BUSI 1001 Previous Examination Questions

Table of Contents

1. Introduction to Financial Accounting and Financial Statements 2

2. Accounting Information Systems 13

3. Accrual Accounting 15

4. Financial Statement Analysis 37

5. Cash and Investments 45

6. Revenue and Accounts Receivable 58

7. Inventory 71

8. Property, Plant and Equipment and Intangibles 77

9. Liabilities 84

10. Shareholders’ Equity 86

11. The Statement of Cash Flow 92

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1 – Introduction to Financial Accounting and Financial Statements

Multiple Choice Questions

1. Which of the following assets would be classified as an intangible asset?

a) Patent
b) Land
c) Equipment
d) Delivery Vehicle

2. Property, plant, and equipment are conventionally presented in the balance sheet at
a) original cost less residual value
b) original cost less accumulated depreciation
c) fair value less residual value
d) fair value less book value

3. The following accounts appeared on the Balance Sheet of Wolowitz Engineering:

Accounts Payable $ 100

Accounts Receivable 5,320
Bank Loan 2,300
Cash 2,540
Common Stock 3,000
Inventory 7,600
Long-term debt 18,560
Machinery 10,500
Retained Earnings 2,000

What is the total amount of all assets?

a) $ 5,000
b) $20,960
c) $25,960
d) $37,570
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4. What is the difference between current assets and non-current assets?

a) Current assets must be paid within one year of the date of the Balance Sheet.
Non-current assets are due after one year of the Balance Sheet date.
b) Current assets have a finite life. Non-current assets have an infinite life
c) Current assets will be used up or converted to cash within one year or one
operating cycle from the date of the Balance Sheet. Non-current assets will be
used up or converted to cash beyond one year or one operating cycle from the
date of the Balance Sheet.
d) Current assets are the investments made by the shareholders in the company.
Non-current assets are the accumulation of net income since incorporation
less dividends.

5. At the end of 20x3, Libby Company reported an ending balance for retained
earnings of $50,000. During 20x4, the company reported the following amounts:
Dividends declared and paid, $30,000 and net income, $40,000. The 20x4 statement
of Retained Earnings should report an ending balance for retained earnings of
a) $90,000
b) $80,000
c) $60,000
d) $40,000

6. Which financial statement reports assets, liabilities, and shareholders' equity?

a) Statement of earnings
b) Statement of shareholders’ equity
c) Statement of financial position
d) Statement of cash flow

7. As at December 31, Hine Corporation has assets of $3,500 and shareholders' equity
of $2,000. What are the liabilities for Hine Corporation as at December 31?
a) $1,500
b) $2,000
c) $3,500
d) $5,500
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8. Neilson Instruments had retained earnings of $145,000 at December 31, 20x0. Net
income for 20x1 totalled $90,000, and dividends for 20x1 were $30,000. How
much retained earnings should Neilson report at December 31, 20x1?
a) $205,000
b) $235,000
c) $140,000
d) $175,000

9. Which of the following best describes a liability?

a) Liabilities are a form of share capital
b) Liabilities are future economic benefits to which a company is entitled.
c) Liabilities are accounts receivable of the company
d) Liabilities are economic obligations to creditors to be paid at some future date
by the company

10. Current assets are assets expected to be converted to cash, sold, or consumed:
a) within the next 12 months or within the business's normal operating cycle if
less than a year
b) within the next 12 months or within the business's normal operating cycle if
longer than a year
c) within the next 6 months
d) within the next 24 months

11. The trial balance for Pert Ltd. included the following at January 31, 20x3:

Accounts payable $ 37,000

Common shares 300,000
Bank Loan (5 year loan, payable in annual
instalments of $100,000) 500,000
Retained earnings 680,000
Unearned revenues (to be earned February 80,000
2013)

Which of the following would appear as total long-term liabilities on the January
31, 2013 balance sheet?
a) $ 400,000
b) $ 500,000
c) $ 617,000
d) $1,380,000
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12. The balance sheet

a) represents what has happened to the business in the last financial year
b) represents what the business expects to happen in the next financial year
c) represents the market value of the business if it were to be sold
d) represents the cumulative effect of everything financial accounting has
recorded about the organization since the day it began

13. Which one of the following would not be recorded as an asset by a business?
a) a five-year signed contract with the president who has improved the
company's performance significantly
b) land not currently being used, but held for future development
c) cash owing to the business from employees
d) amounts due from customers who have received products from the company
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Problems

Problem 1

The following items were taken from the December 31, 20x4 financial statements of Hoffer Inc.

Salaries Expense $ 91,500 Accounts receivable $ 86,500

Share Capital 40,000 Insurance Expense 10,800
Accounts payable 57,000 Income Tax Expense 22,700
Supplies 23,200 Accumulated Depreciation-Equip. 30,000
Inventory 122,800 Note payable (due July 30, 20x9) 103,600
Land 36,000 Cash 17,800
Advertising Expense 24,000 Equipment 60,000
Sales 400,200 Unearned Revenue 52,600
Cost of Goods Sold 143,000 Depreciation Expense 15,000
Miscellaneous Expense 35,700 Interest Expense 4,500

The beginning retained earnings balance was $18,100. Dividends of $8,000 were declared and
paid during the year.

Required:

a) Prepare a Statement of Income for the year ending December 31, 20x4.
b) Calculate Retained Earnings as at December 31, 20x4.

Problem 2

You have received the following alphabetical list of Statement of Financial Position (balance
sheet) accounts for Picton Company at December 31, 2008. Prepare a balance sheet in proper
format.

Accounts receivable $35,000 Furniture & Fixtures $150,000

Advances paid by Inventory 85,000
customers for
services to be provided Land 125,000
for in
the future 20,000 Long-term investments 100,000
Accounts payable 75,000 Patents 45,000
Accumulated depreciation 65,000 Prepaid insurance 10,000
Bank loan, due Dec 31, 130,000 Retained Earnings ?
2011
Common stock 150,000 Wages expense 130,000
Cash 12,000 Wages payable 12,000
Depreciation expense 12,000
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Problem 3

The following list is a partial list of account balances for the Jamieson Company as at December
31, 20x4:

Accounts payable 12,780

Accounts receivable 26,820
Bank loan, due December 31, 20x8 72,000
Cash 45,180
Common stock 90,000
Cost of goods sold 151,200
Depreciation expense 8,640
Dividends declared 3,780
Interest expense 6,480
Income tax expense 7,380
Insurance expense 4,140
Inventory 79,560
Income taxes payable 1,800
Office equipment 43,200
Office supplies 5,600
Office supplies expense 15,800
Prepaid insurance 1,980
Rent expense 38,340
Salary expense 32,400
Salaries payable 2,700
Sales 283,680

Required –

Prepare a Statement of Income in good form.

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Problem 4

Identify the errors in the Statement of Financial Position below (assuming all accounts are
behaving as they typically would), by labelling each error using sequential numbers. Explain
briefly what the error is and why it is wrong on the next page. The first one has been done for
you as an example. DO NOT redo the financial statement.
Each correct identification/explanation is worth 1 mark. Incorrect identifications will lose .5
marks.

STATEMENT OF FINANCIAL POSITION

BABBETT’S BOOKSTORE INC.
For the year ended December 31, 20x5

Assets

Current assets
Inventory 26,000 1
Cash 3,000
Investments 15,000
Common shares 1,000
Prepaid expenses 2,000
47,000
Land 150,000
Accounts receivable 8,000
Property, plant and equipment $80,000
Depreciation expense (7,000) 73,000
$278,000

Liabilities and Shareholder’s Equity

Current liabilities
Accounts payable and accrued liabilities $20,000
Mortgage payable 210,000
230,000
Retained earnings 43,000
Unearned revenue 10,000
Dividends (5,000)
$278,000

Example:
1 As the first item in the column, this number should have a $ sign.
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1 – Introduction to Financial Accounting and Financial Statements

Multiple Choice Questions

1. a

2. b

3. c Cash + Machinery + Accounts Receivable + Inventory

4. c

5. c

6. c

7. a

8. a

9. d

10. b

11. a

12. d

13. a
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Problems

Problem 1

a. Hoffer Inc.
Income Statement
For the year ended December 31, 20x4 1

Sales $400,200 0.5

Cost of goods sold 143,000 1
Gross margin (profit) 257,200 1
Operating expenses
Salaries $91,500 0.5
Insurance 10,800 0.5
Depreciation 15,000 0.5
Miscellaneous 35,700 0.5
Advertising 24,000 177,000 0.5
Operating income (or Net income before taxes) 80,200
Interest expense 4,500 0.5
75,700
Income tax expense 22,700 0.5
Net income $53,000

b. $18,100 Op R/E + 53,000 Net Income – 8,000 Dividends = $63,100 2

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Problem 2

Picton Company 1 mark for proper title

Statement of Financial Position
as at December 31, 2008

ASSETS 1 mark for proper classification

Current Assets
Cash $ 12,000
Accounts receivable 35,000
Inventory 85,000
Prepaid Insurance 10,000
142,000

Long-term investments 100,000

Land 125,000
Furniture and fixtures $150,000
Less accumulated depreciation 65,000 85,000
Patents 45,000
355,000

$497,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable $75,000
Wages payable 12,000
Customer advances 20,000
107,000

Bank loan 130,000

Shareholders’ Equity
Common Stock 150,000
Retained earnings 1 mark 110,000
260,000

$497,000

Deduct 0.5 mark for each mistake.

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Problem 3

Jamieson Company
Statement of Income
For the year ended December 31, 20x4
1 mark for proper titling

Sales $283,680
Cost of goods sold 151,200
Gross margin 132,480
Operating expenses
Depreciation 8,640
Insurance 4,140
Office supplies 15,800
Rent 38,340
Salaries 32,400
99,320

Operating income 33,160

Interest expense 6,480
Net income before taxes 26,680
Income tax expense 7,380
Net income $19,300

2 marks for proper formatting

3 marks for content (deduct 0.5 mark for every error made). Note that including interest expense
with operating expenses is acceptable.

Problem 4

• Title: the name of the company should be above the name of the statement
• Date: the date should read ‘as at’ not ‘for the year ended’
• Current assets are out of order – Cash should be first, followed by AR, Inv. PPD
• Accounts receivable should be in current assets
• Common shares should be in shareholders’ equity
• the reduction from PPE should be Accumulated Depreciation, not Depreciation Expense
• Mortgage payable should be classified as a long-term liability
• Unearned revenue should be classified as a current liability
• dividends should not be shown separately but should reduce R/E
1 mark each (possibility of 1 mark overmark)
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2 – Accounting Information Systems

Multiple Choice Questions

1. A company that receives money in advance of performing a service

a. debits cash and credits prepaid fees.
b. debits unearned fees and credits accounts payable.
c. debits cash and credits unearned revenues.
d. debits cash and credits accounts receivable.

