FINANCIAL ACCOUNTING FUNDAMENTALS [FA1] ASSIGNMENT #3

Note: This assignment is similar in form, length, and difficulty to the actual FA1 finalexamination; however, because of its placement in the course, it will cover content in Modules 1through 9 inclusive. The emphasis of each module in this assignment is based on theweightings in the examination blueprint, adjusted for the absence of Module 10 material. TheFA1 final examination will cover all 10 modules, as indicated in the examination blueprint. Thisassignment will allow you to gauge your readiness for the final examination and to better targetyour exam study, based on the performance feedback you receive from your marker. To get themost benefit from the assignment, complete it under exam conditions within the three-hour timelimit. The total marks for this assignment are 50, and it is worth 5% of your final grade. Thetotal marks for the final examination are 100 and it will be worth 70% of your final grade.Marks 7.5 Question 1 Select the best answer for each of the following unrelated items. Answereach of these items in your examination booklet by giving the number of your choice. Forexample, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If morethan one answer is given for an item, that item will not be marked. Incorrect answers will bemarked as zero. Marks will not be awarded for explanations. Note: 1/2 mark eacha. What type of account is prepaid expense? 1) Asset 2) Liability 3) Expense 4) Ownersequityb. How would a transaction that increases an expense and decreases an asset be recorded?1) Debit the asset and credit the expense 2) Debit the asset and debit the expense 3) Debitthe expense and credit the asset 4) Credit the expense and credit the assetc. The following T-accounts reflect the correct posting of a journal entry on May 12 by LennoxLtd.:Cash Accounts Payable 24,000 24,000What transaction is represented by the posting? 1) A purchase of supplies by Lennox for$24,000 on credit 2) A purchase of supplies by Lennox for $24,000 cash 3) A payment madeto a supplier by Lennox of $24,000 on account 4) A sale of goods by Lennox for $24,000 oncreditFA1 Page 2 of 9d. Which method of depreciation provides a constant expense over the life of an asset? 1)Specific identification 2) Units-of-production 3) Straight-line 4) Declining-balancee. A $4,650 debit to utilities expense was incorrectly posted as a $465 debit. What is the effectof this error on the trial balance and the utilities expense account? 1) The debit column of thetrial balance would be $4,185 too low and utilities expense would be understated by $4,185. 2)The debit column of the trial balance would be $4,185 too high and utilities expense would beunderstated by $4,185. 3) The debit column of the trial balance would be $4,185 too low andutilities expense would be overstated by $4,185. 4) The debit column of the trial balance wouldbe $4,185 too high and utilities expense would be overstated by $4,185.f. At March 31, 2015, JBL Company had assets of $500,000 and liabilities of $400,000. Whatpercentage of the assets held by JBL at March 31, 2015, is financed by equity? 1) 0% 2) 20%3) 45% 4) 80%g. On February 1, 2015, Barnes Ltd. purchased a new building for $400,000, paying $300,000cash and signing a one-year note payable for the balance of $100,000. What is the effect of thisbusiness transaction on the accounting equation of Barnes? 1) Assets increase by $100,000,liabilities increase by $100,000, and equity increases by $100,000. 2) Assets increase by$400,000, liabilities increase by $100,000, and equity increases by $300,000. 3) Assetsincrease by $100,000, liabilities increase by $100,000, and equity does not change. 4) Assetsincrease by $300,000, liabilities increase by $100,000, and equity increases by $200,000.h. A $2,200 debit to salary expense was incorrectly posted as a credit of $2,200 to salaryexpense. What is the effect of this error on the trial balance and salary expense? 1) The debitcolumn of the trial balance is $2,200 too low and salary expense is understated by $2,200. 2)The debit column of the trial balance is $2,200 too high and salary expense is overstated by$2,200. 3) The debit column of the trial balance is $4,400 too high and salary expense isoverstated by $4,400. 4) The debit column of the trial balance is $4,400 too low and salaryexpense is understated by $4,400.i. What types of account balances are increased by debits? 1) Assets and liabilities 2) Assetsand owners equity 3) Assets and expenses 4) Assets and revenuesNote: Use the following information to answer parts (j) to (l). Fitness Works is an exercise club.Members may join at any time during the year but must pay for a 12-month membership at thetime of joining. The membership fees paid are initially recorded in the unearned membershipfees account. Selected information from the unearned membership fees account of FitnessWorks appears below:Unearned membership fees 120,000 Balance January 1, 20152015180,000 Balance December 31, 2015390,000 Credit entries duringj. What was the amount of membership fees received by Fitness Works in 2015? 