FINANCIAL ACCOUNTING FINAL EXAMINATION

Sample Exam for Practice Only

Time: 3 hours
Question 1

(40 marks)

(72 minutes)

Each question is worth 2 marks.

1. The journal entry to record a return of merchandise purchased on account under a periodic
inventory system would credit
a. Accounts payable
b. Purchase returns and allowances
c. Sales
d. Merchandise inventory
2. Under the accrual basis of accounting
a. Cash must be received before revenue is recognized.
b. Net earnings are calculated by matching cash outflows against cash inflows.
c. Events that change a company's financial statements are recognized in the period they
occur rather than in the period in which cash is paid or received.
d. The ledger accounts must be adjusted to reflect a cash basis of accounting before
financial statements are prepared under generally accepted accounting principles.
3. If a company fails to record estimated bad debts expense
a. Net realizable value is understated
b. Expenses are understated
c. Revenues are understated
d. Receivables are understated
4.

5.

If the amount of bad debts expense is understated at year end,

a. Earnings will be understated.
b. Shareholders Equity will be understated.
c. Allowance for Doubtful Accounts will be overstated.
d. Net Accounts Receivable will be overstated.
Equipment was purchased on January 1 for $30,000 with an estimated salvage value of $6,000
at the end of its useful life. The current year's Amortization Expense is $3,000 calculated on the
straight-line basis and the balance of the Accumulated Amortization account at the end of the
year is $15,000. The remaining useful life of the equipment is
a. 10 years.
b. 8 years.
c. 5 years.
d. 3 years.

6.

A company purchased equipment for $100,000. The equipment has an estimated $10,000 salvage
value at the end of its estimated 5-yr useful life. If the company uses the diminishing / declining
balance method of depreciation (rate = 40%), the amount of annual depreciation recorded for
the second year after purchase would be
a. $40,000.
b. $24,000.
c. $36,000.
d. $21,600.

7. One thousand bonds with a face value of $1,000 each, are sold at 103. The entry to record the issue:
a. Cash
1,030,000
Bonds Payable..............................................................
1,030,000
b. Cash ...................................................................................... 1,000,000
Premium on Bonds Payable ..................................................
30,000
Bonds Payable..............................................................
1,030,000
c. Cash ...................................................................................... 1,030,000
Premium on Bonds Payable .........................................
30,000
Bonds Payable..............................................................
1,000,000
d. Cash ...................................................................................... 1,030,000
Discount on Bonds Payable .........................................
30,000
Bonds Payable..............................................................
1,000,000
8.

Following is the shareholders equity section of the balance sheet of Brownlow Corporation:
Share capital:
Common shares, 10,000 authorized, 7,000 shares issued
$ 70,000
Retained earnings
120,000
Total shareholders equity
$190,000
Entry to record Brownlows repurchase of 1,000 of its common shares at $11/share includes:
a. a debit to Retained Earnings for $10,000
b. a debit to Common Shares for $10,000
c. a debit to Contributed CapitalReacquisition of Shares for $11,000
d. a credit to Common Shares for $11,000

9.

The Bryan Company purchased inventory on account for $350. This transaction was properly
recorded. A week later, the Bryan Company discovered a defect in the inventory and returned the
inventory to the supplier for credit. 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
e) Debiting cash and crediting accounts payable for $350

10.

The Troy Company acts as a landlord, renting office space to companies. On October 1, it rented
office space and received three months' rent in advance totaling $4,500. The entire amount was
used to increase rent revenue. What adjusting entry is necessary on October 31?
a) Rent revenue
$1,500
Unearned rent
$1,500
b) Unearned rent
$1,500
Rent revenue
$1,500
c) Rent revenue
$3,000
Unearned rent
$3,000
d) Unearned rent
$3,000
Rent revenue
$3,000
e) No adjusting entry is necessary

11.

The Brunswick Company obtained a $20,000 note payable on October 1, 20x7, which is due in 5
years. Interest, at an annual rate of 12%, will be paid once a year on September 30th. Brunswick
made the appropriate journal entry on October 1, 20x7. No other journal entry has been made.
What journal entry is necessary as of December 31, 20x7?
a) Debit interest expense and credit note payable for $600
b) Debit interest expense and credit note payable for $2,400
c) Debit interest expense and credit interest payable for $600
d) Debit interest expense and credit interest payable for $2,400
e) Debit interest expense and credit interest receivable for $2,400

12.