2. What types of accounts normally have a debit balance?

a. Assets and liabilities
b. Assets and expenses
c. Assets and shareholders’ equity
d. Assets and revenues

3. Losier Company made the following correct journal entry on July 6, 20x2:

Cash $5,400
Unearned revenue $5,400

What was this journal entry recording?

a) Increase in an asset and a decrease in a liability
b) Increase in an asset and an increase in owners’ equity
c) Increase in an asset and a decrease in a liability
d) Increase in an asset and an increase in a liability

4. The entry to record the purchase of supplies on account would include a

a) credit to the Accounts Payable account
b) debit to the Retained Earnings account
c) credit to the Cash account
d) credit to the Supplies account
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2 – Accounting Information Systems

SOLUTIONS

Multiple Choice Questions

1. c

2. b

3. d

4. a
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3 – Accrual Accounting

Multiple Choice Questions

1. Karr Corporation received cash of $7,200 on August 1, 20x8 for one year's rent in
advance and recorded the transaction with a credit to Rent Revenue. The December
31, 20x8 adjusting entry is
a) Debit Rent Revenue and credit Unearned Rent, $3,000
b) Debit Rent Revenue and credit Unearned Rent, $4,200.
c) Debit Unearned Rent and credit Rent Revenue, $3,000
d) Debit Unearned Rent and credit Rent Revenue, $4,200

2. Baker Corp.'s liability account balances at June 30, 20x2 included a 10 percent note
payable in the amount of $1,000,000. The note is dated October 1, 20x0 and
interest is payable each October 1. The first interest payment was made on October
1, 20x1. In Baker's June 30, 20x2 balance sheet, what amount should be reported as
accrued interest payable for this note?
a. $ 37,500
b. $ 66,667
c. $ 75,000
d. $ 112,500

3. BQ Ltd. sells merchandise to a customer for $10,000, accepting $2,000 cash and an
$8,000, 60-day note receivable. BQ Ltd. sets selling prices so that the cost of goods
sold is always equal to 30% of sales. Which of the following correctly describes the
effect of this sale on the accounting equation? Assume that BQ uses a perpetual
system.
a) Increase assets $10,000; no effect on liabilities; increase equity $10,000
b) Increase assets $5,000; decrease liabilities $2,000; increase equity $7,000
c) Increase assets $8,000; increase liabilities $2,000; increase equity $10,000
d) Increase assets $7,000; no effect on liabilities; increase equity $7,000

4. On January 1, 20x6, a company had office supplies on hand of $4,200. During

20x6, it purchased additional office supplies for $68,200. At December 31, 20x6
there is $6,400 of office supplies remaining on hand. What is the company’s office
supplies expense for 20x6?
a) $6,400
b) $66,000
c) $68,200
d) $70,400
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5. On September 1, 20x4, a company borrowed $600,000 from the bank at an interest

rate of 6%. The repayment schedule calls for annual payments of $100,000 plus
interest commencing on August 31, 20x5. What is the balance in the note payable
account as at December 31, 20x7?
a) $100,000
b) $200,000
c) $300,000
d) $306,000

6. On July 1, 20x8, an entity purchased a 4-year insurance policy and paid a premium
of $40,000. The entity has a December 31 year end. Which of the following
statements is true?
a) Under cash basis accounting, the Insurance expense for the period ending
December 31, 20x8, will be $5,000
b) Under accrual accounting, there will be a balance of $20,000 in the Prepaid
insurance account on December 31, 20x9
c) Under cash basis accounting, there will be a balance of $25,000 in the
Prepaid insurance account on December 31, 20x9
d) Under accrual accounting, there will be a balance of $35,000 in the Prepaid
insurance account on December 31, 20x8

7. At December 31, 20x8, the books of Leslie Inc. contained the following error:

The company failed to accrue wages for the last 3 days of

December 20x8 in the amount of $5,000.

Which of the following statements correctly describes the impact of the error on the
December 31, 20x8 financial statements of Leslie?
a) Expenses are understated, liabilities are understated, and shareholders’ equity
is understated
b) Expenses are understated, liabilities are understated, and shareholders’ equity
is overstated
c) Expenses are understated, liabilities are understated, and there is no impact on
shareholders’ equity
d) Expenses are overstated, liabilities are understated, and shareholders’ equity is
overstated
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8. An entity had a credit balance of $100,000 in the retained earnings account on

January 1, 20x1. During 20x1, net loss for the year was $20,000. The entity
declared and a dividend of $60,000. At year end, $20,000 of the dividend was
payable to shareholders. What was the balance in the retained earnings account at
the end of 20x1?
a) $20,000
b) $60,000
c) $40,000
d) $80,000

9. Clark Co.'s advertising expense account had a balance of $146,000 at December

31, 20x1, before any necessary year-end adjustment relating to the following:

• Included in the $146,000 is the $15,000 cost of printing catalogs for a sales
promotional campaign in January 20x2.

• Radio advertisements broadcast during December 20x1 were billed to Clark

on January 2, 20x2. Clark paid the $9,000 invoice on January 11, 20x2.

What amount should Clark report as advertising expense in its income statement
for the year ended December 31, 20x1?
a. $122,000
b. $131,000
c. $140,000
d. $155,000

10. The September 30, 20x2 unadjusted trial balance of Lipper Company showed a
credit balance of $47,000 in the unearned revenue account. Of this amount, $17,000
had still not been earned at September 30, 20x2. Which of the following would be
the correct September 30, 20x2 adjusting journal entry with respect to unearned
revenue?
a) Unearned Revenue 30,000
Revenue 30,000
b) Unearned Revenue 17,000
Revenue 17,000
c) Revenue 30,000
Unearned Revenue 30,000
d) Cash 17,000
Revenue 17,000
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11. An entity made cash sales of $48,000 and credit sales of $90,000 during 20x6. All
but $6,000 of the credit sales was collected by year-end. The company incurred
expenses of $75,500 during the year, and paid for all but $9,000. No dividends
were declared in 20x6. How will the shareholders’ equity increase as a result of
these transactions?
a) $66,500
b) $71,500
c) $62,500
d) $57,500

12. Purchasing inventory on account for $56,000, selling 80% of the inventory for
$90,000, and paying $40,000 on account for the inventory would have which one of
the following impacts on the income statement?
a) revenues $90,000, cost of goods sold $44,800
b) revenues $72,000, cost of goods sold $44,800
c) revenues $90,000, cost of goods sold $56,000
d) revenues $72,000, cost of goods sold $40,000

13. On January 1, 2010, total assets for an entity were $125,000; on December 31,
2010, total assets were $145,000. On January 1, 2010, total liabilities were
$110,000; on December 31, 2010, total liabilities were $115,000. What are the
amount of the change and the direction of the change in the shareholders' equity for
2010? A positive number represents an increase; a negative number represents a
decrease.
a) ($15,000)
b) $15,000
c) ($30,000)
d) $30,000

14. Supplies inventory at the beginning = $12,000. Purchases are $56,000. Inventory at
the end = $18,700. Supplies expense is…
a) $18,700
b) $37,300
c) $62,700
d) $49,300

15. A building was purchased for $250,000 at the beginning of the year, if the useful
life is 40 years, what is the annual depreciation?
a) $3,125
b) $6,250
c) $12,500
d) $25,000
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16. On November 1, 20x4, you rented some office space to another company for
$2,500 per month. You received the first 6 months rent in advance. What is the
amount of unearned rent on your December 31, 20x4 balance sheet?
a) $5,000
b) $7,500
c) $10,000
d) $15,000

17. Your year end is December 31. You took out a loan on March 1 for $300,000. If the
interest rate is 8.5%, what is the amount of interest expense for the current year?
a) $19,125
b) $21,250
c) $23,375
d) $25,500

18. Your year end is December 31. You lent $150,000 to another company on Oct 1. If
the interest rate is 6%, what is the amount of interest receivable for the current
year?
a) $1,500
b) $2,250
c) $4,500

19. On January 1, 20x1, an entity had the following balances in its shareholders' equity
accounts: Common stock - $100,000, and Retained earnings - $30,000. During
20x1, the company issued 1,000 additional shares of common stock for $10 per
share, reported net income of $40,000, declared dividends of $20,000. By
December 31, 20x1, $12,000 of the dividends declared were paid. What amount of
total shareholders' equity would the entity report in its December 31, 20x1, balance
sheet?
a) $120,000
b) $168,000
c) $180,000
d) $160,000
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20. On May 15, 20x2, Banx Ltd. paid $4,500 to settle an account payable resulting
from the purchase of goods on account in April 20x2. What is the effect of this
business transaction on the accounting equation of Banx?
a) Assets decrease $4,500, liabilities decrease $4,500, and equity decreases
$4,500.
b) Assets decrease $4,500, liabilities decrease $4,500, and equity does not
change.
c) Assets increase $4,500, liabilities increase $4,500, and equity does not
change.
d) Assets decrease $4,500, liabilities do not change, and equity decreases $4,500.

21. A credit of $760 to accounts payable was incorrectly posted as a debit of $760 to
accounts payable. What is the effect of this error on the trial balance and accounts
payable?
a) The credit column of the trial balance is $1,520 too low and accounts payable
is understated by $1,520.
b) The credit column of the trial balance is $1,520 too high and accounts payable
is overstated by $1,520.
c) The credit column of the trial balance is $760 too low and accounts payable is
understated by $760.
d) The credit column of the trial balance is $760 too high and accounts payable
is overstated by $760.

22. At March 31, 20x3, the unadjusted trial balance of JL Company has a debit balance
of $12,000 in the prepaid rent account. At March 31, 20x3, $9,000 of the balance in
the prepaid rent account had not been used. JL prepares adjusting journal entries
monthly. Which of the following would be the correct monthly adjusting journal
entry at March 31, 20x3, with respect to this prepaid rent?
a) Prepaid rent $3,000
Rent expense $3,000
b) Rent expense 9,000
Prepaid rent 9,000
c) Cash 9,000
Prepaid rent 9,000
d) Rent expense 3,000
Prepaid rent 3,000
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23. The following T-accounts reflect the correct posting of a journal entry on May 12,
20x2 by Lennox Ltd.:

Cash Accounts Payable

24,000 24,000

What transaction is represented by the posting?

a) A purchase of supplies by Lennox for $24,000 on credit
b) A purchase of supplies by Lennox for $24,000 cash
c) A payment made to a supplier by Lennox of $24,000 on account
d) A sale of goods by Lennox for $24,000 on credit

24. Digital Times is an online news service. Its customers pay a subscription fee for six
months in advance. The January 31, 20x3, unadjusted trial balance of Digital Times
shows a credit balance of $1,420,000 in the unearned subscription fees account.
During the month of January 20x3, $220,000 of the unearned subscription fees
were earned. Which of the following would be the correct monthly adjusting
journal entry at January 31, 20x3, with respect to unearned subscription fees?
a) Unearned subscription fees $220,000
Subscription fee revenue $220,000
b) Subscription fee revenue 220,000
Unearned subscription fees 220,000
c) Cash 220,000
Subscription fee revenue 220,000
d) Unearned subscription fees 1,200,000
Subscription fee revenue 1,200,000

25. Cash for services to be performed in 20x1 is received in 20x0. Using the accrual
basis of accounting, the revenue should appear on:
a) the 20x0 income statement
b) both the 20x0 and 20x1 income statements
c) neither the 20x0 nor 20x1 income statement
d) the 20x1 income statement
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26. Place the accounting cycle in order:

1 Financial Statement
2 Journal Entry
3 Trial Balance
4 Posting to General Ledger

a) 4, 2, 1, 3
b) 4, 2, 3, 1
c) 2, 4, 1, 3
d) 2, 4, 3, 1

27. Which of the following accounts would normally have a credit balance?
a) Accumulated depreciation
b) Building
c) Salary expense
d) Prepaid expense

Use the following information to answer questions 28 - 29:

Yao Company began operations on June 1, 20x1 and prepares monthly financial statements. It
has the following partial unadjusted trial balance at June 30, 20x1:

Debit Credit
Prepaid insurance 6,000
Unearned service revenue 2,900

28. The balance in the prepaid insurance account relates to a 1-year insurance policy,
effective June 1, 20x1. Which of the following would be the correct adjusting
journal entry at June 30, 20x1 with respect to this insurance policy?
a) Prepaid insurance 500
Insurance expense 500
b) Insurance expense 500
Prepaid insurance 500
c) Prepaid insurance 6,000
Cash 6,000
d) Insurance expense 500
Cash 500
 23

29. The balance in the unearned service revenue account represents a cash payment
made by a customer in June 20x1. At June 30, 20x1, Yao had earned $1,200 of the
service fees. Which of the following would be the correct adjusting journal entry at
June 30, 20x1 with respect to this payment?
a) Unearned service revenue 1,700
Service revenue 1,700
b) Service revenue 1,700
Unearned service revenue 1,700
c) Cash 1,200
Service revenue 1,200
d) Unearned service revenue 1,200
Service revenue 1,200

30. Cash for services to be performed in 20x1 is received in 20x0. Using the accrual
basis of accounting, the revenue should appear on:
a) the 20x0 income statement
b) both the 20x0 and 20x1 income statements
c) neither the 20x0 nor 20x1 income statement
d) the 20x1 income statement
 24

Problems

Problem 1

Rice Co. was incorporated on January 1, 20x1, with $500,000 from the issuance of common
stock and borrowed funds of $75,000. During the first year of operations, net income was
$25,000. On December 15, Rice paid a $2,000 cash dividend. No additional activities affected
owners' equity in 20x1. At December 31, 20x1, Rice's liabilities had increased to $94,000. In
Rice's December 31, 20x1, balance sheet, total assets should be reported at what amount? (4
marks)

Problem 2

Atlantic Company adjusts and closes its books each December 31. It is now December 31, 20x5,
and the adjusting entries are to be made. You are requested to prepare the adjusting entry that
should be made for each of the following items (note that the original entries have been made,
i.e. you do not need to provide the original entry):

i. The company paid an 18 month insurance premium in advance on March 1, 20x5,

amounting to $15,600, which was debited to prepaid insurance.

ii. The company rented a warehouse on September 30, 20x5, for two years. It had to pay the
full amount of rent for the full two year term in advance on September 30, amounting to
$15,000, which was debited to rent expense.

iii. The company made large sale and received a 7% note from a customer with a face
amount of $100,000. The note was dated August 1, 20x5; the principal plus the interest is
payable one year later. Notes receivable was debited, and sales revenue was credited on
the date of sale, August 1, 20x5.

iv. On February 1, 20x5, the company took out a $200,000, 6% bank loan. On that date, cash
was debited and bank loan payable credited for $200,000. The loan is payable on
February 1, 20x6, for the face amount of $200,000 plus interest for one year.

v. The Office Supplies account balance at January 1, 20x5 was $6,900. During the year, a
total of $20,500 of office supplies were purchased and debited to the office supplies
account. At year-end, an inventory count showed that $5,600 of office supplies were on
hand.
 25

Problem 3

Victor Strait opened an architecture company; the following transactions were completed during
December 20x8.

