

Assets Liabilities
Current Assets Current Liabilities
Cash.............................................. $ 22,450 Accounts payable........ $ 9,600
Accounts receivable....................... 11,250 Non-current Liabilities
Long-term debt............ 32,000
Inventory........................................ 92,000 Total Liabilities............. 41,600
................................................ 125,700 Shareholders' Equity
Non-current Assets
Building.......................................... 172,000 Common shares.......... $45,000
Retained earnings....... 168,500
(should be in income statement)....
Less depreciation expense............ (14,200)
................................................ 157,800 Total shareholders' equity 213,500
Total liabilities and
Total assets............................ $283,500 Shareholders' Equity. . .$255,100 not
balance

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Question 4 Review of Financial Statements continued

Required:

a) Identify any errors in the financial statements.

The errors are:

 The Statement of Financial Position is not classified.
 The Statement of Financial Position is not balanced (Total Assets do not equal
Liabilities + Shareholders’ Equity).
 Prepaid rent is recorded on the Statement of Income; it should be a current asset.
 Dividends are recorded on the Statement of Income; they should be deducted and shown in
the Statement of Changes in Equity. (This is just a presentation error and would not affect
the Statement of Financial Position from balancing).
 Depreciation expense should be recorded on the Statement of Income and not deducted
from the asset. The accumulated depreciation should be reflected on the Statement of
Financial Position and deducted from the related asset.

Attention:
Name is wrong: statement of retained earnings is incorrect->balance sheet
Cash balance -2200-> bank indebtedness should be placed in current liabilities
Cost of sales should not be in the assets -> be an expense on in Income statement
Equipment at market value -> historical cost should be used in recording assets
Deffered revenue is listed as an asset -> should be included in current liabilities
Accumulated depreciation should be deducted on the balance sheet
Long term debt is not a current liability -> long term liabilities
Accrued receivables are not liabilities -> current assets
Prepaid rent not liability -> current assets
Accounts payable -> current liabilities
Goodwill -> non-current asset
Partners’ equity -> heading should ne Shareholders’ Equity
No share capital listed -> must have!

Mason’s Mechanics Inc.

Statement of Income
For the Year Ended December 31, 2017

Sales Revenue................................................................... $326,000

Cost of goods sold.............................................................. $ 182,000
Gross Profit........................................................................ 144,000
Operating expenses:
Salaries & Wages expense......................................... $24,600
Depreciation expense.................................................. 14,200
Rent expense.............................................................. 24,000
Supplies expense........................................................ 2,100 246,900
Earnings before taxes........................................................ $79,100
Income tax expense.................................................... 26,000

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Net income......................................................................... $53,100

Mason’s Mechanics Inc.

Statement of Changes in Equity
For the Year Ended December 31, 2017

Retained earnings, January 1, 2017................................... $138,200

Add: Net income................................................................. 53,100
191,300
Deduct: Dividends declared................................................ ( 5,000)
Retained earnings, December 31, 2017............................. $186,300

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Question 4 Review of Financial Statements continued

Mason’s Mechanics Inc.

Statement of Financial Position
December 31, 2017

Assets Liabilities
Current Assets Current Liabilities
Cash.............................................. $ 22,450 Accounts payable........ $ 9,600
Non-current Liabilities
Accounts receivable....................... 11,250 Long-term debt............ 32,000
Inventory........................................ 92,000 Total Liabilities............. 41,600
Prepaid rent................................... 3,600
Total Current Assets...................... 129,300 Shareholders' Equity
Non-current Assets
Building.......................................... 172,000 Common shares.......... $45,000
Less: Accumulated depreciation.... (28,400) Retained earnings....... 186,300
...................................................... 143,600 Total shareholders' equity 231,300

Total liabilities and

Total assets................................... $272,900 shareholders' equity.... $272,900

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Question 5 Financial Analysis

