BUSI 353

Extra practice Midterm questions (solutions are in the back part of this file)

Multiple choice questions (1 Mark each; Recommended time allocation: 10 Minutes)

1. Objectives of financial reporting do NOT include

a) providing information that is useful to users in making resource allocation decisions.
b) providing information about the liquidation value of an enterprise.
c) providing information about an entity’s economic resources, obligations, and equity/net assets.
d) providing information about changes in an entity’s economic resources, obligations, and equity/net
assets.
e) providing information for assessing management stewardship.

2. Fundamental qualitative characteristics include

a) relevance and comparability.
b) faithful representation and timeliness.
c) relevance and faithful representation.
d) verifiability and relevance.
e) understandability and faithful representation.

3. Financial statements prepared under ASPE include a

a) statement of comprehensive income.
b) statement of cash flows and a statement of changes in shareholders’ equity.
c) balance sheet and a statement of retained earnings.
d) statement of retained earnings and a statement of comprehensive income.
e) statement of changes in shareholders’ equity and balance sheet.

4. During a major renovation project of its head office, a worker was seriously injured. While the company
believes that it was not at fault, it does include the incident in the notes to its financial statements. This is
consistent with the
a) full disclosure principle.
b) financial capital maintenance assumption.
c) going concern assumption.
d) economic entity assumption.
e) cost-benefit trade-off

5. During 2021, Cantaloupe Corp disposed of Raspberry Division, a major segment of its business. Cantaloupe
realized a gain of $1,500,000, net of taxes, on the sale of Raspberry’s assets. During 2021, Raspberry’s
operating losses, net of taxes, were $1,800,000. How should these facts be reported in Cantaloupe’s income
statement for 2021?
Total Amount to be Included in
Income from Results of
Continuing Operations Discontinued Operations
a) $1,800,000 loss $1,500,000 gain
b) $300,000 loss 0
c) 0 $300,000 loss
d) $1,500,000 gain $1,800,000 loss
e) $1,800,000 loss $300,000 loss

6. Pluto Corp.'s trial balance included the following account balances at December 31, 2021:

Accounts receivable (net) ............................................................. $41,000

Trading securities ......................................................................... 7,000
Accumulated depreciation on equipment and furniture ................. 15,000
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 Cash ............................................................................................. 10,000
Inventory....................................................................................... 27,000
Equipment .................................................................................... 25,000
Patent ........................................................................................... 4,000
Prepaid expenses ......................................................................... 1,500
Land held for future business site ................................................. 18,000

Under typical circumstances, in Pluto’s December 31, 2021 statement of financial position, the current assets
total is
a) $104,500.
b) $90,500.
c) $86,500.
d) $73,500.
e) none of the above

7. Your company uses an Aging Method to account for its bad debts. The ledger currently shows a balance in
Allowance for Doubtful Accounts of $11,700. The following aging information is available to you. What journal
entry should be recorded to reflect bad debts?

Days Outstanding Accounts Receivable Balance Estimated Amount Uncollectible

0-30 $100,000 1.0%
31-90 $200,000 2.0%
Greater than 90 $300,000 3.0%

a) DR Bad Debt Expense 2,300

CR Allowance for Doubtful Accounts 2,300
b) DR Allowance for Doubtful Accounts 2,300
CR Bad Debt Expense 2,300
c) DR Bad Debt Expense 2,300
CR Accounts Receivable 2,300
d) DR Allowance for Doubtful Accounts 2,300
CR Bad Debt Expense 2,300
e) None of the above

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Question 1: Statement of changes in shareholders’ equity (8 Marks; Recommended Time Allocation: 15
Minutes)

Tote Ltd. reported the following balances at January 1, 2021:

Common shares .................................................................................. $420,000
Retained earnings ............................................................................... 30,000
Accumulated other comprehensive income ......................................... 58,000

During the year, Tote earned comprehensive income of $270,000 and dividends of $5,000 were declared. Net
income (Profit) was $200,000.

Instructions
Prepare a statement of changes in shareholders’ equity for the year ended December 31, 2021.

