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Warning: TT: undefined function: 32 ACCT 351v Intermediate Financial Accounting I Practice Final Examination (with Solutions)Instructions to the Student: This practice exam is intended to provide a sample of various learning concepts covered after the midterm exam. The practice examination questions...

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ACCT 351v13 Intermediate Financial Accounting I Practice Final Examination (with Solutions) Instructions to the Student: 1. This practice exam is intended to provide a sample of various learning concepts covered after the midterm exam. The practice examination questions may not be the same as the actual examination questions. The actual exam is based on any of the learning objectives from the textbook that are identified in the ACCT 351 course lessons. 2. This practice exam should be written as a closed-book examination without the use of books, tapes, or notes, in order to provide the best feedback on areas that require additional study. 3. This is a comprehensive exam so it will take longer to complete than the actual final examination. You can allow yourself unlimited time to complete this practice examination. 4. This examination contributes 0% to your grade in this course. It is designed with a comprehensive format for study purposes only. 5. The breakdown for this examination is as follows: Part 1 2 3 4 5 6 7

Description Written Response/Theory Short Calculations Accounts Receivable Inventory Investments Assets Intangibles

Note: For all journal entries, explanations are not required. Show calculations wherever possible. If you need a calculator to determine an amount, then that calculation should be shown.

ACCT 351v13 Practice FINAL Solutions

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ACCT 351v13 Intermediate Financial Accounting I Practice Final Examination Part 1: Written Response/Theory Note: The questions in Part 1 are examples only. Any of the learning objectives in the course that deal with accounting theory may be examined in the actual examination, so it is important to review and understand all the objectives. The Summary of Learning Objectives in the e-textbook are a good place to start this type of review. When you are answering written response questions worth several marks, think about what, why, when, and how to answer the question fully. Complete each unrelated question. 1. When an asset is held for sale, what basis is used to determine the amount to report on the Balance Sheet, and how is it presented on the Balance Sheet? Solution: The asset is remeasured to the lower of its carrying value and fair value less cost to sell (etextbook, pp. 19-20 Depreciation). 2. Differentiate between a periodic and perpetual inventory system. Solution: A perpetual system records purchases to Inventory, while periodic records purchases to Purchases. For perpetual, freight-in, purchase returns/allowances/discounts are recorded to Inventory while periodic records these to separate accounts. For perpetual, the Cost of Goods Sold is recognized and recorded at the time of each sale by debiting COGS and crediting Inventory. For periodic no such entry is done and COGS is a residual amount that depends on separately calculating the cost of ending inventory at the end of each period, usually by costing the physical count. Under a perpetual inventory system, the balance of the Inventory account should always represent the ending inventory amount. For periodic, the inventory balance is adjusted to equal the costed physical count. Even under the perpetual system, an annual count is needed to test the accuracy of the records.

ACCT 351v13 Practice FINAL Solutions

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3. Explain the concepts of other comprehensive income, comprehensive income, and accumulated other comprehensive income. Solution: Other comprehensive income is made up of revenues, gains, expenses, and losses that accounting standards say are included in comprehensive income, but excluded from net income. Comprehensive income is the total of net income and other comprehensive income and represents the change in equity (or the net assets) of any entity during a period from non-owner source transactions and events. Accumulated other comprehensive income is the balance of all past charges and credits to other comprehensive income to the balance sheet date. It is included in the shareholder’s equity section of the balance sheet 4. When a note is received for property and the market rate is unknown, how is the transaction’s fair value determined? How is fair value determined when neither the market rate nor the property’s fair value is known? Solution: The fair value of the property that is given up can be used as an estimate of the fair value of the note received. If neither fair value is known, then a market rate must be imputed and then used to determine the note’s present value. The objective of calculating the appropriate interest rate is to approximate the rate that would have been agreed on if an independent borrower and lender had negotiated a similar transaction. The choice of a rate is affected by the prevailing rates for similar instruments by issuers with similar credit ratings. It is also affected by factors such as restrictive covenants, collateral, the payment schedule, and the existing prime interest rate.

