University of Waterloo
AFM 291 – Intermediate Financial Accounting 1 – Spring 2004
Prof. Omer Pamukcu
June 11, 2004
Section (Please Circle): 001 002
Part Assigned Your Points
A. Multiple Choice 20
B. Multiple Choice 15
C. Reconstructing Financial Events 15
E. Adjusting Entries 15
D. Percentage of Completion Method 20
F. Installment Sales Method 15
1. This examination consists of 8 pages, not including the cover page. Please
check immediately to be certain that all pages have been included.
2. Show all your work and calculations. I cannot give partial credit if I cannot
see the work you have done. No partial credit is given for multiple choice
3. Good luck!
Part A – Multiple Choice (20 Points, 2 Points Each)
1. The information provided by financial reporting pertains to
a. individual business enterprises, rather than to industries or an economy as a
whole or to members of society as consumers.
b. business industries, rather than to individual enterprises or an economy as a
whole or to members of society as consumers.
c. individual business enterprises, industries, and an economy as a whole, rather
than to members of society as consumers.
d. an economy as a whole and to members of society as consumers, rather than to
individual enterprises or industries.
2. The body that has the responsibility to set generally accepted accounting principles
in Canada is the
3. In establishing financial accounting standards, “due process” refers to
a. the process of giving interested parties ample opportunity to express their
b. the practice of researching, creating a task force, issuing an exposure draft and
establishing the new GAAP.
c. the researching of the legal implications of proposed new accounting standards.
d. the requirement that all accountants must receive a copy of financial standards.
4. Which of the following best illustrates the accounting concept of conservatism?
a. Use of the allowance method to recognize bad debt losses from credit sales
b. Use of the lower of cost or market approach in valuing inventories
c. Use of the same accounting method from one period to the next in calculating
d. Utilization of a policy of deliberate understatement of asset values in order to
present a conservative net income figure
5. Timeliness is an ingredient of the primary quality of
a. Yes Yes
b. No Yes
c. Yes No
d. No No
AFM 291 – Exam 1 – June 11, 2004 1
6. Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability
7. Catt Company, with an applicable income tax rate of 30 percent, reported net
income of $280,000. Included in income for the period was an extraordinary loss
from flood damage of $40,000 before deducting the related tax effect. The
company's income before income taxes and extraordinary items was
8. Which of these is generally an example of an extraordinary item?
a. Loss incurred because of a strike by employees.
b. Write-off of deferred marketing costs believed to have no future benefit.
c. Gain resulting from the devaluation of the Canadian dollar.
d. Gain resulting from the government expropriating a piece of land used as a
9. Shank Corporation made a very large arithmetical error in the preparation of its
year-end financial statements by improper placement of a decimal point in the
calculation of amortization. The error caused the net income to be reported at
almost double the proper amount. Correction of the error when discovered in the
next year should be treated as
a. an increase in amortization expense for the year in which the error is
b. a component of income for the year in which the error is discovered, but
separately listed on the income statement and fully explained in a note to the
c. an extraordinary item for the year in which the error was made.
d. an adjustment to beginning retained earnings, net of tax.
10. The principal disadvantage of using the percentage-of-completion method of
recognizing revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable
c. is likely to assign a small amount of revenue to a period during which much
revenue was actually earned.
d. all of these.
AFM 291 – Exam 1 – June 11, 2004 2
Part B: Multiple Choice (15 Points, 3 Points Each)
Use the following information to answer questions 11-13
Assume that Goines Company decides to sell its appliance subsidiary on October 31, 2004.
The sale qualifies as a discontinued operation. Pertinent data regarding the operations of
the appliance subsidiary are as follows:
Income from operations from the beginning of 2004 to October 31, 2004 was $150,000
Loss from operations from October 31, 2004 to the end of the year was $90,000.
Estimated loss on the sale of net assets of the discontinued operation on May 1, 2005,
Income from continuing operations for 2004 were $500,000
The tax rate on all sources of income is 35%
11. What is the income from the operations of the discontinued appliance subsidiary in
12. What is the income from disposal of the discontinued appliance subsidiary in 2004?
13. What is the net income reported in 2004?
Use the following information to answer questions 14-15.
Hardy’s Hardware and Lumber began operations in 2004. The company allows customers
to pay in installments for many of its products. Installment sales for 2004 were
$3,000,000. If revenue is recognized at the point of delivery, $1,800,000 in gross profit
would be recognized in 2004. If the company instead uses the cost recovery method,
$300,000, in gross profit would be recognized in 2004.
14. What was the amount of cash collected on installment sales in 2004?
d. No cash was collected.