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Question 2: Discontinued operations (12 Marks; Recommended Time Allocation: 22 Minutes)

Doberman Corporation operates several stores in British Columbia (Vancouver, Victoria, Kamloops, Penticton
and Prince George). The restructuring of its organization on November 20, 2021 has led to the decision to sell
its Prince George store. In preparing financial statements at December 31, 2021, the following information was
made available:
1. The Prince George operation incurred a loss of $283,500 for the 2021 calendar year, including $225,000
for the period January 1 to November 20, 2021.
2. Estimated costs to sell are $300,000.
3. At December 31, 2021, the fair value of the Prince George non-current assets, which are held for sale in
accordance with IFRS, is estimated at $7 million and the carrying (book) value is $7.3 million.
4. The combined provincial and federal income tax rate is 30%.
5. It is estimated that the operation will lose an additional $250,000 in 2022 before it is sold.
6. Doberman’s “Income before Discontinued Operation” is $290,000.

Instructions
a) The Prince George operation qualifies for reporting as a discontinued operation. Prepare the lower portion
of Doberman’s 2021 income statement starting with “Income before Discontinued Operation.”

b) In early 2022, the Prince George operation is sold for $8.5 million, with actual costs to sell of $400,000.
The operation lost an additional $150,000 before it was sold. What amount should be reported in the
discontinued operations section of Doberman’s 2022 income statement?

c) What conditions must be met in order for Prince George store to be reported as a discontinued operation?

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Question 3. Percentage-of-completion and completed-contract methods (15 Marks; Recommended Time
Allocation: 27 Minutes)

On February 1, 2020, Owl Contractors agreed to construct a building at a total contract price of $3,000,000.
Information relating to the costs and billings for this contract is as follows:

2020 2021 2022

Total costs incurred to date $ 750,000 $1,320,000 $2,300,000
Estimated costs to complete 1,250,000 880,000 -0-
Progress billings to date 1,100,000 2,000,000 3,000,000
Cash Collections during the year 1,000,000 750,000 1,200,000

Instructions

Calculate all percentage calculations to two decimal places (e.g. 12.34%).

a) Using the percentage-of-completion method, calculate the revenue and gross profit that should be
reported for 2020, 2021, and 2022. (3 Marks)

b) Under completed contract method, calculate the revenue and gross profit that should be reported for
2020, 2021, and 2022. (3 Marks)

c) Assume that the estimated cost to complete in 2021 was $1,800,000 instead of $880,000. Prepare the
journal entries for 2021 under both completed contract and percentage-of-completion methods. (6
Marks)

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Question 4: Comprehensive income statement and retained earnings (17 Marks; Recommended Time
Allocation: 30 Minutes)

Spaniards Corporation's capital structure consists of 20,000 common shares. At December 31, 2021 an
analysis of the accounts and discussions with company officials revealed the following information:

Sales ............................................................................................ $1,200,000

Purchase discounts ...................................................................... 18,000
Purchases .................................................................................... 720,000
Earthquake loss (net of $18,000 tax) ........................................... 42,000
Selling expenses .......................................................................... 128,000
Other comprehensive loss ............................................................ 40,000
Cash ............................................................................................. 60,000
Accounts receivable...................................................................... 90,000
Accumulated depreciation............................................................. 180,000
Dividend income ........................................................................... 18,000
Inventory, January 1, 2021 ........................................................... 152,000
Inventory, December 31, 2021 ...................................................... 125,000
Unearned service revenue ............................................................ 4,400
Accrued interest payable .............................................................. 1,000
Land ............................................................................................. 370,000
Patents ......................................................................................... 100,000
Retained earnings, January 1, 2021 ............................................. 270,000
Interest expense ........................................................................... 17,000
Cumulative effect of change from straight-line to accelerated
depreciation (net of $15,000 tax) .................................................. 35,000
General and administrative expenses ........................................... 160,000
Dividends declared ....................................................................... 29,000
Allowance for doubtful accounts ................................................... 5,000
Notes payable (maturity July 1, 2024) ........................................... 200,000
Machinery and equipment............................................................. 450,000
Materials and supplies .................................................................. 40,000
Accounts payable ......................................................................... 60,000
Accumulated Other Comprehensive Income, January 1, 2021 ..... 49,000

Unless indicated otherwise, you may assume a 30% income tax rate.