ACCT 351v13 Practice FINAL Solutions

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Part 2: Short Calculations Complete each unrelated question. 1. Jackson Inc. purchased factory equipment that was installed and put into service January 2, 2018, at a total cost of $90,000. Residual value was estimated at $6,000. The equipment is being depreciated over 4 years using the double declining balance method. For the year 2019, what should Jackson record for depreciation expense on this equipment? Solution: Rate = 4 years = ¼ = 25% X 2 = 50% 2018: 90,000 X 50% = 45,000 2019: 45,000 X 50% = 22,500 2. Morpurgo Enterprises purchased a new machine for $60,000 on April 1, 2013. At that time, the company expected to use the machine for 9 years and then sell it for $6,000. The company has a calendar year accounting period. The machine was sold for $33,000 on Sept 30, 2018. Assuming straight-line depreciation, no depreciation in the year of acquisition, and a full year of depreciation in the year of retirement, what would be the gain to be recognized at the time of sale? Solution: $3,000 [(60,000 - 6,000) /9] X 5 = 30,000 accumulated depreciation 60,000 cost – 30,000 accum. Depr. = 30,000 carrying value 33,000 proceeds – 30,000 carrying value = 3,000 gain 3. Makeshift Co. purchased land as a factory site for $500,000. Makeshift paid $20,000 to tear down two buildings on the land. Salvage was sold for $2,700. Legal fees of $1,740 were paid for title investigation and making the purchase. Architect’s fees were $20,600. Title insurance cost $1,200 and liability insurance during construction cost $1,300. Excavation cost $5,220. The contractor was paid $1,200,000. An assessment made by the city for pavement was $3,200. Interest costs during construction were $85,000. Training costs for employees in charge of building maintenance for the new air quality systems were $10,000. a. What is the cost of the land that should be recorded? Solution: $523,440 (500,000 + 20,000 – 2,700 + 1,740 + 1,200 + 3,200) b. What is the cost of the building that should be recorded? Solution: $1,312,120 (20,600 + 1,300 + 5,220 + 1,200,000 + 85,000) Note: ASPE allows choice to capitalize interest or not. IFRS requires the capitalization of avoidable interest (e-textbook, pp. 8–9).

ACCT 351v13 Practice FINAL Solutions

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4. Exquisite Pens Corporation has two products in its ending inventory, each accounted for at the lower of cost and market. A profit margin of 30% on selling price is considered normal for each product. Specific data with respect to each product follows: Fancy AD-15 Fantastic AD-wow Historical cost Estimated cost to dispose Estimated selling price

$30.00 10.00 70.00

$95.00 26.00 120.00

In pricing its ending inventory using the lower of cost and market, what unit values should Exquisite Pens use for Fancy AD-15 and Fantastic AD-wow, respectively? Solution:

$30.00 and $94.00 (120 – 26)

5. On April 15th of the current year, a fire destroyed the entire uninsured inventory of Marco retail store. The following data are available: Sales, January 1 through April 15 Inventory, January 1 Purchases, January 1 through April 15 Markup on cost

$450,000 75,000 375,000 25%

What is the estimated amount of the inventory loss?

Solution: $90,000 [(75,000 + 375,000) - (450,000/1.25)]

ACCT 351v13 Practice FINAL Solutions

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Part 3: Accounts Receivable Part 3 – Question 1 (Allowance for doubtful accounts) The Acme Company’s January 1, 2018 balances are: Accounts Receivable $400,000 Dr Allowance for doubtful accounts 20,000 Cr During 2018, $45,000 of accounts receivable are judged to be uncollectible and no more effort to collect these accounts will be made. Total sales for 2018 are $1,200,000, of which $200,000 are cash sales. The customers paid $900,000 on account during 2018. Required: a. Assuming that Acme uses 4% of credit sales as its estimate of bad debts, provide the journal entries to record write-offs and bad debt for 2018. What is the December 31, 2018 balance for net accounts receivable? Solution: Allowance for doubtful accounts Accounts receivable Bad debt expense Allowance for doubtful accounts

45,000 45,000 40,000 40,000

Net accounts receivable balance December 31, 2018 Accounts receivable 455,000) (400,000 + 1,000,000 - 900,000 - 45,000) Allowance for doubtful accounts (15,000) (20,000 - 45,000 + 40,000) Net accounts receivable 440,000)

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b. Assuming instead that Acme uses 9% of accounts receivable as its estimate of uncollectible accounts, provide the journal entries to record write-offs and bad debt for 2018. What is the December 31, 2018 balance for net accounts receivable? Solution: Allowance for doubtful accounts Accounts receivable Bad debt expense Allowance for doubtful accounts