The Jerome Company's records were partially destroyed in a flood. The company does not know
what sales have been for the year, but it does know that 60% of its sales have been on account.
Furthermore, the company knows that its beginning accounts receivable balance was $45,000 and
its ending accounts receivable balance at the time of the flood was $60,000. From the beginning
of the year until the flood occurred, cash collections on credit sales were $255,000. What were the
total sales for the year until the time of the flood?
a) $270,000
b) $400,000
c) $425,000
d) $450,000

13.

A buyer borrows money at 12% interest to pay an $8,000 invoice with terms 1/10, n/30 within
the discount period. What is the buyers net savings of borrowing the money to pay the invoice
within the discount period?
a. $0
b. $26.67
c. $27.92
d. $53.33

14.

Shannon Company acquires land for $56,000 cash. Additional costs are as follows:
Removal of shed
$ 300
Filling and grading
1,500
Salvage value of lumber from shed
120
Broker commission
1,130
Paving of parking lot
10,000
Closing costs
560
Shannon will record the acquisition cost of the land as
a. $56,000.
b. $57,690.
c. $59,610.
d. $59,370.

15.

The following totals for the month of April were taken form the payroll register of Main Co.
Salaries
CPP withheld
Income taxes withheld
Medical insurance deductions
EI withheld
Union dues withheld

$12,000
550
2,500
450
32
216

The journal entry to record the monthly payroll on April 30 would include a
a. debit to Salaries Expense for $12,000.
b. credit to Salaries Payable for $12,000.
c. debit to Salaries Payable for $12,000.
d. debit to Salaries Expense for $8,500.
16.

On April 1, 20x6, a company issued 5-year, 9% bonds totaling $7,000,000 when the market
interest rate was 8%. Interest is paid semi-annually on June 30 and December 31. Which of the
following represents the amount of cash the company will receive on April 1, 20x6, when the
bonds are issued? Select the answer to the nearest thousand.
a) $7,000,000
b) $7,157,500
c) $7,284,000
d) $7,630,000

17.

On January 1, 20x3, Ross Ltd. issued $1,000,000 of 9% 10-year bonds when the market interest
rate was 10%. Ross received $937,878 cash. The bonds pay interest semiannually. On
December 31, 20x3, the market interest rate changed to 10.5%. Which of the following
statements is true?
a)
The discount on the bonds will be increased on December 31, 20x3 to reflect change in
the market rate.
b)
Bonds payable will be reduced on December 31, 20x3 to reflect the drop in the market
value of the bonds.
c)
The bonds payable amount will not change on December 31, 20x3
d)
The amount of discount on the bonds will remain at $62,122 on December 31, 20x3

18.

Allstate Inc., has 10,000 shares of $8, no par value, cumulative preferred shares and 100,000
shares of no par value common shares outstanding at December 31, 20x1. If the board of
directors declares a $60,000 dividend, the
a. preferred shareholders will receive 1/10th of what the common shareholders will receive.
b. preferred shareholders will receive the entire $60,000.
c. $60,000 will be held as restricted retained earnings and paid out at some future date.
d. preferred shareholders will receive $30,000 and the common shareholders will receive
$30,000

19.

Which of the following items would not be considered a capital asset?

1.
A 747 owned by Air Canada.
2.
A new car in the lot of a Ford dealership.
3.
The patent on the "11 secret herbs and spices" owned by Kentucky Fried Chicken.
4.
The land on which the John Deere manufacturing plant is located.
5.
A coal mine owned by a mining company.
a) 2
b) 1 and 4
c) 2 and 3
d) 4 and 5
e) 1, 3 and 5

20.