Instructions
a) Compute what should be the Cost of Goods Sold. (3 Marks)
b) Prepare, in good form, a multiple-step comprehensive income statement. (7 Marks)
c) Why do you think the Comprehensive Income Statement does NOT show any: (1) Depreciation Expense, or
(2) Salaries and Wages Expense? Should they be shown? Explain.
d) Prepare, in good form, the Retained Earnings portion of the Statement of Changes in Equity. (5 Marks)
e) What should be the balance of Accumulated Other Comprehensive Income (Loss) as of December 31,
2021?

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Question 5: Transfers of Receivables (8 Marks; Recommended Time Allocation: 15 Minutes)

Your company has decided to transfer all of its accounts receivable to a factoring company. The ledger
currently shows the following account balances:

 Accounts Receivable: $100,000

 Allowance for Doubtful Accounts: $9,000.

The factor charges a fee of 4% of the full balance of accounts receivable. There are no holdbacks.

(A) The factor believes that the Allowance for Doubtful Accounts should be $11,000. Accordingly, the factor
pays your company $89,000 minus the fee. What journal entry or entries should be recorded if the transfer
is made with recourse?

(B) The factor believes that the Allowance for Doubtful Accounts should be $16,000. Accordingly, the factor
pays your company $84,000 minus the fee. What journal entry or entries should be recorded if the transfer
is made without recourse?

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Question 6: Promissory Note Receivable (8 Marks; Recommended Time: 15 Minutes)

On January 1, 2020, ABC Company, a public company, sold machinery for $20,000 cash and a 2 year, 2%
interest-bearing note of $50,000, maturity date December 31, 2021. Market rate for a note with similar risk is
5%. The cost of the machinery was $17,000.

Instructions: Use the gross method

1. Prepare all journal entries from the sale date to maturity date.
2. Assume that after ABC received the payment on December 31, 2020, the buyer renegotiated the terms
on the note as follows: two interest payments of $850 at the end of 2021 and 2022, and $45,000 at
December 31, 2022. Current market rate is 7%. Prepare the journal entry, if any, for this revised note
receivable.
3. Would your answer be different if ABC was following ASPE? Explain and include any change in the
calculation of the impairment loss, if any.

Round to the nearest dollar and show all work for full marks

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Solutions to extra practice questions:

MCQs solutions:

1. b
2. c
3. c
4. a
5. c
6. c $41,000 + $7,000 + $10,000 + $27,000 + $1,500 = $86,500
7. a (1%x100,000 + 2%x200,000 + 3%x300,000) -11,700 = 2,300

Question 1 Solution
TOTE LTD.
Statement of Changes in Shareholders’ Equity
For the Year Ended December 31, 2021

Accumulated Other
Common Retained
Comprehensive
Total Shares Earnings Income
Beginning balance,
$508,000 $420,000 $ 30,000 $58,000
January 1, 2021

Net income 200,000 200,000

Dividends declared 5,000 5,000

Other comprehensive
income 70,000 70,000

Ending balance,
$773,000 $420,000 $225,000 $128,000
December 31, 2021

Note: net income or loss is closed to Retained earnings. OCI does NOT appear under Retained earnings as it
is closed to AOCI.

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Question 2 Solution

a) Discontinued operations of Prince George store

Income before Discontinued Operations 290,000

Discontinued Operation:
1. Loss from operations $283,500, net of tax benefit $85,050* (198,450)
2. Write-down of held for sale assets, net of tax benefit $180,000** (420,000)
(618,450)

Net Income (Loss) (328,450)

Calculations:
* Loss from operations 283,500 x .30 tax = 85,050 tax and 198,450 after tax
** FVLCTS = 7,000,000 – 300,000 = 6,700,000. CV 7,300,000 – FVLCTS 6,700,000 = 600,000
600,000 x .30 tax = 180,000 tax. 420,000 after tax

