BUS 285

Practice Questions 2

Question One

Following their early retirements from jobs as elementary school teachers, your parents decided to start
a landscaping business. Paradise Landscapes Inc. (PLI) has now been in business for several years. A
student at the Paul J. Hill School of Business, your parents expect that you will prepare PLI’s financial
statements. They have asked that you prepare the following:

 A CLASSIFIED statement of financial position/balance sheet

 A MULTIPLE STEP income statement

The financial statements must be prepared in good form based on the adjusted trial balance which
follows.

Paradise Landscapes Inc.

Adjusted Trial Balance
December 31, 2020

Account DR. CR.

Accounts payable $5,000
Accounts receivable $15,000
Accumulated depreciation – equipment 40,000
Allowance for doubtful accounts 3,000
Cash 55,000
Cash dividends 20,000
Common shares 10,100
Cost of goods sold 110,000
Depreciation expense 4,500
Equipment 100,000
Income tax expense 18,000
Income tax payable 2,500
Interest expense 7,000
Inventory 13,000
Land 50,000
Loss on sale of equipment 6,000
Note payable 75,000
Operating expenses 90,000
Prepaid expenses 8,000
Retained earnings 53,600
Sales 325,000
Sales returns and allowances 16,000
Selling expenses 3,250
Wages payable 1,550
$515,750 $515,750

According to the most recent statement for the note payable, the principal portion to be repaid in 2021
is $17,500.
Paradise Landscape Inc. (PLI)
Question Two

After completing the 2020 financial statements, your father asked for your assistance in recording the
wages to be paid to PLI employees on April 30, 2021. The following are the expected payroll amounts
for April 2021:

 Gross wages earned of $5,000.00

 Employee Canada Pension Plan (CPP) contributions of $247.50
 Employee Employment Insurance (EI) contributions of $94.00
 Employee income taxes of $1,300.00

The details of the employer payroll obligations are as follows:

 Employer CPP contributions of $247.50

 Employer EI contributions of $131.60

You have been asked to prepare the journal entries (in good form) required on April 30, 2021 ONLY.
The deductions will be remitted on May 15, 2021. You are NOT to prepare the journal entry to record
the remittances. Please ensure you provide detailed supporting calculations and round all amounts to the
nearest cent (5 marks).

Question Three (13 Marks)

After completing BUS 285 and 385 in 2020, the Faculty of Business Administration hired you as a
Lab Instructor. Next week’s BUS 285 lab will focus on the cash flow statement. The BUS 285
instructors are attending a conference and did not have an opportunity to prepare the lab solution
prior to their flight.

They provided you with the following question:

Cash Flows Are Fun Inc.

Comparative Statements of Financial Position/Balance
Sheets December 31

2020 2019
Cash $53,625 $25,000
Accounts receivable 58,000 51,000
Inventory 40,000 60,000
Prepaid expenses 5,000 4,000
Land 20,000 50,000
Equipment 154,000 130,000
Accumulated depreciation - equipment (35,000) (25,000)
$295,625 $295,000

Accounts payable $54,000 $44,000

Income taxes payable 4,000 6,000
Long term loan payable 68,000 79,000
Common shares 130,000 130,000
Retained earnings 39,625 36,000
$295,625 $295,000

Cash Flows Are Fun Inc.

Income Statement
Year Ended December 31,2020

Sales $338,150
Gain on sale of equipment 2,000
340,150
Cost of goods sold 165,000
Operating expense 130,000
Interest expense 11,400
Income tax expense 24,125 330,525
Profit $9,625

Additional information:
 Depreciation expense of $24,000 is included in operating expenses.
 No gain or loss resulted from the sale of land during 2020. Equipment with a cost of $20,000
and accumulated depreciation of $14,000 was sold during 2020.

The instructors have asked that you prepare the COMPLETE statement of cash flows (in good
form) using the INDIRECT METHOD such that it can be shared with the BUS 285 students at
the end of the lab. Please ensure you provide detailed supporting calculations.
 Question Four (25 Marks)

Destination Wedding Dresses Inc. (DWDI) has been in business for several years. DWDI designs
and manufactures wedding dresses for bridal stores which cater to brides getting married in
countries other than Canada.

DWDI’s bookkeeper has fallen ill and has been unable to complete the accounting. You have been
hired to journalize the April 2021 transactions which follow (in good form). Please ensure you
provide detailed supporting calculations and round all amounts to the nearest dollar.

To facilitate the journalizing of the transactions, D&C has been provided with the following post-
closing trial balance as at DWDI’s March 31, 2021 fiscal year end (8 marks):

Destination Wedding Dresses

Inc.
Post Closing Trial
Balance March 31,
2021

Account DR. CR.