Dec 1 Issued 100 common shares of the new company, Strait Ltd., to Victor Strait in
exchange for $6,000 cash.
Dec 1 Signed a lease for office space paying the first and last months rent on a one year
lease. The monthly rent is $1,000.
Dec 1 Purchased a two year insurance policy for $1,560 that expires on November 30,
20x10. The policy is effective as at Dec 1, 20x8.
Dec 3 Purchased the office furniture and equipment of a retiring architect for $4,000,
paying $1,000 in cash and agreeing to pay the balance in six months. Victor
estimated the office equipment and furniture had a useful life of 5 years.
Dec 7 Completed work for a client and immediately collected $680 in cash for the
work done.
Dec 13 Completed work for JP Developers and sent them an invoice for $1,875.
Dec 17 Purchased office supplies on credit for $300.
Dec 28 Received $1,875 from JP Developers for the work completed on Dec. 13.
Dec 31 Paid $1,300 cash to the office secretary for December’s wages.
Dec 31 Performed a count of office supplies, which revealed that $200 of the $300 worth
of office supplies purchased on December 17 were still on hand.

Required –

Prepare journal entries to record the above transactions including any adjusting entries required
at December 31.

Problem 4

Rice Co. was incorporated on January 1, 20x1, with $500,000 from the issuance of stock and
borrowed funds of $75,000. During the first year of operations, net income was $25,000. On
December 15, Rice paid a $2,000 cash dividend. No additional activities affected owners' equity
in 20x1. At December 31, 20x1, Rice's liabilities had increased to $94,000. In Rice's December
31, 20x1, balance sheet, total assets should be reported at what amount? (3 marks)
 26

Problem 5

Coltrane Inc. was created on January 2, 20x5. Coltrane Inc. operates a jazz recording studio. The
following summary transactions occurred during the year ended December 31, 20x5:

1. The owner of the company, Jack Coltrane invested $400,000 of his own money into the
company in exchange for common shares

2. Borrowed $500,000 from a local bank on January 31, 20x5. The interest on the loan is
6% and interest is payable annually each January 31st.

3. On February 28, 20x5, purchased and renovated a studio at a cost of $500,000. The
expected useful life of the studio is 40 years with no residual value.

4. On March 31, 20x5, purchased studio recording equipment on account in the amount of
$300,000. The equipment has a useful life of 10 years with no residual value.

5. On March 31, 20x5 purchased and paid for a two-year comprehensive insurance policy
on the building and equipment at a cost of $6,000.

6. Purchased supplies of $5,600 during the year. By the end of the year, there were $1,200
of supplies remaining.

7. Total billings to customers using the studio during the year totaled $350,000. By the end
of the year, $290,000 of this amount was collected. Jack believes that of the remaining
$60,000 owing, he will be able to collect $50,000.

8. Total expenses for the year totaled $260,000. At the end of the year, all of these were
paid with the exception of $25,000 of invoices. (Use a generic ‘Expenses’ account to
record these).

Required –

a) Prepare journal entries to record the above. For each entry, if necessary, write the initial
entry and then write an adjusting entry.
b) Prepare a Statement of Income for Coltrane Inc. for the year ended December 31, 20x5.
You do not need to prepare T-Accounts to do this – you should be able to put it together
using the journal entries.
 27

Problem 6

The following transactions pertain to the Bongiorno Corporation’s 20x4 fiscal year:

Jan 1 The business was established by Joe Bongiorno who invested $100,000 cash in
exchange for common shares.

Jan 2 Signed a two-year lease for office space. The monthly rent is $3,000. The first
month’s rent was paid on Jan 2. In addition, a $5,000 security deposit was also
paid to the landlord. This security deposit will be refundable on December 31,
20x5.

Jan 15 Purchased $3,500 of supplies on account.

Jan 30 Purchased office furniture costing $15,000 for cash.

Jan 31 Purchased a two-year insurance policy at a cost of $3,840. The insurance policy
takes effect on Feb 1.

Feb 15 Paid for the supplies purchased on Jan 15.

Dec 15 Received $4,500 from a customer for services to be provided in January 20x5.

Dec 31 Write the adjusting entry for the insurance expense.

Dec 31 It is estimated that the furniture will be used for 10 years. Assume straight-line
depreciation and no residual value.

Dec 31 A count of supplies shows that there are $1,100 of supplies remaining.

Required –

Write journal entries to record all of the above transactions

 28

Problem 7

Below are four transactions that were completed during 20x5 by Doby Company. The annual
accounting period ends on December 31. Each transaction will require an adjusting entry at
December 31, 20x5. You are to provide the 20x5 adjusting entries required for Doby Company.

a. On July 1, 20x5, Doby Company paid for a two-year insurance premium for a policy on
its equipment. Coverage of the insurance policy starts on July 1, 20x5. This transaction
was recorded as follows:

Jul 1, 20x5 Prepaid Insurance $1,000

Cash $1,000

b. On December 31, 20x5 a tenant renting some office space from Doby Company had not
paid the rent of $500 for December.

c. On September 1, 20x5, Doby Company borrowed $3,000 cash and gave a one-year, 10
percent, note payable. The total interest of $300 is payable on the due date, August 31,
20x6. The note was recorded as follows:

Sep 1, 20x5 Cash $3,000

Note payable $3,000

d. Assume Doby Company publishes a monthly magazine. On October 1, 20x5, the

company collected $440 for subscriptions two years in advance. The subscriptions start
on October 1, 20x5. The $440 collection was recorded as follows:

Oct 1, 20x5 Cash $440

Unearned subscription revenues $440
 29

3 – Accrual Accounting
SOLUTIONS

Multiple Choice Questions

1. b

2. c $1,000,000 x 10% x 9/12 = $75,000

3. d 10,000 – (10,000 x 0.3) = $7,000

4. b $4,200 + 68,200 - $6,400 = $66,000

5. c

6. d $40,000 / 4 years x (4 – 0.5 years) = $35,000

7. b

8. a $100,000 – 20,000 – 60,000 = $20,000

9. c $146,000 – 15,000 + 9,000 = $140,000

10. a

11. c 48,000 + 90,000 – 75,500 = $62,500

12. a COGS = $56,000 x 80% = $44,800

13. b Change in Assets = Change in Liabilities + Change in Shareholders’ equity

($145,000 – 125,000) = ($115,000 – 110,000) + X
$20,000 = 5,000 + X
X = $15,000 increase

14. d $12,000 + 56,000 – 18,700 = $49,300

15. b $250,000/40 years = $6,250/year

16. c Unearned = 6 months – 2 months = 4 months

4 x $2,500 = $10,000 still unearned at December 31, 20x4

17. b $300,000 x 8.5% x 10/12 = $21,250

18. b $150,000 x 6% x 3/12 = $2,250

 30

19. d $100,000 OP CS + 30,000 Op RE + 10,000 New Shares + 40,000 NI – 20,000

Div = $160,000

20. b

21. a

22. d

23. c

24. a

25. d

26. d

27. a

28. b

29. d

30. d
 31

Problems

Problem 1

500,000 + 75,000 + 25,000 – 2,000 + (94,000 – 75,000) = $617,000

Problem 2

i. Insurance expense 8,667

Prepaid insurance 8,667
$15,600 x 10/18

ii. Prepaid rent 13,125

Rent expense 13,125
$15,000 x 21/24

iii. Interest receivable 2,917

Interest revenue 2,917
$100,000 x 7% x 5/12

iv. Interest expense 11,000

Interest payable 11,000
$200,000 x 6% x 11/12

v. Office supplies expense 21,800

Office supplies 21,800
6,900+20,500-5,600
For each part ….
1 mark for the correct amount
1 mark for the correct entry accounts
 32

Problem 3 – 18 marks – each J/E is worth 1 mark with 3 exceptions noted below

Dec 1 Cash $6,000

Common Shares $6,000

Dec 1 Prepaid Rent 2,000

Cash 2,000

Dec 1 Prepaid insurance 1,560

Cash 1,560

Dec 3 Office furniture and equipment 4,000

Cash 1,000
Note payable 3,000
2 marks

Dec 7 Cash 680,

Revenue 680

Dec 13 Accounts Receivable 1,875

Revenue 1,875

Dec 17 Office supplies 300

Accounts Payable 300

Dec 28 Cash 1,875

Accounts Receivable 1,875

Dec 31 Wage expense 1,300

Cash 1,300

Dec 31 Office supplies expense 100

Office supplies 100
2 marks

Dec 31 Rent expense 1,000

Prepaid rent 1,000
2 marks

Dec 31 Insurance expense ($1,560 / 24 mo) 65

Prepaid insurance 65
2 marks

Dec 31 Depreciation expense ($4,000 / 5 years x 1/12) 67

Accumulated depreciation 67
2 marks
 33

Problem 4

$500,000 + 75,000 + 25,000 – 2,000 + (94,000 – 75,000) = $617,000 3 marks

OR: $94,000 liab + (500,000 + 25,000 – 2,000) equity

Problem 5

a) 1. Cash $400,000
Common Shares $400,000
0.5 marks

2. Cash 500,000
Bank Loan 500,000
0.5 marks

Interest expense 27,500

Interest payable 27,500
$500,000 x 6% x 11/12
1 mark

3. Studio 500,000
Cash 500,000
0.5 marks

Depreciation expense 10,417

Accumulated depreciation 10,417
$500,000 /40 x 10/12
1 mark

4. Equipment 300,000
A/P 300,000
0.5 marks

Depreciation expense 22,500

Accumulated depreciation 22,500
$300,000 /10 x 9/12
1 mark

5. Prepaid insurance 6,000

Cash 6,000
0.5 marks

Insurance expense 2,250

Prepaid insurance 2,250
$6,000/24 x 9 months
1 mark
 34

6. Supplies 5,600
Cash 5,600
0.5 marks

Supplies expense 4,400

Supplies 4,400
1 mark

7. Accounts receivable 350,000

Revenue 350,000
0.5 marks

Cash 290,000
Accounts receivable 290,000
0.5 marks

Bad debt expense 10,000

Allowance for doubtful accounts 10,000
1 mark

8. Expenses 260,000
Accounts payable 260,000
0.5 marks

Accounts payable 235,000

Cash 235,000
0.5 marks

b) Coltrane Corporation
Statement of Income
For the year ended December 31, 20x5 (1 mark for proper
titling)