Note under discontinued operations

 Show one line for the profit/loss from operations and a separate second line for either the
actual gain or loss on disposal of the assets or the write down amount (as above).
Alternatively, you can combine the two lines and disclose the split.
 show the actual $ value for the tax under discontinued operations (i.e. 85,050 and 180,000)

b)
Sale price ..................................................................................... $8,500,000
Actual costs to sell ........................................................................ (400,000)
Actual FVLCTS ............................................................................. 8,100,000
Minus previously reported carrying value (last year’s FVLCTS) .... (6,700,000)
Less additional loss from operations ............................................. (150,000)

Estimated pre-tax amount ............................................................. 1,250,000

Applicable income tax at 30% ....................................................... (375,000)
Income from discontinued operations ........................................... $ 875,000

c) Discontinued Operation (IFRS)

A discontinued operation is a Component of an entity that either has been disposed of, or is classified as Held
for Sale, and:
(i) represents (or is part of) a separate major line of business or geographical area of operations; or
(ii) is a subsidiary acquired exclusively with a view to resale.

Component – A component of an enterprise comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the enterprise.

Held for Sale – the important criteria of Held for Sale are:
1. the assets and liabilities are available for immediate sale;
2. the sale is highly probable:
(a) Management is committed to a plan to sell;
(b) Initiated an active program to identify a buyer;
(c) Selling price is reasonable in relation to current fair value; and
(d) Expected to be sold within 1 year.

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Question 3 Solution

a) Percentage-of-Completion
Revenue Gross Profit
2020 $1,125,000a $375,000aa
2021 $ 675,000b $105,000bb
2022 $1,200,000c $220,000cc
Total $3,000,000 $700,000**
a
$750,000
————— = 37.50% × $3,000,000 contract price = $1,125,000
$2,000,000
aa
$1,125,000-750,000 = $375,000

b
$1,320,000
————–— = 60.00% × $3,000,000 = $1,800,000
$2,200,000

Less 2020 revenue (1,125,000)

Equals 2021 revenue $ 675,000
bb
$675,000 – 570,000 (=$1,320,000-$750,000) = $105,000
c
Total revenue $ 3,000,000
Recognized to date (1,800,000)
2022 revenue $ 1,200,000
cc
1,200,000- 980,000 (=2,300,000-1,320,000) = $220,000
**
Total revenue $3,000,000
Total costs 2,300,000
Total gross profit $ 700,000

b) Under completed contract method no revenue would be recognized until the contract is completed. Hence
no revenue or gross profit recognized in 2020 or 2021. In 2022, the full revenue of $3,000,000 and gross profit
of $700,000 would be recognized

c) For both methods in 2021, recognize the full loss:

Total estimated cost = 1,320,000 + 1,800,000 = $3,120,000. Hence unprofitable contract as total revenue =
$3,000,000 thus estimated loss of $120,000.

Completed contract method:

Loss on LT contract 120,000
Construction in progress inventory 120,000

Percentage of completion method:

Steps for the 4th Journal entry when contract is unprofitable:
1. Calculate revenue as normal
Percent complete = 1,320,000/3,120,000 x $3,000,000 = 1,269,231
Revenue to date (2020) 1,125,000
Revenue this year 144,231

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 2. CR CIP Inventory = Loss ($120,000) + previous years’ profits, $375,000 = $495,000 (see Note 2
below)
3. Costs of Construction is to balance journal entry

(1) CIP Inventory (1,320,000 – 750,000) 570,000

Cash, Accounts Payable, etc. 570,000

(2) Accounts Receivable 900,000

Billings on Contract (2,000,000 – 1,100,000) 9000,000

(3) Cash 750,000

Accounts Receivable 750,000

(4) **SEE CALCULATIONS above**

Costs of Construction --- to balance JE 639,231

CIP Inventory 495,000
Construction Revenue 144,231
NOTICE: 144,231-639,231 = (495,000)

######## OR ########

CIP Inventory 144,231

Construction Revenue 144,231

Costs of Construction 570,000

CIP Inventory 570,000

Costs of Construction (or Loss on Contract) 69,231

CIP Inventory (See Note 1 and Note 2 below) 69,231

Note 1

2021 reported loss, before additional accrual:

Revenue 144,231
Costs of Construction (570,000)
Loss before additional accrual (425,769)

Additional accrual required:

Let X be the additional amount of accrual that is required.