Cash $167,333
Accounts receivable 2,700,000
Allowance for doubtful accounts $300,000
Interest receivable 2,667
Inventory 500,000
Notes receivable 200,000
Prepaid insurance 899
Building 194,000
Accumulated depreciation – building 68,750
Sewing machines 260,000
Accumulated depreciation – sewing machines 33,000
Accounts payable 1,009,000
Bank loan payable 350,000
Common shares, unlimited number authorized, 100,000 outstanding 300,000
Retained earnings 1,964,149
$4,024,899 $4,024,899

April 1: During fiscal 2021, DWDI sold $100,000 of wedding dresses to a Toronto bridal store.
The bridal store was unable to pay its account when due. Accordingly, on April 1, DWDI
accepted a signed note receivable from the bridal store. The note plus interest at a rate of 8% per
annum will be due in 6 months.

April 14: DWDI sold $500,000 of wedding dresses to a Montreal bridal store on account, terms
2/10, n/30. The cost of the wedding dresses sold was $290,000. DWDI uses a PERPETUAL
inventory system.

April 21: DWDI received payment in full on the account from the Montreal bridal store.

Question Four continued

Destination Wedding dresses (DWDI)

You have also been asked to make the adjusting entries (in good form) required on April 30, 2021,
provide detailed supporting calculations and round all amounts to the nearest dollar. To facilitate
making the adjusting entries, you have been provided with the following additional information:

 DWDI records depreciation at the end of each month. Additional information including the
methods used to depreciate property, plant and equipment follows:
o The building, which cost $194,000 and has $68,750 accumulated depreciation to date,
has a useful life of 40 years and is depreciated using the DIMINISHING BALANCE
method at double the straight line rate.
o The sewing machines, which cost $260,000, are expected to be used for a total of 2
million hours, are depreciated using the UNITS OF PRODUCTION method. The
expected residual value is $40,000. During April 2021, the sewing machines were used
for 16,000 hours (ignore this part).

 The prepaid insurance on the March 31, 2021 post closing trial balance relates to two insurance
policies detailed below:
 o $352 relates to a property insurance policy which expires May 31, 2021.
o The remaining $547 relates to a liability insurance policy which expired April 30, 2021.
Also on April 30, 2021, DWDI renewed its liability insurance policy for a one-year
period. The premium of $7,220 was paid immediately and debited to insurance expense.

Note: All journal entries should be dated April 30. (year end)

Question Five - Hamma Home Furnishings Inc. (4 Marks)

Hamma Home Furnishings Inc. (HHFI) manufactures and sells high quality wood furniture. On
April 1, 2021, an electrical short caused sawdust in the manufacturing facility to ignite and caused a
fire. HHFI’s accountant was the only person in the building at the time of the fire. She was able to put
the fire out, but suffered minor burns to her hands and arms and she is currently on short term
disability. As a result, HHFI has hired D&C to assist it with the accounting related to the fire.

A commercial jigsaw used in the manufacture of furniture was damaged in the fire. HHFI purchased
the jigsaw on July 1, 2017 at a cost of $5,000. Rather than repairing the jigsaw, HHFI sold it to a
construction business for $2,250.

HHFI depreciates its property, plant and equipment on a STRAIGHT LINE BASIS. The jigsaw had
an expected useful life of 5 years at the time of acquisition.

HHFI has not recorded depreciation since its December 31, 2020 year end.

You have been hired to prepare all journal entries (in good form) necessary as a result of the fire.
Please ensure you provide detailed supporting calculations and round all amounts to the nearest dollar.

Question Six

Huron Corporation (HC) operates in an industry which has a high rate of uncollectible accounts. You
have been provided with the following aged accounts receivable listing as at April 30, 2021:

Days accounts Amount Estimated %

outstanding uncollectible
0 – 30 days $600,000 5%
31 – 60 days 75,000 20%
61 – 90 days 45,000 35%
90 + days 30,000 50%
$750,000

Days Accounts Outstanding Amount Estimated Percentage Uncollectible

0 to 30 days $600,000 5%
31 to 60 days 75,000 20%
61 to 90 days 45,000 35%
90+ days 30,000 50%
$750,000

If the allowance for doubtful account has a credit balance of $37,500 before any adjustment
required as at April 30, 2021, what is the required adjusting entry? (round all amounts to
the nearest dollar)

If the allowance for doubtful account has a debit balance of $37,500 before any adjustment required as
at April 30, 2021 , what is the required adjusting entry?

Question Seven

The Loan Approvals Committee granted the request to Happy Industries for a $200,000 loan. According
to the draft loan agreement, HI will be provided with the funds on May 1, 2021 and the balance of the
loan will be repayable in annual payments due April 30 of each year of the 10 year term. Interest will be
charged at a rate of 6% per year.

If the loan is structured to have BLENDED PRINCIPAL AND INTEREST PAYMENTS of

$27,174 per year, you are to complete the loan amortization schedule which follows. Please ensure
you provide detailed supporting calculations and round all amounts to the nearest dollar.

You have also been asked to prepare the journal entries (in good form) to record the receipt of the loan
on May 1, 2021 and the payments to be made on April 30, 2022 and 2023.
 Total Interest Reduction Principal
Date Payment Expense of Principal Balance
May 1, 2021
April 30, 2022

April 30, 2023