Revenue 0.5 $350,000

Expenses
Expenses 0.5 260,000
Depreciation 1 32,917
Interest 1 27,500
Insurance 1 2,250
Supplies 1 4,400
Bad debts 1 10,000
337,067

Net income $ 12,933

 35

1 mark for overall formatting of statement

Problem 6

Jan 1 Cash $100,000

Common Shares $100,000

Jan 2 Rent expense $3,000

Prepaid security deposit 5,000
Cash 8,000

Jan 15 Supplies 3,500

Accounts payable 3,500

Jan 30 Office furniture 15,000

Cash 15,000

Jan 31 Prepaid insurance 3,840

Cash 3,840

Feb 15 Accounts payable 3,500

Cash 3,500

Dec 15 Cash 4,500

Deferred / Unearned revenues 4,500

Dec 31 Insurance expense ($3,840/24 x 11) 1,760

Prepaid insurance 1,760

Dec 31 Depreciation expense ($15,000 / 10 x 11/12) 1,375

Accumulated depreciation 1,375

Dec 31 Supplies expense ($3,500 – 1,100) 2,400

Supplies 2,400
 36

Problem 7

2 marks for each part:

1 mark for the correct amount
1 mark for the correct accounts and proper format

a. Dec 31, 20x5 Insurance expense $250

Prepaid expense $250
$1,000 x 6/24 = $250

b. Dec 31, 20x5 Rent receivable (or accounts rec) 500

Rent income 500

c. Dec 31, 20x5 Interest expense 100

Interest payable 100
$300 x 4/12 = $100

d. Dec 31, 20x5 Unearned subscription revenues 55

Subscription revenues 55
$440 x 3/24 = $55
 37

4 – Financial Statement Analysis

Multiple Choice Questions

The Following Data Apply to Items 1-3:

Selected data from Ostrander Corporation's financial statements for the years indicated are
presented below in thousands.
December 31
20x1 20x0
Cash $32 $28
Short-term investments 169 172
Accounts receivable (net) 210 204
Merchandise inventory 440 420
Tangible fixed assets 480 440
Total assets 1,397 1,320
Current liabilities 370 368
Total liabilities 790 750
Common stock outstanding 226 210
Retained earnings 381 360

20x1 Operations
Total Sales (all on account) $4,175
Cost of goods sold 2,880
Interest expense 50
Income tax expense 120
Net income 175

1. The acid test (quick) ratio for Ostrander Corporation in 20x1 is

a) 1.73
b) 1.87
c) 1.11
d) 0.54

2. Merchandise inventory turnover for Ostrander Corporation in 20x1 is

a) 6.54 times
b) 6.70 times
c) 6.85 times
d) 9.70 times
 38

3. Days sales in Accounts Receivable (Average Collection Period) (using 365 days)
for Ostrander Corporation in 20x1 is
a) 18.10 days
b) 26.61 days
c) 17.83 days
d) 18.36 days

4. Financial data from an entity’s balance sheet at December 31, 20x4 is as follows:

Cash $200,000
Accounts Receivable 350,000
Prepaid expenses 50,000
Inventory 600,000
Accounts payable 400,000
Current portion of long term debt 100,000

What is the entity’s quick ratio?

a) 1.1
b) 1.2
c) 2.4
d) 1.4

5. Financial data from an entity’s financial statements at December 31, 20x4 and 20x5
is as follows:

Dec 31, 20x5 Dec 31, 20x4

Total Assets $5,600,000 $5,200,000
Revenue 7,600,000 7,000,000
Net income 450,000 430,000

What is the asset turnover for the year ended December 31, 20x5?
a) 1.41
b) 1.36
c) 0.083
d) 1.30
 39

6. Which of the following statements about the current ratio is true?

a) The current ratio compares current accounts receivable to current accounts
payable
b) The current ratio compares current assets to current liabilities
c) The current ratio compares highly liquid assets to current liabilities.
d) The current ratio compares current accounts receivable to sales

7. The financial statements shows net sales of $ 335,268 for its year ended 20x7.
Accounts receivable are $28,264 at year end 20x7 and $25,602 at year end 20x6.
Calculate the company’s average collection period for accounts receivable days.
a) 30.8
b) 29.4
c) 27.9
d) 58.6

8. Assume a company has a current ratio of 1.5 and working capital equal to $25,000.
If the company's current liabilities are equal to $50,000, its total current assets are:
a) $7,500
b) $25,000
c) $37,500
d) $75,000

9. The following data is available:

Dec 31, 20x7 Dec 31, 20x6

Total assets $950,000 $850,000
Net income 140,000

The return on assets for 20x7 is:

a) 16.5%
b) 7.8%
c) 15.5%
d) 14.7%
 40

10. The following data is available:

Dec 31, 20x7 Dec 31, 20x6

Total assets $950,000 $850,000
Total equity 625,000 535,000
Net income 140,000

The return on equity is:

a) 15.5%
b) 22.4%
c) 24.1%
d) 26.2%

Use the following information to answer questions 11-12:

The following are selected balances from a company’s accounts:

Dec 31, 20x3 Dec 31, 20x2

Accounts Receivable $350,000 $295,000
Inventory 460,000 520,000

for the year ended

Dec 31, 20x3
Credit Sales $2,600,000
Cost of goods sold 1,700,000
Gross margin $ 900,000

11. What is the average collection period (days sales in accounts receivable)?
a) 41 days
b) 45 days
c) 49 days
d) 51 days

12. What is the inventory turnover?

a) 3.1
b) 3.3
c) 3.5
d) 3.7
 41

13. For 20x6, Cline Company reports beginning of the year total assets of $900,000,
end of the year total assets of $1.1 million, net sales of $1.5 million, and net income
of $300,000. Cline’s 20x6 asset turnover ratio is
a) 0.27 times
b) 0.30 times
c) 1.36 times
d) 1.50 times

14. The following information relates to Mercury Ltd.

20x5 20x6
Accounts receivable $30,000 $50,000
Credit sales 280,000 320,000

What is Mercury’s days sales in accounts receivable for the year 20x6?
a) 43.4 days
b) 45.6 days
c) 52.1 days
d) 57.0 days
 42

Problems

Problem 1

Selected comparative financial statements of Thornhill Company follows:

Thornhill Company
Comparative Balance Sheets
As at December 31, 20x1 and 20x0
20x1 20x0
ASSETS
Current Assets $ 48,480 $ 38,424
Property, plant and equipment 90,000 96,000
$138,480 $134,424

LIABILITIES & SHAREHOLDERS’ EQUITY

Current liabilities $ 20,200 $ 19,960
Long-term liabilities 50,000 60,000
Shareholders’ Equity 68,280 54,464
$138,480 $134,424

Thornhill Company
Income Statement
For the year ended December 31, 20x1

Sales $444,000
Cost of goods sold 267,300
Gross profit 176,700
Operating expenses 125,000
Operating income 51,700
Interest expense 3,500
Net income before taxes 48,200
Income tax expense 14,500
Net income $ 33,700

Required –
(a) Convert the 20x1 balance sheet into a common-size balance sheet (i.e. one used for
vertical analysis). (2 marks)
(b) Calculate the following ratios for the year ended December 31, 20x1. For each ratio,
provide a short explanation of what is the meaning of the ratio.
i. Days sales in accounts receivable (beginning and ending accounts receivable were
$44,000 and $52,000 respectively).
ii. Inventory turnover (opening and ending inventory was $36,000 and $40,000
respectively)
iii. Times interest earned
iv. Return on equity (8 marks)
 43

4 – Financial Statement Analysis

SOLUTIONS

Multiple Choice Questions

1. c (32 + 169 + 210) / 370 = 1.11

2. b 2,880 / [(440 + 420) ÷ 2] = 6.70x

3. a [(210 + 204) ÷ 2] / (4,175 ÷ 365) = 18.1

4. a ($200,000 + 350,000) / (400,000 + 100,000) = 550,000 / 500,000 = 1.1

5. a 7,600,000 / [(5,600,000 + 5,200,000) / 2] = 1.41

6. b

7. b Average A/R = ($28,264 + 25,602)/2 = $26,933

Collection period = $26,933/(335,268/365) = 29.4 days

8. d Current ratio = CA/CL

1.5 = CA/$50,000
CA = $50,000 x 1.5 = $75,000

9. c $140,000 / [(950,000 + 850,000) / 2] = 15.5%

10. c 140,000 / [(625,000 + 535,000) / 2] = 24.1%

11. b [($350,000 + 295,000) / 2] / (2,600,000 / 365)

$322,500 / 7,123
= 45 days

12. c $1,700,000 / (460,000 + 520,000) / 2

$1,700,000 / 490,000
= 3.5

13. d $1,500,000 / 1,000,000 = 1.5

14. b 365 / [$320,000 /{ (30,000 + 50,000) / 2}] = 45.6 days

 44

Problems

Problem 1

(a) ASSETS
Current Assets 35%
Property, plant and equipment 65%
100%

LIABILITIES & SHAREHOLDERS’ EQUITY

Current liabilities 15%
Long-term liabilities 36%
Shareholders’ Equity 49%
100%
2 marks

(b) i. [(44,000 + 52,000) / 2] / (444,000 / 365)

= 48,000 / 1,216.4
= 39.5 days

It takes on average 39.5 days to collect an accounts receivable.

ii. 267,300 / [(36,000 + 40,000) / 2]

= 267,300 / 38,000
= 7x

Thornhill sells their inventory on average, 7 times a year.

iii. 51,700 / 3,500 = 14.8

Thornhill generates 14.8 times operating income relative to interest.

iv. 33,700 / (68,280 + 54,454) / 2)

= 33,700 / 61,372
= 54.9%

Thornhill generated a return of 54.9% on its equity.

1 mark for the calculation of the ratio

1 mark for a reasonable explanation
 45

5 – Cash and Investments

Multiple Choice Questions

1. A company’s bookkeeper incorrectly recorded the receipt of a $480 cheque,

received in settlement of an accounts receivable, as a receipt of $840. The error was
found when the bank account was reconciled at month end. How would the error be
dealt with at the end of the month?
a) $360 addition to the balance per bank in the bank reconciliation
b) $360 deduction from the balance per bank in the bank reconciliation
c) $360 addition to the balance per books
d) $360 deduction from the balance per books

2. In preparing the December 31, 20x0 bank reconciliation for an entity, the
bookkeeper noted that a $540 cheque received from a customer in payment of an
accounts receivable had been recorded by the entity as $450. Which of the
following statements is true with respect to this item?
a) $90 should be added to the balance per bank
b) $90 should be deducted from the balance per bank
c) $90 should be added to the balance per books
d) $90 should be deducted from the balance per books

3. You are in the process of preparing a bank reconciliation for an entity. Data is as
follows:

Balance per bank, June 30 $6,500

Balance per books, June 30 7,800
Deposit in transit not recorded by the bank 650
Outstanding cheques 1,600

What is the adjusted balance per books at June 30?

a) $5,550
b) $7,450
c) $7,800
d) $6,850
 46

4. An entity invested $100,000 in the shares of another company during 20x5. At the
end of 20x5, the fair value of the shares is $120,000. The entity classifies these
shares as Fair Value through Profit and Loss (FVPTL). Which of the following will
be a part of the journal entry the entity will make at the end of the year?
a) Credit FVTPL Investments $20,000
b) Credit Gain on FVTPL Investments $20,000
c) Credit Gain on FVTOCI Investments $20,000
d) No entry will be made as the shares have not yet been sold.

