TEST BANK for Accounting Principles, Volume 2, 9th Canadian Edition by Jerry J. Weygandt, Donald E. by StudyGuide

Test Bank for Accounting Principles, Ninth Canadian Edition

3. Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. A revision to depreciation will be required if there are (a) capital expenditures during the asset’s useful life; (b) impairments in the asset’s fair value; (c) changes in the asset’s fair value when using the revaluation model; and/or (d) changes in the appropriate depreciation method, estimated useful life, or residual value. An impairment loss must be recorded if the recoverable amount is less than the carrying amount. Revisions of periodic depreciation are made in present and future periods, not retroactively. The new annual depreciation is determined by using the depreciable amount (carrying amount less the revised residual value), and the remaining useful life, at the time of the revision.

4. Demonstrate how to account for property, plant, and equipment disposals. The accounting for the disposal of a piece of property, plant, or equipment through retirement or sale is as follows: (a) Update any unrecorded depreciation for partial periods since depreciation was last recorded. (b) Calculate the carrying amount (cost – accumulated depreciation). (c) Calculate any gain (proceeds > carrying amount) or loss (proceeds < carrying amount) on disposal. (d) Remove the asset and accumulated depreciation accounts at the date of disposal. Record the proceeds received and the gain or loss, if any. An exchange of assets is recorded as the purchase of a new asset and the sale of an old asset. The new asset is recorded at the fair value of the asset given up plus any cash paid (or less any cash received). The fair value of the asset given up is compared with its carrying amount to calculate the gain or loss. If the fair value of the new asset or the asset given up cannot be determined, the new long-lived asset is recorded at the carrying amount of the old asset that was given up, plus any cash paid (or less any cash received).

5. Record natural resource transactions and calculate depletion. The units-of-production method of depreciation is generally used for natural resources. The depreciable amount per unit is calculated by dividing the total depreciable amount by the number of units estimated to be in the resource. The depreciable amount per unit is multiplied by the number of units that have been extracted to determine the annual depletion. The depletion and any other costs to extract the resource are recorded as inventory until the resource is sold. At that time, the costs are transferred to cost of resource sold on the income statement. Revisions to depletion will be required for capital expenditures during the asset’s useful life, for impairments, and for changes in the total estimated units of the resource.

6. Identify the basic accounting issues for intangible assets and goodwill. The accounting for tangible and intangible assets is much the same. Intangible assets are reported at cost, which includes all expenditures necessary to prepare the asset for its intended use. An intangible asset with a finite life is amortized over the shorter of its useful life and legal life, usually on a straight-line basis. The extent of the annual impairment tests depends on whether IFRS or ASPE is followed and whether the intangible asset had a finite or indefinite life. Intangible assets with indefinite lives and goodwill are not amortized and are tested at least annually for impairment. Impairment losses on goodwill are never reversed under both IFRS and ASPE.

Test Bank for Accounting Principles, Ninth Canadian Edition

7. Illustrate the reporting and analysis of long-lived assets. It is common for property, plant, and equipment, and natural resources to be combined in financial statements under the heading “property, plant, and equipment.” Intangible assets with finite and indefinite lives are sometimes combined under the heading “intangible assets” or are listed separately. Goodwill must be presented separately. Either on the balance sheet or in the notes, the cost of the major classes of long-lived assets is presented. Accumulated depreciation (if the asset is depreciable) and carrying amount must be disclosed either on the balance sheet or in the notes. The depreciation and amortization methods and rates, as well as the annual depreciation expense, must also be indicated. The company’s impairment policy and any impairment losses should be described and reported. Under IFRS, companies must include a reconciliation of the carrying amount at the beginning and end of the period for each class of long-lived assets and state whether the cost or revaluation model is used. The asset turnover ratio (net sales ÷ average total assets) is one measure that is used by companies to show how efficiently they are using their assets to generate sales revenue. A second ratio, return on assets (profit ÷ average total assets), calculates how profitable the company is in terms of using its assets to generate profit.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 Ed Harris Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the account, Land: Debits 1. Cost of real estate purchased as a plant site (land and building). ............................. $ 320,000 2. Legal fees paid at the time of the purchase of the real estate. ................................... 6,500 3. Cost of demolishing building to make land suitable for construction of a new building .......................................................................................................... 12,000 4. Architect's fees on building plans. ............................................................................... 14,000 5. Excavation costs for new building. .............................................................................. 24,000 6. Cost of filling and grading the land. ............................................................................. 5,000 7. Insurance and taxes during construction of building. ................................................ 6,000 8. Cost of repairs to building under construction caused by a small fire. ...................... 14,000 9. Interest paid during the year, of which $ 52,000 pertains to the construction period ...................................................................................................... 64,000 10. Full payment to building contractor............................................................................ 760,000 11. Cost of parking lots and driveways. ............................................................................. 36,000 12. Property taxes paid for the current year on the land. ................................................. 4,000 Total Debits................................................................................................................... $1,265,500

13. Insurance proceeds for fire damage. ........................................................................... 14. Proceeds from residual of demolished building. ........................................................ Total Credits .................................................................................................................

Credits $10,000 3,500 $13,500

Instructions Analyze the above transactions using the columns below. Insert the number of each transaction in the item space and insert the amounts in the appropriate columns.

Item

Land

Land Improvements

Building

Other

Account Title

Land Improvements

Building

Other

Account Title

Solution 1 (15 min.) Item 1.

Land $320,000

6,500

12,000

Test Bank for Accounting Principles, Ninth Canadian Edition

$ 14,000

24,000

5,000

6,000

8. 9.

52,000

10.

760,000

11.

$14,000

Fire Loss

12,000

Interest Expense

$36,000

Land Improvements

12.

4,000

Property Tax Expense

13.

(10,000)

Fire Loss

14.

(3,500)

Totals

$340,000

$36,000

$856,000

$20,000

Bloomcode: Analysis Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Exercise 2 Rainbow Logistics purchased land with the intention of building an office. Rainbow also engaged other contractors for fencing, paving, lighting, landscaping, and to remove a dilapidated building to make room for a new office building. The following information relates to these transactions: 1. Purchased land for $350,000. 2. Paid $4,000 for seller's unpaid property taxes. 3. Paid $22,000 to have the dilapidated building removed. 4. Paid a builder $400,000 to design and build the office building. 5. Paid a company $20,000 to grade and clear the land to make it suitable for building purposes. 6. Paid a landscaping company $10,000 for trees and shrubs. 7. Paid a contractor $16,000 for outside lighting around the parking area and sidewalks. 8. Paid $26,000 to have the parking lot paved.

Test Bank for Accounting Principles, Ninth Canadian Edition

Paid a fence builder $15,000 to construct a security fence around the property.

Instructions Determine the cost of the land, the building, and the land improvements. Solution 2 (10 min.) Land = $350,000 + $22,000 + $4,000 + $20,000 = $396,000 Building = $400,000 Land improvements = $10,000 + $16,000 + $15,000 + $26,000 = $67,000 Bloomcode: Analysis Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Exercise 3 Identify the following expenditures as capital expenditures or operating expenditures: 1. Replacement of worn-out gears on factory machinery 2. Construction of a new wing on an office building 3. Painting the exterior of a building 4. Oil change on a company truck 5. Replacing a network server’s hard drive, thereby increasing data storage capacity by ten times. No extension of useful life expected 6. Overhaul of a truck motor. One-year extension in useful life is expected 7. Purchased a wastebasket, with an expected useful life of five years, at a cost of $10 8. Painting and lettering of a used truck upon acquisition of the truck Solution 3 (5 min.) 1.

operating

capital

operating

capital

operating

Test Bank for Accounting Principles, Ninth Canadian Edition

capital

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Exercise 4 Below are selected entries for Joanna Co.: 1. The $60 cost of repairing a printer was charged to Equipment. 2. The $5,000 cost of a major truck engine overhaul was debited to Repairs Expense. The overhaul is expected to increase the operating efficiency of the truck. 3. The $6,000 closing costs associated with the acquisition of land were debited to Legal Fees Expense. 4. A $600 charge for transportation costs on new equipment purchased was debited to Delivery Expense. 5. Freight cost incurred bringing a new piece of equipment to the plant site was charged to Equipment. Instructions For each entry above, make a correcting entry if necessary. If the entry given is correct, then state "No entry required." Solution 4 (10 min.) 1. Repairs Expense........................................................................................ Equipment......................................................................................... 2.

60 60

Vehicles ..................................................................................................... Repairs Expense ................................................................................

5,000

Land .......................................................................................................... Legal Fees Expense ...........................................................................

6,000

Equipment ................................................................................................ Delivery Expense ...............................................................................

600

No entry required.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment

5,000

6,000

600

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

Exercise 5 Below are transactions for Oriel Company: 1. Purchased land for $900,000. 2. Paid $20,000 to demolish building located on land. 3. Paid $3,000 for building permit. 4. Paid $2,000 for architect fees. 5. Paid $3,000 for excavation costs. 6. Paid interest of $22,000 during construction of new building. 7. Paid $960,000 to complete the building. 8. Paid $30,000 to pave the parking lot. 9. Paid $4,000 for underground sprinkler. 10. Ordered new equipment, paid $30,000. 11. Paid $1,500 to install and test new equipment. 12. Paid $250 to insure equipment for one year. 13. Paid $2,500 to paint office walls in the new building. 14. Paid $2,000 to repair equipment. 15. Purchased a truck for $25,000. 16. Paid $250 for truck licence. 17. Paid $60 for oil change on new truck. 18. Paid $15,000 for fences around the new building. 19. Purchased two cash registers for $1,100 each. 20. Paid $2,200 for annual yard maintenance. Instructions a) Determine if each item should be capitalized (C) or expensed (E). b) Determine the balance in the Land account and the Building account. Solution 5 a) 1. C 2.

Test Bank for Accounting Principles, Ninth Canadian Edition

10. C 11. C 12. E 13. E 14. E 15. C 16. E 17. E 18. C 19. C 20. E b)

Land Account = $900,000 + $20,000 = $920,000 Building Account = $3,000 + $2,000 + $3,000 + $22,000 + $960,000 = $990,000

Exercise 6 Extra Company purchased land for $115,000 with the intention of constructing a new operating facility. The land purchase included a dilapidated building that was removed at a cost of $16,000. The only salvage value from this old building was some materials, that were sold for proceeds of $4,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

Extra had paid surveying costs of $1,800 and legal fees related to land transfer of $6,700. The new building was quickly constructed at a total cost of $422,000. Architectural drawings and permits on the construction of this new facility totalled $18,000 and $10,650, respectively. Insurance premiums of $9,200 are paid annually. The production manager is currently on-site facilitating the production startup. This manager has an annual salary of $85,000. Instructions a) Calculate the acquisition cost of the land. Identify each element of cost clearly. b) Calculate the acquisition cost of the new building. Identify each element of cost clearly. Solution 6 (10 min.) a) Purchase price .......................................................................................... Demolition costs ....................................................................................... Proceeds from salvaged materials .......................................................... Surveying costs ......................................................................................... Legal fees for land transfer ...................................................................... Acquisition cost of land ............................................................................ b)

Construction costs.................................................................................... Architectural drawings ............................................................................. Building permits ....................................................................................... Acquisition cost of building......................................................................