P13.2 (LO 3), AP The comparative statements of Wahlberg Company are presented here.
Wahlberg Company
Income Statements
For the Years Ended December 31
  2022   2021
Net sales   $1,890,540   $1,750,500
Cost of goods sold   1,058,540   1,006,000
Gross profit   832,000   744,500
Selling and administrative expenses   500,000   479,000
Income from operations   332,000   265,500
Other expenses and losses    
Interest expense   22,000   20,000
Income before income taxes   310,000   245,500
Income tax expense   92,000   73,000
Net income   $ 218,000   $ 172,500
Wahlberg Company
Balance Sheets
December 31
  2022   2021
Assets    
Current assets    
Cash   $60,100   $64,200
Debt investments (short-term)   74,000   50,000
Accounts receivable (net)   117,800   102,800
Inventory   126,000   115,500
Total current assets   377,900   332,500
Plant assets (net)   649,000   520,300
Total assets   $1,026,900   $852,800
Liabilities and Stockholders’ Equity
Current liabilities    
Accounts payable   $160,000   $145,400
Income taxes payable   43,500   42,000
Total current liabilities   203,500   187,400
Bonds payable   220,000   200,000
Total liabilities   423,500   387,400
Stockholders’ equity    
Common stock ($5 par)   290,000   300,000
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 Wahlberg Company
Income Statements
For the Years Ended December 31

Retained earnings   313,400   165,400

Total stockholders’ equity   603,400   465,400
Total liabilities and stockholders’ equity   $1,026,900   $852,800
All sales were on credit. Net cash provided by operating activities for 2022 was $220,000.
Capital expenditures were $136,000, and cash dividends paid were $70,000.
Instructions
Compute the following ratios for 2022.
1. Earnings per share.
2. Return on common stockholders’ equity.
3. Return on assets.
4. Current ratio.
5. Accounts receivable turnover.
6. Average collection period.
7. Inventory turnover.
8. Days in inventory.
9. Times interest earned.
10. Asset turnover.
11. Debt to assets ratio.
12. Free cash flow.

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 PROBLEM 13.2A

($218,000 – $0)
(a) Earnings per share = 59,000 (1) = $3.69

 60,000* + 58,000**  *$300,000 **$290,000

 
(1)  2  $5 $5

Note: There was no treasury stock, so the number of shares

issued equals the number of shares outstanding.
(b) Return on common stockholders’ equity =
($218,000 – $0)
 $465,400 + $603,400 
 2 

$218,000
= $534,400
= 40.8%

(Rtn. on common stockholders' equity = (Net inc. - Pref. div.) ÷ Ave. common stockholders' equity)
[40.8% = ($218,000 - $0) ÷ (($465,400 + $603,400) ÷ 2)]

$218,000
 $852,800 + $1,026,900  $218,000
 2 
(c) Return on assets =  = $939,850 =
23.2%

(Rtn. on assets = Net inc. ÷ Ave. tot. assets)

[23.2% = $218,000 ÷ (($852,800 + $1,026,900) ÷ 2)]

$377,900
(d) Current ratio = $203,500 = 1.86:1

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PROBLEM 13.2A (Continued)

$1,890,540
 ($102,800 + $117,800) 
 2 
(e) Accounts receivable turnover = 
$1,890,540
= $110,300 = 17.1 times

(Accts. rec. turnover = Net credit sales ÷ Ave. net accts. rec.)
[17.1 times = $1,890,540 ÷ (($102,800 + $117,800) ÷ 2)]

(f) Average collection period = 365 days ÷ 17.1 = 21.3 days

$1,058,540
 $115,500 + $126,000  $1,058,540
 2  $120,750
(g) Inventory turnover = = = 8.8 times
(Inv. turnover = CGS ÷ Ave. inv.)
[8.8 times = $1,058,540 ÷ (($115,500 + $126,000) ÷ 2)]

(h) Days in inventory = 365 days ÷ 8.8 = 41.5 days

$218,000 + $92,000+ $22,000

(i) Times interest earned = $22,000 = 15.1 times

$1,890,540



$1,026,900 + $852,800 

 2 

(j) Asset turnover =   = 2.01 times

(Asset turnover = Net sales ÷ Ave. tot. assets)

[2.01 times = $1,890,540 ÷ (($1,026,900 + $852,800) ÷ 2)]

$423,500
(k) Debt to assets ratio = $1,026,900 = 41%

(l) Free cash flow = $220,000 – $136,000 – $70,000 = $14,000

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Question 6 Statement of Cash Flow

P12.9 (LO 2), AP Condensed financial data of Granger Inc. follow.