5. The bank statement shows a balance of $13,556. You determine that deposits in
transit are $1,450 and that outstanding cheques are $2,265. What is the balance in
the cash account?
a) $11,291
b) $12,741
c) $14,371
d) $15,006

6. If a bank statement included an NSF cheque for $450, the journal entry to record
this reconciling item would include a
a) debit to Cash for $450
b) credit to Cash for $450
c) credit to Accounts Receivable for $450
d) debit to Accounts Payable for $450

7. If the bookkeeper mistakenly records a deposit of $360 as $630, the error would be
shown on the bank reconciliation statement as a:
a) $270 deduction from the bank balance
b) $270 deduction from the book balance
c) $270 addition to the book balance
d) $270 addition to the bank balance

8. On June 3, 20x5 shares of Company X were purchased at cost of $65,000. On Dec

31, 20x5 the market value was $50,000. If these shares were classified as FVTOCI,
what will be reported on Dec 31 20x5?
a) A loss of $15,000 on the income statement
b) A loss of $15,000 in other comprehensive income
c) A loss of $15,000 charged directly to retained earnings
d) Not recorded because no sale has taken place
 47

9. On June 3, 20x5 shares of Company X were purchased at cost of $65,000. On Dec

31, 20x5 the market value was $50,000. On Feb 15, 20x6 the shares were sold for
$75,000. If these shares were classified as FVTPL, what gain is reported in 20x6?
a) $10,000
b) $15,000
c) $25,000
d) $30,000

10. Which of the following does not require a journal entry for a bank reconciliation?
a) outstanding cheques
b) bank service charges
c) collection by the bank of a note receivable
d) NSF cheque returned by the bank
 48

Problems

Problem 1

On June 30, 20x5, the Lanz Corporation purchased 1,600 shares of James Inc. for
$36 per share. Dividends and share prices for James for 20x5 and 20x6 are as
follows:
Dividend per Fair Value
share paid per Share
Dec 31, 20x5 $1.50 $42
Dec 31, 20x6 0 33

Assuming that Lanz classifies the shares as FVTOCI, prepare the journal entries at
December 31, 20x5 and 20x6. (3 marks)

Problem 2

When preparing the bank reconciliation for her company, Mary noted that a cheque for $2,345,
received in settlement of an outstanding account receivable, was recorded as $2,435 in the
company’s books. What adjusting entry, if any, would be required to correct this error? (2 marks)

Problem 3

On June 30, 20x2, the Marsalis Company purchased $130,000 of the shares of Powell Inc.
During the year, Marsalis received $3,000 of dividends of Powell Inc. At December 31, 20x2,
the shares of Powell had a fair value of $110,000.

Required –

a) Assume that Marsalis classifies the investment as Fair Value through Profit and Loss
(FVTPL). Write the journal entries for the year ended December 31, 20x2,
b) Assume that Marsalis classifies the investment as Fair Value through Other
Comprehensive Income (FVTOCI).
i) Write the journal entries for the year ended December 31, 20x2.
ii) Assume that Marsalis’ net income for the year ended December 31, 20x2 is
$460,000. Prepare the bottom portion of the Statement of Comprehensive Income
starting with the line ‘Net Income’.
 49

Problem 4

Information necessary for the preparation of a bank reconciliation for the Wesley Company at
March 31 is listed below:

1. Accompanying the bank statement was a cheque from Roper Inc. for $186, which was
marked Non Sufficient Funds (NSF) by the bank.

2. Cheques outstanding as of March 31 were as follows:

#84 for $1,841
#88 for $1,323
#89 for $16

3. On March 29, the bank collected a non-interest-bearing note for Wesley Company. The
note was for $2,963.

4. A deposit of $2,008 was in transit at the end of the month; it had been put in the night
depository of the bank on March 31.

5. In recording a $160 cheque received on account from a customer, the accountant for the
Wesley Company erroneously listed the collection in the cash receipts journal as $16.
The cheque appeared correctly among the deposits on the March bank statement.

6. The bank service charge for March amounted to $53.

7. The bank statement also showed that a deposit in transit totalling $1,958 on the February
28 bank reconciliation had been recorded by the bank in March.

8. The cash balance per books of the Wesley Company is $12,604.

9. The bank statement shows a balance of $16,644 as of March 31.

Required –

a) Prepare the necessary adjusting journal entries resulting from the above. Calculate the
revised cash balance per books.
b) Prepare a bank reconciliation at March 31.
 50

Problem 5

The new accountant for Askan Construction gathered the following information to prepare the
November 30, 20x1 bank reconciliation:

1. November 30 cash balance in the general ledger = $5,514.

2. November 30 cash balance on the bank statement = $10,959.
3. A review of cashed cheques returned with the bank statement indicated that cheques
amounting to $5,297 had not been cashed by November 30.
4. The bank charged the company $32 for monthly standard service charges.
5. The bank collected a $3,200 note plus interest of $90 on behalf of the company.
6. The bank statement included a debit with respect to a non-sufficient funds (NSF) cheque
from Creative Designs in the amount of $910.
7. The company recorded a $3,210 cheque in payment of an account payable as $2,310 (the
correct amount is $3,210).
8. The November 30, 20x1 deposit of $1,300 was recorded by the bank on Dec 1, 20x1.

Required –

a) Prepare the journal entries required to adjust the cash account. Calculate the adjusted cash
balance in the general ledger.
b) Prepare the bank reconciliation for Askan Construction at November 30, 20x1.
 51

Problem 6

The January 31 bank statement of Jasmine Inc, has just arrived. You gather the following data:

1. The January 31 bank balance is $8,988.

2. Jasmines’ Cash account shows a balance of $7,392 on January 31.
3. The following cheques are outstanding at January 31:

Cheque No. Amount

616 $403
802 74
806 36
809 161
810 229
811 48
$951

4. The bank statement includes two special deposits: $894, which is the amount of dividend
revenue the bank collected from Apple Inc. on behalf of Jasmine Inc., and $17, the
interest revenue Jasmine Inc. earned on its bank balance during January.
5. The bank statement lists a $8 bank service charge.
6. On January 31, a deposit of $381 was made which will appear on the February bank
statement.
7. The bank statement includes a returned cheque from a customer. The cheque in the
amount of $77 was deposited by Jasmine on Jan 12 but returned due to insufficient funds
(NSF)
9. A few customers pay monthly bills by electronic fund transfer (ETF). The January bank
statement lists an ETF deposit for sales revenue of $200.

Required –

a. Prepare the adjusting journal entries required from the above information.
b. Prepare a bank reconciliation as at January 31.
 52

5 – Cash and Investments

SOLUTIONS

Multiple Choice Questions

1. d

2. c

3. a $6,500 + 650 – 1,600 = $5,550

4. b

5. b $13,556 + 1,450 outstanding deposits – 2,265 outstanding cheques = $12,741

6. b

7. b

8. b $65,000 – 50,000 = $15,000 loss.

9. c Loss reported in 20x5 = $65,000 – 50,000 = $15,000. Book value of the

shares at January 1is $50,000.
$75,000 – 50,000 = $25,000 gain reported in 20x6.

10. a
 53

Problems

Problem 1

Dec 31, 20x5 FVTOCI Investments $9,600

OCI – Gain on FVTOCI Inv. $9,600
1 mark

Cash 2,400
Dividend income 2,400
1 mark

Dec 31, 20x6 OCI – Loss on FVTOCI Inv. 14,400

FVTOCI Investments 14,400
1 mark

Problem 2

Accounts receivable 90
Cash 90
 54

Problem 3

a) FVTPL Investments 130,000

Cash 130,000
0.5 marks

Cash 3,000
Dividend income 3,000
1 mark

Loss on investments 20,000

FVTPL Investments 20,000
1 mark

b) i) FVTOCI Investments 130,000

Cash 130,000
0.5 marks

Cash 3,000
Dividend income 3,000
1 mark

OCI - Loss on investments 20,000

FVTOCI Investments 20,000
1 mark

ii) Net income $460,000

Other comprehensive income
Loss on FVTOCI Investments 20,000
Comprehensive Income $440,000
2 marks
 55

Problem 4

a) Accounts receivable 186

Cash 186
1 mark

Cash 2,963
Note receivable 2,963
1 mark

Cash ($160 – 16) 144

Accounts receivable 144
1 mark

Bank service charges 53

Cash 53
1 mark

Revised cash balance = $12,604 – 186 + 2,963 + 144 – 53 = $15,472

1 mark

b) Cash balance per bank $16,644

Add deposit in transit 1 2,008
Less outstanding cheques 1 (3,180)
Cash balance per books $15,472
 56

Problem 5

a) Bank service charges 32

Cash 32
1 mark

Cash 3,290
Note receivable 3,200
Interest revenue 90
1 mark

Accounts receivable 910

Cash 910
1 mark

Accounts payable 900

Cash 900
1 mark

Revised cash balance

= $5,514 – 32 + 3,290 – 910 - 900 = $6,962 1 mark

b) Balance per bank $10,959

Less outstanding cheques 1 (5,297)
Plus outstanding deposit 1 1,300
Balance per books $6,962
 57

Problem 6

a. Cash 894
Dividend revenue 894

Cash 17
Interest revenue 17

Bank service charges 8

Cash 8

Accounts receivable 77
Cash 77

Cash 200
Sales 200

1 mark for each entry

b. Adjusted balance per books:

$7,392 + 894 + 17 – 8 – 77 + 200 = $8,418 1 mark

Balance per bank $8,988

Add outstanding deposit 1 381
Less outstanding cheques 1 (951)
Balance per books $8,418
 58

6 – Revenue and Accounts Receivable

Multiple Choice Questions

1. Glover Inc. estimates bad debt expense to be 2% of credit sales. Accounts

receivable at the beginning of the year totaled $2,300,000 and at the end of the year
were $2,620,000. The allowance for doubtful accounts at the beginning of the year
was $68,000. Collections on accounts receivable during the year totaled
$4,130,000. Accounts written off during the year totaled $50,000. All sales are
credit sales. What is the total bad debt expense for the year?
a) $66,000
b) $90,000
c) $114,000
d) $115,200

Use the following information for questions 2 - 4:

On January 1, 20x7, Walsh Inc. entered into a 3 year construction contract for $2,700,000. The
actual and expected costs to complete the project as at each year end are outlined in the table
below.
Dec 31, 20x7 Dec 31, 20x8 Dec 31, 20x9
Costs incurred during the year $800,000 $650,000 $600,000
Expected costs to complete $1,200,000 $550,000

2. How much profit should Walsh Inc. recognize in relation to this contract for the
fiscal year 20x7?
a) $ 280,000
b) $ 700,000
c) $1,080,000
d) $1,900,000

3. How much revenue should Walsh Inc. recognize in relation to this contract for the
fiscal year 20x8?
a) $ 829,756
b) $ 877,500
c) $1,080,000
d) $1,957,500
 59

4. What is the actual total profit that was realized on this contract for the three year
period?
a) $600,000
b) $650,000
c) $700,000
d) $750,000

5. Amy Company uses the credit sales method to estimate bad debt expense. The
company estimates bad debt expense to be 2% of credit sales. During 20x1, Amy
recorded credit sales of $3,750,000. During the year, an accounts receivable for
$17,000 was written off. Accounts receivable uncollected at the end of the year
totaled $880,000. What was the bad debt expense for 20x1?
a) $17,000
b) $17,600
c) $74,660
d) $75,000

6. The balance in a company’s allowance for doubtful accounts at the beginning of the
year was $7,800 cr. During the year, the company wrote off $8,600 of accounts
receivable and recovered $400 of accounts receivable previously written off. At the
end of the year, the company estimates the ending balance in the allowance for
doubtful accounts to be $8,500. What is the bad debt expense for the year?
a) $8,100
b) $8,500
c) $8,600
d) $8,900

7. On January 1, 20x8, Brantford Company's allowance for doubtful accounts had a

credit balance of $6,000. Sales revenue for 20x8 was $1,000,000 of which 80% was
on credit. Historical data indicates that 3 percent of credit sales prove uncollectible.
The company wrote off $10,000 of accounts receivable during the year. What
should the balance in the allowance account be after the adjusting entry for doubtful
accounts is made?
a) $ 8,000 cr.
b) $ 8,000 dr.
c) $14,000 cr.
d) $20,000 cr.
 60

8. The accounts receivable clerk had prepared the following aging of Rollins Corp's
accounts receivable. The current balance in the allowance for doubtful accounts is
$9,800 dr.

