BUSI 1001/1004 – Financial Accounting

Sample Final Examination

Question 1 – Multiple Choice (36 marks) (65 minutes)

Each Question is worth 2 marks

1. Selected June 30, 20x2 balance sheet account balances for Euge Ltd. follow:

Accounts payable $290,000

Accounts receivable 300,000
Cash 30,000
Common Shares 400,000
Equipment 190,000
Inventory 320,000

What is the quick ratio at June 30, 20x2?

a) 0.879
b) 1.138
c) 1.217
d) 2.345

2. Which of the following pairs of adjustments in a bank reconciliation would both

result in adjusting
journal entries?
a) Bank charges, outstanding cheques
b) Outstanding cheques, deposits not yet recorded by the bank
c) Errors made by the bank, collection of a note by the bank on behalf of the
company
d) NSF cheque, errors made by the company
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3. Sabor 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 Sabor shows
a credit balance of $1,420,000 in the unearned subscription fees account. During
the month of January 20x3, $430,000 of additional subscription fees were collected
and credited to the unearned subscription fees account. It was determined that the
correct balance in the unearned subscription fees account at the end of January 203
was $1,630,000. 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 1200,000

4. Selected information for a company for the year 20x6 follows:

Net sales $ 45,000

Cost of goods sold 30,000
Inventory, January 1 9,000
Inventory, December 31 7,800

What was the inventory turnover ratio?

a) 3.57 times
b) 3.67 times
c) 3.85 times
d) 5.36 times
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5. The following information was taken from the inventory records of XYZ Limited:

Dates Inventory Units

Inventory January 1 100 units at $2.00
Purchases: March 15 400 units at $1.95
July 31 500 units at $1.90
Sales: April 11 200 units at $5.00
September 19 400 units at $5.00

What is the cost of goods sold, assuming that the FIFO method is used in a
perpetual inventory system?
a) $1,145
b) $1,150
c) $1,170
d) $1,200

6. The following information pertains to a chequing account of a company at July 31:

Balance per bank statement $40,000

Interest earned for July 100
Outstanding cheques 3,000
Customers' cheques returned for insufficient funds 1,000
Deposit in transit 5,000

At July 31, the company's correct cash balance is

a) $41,100
b) $41,000
c) $42,100
d) $42,000
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7. An analysis of Thrift Corp.'s unadjusted prepaid expense account at December 31,

20x1, revealed the following

• An opening balance of $1,500 for Thrift's comprehensive insurance policy.

Thrift had paid an annual premium of $3,000 on July 1, 20x0

• A $3,200 annual insurance premium payment made July 1, 20x1

• A $2,000 advance rental payment for a warehouse Thrift leased for one year
beginning January 1, 20x2

In its December 31, 20x1 statement of financial position, what amount should
Thrift report as prepaid expenses?
a) $5,200
b) $3,600
c) $2,000
d) $1,600

8. On January 1, 20x6, total assets for Sammy Inc. were $125,000; on December 31,
20x6, total assets were $145,000. On January 1, 20x6, total liabilities were
$110,000; on December 31, 20x6, total liabilities were $115,000. What are the
amount of the change and the direction of the change in Sammy Inc.’s shareholders'
equity for 20x6?
a) increase of $30,000
b) increase of $15,000
c) decrease of $30,000
d) decrease of $15,000

9. The premium on a three-year insurance policy expiring on December 31, 20x11,

was paid in total on January 1, 20x9. The original payment was initially debited to a
prepaid asset account. The appropriate journal entry has been recorded on
December 31, 20x9. The balance in the prepaid asset account on December 31,
20x9 should be
a) Zero
b) The same as it would have been if the original payment had been debited
initially to an expense account
c) The same as the original payment
d) Higher than if the original payment had been debited initially to an expense
account
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10. Bart Company’s accounting records indicated the following information:

Inventory, January 1, 20x9 $500,000

Purchases during 20x9 2,500,000
Sales during 20x9 3,200,000

A physical inventory taken on December 31, 20x9, resulted in an ending inventory

of $425,000. Bart’s gross profit on sales has remained constant at 25% in recent
years. Bart suspects some inventory may have been taken by a new employee. At
December 31, 20x9, what is the estimated cost of the missing inventory?
a) $ 25,000
b) $100,000
c) $175,000
d) $225,000

11. On July 1, 20x11, Nesser Company purchased for $540,000 a warehouse building
and the land on which it is located. The following data were available concerning
the property:

Current Seller’s
Appraised Original
Value Cost
Land $200,000 $140,000
Warehouse building 300,000 420,000
$500,000 $420,000

Nesser should record the land at

a) $140,000
b) $180,000
c) $200,000
d) $216,000

12. On January 1, 20x3, the ledger of Global Corporation correctly showed supplies
inventory of $500. During 20x3, supplies purchases amounted to $700. A count
(inventory) of supplies on hand at December 31, 20x3 showed $400. The 20x3
income statement should report supplies expense amounting to
a) $1,200
b) $1,100
c) $800
d) $700
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13. Failure to make an adjusting entry to recognize service revenue receivable would
cause
a) an overstatement of assets, net income, and shareholders' equity
b) an overstatement of assets and shareholders' equity and an understatement of
net income
c) no effect on assets, liabilities, net income, nor shareholders' equity
d) an understatement of assets, net income, and shareholders' equity

14. For the year 20x4, Tally Corporation reported $50,000 pretax income (average
annual income tax rate of 40%). The after tax income was
a) $30,000
b) $20,000
c) $15,000
d) $10,000

15. 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) $100,000
b) $90,000
c) $80,000
d) $60,000

16. Select the statement which best describes the primary purpose of closing entries
a) To facilitate adjusting entries
b) To reduce the balances of revenue and expense accounts to zero so that they
may be used to accumulate the revenues and expenses of the next period
c) To complete the recording of various transactions which are begun in one
period and concluded in a later period
d) To determine the amount of net income or net loss for the period

17. The owner of Smith’s Jewellery included the cost of her winter vacation to Mexico
as part of travel expenses in the company’s income statement for the year ended
December 31, 2002. This recording of travel costs goes against which of the
following fundamental assumptions of accounting?
a) Going-concern assumption
b) Business entity assumption
c) Matching principle
d) Conservatism principle
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18. 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 average collection period for the year 20x6?

a) 43.4 days
b) 45.6 days
c) 52.1 days
d) 57.0 days
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Question 2 – Short Answer Questions (19 marks) (34 minutes)

a. On December 31, 20x2, prior to making any adjusting entries, Mangione Co. had
the following balances in its general ledger:

Sales revenue (7% were for cash sales) $4,700,000 cr.

Accounts receivable 397,000 dr.
Allowance for doubtful accounts 2,300 dr.

Prepare the adjusting journal entry to record bad debt expense for the year ended
December 31, 20x2 under the following two assumptions:
i. The company estimates bad debts will equal ½ of 1% of credit sales.
ii. The company estimates that bad debts will equal to 4% of accounts
receivable.
(4 marks)

b. At December 31, 20x3 Adair Ltd. had 600,000 shares outstanding that had been
issued for $3.75 per share. In 20x4 the company made the following transactions:
• on May 2, 150,000 shares are issued at $7.20
• on July 16, 80,000 shares are repurchased and cancelled at $3.60
• on November 30, 60,000 shares are repurchased and cancelled at $8.60

Required -
Prepare the journal entries for the 20x4 transactions. (7 marks)

c. Romero Company's net accounts receivable were $500,000 at December 31, 20x8
and $550,000 at December 31, 20x9. Net cash sales for 20x9 were $325,000. The
accounts receivable turnover for 20x9 was 7.0. What were Romero's total net sales
for 20x9? (3 marks)

d. On March 15, 20x4, we purchase 20,000 shares of the Beegie Company for
$180,000 and classify these as FVTOCI. On December 31, 20x4, our fiscal year-
end, the fair value of the shares is $12 per share.

