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Pe - 5 PDF
Pe - 5 PDF
Time: 3 hours
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
5. 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 Brownlow’s 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 Capital—Reacquisition 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 buyer’s 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 $12,000
CPP withheld 550
Income taxes withheld 2,500
Medical insurance deductions 450
EI withheld 32
Union dues withheld 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:
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:
Revenue $3,000
Cost of goods sold 1,200
Interest expense 25
Other expenses 1,350
Income before income taxes 425
Income tax expense 190
Net income $ 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) Write the journal entry to record the issue of the bonds on December 31, 20x5.
(b) Write the journal entry to record the June 30 and December 31 coupon payments in 20x6.
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) 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
(b) Based on your calculations, which depreciation basis would produce the highest retained
earnings at the end of the second year?
(c) 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.
(d) 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 -
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:
Current Assets
Cash $ 18 $ 19 $14
Accounts receivable 90 72 61
Inventory 60 50 40
Prepaid rent 10 12 7
178 153 122
Long-term assets
Capital assets 160 158 140
Accumulated depreciation (103) (90) (75)
57 68 65
Current liabilities $ 87 $ 45 $ 46
Long-term liabilities 33 46 45
120 91 91
Shareholders equity
Common stock 40 40 40
Retained earnings 75 90 61
115 130 101
$235 $221 $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. b
2. c
3. b
4. d
7. c
9. b
10. c
11. c
17. c
18. b
19. a
CPT PV = $5,198,562
Question 4
(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.
20x3 20x2
(a) Return on equity = Net $63.7 / [(115 + 130) / 2) $55.8 / [(130 + 101) / 2)
Income / Average S/E = 63.7 / 122.5 = 55.8 / 115.5
= 52% = 48%
(b) Return on Assets = Net $106.2 / [(235 + 221) / 2) $93.8 / [(221 + 187) / 2]
Income before taxes / = 106.2 / 228 = 93.8 / 204
Average Assets = 47% = 46%
(f) Average collection period = [(90 + 72) / 2] / (803 / 365) [(72 + 61) / 2] / (711 / 365)
Average AR / Average Daily = 81 / 2.2 = 66.5 / 1.9479
Credit Sale = 37 days =34 days
(g) Inventory turnover = COGS / $531 / [(60+ 50) / 2] $476 / [(50 + 40) / 2]
Average Inventory = 531 / 55 = 476 / 45
= 9.65 times = 10.6 times
(j) Asset Turnover = Sales / $803 / [(235 + 221) / 2] $711 / [(221 + 187) / 2]
Average Total Assets = 803 / 228 = 711 / 204
= 3.5 = 3.5