15. What is the balance of the deferred gross profit on the balance sheet in 2004?
AFM 291 – Exam 1 – June 11, 2004 3
Part C: Reconstructing Financial Events (15 Points)
1. In 2004, Spins Corp. declared dividends of $65,000. The following information reflects
the changes in the owner’s equity section reported in the 2004 balance sheet:
Common Stock $375,000 $280,000
Contributed Surplus $935,000 $725,000
Retained earnings $237,500 $256,000
What amount of Net Income did Spins report in 2004?
2004 Net income is: ___________________________________
2. Use the following information related to Spins Corp. to solve for the amount of cost of
goods sold reported in 2004.
Spins Corp. purchased $250,000 of inventory in 2004
The balance sheet shows:
Merchandise inventory $128,000 $177,000
Accounts payable $55,000 $62,000
Assume: all purchases of merchandise are made “on account” and all accounts payable
relate exclusively to credit from suppliers
COGS on the 2004 income statement is: __________________
3. Use the above information (including the COGS amount, use $300,000 for COGS if
unable to solve part 1 above) to solve for the amount of cash paid to suppliers in 2004.
The amount of cash paid to suppliers in 2004 is: ____________________________
AFM 291 – Exam 1 – June 11, 2004 4
Part D: Adjusting Entries (15 Points)
The following list of accounts and their balances represents the unadjusted trial balance of
Alt Company at December 31, 2004:
Cash $ 39,590
Accounts Receivable 69,000
Allowance for Doubtful Accounts $ 500
Merchandise Inventory 54,720
Prepaid Rent 24,000
Investment in Allen Corp. Bonds 70,000
Plant and Equipment 156,000
Accumulated Amortization 14,740
Accounts Payable 11,370
Bonds Payable 90,000
Common Shares 170,000
Retained Earnings 97,180
Cost of Goods Sold 154,400
Salaries and Wages Expense 32,000
Interest Expense 2,040
Rent Revenue 14,400
Miscellaneous Expense 890
Insurance Expense 6,550
Using the information provided in the unadjusted trial balance, prepare the following
1. The balance in the Insurance Expense account contains the premium costs of three
Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2003;
Policy 2, original cost of $2,700, 3-yr. term, taken out on Oct. 1, 2004;
Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2004.
AFM 291 – Exam 1 – June 11, 2004 5
2. On September 30, 2004, Alt received $14,400 rent from its lessee for an eighteen
month lease beginning on that date.
3. At December 31, 2004, salaries accrued but unpaid were $4,200.
4. Based upon an aging of the accounts, Alt estimates that five percent of the Accounts
Receivable balance on December 31, 2004 will become uncollectible.
5. On April 30, 2004, Alt rented a warehouse for $2,000 per month, paying $24,000 in
AFM 291 – Exam 1 – June 11, 2004 6
Part E: Percentage of Completion and Completed Contract Methods (20 Points)
Easten Construction Company, established in January 1, 2004, is engaged in several
construction contracts to build apartments. The Board of Directors is trying to decide
between using the percentage of completion method and the completed contract method
for recognizing revenues and has requested the revenues and gross profit recognized under
each of the methods. The construction activities for the year ended December 31, 2004,
are presented in the following table:
Cash Costs Additional
Total Billings Collections Incurred Costs to
Contract Through Through Through Complete
Project Price 12/31/04 12/31/04 12/31/04 Contracts
A 615,000 340,000 310,000 510,000 170,000
B 415,000 135,000 135,000 140,000 260,000
C 475,000 475,000 390,000 350,000 0
D 300,000 120,000 80,000 180,000 180,000
E 480,000 400,000 400,000 320,000 80,000
Total 2,320,000 1,470,000 1,315,000 1,500,000 690,000
Complete the following table using the information given under the percentage of
Percentage of Percentage of Completed Completed
Completion Completion Contract Contract
Project Revenues Gross Profit Revenues Gross Profit
AFM 291 – Exam 1 – June 11, 2004 7
Part F: Installment Sales Method (15 Points)
Answer the following questions using the information presented for Caps Ltd.
Caps Ltd. sold merchandise for $300,000 on installment on January 14, 2004. The
merchandise Caps sold had a cost of $240,000. In 2004, Caps collected $120,000 from the
1. What is the gross profit and gross profit percentage for the installment sales in 2004?
Gross Profit on Installment Sales
2. Provide the journal entries to be made in 2004 for the installment sales under the
installment sales method.
3. In 2005, Caps collected an additional $80,000 from the customer. What are the
balances of the Deferred Gross Profit accounts, before to closing entries, in 2005?
DGP (I/S) DGP (B/S)
Balance prior to closing in 2005
AFM 291 – Exam 1 – June 11, 2004 8