(425,769) + X = (495,000) Solve for X  X = (69,231)

Note 2

Notice the end result:

Construction Revenue 144,231

Costs of Construction (570,000) }(570,000)+(69,231) = (639,231)
Additional loss accrual (69,231) }
2021 Loss associated with this contract (495,000)

Over the 2 years, Year 2020 and Year 2021, combined, the reported loss is $120,000, but for each individual year, we
observe:
 Year 2020 Income: 375,000
 Year 2021 Loss: (495,000)
 Combined 2 years: Loss of (120,000), which is the expected loss on the contract
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Question 4 Solution

a. Cost of Goods Sold

Merchandise inventory, Jan. 1 ...................................................... $152,000

Purchases $720,000
Less purchase discounts 18,000
Net purchases........................................................................ 702,000
Merchandise available for sale (COGAS) ..................................... 854,000
Less merchandise inventory, Dec. 31 ........................................... 125,000
Cost of goods sold ................................................................. 729,000

b.
SPANIARDS CORPORATION
Statement of Comprehensive Income
For the Year Ended December 31, 2021

Sales ................................................................................................... $1,200,000

Cost of goods sold ................. 729,000
Gross profit on sales ............................................................................ 471,000
Operating expenses
Selling expenses .......................................................................... 128,000
General and administrative expenses ........................................... 160,000
Total operating expenses ....................................................... 288,000
Operating income ................................................................................ 183,000
Other revenue and gains
Dividend income ........................................................................... 18,000
Other expenses and losses
Interest expense ........................................................................... (17,000)
Loss from earthquake ................................................................... (60,000) (77,000)
Income before taxes ............................................................................ 124,000
Income taxes ................................................................................ 37,200
Net Income .......................................................................................... $86,800
Other comprehensive loss, net of tax (40,000 – 30%)........................ (28,000)
Comprehensive income ....................................................................... $ 58,800

c. IFRS permits a company to present expenses using a Nature of Expenses or a Function of Expenses
approach. However, if a Function approach is used, disclosure must be made of certain expense categories
such as “Depreciation Expense” and “Salaries and Wages Expense.” In particular, IAS 1, paragraph 104
says:

An entity classifying expenses by function shall disclose additional information on the nature of expenses,
including depreciation and amortisation expense and employee benefits expense.

In the case of this question, it is likely the case that Depreciation Expense and Salaries and Wages Expense
are not shown on the CIS because the company has chosen to use the Function approach to expense
presentation/classification. This implies that there is some depreciation included in COGS, some depreciation
included in Selling Expenses, and some depreciation included in General and Administrative Expenses. A
similar comment can be made about Salaries and Wages. However, the company would need to provide
additional disclosure of the amount of the total of Depreciation and Salaries and Wages.

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d.
SPANIARDS CORPORATION
Statement of Changes in Equity (Retained Earnings portion only)
For the Year Ended December 31, 2021

Opening retained earnings, January 1, 2021, as previously reported $270,000

Cumulative effect of change in depreciation methods,
net of applicable taxes of $15,000* ................................................ (35,000)
Opening retained earnings, January 1, 2021, as restated................... 235,000
Add: Net income .................................................................................. $86,800
Deduct: Dividends declared ................................................................. 29,000 57,800
Ending retained earnings, December 31, 2021 .................................... $292,800

* 50,000 x .3 = 15,000 tax which you must show on the face of the statement.
Note: add net income to R/E (OCI is not part of R/E).

e. Balance of Accumulated Other Comprehensive Income (AOCI) as of December 31, 2021

Opening AOCI, January 1, 2021 .......................................................... $49,000

Add: Other Comprehensive Income during the year ............................ $ 0
Deduct: Other Comprehensive Loss during the year ........................... (28,000) (28,000)
Ending AOCI, December 31, 2021 ...................................................... $21,000

