BAT4M - Practice Exam Answer Key

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1 Credit Cards and Debit Cards BAT4M - Practice Exam Answer Key Journalize the following sales for Laura's Hardware Store: January 19: Sold $30.00 of merchandise. PST is calculated at $2.40. GST is calculated at $2.10. Payment received on a Diner s Club (non-bank) credit card. (This card charges the business a 4% fee for the total amount charged.) January 19: Sold $40.00 merchandise. PST is calculated at $3.20. GST is calculated at $2.80. The customer paid using a bank issued VISA card. (The business pays a 6% fee to VISA for the total amount charged on each VISA sale.) January 19: Sold $50.00 of merchandise. PST is calculated at $4.00. GST is calculated at $3.50. The customer paid using a debit card. (The business pays a flat $0.20 fee to the bank any sale using a debit card.) January 29: Received payment from the Diner s Club credit card company. Date Particulars P.R. Debit Credit January 19, 2004Accounts Receivable - Diner's Club Sale PST Payable 2.40 GST Payable 2.10 January 19, 2004Cash VISA Discount Expense 2.76 Sale PST Payable 3.20 GST Payable 2.80 January 19, 2004Cash Debit Expense 0.20 Sale PST Payable 4.00 GST Payable 3.50 January 29, 2004Cash Credit Card Expense 1.38 Accounts Receivable - Diner's Club Receivables, Page 1

2 Bad Debts Expense Mildred owns Mildred s Motorcycle Repair in Etobicoke. Sadly, Mildred does not always receive payment on her accounts, and must sooner or later write them off. Record the transactions outlined below within the journal provided. April 30: Mildred uses the allowance method to account for her Bad Debts Expense. In particular, she uses the percent of sales (Income Statement focus) approach. The total sales for the month of April are $12, Mildred estimates her Bad Debts expense to be 5% of her total sales. Make the necessary adjusting entry to record the allowance for this bad debts expense. May 3: Mildred provides C. Varone $ of repairs on credit. May 8: Mildred provides K. Smith $ of repairs on credit. May 18: Mildred tries to phone C. Varone to see about his late payment, but the phone number is disconnected. Mildred writes off the entire account, totaling $ May 23: Mildred tries to phone K. Smith to see about her late payment, but she learns that Ms. Smith has declared bankruptcy. Mildred writes off the entire account, totaling $ May 29: Much to her surprise, Mildred receives a $ payment on the C. Varone account! It turns out that Mr. Varone had simply moved and needed some time to catch up on his finances. May 31: The total sales for the month of May are $8, Remember, Mildred estimates her Bad Debts at 5% of her total sales. Make the necessary adjusting entry to record the prediction of this bad debts expense. Receivables, Page 2

3 Date Details P.R. Debit Credit April 30, 2004Bad Debts Expense Allowance for Doubtful Accounts May 3, 2004A/R - Varone Fees Earned May 8, 2004A/R - Smith Fees Earned May 18, 2004Allowance for Doubtful Accounts A/R - Varone May 23, 2004Allowance for Doubtful Accounts A/R - Smith May 29, 2004A/R - Varone Allowance for Doubtful Accounts May 29, 2004Cash A/R - Varone May 31, 2004Bad Debts Expense Allowance for Doubtful Accounts Receivables, Page 3

4 Lump-Sum Asset Purchase 1. Journalize the following lump-sum purchase of capital assets on March 19 th, 2004: Purchased equipment (valued at $10,000.00), building (valued at $90,000.00), and land (valued at $200,000.00) for $250, Paid cash. March 19 Equipment 8, Building 75, Land 166, Cash 250, Amortization Methods and Disposal of Assets 2. Mildred purchases computer equipment for $3, on March 9 th, She estimates that she will use it for three years, after which she hopes to sell it for $ In the meantime she will calculate amortization using the straight-line method. Assuming that Mildred s firm runs a one-year accounting period, which ends on December 31 st : i) Show the entry that will be made on December 31 st, 2004 to adjust for the amortization expense for the first year. (Use the nearest-whole month rule.) ii) Show the entry that will be made on December 31 st, 2005 to adjust for the amortization expense for the second year. Dec. 31, 04 Amortization Expense / Equip Accumulated Amortization / Equip Dec. 31, 05 Amortization Expense / Equip. 1, Accumulated Amortization / Equip. 1, Receivables, Page 4