1) $180,0002) $330,000 3) $390,000 4) $450,000k. What was the amount of membership fees earned by Fitness Works in 2015? 1) $180,0002) $330,000 3) $390,000 4) $450,000 l. How much money from membership fees did FitnessWorks receive in 2014 for memberships in 2015? 1) $120,000 2) $180,000 3) $330,000 4)$390,000m. There is a credit balance of $ 2,300 in the J. Smythe capital account before closing entriesare made. For the year, total revenues are $42,500, total expenses are $32,400, and ownerwithdrawals are $6,000. What is the balance in the J. Smythe capital account on the year-endbalance sheet? 1) $ 1,800 2) $ 6,400 3) $13,800 4) $18,400 n. A company has an asset thathas a cost of $10,000 and accumulated depreciation of $7,840 at December 31, 2014, beforerecording depreciation expense for the year. The residual value of the asset is $2,000, thedouble-declining-balance of method of depreciation is used, and the useful life of the asset isfive years. Depreciation expense for the year ended December 31, 2014, would equal which ofthe following amounts? 1) $ 160 2) $ 864 3) $1,600 4) $2,160FA1 Page 4 of 9o. A company did not make an adjusting entry for $5,600 of accrued revenue when preparing itsJune 30, 2014, financial statements. What would be the impact on its assets, liabilities, andrevenues of not making the appropriate adjusting entry? 1) Assets would be understated by$5,600, liabilities would be correctly stated, and revenues would be understated by $5,600. 2)Assets would be understated by $5,600, liabilities would be understated by $5,600, andrevenues would be understated by $5,600. 3) Assets would be correctly stated, liabilities wouldbe understated by $5,600, and revenues would be overstated by $5,600. 4) Assets would beoverstated by $5,600, liabilities would be correctly stated, and revenues would be overstated by$5,600.7 Question 2 Following are selected general ledger account balances, before any adjustingjournal entries, for Outdoor Services Ltd. at March 31, 2015:Debit Credit Cash 3,971 Petty cash 250 Accounts receivable 495,000 Allowance fordoubtful accounts 2,514 Non-strategic equity investment Geldt shares 28,000The bank statement at March 31, 2015, showed a cash balance of $4,253. A review of the bankstatement revealed the following information: Bank service charges: $27 NSF cheque, J.Hay: $812 A cheque for $560, in settlement of an account payable to JJ & Co., had beenentered in the companys records as $650 Outstanding cheques: $1,364 A cheque, writtenby Outdoor Pool Services Co. in the amount of $333, was deducted from Outdoor Servicesbank account, in error, by the bankOn March 29, 2015, the petty cash box contained receipts for miscellaneous supplies in theamount of $121 and cash of $105.Outdoor Services uses the balance sheet method to account for bad debt expense. Thecompany has estimated that bad debts will equal 3% of accounts receivable.At March 31, 2015, the market value of Geldt shares equalled $31,000.Required 4 a. Prepare the bank reconciliation at March 31, 2015, as well as any adjustingjournal entries resulting from the bank reconciliation.1 b. Prepare the journal entry that would have been made to replenish the petty cash fund onMarch 29, 2015.1 c. Prepare the adjusting journal entry to record bad debt expense for the year ended March31, 2015.1 d. Prepare the March 31, 2015, adjusting journal entry, if required, with respect to the nonstrategic equity investment.FA1 Page 5 of 94 Question 3 Josh, the owner of Hi-Tech Gadgets, has prepared the preliminary financialstatements for the company for the year ended December 31, 2015. He has been doing theaccounting for the company since it started three years ago. Because the company has been sosuccessful, Josh thinks it is now time to sell the company. Based on the preliminary financialstatements, net sales for 2015 are $1,000,000 and cost of goods sold is $600,000.Josh is unsure whether he has applied the lower of cost and net realizable value rule correctlyto the companys inventory. The cost of the inventory on hand at December 31, 2015, is$300,000, but its net realizable value is only $100,000. Josh believes the decline in the value ofthe inventory is due to an excess supply in the market, but he believes the excess supply is onlytemporary and is confident that the net realizable value will be in excess of cost early next year.Therefore, he has recorded inventory at cost ($300,000) in the preliminary financial statementsfor the year ended December 31, 2015. He has come to you, a professional accountant, foradvice on this issue.Required1 a. Explain whether it is appropriate to ignore the lower of cost and net