Prepare the journal entries for the above transactions (3 marks)

e. During the current year, you signed a 3 year contract to deliver services for a total
amount of $600,000. At the end of the year, you incurred $120,000 of expenditures
on the contract and estimate you will incur an additional $360,000 to the end of the
contract. How much revenues and profit will you realize on this contract in the
current year? (2 marks)
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Question 3 (6 marks) (11 minutes)

On July 1, 20x2, Letent Ltd. issued 10-year, 6% bonds for total cash proceeds of
$862,357, when the market interest rate was 5%. The bonds pay interest semi-annually
on December 31 and June 30. The face value of the bonds is $800,000.

Required –

a. Prepare the journal entry to record the issuance of the bonds on July 1, 20x2.
b. Prepare the journal entries to record the interest expense on December 31, 20x2
and June 30, 20x3.

Question 4 (12 marks) (22 minutes)

Following is the December 31, 20x0 balance sheet (beginning of the year) and the
statement of cash flows for the year ended December 31, 20x1 for Meadows Ltd.:

Meadows Ltd.
Balance Sheet
as at December 31, 20x0

Assets
Cash $ 4,000
Accounts receivable 75,000
Inventory 82,000
Vehicles and equipment 360,000
Accumulated depreciation — vehicles and equipment (82,000)
$ 439,000

Liabilities and equity

Accounts payable $ 35,000
Interest payable 4,000
Notes payable 174,000
Common shares 30,000
Retained earnings 196,000
$ 439,000
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Meadows Ltd.
Statement of Cash Flows
year ended December 31, 20x1

Cash flows from operating activities

Net income $ 21,000
Adjust for noncash items:
Depreciation expense — vehicles and equipment 28,000
Gain on sale of vehicle (2,000)
Adjust for changes in working capital items
Change in accounts receivable 5,000
Change in accounts payable 5,000
Change in inventory (3,000)
Change in interest payable (2,000)
52,000
Cash flows from investing activities
Proceeds on sale of vehicle 20,000

Cash flows from financing activities

Repayment of note payable (69,000)
Share issue 20,000
Cash dividends paid (20,000)
(69,000)

Net increase in cash 3,000

Cash, January 1, 20x1 4,000
Cash, December 31, 20x1 $ 7,000

Additional information:
1. During the year, the company sold a vehicle with a cost of $30,000 for $20,000
cash.
2. The note payable at December 31, 20x1 is due on December 31, 20x6.

Required

Prepare a properly formatted balance sheet for Meadows Ltd. at December 31, 20x1.
Show your supporting calculations.
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Question 5 (9 marks) (16 minutes)

Gyra Inc. acts as sales representative for a number of small companies. The owner of the
company has decided to change from leased vehicles to company-owned vehicles for its
sales representatives. On December 31, 20x2, the company plans to purchase 5 vehicles
at a cost of $33,600 each. Each vehicle has an estimated residual value of $4,500, a
useful life of 6 years, and will be driven a total of 150,000 kilometres.

Spyro, the owner of the company, has also decided to provide the company’s 5 sales
representatives with new computers. Spyro has found someone willing to buy the 5 old
computers now, for a total of $2,500 cash. The 5 old computers have a total cost of
$25,000 and total accumulated depreciation of $20,000, after recording depreciation
expense up to December 31, 20x2.

Required –

a. Calculate the first year’s total depreciation expense on the new vehicles,
assuming the company chooses to use the straight-line method of depreciation.
b. (1) Calculate the depreciation expense on the new vehicles, for the years 20x3,
20x4 and 20x5 assuming the company chooses to use the diminishing balance
method of depreciation at a rate of 33 1/3%. (2) Assume that one of the vehicles
is sold on December 31, 20x7 for $3,000. What is the gain or loss on the sale fo
the vehicle?
c. Calculate the first year’s total depreciation expense on the new vehicles,
assuming the company chooses to use the units-of-production method of
depreciation and the 5 new vehicles are expected to be driven a total of 100,000
kilometres in the year ended December 31, 20x3.
d. Prepare the journal entry that would be made to record the sale of the old
computers.
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Question 6 (18 marks) (32 minutes)

The following financial statements and information relate to White Inc.

