University of Toronto
Faculty of Arts and Science
and
Rotman School of Management
RSM220H1S - Financial Accounting
Final Examinations
Duration: 3 hours
Aids allowed: Hand-held, battery-operated calculator
Please answer all questions on this exam paper
7 questions -you must answer ALL questions.
The exam consist of 22 pages
Time value of money tables are included at the end of the exam (pg. 22). You may rip the tables out when answering questions:
FIRST NAME
I
LAST NAME STUDENT#
Question Grade
1 / 20
2 / 12
3 /32
4 / 15
5 /
13
6
/8
7
/80
Total:
/180
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PAST EXAM 3
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QUESTION 1 (20 marks)
REQUIRED: Please answer the following questions by choosing the� answer (2 marks each):
1. Which of the following statements with respect to the impact of inventory errors is not correct? All else being equal,
a) an overstatement of ending inventory will result in an overstatement of income.
b) an overstatement of ending inventory will result in an understatement of Income.
c) an overstatement of beginning inventory will result in an understatement of income.
d) an understatement of beginning inventory will cause cost of goods sold to· be understated
2. Which of the following does not correctly describe a perpetual inventory accounting system?
a) In a perpetual system cost of goods sold are calculated every time a sale is made.
b) In a perpetual system, assuming shrinkage of zero, inventory and cost of goods sold do not have to be updated at the end of
the period.
c) In a perpetual system, assuming a FIFO cost flow, the cost of goods sold would equal those from a periodic system.
d) The use of this system eliminates the requirement for an annual physical inventory count.
3. Wells Corp. purchased machinery for $315,000 on July 1, 2020. It is estimated that it will have a useful life of 10 years, residual
value of $15,000, production of 240,000 units, and 25,000 working hours. During 2021, Wells Corp. produces 25,500 units using
the machine. What is the depreciation expense for 2021 under the double declining- balance method?
a) $55,500
b) $63,000
c) $56,700
d) $50,400
4. Under IFRS, what approach(es) can be. used to test the impairment of the long-lived assets?
a) Cost recovery impairment method
b) Rational entity impairment method
c) Revaluation impairment method
d) Both a) and b)
5. Under the deferral method, for non-owner contribution of equipment, what account should be credited?
a) Deferred Revenue
b) Retained Earnings
c) Accumulated Other Comprehensive Income
d) Accumulated Depreciation
6. Snead Corporation, which has a calendar year accounting period, purchased a new machine for $60,000 on April 1, 2011. At that
time, Snead expected to use the machlrie for nine years and then sell it for $6,000. The machine was sold for $33,000 on Sept.
30, 2016. Assuming straight-line amortization, no amortization in the year of acquisition, and a full year of amortization in the
year of retirement, the gain to be recognized at the time of sale would be
a) $6,000.
b) $4,590.
c) $3,000.
d) $0.
7. The most common method of recording depletion for accounting purposes is the
a) percentage depletion method.
b) decreasing charge method.
c) units-of-production method.
d) straight-line method.
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8. On April 1, Renfro Corporation purchased for $765,000 a tract of land on which was located a warehouse and office building.
The following data were collected concerning the property:
Land
Warehouse
Office building
Total
Current Assessed Valuation
$300,000
200,000
400,000
$900,000
Vendor's Original Cost
$250,000
150,000
300,000
$700,000
What are the appropriate amounts that Renfro should record for the land, warehouse, and office building, respectively?
a) Land, $250,000; warehouse, $150,000; office building, $300,000.
b) Land, $255,000; warehouse, $170,000; office building, $340,000.
c) Land, $273,214; warehouse, $163,929; office building, $327,857.
d) Land, $300,000; warehouse, $200,000; office building, $400,000.
9. Which one of the following conditions must be met in order to recognize revenues on sale of goods (under IFRS)?
a) The entity retains continuing managerial involvementto the degree usually associated with ownership
b) The costs incurred or to be incurred in respect of the transaction can be measured reliably.
c) It is probable that the economic benefits associated with the transaction will flow to the buyer
d) The entity retains effective control over the goods sold;
10. Which one of the following conditions must be met in order to capitalize costs relating to internally developed intangible
assets (under IFRS)?
a) The resulting product will become technically feasible within one year
b} The product can be sold in its current state
c) The company has plans to acquire technical expertise and ability to carry out the project
d) The company can reliably measure the expenditures attributable to the intangible asset during its development.
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QUESTION 2 (12 marks)
On December 31, 2020, Hall Company finished consultation services and accepted in exchange a promissory note with a face value
of $500,000, a due date of December 31, 2023, and a stated rate of eight percent (8%), with interest receivable at the end of each
year. It is determined that the effective rate for this type of note is ten percent (10%).
PART I (7 marks)
REQUIRED: Record this transaction on December 31, 2020. Clearly label each journal entry. For each component of the journal
entry, 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 (IIS) $10.
PART II (5 marks)
REQUIRED: Prepare the necessary journal entry related to this note on December 31, 2021, under the effective interest method
(Round to whole dollars). Clearly label each journal entry. For each component of the journal entry, 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 (!IS) $10.
QUESTION 3 (32 marks)
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Adventure Computer Company (ACC) sells a variety of computers and computer parts. The company has a fiscal year end on
December 31. Answer the following independent parts.