45,000 45,000 65,950 65,950

Breakdown: Estimate (400,000 + 1,000,000 – 900,000 – 45,000) X 9% = 40,950 cr AFDA balance before adjustment 20,000 – 45,000 = 25,000 dr Amount of journal entry required 65,950 cr Net accounts receivable balance December 31, 2018 Accounts receivable 455,000) Allowance for doubtful accounts (40,950) Net accounts receivable 414,050)

ACCT 351v13 Practice FINAL Solutions

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Part 3 – Question 2 (Notes Receivable) On January 1, 2018, Solomon Company sold merchandise and received a $12,000 threeyear, 6% note. The market rate at that time was 12%. Interest is paid annually at the end of each year and the principal is due at the end of the third year. Required: 1. Provide journal entries for the 2018 fiscal year. Solomon’s year-end is December 31st. Jan 1/18

Dec 31/18

Note receivable Sales revenue

10,270

Cash Note receivable Interest revenue

10,270 720 512

(12,000 X 6%) 1,232 (10,270 X 12%)

2. What interest rate would you use in requirement (1) present value calculations if the note was a $12,000 three-year, 0% note? Solution: 12% 3. What would the fair value of the note be if the face rate/value was the same as the market rate of 12%? Solution: $12,000

ACCT 351v13 Practice FINAL Solutions

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Part 3 – Question 3 (Factoring of Accounts Receivable) Certain account balances for Double Trouble Inc. are as follows: Accounts Receivable Allowance for Doubtful Accounts Sales

$382,000 Dr 11,750 Cr 430,000 Cr

Required: 1. Prepare the journal entry(ies) required to record the transaction if Double Trouble factors, without recourse, $130,000 of receivables with Fearless Finance. The finance charge is 11.5% of the amount factored. Solution: Cash Loss on sale of receivables Accounts receivable

115,050 14,950

(130,000 X 11.5%) 130,000

2. Prepare the journal entry(ies) required assuming instead that Double Trouble wants to factor on a with recourse basis, $200,000 of accounts receivable. The finance charge is 2.25% of the accounts receivable along with a reserve of 4.25% of the accounts receivable to cover probable adjustments. Assume that the transaction meets the criteria to be accounted for as a sale and that the recourse obligation has a fair value of $8,000. Solution: Cash Due from factor Loss on sale of receivables Recourse liability Accounts receivable

ACCT 351v13 Practice FINAL Solutions

(200,000 X 93.5%)

187,000 8,500 12,500

(200,000 X 2.25%) + 8,000 8,000 200,000

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Part 4: Inventory Part 4 – Question 1 (Inventory Errors) Mesa Company reported cost of goods sold for 2018 of $800,000 and December 31, 2018 Retained Earnings balance of $3,600,000. They later discovered errors in the ending inventories for both 2017 and 2018—they were overstated by $200,000 and $110,000, respectively. Required: Determine the correct amounts for 2018 cost of goods sold and December 31, 2018 retained earnings.

Solution: Cost of goods sold as reported Overstatement of Dec 31, 2017 inventory Overstatement of Dec 31, 2018 inventory

$800,000) (200,000) 110,000)

Corrected cost of goods sold

$710,000)

Dec 31, 2018 retained earnings as reported Overstatement of Dec 31, 2018 inventory* Corrected Dec 31, 2018 retained earnings

$3,600,000) (110,000) $3,490,000)

*Rationale: In 2017, ending inventory was overstated by $200K, therefore COGS is understated, NI is overstated, and R/E is overstated by $200K. In 2018, opening inventory is now overstated by the $200K, therefore COGS is overstated, NI is understated, and R/E is understated by $200K. At this point the ending balance in 2018 for retained earnings is now correct because this type of error offsets itself in the second year. Therefore, no correction is needed to R/E for the 2017 error for $200K because the error was discovered AFTER the offset had occurred in the 2nd year. In 2018, another error occurred and ending inventory was overstated by $110K, therefore COGS is understated, NI is overstated, and R/E is overstated by $110K. At this point the error has now been discovered, therefore a correction (reduction of $110K) to R/E is required because it hasn’t had a chance to offset itself as was the case for the error in 2017.

