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BUSI 1043: INTRODUCTION TO FINANCIAL ACCOUNTING

UNIT EXERCISES
TABLE OF CONTENTS

PART TWO: UNIT EXERCISES............................................................................................................2

Unit 1 Exercises................................................................................................................................................................ 2

Unit 2 Exercises................................................................................................................................................................ 5

Unit 3 Exercises................................................................................................................................................................ 7

Unit 4 Exercises................................................................................................................................................................ 9

Unit 5 Exercises.............................................................................................................................................................. 12

Unit 7 Exercises.............................................................................................................................................................. 14

Unit 8 Exercises.............................................................................................................................................................. 17

Unit 9 Exercises.............................................................................................................................................................. 18

Unit 10 Exercises............................................................................................................................................................ 20

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PART TWO: UNIT EXERCISES

 Weight 18% (each for 2%) of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 1-5, and 7-10
Brief Description
Each week (except for Unit 6 and Unit 11 during major tests), students will submit an exercise that will
consist of several questions related to that week’s unit. The purpose of these exercises are for students
to understand and solidify introductory financial accounting course concepts and techniques. Finished
exercises are to be submitted online by the appropriate date for each unit. There are 9 exercises in
total worth 2% each.
Submission Instructions
Late Submission Policy
 This assignment is subject to the Late Submission penalty policy, namely 5% per day for three
days.
 This page will close and will not allow further submissions after this Late Submission period has
expired.
 In the event of an emergency situation preventing you from submitting within this time frame,
special permission must be obtained from your instructor. Documentation substantiating
emergency is required. In such a circumstance, if the extension is granted, the professor will
reopen the submission function for you on an individual basis.
 Please do not email your submissions to your professor, either before or after the due date; all
coursework should be submitted through the online course (Moodle).

Unit 1 Exercises
 Weight 2% of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 1
Objectives [ULO 1.1, 1.2, 1.3, 1.4]
Evaluation and Feedback
Unit 1 will be marked out of 100 points. The following scale indicates the criteria students are to
adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated Grade Points

Question 1 Identify the component of the financial statements /12
Question 2 Understand income statement /20
Question 3 Evaluate trial balance /16
Question 4 Record entries and prepare trial balance /52
Total /100
Grade

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Exercise Questions
Question 1.1
Identify the type of financial statement (Balance Sheet, Income Statement, Statement of Retained
Earnings, and/or Statement of Cash Flow) in which decision-makers can find the following information.
Hint: In some cases, more than one statement will report the needed data.
(add options to choose from here)
 Common shares
 Income tax payable
 Dividends
 Income tax expense
 Ending balance of retained earnings
 Revenue
 Cash spent to acquire equipment
 Selling, general and administrative expenses
 Adjustments to reconcile net income to net cash provided by operations
 Ending cash balance
 Current liabilities
 Net income
Question 1.2
1. Fill in the gaps with the missing amounts in the representative letter for each company.
2. At the end of the year, which company has the highest net income? Which company has the
highest percentage of net income to revenue?
Hint: A statement of retained earnings will help you with your calculations.
Example of your answer: $30 (40 – 20 + 10 = 30)

Alpha Beta Delta

Beginning
Assets $78 $30 F
Liabilities 47 19 $2
Common shares 6 1 2
Retained earnings A 10 3

Ending
Assets B $48 $9
Liabilities $48 30 G
Common shares 6 1 2
Retained earnings 27 D 4
Dividends 3 2 0

Income Statement
Revenues $216 E $20
Expenses 211 $144 19
Net Income C 9 1

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Missing Amount Solution

A $
B $
C $
D $
E $
F $
G $
The company with ________
the highest net
income is:

Question 1.3
Dr. Li’s Family Dental has the following trial balance:
Dr. Li’s Family Dental
Trial Balance
December 31, 2016
Debit Credit
Cash $16,000
Accounts receivable 3,000
Supplies 14,000
Equipment 22,000
Land 50,000
Accounts payable $29,000
Note payable 20,000
Share capital 10,000
Retained earnings 8,000
Service revenue 60,000
Salary expense 15,000
Rent expense 6,000
Interest expense 1,000
TOTAL $127,000 $127,000

1. Compute the following amounts for Dr. Li’s dental practice:

 Total assets: _______________________
 Total liabilities: _______________________
 Net income or loss during December: _______________________
 Total shareholders’ equity: _______________________
Question 1.4
During October 2016, Paws Veterinary Clinic completed the following transactions:

Month Da Transaction
y
Oct. 1 Paws received $30,000 cash and issued common shares to shareholders
4 Purchased supplies, $1,000, and equipment, $2,600 on account
5 Performed checkup services, and received cash, $1,500