WHITE INC.
Balance Sheet
December 31

20x2 20x1
Assets
Cash $ 9,000 $ 11,000
Accounts receivable 50,000 42,700
Inventory 15,000 21,000
Prepaid rent 2,500 2,300
Property, plant and equipment 950,000 920,000
Accumulated depreciation (270,000) (225,000)
$ 756,500 $ 772,000
Liabilities and equity
Accounts payable $ 22,900 $ 25,100
Salaries payable 1,600 1,180
Bank loan payable 66,000 146,000
Common stock 130,000 80,000
Retained earnings 536,000 519,720
$ 756,500 $ 772,000

WHITE INC.
Income Statement
year ended December 31, 20x2

Sales $ 600,000
Cost of goods sold (195,000)
Other expenses (182,370)
Salary expense (90,000)
Depreciation expense (60,000)
Interest expense (3,350)
Loss on sale of equipment 3,000
Net income $ 66,280

Additional information
The company sold equipment with an original cost of $20,000.
The bank loan payable balance at Dec 31, 20x1 is due on Dec 31, 20x7.

Required
Prepare a statement of cash flow for the year ended December 31, 20x2. The cash flow
from operating activities section of the cash flow statement should be prepared using the
direct method. Show your supporting calculations.
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SOLUTION

Question 1

1. b ($300,000 + 30,000) / 290,000

2. d

3. a

4. a $30,000 ÷ [(9,000 + 7,800) ÷ 2] = 3.57

5. c Ending inventory = 100 + 400 + 500 - 200 - 400 = 400 units

400 units x $1.90 = $760
COGS = $1,930 Goods Available for Sale - 760 = $1,170

6. d Balance per bank statement $40,000

Add deposit in transit 5,000
Less outstanding cheques (3,000)
Balance per books $42,000

7. b ($3,200 x ½) + 2,000 = $3,600

8. b

9. b

10. c COGS = $3,200,000 x 75% = $2,400,000

Ending inventory should be: $500,000 + 2,500,000 – 2,400,000 = $600,000
Missing inventory = $600,000 – 425,000 = $175,000

11. d $540,000 x $200,000 / 500,000

12. c $500 + 700 – 400 = $800

13. d

14. a $50,000 x 0.6 = $30,000

15. d $50,000 + 40,000 – 30,000 = $60,000

16. b

17. b

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

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Question 2

a. i. Bad debt expense ($4,700,000 x .93 x .5%) $21,855

Allowance for doubtful accounts $21,855
2 marks

ii. Bad Debt expense

Allowance for doubtful accounts 18,180
$397,000 x 4% = 15,880 18,180
Adjustment required = $15,880 + 2,300
2 marks

b. May 2 Cash (150,000 x 7.20) 1,080,000

Common Shares 1,080,000
1 mark

Jul 16 Common Shares (80,000 x 4.44) 355,200

Contributed Surplus 67,200
Cash (80,000 x 3.60) 288,000
2 marks
Book value per share =
($2,250,000 + 1,080,000) / (600,000 + 150,000)
= 3,280,000 / 750,000
= 4.44 2 marks