$115,000 16,000 (4,000) 1,800 6,700 $135,500 $422,000 18,000 10,650 $450,650

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Exercise 7 On August 1, 2024, Mark Leamington Engineering paid $1,000,000 in a lump-sum purchase of land, building, and equipment. The payment consisted of $200,000 cash and a note payable for the balance. An appraisal revealed the following fair values at the time of the purchase: Land .......................................... $500,000 Building..................................... 450,000 Equipment ................................ 250,000 Instructions Prepare the necessary journal entry to record this lump-sum purchase (round all percentage calculations to two decimal places). Solution 7 (10 min.) Asset

Fair Value

Total Fair

% of Fair

Cost

Allocated

Test Bank for Accounting Principles, Ninth Canadian Edition

Land Building Equipment Total Aug. 1, 2024

$ 500,000 450,000 250,000 $1,200,000

Value $1,200,000 1,200,000 1,200,000

Value 41.67% 37.50% 20.83%

$1,000,000 1,000,000 1,000,000

Land ........................................................................................ Building ................................................................................... Equipment .............................................................................. Cash .............................................................................. Notes Payable...............................................................

Cost $ 416,700 375,000 208,300 $1,000,000

416,700 375,000 208,300 200,000 800,000

Exercise 8 Shen Athletics purchased factory equipment with an invoice price of $92,000. Other costs incurred were freight costs, $2,500; installation of wiring and foundation, $2,200; material and labour costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; one-year fire insurance policy covering equipment, $1,400. The equipment is estimated to have an $8,000 residual value at the end of its five-year useful service life. Instructions a) Calculate the acquisition cost of the equipment. Identify each element of cost clearly. b) If the double diminishing-balance method of depreciation was used, the constant percentage applied to a diminishing carrying amount would be ______. Solution 8 (10 min.) a) Invoice cost ............................................................................................... Freight costs ............................................................................................. Installation of wiring and foundation ...................................................... Material and labour costs in testing ........................................................ Acquisition cost ........................................................................................ b)

$92,000 2,500 2,200 700 $97,400

If the diminishing-balance method of depreciation was used, the constant percentage applied to a diminishing carrying amount would be 40% (100% ÷ 5 years) x 2.

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 9 Dufferin Company uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during the first three years. 2023 July 1 Purchased a new computer system from The Computer Centre for $37,000 cash and shipping costs of $250. Nov. 3 Incurred ordinary repairs on computer of $3,280. Dec. 31 Recorded 2023 depreciation on the basis of an estimated five-year life and residual value of $1,250. 2024

Dec. 31

Recorded 2024 depreciation.

2025

Jan.

Paid $9,800 for a major upgrade of the computer. This expenditure is expected to increase the operating efficiency and capacity of the computer.

Instructions Prepare the necessary entries. (Show calculations.) Solution 9 (15 min.) 2023 July 1 Equipment ......................................................................... Cash ......................................................................... Nov. 3

Dec. 31

2024

2025

Dec. 31

Jan. 1

37,250 37,250

Repairs Expense ................................................................ Cash .........................................................................

3,280

Depreciation Expense ....................................................... Accumulated Depreciation–Equipment ................. [($ 37,250 – $ 1,250) ÷ 5 × 1/2]

3,600

Depreciation Expense ....................................................... Accumulated Depreciation–Equipment ................. [($ 37,250 – $ 1,250) ÷ 5]

7,200

Equipment ......................................................................... Cash .........................................................................

9,800

3,280

3,600

7,200

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment Learning Objective: Apply depreciation methods to property, plant, and equipment.

9,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 10 On March 31, 2024, Holland Industries purchased assets for $2,500,000 cash. Before completing the purchase, Holland had an appraisal completed to determine the relative value of each of the assets included in the purchase price. The appraisal indicated that the fair value of the land, if purchased separately, would be $375,000, the building’s value is $1,900,000, the manufacturing equipment $192,500, and the office equipment $55,000. In addition to the land, building and equipment, the purchase price includes inventory with a net realizable value of $27,500. The anticipated life of the building is 25 years, the manufacturing equipment 10 years, and the office equipment five years, with no residual value for any of them. Holland has a December 31 year end. Instructions a) Record the purchase on March 31, 2024 (round percentages to one decimal place) b) Record the depreciation expense for 2024 using the straight-line method assuming the company chooses to prorate depreciation based on the number of months the asset has been in use. Solution 10 (20 min.) a) Allocation of cost based on fair values:

Land Building Manufacturing equipment Office equipment Inventory

Fair value $ 375,000 1,900,000 192,500 55,000 27,500 $2,550,000

Percentage 14.7% 74.5% 7.5% 2.2% 1.1% 100.0%

Entry to record purchase Land .......................................................................................................... Building ..................................................................................................... Equipment ................................................................................................ Equipment (office) .................................................................................... Merchandise Inventory............................................................................. Cash ...................................................................................................

Allocation of cost $ 367,500 1,862,500 187,500 55,000 27,500 $2,500,000

367,500 1,862,500 187,500 55,000 27,500 2,500,000

b) Depreciation Expense............................................................................... Accumulated Depreciation–Building ............................................... ($1,862,500 ÷ 25) x 9/12

78,188 55,875

Test Bank for Accounting Principles, Ninth Canadian Edition

Accumulated Depreciation–Equipment .......................................... ($187,500 ÷ 10) x 9/12) Accumulated Depreciation–Equipment (office) .............................. ($55,000 ÷ 5) x 9/12)

14,063 8,250

Exercise 11 On May 5, 2024, Vermilion River Adventures purchased a property for $400,000 cash. The property included the following long-lived assets: Appraised Value Land .......................................................................................................... $120,000 Building ..................................................................................................... 200,000 Equipment ................................................................................................ 100,000 Paved area ................................................................................................ 20,000 Outdoor lighting ....................................................................................... 10,000 $450,000 Instructions a) Give the journal entry to allocate the purchase price between the above assets. Round all amounts to the nearest dollar, if necessary. b) Prepare a compound journal entry to record depreciation of the long-lived assets on December 31, 2024, assuming the following additional details: Useful Life in Years Residual Value Building 30 $20,000 Equipment 5 10,000 Paved area 4 -0Outdoor lighting 10 -0Prorate depreciation based on the number of months the asset has been in use. Solution 11 (20 min.) a) Land Building Equipment Paved area

% of Appraised Value $120,000 ÷ $450,000 × $400,000 $200,000 ÷ $450,000 × $400,000 $100,000 ÷ $450,000 × $400,000 $20,000 ÷ $450,000 × $400,000

Allocation of Purchase Price = $106,667 = 177,778 = 88,889 = 17,778

Test Bank for Accounting Principles, Ninth Canadian Edition

Outdoor lighting

8,888 $400,000

Land ........................................................................................ Building ................................................................................... Equipment .............................................................................. Leasehold Improvement ........................................................ Leasehold Improvement (lighting) ........................................ Cash ..............................................................................

106,667 177,778 88,889 17,778 8,888

Depreciation Expense............................................................................... Accumulated Depreciation–Building ............................................... [($177,778 – $20,000) ÷ 30] × 8/12 Accumulated Depreciation–Equipment .......................................... [($ 88,889 – $10,000) ÷ 5] × 8/12 Accumulated Depreciation–Leasehold Improvements .................. [($17,778 – $0) ÷ 4] × 8/12 Accumulated Depreciation–Leasehold Improvements (Lighting).. [($8,888 – $0) ÷ 10] × 8/12

17,581

May 5

$10,000 ÷ $450,000 × $400,000

400,000

3,506 10,519 2,963 593

Exercise 12 Independent Energy depreciates its property, plant, and equipment assets using the straight-line method. The company's fiscal year end is December 31. The following selected transactions and events occurred during the first three years: 2023 Jan. 1 Purchased equipment from Equipment World for $214,500 on account. Independent Energy also incurred freight and installation costs of $1,500 and $4,000, respectively. Sept. 30 Paid for annual insurance of $4,200 and routine maintenance of $1,700 for the machine. The insurance policy expires on September 30, 2024. Dec. 31 Recorded 2023 depreciation on the basis of an estimated 10-year useful life and residual value of $20,000. 2024

Dec. 31

Recorded 2024 depreciation and impairment loss (if any). Independent Energy conducted an impairment assessment as indicators suggested that an impairment may be possible. It was determined that the recoverable amount of the equipment is currently $160,000. The estimated residual value remained unchanged.

Test Bank for Accounting Principles, Ninth Canadian Edition

2025

Dec. 31

Independent Energy sold the equipment to Engaged Auto Company for proceeds of $140,000.

Instructions Prepare the necessary entries. (Show calculations.) Solution 12 (30 min.) 2023 Jan. 1 Equipment ......................................................................... Accounts Payable .................................................... ($214,500 + $1,500 + $4,000) Sept. 30

Dec. 31

2024

Dec. 31

2025

Dec. 31

220,000 220,000

Repairs Expense ................................................................ Prepaid Insurance ............................................................. Cash .........................................................................

1,700 4,200

Depreciation Expense ....................................................... Accumulated Depreciation–Equipment ................. [($220,000 – $20,000) ÷ 10]

20,000

Depreciation Expense ....................................................... Accumulated Depreciation–Equipment ................. [($220,000 – $20,000) ÷ 10]

20,000

Impairment Loss................................................................ Accumulated Depreciation–Equipment ................. Carrying amount = $220,000 – $20,000 – $20,000 = $180,000 Impairment loss = $180,000 – $160,000 = $20,000

20,000

Depreciation Expense ....................................................... Accumulated Depreciation–Equipment ................. [($160,000 – $20,000) ÷ (10 - 2 years)]

17,500

5,900

20,000

17,500

Cash ................................................................................... 140,000 Accumulated Depreciation–Equipment ........................... 77,500 Loss on Disposal ................................................................ 2,500 Equipment ............................................................... 220,000 Accumulated depreciation = $20,000 + $20,000 + $20,000 + $17,500 = $77,500 Carrying amount = $220,000 – $77,500 = $142,500 Gain (loss) on disposal = $140,000 – $142,500 = $(2,500)

Bloomcode: Analysis Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment Learning Objective: Apply depreciation methods to property, plant, and equipment.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Depreciation Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposal of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Exercise 13 Das Gym purchased new equipment for $175,000. It is estimated that the equipment will have a $15,000 residual value at the end of its five-year useful service life. The double diminishing-balance method of depreciation will be used. Instructions Prepare a depreciation schedule that shows the annual depreciation expense on the equipment for its five-year life. Round all amounts to the nearest dollar. Solution 13 (10 min.) Double diminishing-balance rate = (100% ÷ 5) × 2 = 40% Carrying amount Annual End of Year Beginning Depreciation Depreciation Accumulated Carrying amount Year of Year × Rate = Expense Depreciation End of Year 1 $175,000 × 40% $70,000 $ 70,000 $105,000 2 105,000 × 40% 42,000 112,000 63,000 3 63,000 × 40% 25,200 137,200 37,800 4 37,800 × 40% 15,120 152,320 22,680 5 22,680 × 40% 7,680* 160,000 15,000 *Adjusted to $7,680 because ending carrying amount should not be less than the expected residual value of $15,000. Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 14 Randy Automotive purchased equipment on October 1, 2024, at a total cost of $ 150,000. The machine has an estimated useful life of eight years or 100,000 hours, and an estimated residual value of $10,000. During 2024 and 2025, the machinery was used 4,400 and 12,800 hours, respectively.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Calculate depreciation expense at December 31, 2024 and December 31, 2025, under the following depreciation methods (round all amounts to the nearest dollar): 2024 2025 Straight-line depreciation ________ ________ Units-of-production depreciation ________ ________ Double diminishing-balance depreciation ________ ________ Solution 14 (15 min.) Straight-line depreciation Units-of-production depreciation Double diminishing-balance depreciation