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7 Paid cash to acquire land for an office site, $22,000

11 Performed a surgery on a sick cat, and billed the customer $500
16 Paid for the equipment, purchased Oct 4 on account
17 Paid the telephone bill, $95
18 Received partial payment from client on account, $250
22 Paid the water and electricity bills, $400
29 Received $2,000 cash for conducting a workshop on “Healthy Cat Living”
31 Paid employee salary, $1,300
31 Declared and paid dividends of $1,500

2. Record each transaction in the journal. Key each transaction by date. Explanations are not
required.
3. Prepare the trial balance of Paws at October 31, 2016.

Unit 2 Exercises
 Weight 2% of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 2
Objectives [ULO 2.1, 2.2, 2.3, 2.4]
Evaluation and Feedback
Unit 2 will be marked in its entirety out of 100. The following scale indicates the criteria students are to
adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated % of Final Grade

Question 1 Understand accrual basis accounting /8
Question 2 Prepare year end entries /18
Question 3 Prepare closing entries /24
Question 4 Identify and explain cash basis and accrual basis /50
Total /100

Exercise Questions
Question 2.1
On December 15, 2015, a public company received an order from a customer for services to be
performed on December 28, 2015. Due to a backlog of orders, the company does not perform the
services until January 3, 2016. The customer pays for the services on January 6, 2016. When should
revenue be recorded for the company? Why (support your argument with a principle from the
textbook)?
Question 2.2
Scranton Motors Ltd company faced the following situations.
 The business has an interest expense of $9,000 early in January 2017.
 An interest revenue of $2,000 has been earned but not yet received.

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 When the business collected $12,000 in advance three months ago, the accountant debited
Cash and credited Unearned Revenue. The client was paying for two cars, one delivered in
December, the other will be delivered in February 2017.
 Salary expense is $500 per day – Monday through Friday – and the business pays employees
each Friday. For example, purposes, assume that this year, December 31 falls on a Tuesday.
 The unadjusted balance of the Supplies account is $2,100. The total cost of supplies on hand is
$800.
 Equipment was purchased at the beginning of this year at a cost of $40,000. The equipment’s
useful life is four years. Record the depreciation for this year and then determine the
equipment’s carrying amount.
4. Journalize the adjusting entry needed at year end for each situation. Each scenario should be
considered independently.
Question 2.3
5. Prepare the required closing entries for the following selected accounts from the records of ShipIT
Transportation Inc. on December 31, 2016.

Cost of services sold $11,600

Accumulated depreciation 17,800
Selling, general, and administrative expense 6,900
Retained earnings, December 31, 2015 1,900
Service revenue 23,600
Depreciation expense 4,100
Other revenue 600
Income tax expense 400
Dividends 400
Income tax payable 300
6. How much net income did ShipIT Transportation Inc. earn during the year ended December 31,
2016? Prepare a T-account for Retained Earnings to show the December 31, 2016 balance of
Retained Earnings.
Question 2.4
Academic Consultants Inc. had the following selected transactions in August 2016:

Month Da Transactions
y
Aug. 1 Prepaid insurance for August through December, $1,000
4 Purchased software for cash, $800
5 Performed service and received cash, $900
8 Paid advertising expense, $300
11 Performed service on account, $3,000
19 Purchased computer on account, $1,600
24 Collected for the August 11 service
26 Paid account payable from August 19
29 Paid salary expense, $900
31 Adjusted for August insurance expense (see Aug 1)
31 Earned revenue of $800 that was collected in advance in July

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7. Show how each transaction would be handled using the cash basis and the accrual basis.
Under each column, give the amount of revenue or expense for August. Journal entries are not
required. Use the following format for your answer and show your computations.

Academic Consultants Inc.

Amount of Revenue (Expense) for August 2016
Date Cash Basis Accrual Basis
Aug 1 Revenue/(Expense) Amount Revenue/(Expense) Amount

8. Compute August income (loss) before tax under each accounting method.
9. Explain which measure of net income or net loss is preferable.

