FINANCIAL ACCOUNTING 1 [FA1] EXAMINATION Before starting to write the examination, make sure that it is complete and that there are no printing defects. This examination consists of 8 pages. There are 10 questions for a total of 100 marks. READ THE QUESTIONS CAREFULLY AND ANSWER WHAT IS ASKED. To assist you in answering the examination questions, CGA-Canada includes the following glossary of terms. Glossary From David Palmer, Study Guide: Developing Effective Study Methods (Vancouver: CGA-Canada, 1996). Copyright David Palmer. Compare Contrast Criticize Define Describe Diagram Discuss Evaluate Explain Examine qualities or characteristics that resemble each other. Emphasize similarities, although differences may be mentioned. Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between) Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons. Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes. Tell the whole story in narrative form. Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description. This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors. This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. (Just stating your own ideas is not sufficient.) Cite authorities. Cite advantages and limitations. In explanatory answers you must clarify the cause(s), or reasons(s). State the "how" and "why" of the subject. Give reasons for differences of opinions or of results. Illustrate Indicate Interpret Justify List Outline Prove Relate Review State Summarize Trace Make clear by giving an example, e.g., a figure, diagram or concrete example. Provide a short explanation. Translate, give examples of, solve, or comment on a subject, usually making a judgment on it. Prove or give reasons for decisions or conclusions. Present an itemized series or tabulation. Be concise. Point form is often acceptable. (Also Enumerate or Identify) This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details. Establish that something is true by citing evidence or giving clear logical reasons. Show how things are connected with each other or how one causes another, correlates with another, or is like another. Examine a subject critically, analyzing and commenting on the important statements to be made about it. Present the main points in brief, clear sequence, usually omitting details, illustrations, or examples. Give the main points or facts in condensed form, like the summary of a chapter, omitting details and illustrations. In narrative form, describe progress, development, or historical events from some point of origin.
CGA-CANADA FINANCIAL ACCOUNTING 1 EXAMINATION March 2003 Marks Time: 3 Hours 9 Question 1 Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if (1) is the best answer for item (a), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. No account will be taken of any explanations you offer. Note: 1 1 /2 marks each a. Strople Company paid the bank $20,000 in interest, of which $6,000 is not yet due. No interest expense has yet been recorded. Which of the following statements best describes how the assets and owner s equity would be affected by this transaction? 1) Assets will decrease by $20,000 and owner s equity will decrease by $20,000. 2) Assets will decrease by $20,000, owner s equity will increase by $14,000, and liabilities will increase by $6,000. 3) Assets will decrease by $14,000 and owner s equity will increase by $14,000. 4) Assets will decrease by $14,000 and owner s equity will decrease by $14,000. b. Dattolico Co. received $10,000 from a customer towards an order worth $80,000. The goods ordered will not be ready until after the end of the accounting year. Which of the following statements best describes the effect of this transaction? 1) Assets will increase by $10,000 and owner s equity will increase by $10,000. 2) Assets will increase by $80,000, liabilities will increase by $70,000, and owner s equity will increase by $10,000. 3) Assets will increase by $10,000 and liabilities will increase by $10,000. 4) Assets will increase by $80,000 and liabilities will increase by $80,000. c. Lukah Traders, a proprietorship, paid $3,000 towards an air ticket for a personal trip for the owner. Which of the following statements best describes the effect of this transaction? 1) Assets will decrease by $3,000, net income will decrease by $3,000, and owner s capital will decrease by $3,000. 2) Assets will decrease by $3,000 and liabilities will increase by $3,000. 3) Assets will decrease by $3,000 and owner s capital will decrease by $3,000. 4) There will be no effect on the assets, liabilities, or owner s capital of the firm. Continued... EFA1M03 CGA-Canada, 2003 Page 1 of 8