5 3. Mildred purchases binding equipment for $2, on May 13 th, She is told that this equipment can bind a total of 500,000 books, after which it can be returned to the seller for recycling. The seller will pay $ for these used binders. In the meantime Mildred will calculate amortization using the units-of-production method. Assuming that Mildred s firm runs a one-year accounting period, which ends on December 31 st : i) Show the entry that will be made on December 31 st, 2004 to adjust for the amortization expense for the first year, if Mildred used her binding equipment to bind 30,000 books. ii) Show the entry that will be made on December 31 st, 2005 to adjust for the amortization expense for the second year if Mildred used the equipment to bind 120,000 books. Dec. 31, 04 Amortization Expense / Equip Accumulated Amortization / Equip Dec. 31, 05 Amortization Expense / Equip Accumulated Amortization / Equip Mildred purchases a building on September 25 th, 2004 at a cost of $180, She is going to use the CCRA rules for amortizing this building, so she will apply the capital cost allowance percentage of 4% (this percentage applies to all Class #1 assets, which are defined as buildings and other structures under the Income Tax Act). The CCRA also requires that Mildred apply the half-year rule for the first year of ownership. Assuming that Mildred s firm runs a one-year accounting period, which ends on December 31 st : i) Show the entry that will be made on December 31 st, 2004 to adjust for the amortization expense for the first year. ii) Show the entry that will be made on December 31 st, 2005 to adjust for the amortization expense for the second year. Dec. 31, 04 Amortization Expense / Building 3, Accumulated Amortization / Building 3, Dec. 31, 05 Amortization Expense / Building 7, Accumulated Amortization / Building 7, Receivables, Page 5

6 5. At the beginning of 2006, Mildred realizes that the computer equipment she purchased for $3, on March 9 th, 2004 is now completely obsolete because of new technology in the computer field. She maintains her original estimate that she will use it for a total of three years, but she now realizes that she will not be able to sell it for any money at all. Calculate the revised annual amortization for this computer equipment. i) Show the entry that will be made on December 31 st, 2006 to adjust for the amortization expense associated with this computer. ii) Show the entries that will be made on March 9, 2007, when the computer equipment is thrown in the garbage. (Don t forget to first bring the accumulated amortization account up to date!) Dec. 31, 06 Amortization Expense / Equipment 1, Accumulated Amortization / Equip. 1, Mar. 9, 07 Amortization Expense / Equipment Accumulated Amortization / Equip Mar. 9, 07 Accumulated Amortization / Equip. 3, Computer Equipment 3, On August 25 th, 2005, Mildred sells her company van for $6, The van was originally purchased for $15, The van has been amortized using the straight-line method at $2, per year, and its accumulated amortization account had a balance of $8, as at December 31 st, i) Show the entry that will be made on August 25 th, 2005 to bring the accumulated amortization account up to date. ii) Show the entry that will be made on August 25 th, 2005 to record the sale of the van. Aug. 25, 05 Amortization Expense / Van 1, Accumulated Amortization / Van 1, Aug. 25, 05 Cash 6, Accumulated Amortization / Van 9, Gain on Sale of Asset Van 15, Receivables, Page 6

7 Intangible Assets 8. On April 27 th, 2004 Mildred spends $4, cash to repaint a store that she is currently leasing. She has six years left on her lease, and the paint is expected to last for the duration. i) Show the entry that will be made on April 27 th, 2004 when the painting is completed and paid for with cash. ii) Show the entry that will be made on May 31 st, 2004 to record one month s of amortization expense on the leasehold improvement. Apr. 27, 04 Leasehold Improvement 4, Cash 4, Apr. 27, 04 Amort. Exp. / Leasehold Improvement Leasehold Improvement Receivables, Page 7

