University of Toronto
Faculty of Arts and Science
and
Rotman School of Management
RSM 220 HlS - Financial Accounting
Final Examinations
Duration: 3 hours
Aids allowed: Hand-held, battery-operated calculator
Please answer all questions on this exam paper (or in booklets, etc.)
7 questions-you must answer ALL questions.
The exam consist of 20 pages
FIRST NAME: _______________________ _
LAST NAME: _______________________ _
Student#: _______________ _
Following formulas are provided for your reference:
Present value of a lump sum: PV=
PMT
(1 +rr
RSM220H1S Final Exam
Present value of an annuity:
1-( 1 l
PV = PMT
-"--(_I +_r_r�
PAST EXAM 1
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QUESTION 1 - Multiple Choice {16 marks)
REQUIRED: Please answer the following questions (2 marks each) by circling only the best answer:
1. In December 2020, OnlineSales.com, a consumer promotion business was told by auditors that it was recording revenues
too early. In one example, the company recognized $55,000 in cash sales prior to providing any "significant services". The
company does not offer refunds. Therefore, which of the following requirements of revenue recognition were not met?
a) Performance
b) Measurement
c) Collectability
d) Both A.) and C.)
e) Promotions.com met all of the elements of revenue recognition and should have recognized revenue
2. OnlineBooksiez.com is a seller of books online. The company doesn't have stores and all customers purchase the books
online. Once the company receives an order and a credit card transaction is authorized, it ships the product to the
customer. Which of the following is the most conservative way of accounting for revenues?
a) Recognizing revenue when the product is manufactured
b) Recognizing revenue when the cash is received
c) Recognizing revenue under FOB shipping point sales terms
d) Recognizing revenue under FOB destination sales terms
3. The discrete earnings process is one that
a) Unfolds over several accounting periods.
b) Includes a critical event.
c) has substantial completion which can be deferred.
d) must be accounted for by the percentage-completion method (i.e. in reference to stage of completion).
4. The following information is available for SuperCompany Inc (SCI):
$ 8,000
400,000
Allowance for doubtful accounts at December 31, 2020
Credit sales during 2021
Accounts receivable deemed worthless and written off during 2021 9,000
As a result of a review and aging of accounts receivable in early January 2022, however, it has been determined that an
allowance for doubtful accounts of $7,500 is needed at December 31, 2021. What amount should SCI record as bad debt
expense for the year ended December 31, 2021?
a) $6,500
b) $7,500
c) $8,500
d) $15,500
5. Which of the following goods should be included in the seller's inventory?
a) Goods in transit if shipped f.o.b. shipping point
b) Goods out on consignment
c) Goods sold with estimable rates of return
d) None of the above
6. Major characteristics of property, plant, and equipment do NOT include:
a) Long-term in nature
b) Usually subject to depreciation
c) Acquired and held for resale
d) Possess physical substance
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7. Capitalized cost of property, plant, and equipment includes all expenditures needed to:
1) acquire the asset (purchase price)
2) bring it to its location where it is ready for use (including delivery)
3) bring it to state where it is ready for use (including installation and assembly}
4) discharge obligations associated with asset's eventual disposal (e.g. site restoration)
a) 1) and 2) only;
· b) 1) and 3) only;
c) 1), 2} and 3} only;
d) All of them
8. With regard to borrowing costs that are incurred during acquisition, construction or production of qualifying assets, which
of the following statement is FALSE?
a) Under IFRS, they MUST be capitalized as part of the asset's cost;
b) Under IFRS, they MUST be expensed as interest expense;
c) Under ASPE, they MUST be expensed as interest expense;
d) Under ASPE, they MUST be capitalized as part of the asset's cost;
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QUESTION 2 (21 marks)
On December 31, 2020, Selling Company Inc. (SCI) sold product to Buying Company Ltd (BCL), accepting a 3%, four-year (4-year)
promissory note of $400,000 in exchange. Interest is payable annually on December 31, starting December 31, 2021. SCI normally
pays 6% interest to borrow funds. BCL, however, normally pays 8% to borrow funds. The product sold is carried on SCl's books at a
manufactured cost of $255,000. Assume SCI uses the perpetual inventory system.