realizable value rule forinventory when the decline in inventory value is considered to be only temporary.1 b. Based on the preliminary financial statements, determine the gross profit ratio of Hi-TechGadgets for the year ended December 31, 2015.2 c. Prepare the adjusting journal entry that Hi-Tech Gadgets would make at December 31,2015, to apply the lower of cost and net realizable value rule to its inventory. Explain whetherthe gross profit ratio of Hi-Tech Gadgets for the year ended December 31, 2015, would increaseor decrease as a result of this adjusting journal entry.6 Question 4 PV Ltd. is considering issuing 15-year bonds in the amount of $500,000 to financethe building of a new warehouse facility. The bonds will have a contract interest rate of 9% andwill pay interest semi-annually on November 30 and May 31.Required 2 a. Assume the bonds are issued when the market interest rate is 10%. Determinethe issue price of the bonds and prepare the journal entry to record the issuance. 1 b. Assumethe bonds are issued when the market interest rate is 8%. Determine the issue price of thebonds. 1 c. Assume the bonds are issued when the market interest rate is 9%. Determine theissue price of the bonds and prepare the journal entry to record the issuance.2 d. The president of PV is considering financing the new warehouse by issuing additionalshares. As chief financial officer of the company, briefly explain two disadvantages of usingbond financing over share financing for the president.FA1 Page 6 of 96 Question 5 NDG Company is a small retailer. All sales are in cash only and the companyguarantees customers they will be satisfied with their purchase or their money will be refundedon return of the merchandise. The company uses a perpetual inventory system. The followingare the summarized transactions of NDG for the month of July 2015: 1. Sales for the monthwere $75,000. The cost of the merchandise sold in July was $30,000. 2. Merchandise with asales value of $3,000 was returned by customers during the month for a cash refund. Thismerchandise, which cost $1,200, was undamaged and returned to inventory. 3. Most customerspick up their merchandise at the NDGs store. However, NDG agreed to pay the delivery chargeof $400 to have merchandise delivered to the home of a particularly good customer. 4. NDGpurchased merchandise for $40,000, on account, from one supplier during July. The supplieroffered terms of 2/15, n/30, FOB shipping point. 5. NDG paid $650 in freight charges to ashipping company to have its July merchandise purchases delivered to NDGs store. 6. The$40,000 account payable from the July purchase was paid in July, within the discount period. 7.Interest expense for the month, paid in cash, was $2,000. 8. Operating expenses, in addition tothose listed in transactions 1 to 7, for the month of July 2015 were $30,000 and all were paid incash during July.Required 4 a. Prepare journal entries to record the above transactions of NDG for the month ofJuly 2015.1 b. Prepare a multiple-step income statement for NDG for the month ended July 31, 2015.1 c. You are a professional accountant and a friend of Nicholas, the owner of NDG. Nicholastells you that the margins in his business are low and, therefore, the company needs to takeadvantage of all of the purchase discounts offered by its suppliers. Nicholas has instructed hisstaff to take the purchase discount even when payment is made after the discount period.Nicholas says it is up to the supplier to accept or reject the discount. Discuss the ethics ofNDGs policy with respect to taking purchase discounts.1.5 Question 6 Alan and Illona formed a partnership on January 1, 2008, to provide marketingservices to clients. The partnership was successful in its first five years of business, whichresulted in large capital account balances for each partner. At January 1, 2014, Alans capitalaccount balance equalled $508,000 and Illonas capital account balance equalled $550,000.The partnership agreement states that Alan will receive a salary allowance of $50,000 and Illonawill receive a salary allowance of $56,000. The partnership agreement also states that eachpartner will receive an interest allowance equal to 6% of their beginning of the year capitalaccount balance and any residual income or loss will be shared equally. As a result of pooreconomic conditions in 2014, the partnerships clients purchased less marketing services thannormal. Partnership income for the year ended December 31, 2014, amounted to only$149,000.Required Prepare a statement showing the allocation of income for the year ended December31, 2014, to each partner.FA1 Page 7 of 97 Question 7 SB Holdings Ltd. is a wholesaler of soybeans and it uses a perpetual inventorysystem to collect information about cost of goods sold and cost of inventory on hand. Itsopening inventory and purchases of soybeans during the month of June 2015 were as follows:June 1 Opening inventory ………………. 