Unit 3 Exercises
 Weight 2% of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 3
Objectives [ULO 3.1, 3.2, 3.3, 3.4]
Evaluation and Feedback
Unit 3 will be marked in its entirety out of 100. The following scale indicates the criteria students are to
adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated % of Final Grade

Question 1 Define internal control /13
Question 2 Prepare bank reconciliation /24
Question 3 Prepare cash budget /22
Question 4 Journalize transaction and prepare bank recon /41
Total /100

Exercise Questions
Question 3.1
Explain how and where accounts receivable are reported on the financial statements, and what the
difference is between accounts receivable and notes receivable.
Question 3.2
John Snow’s chequebook lists the following:

Date Cheque # Item Cheque Deposit Balance

Nov 1 $505
4 622 Horizon Utility $39 466

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9 Dividends $116 582

13 623 Canadian Tire 43 539
14 624 Petro-Canada 58 481
18 625 Cash 50 431
26 626 Faith of the Seven Church 25 406
28 627 Affordable Housing 275 131
30 Paycheque 746 877
The November bank statement shows:

Balance $505
Add deposits 116
Deduct cheques No. Amount
622 $39
623 43
624 85
625 50
Other charges:
NSF cheque $8
Service charge 12
Balance $384
1. Prepare John Snow’s bank reconciliation at November 30th.
Question 3.3
Digital Solutions Inc is preparing its cash collection summary for 2018. Digital ended 2017 with cash of
$81 million, and managers need to keep a cash balance of at least $75 million for operations.
Account Receivables are expected to total $11,284 million during 2018, and payments for the cost of
services should reach $6,166 million. Estimate bad debt expense will be at $2,543 million.
During 2018, Digital expects to invest $1,825 million in new equipment and sell older assets for $115
million. Debt payments scheduled for 2018 will total $597 million. The company forecasts net income
of $890 million for 2018 and plans to pay dividends of $338 million.
10. Prepare Digital Solutions cash balance for 2018. Will the cash receipts and payments leave Digital
with the desired ending cash balance of $75 million, or will the company need additional
financing? If it does, how much will it need?
Hint: cash collections - cash payments = ending cash - desired balance = financing (if needed)
Question 3.4
The October 31 bank statement of Spooky Halloween Costumes Ltd. (SHC) has just arrived from TD
Bank. To prepare the SHC bank reconciliation, you gather the following data:
 SHC’s Cash account shows a balance of $2,256.14 on October 31.
 The October 31 bank balance is $4,023.05.
 The bank statement shows that SHC earned $38.19 of interest on its bank balance during
October. This amount was added to SHC’s bank balance.
 SHC pays utilities of $250 and insurance of $100 by EFT.
 The following SHC cheques did not clear the bank by October 31:

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Cheque # Amount
237 $46.10
288 141.00
291 578.05
293 11.87
294 609.51
295 8.88
296 101.63

 The bank statement includes a donation of $850, electronically deposited to the bank for SHC.
 The bank statement lists a $10.50 bank service charge.
 On October 31, the SHC treasurer deposited $16.15, which will appear on the November bank
statement.
 The bank statement includes a $300 deposit that SHC did not make. The bank added $300 to
SHC’s account for another company’s deposit.
 The bank statement includes two charges for returned cheques from donors. One is a $395
cheque received from a donor with the imprint “Unauthorized Signature.” The other is a
nonsufficient funds cheque in the amount of $146.67 received from a client.
11. Prepare the bank reconciliation for SHC.
12. Journalize the October 31 transactions needed to update SHC’s Cash account. You do not need to
include an explanation for each entry.

Unit 4 Exercises
 Weight 2% of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 4
Objectives [ULO 3.1, 3.2, 3.3, 3.4, 4.1, 4.2, 4.3, 4.4]
Evaluation and Feedback
Unit 4 will be marked in its entirety out of 100. The following scale indicates the criteria students are to
adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated % of Final Grade

Question 1 Prepare journal entries /20
Question 2 Compute interest receivables /20
Question 3 Evaluate and calculate ratios /22
Question 4 Prepare adjusting entries /10
Question 5 Determine net income and compute ratios /28
Total /100

Exercise Questions
Question 4.1
Multi-Media Ltd. completed the following transactions:
 September 14, 2016: Provided services to Inga Corporation on account, $3,000, terms 30 days.

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 November 1, 2016: Accepted a one-year, 12% note from Inga Corporation to settle its account.
 December 31, 2016: Accrued interest on the note from Inga Corporation (round to the nearest
dollar).
 November 1, 2017: Received amount due from Inga Corporation.

13. Record entries for the above transactions.

Question 4.2
14. Compute the unknowns for the following transactions dealing with interest on notes receivable.
365 days per year. Round your answers to the nearest dollar.

Principal Rate Interest Duration Interest Value Maturity

$10,000 10% 120 days E G
$25,000 12% C $2,515 H
A 6% 180 days $2,959 I
$50,000 B 60 days $493 J
$36,000 9% D F $36,710

Question 4.3
Dunder Mifflin had the following balances in selected accounts at the end of 2015 and 2016.