PARTI
REQUIRED: Prepare the required journal entries for SCI to record the transaction at December 31, 2020. Assume that the effective
interest method is used and round all values to the nearest dollar. For each component of the journal entries, clearly state whether
the entry (dr./cr.) is made to the income statement (1/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For
example, Dr. Cash (BIS) $10; Cr. Revenue (I/SJ $10. (7 marks)
PART II
REQUIRED: Prepare all required journal entries for 2021 (for SCI) relating to the sale. For each component of the journal entries,
clearly state whether the entry (dr./cr.) is made to the income statement (1/S), balance sheet (B/S) or statement of other
comprehensive income (OCI). For example, Dr. Cash (B/SJ $10; Cr. Revenue (I/SJ $10. (4 marks)
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PART Ill
REQUIRED: Prepare all required journal entries for 2024 (for SCI) relating to the sale. For each component of the journal entries,
clearly state whether the entry (dr./cr.) is made to the income statement (1/S), balance sheet (B/S) or statement of other
comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue {I/S) $10. (4 marks)
PART IV
REQUIRED: What is the pattern of interest expense in this question (i.e. is it increasing, decreasing, or is it constant over the years)?
Explain why this pattern exists. (2 marks)
PARVV
REQUIRED: Assume that SCI is having liquidity problems and needs to receive cash immediately. How can they use the receivable to
do so, and what is the impact on its financial statements? (4 marks)
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QUESTION 3 (19 marks)
Answer the following independent parts. For each component of the journal entries, clearly state whether the entry (dr./cr.) is made
to the income statement (1/5), balance sheet (B/5) or statement of other comprehensive income (OCI). ·For example, Dr. Cash (B/5)
$10; Cr. Revenue (1/5) $10.
PARTI
Frances Limited Inc. has a fiscal year end on June 30. Below is an inventory purchases and sales record for the year ending on June
30, 2021. This record is maintained by the warehouse managers, and none of this information has been entered in the company's
accounting software. The company has only one product in inventory, and all units of that product are the identical (homogenous).
Date Units Purchased Units Sold Units Balance
July 1, 2020 45 (@ $100 each)
February 13, 2021 30 ($130 each)
February 26, 2021 45 ($125 each)
March 17, 2021 80 @ $165 each
April 25, 2021 70 ($145 each)
May 28, 2021 30@ $185 each
June 19, 2021 50@ $195 each
June 30, 2021 30
a) REQUIRED: Using the FIFO Method (under perpetual inventory system), calculate the company's cost of goods sold (COGS)
for fiscal year ending June 30, 2021. Show all calculations for full marks. (S marks)
b) REQUIRED: Using the FIFO Method (under perpetual inventory system), prepare the journal entry (entries) for the May 28,
2021 sale assuming cash is received. (4 marks)
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PART II
On June 30, 2021, the inventory of BarySound Inc. (BSI) was categorized as follows:
Cost Net Realizable Value
Type A $422,000 $360,000
Type B 540,000 575,000
TypeC 675,900 650,000
TypeD 471,200 475,000
Total 2,109,100 2,060,000
BSI values inventory on an item-by-item basis.
REQUIRED: Prepare the needed adjusting journal entry to write down the inventory (using the allowance method). (5 marks)
PART Ill
On April 15, 2021, a fire destroyed the entire uninsured inventory of a retail store of LocalWares Ltd (LWL). The following data
are available:
Sales, July 1, 2020 through April 15, 2021
Inventory, July 1, 2020
Purchases, July 1, 2020 through April 15, 2021
Markup on cost
$4,500,000
750,000
3,750,000
25%
REQUIRED: What is the estimated cost of destroyed inventory, if any, at April 15, 2021? Use the Gross Profit Method of estimating
inventory to support your answer and show all calculations for full marks. (5 marks)
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QUESTION 4 (36 marks)
Renfro Corporation (RC) has a fiscal year end of December 31 and applies straight-line depreciation to its PP&E. RC purchased
$4,500,000 a building on July 1, 2020.
Answer the following independent parts. For each component of the journal entries, clearly state whether the entry {dr./cr.) is made
to the income statement (1/S), balance sheet (B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S)
$10; Cr. Revenue (1/S) $10.
PARTI
Suppose the building is used as a warehouse (for production). It was estimated that the building has a useful life of 30 years at
purchase {no residual or salvage value). RC uses a revaluation model for its PP&E and it re-values all of its PP&E every three years to
make sure that the book values of its long term productive assets are not too far from their market values. On December 31, 2022,
the building was estimated to have a fair value of $3,875,000. Also on December 31, 2022, RC adjusted the useful life of the building
to be 25 more years. On December 31, 2025, the building was estimated to have a fair value of $3,750,000.
a) REQUIRED: Prepare all journal entries needed for the revaluation on December 31, 2022. (9 marks)
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b) REQUIRED: Prepare all journal entries needed for the revaluation on December 31, 2025. (10 marks)
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PART II
Suppose the building is used as a warehouse {for production). It was estimated that the building has a useful life of 30 years at
purchase (no residual). RC uses a revaluation model for its PP&E and it re-values all of its PP&E every three years to make sure that
the book values of its long term productive assets are not too far from their market values. On January 1, 2022, the building was sold
for $4,375,000 in order to obtain fund for a new and more upgraded warehouse and cash was received.