2024 $4,375 $6,160 $9,375

2025 $17,500 $17,920 $35,156

(1) Straight-line depreciation December 31, 2024 = ($150,000 – $10,000)/8 x 3/12 = $4,375 December 31, 2025 = ($150,000 – $10,000)/8 = $17,500 (2) Units-of-production depreciation December 31, 2024 = ($150,000 – $10,000)/100,000 = $1.40 x 4,400 = $6,160 December 31, 2025 = ($150,000 – $10,000)/100,000 = $1.40 x 12,800 = $17,920 (3) Double diminishing-balance depreciation Double diminishing rate = 200%/8 years = 25% December 31, 2024 = $150,000 x 25% x 3/12 = $9,375 December 31, 2025 = ($150,000 – $9,375) x 25% = $35,156 Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 15 Equipment acquired on October 1, 2024, at a cost of $540,000 has an estimated useful life of 10 years. The residual value is estimated to be $55,000 at the end of the equipment's useful life. The company has a December 31 year end. Instructions Calculate the depreciation expense for December 31, 2024 and 2025, using: a) the straight-line method. b) the double diminishing-balance method.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 15 (10 min.) a) Straight-line method 2024 $540,000 – $55,000 × 3/12 = $12,125 10 years 2025

($540,000 – $55,000)/10 = $48,500

b) Double diminishing-balance method Depreciation rate = 200% ÷ 10 years = 20% 2024

$540,000 × 20% × 3/12 = $27,000

2025

($540,000 – $27,000) × 20% = $102,600

Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 16 On October 1, 2024, Stan Auto Rentals purchases a new automobile for $30,000 to add to its fleet of rental cars. The automobiles are rented out on a short-term basis with rental fees calculated based on distance driven by the customer. Stan’s policy is to sell and replace a car after the earlier of three years, or 75,000 kilometres. The average selling price of the used cars is $8,000. This particular car was driven 8,000 km in 2024, 39,000 km in 2025, and 21,000 km in 2026. Instructions a) Calculate 2024 and 2025 depreciation expense under each of the following methods (round all amounts to the nearest dollar): (i) Straight-line (ii) Diminishing-balance using a 40% rate (iii) Units-of-production b) Which method will best match the estimated pattern in which the asset’s economic benefits are expected to be consumed? Explain. Solution 16 (10 min.) a) 2024 (i) ($30,000 – $8,000) ÷ 3 x 3/12 = $1,833 (ii) ($30,000 x 40%) x 3/12 = $3,000 (iii) ($30,000 – $8,000) ÷ 75,000 km x 8,000 km = $2,347

2025 ($30,000 – $8,000) ÷ 3 = $7,333 ($30,000 – $3,000) x 40% = $10,800 ($30,000 – $8,000) ÷ 75,000 km x 39,000 km = $11,440

Test Bank for Accounting Principles, Ninth Canadian Edition

Because revenue is based on units-of-production (kilometres driven), the method that will best match the estimated pattern in which the asset’s economic benefits are expected to be consumed is units-of-production.

Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 17 Sangria Boat Lifts purchased equipment on January 1, 2024, for $96,000. It is estimated that the equipment will have a $5,000 residual value at the end of its eight-year useful life. It is also estimated that the equipment will produce 100,000 units over its eight-year life. Instructions Answer the following independent questions. a) Calculate the amount of depreciation expense for the year ended December 31, 2024, using the straight-line method of depreciation. b) If 16,000 units of product are produced in 2024 and 36,000 units are produced in 2025, what is the carrying amount of the equipment at December 31, 2025, using the units-of-production depreciation method? c) If the company uses the double diminishing-balance method of depreciation, what will be the balance of the Accumulated Depreciation–Equipment account at December 31, 2026? Solution 17 (15 min.) a) Straight-line method:

$96,000 – $5,000 = $11,375 per year 8

Units-of-production method:

$96,000 – $5,000 = $0.91 per unit 100,000 units

2024 16,000 units × $0.91 2025 36,000 units × $0.91 Accumulated depreciation

= = =

$14,560 32,760 $47,320

Cost of asset..................................... Less: Accumulated depreciation..... Carrying amount..............................

$96,000 47,320 $48,680

Double diminishing-balance method: (200%/8) Carrying amount DiminishingBeginning of Year × Balance Rate =

Depreciation Accumulated Expense Depreciation

Test Bank for Accounting Principles, Ninth Canadian Edition

2024 2025 2026

$96,000 72,000 54,000

25% 25% 25%

$24,000 18,000 13,500

$24,000 42,000 55,500

Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 18 The Picnic Basket, a popular pizza restaurant, has a thriving delivery business. The Picnic Basket has a fleet of three delivery automobiles. Information related to the fleet is as follows: Accumulated Kilometres Estimated Life Depreciation Operated Car Cost Residual Value in Kilometres Beg. of the Year During Year 1 $18,000 $3,000 50,000 $2,100 20,000 2 15,000 2,400 60,000 1,890 22,000 3 20,000 2,500 70,000 2,000 19,000 Instructions Using the units-of-production method: a) Determine the depreciation rates per kilometre for each car. b) Determine the depreciation expense for each car for the current year. c) Make one compound journal entry to record the annual depreciation expense for the fleet. Solution 18 (10 min.) a)

Car 1

$18,000 – $3,000 = $ 0.30 per km. 50,000 km

Car 2

$15,000 – $2,400 = $ 0.21 per km. 60,000 km

Car 3

$20,000 – $2,500 = $ 0.25 per km. 70,000 km

Car 1 Car 2 Car 3

20,000 km × $0.30 = $6,000 22,000 km × $0.21 = $4,620 19,000 km × $0.25 = $4,750

Depreciation Expense............................................................................... Accumulated Depreciation–Vehicles (Car 1)....................................

15,370 6,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accumulated Depreciation–Vehicles (Car 2).................................... Accumulated Depreciation–Vehicles (Car 3)....................................

4,620 4,750

Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 19 The Northwood Clinic purchased a new surgical laser for $75,000. The estimated residual value is $7,500. The laser has a useful life of four years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in Year 1; 2,100 hours in Year 2; 3,400 hours in Year 3; 2,900 hours in Year 4. Instructions a) Calculate the annual depreciation for each of the four years under each of the following methods: i) straight-line ii) units-of-production b) If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer. c) Which method would result in the lowest reported profit in the first year? Which method would result in the lowest total reported profit over the four-year period? d) Which method would result in the lowest cash flow in Year 1? Over the life of the asset? Solution 19 (10 min.) a) i) Straight-line method: $75,000 – $7,500 = $16,875 per year 4 years ii)

Units-of-production method: $75,000 – $7,500 = $ 6.75 per hour 10,000 hours

Year

1 2 3 4

Year 1 Year 2 Year 3 Year 4 Total

1,600 × $6.75 = $10,800 2,100 × $6.75 = $14,175 3,400 × $6.75 = $22,950 2,900 × $6.75 = $19,575 Straight-line $16,875 16,875 16,875 16,875 $67,500

Units-of-Production $10,800 14,175 22,950 19,575 $67,500

Test Bank for Accounting Principles, Ninth Canadian Edition

The units-of-production method can be justified based on the variable usage the laser will receive during its useful life.

The straight-line method provides the highest depreciation expense for the first year, and therefore the lowest first year profit. Over the four-year period, both methods result in the same total depreciation expense ($67,500) and, therefore, the same total profit.

Both methods will result in the same cash flow in Year 1 and over the life of the asset. Recording depreciation expense does not affect cash flow. There is no Cash account involved in the entry to record depreciation (Dr. Depreciation Expense; Cr. Accumulated Depreciation). It is only an allocation of the capital cost to expense over an asset’s useful life.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 20 Gordon’s Garage purchased a specialized machine on April 1, 2024, for a total cost of $254,000 from Scissor Manufacturers. This machine is expected to become outdated and be replaced in 16 years at which time it will have a residual value of $25,000. Instructions a) What amount would be reported as depreciation expense for this machine on Gordon’s income statement for December 31, 2024 and December 31, 2025, under the following depreciation methods? (rounded to two decimals) i) Straight-line method ii) Double diminishing-balance method b) What is the machine’s carrying amount at December 31, 2025, under both depreciation methods discussed in part a)? Solution 20 (15 min.) a) i) Straight-line method Annual Depreciation = $254,000 – $25,000/16 years = $14,312.50 2024: $14,312.50 x 9/12 months = $10,734.38 2025: $14,312.50 ii) Double diminishing-balance method Double Diminishing Rate = 200%/16 = 12.5% Carrying amount Depreciation

Annual

Accumulated

Carrying

Test Bank for Accounting Principles, Ninth Canadian Edition

Year 2024 2025 b)

Beginning Year × Rate = $254,000.00 12.5% x 9/12 230,187.50 12.5%

Depreciation $23,812.50 28,773.44

Depreciation $23,812.50 52,585.94

amount $230,187.50 201,414.06

Carrying amount, December 31, 2025: Straight-line = $ 254,000.00 – $ 10,734.38 – $ 14,312.50 = $ 228,953.12 Double diminishing-balance = $ 201,414.06

Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 21 Prairie Airlines purchased a 747 aircraft on January 1, 2023, at a cost of $30,000,000. The estimated useful life of the aircraft is 20 years, with an estimated residual value of $4,000,000. On December 31, 2025, before recording 2025 depreciation, the airline revises the total estimated useful life to 15 years with a revised residual value of $3,000,000. Instructions a) Calculate the depreciation and carrying amount at December 31, 2024, using the straight-line method and the double diminishing-balance method. b) Assuming the straight-line method is used, calculate the depreciation expense for the year ended December 31, 2025. Solution 21 (20 min.) a) Straight-line method Annual Depreciation $1,300,000 1,300,000

Accumulated Depreciation $1,300,000 2,600,000

Carrying amount $28,700,000 27,400,000

Annual Depreciation $3,000,000 2,700,000

Accumulated Depreciation $3,000,000 5,700,000

Carrying amount $27,000,000 24,300,000

Carrying amount, December 31, 2025 ................................ Less: Revised residual value ................................................ Depreciable cost ..................................................................

$27,400,000 3,000,000 $24,400,000

Year 2023 2024

Depreciable Cost $26,000,000 26,000,000

Depreciation Rate = 5% 5%

Double diminishing-balance method

Year 2023 2024 b)

Carrying amount Depreciation Beginning Year × Rate = $30,000,000 10% 27,000,000 10%

Test Bank for Accounting Principles, Ninth Canadian Edition

Remaining useful life (15 years – 2 years) ...........................

13 yrs.