ACCT 351v13 Practice FINAL Solutions

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Part 4 – Question 2 (Estimating Inventory) Records for South Dept. of Kindale Co. for January 2018 are summarized below: Sales (gross) Sales returns Purchases Purchase Returns Freight on purchases Beginning inventory

$850,000 2,500 516,500 2,200 7,000 45,000

Required: 1. Estimate the valuation of the ending inventory and cost of goods sold using the gross margin method. Last year’s gross margin was 48% of sales. Solution: Net sales ($850,000 – $2,500)

847,500

Opening inventory Net purchases ($516,500 + $7,000 – $2,200)

45,000 521,300 566,300

Gross margin (847,500 X 0.48) Cost of goods sold ($847,500 – $406,800) Ending inventory ($566,300 – $440,700)

406,800 440,700 125,600

2. What percentage would you use in part (1) above if the only information you were given was that last year’s gross margin was 48% of cost? Solution: Gross profit as a percent of sales must be calculated before the rest of the calculation in part (1) can be completed: 48% 100% + 48%

ACCT 351v13 Practice FINAL Solutions

= 32.43%

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Part 4 – Question 3 (Estimating Errors and Adjustments) On December 31, 2018, inventory was counted for the Mayflower Co., and the general ledger inventory account was adjusted to reflect the cost of the inventory counted due to shrinkage. After this, the following additional information became available. a. The company’s ending inventory count included $4,000 at the end of 2018 and $3,000 at the end of 2017 of goods held on consignment from Jamboree Co. b. At December 31, 2018, goods were in transit from a vendor. The cost of the goods to Mayflower is $25,000 and the goods were shipped f.o.b. shipping point on December 30, 2018. These goods were not included in either the year-end inventory or in accounts payable. c. Goods shipped to a customer on December 27, 2018 were in transit at year-end. The goods were shipped f.o.b. destination. Sales revenue for $40,000 was recorded on December 27, 2018 and the goods, costing $24,000, were not included in December 31, 2018 ending inventory. d. On December 21, 2018, the company purchased $2,000 of merchandise for cash. On December 28, 2018, $600 of the merchandise was returned to the vendor for credit. The purchase of the merchandise was recorded by Mayflower but the return was not recorded. Required: Complete the following schedule, showing the dollar effect, if any, of each of the above items on the December 31, 2018 amounts: Inventory Initial balance

Accounts Payable $50,000

$300,000

Net Sales $975,000

Cost of Goods Sold $520,000

Adjustments: a) b) c) d) Adjusted Balance

$

ACCT 351v13 Practice FINAL Solutions

$

$

$

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Solution: Net Sales

Initial balance

Inventory Accounts Payable $300,000 $50,000

$975,000

Cost of Goods Sold $520,000

Adjustments: a) b) c) d) Adjusted Balance

(4,000) 25,000 24,000 0 $345,000

0 0 (40,000) 0 $935,000

1,000 0 (24,000) (600) $496,400

ACCT 351v13 Practice FINAL Solutions

0 25,000 0 (600) $74,400

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Part 5: Investments Part 5 – Question 1 (Amortized cost investments) On April 1, Dicor Corporation purchased $56,000 of 5-year, 4% bonds of Syte Ltd. for a purchase price equal to the discounted cash flows. They provide a 3% return, and are classified as a held-to-maturity investment. The bonds pay interest semi-annually on April 1 and October 1. Required: 1. Prepare all relevant journal entries for Dicor for the first year. Dicor follows IFRS and uses the amortized cost model for this investment. The company’s year- end is March 31. Solution: Apr. 1 Bond investment at amort cost Cash Oct. 1

Mar. 31

58,582 58,582

Cash Bond investment at amort cost Interest income

1,120

Interest receivable Bond investment at amort cost Interest income

1,120

($56,000 X 4% X 6/12)

241 879

(58,582 X 3% X 6/12)

245 875

(58,582 – 241) X 3% X 6/12

2. How would the entries differ if the company followed ASPE and used the effective interest method? (No journal entries are required.)

Solution: The entries would be the same under ASPE using the effective interest method. However, ASPE can also amortize using the straight-line method since no specific method is mandated. The investment and the interest income would then differ from part (1) above. Refer to e-textbook page 9, Investments.

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3. Suppose an impairment review was triggered on Mar 31 and management determined that the impaired discounted cash flows were $50,000 using the current market rate and $48,000 using the market rate back when the bonds were purchased. What entry, if any, would be made? Assume that the company applies the impairment amount to the carrying amount of the impaired investment, and that the company follows IFRS in accordance with IAS 39. Solution: Mar. 31 Loss on impairment Bond investment at amort cost

(58,582 – 241 – 245 – 48,000)

10,096 10,096

4. How would your answer differ in part (3) above if the company followed ASPE? Solution: Mar. 31 Loss on imp...