2015 2016
Cash $58,000 $45,000
Short-term investments 46,000 39,000
Accounts receivable 54,000 61,000
Allowance for uncollectible accounts 3,500 5,000
Inventory 78,000 98,000
Accounts payable 91,000 102,000
Wages payable 17,000 25,000
Income tax payable 4,500 6,500
Note payable (due 2022) 100,000 100,000
Sales 415,000 525,000
Cost of goods sold 225,000 304,000

The accounts receivable at the end of 2014 were $50,000 and the allowance for uncollectible accounts
was $2,500.
15. Calculate the acid test ratio for 2015 and 2016 for Dunder Mifflin.
16. Calculate the days' sales in receivables for 2015 and 2016 for Dunder Mifflin.
17. Determine whether the acid-test ratio improved or deteriorated from 2015 to 2016.
18. Determine whether the collection period increased or decreased from 2015 to 2016.

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Question 4.4
StorageTek Corporation gathered the following information from its accounting records for the year
ended December 31, 2016, prior to adjustment:
 Net credit sales for the year = $1,150,000
 Accounts Receivable (Dec 31, 2016) = $93,000
 Allowance for Uncollectible Accounts, prior to adjustment (Dec 31, 2016) = $6,000 debit balance
 StorageTek Corporation uses the allowance method of accounting for bad debts and estimates
bad debts at 3% of net credit sales.

19. Prepare the adjusting entry on December 31, 2016.

20. Determine the balance in the Allowance for Uncollectible Accounts account after the adjusting
entry is recorded.
21. Show how the receivables would be reported on the December 31, 2016, Balance Sheet for
Storage Tek Corporation.
Question 4.5
Assume Deloitte & Touche, the accounting firm, advises Deep Sea Seafood that their financial
statements must be changed to conform with GAAP. At December 31, 2016, Deep Sea Seafood
accounts include the following:

Cash $51,000
Short-term trading investments, at cost 19,000
Accounts receivable 37,000
Inventory 61,000
Prepaid expenses 14,000
Total current assets $182,000
Accounts payable $62,000
Other current liabilities 41,000
Total current liabilities $103,000

Deloitte & Touche advised Deep Sea Seafood Co. that:

 Cash includes $20,000 that is deposited in a compensating balance account that is tied up until
2018.
 The fair value of the short-term trading investments is $17,000. Deep Sea Seafood purchased
the investments a couple of weeks ago.
 Deep Sea Seafood has been using the direct write-off method to account for uncollectible
receivables. During 2016, Deep Sea Seafood wrote off bad receivables of $7,000. Deloitte &
Touche determines that bad debt expense for the year should be 2.5% of sales revenue, which
totaled $600,000 in 2016.
 Deep Sea Seafood reported net income of $92,000 in 2016.

22. Restate Deep Sea Seafood’s current accounts to conform to GAAP.

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23. Compute Deep Sea Seafood’s current ratio and acid-test ratio before and after your corrections.
24. Determine Deep Sea Seafood’s correct net income for 2016.

Unit 5 Exercises
 Weight 2% of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 5
Objectives [ULO 5.1, 5.2, 5.3, 5.4]
Evaluation and Feedback
Unit 5 will be marked in its entirety out of 100. The following scale indicates the criteria students are to
adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated % of Final Grade

Question 1 Compute gross profit and inventory turnover /6
Question 2 Determine the effect on cost /24
Question 3 Compute COGS /18
Question 4 Prepare journal entries /14
Question 5 Journalize transactions /38
Total /100

Exercise Questions
Question 5.1
Assume 007 Inc. made sales of $891.3 million during 2016. The cost of goods sold for the year totaled
$581.2 million. At the end of 2015, 007 Inc. inventories stood at $190.4 million, and the company
ended 2016 with an inventory of $232 million. Compute 007’s gross profit percentage and rate of
inventory turnover for 2016.
Question 5.2
Determine the effect on the cost of goods sold, total assets, and gross margin for 2015 and 2016 if the
following inventory errors are not corrected. Indicate your answer with (+) for overstated, (-) for
understated, and (0) for no effect.
The beginning inventory for 2015 is understated.
Ending inventory for 2015 is understated.