Revised annual depreciation ..............................................

$1,876,923

Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 22 Winningham Company sold the following two machines in 2024: Machine A Machine B Cost $92,000 $43,000 Purchase date July 1, 2020 Jan. 1, 2020 Useful life 8 years 8 years Residual value $4,000 $3,000 Depreciation method Straight-line Double diminishing-balance Date sold July 1, 2024 Aug. 1, 2024 Sales price $37,000 $12,000 Instructions Journalize all entries required to update depreciation and record the sales of the two assets in 2024. The company has recorded depreciation on the machine to December 31, 2023. Solution 22 (20 min.) July 1 Depreciation Expense .................................................................. Accumulated Depreciation–Equipment ........................... ($92,000 – $4,000) ÷ 8 × 6/12 = $ 5,500 Cash .............................................................................................. Accumulated Depreciation–Equipment A*................................. Loss on Disposal .......................................................................... Equipment A ...................................................................... *2020 2021 2022 2023

($92,000 – $4,000) ÷ 8 × 6/12 ($92,000 – $4,000) ÷ 8

$ 5,500 11,000 11,000 11,000

5,500 5,500

37,000 44,000 11,000 92,000

Test Bank for Accounting Principles, Ninth Canadian Edition

2024 ($92,000 – $4,000) ÷ 8 × 6/12 Total accumulated depreciation at date of disposal Aug. 1

5,500 $44,000

Depreciation Expense .................................................................. Accumulated Depreciation–Equipment B. ....................... ($43,000 – $29,395) × 25% × 7/12 = $1,984

1,984

Cash .............................................................................................. Accumulated Depreciation–Equipment B** ............................... Gain on Disposal ............................................................... Equipment .........................................................................

12,000 31,379

**2020 $43,000 × 25% 2021 ($43,000 – $10,750) × 25% 2022 ($43,000 – $18,813) × 25% 2023 ($43,000 – $24,860) × 25% 2024 ($43,000 – $29,395) × 25% × 7/12 Total accumulated depreciation at date of disposal

1,984

379 43,000

$10,750 8,063 6,047 4,535 1,984 $31,379

Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposal of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Exercise 23 Paper Products Inc. sold two pieces of machinery equipment in 2024. The following information pertains to the two machines: Purchase Useful Residual Depreciation Sales Machine Cost Date Life Value Method Date Sold Price #1 $86,000 7/1/20 5 yrs. $6,000 Straight-line 7/1/24 $20,000 #2 $50,000 7/1/23 5 yrs. $5,000 Double diminishing- 12/31/24 $32,000 balance Instructions a) Calculate the accumulated depreciation on each machine at the date of disposal. b) Prepare the journal entries in 2024 to record 2024 depreciation and the sale of each machine. Solution 23 (20 min.) a) Machine #1 Year

Depreciable Cost

Depreciation Rate

Annual Depreciation

Accumulated Depreciation

Test Bank for Accounting Principles, Ninth Canadian Edition

2020 $80,000 2021 80,000 2022 80,000 2023 80,000 2024 80,000 *One-half a year.

20% 20% 20% 20% 20%

$ 8,000* 16,000 16,000 16,000 8,000*

$ 8,000 24,000 40,000 56,000 64,000

DDB Rate 40% 40%

Annual Depreciation $10,000* 16,000

Accumulated Depreciation $10,000 26,000

Machine #2 Carrying amount Year Beginning of Year 2023 $50,000 2024 40,000 *One-half a year. b)

Machine 1 Depreciation Expense .................................. 8,000 Accumulated Depreciation–Equipment 8,000

Machine 2 16,000 16,000

Cash .............................................................. Loss on Disposal ........................................... Accumulated Depreciation–Equipment...... Equipment............................................. Gain on Disposal ...................................

32,000 -026,000

20,000 2,000* 64,000 86,000 -0-

50,000 8,000**

*NBV: $86,000 – $64,000 = $22,000; Proceeds – NBV: $20,000 – $22,000 = -$2,000 [a loss] **NBV: $50,000 – $26,000 = $24,000; Proceeds – NBV: $32,000 – $24,000 = $8,000 [a gain] Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposal of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Exercise 24 Mendelsohn Company purchased equipment on January 1, 2024, at a cost of $48,000. The equipment is expected to have an estimated residual value of $3,000 at the end of its five-year life. The company’s new accountant has used the double diminishing-balance method to depreciate the equipment at December 31, 2024. However, the company has a policy of using the straight-line method to depreciate equipment. Profit for the year ended December 31, 2024, was $55,000 as the result of depreciating the equipment incorrectly. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Using the method of depreciation that the company normally follows, prepare the correcting entry and determine the correct profit. (Show calculations.) Solution 24 (10 min.) Depreciation recorded: ($48,000 – $0) × 40%........................ Correct depreciation: ($48,000 – $3,000) ÷ 5 yrs. .................. Overstatement of depreciation in 2024.................................

$19,200 9,000 $10,200

Accumulated Depreciation–Equipment .................................................. Depreciation Expense ....................................................................... Correct profit: Profit as reported ........................................................... Add: Overstatement of depreciation expense............... Correct profit ..................................................................

10,200 10,200

$55,000 10,200 $65,200

Bloomcode: Application Difficulty: Medium Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 25 Equipment was acquired on January 1, 2022, at a cost of $90,000. The equipment was originally estimated to have a residual value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2023, using the straight-line method. On December 31, 2024, before recording 2024 depreciation, the estimated residual value was revised to $6,000 and the useful life was revised to a total of eight years. Instructions Determine the depreciation expense for 2024. Solution 25 (5 min.) Calculate the carrying amount at the time of the revision: $90,000 – $5,000 = $8,500 annual depreciation expense 10 years Two years have been depreciated: $8,500 × 2 = $17,000 Carrying amount at the time of the revision: $90,000 – $17,000 = $73,000 Calculate the revised annual depreciation:

Test Bank for Accounting Principles, Ninth Canadian Edition

$73,000 – $6,000 = $11,167 revised annual depreciation 6 years remaining The depreciation expense for 2024 is $11,167. Bloomcode: Application Difficulty: Medium Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 26 On January 1, 2023, Katsumi Company purchased and installed a telephone system at a cost of $20,000. The equipment was expected to last five years with a residual value of $3,000. On January 1, 2024, more telephone equipment was purchased to compliment the current system for $8,000. The new equipment is expected to have a useful life of four years. Through an error, the new equipment was debited to Telephone Expense. Katsumi Company uses the straight-line method of depreciation. Instructions Prepare a schedule as follows showing the effects of the error on Telephone Expense, Depreciation Expense, and profit for each year and in total beginning in 2024 through the useful life of the new equipment. Telephone Expense Depreciation Expense Profit Overstated Overstated Overstated Year (Understated) (Understated) (Understated) –––––––––––––––––––––––––––––––––----------------------------------------------------–––––––––– 2024 2025 2026 2027 Solution 26 (25 min.) Telephone Expense Depreciation Expense Profit Overstated Overstated Overstated Year (Understated) (Understated) (Understated) –––––––––––––––––––––––––––––----------------------------------------------------–––––––––––––– 2024 $8,000 $(2,000) $(6,000) 2025

(2,000)

2,000

Test Bank for Accounting Principles, Ninth Canadian Edition

2026

(2,000)

2,000

2027

(2,000)

2,000

Total

$8,000

$(8,000)

-0-

Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

Exercise 27 Harrison Rentals purchased an apartment building in January 2016. At the time, the building was expected to have a useful life of 25 years with a residual value of $100,000, during which time it was projected to generate annual rentals of $30,000). The building’s original cost was $500,000. At January 1, 2024, the accumulated depreciation balance on this building was $128,000, and 2024 depreciation has been recorded as $16,000. Harrison has a December 31 year end. During December 2024 Harrison had the following events and transactions related to the building. All transactions are for cash. 1. Painted all the walls in the common areas at a cost of $8,000. 2. Replaced the electrical wiring in three suites due to safety concerns at a cost of $4,500. 3. Replaced all of the linoleum flooring in the suites with hardwood, installed in-suite laundry facilities in each unit, and made other improvements at total cost of $120,000. As a result, the annual rental revenue has been doubled. 4. Completed structural repairs to the building at a cost of $100,000. As a result of this work the building life is expected to be 10 years longer than the original estimate. The residual value estimate has been revised to $134,000. Instructions a) Calculate the carrying amount of the building on December 31, 2024. Provide explanations for any increases to building cost. b) Record the 2025 depreciation expense using the straight-line basis, assuming that the increased rental rates go into effect January 1, 2025. Solution 27 (15 min.) a) Building cost, balance January 1, 2024 ........................................................... Add: Item 3 (new flooring and laundries are added to the

$500,000

Test Bank for Accounting Principles, Ninth Canadian Edition

cost because they increase the building’s revenuegenerating capacity) .............................................................. Item 4 (structural repairs are added to the cost because this extends the useful life of the building) ........................... Less: Accumulated depreciation ($128,000 + $16,000) ................................... Carrying amount, December 31, 2024 ............................................................. b) Revised depreciable cost ($576,000 – $134,000) Remaining life (from Jan. 1, 2025) = (25 – 9 + 10) 2025 depreciation expense = $442,000 ÷ 26

120,000 100,000 720,000 144,000 $576,000

$ 442,000 26 $ 17,000

Depreciation Expense............................................................................... Accumulated Depreciation–Building ...............................................

17,000 17,000

Exercise 28 At January 1, 2024, Penner Auto Repairs owned the following assets: Asset Date purchased Original cost

Building Jan. 1, 2017 $500,000

Depreciation method

Straight-line

Useful life/Depreciation rate Estimated residual value Estimated remaining life (as of January 1, 2024)

Automobiles Jan. 1, 2023 $45,000

40 years $200,000

Diminishingbalance 45% not applicable

33 years

not applicable

Computers Jan. 1, 2023 $10,000

Furniture Jan. 1, 2017 $20,000

Straight-line

3 years $1,000

15 years $4,000

2 years

8 years

Prior to recording depreciation expense for 2024, Penner undertook a review of the assets’ remaining life and value and determined that the following changes are warranted based on currently available information: Building: No changes Automotive: No changes Computers: Obsolete

Test Bank for Accounting Principles, Ninth Canadian Edition

Furniture:

Remaining life will be 10 years with $5,000 residual value.

Instructions Calculate 2024 depreciation on each of these assets, taking the new information into account. Round all amounts to the nearest dollar. Solution 28 (20 min.) Building Cost ........................................................................................................... Residual value........................................................................................... Depreciable value ..................................................................................... Estimated life ............................................................................................ 2024 depreciation expense ($300,000 ÷ 40).............................................

$500,000 $200,000 $300,000 40 years $7,500

Automobile Cost ........................................................................................................... 2023 depreciation ($45,000 x 45%) .......................................................... Carrying amount Jan. 1, 2024 .................................................................. Depreciation rate ...................................................................................... 2024 depreciation expense ($24,750 x 45%) ...........................................

$45,000 $20,250 $24,750 45% $11,138

Computers Cost ........................................................................................................... Accumulated depreciation Jan 1, 2024 ($10,000 – $1,000) ÷ 3 x 1 .......... Carrying amount Jan. 1, 2024 .................................................................. Revised residual value .............................................................................. Revised depreciable cost ......................................................................... Remaining life ........................................................................................... 2024 depreciation expense ($7,000 ÷ 1 year) ..........................................