The Laughton Company acquired land to be used for the construction of a new office building.
The following items were associated with the acquisition of the land:
Land Survey
Legal Fees
Title Search
Realtor Commissions
Amount paid to the former owner of the land
Demolition of the existing building on the land

$ 2,000
10,000
5,000
35,000
350,000
50,000

For what dollar amount will The Laughton Company debit the land account and debit various
expense accounts, respectively?
Various
Land
Expenses
a)
$350,000
$102,000
b)
385,000
67,000
c)
402,000
50,000
d)
437,000
15,000
e)
452,000
0

Question 2

(17 marks)

(31 minutes)

The following are the Balance Sheet and Income Statement for Fuzzy Wines Ltd. for 20x5:
Fuzzy Wines Ltd.
Balance Sheet
as at August 31, 20x5
20x5
Current Assets:
Cash
$ 80
Term deposits
0
Accounts receivable 520
Inventories
340
940
Noncurrent assets
Plant and equip.
1,450
Accumulated Dep. (475)
975
$1,915

20x5
Current Liabilities:
$ 175
Demand loan
$ 140
150
Accounts payable
425
350
565
250
Noncurrent liabilities
925
Long-term notes
225
790
925
Shareholders' equity
(350)
Paid-in capital
700
575
Retained earnings
425
1,125
$1,500
$1,915
Fuzzy Wines Ltd.
Income Statement
for the year ended August 31, 20x5

Revenue
Cost of goods sold
Interest expense
Other expenses
Income before income taxes
Income tax expense
Net income

20x4

20x4
$ 100
200
300
400
700
500
300
800
$1,500

$3,000
1,200
25
1,350
425
190
$ 235

Additional information 1. The term deposits and demand loan are considered to be cash and cash equivalents.
2. One noncurrent asset was sold for $15 during the year. The cost of the asset was $100, the
accumulated depreciation on the asset was $75. The gain or loss on the asset sold is included in
Other expenses on the statement of income.
Required (a) Prepare a statement of cash flow for the year ended August 31, 20x5 using the indirect method.
(b) Prepare the Cash Flow from Operations section using the direct method.

Question 3

(7 marks)

(13 minutes)

The Kara Corporation issued, $5,000,000 of 15 year bonds on December 31, 20x5. Coupon payment
dates are on June 30 and December 31. The bonds pay a coupon of 6.2% and were issued to yield
5.8%.
Required (a)
(b)

Write the journal entry to record the issue of the bonds on December 31, 20x5.
Write the journal entry to record the June 30 and December 31 coupon payments in 20x6.

Question 4

(8 marks)

(14 minutes)

A friend of yours is just starting a yard grooming service and has purchased a group of lawnmowers for
$20,000. The friend expects the mowers to last 5 yrs and to have negligible resale value at that point.
The friend's business plan projects cutting 5,000 lawns over the five years, with per year projections of
500, 1,000, 1,200, 1,800 and 500 lawns over the five years.
Required (a)

(b)
(c)
(d)

Calculate the accumulated depreciation balance at the end of the 2nd yr with the following:
1. Straight-line
2. Diminishing balance / declining balance (25% rate)
3. Units-of-production
Based on your calculations, which depreciation basis would produce the highest retained
earnings at the end of the second year?
Your friend has never heard of the units-of-production basis. Explain why companies use it and
comment on whether it would make sense for your friend's business.
If the 25% diminishing / declining balance method is used, accumulated depreciation will be
$15,254 at the end of the fifth year. Suppose that on the first day of the sixth year, all the
lawnmowers are sold as junk for $1,000 cash in total. Calculate the gain/loss on sale that would
be recorded that day.

Question 5

(10 marks)

(18 minutes)

On January 1, 20x0, Calvin Corporation had 60,000 shares of no par value 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.
Mar 20 Repurchased and cancelled 5,000 shares at $12.50 each.
June 1 Declared a cash dividend of $2.00 per share to shareholders of record on June 15.
June 30 Paid the $2.00 cash dividend.
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.

Question 6

(18 marks)

(32 minutes)

The following are the income statements and balance sheets for The Chappaqua Company at and for
the years ended December 31,20x3, 20x2, and 20x1:

Sales (all credit sales)

Cost of Goods Sold
Gross Profit
Operating Expenses
Operating Income
Interest expense
Income before Income Taxes
Income Tax Expense
Net Income
Current Assets
Cash
Accounts receivable
Inventory
Prepaid rent
Long-term assets
Capital assets
Accumulated depreciation

Current liabilities
Long-term liabilities
Shareholders equity
Common stock
Retained earnings