REQUIRED: Prepare the journal entry for the sale (assuming all the accounts associated with the building have been kept updated on
the date of sale). (8 marks)
PART Ill
Suppose the building is used as a warehouse (for production). It was estimated that the building has a useful life of 30 years at
purchase (no residual). On July 1, 2021, RC decided to discontinue a major line of its business, and the building belongs to the
discontinued component. On December 31, 2021, the building is estimated to have a fair value of 4,000,000 {the cost to sell it is
negligible).
REQUIRED: Prepare necessary journal entry {or entries) on December 31, 2021. (S marks)
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PART IV
Suppose that the building RC purchased at $4,500,000 on July 1, 2020 was considered as an investment property (for renting}. On
December 31, 2020, the building was estimated to have a fair value of $4,875,000. Prepare necessary journal entry (or entries) on
December 31, 2020. (4 marks)
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QUESTION 5 (8 marks)
Information Processing Inc {IPI) exchanged machinery that it uses in its manufacturing operations for similar equipment that is used
in the operations of Cathy Company (Cathy). IPI also gave Cathy $85,000 in the exchange. The following information pertains to the
exchange:
Equipment (cost)
Accumulated Amortization
FV of equipment
Cash received (paid)
IPI
$2,270,000
1,170,000
920,000
(85,000)
Cathy
$2,560,000
1,360,000
Unknown
85,000
Assume amortization has already been updated to the date of the exchange.
REQUIRED: Prepare the journal entry on IPl's books assuming that the exchange is determined to have commercial substance. For
each component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (1/S), balance sheet
(B/S) or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (1/S) $10.
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QUESTION 6 (20 marks)
Peggy Computer Company (PCC) uses the straight-line method for all amortization and amortizes its patents over their legal life. On
January 2, 2020, PCC acquired patents with remaining legal life of 15 years at a cost of $225,000. PCC calculates amortization
expense from the nearest full month. At December 31, 2022, management of PCC determined that the net (undiscounted) future
cash flows that are expected from use of the patents would be $185,000, the value in use was $175,000, the fair value (or resale
value) of the patent was approximately $170,000 and disposal costs would be $10,000.
PARTI
Suppose PCC follows ASPE.
REQUIRED: What model should PCC apply to account for the impairment of its patents? Are there any Impairments to the patents?
Show all the calculations to support your answer. Prepare the journal entry to record the impairment if there is any. For each
component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (1/S), balance sheet (B/S)
or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (1/S) $10. (5 marks)
PART I
Suppose PCC follows IFRS.
REQUIRED: What model should PCC apply to account for the impairment of its patents? Are there any impairments to the patents?
Show all the calculations to support your answer. Prepare the journal entry to record the impairment if there is any. For each
component of the journal entries, clearly state whether the entry (dr./cr.) is made to the income statement (1/S), balance sheet (B/S)
or statement of other comprehensive income (OCI). For example, Dr. Cash (B/S) $10; Cr. Revenue (1/S) $10. (8 marks)
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PART Ill
PCC has some indefinite-life intangibles. The carrying value of these intangibles on December 31, 2022 was $180,000. On the same
day, management of PCC determined that the net (undiscounted) future cash flows that are expected from use of the intangibles
would be $185,000, the value in use was $175,000, the fair value (or resale value) of the patent was approximately $170,000 and
disposal costs would be $10,000. Suppose PCC follows ASPE.
REQUIRED: Are there any impairments to the intangibles? Show all the calculations to support your answer. Calculate the amount of
impairment loss, if there is any. For each component of the journal entries, clearly state whether the entry (dr./cr.) is made to the
income statement (1/S), balance sheet (B/S) or statement.of other comprehensive income {OCI). For example, Dr. cash {B/S) $10; Cr.
Revenue (1/S) $10. (3 marks)
PART IV
REQUIRED: Will any of your answer in Part Ill change if PCC follows IFRS instead of ASPE? Are there any impairments to the
intangibles? Show all the calculations to support your answer. Calculate the amount of impairment loss, if there is any. (4 marks)
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