$10,000 $3,000 $7,000 $-0$7,000 0 years $7,000

Furniture Cost ........................................................................................................... Accumulated depreciation Jan. 1/24 ($20,000 – $4,000) ÷ 15 x 7 ........... Carrying amount Jan. 1/24....................................................................... Revised residual value .............................................................................. Revised depreciable cost ......................................................................... Remaining life ........................................................................................... 2024 depreciation expense ......................................................................

$20,000 $7,467 $12,533 $5,000 $7,533 10 years $753

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 29 Redwood Company performs an assessment annually for possible impairment losses and has gathered the following information pertaining to selected assets at December 31, 2024: Asset Building Equipment Computers Furniture Original cost $400,000 $245,000 $100,000 $20,000 Accumulated depreciation 220,000 16,000 20,000 13,000 Recoverable amount 550,000 225,000 70,000 8,000 Impairment loss (if any) ? ? ? ? Instructions Determine if the assets identified by Redwood are impaired and prepare any necessary adjusting entries to record the impairments. Solution 29 (10 min.) Asset Building Equipment Computers Furniture Original cost $400,000 $245,000 $100,000 $20,000 Accumulated depreciation 220,000 16,000 20,000 13,000 Recoverable amount 550,000 225,000 70,000 8,000 Impairment loss (if any) 0 4,000 10,000 0 2024

Dec. 31

Impairment Loss................................................................ Accumulated Depreciation–Equipment ................. Accumulated Depreciation–Equipment (Computers) Carrying amount = $345,000 – $16,000 – $20,000 = $309,000 Impairment loss = $309,000 – $295,000 = $14,000

14,000 4,000 10,000

Exercise 30 The following assets were sold by DNC Company during the 2024 fiscal year. The company’s year end is December 31. Asset Original cost Accumulated depreciation

Vehicles $60,000 $35,000

Equipment $8,000 $7,000

Furniture $18,000 $7,000

Test Bank for Accounting Principles, Ninth Canadian Edition

(December 31, 2023) Depreciation method Diminishing-balance Straight-line Straight-line Depreciation rate/years remaining 25% 2 years 8 years Estimated residual value not applicable not applicable not applicable Selling price $22,500 $708 $14,000 Date of sale in 2024 April 1 August 1 October 31 Instructions Calculate the gain or loss on disposal for each asset sold and prepare any necessary journal entries to record the disposals for DNC. (Round to the nearest dollar) Solution 30 (15 min.) Apr. 1 Depreciation Expense .................................................................. Accumulated Depreciation–Vehicles ................................ ($60,000 – $35,000) × 25% × 3/12 = $1,563

Aug. 1

Oct. 31

1,563 1,563

Cash .............................................................................................. Accumulated Depreciation–Vehicles ($35,000 + $1,563)............ Loss on Disposal .......................................................................... Vehicles ..............................................................................

22,500 36,563 937

Depreciation Expense .................................................................. Accumulated Depreciation–Equipment ........................... [($8,000 – $7,000)/2 x 7/12] = $ 292

292

Cash .............................................................................................. Accumulated Depreciation– Equipment ($7,000 + $292) ........... Equipment .........................................................................

708 7,292

Depreciation Expense .................................................................. Accumulated Depreciation–Furniture. ............................. ($18,000 – $7,000)/8 × 10/12 = $ 1,146

1,146

Cash .............................................................................................. Accumulated Depreciation–Furniture ($7,000 + $1,146)............ Gain on Disposal ................................................................ Furniture ............................................................................

14,000 8,146

60,000

292

8,000

1,146

4,146 18,000

Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposal of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 31 1. Lui Company purchased equipment in 2017 for $80,000 and estimated an $8,000 residual value at the end of the equipment's 10-year useful life. At December 31, 2023, there was $50,400 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2024, the equipment was sold for $21,000. Prepare the appropriate journal entries to record the sale of the equipment for Lui Company. 2. Gagne Company sold a delivery truck for $11,000. The delivery truck originally cost $25,000 in 2020 and $6,000 was spent on a major overhaul in 2021 (charged to the Vehicles account). Accumulated depreciation on the delivery truck to the date of disposal was $20,000. Prepare the appropriate journal entry to record the disposition of the delivery truck. 3. Crenshaw Company sold office equipment that had a carrying amount of $4,500 for $6,000. The office equipment originally cost $15,000 and it is estimated that it would cost $19,000 to replace the office equipment. Prepare the appropriate journal entry to record the disposition of the office equipment. Solution 31 (15 min.) 1. Depreciation Expense............................................................................... Accumulated Depreciation–Equipment .......................................... To record depreciation expense for the first three months of 2024. ($72,000 ÷ 10 × 3/12) = $1,800

1,800 1,800

Cash........................................................................................................... Loss on Disposal ....................................................................................... Accumulated Depreciation–Equipment ($50,400 + $1,800) ................... Equipment......................................................................................... To record sale of equipment at a loss

21,000 6,800 52,200

Cash........................................................................................................... Accumulated Depreciation–Vehicles ....................................................... Vehicles ($25,000 + $6,000) ............................................................... To record disposition on delivery truck at carrying amount.

11,000 20,000

Cash........................................................................................................... Accumulated Depreciation–Equipment .................................................. Equipment......................................................................................... Gain on Disposal ............................................................................... To record disposal of office equipment at a gain.

6,000 10,500

80,000

31,000

15,000 1,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 32 Zedel Delivery Services has a December 31, 2024, year end. On January 1, 2024, Zedel has a delivery van with a cost of $35,000 and accumulated depreciation of $12,000. The van was expected to have a residual value of $5,000 and a useful life of five years. Zedel uses straight-line depreciation. Zedel plans to replace its delivery van on April 1, 2024, and is considering two alternatives: 1. Zedel has been offered $14,000 for the old van. If Zedel accepts this offer, Zedel would then purchase a replacement for $50,000 cash. 2. Trade the old van for a new one. The dealer will allow a $22,000 trade-in allowance on the old van, and Zedel will have to pay additional cash of $28,000. Instructions a) Record the updated depreciation on the old van to April 1, 2024. b) Record the disposal of the van under each of the two alternatives. c) Which alternative do you recommend and why? Solution 32 (15 min.) a) Depreciation Jan. 1 – Apr. 1, 2024: ($35,000 – $5,000) ÷ 5 x 3/12 = $1,500 Apr. 1Depreciation Expense............................................................................. Accumulated Depreciation–Vehicles .....................................

1,500 1,500

b) Option 1: Cash ................................................................................................ Accumulated Depreciation–Vehicles ($12,000 + $1,500) .............. Loss on Disposal ............................................................................. Vehicles (old) ..........................................................................

14,000 13,500 7,500

Vehicles (new)................................................................................. Cash.........................................................................................

50,000

Vehicles (new) ($22,000 + $28,000) ................................................ Accumulated Depreciation–Vehicles............................................. Gain on Disposal ..................................................................... Vehicles (old) .......................................................................... Cash.........................................................................................

50,000 13,500

35,000

50,000

Option 2:

500 35,000 28,000

Cash required for alternative #1 ($50,000 – $14,000) = $36,000. Cash required for alternative #2 = $28,000. Because the second option requires less cash to acquire the same van, it is the recommended option.

Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposal of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Exercise 33 Presented below are selected transactions for Donald Company for 2024: Jan. 1 Received $3,000 scrap value on retirement of equipment that was purchased on January 1, 2013. The equipment cost $80,000 on that date, and had an estimated useful life of 10 years with no residual value. Apr. 30 Sold equipment for $50,000 that was purchased on January 1, 2021. The equipment cost $90,000, and had an estimated useful life of five years with no residual value. Dec. 31 Scrapped a business automobile that was purchased on September 1, 2019. The car cost $20,000 and was depreciated on an eight-year useful life with a residual value of $800. Instructions Journalize all entries required as a result of the above transactions. Donald Company uses the straight-line method of depreciation and has recorded depreciation to December 31, 2023. Solution 33 (15 min.) Jan. 1 Cash ................................................................................................ Accumulated Depreciation–Equipment ........................................ Equipment .............................................................................. Gain on Disposal ..................................................................... Apr. 30

Dec. 31

3,000 80,000 80,000 3,000

Depreciation Expense .................................................................... Accumulated Depreciation–Equipment ................................ ($90,000 ÷ 5) × 4/12 = $6,000

6,000

Cash ................................................................................................ Accumulated Depreciation–Equipment ........................................ ($18,000 × 3) + $6,000 Equipment .............................................................................. Gain on Disposal ($50,000 – $30,000).....................................

50,000 60,000

Depreciation Expense .................................................................... Accumulated Depreciation–Vehicles ..................................... ($20,000 – $800) ÷ 8 = $2,400

2,400

Accumulated Depreciation–Vehicles............................................. ($2,400 × 5) + ($2,400 x 1/3) Loss on Disposal ............................................................................. Vehicles ...................................................................................

12,800

6,000

90,000 20,000

2,400

7,200 20,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 34 On January 1, 2024, Jelly Stone Industries invested $2,000,000 in land that includes a stand of timber and the rights to cut the timber. The property is expected to yield 50,000 cubic metres of timber. After the amount of lumber permitted by law has been cut, Jelly Stone expects to be able to sell the land for $400,000 less $150,000 that must be spent on reforestation. Jelly Stone invested a further $300,000 in equipment that is expected to last for the same number of units as the property yields, with no residual value. Instructions a) Using the units-of-production method, calculate depletion/depreciation for 2024 on both the timber investment and for the equipment, assuming that 12,000 cubic metres are sawn in the year. b) Explain why the units-of-production method is considered the most appropriate method for depletion of natural resources. Solution 34 (10 min.) a) Depletion of timber: ($2,000,000 – [$400,000 – $150,000]) ÷ 50,000 = $35 per cubic metre; $35 x 12,000 = $420,000 Depreciation of equipment: $300,000 ÷ 50,000 = $6 per cubic metre; $6 x 12,000 = $72,000 b)

The units-of-production method is considered appropriate because the cost of the asset is matched exactly with the asset being physically used up. This will also result in a good matching of expenses with revenues, which are also determined on a per-unit basis.

Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

Exercise 35 Johansan Mining Company purchased a mine for $80 million, which is estimated to have 250,000 tonnes of ore and a residual value of $10 million. In the first year, 50,000 tonnes of ore are extracted and sold. In the second year, 150,000 tonnes of ore are extracted but only 125,000 tonnes are sold.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Prepare the journal entry to record depletion expense for the first year and the second year. b) What amount and in what account are the tonnes of ore not sold reported? Solution 35 (10 min.) a) Calculation of the depletion expense/tonne of ore: ($80,000,000 – $10,000,000) ÷ 250,000 tonnes = $280 per tonne First year: 50,000 tonnes × $280 = $14,000,000 Inventory.............................................................................................. 14,000,000 Accumulated Depletion–Resource ............................................. 14,000,000 b)

Second year: 150,000 tonnes × $280 = $42,000,000 Inventory.............................................................................................. 42,000,000 Accumulated Depletion–Resource ............................................. 42,000,000 Note: Depletion is recorded for the full amount extracted. The ore that is extracted and not sold remains in an Inventory account in the current assets section of the balance sheet. In this case $7,000,000 (25,000 × $280) should be reported as inventory. The amount related to the ore that is extracted and sold [$35,000,000 = 125,000 x $280] will be transferred to the Cost of Goods Sold account along with all the other costs of extracting the ore.