d. On July 1, 2000, Nyland Ltd. purchased a 3-year insurance policy and paid a premium of $60,000. Nyland has a December 31 year end. Which of the following statements best describes the effect of this transaction? 1) Under cash basis accounting, there will be a balance of $40,000 in the prepaid insurance account on December 31, 2000. 2) Under accrual accounting, the insurance expense for the period ending December 31, 2000 will be $20,000. 3) Under accrual accounting, the balance in the prepaid insurance account on December 31, 2000 will be $50,000. 4) Under cash basis accounting, the insurance expense for the year ending December 31, 2000 will be $10,000. e. On January 1, 2001, Armstrong Ltd. issued 5-year, 9% bonds for $1 million, at a premium of $120,000. The bonds pay interest semiannually. On December 31, 2001, the market interest rate increased to 10%, thus making the bond coupon interest rate lower than the current market rate. Which of the following statements best describes the effect on bonds payable and the related accounts on December 31, 2001? 1) On December 31, 2001, the entire premium account will be written off and a bond discount account will be created to reflect the decrease in market value. 2) On December 31, 2001, the entire premium account will be written off but no discount will be recognized to reflect the decrease in market value. 3) There will be no change in the premium account and it will be $120,000 on December 31, 2001. 4) There will be no change in the bonds payable account on December 31, 2001. f. The bookkeeper for Petty Ltd. failed to replenish the petty cash fund at December 31, 2002. The petty cash box contained $150 in cash and receipts for $350. Which of the following statements best describes the effect this failure to replenish the petty cash fund would have on the company s December 31, 2002 financial statements? 1) Petty cash would be overstated and expenses understated. 2) Petty cash would be understated and expenses overstated. 3) Petty cash would be overstated and expenses overstated. 4) Petty cash would be understated and expenses understated. EFA1M03 CGA-Canada, 2003 Page 2 of 8
10 Question 2 Note: 2 1 /2 marks each Note: Use the following information to answer parts (a) and (b). Air Anywhere started the year with a normal balance of $2,300,000 in the unearned ticket revenue account. During the year, credits to the account equalled $15,550,000 and debits equalled $14,900,000. a. What would be the balance in the account at the end of the year? 1) $ 1,650,000 2) $ 2,950,000 3) $15,550,000 4) $28,150,000 b. What amount of ticket revenue originally recorded as unearned became earned during the year? 1) $14,900,000 2) $15,550,000 3) $17,200,000 4) $17,850,000 c. Hay s Designs uses the retail method to determine ending inventory for calculating its monthly financial statements. The following information is available for the month of November 2002. At Cost At Retail Inventory, November 1, 2002 $ 25,200 $ 42,000 Purchases during November 36,000 60,000 Sales 80,000 What is the November 30, 2002 inventory, at cost? 1) $13,200 2) $18,800 3) $22,000 4) $61,200 d. Forrester Corporation bought a parcel of land for $500,000 for the purpose of building a factory. The land contained a shed that needed to be demolished. The demolition costs were $15,000, but $5,000 was salvaged by selling the materials recovered from the demolished shed. Closing costs of $20,000 included legal and brokerage fees. At what amount should the cost of the land be recorded in the books of Forrester Corporation? 1) $500,000 2) $520,000 3) $530,000 4) $535,000 EFA1M03 CGA-Canada, 2003 Page 3 of 8
8 Question 3 The December 31, 2002 trial balance of Tilt Ltd. includes the following errors: 1. The purchase of a piece of office equipment for $2,000 was debited to advertising expense. 2. A $750 credit sale was recorded as a debit to sales and a credit to accounts receivable. 3. The payment of an account payable was recorded as a $3,500 debit instead of a $5,300 debit. 4. Dividends amounting to $5,000 were treated as salary expense. In addition to the above errors, some account balances were entered into the wrong column (all accounts have an ending balance which is appropriate for the type of account). TILT LTD. Trial Balance December 31, 2002 Debit Credit Cash $ 5,000 $ Accounts receivable 178,500 Office supplies 2,600 Inventory 60,000 Plant and equipment 198,000 Accumulated amortization plant and equipment 120,000 Accounts payable 34,800 Unearned revenue 2,500 Notes payable 15,000 Common shares 50,000 Retained earnings 123,300 Sales 798,500 Cost of goods sold 400,000 Salary expense 225,000 Advertising expense 8,200 Other expenses 65,000 Total $ 1,199,800 $ 1,086,600 Prepare a correct December 31, 2002 trial balance for Tilt Ltd. Show your calculations. EFA1M03 CGA-Canada, 2003 Page 4 of 8
13 Question 4 The following activities relate to Smith s Sportswholesale, a proprietorship, for the year ended September 30, 2002. All sales are made on credit. The company uses the gross method to record purchase/sales discounts and it maintains a perpetual inventory system. 1. Sales amounted to $2,000,000. The company offers a sales discount of 1/15, n30. The cost of the merchandise sold equalled $800,000. 2. Golf World Ltd. returned merchandise with a sales value of $70,000 and a cost of $28,000. The merchandise returned was not damaged and will be resold at a later date. 3. Credits to accounts receivable for collections amounted to $1,500,000, with 40% of the payments being within the sales discount period. 4. Amortization on plant and equipment amounted to $20,000. 5. Selling and administrative expenses, paid for in cash, amounted to $325,000. 6. The owner, J. Smith, withdrew $75,000 in cash during the year. 9 a. Prepare journal entries to record all the transactions for Sportswholesale for the year ended September 30, 2002. 4 b. Prepare the closing entries for Sportswholesale for the year ended September 30, 2002. 10 Question 5 Terry s Toys uses a perpetual inventory system. The following information relates to purchases and sales of talking teddy bears for the month of December 2002. Number of Units Unit Price Inventory, December 1, 2002 70 units $18 Sales, December 1-12 70 units Purchases, December 13 100 units $22 Sales, December 14-19 60 units Purchases, December 20 40 units $25 Sales, December 21-31 30 units The teddy bears sell for $35 each. 4 a. What dollar value would be assigned to cost of goods sold for the month of December, assuming the company uses FIFO inventory pricing? (Show your calculations.) 4 b. What dollar value would be assigned to cost of goods sold for the month of December, assuming the company uses LIFO inventory pricing? (Show your calculations.) 2 c. In a period of rising prices, which method, FIFO or LIFO, will give the higher value for cost of goods sold? Explain briefly. EFA1M03 CGA-Canada, 2003 Page 5 of 8