Date since due $ % uncollectible

0 to 30 days $500,000 1%
30 – 60 days 200,000 4%
Over 60 days 100,000 10%
$800,000

What is the bad debt expense for the year?

a) $13,200
b) $23,000
c) $32,800
d) $40,000

9. The following information is available for Madill Company:

Allowance for doubtful accounts at December 31, 20x6 $8,000cr.

Credit sales during 20x7 $400,000
Accounts receivable deemed worthless and written off during 20x7 $9,900
Previously written off accounts receivable collected during 20x7 900

As a result of a review and aging of accounts receivable in early January 20x8,

however, it has been determined that an allowance for doubtful accounts of $7,500
is needed at December 31, 20x7. What amount should Madill record as bad debt
expense for the year ended December 31, 20x7?
a) $6,500
b) $7,500
c) $8,500
d) $9,900
 61

The Following Data Apply to Items 10 – 12:

The following is a summary of transactions in the allowance for doubtful accounts of Good
Credit Co. for the year 20x1:

Allowance for Doubtful Accounts

Total Debits $80,000 Jan 1, 20x1, Beginning Balance $50,000
Total Credits 70,000

Good Credit had a beginning balance of $800,000 and an ending balance of $950,000 in
accounts receivable. There were no recoveries of accounts during 20x1.

10. What was the net book value of accounts receivable on the balance sheet as at
December 31, 20x0?
a) $900,000
b) $850,000
c) $750,000
d) $730,000

11. What was the amount of accounts receivable written off during the year 20x1?
a) $150,000
b) $80,000
c) $70,000
d) $10,000

12. What was the bad debt expense for the year 20x1?
a) $150,000
b) $80,000
c) $70,000
d) $40,000
 62

Problems

Problem 1

The following information is available for the Stuart Company:

Allowance for doubtful accounts at December 31, 20x7 $ 6,000 cr.

Credit sales during 20x8 400,000
Accounts receivable deemed worthless and written off during 8,000
20x8

As a result of a review and aging of accounts receivable in early January 20x9,

however, it has been determined that an allowance for doubtful accounts of $4,800
is needed at December 31, 20x8. What amount should Stuart record as "bad debt
expense" for the year ended December 31, 20x8? (3 marks)

Problem 2

On January 1, 20x7, Murphy Construction Company entered into a 4-year service

contract for the total price of $3,600,000. You have the following information for
the first two years of the contract:

20x7 20x8
Costs incurred during the year $960,000 $910,000
Estimated costs to complete 2,240,000 1,530,000

What is the revenue and profit or loss that will be realized on this contract in 20x8?
(5 marks)
 63

Problem 3

EED Ltd. began operations on January 1, 20x7. The company uses the allowance method
of accounting for bad debt expense. Based on industry averages and its experience in
20x7, EED Ltd. decided that an allowance equal to 5% of total accounts receivable would
be sufficient to cover uncollectible accounts. On December 31, 20x7 there was a $2,000
credit balance in the allowance for doubtful accounts account and a $40,000 debit balance
in the accounts receivable account.

During 20x8 the following summarized transactions occurred:

1. Sold merchandise on credit for $500,000.
2. Wrote off uncollectible accounts receivable in the amount of $1,500.
3. Received $200 in collection of an account that was written off in 20x7.
4. Received cash of $400,000 in payment of outstanding accounts receivable.

Prepare journal entries to record the above transactions on the books of EED Ltd. In
addition, prepare journal entries, if any, required at December 31, 20x8 to record bad debt
expense for the year.

Problem 4

The JH Company entered into a 4 year contract to provide computer support

services to a local municipal government. The total contract price is $3,000,000.
Data relating to the contract for the first two years are as follows:

20x1 20x2
Costs incurred during the year $300,000 500,000
Expected costs to complete the contract 1,200,000 800,000

How much revenue and profit will be recorded on this contract in each of the first
two years? (6 marks)
 64

Problem 5

A company sells medical imaging machinery. They also provide installation services if
customers require it and provide maintenance contracts to service the machine. Customers have
the option to purchase one, two or all three product/service offerings.

The stand-alone selling prices are as follows:

Machine $750,000
Installation 80,000
Maintenance contract – 5 years 150,000

If a customer chooses to purchase all three, the selling price is $900,000. Customers sign a
contract with the entity when the payment is made.

Required –

Using the 5 step analysis to recognize revenue, how would you recognize the revenue of a sale
the three product bundle. Write the relevant journal entries.

Problem 6

Gardner Building Supplies, Ltd., gives you the following aged accounts receivable list at
the end of the fiscal year:

Age of Account % of Uncollectible

(Days) Amount Accounts Receivable
0-30 $600,000 1%
31-60 200,000 3
61-90 100,000 20
Over 90 days 20,000 60

During the year, specific uncollectible accounts receivable totaled $41,000. An account of
$2,700 that was written off in a previous year was collected during the current year.

Total yearly credit sales for Gardner are $3,400,000. The balance in the Allowance for Doubtful
Accounts at the beginning of the year was $36,000 credit.

Gardner uses the aging of accounts receivable method to determine bad debt expense.

Required –

a. Prepare the journal entries to record the write-off of the uncollectible amounts and the
recovery of a previously written off account.
 65

b. Prepare the journal entry to record bad debt expense at the end of the year.

Problem 7

Surplus Ltd. had excess cash, which it invested in the shares of Neltell Ltd. The company
purchased 1,000 shares on June 30, 20x1 at $25 per share. On December 31, 20x1, the market
value of Neltell shares was $20 and on December 31, 20x2, the market value of the shares had
increased to $22.

Required –

Assuming that the investment in the shares of Neltell is classified as Fair Value through Other
Comprehensive Income (FVTOCI), prepare all journal entries for the years 20x1 to 20x2.
 66

6 – Revenue and Accounts Receivable

SOLUTIONS

Multiple Choice Questions

1. b Credit Sales = $320,000 Increase in A/R + Write-offs + 4,130,000

Collections = $4,500,000
Bad debt expense = $4,500,000 x 2% = $90,000

2. a 800 / 2,000 x 700,000

3. b $2,700,000 x (1,450/2,000 – 800/2,000)

4. b $2,700,000 – 800,000 – 650,000 – 600,000

5. d Bad debt expense = $3,750,000 x 2% = $75,000

6. d 7,800 cr + 8,600 dr. + 400 cr. = 400 dr.

Bad debt expense = $8,500 + 400 = $8,900

7. d 6,000 cr. + 10,000 dr. + (800,000 x 3%) = $20,000 cr.

8. c Allowance = (500,000 x 1%) + (200,000 x 4%) + (100,000 x 10%)

= 23,000 + 9,800 balance = $32,800

9. c Balance in the allowance account before adjustment

= $8,000 – 9,900 + 900 = $1,000 dr.
Bad debt expense = $7,500 + 1,000 - $8,500

10. c $800,000 – 50,000 = $750,000

11. b

12. c
 67

Problems

Problem 1

Allowance for Doubtful Accounts

W/O 8,000 $6,000 Beg
1 6,800 BDE 2 marks
mark
4,800 End

Problem 2

% of completion at the end of year 1: $960 / (960 / 2,240)

= 960 / 3,200 = 30% 1 mark
% of completion at the end of year 2: ($960 + 910) / (960 + 910 + 1,530)
= 1,870 / 3,400 = 55% 2 mark
Revenues to be realized in 20x8: $3,600,000 (0.55 – 0.30) = $900,000 1 mark
Profit (loss) in 20x8: $900,000 – 910,000 = ($10,000) 1 mark

Problem 3 – 12 marks

1. Accounts receivable 500,000

Sales 500,000
1 mark

2. Allowance for Doubtful Accounts 1,500

Accounts receivable 1,500
2 marks

3. Accounts receivable 200

Allowance for Doubtful Accounts 200
2 marks

Cash 200
Accounts Receivable 200
2 marks

4. Cash 400,000
Accounts Receivable 400,000
1 mark

5. Bad debt expense 6,225

Allowance for Doubtful Accounts 6,225
1 mark
 68

Balance in AFDA:
$2,000 cr. + 1,500 dr. + 200 cr. 1 mark $700 cr.
Balance required:
$40,000 + 500,000 – 1,500 - 400,000
= 138,500 x 5% 2 marks 6,925 cr.
Bad debt expense $6,225

Problem 4

Year 1 % of completion = 300/(300 + 1,200) = 300/1,500 = 20% 1 mark

Revenues = $3,000,000 x 20% = $600,000 1 mark
Profit = $600,000 – 300,000 = $300,000 0.5 marks

Year 2 % of completion = 300 + 500 /(300 + 500 + 800) = 800/1,600 = 50%

2 marks
Revenues = $3,000,000 x (0.50 - 0.20) = $900,000 1 mark
Profit = $900,000 – 500,000 = $400,000 0.5 marks

Problem 5

Step 1 Identify the contract with the customer. 1 mark

The contract with the customer was signed when the customer paid the $900,000.

Step 2 Identify the separate performance obligations in the contract. 2 marks

There are three separate performance obligations in this contract: the delivery of
the computer, the installation of the computer and the maintenance contract.

Step 3 Determine the transaction price. 1 mark

The total transaction price is $900,000.

Step 4 Allocate the transaction price to the separate performance obligations in the
contract. 4 marks

Stand Alone % of Total

Selling Price Stand Alone Allocation
Selling Price of Revenue
Machine $750,000 76.5% $688,500
Installation 80,000 8.2% 73,800
Maintenance contract 150,000 15.3% 137,700
$980,000 $900,000
 69

Step 5 Recognize revenue when (or as) the entity satisfies each performance obligation.
On the day the contract is signed and the $900,000 cash payment is received, the
following entry will be written: 1 mark
Cash $900,000
Deferred Revenue $900,000

When the machine is delivered to the customer’s premises, the revenue on the
computer can be realized: 1 mark
Deferred Revenue 688,500
Revenue 688,500

When the installation is complete, the installation revenue can be realized: 1

mark
Deferred Revenue 73,800
Revenue 73,800

The revenue on the maintenance contract would be recognized over the 5 year
period using the % of completion method. 1 mark

Problem 6

a. Allowance for doubtful accounts 41,000

Accounts receivable 41,000
1 mark

Accounts receivable 2,700

Allowance for doubtful accounts 2,700
1 mark

Cash 2,700
Accounts receivable 2,700
1 mark

b. Desired balance in Allowance for Doubtful Accounts -

$600,000 x 1% $6,000
200,000 x 3% 6,000
100,000 x 20% 20,000
20,000 x 60% 12,000
2 marks $44,000 cr.
Current balance in Allowance for Doubtful Accounts -
$36,000 cr. + 41,000 dr. + 2,700 cr. 2 marks 2,300 dr.
Bad debt expense 1 mark $46,300

Bad debt expense 46,300

Allowance for doubtful accounts 46,300
1 mark
 70

Probem 7

Jun 30, 20x1 Investment in Neltell Ltd. $25,000

Cash $25,000
1 mark

Dec 31, 20x1 OCI – Loss on FVTOCI Investments 5,000

Investment in Neltell Ltd. 5,000
1 mark

Dec 31, 20x2 Investment in Neltell Ltd. 2,000

OCI – Gain on FVTOCI Investments 2,000
1 mark
 71

7 - Inventory

Multiple Choice Questions

The Following Data Apply to Items 1-3:

Addison Hardware began the month of November with 150 large brass switchplates on hand at a
cost of $4.00 each. These switchplates sell for $7.00 each. The following schedule presents the
sales and purchases of this item during the month of November.