Cost of Goods Sold Effect in 2015 on Total Gross Margin

Assets

Cost of Goods Sold Effect in 2016 on Total Gross Margin

Assets

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Question 5.3
Oak Tree Ltd. Inventory records for a particular development program show the following at October
31, 2016:

Oct 1 Beginning inventory 5 units @ $150 = $750

15 Purchase 11 units @ 160 = 1,760
26 Purchase 5 units @ 170 = 850

On October 31, 10 units of these programs are on hand. Oak Tree Ltd. uses the perpetual inventory
system.
25. Compute the cost of goods sold and ending inventory, using each of the following methods:
 Specific unit cost, with two $150 units, three $160 units, and five $170 units still on hand at the
end.
 Weighted-average cost
 First-in, first-out cost
26. Which method produces the highest cost of goods sold? Which method produces the lowest cost
of goods sold? What causes the difference in the cost of goods sold?
Question 5.4
27. Prepare journal entries for 2016 for the following independent situations. Assume each
organization has a December 31st year-end.
Keepers Inc. purchased a patent for $425,000 on January 1 st. Keepers estimates this patent to have a 5-
year useful life.
Blue Bat Corporation purchases one of their main competitors on March 31. Blue Bat paid $90,000 for
this purchase, which included assets of $70,000 and liabilities of $2,000. The goodwill is believed to
have an indefinite benefit.
Question 5.5
Assume Interstellar Communications Ltd.’s balance sheet includes the following assets under Property,
Plant, and Equipment: Land, Buildings, and Motor-Carrier Equipment. Interstellar Communications has
a separate accumulated depreciation account for each of these assets except land. Further, assume
that Interstellar completed the following transactions:
 Jan 2: Sold motor-carrier equipment with accumulated depreciation of $67,000 (cost of
$130,000) for $70,000 cash. Purchased similar new equipment with a cash price of $176,000.
 July 3: Sold a building that had cost $650,000 and had accumulated depreciation of $145,000
through December 31 of the preceding year. Depreciation is computed on a straight-line basis.
The building had a 40-year useful life and a residual value of $250,000. Interstellar received
$100,000 cash and a $400,000 note receivable.
 Oct 29: Purchased land and a building for a single price of $420,000. An independent appraisal
valued the land at $150,000 and the building at $300,000.
 Dec 31: Recorded depreciation as follows: New motor-carrier equipment has an expected useful
life of six years and an estimated residual value of 5% of the cost. Depreciation is computed on

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the double-diminishing-balance method. Depreciation on buildings is computed by the straight-

line method. The new building carries a 40-year useful life and a residual value equal to 10% of
its cost.
28. Please journalize each of the transactions from Jan 2nd – Dec 31st.

Unit 7 Exercises
 Weight 2% of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 7
Objectives [ULO 7.1, 7.2, 7.3, 7.4]
Evaluation and Feedback
Unit 7 will be marked in its entirety out of 200. The following scale indicates the criteria students are to
adhere to, and their relative weights to the assignment overall.

  Activity/Competencies Demonstrated % of Final

Grade
Question 1 Journalize transactions /23
Question 2 Prepare warranty entries and effects /17
Question 3 Record bonds entries /18
Question 4 Prepare bond and interest entries /18
Question 5 Calculate EPS /24
Question 6 Prepare journal entries /14
Question 7 Determine preferred equity and book value per /16
share
Question 8 Prepare journal entries and shareholders’ equity /29
Question 9 Calculate return on assets and return on equity /23
Question 10 Calculate shareholders’ equity /18
Total   /200

Exercise Questions
Question 7.1
Time Traveler Magazine completed the following transactions during 2016:
 Oct 31: Sold one-year subscriptions, collecting cash of $1,750, plus HST of 13%.
 Dec 31: Remitted (paid) HST to Canada Revenue Agency (CRA).
 Dec 31: Made the necessary adjustment at year-end.
29. Journalize these transactions and then report any liability on the company’s balance sheet on
December 31st.