Exercise 36 McGuinness Mining Company purchased land containing an estimated 15 million tonnes of ore at a cost of $5,400,000. The land without the ore is estimated to be worth $600,000. The company expects to operate the mine for 10 years. Buildings costing $800,000 are erected on the site and are depreciated over the life of the mine. Equipment costing $1,000,000 is depreciated over the life of the mine. The buildings and the equipment possess no residual value after the mine is closed. During the first year of operations, the mining company mined and sold 2 million tonnes of ore. Instructions a) Calculate the depletion cost per tonne of the mine. b) Calculate the depletion expense for the first year on the mine. Solution 36 (20 min.) a) Depletion cost per tonne:

Test Bank for Accounting Principles, Ninth Canadian Edition

($5,400,000 – $600,000) ÷ 15 million tonnes of ore = $0.32 per tonne b)

2,000,000 tonnes × $0.32 = $640,000

Exercise 37 Kewais Company invested $6 million for the rights to explore and extract natural resources from land in Ukraine. The company estimated that a total of 1.5 million tonnes of ore would be extracted from the property. The company extracted 50,000 tonnes of ore in year 1, 110,000 tonnes of ore in year 2, and 205,000 tonnes of ore in year 3. Instructions Prepare the necessary journal entries to record depletion expense in all three years. Solution 37 (5 min.) Depletion rate = $6,000,000/1,500,000 tonnes = $4 per tonne of ore extracted Year 1

Year 2

Year 3

Inventory ($4 x 50,000) ................................................................... Accumulated Depletion–Resource ........................................

200,000

Inventory ($4 x 110,000) ................................................................. Accumulated Depletion–Resource ........................................

440,000

Inventory ($4 x 205,000) ................................................................. Accumulated Depletion–Resource ........................................

820,000

200,000

440,000

820,000

Exercise 38 Below are several transactions for McLaughlin Inc.: 1. Timber rights were purchased on a tract of land for $600,000. The timber is estimated at 2,800 cubic metres. During the current year, 180 cubic metres of timber were cut and sold. 2. A company purchased another company on July 1 and recorded goodwill of $400,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

Costs of $18,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $9,000 was spent in legal costs to successfully defend the patent against competitors. The patent has a legal life of 20 years and an estimated nine-year useful life. The company acquired a trademark for the cost of $25,000. The trademark has 20 years until it expires and then it can be renewed for another 20 years for the cost of $25.

Instructions For each of the unrelated transactions, determine the amount of the depreciation, depletion, or amortization expense for the current year and present the adjusting entries required to record each expense at year end. Solution 38 (10 min.) 1. Calculation of depletion/cubic metre: $600,000 ÷ 2,800 = $214.29/cubic metre 180 × $214.29 = $38,572 Inventory.............................................................................................. Accumulated Depletion–Resource ............................................. 2.

No entry. Goodwill is not amortized.

Legal costs to successfully defend a patent are capitalized. Amortization Expense ......................................................................... Accumulated Amortization–Patent ............................................ ($27,000 ÷ 9 years = $3,000)

38,572 38,572

3,000 3,000

No amortization is necessary. The trademark can be renewed for a small cost and thus it may be treated as if it has indefinite life.

Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

Exercise 39 During the current year, Lui Company incurred several expenditures: 1. Spent $50,000 in legal costs in a patent defence suit. The patent was unsuccessfully defended. 2. Purchased a trademark from another company. The trademark can be renewed indefinitely. Lui Company expected the trademark to contribute to revenue indefinitely. 3. Lui Company acquired a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining legal life of 15 years and an estimated five-year useful life.

Test Bank for Accounting Principles, Ninth Canadian Edition

Lui Company is spending considerable time and money in developing a different patent for another product. So far, $3,000,000 has been spent this year on research. Lui Company is very confident it will obtain this patent in the next few years.

Instructions Briefly explain whether the expenditures listed above should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate whether the asset should be amortized or not, and if so, the number of years over which it should be amortized. Explain your answer. Solution 39 (10 min.) 1. Operating expense. Only successful patent defence costs can be capitalized. 2.

Intangible asset. Trademarks are renewable. Since Lui Company expects to use the trademark indefinitely, no amortization is recorded.

Intangible asset. The patent cost of $2,000,000 should be amortized over its expected remaining useful life of five years since this is shorter than the remaining legal life of 15 years.

Operating expense. Research costs should be expensed when incurred.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

Exercise 40 1. A company purchased a patent on January 1, 2024, for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be five years from the date of acquisition. On June 30, 2024, the company paid legal costs of $162,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2024. 2. Walker Company purchased a franchise from Tasty Food Company for $400,000 on January 1, 2024. The franchise is for an indefinite time period and gives Walker Company the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2024. 3. Chernomyrdin Company incurred research costs of $200,000 and successful development costs of $500,000 in 2024 in developing a new product that the company was able to patent in early January 2024. The company expects the product to be useful for 10 years. Prepare the necessary journal entries during 2024 to record these events and any adjustments at year end on December 31, 2024. Solution 40 (15 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

December 31, 2024 Amortization Expense ......................................................................... 518,000 Accumulated Amortization–Patent ............................................ To record patent amortization $2,500,000 ÷ 5 years ..................................................... $500,000 $162,000 ÷ 54 months = $3,000 × 6 months ................ 18,000 $518,000 January 1, 2024 Franchise ............................................................................................. Cash .............................................................................................. To record acquisition of Tasty Food franchise.

518,000

400,000 400,000

December 31, 2024 Indefinite life, no amortization necessary; no entry. 3.

2024 Research Expense ................................................................................ Cash .............................................................................................. To record research expense for the current year. Patent .................................................................................................. Cash .............................................................................................. To capitalize development costs. December 31, 2024 Amortization Expense ($500,000 ÷ 10 years) ...................................... Accumulated Amortization–Patent ............................................ To record amortization of successful development costs relating to the patent.

200,000 200,000

500,000 500,000

50,000 50,000

Exercise 41 Identify whether the following intangible assets are considered finite life (F) or indefinite life (I). ____ Franchise ____ Patents

Test Bank for Accounting Principles, Ninth Canadian Edition

____ Goodwill ____ Development Costs ____ Trademarks ____ Licence ____ Copyrights Solution 41 (5 min.) __I__ Franchise __F__ Patents __I__ Goodwill __F__ Development Costs __I__ Trademarks __I__ Licence __F__ Copyrights Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

Exercise 42 During 2024 Blackmud Research had the following transactions for cash. This is Blackmud’s first year of operations. Mar. 1 Registered a new patent, with a legal life of 20 years, at a cost of $30,000. June 30 Incurred research costs of $68,000. Aug. 1 Incurred development costs of $50,000 related to a product that meets the standards required for capitalization of costs. The costs are expected to provide commercial benefits for five years. Aug. 31 Purchased a trademark with an indefinite life for $102,000. Nov. 1 Purchased software copyright for $300,000. The copyright has a remaining legal life of 30 years, and the related software is expected to produce revenue for six years.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Record the transactions. b) Prepare the section of the December 31, 2024, balance sheet of Blackmud Research that reports intangible assets. Show calculations where applicable. Solution 42 (20 min.) a) Mar. 1 Patent ............................................................................................. Cash......................................................................................... June 30

Aug. 1

Aug. 31

Nov. 1

30,000 30,000

Research Expense .......................................................................... Cash.........................................................................................

68,000

Development Costs ........................................................................ Cash.........................................................................................

50,000

Trademark ...................................................................................... Cash.........................................................................................

102,000

Copyright ........................................................................................ Cash.........................................................................................

300,000

68,000

50,000

102,000

300,000

b) BLACKMUD RESEARCH Balance Sheet (partial) December 31, 2024 Intangible assets (non-current assets) Finite-life intangible assets ($30,000 + $50,000 + $300,000) ................... Less: Accumulated amortization*............................................................ Indefinite-life intangible assets ............................................................... Total intangible assets...................................................................... Amortization: Patent = ($30,000 ÷ 20 x 10/12) ........................................................................ Development costs ($50,000 ÷ 5 x 5/12) .......................................................... Copyright ($300,000 ÷ 6 x 2/12) ........................................................................ Total ..................................................................................................................

$380,000 13,750

$366,250 102,000 $468,250

$ 1,250 4,167 8,333 $13,750

Bloomcode: Application Difficulty: Medium Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 43 The following information is available from the audited financial statements of Molson Coors Brewing Company and Big Rock Breweries Income Trust for their year ends. Molson/Coors Big Rock Breweries (in millions of US dollars) (in thousands of Cdn. dollars) Net revenue $ 5,844 $ 38,701 Profit 373 8,380 Total assets, ending 11,603 42,170 Total assets, beginning 11,799 41,786 Instructions a) Calculate both companies’ asset turnover and return on assets. Round to two decimal places. b) Compare the companies’ effectiveness in using their assets to produce revenue and profit. Solution 43 (10 min.) a) Molson/Coors Big Rock $5,844 ÷ [($11,603 + $11,799) ÷2] $38,701 ÷ [($42,170 + $41,786) ÷2] = 0.50 times = 0.92 times Return on assets $373 ÷ [($11,603 + $11,799) ÷2] $8,380 ÷ [($42,170 + $41,786) ÷2] = 3.19% = 19.96% Asset turnover

Big Rock’s performance in asset management is better when measured by either of the two ratios. This suggests that Big Rock is more effective in using its assets to generate revenue and profit even though it is a smaller company.

Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 44 Presented below is information related to long-lived assets at year end on December 31, 2024, for Jankowski Company: Buildings ................................................................................................... $1,080,000 Goodwill .................................................................................................... 420,000 Patents ...................................................................................................... 600,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Coal mine .................................................................................................. Accumulated depreciation–building ....................................................... Accumulated depletion–coal mine .......................................................... Accumulated amortization–patents ........................................................

390,000 670,000 275,000 120,000

Instructions Prepare a partial balance sheet for Jankowski Company that shows how the above listed items would be presented. Solution 44 (10 min.) JANKOWSKI COMPANY Balance Sheet (Partial) December 31, 2024 Property, Plant, and Equipment Buildings ................................................................................................... $1,080,000 Less: Accumulated depreciation–buildings ............................................ 670,000 Coal mine .................................................................................................. Less: Accumulated depletion–resource .................................................. Total property, plant, and equipment ............................................. Intangible Assets Patents ...................................................................................................... Less: Accumulated amortization–patents............................................... Total Intangible Assets ..................................................................... Goodwill............................................................................................................ Total long-lived assets .....................................................................................

