BUSI 2001 Intermediate Accounting 1

Test 1 Sample Questions

Question 1 (10 marks) (20 minutes)
Each question is worth 2 marks.
1.

If the month-end bank statement shows a balance of $31,000, outstanding cheques

are $12,000, a deposit of $4,000 was in transit at month end, and a cheque for $500
was erroneously charged by the bank against the account, the adjusted balance in
the bank account at month end is
a) $22,500
b) $23,500
c) $15,500
d) $38,500

2.

Orr Co. prepared an aging of its accounts receivable at December 31, 20x5, and
determined that the net realizable value of the receivables was $250,000. Additional
information is available as follows:
Allowance for uncollectible accounts at Jan 1, 20x5 - credit balance
Accounts written off as uncollectible during 20x5
Accounts receivable at December 31, 20x5
Uncollectible accounts recovery during 20x5
For the year ended December 31, 20x5, Orr's bad debt expense would be
a) $23,000
b) $20,000
c) $15,000
d) $10,000

$28,000
23,000
270,000
5,000

3.

Grant Companys accounting records indicated the following information:

Inventory, Jan 1, 20x2
Purchases during 20x2
Sales during 20x2

$ 600,000
3,000,000
4,000,000

A physical inventory taken on December 31, 20x2, resulted in an ending inventory

of $700,000. Grants gross profit on sales has remained constant at 30% in recent
years. Grant suspects some inventory may have been taken by a new employee. At
December 31, 20x2, what is the estimated cost of missing inventory?
a) $100,000
b) $150,000
c) $200,000
d) $800,000
4.

Barclay Inc. uses the retail inventory method. The following information is
available for the current year:
Cost
Retail
Beginning inventory
Purchases
Freight-in
Employee discounts
Net mark-ups
Net markdowns
Sales

$117,000
442,000
8,000

What is the approximate cost of the ending inventory?

a) $153,720
b) $147,000
c) $143,800
d) $142,380

$183,000
623,000
3,000
22,000
30,000
585,000

Question 2

(5 marks)

(10 minutes)

Peters Appliance Shop has a balance of $14,000 in its prepaid rent account on Aug 31,
20x4. We are in the process of preparing financial statements for the year ended Aug 31,
20x5. Beginning July 1, 20x5 Peter pays $4,000 a month for the rent of its store. The
terms of the lease require that rent be paid six months in advance on January 1 and July 1
of each year. Before July 1, 20x5 Peter paid $3,500 a month in rent. In addition, the new
lease requires Peter to pay 2% of annual sales to the property owner 60 days after the
year end. The prepaid rent at the beginning of the year represented 4 months of prepaid
rent at the old location. Annual sales amounted to $1,350,000.
Calculate the rent expense for the year ended Aug 31, 20x5. What is the balance in the
prepaid rent account at Aug 31, 20x5.
Question 3

(8 marks)

(16 minutes)

On September 30, 20x4 the Pantec Company sold a piece of equipment to Berry
Corporation and accepted a note with a face value of $150,000. The equipments cash
price was $140,000. Pantec has a December 31 year end.
The terms of the note receivable are as follows: $150,000 payable on September 30, 20x9
and 3% interest on the notes face value payable September 30 each year starting
September 30, 20x5.
Required
Prepare all journal entries for the period Sep 30, 20x4 to Dec 31, 20x5.
Question 4

(13 marks)

(26 minutes)

Caliente Corp., a leader in the commercial cleaning industry, acquired and installed, at a
total cost of $12,000,000 three underground tanks for the storage of hazardous liquid
solutions needed in the cleaning process. The tanks were ready for use on December 31,
20x0. The provincial ministry of the environment regulates the use of such tanks and
requires them to be disposed of after 20 years of use. Caliente estimates that the cost of
digging up and removing the tanks in 20x21 will be $3,500,000. An discount rate is 6%.
a.
b.

Prepare the journal entries at December 31, 20x0 and December 31, 20x1.
In 20x13, the estimate of the dismantling cost is $2,500,000 and the estimate of
the discount rate has changed to 4%. What is the depreciation expense and the
interest expense on the asset retirement obligation in 20x13?

SOLUTION
Question 1
1.

$31,000 + 500 + 4,000 12,000 = $23,500

2.

$28,000 Op Bal 23,000 Write Offs + 5,000 Recovery + ??? Bad Debts
= $20,000 Ending Balance
Bad debts = $10,000

3.

COGS = $4,000,000 x 70% = 2,800,000

End Inv = $600,000 + 3,000,000 2,800,000 = $800,000
Loss = $800,000 700,000 = $100,000

4.

Beginning inventory
Purchases
Freight-in
Net mark-ups

$117,000
442,000
8,000
567,000

Employee discounts
Net markdowns
Less sales
Inventory at cost = $210,000 x 567 / 828 = 143,804

$183,000
623,000
22,000
828,000
3,000
30,000
795,000
585,000
$210,000

Question 2
Rent expense
Sep 1, 20x4 to June 30, 20x5: $3,500 x 10 months
July 1, 20x5 to Aug 31, 20x5: $4,000 x 2 months
Rent based on sales: $1,350,000 x 2%

1
1
1

$35,000
8,000
27,000
$70,000

Prepaid rent: $4,000 x 4 months

$16,000

Question 3
Imputed interest:
Enter
compute

N
5

I/Y

FV
150,000

PV
-140,000

PMT
4,500

X = 4.52%

2 marks

Sep 30, 20x4

Note receivable
Sales revenue

140,000
140,000

1 mark

Dec 31, 20x4

Sep 30, 20x5

Dec 31, 20x5

Interest receivable
Interest revenue
140,000 x 4.52%x 3/12

1,582
1,582
1 mark

Cash
Notes receivable
Interest receivable
Interest revenue
140,000 x 4.52%x 9/12
Interest receivable
Interest revenue
141,828 x 4.52%x 3/12

4,500
1,828
1,582
4,746

1,602
1,602
2 marks

Question 4
a.

N = 20, I = 6, FV = 3,500,000
PV = 1,091,317 1 mark
Dec 31, 20x0

Tanks
Cash
Asset Retirement Obligation

13,091,317
12,000,000
1,091,317

1 mark

Dec 31, 20x1

Interest expense
Asset Retirement Obligation
$1,091,317 x 6%

65,479
65,479

1 mark

Depreciation expense
Accumulated depreciation
$13,091,317 / 20

654,566
654,566

1 mark

b.

PV of existing ARO:
N = 8, I = 6, FV = 3,500,000
PV = 2,195,944 2 marks
PV of new ARO:
N = 8, I = 4, FV = 2,500,000
PV = 1,826,726 2 marks
Carrying value of Tanks at beginning of 20x13:
$13,091,317 x 8/20 = 5,236,527 2 marks
Depreciation expense = [$5,236,527 (2,195,944 1,826,726)] / 8
= $608,414 2 marks
Interest expense = $1,826,726 x 4% = 73,069

1 mark