20x3
$803.0
531.0
272.0
161.0
111.0
4.8
106.2
42.5
$ 63.7

20x2
$711.0
476.0
235.0
136.0
99.0
5.2
93.8
38.0
$ 55.8

$ 18
90
60
10
178

$ 19
72
50
12
153

160
(103)
57

158
(90)
68

20x1
$670.0
448.0
222.0
132.0
90.0
5.0
85.0
31.0
$ 54.0

$14
61
40
7
122
140
(75)
65

$235

$221

$187

$ 87
33
120

$ 45
46
91

$ 46
45
91

40
75
115
$235

40
90
130
$221

40
61
101
$187

Required For the years 20x3 and 20x2, calculate the following ratios:
(a) Return on Equity
(b)
Return on Assets
(c) Profit Margin
(d)
Current Ratio
(e) Quick Ratio
(f)
Average collection period
(g) Inventory turnover
(h)
Times interest earned
(i) Debt-to-Equity
(j)
Asset Turover

SOLUTION

Question 1
1.

2.

3.

4.

5.

Depreciable base = 30,000 - 6,000 = 24,000

Total useful life = 24,000 / 3 = 8 years
Years to date - 15,000 / 3 = 5
Years remaining = 8 - 5 = 3

6.

$100,000 x 0.6 x 0.4 = $24,000

7.

8.

The journal entry to record the repurchase would be as follows:

Dr. Common shares
Dr. Retained earnings
Cr. Cash

10,000
1,000

9.

10.

11.

12.

Cash collections of $255,000 + 15,000 increase in AR = $270,000 credit sales

Total sales = $270,000 / 0.60 = $450,000

13.

Savings = $8,000 x 1%
Interest: 7,920* x 12% x 20/365

Amount 'borrowed' of $8,000 x 0.99 (on day 10, we effectively 'borrow'

$7,920 to pay invoice and save $80. We calculate interest for 20 days only
since the full $8,000 would be payable on the 30th day anyways.)
14.

$56,000 + 300 + 1,500 - 120 + 1,130 + 560 = $59,370

11,000

$80.00
52.07
$27,92

15.

The journal entry would be as follows:

Dr. Salaries expense
Cr. CPP Payable
Cr. Income taxes payable
Cr. Medical insurance payable
Cr. EI payable
Cr. Union dues payable
Cr. Cash

16.

17.

18.

19.

20.

N = 10, I = 4, PMT = 315,000, FV = 7,000,000

CPT PV = 7,283,881

All are charged to land.

12,000
550
2,500
450
32
216
8,252

Question 2
(a)

Fuzzy Wines Ltd.

Statement of Cash Flow
For the year ended August 31, 20x5
Cash flow from operations
Net income
Adjust for noncash items
Depreciation ($125 Increase in Acc Dep + 75 Acc Dep on Asset Sold)
Loss on sale of plant and equipment ($25 Net Book Value - 15 Proceeds)
Adjust for changes in non-cash working capital items
Increase in accounts receivable
Increase in inventory
Increase in accounts payable

Cash flow from investing

Purchases of plant and equipment ($525 Increase in Plant & Equip
+ 100 Cost of Plant & Equip Sold)
Proceeds on sale of plant and equipment sold

Cash flow from financing

Repayment of long-term notes
Issue of common stock
Payment of dividends ($235 Net Income - $125 Increase in Retained Earnings)

(b)

$235
200
10
(170)
(90)
225
410

(625)
15
(610)

(175)
200
(110)
(85)

Decrease in cash
Cash and cash equivalents, beginning of year ($175 + 150 - 100)

(285)
225

Cash and cash equivalents, end of year ($80 - 140)

($60)

Cash flow from operations (direct)

Cash collected from customers ($3,000 Sales - 170 Increase in A/R)
Cash paid to suppliers ($1,200 COGS + 90 Increase in Inventories - 225 Increase in AP)
Cash paid for interest
Cash paid for other expenses ($1,350 - 200 Depreciation expense - 10 Loss on Sale of P&E)
Cash paid for income taxes

2,830
(1,065)
(25)
(1,140)
(190)
$410

Question 3
(a)

Proceeds received on bond issue:

N = 30 I = 5.8 / 2 = 2.9
PMT = $5,000,000 x 6.2% / 2 = $155,000
FV = $5,000,000
CPT PV = $5,198,562
Dec 31, 20x5

(b)

Jun 30, 20x6

Dec 31, 20x6

Cash
Bonds Payable
Premium on Bonds Payable
Interest expense ($5,198,562 x 2.9%)
Premium on Bonds payable
Cash
Interest expense ($5,198,562 - 4,242)
$5,194,320 x 2.9%
Premium on Bonds payable
Cash

$5,198,562
$5,000,000
198,562
150,758
4,242
155,000

150,635
4,365
155,000

Question 4
(a)

1.