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Question 7.2
During its first year of operations, Keene Limited had sales of $76,500. The company offers a 2-year
limited warranty on all sales and expects that warranty costs for the first year will average 0.5% of
sales with an additional 1.5% in the second year. During the current year, the company spent $1,200
on warranty repairs.
30. Prepare all journal entries related to the warranty for the current year.
31. How will the warranty liability be reported on the company’s year-end balance sheet?
Question 7.3
On January 31, 2016, Muscle Sports Cars issued 10-year, 4% bonds with a face value of $100,000. The
bonds were issued at 94 and pay interest on January 31 and June 30. Muscle amortizes their bonds by
the straight-line method.
32. Record: (a) the issuance of the bonds on January 31, (b) the semi-annual interest payment and
discount amortization on June 30, and (c) the interest accrual and discount amortization on
December 31.
Question 7.4
On June 30, 2016, the market interest rate was 7%. Starship Enterprises issues $500,000 of 8%, 20-year
bonds at 110.625. The bonds pay interest on June 30 and December 31. Starship amortizes bonds by
the effective-interest method.
33. Record issuance of the bonds on June 30, 2016, the payment of interest on December 31, 2016,
and the semi-annual interest payment on June 30, 2017.
Question 7.5
Alliance Agreement Corporation is considering two plans for raising $2,500,000 to expand its current
operations. The first plan involves the sale of $2,500,000, 8%, 10-year bonds sold at face value. The
second plan involves selling 50,000 common shares at $50 each. Alliance Agreement Corporation
currently has outstanding 200,000 shares of stock and a net income of $900,000. Either plan is
expected to generate an additional income of $400,000 before interest and taxes. The income tax rate
is 30%.
34. Calculate earnings per share for both plans.
Question 7.6
Loki Corporation earned a net income of $90,000 during the year ended December 31, 2016. On
December 15, Loki had declared the annual cash dividend on its $0.35 preferred shares (5,000 shares
issued for $80,000) and a $0.40 per share cash dividend on its common shares (20,000 shares issued
for $60,000). Loki then paid the dividends on January 4, 2017.
35. Journalize the following for Loki Corporation:
 Declaring the cash dividends on December 15, 2016.
 Paying the cash dividends on January 4, 2017.
36. Did Retained Earnings increase or decrease during 2016? If so, by how much?

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Question 7.7
IMA Believer Corp’s balance sheet reported the following shareholders’ equity as of December 31,
2016:
Beginning of the Year End of the Year
Current assets $62,000 $82,000
Current liabilities 25,000 55,000
Plant and equipment 300,000 350,000
Long-term liabilities 50,000 75,000
Common shareholders’ equity 125,000 225,000
Preferred shareholders’ equity 60,000 85,000

Share Capital:
Preferred shares, $100 stated value; $5 cumulative, 10,000 shares authorized, 10,000 issued $1,000,000
Common shares 200,000 shares authorized, 50,000 shares issued 1,500,000
Total share capital $2,500,000
Retained earnings 500,000
Total shareholders’ equity $3,000,000

37. Assuming there are 3 years’ dividends in arrears (including that of the current year), determine (1)
preferred equity and (2) book value per share of common shares.
Question 7.8
Settlers of Catan Co is authorized to issue an unlimited number of common shares and 10,000
preferred shares. During its first year, the business completed the following share issuance
transactions:
 July 19: Issued 10,000 common shares for cash of $6.50 per share.
 Oct 3: Issued 500, $1.50 preferred shares for $50,000 cash.
 Oct 11: Received inventory valued at $11,000 and equipment with fair value of $8,500 for 3,300
common shares.
38. Journalize the transactions. Explanations are not required.
39. Prepare the shareholders’ equity section of Settlers of Catan Co’s balance sheet. The ending
balance of Retained Earnings is a deficit of $42,000.
Question 7.9
40. Given the following information for Victory Stables, calculate their return on assets and equity and
comment on the use of these ratios (why would we use them? what do they tell us?).
Net income $50,000
Interest expense 8,500
Income tax expense 15,250
Preferred dividends 2,500

Beginning of the Year End of the Year

Current assets $62,000 $82,000
Current liabilities 25,000 55,000
Plant and equipment 300,000 350,000
Long-term liabilities 50,000 75,000
Common shareholders’ equity 125,000 225,000
BUSI 1043 INTRODUCTION TO FINANCIAL ACCOUNTING
Preferred shareholders’ equity 60,000 85,000 16
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Question 7.10
Multigrain Health Foods Inc. is authorized to issue 5,000,000 common shares. In its initial public
offering during 2010, Multigrain issued 500,000 common shares for $7.00 per share. Over the next
year, Multigrain’s share price increased and the company issued 400,000 more shares at an average
price of $8.50.
During the next seven years, from 2010 to 2016, Multigrain earned a net income of $920,000. They
declared and paid cash dividends of $140,000. A 10% stock dividend was distributed to the
shareholders in 2016 on the shares outstanding. The market price was $8.00 per share when the stock
dividend was distributed. On December 31, 2016, the company has total assets of $14,500,000 and
total liabilities of $6,820,000.
41. Show the computation of Multigrain’s total shareholders’ equity at December 31, 2016.
42. Present a detailed computation of each element of shareholder’s equity.