PART I (16 marks)
ACC's inventory record has the following information at the end of 2021:
Units Unit Cost
1,600 $18.00 January 1, 2021 (beginning inventory)
Purchases:
2,600 $20.00
2,400 $21.00
1,000 $22.00
January 5, 2021
March 10, 2021
June 15, 2021
September 26, 2021 1,800 $23.00
Sales:
3,400 $40.00 February 8, 2021
July 6, 2021 4,000 $42.00
REQUIRED:
1) Assuming ACC accounts for its inventory under the perpetual system. If First in, First out (FIFO) is used,
a. calculate the ending inventory at December 31, 2021, and
b. prepare the journal entry for the sale on February 8, 2021, assuming cash is received. Clearly label each journal
entry. For each component of the journal entry, 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/5) $10, Cr. Revenue (l/5) $10.
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2} Calculate the cost of goods sold for 2021 if weighted average cost is used. Show all work for full marks.
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PART II (10 marks}
The following information regarding ACC's inventory is found on December 31, 2021:
Item Cost NRV
Good Flash Drives $80,000 $120,000
Redberry Mobiles 50,000 40,000
Applebee Laptops 90,000 72,000
Leno Desktops 95,000 92,000
REQUIRED:
1) Prepare the required journal entry at December 31, 2021 relating to inventory. Clearly label each journal entry. For each
component of the journal entry, 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/5) $10, Cr. Revenue (I/SJ $10.
2) IAS 2 (Inventories) clearly states: "Inventories are usually written down to net realisable value item by item. In some
circumstances, however, it may be appropriate to group similar or related items" (IAS 2). How would your answer change in (1)
above if you used item by item analysis (rather than grouping at product level)? How would you justify ACC:s analysis at
product level (rather than item by item)?
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PART Ill (6 marks)
On December 10, 2021, ACC:s warehouse was partially destroyed by a fire, the cause of which is still under investigation. ACC's beginning
inventory on January 1, 2021 had a balance of $900,000. ACC's purchases for the year were $1.8 million, and purchase returns and
allowances were $200,000. Sales are made at a mark-up of 25% on cost and totaled $2.5 million right before this accident. The final
warehouse count indicated that goods' costing $200,000 was intact and the remaining goods were destroyed.
REQUIRED:
calculate the cost of goods destroyed using the Gross profit method. Show all calculations for full marks.
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QUESTION 4 (15 marks)
Pratt Company uses a mix of procedures to estimate uncollectible accounts. The trial balance before adjustment of Pratt Company
reports the following balances in 2021:
Accounts receivable
Allowance for doubtful accounts
Sales (all on credit)
Sales returns and allowances
PART I (2 marks)
Dr.
$160,000
30,000
Cr.
$ 2,000
950,000
REQUIRED: Based on the past experience, estimated bad debts are at 1% of net credit sales. Prepare the entries to recognize the
estimated bad debts.
PART II (5 marks)
REQUIRED: At the end of 2021, Pratt Company estimates that 8% of accounts receivable will not be collectible. Prepare any
adjusting entry, if necessary, to account for the proper amount of net accounts receivable. Clearly label each journal entry. For each
component of the journal entry, 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.
PART Ill (2 marks)
REQUIRED: How would the accounts receivable be presented on Pratt's Balance Sheet of 2021?
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PART IV (2 marks)
REQUIRED: On January 10, 2022, Pratt Company received the news that Agora Inc, one of Pratt's major customers, filed for
bankruptcy. As a result Pratt decided to write off an amount of $32,000 of accounts receivable owed by Agora Inc. Prepare the
journal entry for this event. Clearly label each journal entry. For each component of the journal entry, 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/SJ $10.
PART V {4 marks)
REQUIRED: On April 10, Pratt Company received cash of $20,000 from Degar Inc. for the accounts receivable that was previously
written off. Prepare the journal entry for this transaction. Clearly label each journal entry. For each component of the journal entry,
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/S) $10.
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QUESTION 5 (13 marks)
Answer the following independent parts:
PART I (5 marks)
One of Sneada Corporation's equipments has the following information:
Cost: $2,000,000
Accumulated amortization: $800,000.
Future net cash inflows from its use:
$1,500,000 (undiscounted amount) and $1,200,000 (appropriately discounted amount, or present value).
Estimated fair value (cost to sell is assumed to be 0): $1,000,000.
REQUIRED:
1) Determine if there is any asset impairment assuming ASPE is used. Explain your reasoning. What is the amount of
impairment loss if there is any?
2) Determine if there is any asset impairment assuming IFRS is used. Explain your reasoning. What is the amount of
impairment loss if there is any?
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PART II (8 marks)
Renfro Corporation (RC)'s fiscal year end is on December 31. RC uses a revaluation model for its PP&E and it revalues 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.
Straight-line depreciation is applied.
RC purchased $2,500,000 a building (warehouse) on January 1, 2019. It was estimated that the building has a useful life of 25 years
at purchase (no residual). On December 31, 2021, the building was estimated to have a fair value of $2,300,000.
REQUIRED:
Prepare all journal entries needed for the revaluation. 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 (8 marks)
Gerber Company exchanged machinery that it uses in its manufacturing operations for similar equipment that is used in the
operations of Rhome Company. Gerber also gave Rhome $450,000 in the exchange. The following information pertains to the
exchange:
Equipment (cost)
Accumulated Amortization
FV of equipment
Cash received (paid)
Gerber Company
$780,000
620,000
250,000
(450,000)
Rhome Company
$860,000
240,000
600,000
450,000
Assume amortization has already been updated to the date of the exchange.
PARTI
REQUIRED: Prepare the journal entry on Gerber' books assuming that the exchange is determined mzr.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 {I/S) $10.
PART II
REQUIRED: How would journal entry be different if the exchange is determined to have commercial substance?
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