Depreciation expense per year = $20,000 / 5 = $4,000

Accumulated depreciation at end of 2nd year = (4,000 x 2) = $8,000

2.

Depreciation expense in year 1 = $20,000 x 25% = $5,000

Depreciation expense in year 2 = $20,000 - 5,000 = 15,000 x 25% = $3,750
Accumulated depreciation at end of 2nd year = $5,000 + 3,750 = $8,750

3.

Depreciation expense in year 1 = $20,000 / 5,000 x 500 = $2,000

Depreciation expense in year 2 = $20,000 / 5,000 x 1,000 = $4,000
Accumulated depreciation at end of 2nd year = $2,000 + 4,000 = $6,000

(b)

Units of production has the lowest accumulated depreciation and will cause retained earnings to
be the highest.

(c)

Units of production should be used when the revenue generated by the asset is based on units of
production. If your friend charges his customers a fee everytime their lawn is cut, then the unit
of production method will provide the best matching of depreciation expense to revenues.

(d)

Net book value: $20,00 - 15,224

Less proceeds
Loss on disposal

$4,746
1,000
$3,746

Question 5
Mar 1

Mar 20

Cash
Common Stock
Common Stock (5,000 x $13.20*)
Contributed Surplus
Cash (5,000 x $12.50)

$600,000
$600,000
66,000
3,500
62,500

* ($720,000 + 600,000) / (60,000 + 40,000)

= $1,320,000 / 100,000
= $13.20
Jun 1

Jun 30

Jul 2

Retained Earnings
Dividends Payable
100,000 - 5,000 = 95,000 shares x $2.00

190,000

Dividends payable
Cash

190,000

Cash
Common Stock

360,000

Aug 1

No entry - common shares outstanding becomes:

60,000 + 40,000 - 5,000 + 20,000
= 115,000 x 2 = 230,000

Sep 15

Common Stock (2,000 x $7.0174*)

Contributed Surplus
Retained Earnings
Cash (2,000 x $11)

190,000

190,000

360,000

14,035
3,500
4,465
22,000

* ($1,320,000 - 66,000 + 360,000) / 230,000

= $1,614,000 / 230,000
= $7.0174
Dec 15

Retained Earnings
Dividends Payable
230,000 - 2,000 = 228,000 shares x 1.10

250,800
280,800

Question 6
(a)

Return on equity = Net

Income / Average S/E

20x3
$63.7 / [(115 + 130) / 2)
= 63.7 / 122.5
= 52%

20x2
$55.8 / [(130 + 101) / 2)
= 55.8 / 115.5
= 48%

(b)

Return on Assets = Net

Income before taxes /
Average Assets

$106.2 / [(235 + 221) / 2)

= 106.2 / 228
= 47%

$93.8 / [(221 + 187) / 2]

= 93.8 / 204
= 46%

(c)

Profit margin = Net Income /

Sales

$63.7 / 803
= 7.9%

$55.8 / 711
= 7.9%

(d)

Current ratio = CA / CL

$178 / 120
= 1.5

$153 / 91
= 1.7

(e)

Quick ratio = Quick Assets /

CL

$108 / 87
= 1.24

$91 / 91
= 1.0

(f)

Average collection period =

Average AR / Average Daily
Credit Sale

[(90 + 72) / 2] / (803 / 365)

= 81 / 2.2
= 37 days

[(72 + 61) / 2] / (711 / 365)

= 66.5 / 1.9479
=34 days

(g)

Inventory turnover = COGS /

Average Inventory

$531 / [(60+ 50) / 2]

= 531 / 55
= 9.65 times

$476 / [(50 + 40) / 2]

= 476 / 45
= 10.6 times

(h)

Times interest earned =

Operating Income / Interest
Expense

$111 / 4.8
= 23 times

$99 / 5.2
= 19 times

(i)

Debt-to-equity = Debt /
Equity

$120 / 115
= 1.04

$91 / 130
= 0.70

(j)

Asset Turnover = Sales /

Average Total Assets

$803 / [(235 + 221) / 2]

= 803 / 228
= 3.5

$711 / [(221 + 187) / 2]

= 711 / 204
= 3.5