Unit 8 Exercises
 Weight 2% of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 8
Objectives [ULO 8.1, 8.2, 8.3, 8.4]
Evaluation and Feedback
Unit 8 will be marked in its entirety out of 100. The following scale indicates the criteria students are to
adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated % of Final Grade

Question 1 Investment Entries /15
Question 2 Time Value of Money /35
Question 3 Investment Entries /15
Question 4 Time Value of Money /35
Total /100

Exercise Questions
Question 8.1
On January 2, Dundar Mifflin acquired 30% of the outstanding stock of Steve & Company for $105,000.
For the year ending, December 31, Steve & Company earned income of $68,000 and paid dividend
$16,000.
43. Prepare the entries for Dundar Mifflin for the purchase of the stock, share of Steve & Company
income and dividends received from Steve & Company.

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Question 8.2
Dundar Mifflin is considering the purchase of a new printer and has narrowed down the possibilities to
two models which perform equally well. However, the method of paying for the two models is
different. Model A requires $8,000 per year payment for the next five years. Model B requires the
following payment schedule.

Year Payment (Model 2)

1 $10,000
2 9,000
3 8,000
4 5,000
5 3,000
44. Which model should you buy assuming a 12% rate?
Question 8.3
45. Prepare the journal entries for the following transactions for Dundar Mifflin:
 Dundar Mifflin purchased 1,200 shares of the total of 100,000 outstanding shares of Steve &
Company stock for $20.75 per share plus a $70 commission.
 Steve & Company total earnings for the period are $84,000.
 Steve & Company paid a total of $40,000 in cash dividends to shareholders of record.
Question 8.4
To expand its operation in Ontario, Dundar Mifflin has applied for a $3,500,000 loan from the TD Bank.
According to Dundar Mifflin financial analyst, the company can only afford a maximum yearly loan
payment of $1,000,000. The bank has offered Dundar Mifflin the following:
 Option 1: 3 year loan with an 8 percent interest rate
 Option 2: 4 year loan with a 10 percent interest rate
 Option 3: 5 year loan with a 12 percent interest rate
46. Compute the loan payment under each option for year 1.
47. Which option should the company choose?

Unit 9 Exercises
 Weight 2% of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 9
Objectives [ULO 9.1, 9.2, 9.3, 9.4]
Evaluation and Feedback
Unit 9 will be marked in its entirety out of 100. The following scale indicates the criteria students are to
adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated % of Final Grade

Question 1 Explain interest on principal loan /8
Question 2 Identify the component of statement of cash flow /26

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Question 3 Explain gain or loss on PP&E /12

Question 4 Prepare complete financial statement /54
Total /100

Exercise Questions
Question 9.1
48. What primary factor should a creditor consider when evaluating whether a corporation can pay
the interest and principal on a loan at maturity?

Question 9.2
49. Classify each of the following as an operating, investing, or financing activity under ASPE:
 Loaning money
 Receipt of cash from the issuance of bonds payable
 Receipt of cash from the sale of equipment
 Payments of acquisition of land
 Receiving cash from customers
 Receiving interest revenue
 Payments for inventory
 Payments for interest
 Receipt of cash from the issuance of stock
 Dividends paid to shareholders
 Receipt of dividend income
 Payment of salaries to employees
 Payment of taxes
Question 9.3
Three-Eyed Raven Ltd. reported the following on December 31, 2016 (in thousands):
2016 2015
From the comparative balance sheet
Property and equipment, net $11,150 $9,590
Long-term notes payable 4,400 3,080
From the statement of cash flows:
Depreciation $1,920
Capital expenditures (4,130)
Proceeds from sale of property and equipment 770
Proceeds from issuance of long-term note payable 1,190
Payment of long-term note payable (110)
Issuance of common shares 383

50. Determine the following items for Three Eyed Raven Ltd. During 2016:
 Gain or loss on the sale of property and equipment.
 Amount of long-term debt issued for something other than cash.

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Question 9.4
Classic Automobiles of Huntsville Ltd. was formed on January 1, 2016, when Classic issued common
shares for $300,000. Early in January 2016, Classic made the following cash payments:
 $150,000 for equipment
 $120,000 for inventory (four cars at $30,000 each)
 $20,000 for 2016 rent on a store building
In February 2016, Classic purchased six cars for inventory on account. Cost of this inventory was
$260,000 ($43,333.33 each). Before year-end, Classic paid $208,000 of this debt. Classic uses the FIFO
method to account for inventory.
During 2016, Classic sold eight vintage autos for a total of $500,000. Before year-end, Classic collected
80% of this amount.
The business employs three people. The combined annual payroll is $95,000, of which Classic owes
$4,000 at year-end. At the end of the year, Classic paid an income tax of $10,000.
Late in 2016, Classic declared and paid cash dividends of $11,000.
For equipment, Classic uses the straight-line depreciation method over five years with zero residual
value.
51. Prepare Classic Automobiles of Huntsville Ltd.’s income statement for the year ended December
31, 2016. Use the single-step format with all revenues listed together and all expenses listed
together.
52. Prepare Classic’s balance sheet on December 31, 2016.
53. Prepare Classic’s statement of cash flows for the year ended December 31, 2016. Format cash
flows from operating activities by using the indirect method.
54. Comment on the business performance based on the statement of cash flows.