100,000 bushels @ $13.00/bushel = $ 1,300,000 June 3Purchase …………………………….. 50,000 bushels @ $13.60/bushel = $ 680,000 June 28Purchase …………………………… 60,000 bushels @ $14.50/bushel = $ 870,000SB Holdings made two sales of soybeans during the month of June 2015, as follows:June 10 Sale …………………………………. 80,000 bushels@ $16/bushel June 29Sale …………………………………. 70,000 bushels@ $17/bushelRequired 2 a. Calculate the dollar value of SBs inventory of soybeans at June 30, 2015, andcost of goods sold for soybeans for the month of June 2015, assuming SB uses the movingweighted average method of inventory costing.1 b. Assume instead that SB Holdings uses the first-in, first-out (FIFO) method of inventorycosting. Explain whether the dollar value of SB Holdings inventory of soybeans at June 30,2015, would be higher or lower than it was under the moving weighted average method ofinventory costing. (You are not required to calculate the dollar value of SBs inventory usingFIFO.)1 c. Briefly explain which inventory costing method, FIFO or moving weighted average, wouldproduce the highest cash flow for SB Holdings for the month of June 2015.2 d. During its physical inventory count at June 30, 2015, SB Holdings incorrectly included thecontents of a storage container in the count. The 5,000 bushels of soybeans in the storagecontainer were part of the sale on June 29 and SB Holdings was holding the soybeans until thecustomer could arrange delivery. Assume the cost of the 5,000 bushels of soybeans was$72,500. Identify the effect (dollar amount and overstated or understated) of this error on SBsgross profit for the year ended June 30, 2015. Assuming inventory is properly counted at June30, 2016, identify the effect of the June 30, 2015, inventory count error (dollar amount andoverstated or understated) on SBs gross profit for the year ended June 30, 2016.1 e. SBs merchandise turnover ratio is 12 for the year ended June 30, 2015. The industryaverage turnover ratio is 18. Explain what the merchandise turnover ratio is and whether SBsmerchandise turnover is better or worse than the industry average.FA1 Page 8 of 95 Question 8 Petros Ltd. is a real estate development company. During 2014 the companymade the following new real estate purchases and sale: On March 4, 2014, the company paid$2,150,000 to purchase land that was previously used as a gas station and auto body shop.Petros paid $51,000 to have an environmental analysis performed and $13,000 to remove tiresand other hazardous material found on the property. In addition, Petros paid $2,000 to have thegrass cut for March through December 2014. On June 13, 2014, the company paid $4,500,000to purchase land and a building, making a cash down payment of $1,000,000 and signing a fiveyear note payable for the rest. At the time of purchase the land had a fair market value of$3,500,000 and the building had a fair market value of $1,500,000. On September 1, 2014,Petros sold land and a building for $2,910,000 cash. The land had a cost of $1,900,000. Thebuilding had a cost of $900,000 and accumulated depreciation of $50,000, after recordingdepreciation on the building up to the date of sale.Required 1 a. Calculate the amount at which the land purchased in March would be recordedon the books of Petros at December 31, 2014.2 b. Prepare the journal entry to record the June 13, 2014, purchase of land and a building.2 c. Prepare the journal entry to record the September 1, 2014, sale of land and a building.6 Question 9 On June 1, 2014, Mohamed and Hem started a business, MH Exports, which wasorganized as a corporation. The corporation was authorized to issue an unlimited number ofcommon shares and an unlimited number of $3 cumulative preferred shares.On June 1, 2014, the corporation issued Mohamed 500 common shares in exchange for$50,000 cash and it issued Hem 500 common shares in exchange for $30,000 cash and avehicle with a market value of $20,000. A friend of Hems agreed to invest in the new businessand on June 1, 2014, was issued 300 preferred shares in exchange for $15,000 cash.On May 15, 2015, the corporation declared its first dividend in the amount of $5,000. Thedividend was to be paid out on June 1, 2015. Required 2 a. Prepare the journal entry(ies) torecord the issuance of shares to Mohamed, Hem, and Hems friend.11/2 b. Preferred shares were issued to Hems friend instead of common shares on therecommendation of an advisor to Mohamed and Hem. Explain why an advisor would suggestthat preferred rather than common shares be offered to Hems friend.11/2 c. Prepare the equity section of the balance sheet as it would appear on June 1, 2014.1 d. Prepare the entry to record the declaration of the dividend on May 15, 2015. Indicate howmuch of the dividend will be paid to the preferred shareholder and how much will be paid to the common shareholders