11 Question 6 As the accountant for Snow Ltd., you have gathered the following information to prepare the November 30, 2002 bank reconciliation: 1. November 30 cash balance in the general ledger: $3,975. 2. November 30 cash balance on the bank statement: $12,700. 3. A review of cashed cheques returned with the bank statement indicated that cheques amounting to $3,100 had not yet been cashed. 4. The bank charged the company $35 for service charges during the month. 5. The bank collected a $5,000 note plus interest of $300 on behalf of the company. 6. The bank recorded a deposit of $1,200 as a deposit of $2,100. 7. An NSF cheque from N. Apy in the amount of $720 was noted on the bank statement. 8. The company entered a $2,680 cheque in payment of office equipment as $2,860. 4 a. Prepare the bank reconciliation for Snow as at November 30, 2002. 4 b. Prepare journal entries resulting from the bank reconciliation. 3 c. In preparing for a discussion with the owner of the business, you are trying to remember the fundamental principles of internal control. List four fundamental principles of internal control, and state which principle dictates the need to have one person collect cash from cash sales and another perform the accounting for cash sales. 9 Question 7 On October 1, 2001, Amar Co. bought a lathe from Daniel and Co. by trading in its old lathe and paying $185,000 cash. The following additional information is available: Original cost of the old lathe $ 130,000 Accumulated amortization $ 89,000 List price of the new lathe (net of trade discount) $ 230,000 Market price of old lathe $ 45,000 Estimated life of new lathe 5 years 5 a. Prepare the journal entry to record the purchase of the lathe on October 1, 2001. 2 b. Prepare the journal entry to record the amortization on the new lathe for the year ended December 31, 2001, using the straight-line method. 2 c. Show, in good form, how the new lathe will be presented on the balance sheet as at December 31, 2001. 8 Question 8 On September 1, 2001, Zengler and Tamler Co. issued $1 million worth of 12% coupon bonds, dated July 1, 2001, with accrued interest. Interest on the bonds is payable semiannually, on December 31 and June 30. 4 a. Prepare the journal entry for the issue of the bond on September 1, 2001. 4 b. Prepare the journal entries arising out of this transaction on December 31, 2001. EFA1M03 CGA-Canada, 2003 Page 6 of 8
8 Question 9 John and Jacob entered into a partnership by contributing $50,000 and $75,000, respectively. The partnership provided for a salary allowance of $80,000 to John and $60,000 to Jacob, and interest of 8% on the capital contributed. The remaining profit and loss is to be shared in proportion to the capital investment of each partner. The firm earned $120,000 before salary allowances or interest. 6 a. Show clearly how the earnings will be allocated to each partner. Show your calculations. 2 b. Calculate the balance in the capital account of each partner, assuming there were no withdrawals during the year by either of the partners. 14 Question 10 Following is the balance sheet as at December 31, 2001 for Sekiy Ltd. and the income statement and cash flow statement for the year ended December 31, 2002. SEKIY LTD. Balance Sheet December 31, 2001 Assets Cash $ 10,000 Accounts receivable 87,000 Inventory 98,000 Furniture and fixtures 60,000 Accumulated amortization furniture and fixtures (12,000) Total assets $ 243,000 Liabilities and shareholders equity Bank loans payable $ 28,000 Common shares 70,000 Retained earnings 145,000 Total liabilities and shareholders equity $ 243,000 SEKIY LTD. Income Statement year ended December 31, 2002 Sales $ 400,000 1 Cost of goods sold $ 240,000 Salary expense 50,000 Rent expense 6,000 Amortization furniture and fixtures 6,000 Other expenses 108,000 410,000 Net loss $ (10,000) 1 All sales were initially made on credit. Continued... EFA1M03 CGA-Canada, 2003 Page 7 of 8
Operating activities SEKIY LTD. Cash Flow Statement year ended December 31, 2002 Cash received from customers $ 421,000 Cash paid to suppliers 2 $ 232,000 Cash paid to employees 50,000 Cash paid for rent 6,000 Cash paid for other expenses 108,000 396,000 Cash flow from operating activities 25,000 Investing activities Cash paid for fixtures (5,000) Financing activities Reduction in bank loans payable (16,000) Increase in cash 4,000 Cash balance, January 1, 2002 10,000 Cash balance, December 31, 2002 $ 14,000 2 All inventory purchases were cash purchases. Prepare the balance sheet for Sekiy as at December 31, 2002. (Note: all information needed to calculate the changes to the beginning balance sheet accounts is available from the 2002 income statement and cash flow statement.) Show your calculations. END OF EXAMINATION 100 EFA1M03 CGA-Canada, 2003 Page 8 of 8