390,000 275,000

$ 410,000

115,000 525,000

600,000 120,000 480,000 420,000 $1,425,000

Bloomcode: Analysis Difficulty: Medium Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 45 Indicate in the blank spaces below, the appropriate group heading for financial reporting purposes. Use the following code to identify your answer: PPE Property, Plant, and Equipment NR Natural Resources I Intangible Assets O Other

Test Bank for Accounting Principles, Ninth Canadian Edition

N/A

Not on the balance sheet

____ 1.

Goodwill

____

Timberlands

____ 2.

Land improvements

____

Franchises

____ 3.

Development costs for a patented product

____

Licences

____ 4.

Accumulated depreciation–buildings

____

10.

Equipment

____ 5.

Trademarks

____

11.

Depreciation expense

____ 6.

Research costs

____

12.

Land

Solution 45 (5 min.) 1.

Goodwill

PPE

Land improvements

Development costs for a patented product

PPE

Accumulated depreciation–buildings

Trademarks

N/A

Research costs

Timberlands

Franchises

Licences

10. PPE

Equipment

11. N/A

Depreciation expense

12. PPE or NR

Land

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 46 Net sales were $1,500,000 and profit was $250,000 in the second year of operation for Tirekicker’s Used Car Company. Total assets in the first year were $800,000 and in the second year $1,200,000. Instructions a) Determine the asset turnover and the return on assets for Tirekicker’s Used Car Company. b) What do these ratios show? Solution 46 (5 min.) a)

Asset turnover = Net sales ÷ Average assets = $1,500,000 ÷ [($800,000 + $1,200,000) ÷ 2)] = 1.5 times Return on assets = Profit ÷ Average assets = $250,000 ÷ [($800,000 + $1,200,000) ÷ 2)] = 25%

The asset turnover ratio shows how efficiently a company uses its assets to generate sales revenue. The return on assets ratio shows the profitability of assets used in the earning process.

Exercise 47 The following information is taken from the records of Wasp Industrial Ltd.

Total assets reported at year end Sales revenue Sales discounts Total expenses

2025 $14,110,500 2,037,210 14,521 875,770

2024 $12,083,700 2,097,100 17,554 890,425

Instructions a) Calculate the 2025 and 2024 asset turnover and return on assets. b) Briefly interpret the results of each ratio examined in part a). Solution 47 (10 min.) a) 2025 asset turnover = ($2,037,210 – $14,521) ÷ [($14,110,500 + $12,083,700) ÷ 2] = 0.15

2023 $10,669,900 2,120,500 16,808 925,860

Test Bank for Accounting Principles, Ninth Canadian Edition

2024 asset turnover = ($2,097,100 – $17,554) ÷ [($12,083,700 + $10,669,900) ÷ 2] = 0.18 2025 return on assets = ($2,037,210 – $14,521 – $875,770)/[($14,110,500 + $12,083,700) ÷ 2] = 0.09 2024 return on assets = ($2,097,100 – $17,554 – $890,425)/[($12,083,700 + $10,669,900) ÷ 2] = 0.10 b)

The asset turnover ratio suggests that for each dollar that Wasp has invested in assets, it produced $0.15 (2025) and $0.18 (2024) in sales. This demonstrates a declining trend that should be closely compared to the industry average. The return on assets ratio suggests that Wasp generated profits of 9% (2025) and 10% (2024) for every dollar invested in assets. This demonstrates a declining trend that should be closely compared to the industry average.

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 9 LONG-LIVED ASSETS CHAPTER STUDY OBJECTIVES 1. Calculate the cost of property, plant, and equipment. The cost of property, plant, and equipment includes all costs that are necessary to acquire the asset and make it ready for its intended use. All costs that benefit future periods (that is, capital expenditures) are included in the cost of the asset. When applicable, cost also includes asset retirement costs. When multiple assets are purchased in one transaction, or when an asset has significant components, the cost is allocated to each individual asset or component using their relative fair values.

2. Apply depreciation methods to property, plant, and equipment. After acquisition, assets are accounted for using the cost model or the revaluation model. Depreciation is recorded and assets are carried at cost less accumulated depreciation. Depreciation is the allocation of the cost of a long-lived asset to expense over its useful life (its service life) in a rational and systematic way. Depreciation is not a process of valuation and it does not result in an accumulation of cash. There are three commonly used depreciation methods: Effect on Annual Method Depreciation Calculation Straight-line Constant amount (Cost − residual value) ÷ estimated useful life (in years) Diminishingbalance

Diminishing amount

Carrying amount at beginning of year × diminishing-balance rate

Units-ofproduction

Varying amount

(Cost − residual value) ÷ total estimated units-ofproduction × actual activity during the year

Each method results in the same amount of depreciation over the asset’s useful life. Depreciation expense for income tax purposes is called capital cost allowance (CCA).

Test Bank for Accounting Principles, Ninth Canadian Edition

recorded if the recoverable amount is less than the carrying amount. Revisions of periodic depreciation are made in present and future periods, not retroactively. The new annual depreciation is determined by using the depreciable amount (carrying amount less the revised residual value), and the remaining useful life, at the time of the revision.

Test Bank for Accounting Principles, Ninth Canadian Edition

separately. Either on the balance sheet or in the notes, the cost of the major classes of long-lived assets is presented. Accumulated depreciation (if the asset is depreciable) and carrying amount must be disclosed either on the balance sheet or in the notes. The depreciation and amortization methods and rates, as well as the annual depreciation expense, must also be indicated. The company’s impairment policy and any impairment losses should be described and reported. Under IFRS, companies must include a reconciliation of the carrying amount at the beginning and end of the period for each class of long-lived assets and state whether the cost or revaluation model is used. The asset turnover ratio (net sales ÷ average total assets) is one measure that is used by companies to show how efficiently they are using their assets to generate sales revenue. A second ratio, return on assets (profit ÷ average total assets), calculates how profitable the company is in terms of using its assets to generate profit.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. All long-lived assets must be depreciated for accounting purposes. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

2. All long-lived assets that are included in property, plant, and equipment must be used in the operations of the business. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

3. If long-lived assets are intended for sale, they are included in property, plant, and equipment. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

4. If an item of property, plant, and equipment is recognized as an asset, it is probable that the company will NOT receive economic benefits from the item. Answer: False Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

5. Any non-refundable taxes incurred on the acquisition of an asset would be expensed at the time of acquisition. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

6. The expenditures necessary to bring the asset to the location and condition necessary to make it ready for its intended use would be included in the cost of the asset. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

7. Costs that benefit future periods are included in a long-lived asset account, and are called operating expenses. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

8. If insurance is incurred transporting the asset to its final position, this insurance will be added to the cost of the asset. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

9. Subsequent to the acquisition of an asset, insurance costs would be added to the cost of the asset. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

10. If paid by the purchaser, freight charges and insurance during transit are included in the cost of equipment. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

11. An architect’s fee for the plans for a new building would be included in the cost of the land improvements. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

12. A basket purchase of long-lived assets requires that the fair values be assigned based on the cost of each asset. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

13. The cost of land improvements is NOT depreciated because land improvements typically do NOT decline in value. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

14. Under IFRS, companies have two models they can choose between to account for their property, plant, and equipment: the cost model or the revaluation model. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

15. Most Canadian companies reporting under IFRS do NOT use the revaluation method when accounting for their long-lived assets.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

16. Land improvements decline in service potential with time. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

17. Depreciation is the systematic allocation of the cost of a long-lived asset, such as property, plant, and equipment, over the asset’s physical life. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

18. An asset’s cost is allocated to expense over the asset’s useful life because the asset is used to help generate revenue over that period of time. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

19. Assets are depreciated over their useful lives even if the use of the asset is NOT directly related to earning profit. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

20. Depreciation is a process of cost allocation. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

21. Residual value is NOT depreciated since the amount is expected to be recovered at the end of the asset’s useful life. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

22. Recording depreciation on long-lived assets affects the balance sheet and the income statement. Answer: True Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

23. The units-of-production method of depreciation will result in the highest cash flow for the company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

24. Subject to acquisition, all costs that relate to that asset are classified as operating expenses. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

25. The Accumulated Depreciation account represents a cash fund available to replace long-lived assets. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

26. In calculating depreciation, both the long-lived asset’s cost and useful life are based on estimates.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

27. Under the double diminishing-balance method, the depreciation rate used each year remains constant. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

28. Using the units-of-production method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

29. Straight-line depreciation will result in a higher profit than the double diminishing-balance method in the early years of an asset’s life. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

30. The Canada Revenue Agency does NOT require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

31. A company using the diminishing-balance method of depreciation will have higher profit in the early years of the asset. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

32. The amount of an asset’s residual value does NOT affect the calculation of depreciation in the units-of-production method. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

33. In the straight-line method, the higher the residual value the greater the profit.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

34. The diminishing-balance method will yield a higher cost of goods sold. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

35. In the diminishing-balance method, the rate of depreciation decreases each year. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

36. In the diminishing-balance method, the depreciation expense on an asset will decrease each year. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

37. In the straight-line method of depreciation, the rate of depreciation remains constant over time. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

38. Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

39. The units-of-production method is ideal for equipment whose production can be measured in units of output. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

40. CRA does NOT allow taxpayers to estimate the useful lives of assets or depreciation rates. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

41. Under CRA, depreciation expense is NOT optional in calculating profit. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

42. The carrying amount of a long-lived asset is the amount originally paid for the asset less anticipated residual value. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

43. Ordinary repairs are costs to maintain the asset’s operating efficiency and expected productive life. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

44. A change in the estimated residual value of a long-lived asset requires a restatement of prior years' depreciation.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

45. Additions and improvements to a long-lived asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

46. Additions and improvements are costs that are incurred to maintain the asset’s operating efficiency, productive capacity, or expected useful life. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

47. An impairment loss is the amount by which the asset’s carrying amount exceeds its recoverable amount. Answer: True Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

48. An impairment loss can only occur in long-lived assets with a finite life. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

49. IFRS allow the reversal of a previously recorded impairment loss. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

50. Under IFRS, at each year end, the company must determine whether or not an impairment loss still exists by measuring the asset’s recoverable amount. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

51. Under the revaluation model, the carrying amount of property, plant, and equipment is its fair value plus any subsequent accumulated depreciation less any subsequent impairment losses. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

52. A loss on disposal of a long-lived asset as a result of a sale or a retirement is calculated in the same way. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

53. A long-lived asset must be fully depreciated before it can be removed from the books. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

54. A loss on disposal of long-lived assets can only occur if the cash proceeds received from the asset sale are less than the asset's carrying amount. Answer: True Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

55. The first step in recording a disposal of a long-lived asset is to update that asset’s depreciation. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

56. In a disposal of an asset, if the carrying amount of the asset exceeds the proceeds received, profit will increase. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

57. When an asset is retired, there are no proceeds received. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

58. In a retirement of an asset, if the carrying amount of the asset is greater than $1, profit will increase.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

59. A higher trade-in value will increase the profit of the company disposing of an asset. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

60. The cost of natural resources is NOT allocated to expense because the natural resources are replaceable only by an act of nature. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

61. Conceptually, the cost allocation procedure for natural resources parallels that of property, plant, and equipment. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

62. Natural resources are often called wasting assets because it is difficult to use the assets in an efficient manner. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

63. Accumulated depreciation is only recognized on natural resources that have been extracted and sold during the period. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

64. The diminishing-balance method is the most common method of depreciation for natural resources. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

65. Natural resources do NOT have to be tested for impairment annually. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

66. Intangible assets have unlimited life because they have no physical substance. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