Granger Inc.
Comparative Balance Sheets
December 31
2022   2021
Assets
Cash $80,800   $48,400
Accounts receivable 87,800   38,000
Inventory 112,500   102,850
Prepaid expenses 28,400   26,000
Long-term investments 138,000   109,000
Plant assets 285,000   242,500
Accumulated depreciation (50,000)   (52,000)
Total $ 682,500   $ 514,750
Liabilities and Stockholders’ Equity
Accounts payable $ 102,000   $67,300
Accrued expenses payable 16,500   21,000
Bonds payable 110,000   146,000
Common stock 220,000   175,000
Retained earnings 234,000   105,450
Total $ 682,500   $ 514,750
Granger Inc.
Income Statement Data
For the Year Ended December 31, 2022
Sales revenue $388,460
Less:
Cost of goods sold $135,460
Operating expenses, excluding depreciation 12,410
Depreciation expense 46,500
Income tax expense 27,280
Interest expense 4,730
Loss on disposal of plant assets 7,500 233,880
$
Net income 154,580

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Additional information:
1. New plant assets costing $100,000 were purchased for cash during the
year.
2. Old plant assets having an original cost of $57,500 and accumulated
depreciation of $48,500 were sold for $1,500 cash.
3. Bonds payable matured and were paid off at face value for cash.
4. A cash dividend of $26,030 was declared and paid during the year.
5. Common stock was issued at par for cash.
6. There were no significant noncash transactions.
Instructions
Prepare a statement of cash flows using the indirect method.
Net cash provided—oper. $176,930
act.

PROBLEM 12.9A

GRANGER INC.
Statement of Cash Flows – Indirect Method
For the Year Ended December 31, 2022

Cash flows from operating activities

Net income....................................................................... $154,580
Adjustments to reconcile net income
  to net cash provided by operating
  activities:
Depreciation expense............................................ $46,500
Loss on disposal of plant assets......................... 7,500
Increase in accounts receivable...........................  (49,800)
Increase in inventory.............................................   (9,650)
Increase in prepaid expenses...............................   (2,400)
Increase in accounts payable...............................   34,700
Decrease in accrued expenses payable................   (4,500)   22,350
Net cash provided by operating
  activities................................................................ 176,930

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Cash flows from investing activities
Sale of plant assets........................................................ 1,500
Purchase of investments............................................... (29,000)
Purchase of plant assets................................................ (100,000)
Net cash used by investing
  activities................................................................ (127,500)

Cash flows from financing activities

Issuance of common stock............................................ 45,000
Payment of cash dividends............................................ (26,030)
Redemption of bonds..................................................... (36,000)
Net cash used by financing
  activities................................................................ (17,030)

Net increase in cash................................................................ 32,400

Cash at beginning of period................................................... 48,400
Cash at end of period.............................................................. $80,800

[Net cash provided by oper. act. = Net inc. + (Depr. + Loss on disp. of plant assets – Incr. in accts. rec. – Incr. in inv. – Incr. in
prepd. exp. + Incr. in accts. pay – Decr. in accrued exp. pay.)]; [$154,580 + ($46,500 + $7,500 – $49,800 - $59,650 - $2,400 +
$34,700 - $4,500)]

Cost principle: Recorded at the price actually paid for an item.

Revenue recognition: A feature of accrual account revenues are recognized on the Income
Statement in the period when realized and earned.
Accrual basis of accounting: Revenues and expenses are recorded when they are earned,
regardless of when the money is actually paid or received.

Liabilities: account payable, accrued liability, income tax payable, long-term debt, unearned
revenue
Provisions: (amount uncertain) warranty, assurance type, service warranty
Contingencies: (will be confirmed once future event occurs) pension, forestry, contaminated land

Warranty

Dr warranty expense
Cr provision for warranty obligations

Service warranty (480 for 2yrs)

Dr Cash 480
Cr Unearned revenue 480

Each month:
Dr unearned revenue 20
Cr. Warranty revenue 20

Depreciation Assignment 2 Q9
Q8 salvage value

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