8 Partnerships July 1, 2004: S. Kwon and E. Seo invest in a partnership. S. Kwon invests $6, cash, and equipment worth $8, He also has a $5, bank loan payable associated with business. E. Seo invests $10, cash. July 15, 2004: S. Kwon and E. Seo each withdraw $ for personal use. July 31, 2004: The partnership generates a $10, net income in this first month. Each partner receives a 10% (per year) interest allowance on their initial investment, plus a salary allowance of $ Any remaining income or loss is split equally. Note: When calculating the interest allowance, remember that this is just a one-month accounting period. Date Account Title Post Ref. Debit Credit July 1, 2004Cash 16, Equipment 8, Bank loan payable 5, Sam Kwon, Capital 9, Edwin Seo, Capital 10, To record investment of Edwin Seo and Sam Kwon July 5, 2004Sam Kwon, Withdrawals Edwin Seo, Withdrawals Cash 1, To record the withdrawals of cach by both partners July 31, 2004Income Summary 10, Sam Kwon, Capital 4, Edwin Seo, Capital 5, Receivables, Page 8

9 Corporations October 1, 2003: Acme Corp. receives its charter to issue unlimited common and preferred shares. It immediately issues 10,000 shares of common stock at $20.00 a share. February 10, 2004: Acme Corp. agrees to issue 2000 shares of preferred stock in exchange for land currently valued at $100, These shares have a dividend preference of $5.00 a year. September 30, 2004: Acme Corp. has generated a Net Income of $140, for its first fiscal year. The board of directors declares $50, of this Net Income as dividends to be paid to shareholders. Preferred shareholders are paid first, and the remaining dividends are divided equally amongst the common shares. (Acme Corp. chooses to debit Retained Earnings directly at the date of declaration.) October 31, 2004: Acme Corp. pays the dividends that were declared on September 30th. Date Account Title Post Ref. Debit October 1, 2003 Cash 200, Credit Common Shares 200, Issued 10,000 shares at $20 per share. Febuary 10, 2004 Land 100, Preferred shares 100, Exchanged 2,000 pref. shares, $5 preference, for land September 30, 2004 Retained Earnings 50, Preferred Dividends Payable 10, Common Dividends Payable 40, Declared dividends of $50, payable on Oct. 31st. October 31, 2004 Preferred Dividends Payable 10, Common Dividends Payable 40, Cash 50, To record payment of dividends declared on Sept. 30th. Receivables, Page 9

10 January 1, 2004: Acme Corp. receives its charter to issue unlimited common and preferred shares. It immediately issues 12,000 shares of common stock at $20.00 a share, and 5000 shares of preferred stock at $30.00 a share with a dividend preference of $3.00 a share. September 10, 2004: Acme Corp retires 2,000 common shares at $21.00 a share. October 31, 2004: Acme Corp. declares a 5% share dividend on its 10,000 common shares. Acme Corp.'s common shares are currently trading at $ (Acme Corp. chooses to debit Retained Earnings directly at the date of declaration.) November 30, 2004: Acme Corp. distributes the share dividends that were declared on October 31st. December 15, 2004: Acme Corp. declares a $3.00 cash dividend on its 5,000 preferred shares. (Acme Corp. chooses to debit Retained Earnings directly at the date of declaration.) December 31, 2004: Acme Corp. distributes the cash dividends that were declared on December 15th. Date Account Title Post Ref. Debit Credit January 1, 2004 Cash 390, Common shares 240, Preferred shares 150, Issued 5,000 preferred shares at $30 per share, and 12,000 common shares at $20 per share September 10, 2004 Common shares 40, Retained Earnings 2, Cash 42, Retired 2,000 common shares at $ October 31, 2004 Retained earnings 11, Common Shares Dividends Distributable 11, To record declaration of a 5% share dividend on 10,000 shares creating 500 shares, with a current market value of $ November 30, 2004 Common Shares Dividends Distributable 11, Common shares 11, To record distribution of common share dividend declared on October 31st. December 15, 2004 Retained Earnings 15, Preferred Dividends Payable 15, To record declaration of a $3.00 cash dividend on 5,000 preferred shares. December 31, 2004 Preferred Dividends Payable 15, Cash 15, To record payment of cash dividend declared on December 15th. Receivables, Page 10

11 Receivables, Page 11