Question 5 Solution

(A)

DR Bad Debt Expense ..................................................................................... 2,000

CR Allowance for Doubtful Accounts ....................................................... 2,000

DR Cash ........................................................................................................ 85,000

DR Discount on Notes Payable..................................................................... 4,000
CR Notes Payable ................................................................................. 89,000

(B)

DR Bad debt expense ........................................................................... 7,000

CR Allowance for Doubtful Accounts .................................................. 7,000

DR Cash ............................................................................................. 80,000

DR Interest Expense ............................................................................ 4,000
DR Allowance for Doubtful Accounts............................................... 16,000
CR Accounts Receivable ...................................................................... 100,000

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Question 6 Solution

1. January 1, 2020 - sold machinery:

Cash ......................................................................................... 20,000

Note receivable ....................................................................... 50,000
Sales revenue (cash $20,000 + PV of note, $47,211*) ...... 67,211
Discount on note receivable ($50,000 - $47,211*) ............. 2,789

*FV = $50,000, PMT = 50,000 x .02 = 1,000, n = 2, i = 5%, PV = ? = $47,211

$50,000 - $47,211 PV = discount of 2,789

Cost of Goods Sold ................................................................. 17,000

Inventory ........................................................................... 17,000

December 31, 2020 - adjusting entry for interest

Cash ......................................................................................... 1,000

Discount on note receivable ..................................................... 1,361
Interest revenue ($47,211 x .05 x 12/12) ........................... 2,361

OR

Discount on note receivable ..................................................... 2,361

Interest revenue ($47,211 x .05 x 12/12) ........................... 2,361

Cash ......................................................................................... 1,000

Discount on note receivable .............................................. 1,000

Steps:
1. DR cash = Face value x coupon rate x #/12 = 50,000 x .02 x 12/12 = 1,000.
2. CR Interest revenue = CV x market rate x #/12 = 47,211 x .05 x 12/12 = 2,360.55
3. Balance journal entry with DR to discount since used gross method

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December 31, 2021 - End of accounting period and maturity value of loan

Cash ......................................................................................... 1,000

Discount on note receivable (remainder) .................................. 1,428
Interest revenue ($47,211 + $1,361) x .05; rounded .......... 2,428

Cash ........................................................................................ 50,000

Note receivable ................................................................. 50,000

OR

Discount on note receivable ..................................................... 2,428

Interest revenue ($47,211+2,361-1,000) x .05 x 12/12) ..... 2,428

Cash ......................................................................................... 1,000

Discount on note receivable .............................................. 1,000

Cash ........................................................................................ 50,000

Note receivable ................................................................. 50,000

Steps:
1. DR cash = Face value x coupon rate x #/12 = 50,000 x .02 x 12/12 = 1,000.
2. CR Interest revenue = new CV x market rate x #/12 = 50,000 less discount remaining 1,428
(=2,789 – 1,361) = 48,572 x .05 x 12/12 = 2,428.60 rounded 2,428 (to balance discount
remaining)
3. Balance journal entry with DR to discount since used gross method

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2. Measurement of impairment (since ABC is a public company, use original rate, 5%, as per IFRS)

Carrying value of note receivable at Dec. 31, 2020 (after interest payment):48,572*
Estimated realizable amount at December 31, 2020:
FV = 45,000, PMT = 850, n = 2, i = 5%, PV = ? = ................... 42,397
Measurement of impairment .................................................... 6,175

*50,000 less discount remaining $1,428 at December 31, 2020 ($2,789 – $1,361) = $48,572

DR Loss on impaired loan or Bad Debt Expense ........... 6,175

CR Allowance for loan impairment ................................... 6,175

3.
If this was a private company:
 ASPE requires the use of the current interest rate; hence 7% would be used in measuring the
impairment.

Carrying value of note receivable at Dec. 31, 2020 (after interest payment):48,572*
Estimated realizable amount at December 31, 2020:
FV = 45,000, PMT = 850, n = 2, i = 7%, PV = ? = ................... 40,842
Measurement of impairment .................................................... 7,730

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