Purchases Sales
Number of Units Unit Cost Units Sold
Transaction
November 5 100
November 7 200 $4.20
November 9 150
November 11 200 4.40
November 17 220
November 22 250 4.80
November 29 100

1. If Addison uses a periodic FIFO inventory system, the value of the inventory on
November 30 would be
a) $936
b) $1,012
c) $1,046
d) $1,104

2. If Addison uses perpetual moving average inventory pricing, the sale of 220 items
on November 17 would be recorded at a unit cost of
a) $4.00
b) $4.16
c) $4.20
d) $4.32

3. If Addison uses weighted average inventory pricing (periodic), the gross profit for
November would be
a) $1,046.
b) $1,482.
c) $1,516.
d) $1,548.
 72

4. A company just starting in business purchased three merchandise inventory items at the
following prices. First purchase $80; Second purchase $95; Third purchase $85. If the
company sold two units for a total of $200 and used the FIFO cost flow assumption, the
gross profit for the period would be
a. $10
b. $20
c. $25
d. $35

5. The Alpha Company purchased inventory on account for $350. This transaction was
properly recorded. A week later, the Alpha Company discovered a defect in the inventory
and returned the inventory to the supplier for credit. The Alpha Company uses a perpetual
inventory system. As the accountant, you would tell the bookkeeper to record the return of
the inventory by:
a. Debiting inventory and crediting accounts payable for $350
b. Debiting accounts payable and crediting inventory for $350
c. Debiting inventory and crediting cash for $350
d. Debiting cash and crediting inventory for $350

6. BQ Ltd. sells merchandise to a customer for $10,000, accepting $2,000 cash and an
$8,000, 60-day note receivable. BQ Ltd. sets selling prices so that the cost of goods
sold is always equal to 30% of sales. Which of the following correctly describes the
effect of this sale on the accounting equation? Assume that BQ uses a perpetual
inventory system.
a. Increase assets $10,000; no effect on liabilities; increase equity $10,000
b. Increase assets $5,000; decrease liabilities $2,000; increase equity $7,000
c. Increase assets $7,000; no effect on liabilities; increase equity $7,000
d. Increase assets $8,000; increase liabilities $2,000; increase equity $10,000

7. FIFO tends to increase cost of goods sold when:

a) costs are increasing
b) costs are declining
c) costs are constant
d) FIFO will always yield the lowest possible cost of goods sold

8. If ending inventory for the year ended December 31, 2010, is overstated by
$25,000:
a) net income for 2011 will be understated by $25,000
b) net income for 2011 will be overstated by $25,000
c) ending inventory for 2011 will be understated by $25,000
d) beginning inventory for 2011 will be understated by $25,000
 73

Problems

Problem 1

Miller, Ltd. estimates the cost of its physical inventory at March 31 for use in an interim
financial statement. The gross profit percentage is 20%. The following account balances
are available:

Inventory, March 1 $220,000

Purchases 164,000
Sales during March 350,000

What is estimate of the cost of inventory reported on the statement of financial position
as at March 31? (4 marks)

Problem 2

On January 1, 20x8, the Music Store had 400 MP3 players in inventory with a cost of $48
per unit. During 20x8 the company made the following purchases of MP3 players:

Feb 21 1,000 units at $50 each = $50,000

Jun 15 1,000 units at $52 each = $52,000
Oct 15 1,000 units at $58 each = $58,000

The selling price of each MP3 player is $100. The store had an excellent Christmas season
with the result that only 70 MP3 players were left in inventory on December 31, 20x8.

Assuming the company uses a periodic inventory system, calculate gross profit for the
year ending December 31, 20x8, under each of the following assumptions:
i. FIFO
ii. Weighted Average

Problem 3

On January 13, 20x8, the Bamboo Brush store was destroyed in a fire. Luckily, the
accounting records were kept in a separate location and the company was able to
reconstruct the following information:

Inventory at January 1, 20x8 $100,000

Sales from January 1 to January 13 60,000
Purchases from January 1 to January 13 10,000
Gross profit percentage on sales 40%

Calculate the cost of inventory destroyed by the fire.

 74

Problem 4

The following information was available from the inventory records of the Bean
Company for January:

Units Unit Cost Total Cost

Balance at January 1 2,000 $9.77 $19,540

Purchases:
January 6 3,000 10.30 30,900
January 26 2,700 10.71 28,917

Sales:
January 7 (2,500)
January 31 (3,500)
Balance at January 31 1,700

Assuming that Bean uses a periodic inventory system, what should be the ending
inventory at January 31, using the weighted average inventory method, rounded to
the nearest dollar? (3 marks)
 75

7 - Inventory
SOLUTIONS

Multiple Choice Questions

1. d 230 x $4.80 = 1,104

2. d 50 @ 4.00 200
200 @ 4.20 840
250 @ 4.16 1,040
-150 @ 4.16 -624
100 @ 4.16 416
200 @ 4.40 880
300 4.32 1,296

3. b Cost of goods available for sale

= (150 x 4.00) + (200 x 4.20) + (200 x 4.40) + (250 x 4.80) = $3,520
Unit cost = $3,520 / 800 = $4.40
Gross Profit = 570 units sold x (7.00 - 4.40) = $1,482

4. c $200 - 80 - 95 = $25

5. b

6. c 10,000 – (10,000 x 0.3) = $7,000

7. b

8. a
 76

Problems

Problem 1

Cost of goods sold = $350,000 x 80% = $280,000 1 mark

Cost of goods available for sale = $220,000 + 164,000 = $384,000 2 mark
Estimated ending inventory = $384,000 – 280,000 = $104,000 1 mark

Problem 2 – 9 marks

b. i. Units sold = 3,400 – 70 = 3,330

Sales = 3,330 x $100 = $333,000 2 marks

Ending inventory = 70 x $58 = $4,060 1 mark

Cost of goods available for sale = $179,200 1 mark
COGS = 179,200 – 4,060 = 175,140 1 mark

Gross profit = $333,000 – 175,140 = $157,860 1 mark

ii. Unit cost = $179,200 / 3,400 = $52.7059 1 mark

COGS = 3,330 x $52.7059 = $175,511 1 mark
Gross profit = $333,000 – 175,511 = $157,489 1 mark

Problem 3 – 4 marks

Beginning inventory $100,000

Purchases 10,000
Cost of goods available for sale 110,000 2
Less COGS: $60,000 x 60% 36,000 2
Ending inventory $ 74,000

Problem 4

Unit cost = $79,357 / 7,700 units = $10.306

Cost of ending inventory = 1,700 units x $10.306 = $17,520 3 marks
 77

8 – Property, Plant and Equipment and Intangibles

Multiple Choice Questions

1. On July 1, 20x9, an entity purchased a machine for $85,000 with an estimated life
of 4 years and a residual value of $5,000. If the company uses the diminishing
balance method for depreciation at a rate of 50%, what would be the balance
reported for the net book value of the machine at December 31, 20x9?
a) $42,500
b) $75,000
c) $63,750
d) $65,000

2. An entity purchased a parcel of land for $500,000 for the purpose of building a
factory. The land contained a shed that needed to be demolished. The demolition
costs were $15,000, but $5,000 was salvaged by selling the materials recovered
from the demolished shed. Closing costs of $20,000 included legal and brokerage
fees. At what amount should the cost of the land be recorded in the books of the
entity?
a) $500,000
b) $520,000
c) $530,000
d) $535,000

3. An entity purchased an asset on December 31, 20x1. The cost of the asset was
$300,000, has a remaining useful life of 10 years and has a $20,000 residual value.
The entity uses the straight line method of depreciation. On December 31, 20x8, the
asset is sold for $80,000.

What is the gain or loss on sale of the asset? A positive number is a gain; a negative
number is a loss.
a) ($24,000)
b) ($10,000)
c) ($52,000)
d) $4,000
 78

4. An entity purchased an asset on December 31, 20x1. The cost of the asset was
$300,000, has a remaining useful life of 10 years and has a $50,000 residual value.
The entity uses the diminished balance method of depreciation at a rate of 20%.

What is the depreciation expense for the year ended December 31, 20x4?
a) $38,400
b) $25,000
c) $30,000
d) $30,720
 79

Problems

Problem 1

Zahn Corp.'s comparative balance sheet at December 31, 20x5 and 20x4,
reported accumulated depreciation balances of $800,000 and $600,000 respectively. Property
with a cost of $50,000 and a carrying (net book value) amount of $40,000 was the only property
sold in 20x5. What is the amount of depreciation expense for 20x5? (3 marks)

Problem 2

On January 2, 20x0, Chegal Ltd. purchased equipment for $100,000. Chegal had to spend an
additional $10,000 for transportation and $15,000 for installation of the equipment. Assume that
all of these were paid in cash. The equipment is expected to produce a total of 100,000 widgets
over its life of 5 years. The residual value expected at the end of 5 years is $25,000. During
20x0, Chegal produced 19,000 widgets.

Required -

a. Prepare the journal entry to record the acquisition of the equipment on January 2, 20x0.
b. Prepare the journal entry at December 31, 20x0 to record the depreciation using the units-
of-production method.

Items c, d and e do not require journal entries

c. Assume Chegal uses the straight-line method of depreciation. Calculate the depreciation
expense for the year ended December 31, 20x0.
d. Assume Chegal uses the diminishing balance method of depreciation at a rate of 40%.
Calculate the depreciation expense for the year ended December 31, 20x0, 20x1, 20x2
and 20x3.
e. Assume that the straight-line method is used and that the equipment is disposed of on
December 31, 20x2 for $52,000. Calculate the gain or loss on disposal on sale of
equipment. Depreciation expense for the year ended December 31, 20x2 has been
recorded.
 80

Problem 3

(a) Alfie Corp. purchased equipment on January 2, 20x2 for $80,000 and estimated an $8,000
residual value at the end of the equipment's 10-year useful life. Alfie uses the straight line
method and has a December 31 year-end. On March 31, 20x9, the equipment was sold for
$21,000.
Prepare the appropriate journal entries for depreciation expense in 20x9 and to remove the
equipment from the books on March 31, 2009. (7 marks)

(b) In 20x5, Reed Co. purchased a manufacturing plant for $3,000,000 cash. Included in the
price was land, building, and equipment. An appraiser assessed the market value of each
component as follows:

Land $1,080,000
Building 1,980,000
Equipment 540,000
$3,600,000

Prepare the journal entry to record the purchase of the plant (3 marks)
 81

8 – Property, Plant and Equipment and Intangibles

SOLUTIONS

Multiple Choice Questions

1. c $85,000 – ($85,000 x 50% / 2) = $63,750

2. c $500,000 + 15,000 – 5,000 + 20,000 = $530,000

3. a Net book value = $300,000 – [(300,000 – 20,000) / 10 x 7] = $104,000

Loss = $104,000 – 80,000 = $24,000

4. a $300,000 x 0.8 x 0.8 x 0.2 = $38,400

 82

Problems

Problem 1

Accumulated depreciation, December 31, 20x4 $600,000

Accumulated depreciation on property sold: 2
$50,000 - 40,000 -10,000
Accumulated depreciation, December 31, 20x5 1 -800,000
Depreciation expense, 20x5 $210,000

Problem 2

a. Equipment ($100,000 + 10,000 + 15,000) 2 125,000

Cash 125,000

b. Depreciation expense 19,000

Accumulated depreciation 19,000
($125,000 – 25,000) / 100,000 x 19,000
2 marks

c. ($125,000 – 25,000) / 5 = $20,000 1

d. 20x0: $125,000 x 40% = $50,000 1

20x1: 75,000 x 40% = 30,000 0.5
20x2: 45,000 x 40% = 18,000 0.5
20x3: 27,000 – 25,000 = $2,000 2

e. Carrying value: $125,000 – (20,000 x 3) 1 $65,000

Proceeds 0.5 52,000
Loss (mark for specifying loss) 0.5 $13,000
 83

Problem 3

a. Depreciation expense to March 31, 20x9:

($80,000 - 8,000) / 10 x 3/12 = 1,800 2 marks

Depreciation expense $1,800

Accumulated depreciation $1,800
1 mark

Accumulated Depreciation to December 31, 20x8:

($80,000 – 8,000) / 10 x 7 years = $50,400 1 mark

Cash 21,000
Accumulated depreciation ($50,400 + 1,800) 52,200
Loss on sale of equipment 6,800
Equipment 80,000
3 marks

b. Land ($1,080 / 3,600 x $3,000,000) 1 900,000

Building ($1,980 / 3,600 x $3,000,000) 1 1,650,000
Equipment ($540 / 3,600 x $3,000,000) 1 450,000
Cash 3,000,000
 84

9 - Liabilities

Multiple Choice Questions

1. An entity provides a two-year warranty on its products. Based on past history, they
estimate that warranty costs will be equal to 1% of the product cost in the first year
and 2.5% of the product cost in the second year of the warranty. The opening balance
in the warranty liability account was $145,000. Total sales for the current year
amounted to $12,000,000. Jamieson’s gross margin is 35%. Total costs incurred to
service warranties for the current year amounted to $110,000. What is the balance in
the warranty liability account at the end of the year.
a) $110,000
b) $163,000
c) $273,000
d) $308,000

Problems

Problem 1

On December 31, 20x1, the Hanlon Corporation took out a 4%, $500,000 bank loan. The loan is
repayable over 3 years at equal annual repayments of $180,174 on December 31 of each year.
The first payment is due on December 31, 20x2 and the last payment is due on December 31,
20x4.

