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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
9
Time: 3 Hours
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:
11/2 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...
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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)
2)
3)
4)
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Petty cash would be overstated and expenses understated.
Petty cash would be understated and expenses overstated.
Petty cash would be overstated and expenses overstated.
Petty cash would be understated and expenses understated.
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10
Question 2
Note:
21/2 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)
2)
3)
4)
$ 1,650,000
$ 2,950,000
$15,550,000
$28,150,000
b. What amount of ticket revenue originally recorded as unearned became earned during the year?
1)
2)
3)
4)
c.
$14,900,000
$15,550,000
$17,200,000
$17,850,000
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.
Inventory, November 1, 2002
Purchases during November
Sales
At Cost
At Retail
$ 25,200
36,000
$ 42,000
60,000
80,000
What is the November 30, 2002 inventory, at cost?
1)
2)
3)
4)
$13,200
$18,800
$22,000
$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)
2)
3)
4)
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$500,000
$520,000
$530,000
$535,000
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8
Question 3
The December 31, 2002 trial balance of Tilt Ltd. includes the following errors:
1.
2.
3.
4.
The purchase of a piece of office equipment for $2,000 was debited to advertising expense.
A $750 credit sale was recorded as a debit to sales and a credit to accounts receivable.
The payment of an account payable was recorded as a $3,500 debit instead of a $5,300 debit.
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
Cash
Accounts receivable
Office supplies
Inventory
Plant and equipment
Accumulated amortization — plant and equipment
Accounts payable
Unearned revenue
Notes payable
Common shares
Retained earnings
Sales
Cost of goods sold
Salary expense
Advertising expense
Other expenses
Total
$
5,000
178,500
2,600
60,000
198,000
120,000
Credit
$
34,800
2,500
15,000
50,000
123,300
798,500
400,000
225,000
8,200
$ 1,199,800
65,000
$ 1,086,600
Required
Prepare a correct December 31, 2002 trial balance for Tilt Ltd. Show your calculations.
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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.
Required
9
a.
4
b. Prepare the closing entries for Sportswholesale for the year ended September 30, 2002.
10
Prepare journal entries to record all the transactions for Sportswholesale for the year ended
September 30, 2002.
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.
Inventory, December 1, 2002
Sales, December 1-12
Purchases, December 13
Sales, December 14-19
Purchases, December 20
Sales, December 21-31
Number of Units
Unit Price
70 units
70 units
100 units
60 units
40 units
30 units
$18
$22
$25
The teddy bears sell for $35 each.
Required
4
a.
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.
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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.)
In a period of rising prices, which method, FIFO or LIFO, will give the higher value for cost of goods
sold? Explain briefly.
©CGA-Canada, 2003
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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.
Required
4
a.
4
b. Prepare journal entries resulting from the bank reconciliation.
3
c.
9
Prepare the bank reconciliation for Snow as at November 30, 2002.
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.
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
Accumulated amortization
List price of the new lathe (net of trade discount)
Market price of old lathe
Estimated life of new lathe
$ 130,000
$ 89,000
$ 230,000
$ 45,000
5 years
Required
5
a.
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.
8
Prepare the journal entry to record the purchase of the lathe on October 1, 2001.
Show, in good form, how the new lathe will be presented on the balance sheet as at
December 31, 2001.
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.
Required
4
a.
4
b. Prepare the journal entries arising out of this transaction on December 31, 2001.
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Prepare the journal entry for the issue of the bond on September 1, 2001.
©CGA-Canada, 2003
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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.
Required
14
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.
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
Accounts receivable
Inventory
Furniture and fixtures
Accumulated amortization — furniture and fixtures
Total assets
$ 10,000
87,000
98,000
60,000
(12,000)
$ 243,000
Liabilities and shareholders’ equity
Bank loans payable
Common shares
Retained earnings
Total liabilities and shareholders’ equity
$ 28,000
70,000
145,000
$ 243,000
SEKIY LTD.
Income Statement
year ended December 31, 2002
Sales
Cost of goods sold
Salary expense
Rent expense
Amortization — furniture and fixtures
Other expenses
Net loss
1
$ 400,000 1
$ 240,000
50,000
6,000
6,000
108,000
410,000
$ (10,000)
All sales were initially made on credit.
Continued...
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SEKIY LTD.
Cash Flow Statement
year ended December 31, 2002
Operating activities
Cash received from customers
Cash paid to suppliers2
Cash paid to employees
Cash paid for rent
Cash paid for other expenses
Cash flow from operating activities
$ 421,000
$ 232,000
50,000
6,000
108,000
396,000
25,000
Investing activities
Cash paid for fixtures
(5,000)
Financing activities
Reduction in bank loans payable
Increase in cash
Cash balance, January 1, 2002
Cash balance, December 31, 2002
2
(16,000)
4,000
10,000
$ 14,000
All inventory purchases were cash purchases.
Required
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
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