Nov 30 Common Shares (60,000 x 4.44) 266,400

Contributed Surplus 67,200
Retained Earnings 182,400
Cash (60,000 x 8.60) 516,000
2 marks

c. Average accounts receivable = $525,000 1 mark

Total credit sales = $525,000 x 7 = $3,675,000 1 mark
Total sales = $3,675,000 + 325,000 = $4,000,000 1 mark

d. Mar 15 FVTOCI Investments $180,000

1 mark Cash $180,000

Dec 31 FVTOCI Investments 60,000

2 marks OCI – Gain on FVTOCI Investments 60,000
(20,000 x 12) – 180,000

e) % of completion = 120 / 480 = 25% 1 mark

Revenues realized = $600,000 x 25% = $150,000 0.5 marks
Profits realized = $150,000 – 120,000 = $30,000 0.5 marks
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Question 3

a. July 1, Cash $862,357

20x2 Bonds payable $862357
1 mark

b. Dec 31, Interest expense ($862,357 x 2.5%) $21,559

20x2 Bonds payable 2,441
Cash 24,000
2 marks

Jun 30, Interest expense* 21,498

20x3 Bonds payable 2,502
Cash 24,000
* ($862,357 – 2,441) x 2.5%
3 marks
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Question 4

Meadows Ltd.
Balance Sheet
as at December 31, 20x1 1 mark for proper titling

ASSETS
Current assets
Cash $ 7,000
Accounts receivable (75,000 – 5,000) 1 70,000
Inventory (82,000 + 3,000) 1 85,000
162,000

Vehicles and equipment (360,000 – 30,000) 1 330,000

Accumulated depreciation (82,000 + 28,000 – 12,000*) 2 (98,000)
232,000

$394,000

LIABILITIES & SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable (35,000 + 5,000) 1 $40,000
Interest payable (4,000 – 2,000) 1 2,000
42,000
Long-term liabilities
Note payable (174,000 – 69,000) 1 105,000

Shareholders’ equity
Common shares (30,000 + 20,000) 1 50,000
Retained earnings (196,000 + 21,000 – 20,000) 2 197,000
247,000

1 mark for proper formatting $394,000

* NBV of vehicle sold = $20,000 Proceeds – 2,000 Gain = $18,000

Accumulated depreciation = $30,000 Cost – 18,000 Acc. Depreciation= $12,000
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Question 5

a. ($168,000 – 22,500) / 6 years = $24,250 1 mark

b. (1) 20x3 $168,000 x 1/3 = $56,000 1 mark

20x4 ($168,000 – 56,000) = 112,000 x 1/3 = 37,333 1 mark

(2) Net book value at Dec 31, 20x7 = $22,500 (residual value) / 5 = 4,500
2 marks
Loss on sale = $4,500 – 3,000 = $1,500 1 mark

c. ($168,000 – 22,500) / 750,000 x 100,000 = $19,400 1 mark

d. Cash 2,500
Accumulated depreciation 20,000
Loss on disposal of computers 2,500
Computers 25,000
2 marks
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Question 6

White Inc.
Statement of Cash Flow
for the year ended December 31, 20x2 1 mark for titling

Cash flow from operations

Cash collected from customers
$600,000 Sales – 7,300 Increase in AR 1 $592,700
Cash paid to suppliers
$195,000 COGS – 6,000 Decrease in Inv + 2,200 Increase in AP 3 (191,200)
Cash paid for other expenses
$182,370 Other Expenses + 200 Increase in Prepaid rent 2 (182,570)
Cash paid to employees
$90,000 – 420 Increase in Salaries Payable 1 (89,580)
Cash paid for interest 1 (3,350)
126,000

Cash flow from investing

Purchases of PPE (see T-Accounts below) 2 (50,000)
Proceeds on sale of PPE: 5,000 NBV of Asset Sold - 3,000 Loss 2 2,000
(48,000)

Cash flow from financing

Repayment of bank loan 1 (80,000)
Issue of common stock 1 50,000
Dividends paid 2 (50,000)
(80,000)

Decrease in cash (2,000)

Cash – beginning 11,000
Cash – end $9,000
1 mark for reconciliation

PPE Accumulated Depreciation

Beg 920,000 20,000 Disposal 15,000 225,000 Beg
New 50,000 60,000 Dep
Exp
End 950,000 270,000 End