Unit 10 Exercises
 Weight 2% of the final grade
 Due no later than 11:00 p.m. on Sunday of Unit 10
Objectives [ULO 10.1, 10.2, 10.3, 10.4]
Evaluation and Feedback
Unit 10 will be marked in its entirety out of 100. The following scale indicates the criteria students are
to adhere to, and their relative weights to the assignment overall.

Activity/Competencies Demonstrated % of Final Grade

Question 1 Prepare a comprehensive income statement /14
Question 2 Compute trend percentage /20
Question 3 Prepare a common size income statement /20
Question 4 Compute various ratios /46
Total /100

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Exercise Questions
Question 10.1
55. Prepare a horizontal analysis of the following comparative income statement for Westwind
Corporation. Round percentage changes to the nearest one-tenth percent.

Westwind Corporation
Comparative Income Statement
For the Years Ended December 31, 2016 and 2015
2016 2015
Total revenue $1,400,000 $1,250,000
Expenses:
Cost of goods sold 925,000 $830,000
Operating expenses 313,000 280,000
Interest expense 14,000 12,000
Income tax expense 48,300 38,000
Total expenses $1,300,300 $1,160,000
Net Income $99,700 $90,000

Question 10.2
56. Compute trend percentages for Flash Corporation total revenue and net income for the following
five-year period, using year 0 as the base year. Round to the nearest full percent.

(in thousands) Year 4 Year 3 Year 2 Year 1 Year 0

Total revenue 1629 1316 $1214 $1101 $1121
Net income 129 109 97 84 87

Question 10.3
57. Use the following data to prepare a common-size comparative income statement for Old Mill
Corporation on December 31, 2016. Round percentages to one-tenth percent.

2016 2015
Net sales $1,510,000 $1,350,000
Expenses:
Cost of goods sold $980,000 $860,000
Selling and general expenses 290,000 230,000
Interest expense 59,0000 59,000
Income tax expense 71,000 53,000
Total expenses $1,400,000 $1,202,000
Net income $110,000 $148,000

Question 10.4
Comparative financial statement data of Lannister Inc. are as follows:

Lannister Inc.
Comparative Income Statement

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Years Ended December 31, 2016 and 2015

2016 2015
Net sales $687,000 $595,000
Cost of goods sold 375,000 276,000
Gross profit 312,000 319,000
Operating expenses 129,000 142,000
Income from operations 183,000 177,000
Interest expense 37,000 45,000
Income before income tax 146,000 132,000
Income tax expense 36,000 51,000
Net income $110,000 $81,000

Lannister Inc.
Comparative Balance Sheet
December 31, 2016 and 2015
2016 2015 2014
Current assets:
Cash $45,000 $49,000
Current receivables, net 212,000 158,000 $200,000
Inventories 297,000 281,000 181,000
Prepaid expenses 4,000 29,000
Total current assets 558,000 517,000
Property, plant and equipment, net 285,000 277,000
Total assets $843,000 $794,000 $700,000
Accounts payable 150,000 105,000 112,000
Other current liabilities 135,000 188,000
Total current liabilities $285,000 $293,000
Long-term liabilities 243,000 231,000
Total liabilities 528,000 524,000
Common shareholders’ equity, no par 315,000 270,000 199,000
Total liabilities and shareholders’ equity $843,000 $794,000

Other information:
The market price of Lannister common stock was $102.17 on December 31, 2016; and $77.01 on
December 31, 2015.
Common shares outstanding: 18,000 during 2016 and 17,500 during 2015.
All sales on credit.
58. Compute the following ratios for 2016 and 2015:
 Current ratio.
 Quick ratio (acid test).
 Receivables turnover and days’ sales outstanding (rounded to the nearest whole day).
 Inventory turnover and days inventory outstanding (rounded to the nearest whole day).
 Accounts payable turnover and days’ payable outstanding (rounded to the nearest whole day).
 Cash conversion cycle (in days).
 Times-interest-earned ratio.

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 Return on assets (use DuPont analysis).

 Return on common shareholders’ equity (use DuPont analysis).
 Earnings per share of common stock.
 Price/earnings ratio.
59. Decide whether (a) Lannister’s financial position improved or deteriorated during 2014 and (b) the
investment attractiveness of Lannister’s common stock appears to have increased or decreased.

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