Required –

a. Prepare an amortization schedule for this loan

b. Prepare the journal entry at December 31, 20x3 to record the annual payment.
 85

9 - Liabilities
SOLUTIONS

Multiple Choice Questions

1. d Warranty expense = 12,000,000 x 65% x 3.5% = $273,000

Warranty liability balance, end of year =
$145,000 Op Bal + 273,000 Expense – 110,000 Costs = $308,000

Problems

Problem 1

a. Date Payment Interest Principal Balance

December 31, 20x1 $500,000
December 31, 20x2 $180,174 $20,000 $160,174 339,826
December 31, 20x3 180,174 13,593 166,581 173,245
December 31, 20x4 180,174 6,929 173,245 0
4 marks

b Interest expense 13,593

Bank loan 166,581
Cash 180,174
2 marks
 86

10 – Shareholders’ Equity

Multiple Choice Questions

1. An entity commenced operations on April 1, 20x0, with outstanding share capital of

50,000, $2 cumulative preferred shares, and 100,000 common shares. In the year
ended April 1, 20x1, the company paid dividends of $125,000. What was the
dividend per common share?
a) $0
b) $0.25
c) $0.75
d) $1.25

2. On January 1, 20x0, an entity issued shares to investors. Investors contributed cash

in the amount of $200,000 plus land and building with a fair market value of
$250,000 and an original cost of $100,000. By how much would shareholders’
equity increase as a result of these transactions?
a) $200,000
b) $250,000
c) $300,000
d) $450,000

3. An entity started the with a balance of $7,500,000 in its common share account.
There were 250,000 common shares outstanding at the beginning of the year. The
following transactions occurred during the year:

Mar 15 Issued 50,000 shares for total proceeds of $1,700,000

Jul 30 Repurchased and cancelled 20,000 shares at a total
cost of $700,000

What is the balance in the common share account at the end of the year?
a) $8,586,667
b) $9,200,000
c) $8,500,000
d) $8,600,000
 87

4.. An entity’s capital structure as at December 31, 20x4 is as follows:

Preferred Shares, 5%, cumulative $1,000,000

Common Shares 7,500,000

The preferred share dividends were last paid on December 31, 20x1. On December
15, 20x4, the entity declared total dividends of $400,000. Of this total, how much
of the dividends were declared on the common shares?
a) $250,000
b) $400,000
c) $300,000
d) $350,000
 88

Problems

Problem 1

The Iris Corporation had the following Shareholders’ Equity section as at December 31, 20x4:

Preferred Shares, $7, noncumulative,

100,000 shares outstanding $10,000,000
Common shares, 5,000,000 shares issued and outstanding 24,000,000
Retained earnings 8,000,000
$42,000,000

The following transactions took place in 20x5.

(1) Issued 1,000,000 common shares for total cash consideration of $6,000,000.
(2) Issued 500,000 common shares for total cash consideration of $3,400,000.
(3) Repurchased and cancelled 100,000 common shares at $12 per share.
(4) Issued 50,000 common shares for a land and building. An independent appraisal of the
land and building indicated that the market value was $100,000 for the land and $350,000
for the building.
(5) Split the common stock 2:1.
(6) Declared the dividends on preferred shares.
(7) Declared a $0.50 dividend on common shares.

Required –
Prepare the journal entries to record these transactions. Round any unit amounts to two decimals.

Problem 2

On January 1, 20x0, Calvin Corporation had 60,000 shares of common shares issued and
outstanding for a total book value of $720,000. During the year, the following transactions
occurred:

Mar. 1 Issued 40,000 shares of common shares for $600,000.

June 1 Declared a cash dividend on outstanding shares of $2.00 per share to shareholders
of record on June 15.
June 30 Paid the total cash dividend declared on June 1.
Jul 2 Issued 20,000 shares of common stock for $360,000
Aug 1 A 2:1 stock split was announced.
Sep 15 Repurchased and cancelled 2,000 shares at $11 each.
Dec. 15 Declared cash dividend on outstanding shares of $1.10/share to shareholders of
record on Dec 31.

Required -
Prepare journal entries to record the above transactions.
 89

10 – Shareholders’ Equity
SOLUTIONS

Multiple Choice Questions

1. b [$125,000 – (50,000 x 2)] /100,000 = 25,000 / 10,000 = $0.25

2. d $200,000 + 250,000 = $450,000

3. a $7,500,000 + 1,700,000 – (20,000 x [(7,500,000 + 1,700,000) / (250,000 +

50,000)] = 9,200,000 – 546,667 = $8,653,333

4. a $400,000 – ($1,000,000 x 5% x 3) = $250,000

 90

Problems

Problem 1

(1) Cash $6,000,000

Common Shares $6,000,000
1 mark

(2) Cash 3,400,000

Common Shares 3,400,000
1 mark

(3) Book value per share =

($24,000,000 + 6,000,000 + 3,400,000) / (5,000,000 + 1,000,000 + 500,000)
= $5.14 2 marks

Common Stock (100,000 x $5.14) 1 514,000

Retained earnings 1 686,000
Cash (100,000 x $12) 1 1,200,000

(4) Land 100,000

Building 350,000
Common shares 450,000
2 marks

(5) No entry 1

(6) Retained Earnings (or Dividends) 700,000

Dividends payable (100,000 x $7) 700,000
1 mark

(7) Retained Earning (or Dividends) 6,450,000

Dividends payable 6,450,000
12,900,000shares x $0.50
1 mark for getting 12,900,000 shares
1 mark for entry
 91

Problem 2

Mar 1 Cash $600,000

Common Stock $600,000
1 mark

Jun 1 Retained Earnings 200,000

Dividends Payable 200,000
100,000 shares x $2.00
2 marks

Jun 30 Dividends payable 200,000

Cash 200,000
1 mark

Jul 2 Cash 360,000

Common Stock 360,000
1 mark

Aug 1 No entry - common shares outstanding becomes:

60,000 + 40,000 + 20,000 = 120,000 x 2 =
240,000
1 mark for no entry; the # of shares is rewarded
as part of the Sep 15 entry

Sep 15 Common Stock (2,000 x $7.00*) 14,000

Retained Earnings 8,000
Cash (2,000 x $11) 22,000

* ($720,000 + 600,000 + 360,000) / 240,000

= $1,680,000 / 240,000
= $7.00
4 marks

Dec 15 Retained Earnings 261,800

Dividends Payable 261,800
240,000 - 2,000 = 238,000 shares x 1.10
2 marks
 92

11 – The Statement of Cash Flow

Problem 1

The following is a partial balance sheet for Douglas Inc. for 20x5 and 20x6:

20x6 20x5
Cash $ 99,000 $ 51,000
Receivables 53,000 39,000
Inventory 101,000 118,000
Prepaid expenses 6,000 9,000
Property, Plant and Equipment (PPE) 420,000 350,000
Accumulated depreciation (110,000) (125,000)

Accounts payable $ 51,000 $ 56,000

Retained earnings 43,000 22,000

Additional Information –

1. The Accumulated Depreciation account has been credited for the depreciation expense for
the period. The depreciation expense amounted to $25,000 and is included in operating
expenses. One asset was disposed of during the year. The original cost of the asset sold was
$100,000. The asset had a net book value of $60,000 on the date of sale.
2. The Retained Earnings account has been charged for dividends and credited for the net
income for the year.

The income statement for 20x6 is as follows:

Sales (all on credit) $660,000

Cost of goods sold 363,000
Gross profit 297,000
Operating expenses 177,000
Operating income 120,000
Loss on sale of PPE 12,000
Interest expense 8,000
Net income before taxes 100,000
Income tax expense 45,000
Net income $ 55,000

Required –

Calculate the following sections of the statement of cash flow:

(a) Cash flow from operations using indirect method.
(b) Cash flow from investing
 93

Problem 2
Windle Ltd.’s comparative balance sheets at December 31, 20x8 and 20x7, and its income
statement for the year ended December 31, 20x8 are as follows.
WINDLE LTD.
Balance Sheets
Dec31 Dec 31 Net
20x8 20x7 Change

Cash $ 68,000 $ 36,000 $ 32,000

Accounts receivable 92,000 39,000 53,000
Inventory 119,000 87,000 32,000
Long-term investment 0 18,000 (18,000)
Land 80,000 80,000 0
Buildings and equipment 463,000 475,000 (12,000)
Accumulated depreciation (123,000) (101,000) (22,000)
$ 699,000 $ 634,000 $ 65,000

Accounts payable $ 22,000 $ 40,000 $ (18,000)

Bonds payable 25,000 0 25,000
Preferred shares 85,000 85,000 0
Common shares 423,000 423,000 0
Retained earnings 144,000 86,000 58,000
$ 699,000 $ 634,000 $ 65,000
WINDLE LTD.
Income Statement
for the year ended December 31, 20x8
Sales $900,000
Cost of goods sold 600,000
Gross profit 300,000
Operating expenses 157,000
Depreciation expense 43,000
Loss on sale of equipment 4,000
Gain on sale of long-term investment (12,000)
192,000
Net income $ 108,000

Additional information: sold equipment that had originally cost $32,000 and had $21,000 of
accumulated depreciation.

Required –
Prepare the following sections of the statement of cash flow for the year ended December 31,
20x8:
a) Cash flow from operations.
b) Cash flow from investing.
 94

11 – The Statement of Cash Flow

SOLUTIONS

Problem 1

(a) Cash flow from operations

Net income $ 55,000
Add back items not requiring a cash outlay
Depreciation 1 25,000
Loss on sale of PPE 1 12,000
Adjust for changes in working capital accounts
Increase in receivables 1 (14,000)
Decrease in inventory 1 17,000
Decrease in prepaid expenses 1 3,000
Decrease in accounts payable 1 (5,000)
$ 93,000

(b) Cash flow from Investing

Purchase of PPE 2 ($170,000)
Proceeds on sale of PPE $60,000 NBV – 12,000 Loss 2 48,000
($122,000)

Background Calculations –

PPE Accumulated Depreciation

Beg 350,000 100,000 Disp 40,000 125,000 Beg
Add 170,000 25,000 Dep
End 420,000 110,000 End
 95

Problem 2 – 14 marks

a) Cash flow from operations - indirect

Net income $108,000
Adjust for non-cash items
Depreciation expense 43,000 1
Loss on sale of equipment 4,000 1.5
Gain on sale of long-term investment (12,000) 1.5
Adjust for changes in noncash working capital accounts
Increase in AR (53,000) 1
Increase in Inventory (32,000) 1
Decrease in accounts payable (18,000) 1
40,000

Alternatively -

Cash flow from operations - direct

Cash collected from customers
900,000 Sales – 53,000 Increase in AR $847,000 3
Cash paid to suppliers
-600,000 COGS – 32,000 Increase in Inv – 18,000 Decrease in AP (650,000) 3
Cash paid for operating expenses (157,000) 1
40,000

b) Cash flow from investing

Proceeds on sale of long-term investments 30,000 2
Proceeds on sale of buildings and equipment
$11,000 NBV – 4,000 Loss on sale 7,000 3
Purchase of buildings and equipment (20,000) 2
17,000

Building and Equipment Accumulated Depreciation

Beg 475,000 32,000 Disp Disp 21,000 101,000 Beg
New 20,000 43,000 Dep

End 463,000 123,000 End