67. The diminishing-balance method of amortization is the most common method of amortization for intangibles. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

68. The amortizable amount of an intangible should be allocated over the shorter of the estimated useful life and legal life. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

69. If an intangible with an indefinite life is disposed of, there is no effect on profit. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

70. A franchise is a contractual arrangement under which the franchisor grants the franchisee the right to sell certain products and/or to provide specific services. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

71. Goodwill CANNOT be sold individually as it is part of the business as a whole. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

72. Goodwill has an indefinite life. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

73. Goodwill should be amortized on the lesser of useful life or 20 years. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

74. Impairment losses on goodwill are NEVER reversed. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

75. IFRS does allow for reversals of impairment losses on both finite-life and other indefinite-life intangible assets if their value increases in the future. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

76. It is NOT necessary to disclose the amount of accumulated amortization on intangible assets in the financial statements. Answer: False Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

77. The return on assets is calculated by dividing net income by total assets. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

78. The asset turnover ratio indicates how efficiently a company uses its assets to generate sales. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

79. Companies must report goodwill separately from property, plant, and equipment, and intangible assets. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 80. Which of the following would NOT be considered an addition to the capital cost of an asset? a) HST paid on the asset b) insurance paid when the asset was in transit from the supplier c) installation fee when asset is delivered d) freight costs paid by the purchaser Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

81. All of the following are examples of property, plant, and equipment EXCEPT a) equipment. b) copyright. c) land. d) building. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

82. An example of operating costs of a long-lived asset would NOT include the following: a) insurance costs paid after the asset is being used in operations. b) maintenance costs. c) repair costs. d) insurance costs paid before the asset is being used in operations. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

83. A company purchased land for $70,000 cash. A total of $7,000 was spent demolishing an old building on the land before construction of a new building could start. The cost of land would be recorded at a) $77,000. b) $70,000. c) $63,000. d) $7,000. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

84. Which one of the following items is NOT considered a part of the cost of a truck purchased for business use? a) insurance during transit b) truck licence c) freight charges d) cost of lettering on side of truck Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

85. Which of the following assets does NOT decline in service potential over the course of its useful life? a) equipment b) furnishings c) land d) fixtures

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

86. The four subdivisions for property, plant, and equipment are normally a) land, land improvements, buildings, and equipment. b) intangibles, land, buildings, and equipment. c) furnishings and fixtures, land, buildings, and equipment. d) property, plant, equipment, and land. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

87. The cost of land does NOT include a) costs to clear the land. b) annual property taxes. c) accrued property taxes assumed by the purchaser. d) legal fees. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

88. Merry Clinic purchases land for $80,000 cash. The clinic assumes $2,000 in property taxes due on the land. The legal fees totalled $1,000. The clinic has the land graded for $2,200. What amount does Merry Clinic record as the cost for the land?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) $82,000 b) $80,000 c) $85,200 d) $84,200 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

89. Juang Company acquires land for $56,000 cash. Additional costs are as follows: Removal of shed ......................... $ 1,800 Filling and grading ...................... 1,500 Paving of parking lot .................. 10,000 Closing costs ............................... 690 Juang will record the acquisition cost of the land as a) $56,000. b) $56,690. c) $69,990. d) $59,990. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

90. Newman Hospital installs a new parking lot. The paving cost $30,000 and the lights to illuminate the new parking area cost $12,000. Which of the following statements is true with respect to these additions? a) $30,000 should be debited to Land. b) $12,000 should be debited to Land Improvements. c) $42,000 should be debited to Land. d) $42,000 should be debited to Land Improvements. Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

91. General Paint Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true? a) Excavation fees are capitalized but building permit fees are not. b) Architect fees are capitalized but building permit fees are not. c) Interest during the construction is capitalized as part of the cost of the building. d) The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

92. A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and re-carpeted and there will also be some plumbing work done. Which of the following statements is true? a) The cost of the building will not include the repainting and re-carpeting costs. b) The cost of the building will include the cost of replacing the roof. c) The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as building improvements. d) The wiring is part of the computer costs, not the building cost. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

93. Fizzard Company purchases a new delivery truck for $45,000. The logo of the company is painted on the side of the truck for $600. The truck licence is $60. The truck undergoes safety testing for $110. What does Fizzard record as the cost of the new truck? a) $45,770 b) $45,060 c) $45,000 d) $45,710 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

94. Interest may be included in the acquisition cost of property, plant, and equipment a) during the construction period of a self-constructed asset. b) if the asset is purchased on credit. c) if the asset acquisition is financed by a long-term note payable. d) if it is a part of a lump-sum purchase. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

95. Expenditures that maintain the operating efficiency and expected productive life of a long-lived asset are generally a) expensed when incurred. b) capitalized as a part of the cost of the asset. c) debited to the Accumulated Depreciation account. d) not recorded until they become material in amount. Answer: a Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

96. Which of the following is NOT true of ordinary repairs? a) They primarily benefit the current accounting period. b) They can be referred to as operating expenditures. c) They maintain the expected productive life of the asset. d) They increase the productive capacity of the asset. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

97. The replacement of the bumper of a company’s delivery truck would be classified as a(n) a) non-monetary exchange. b) addition. c) renovation. d) ordinary repair. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

98. Additions and improvements a) occur frequently during the ownership of a long-lived asset. b) normally involve immaterial expenditures. c) increase the carrying amount of long-lived assets when incurred. d) typically only benefit the current accounting period. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

99. A company purchased property for $300,000. The property included an acre of land valued at $50,000, a building valued at $150,000, and equipment valued at $125,000. The land will be recorded at a cost of a) $45,000. b) $48,234. c) $46,154. d) $50,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

100. A company purchased property for $300,000. The property included an acre of land valued at $50,000, a building valued at $150,000, and equipment valued at $125,000. The building will be recorded at a cost of a) $150,000. b) $140,000. c) $135,000. d) $138,462. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

101. A company purchased property for $300,000. The property included an acre of land valued at

Test Bank for Accounting Principles, Ninth Canadian Edition

$50,000, a building valued at $150,000, and equipment valued at $125,000. The equipment will be recorded at a cost of a) $125,000. b) $120,000. c) $118,723. d) $115,384. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

102. A company purchased property for $300,000. The property included an acre of land valued at $50,000, a building valued at $150,000, and equipment valued at $125,000. The above transaction may be referred to as a a) fair value purchase. b) long-lived asset purchase. c) property purchase. d) basket purchase. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

103. Which of the following is NOT a characteristic of property, plant, and equipment? a) physical substance b) used in operations of business c) not intended for sale d) held for sale Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

104. The cost of property, plant, and equipment includes all of the following items EXCEPT a) annual maintenance. b) purchase price. c) installation fee. d) freight charges. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

105. Which of the following items should NOT be capitalized? a) insurance paid while item is in transit b) land surveying fees c) building permits d) truck licence Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

106. Which of the following items should NOT be included in the cost of land? a) removal of old building b) legal fees c) clearing and draining land d) structural additions on land Answer: d Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

107. Which of the following items qualify as land improvements? a) underground sprinkler b) building c) surveying fees d) grading and clearing land Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

108. Which of the following items is considered an operating expenditure? a) testing new equipment b) installing equipment c) interest on loan to construct a building d) insurance on equipment in use Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

109. Extra Company purchased land for $115,000 with the intentions of constructing a new operating facility. The land purchase included a dilapidated building that was removed at a cost of $16,000. The only salvage value from this old building was some materials that were sold for proceeds of $4,000. Extra had paid surveying costs of $1,800 and legal fees related to land transfer of $6,700. The new building was quickly constructed at a total cost of $422,000. Permits on the construction of this new facility totalled $18,000. Insurance premiums of $9,200 are paid annually. The production manager is currently on-site facilitating the production start-up. This manager has an annual salary of $85,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

What capital cost is assigned to the land? a) $135,500 b) $123,500 c) $115,000 d) $127,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

110. Extra Company purchased land for $115,000 with the intention of constructing a new operating facility. The land purchase included a dilapidated building that was removed at a cost of $16,000. The only salvage value from this old building was some materials that were sold for proceeds of $4,000. Extra had paid surveying costs of $1,800 and legal fees related to land transfer of $6,700. The new building was quickly constructed at a total cost of $422,000. Permits on the construction of this new facility totalled $18,000. Insurance premiums of $9,200 are paid annually. The production manager is currently on-site facilitating the production start-up. This manager has an annual salary of $85,000. What capital cost is assigned to the new building? a) $440,000 b) $449,200 c) $452,000 d) $534,200 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

111. Assume that computer equipment is purchased on August 15, 2024, for $15,000 cash and a $60,000 note payable. Related cash expenditures include insurance during shipping, $750; the annual insurance policy, $1,125; and installation and testing, $1,500. What is the cost of the equipment? a) $75,000 b) $75,750 c) $77,250 d) $78,375

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

112. Assume that computer equipment is purchased on August 15, 2024, for $15,000 cash and a $60,000 note payable. Related cash expenditures include insurance during shipping, $750; the annual insurance policy, $1,125; and installation and testing, $1,500. Which of the following is the correct entry to record these expenditures? a) Equipment .................................................................................................... 78,375 Prepaid Insurance ........................................................................................ 1,125 Cash ........................................................................................................ 19,500 Notes Payable ......................................................................................... 60,000 b) Equipment .................................................................................................... 75,750 Prepaid Insurance ........................................................................................ 1,125 Cash ........................................................................................................ 16,875 Notes Payable ......................................................................................... 60,000 c) Equipment .................................................................................................... 75,000 Cash ........................................................................................................ 15,000 Notes Payable ......................................................................................... 60,000 d) Equipment .................................................................................................... 77,250 Prepaid Insurance ........................................................................................ 1,125 Cash ........................................................................................................ 18,375 Notes Payable ......................................................................................... 60,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

113. Assume Mountbatten Manufacturing Company purchased land, a building, and some equipment on July 31, 2024, for $600,000 cash. The land was appraised at $202,500, the building at $405,000, and the equipment at $67,500. How much of the cost should be allocated to the land? a) $180,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b $600,000 c) $22,500 d) $202,500 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

114. Assume Mountbatten Manufacturing Company purchased land, a building, and some equipment on July 31, 2024, for $600,000 cash. The land was appraised at $202,500, the building at $405,000, and the equipment at $67,500. How much of the cost should be allocated to the building? a) $405,000 b) $45,000 c) $360,000 d) $600,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

115. Assume Mountbatten Manufacturing Company purchased land, a building, and some equipment on July 31, 2024, for $600,000 cash. The land was appraised at $202,500, the building at $405,000, and the equipment at $67,500. How much of the cost should be allocated to the equipment? a) $600,000 b) $60,000 c) $67,500 d) $7,500 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the cost of property, plant, and equipment.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

116. On October 1, 2024, Flexie Products Ltd. purchased a new machine for $78,000. The machine is estimated to have a five-year useful life and a $6,000 residual value. It is also estimated to have a total useful life of 9,000 hours. It is used 1,500 hours in the year ended December 31, 2024, and 1,950 hours in the year ended December 31, 2025. How much depreciation expense should Flexie Products record in 2024 under the straight-line depreciation method? a) $15,600 b) $14,400 c) $3,900 d) $3,600 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

117. On October 1, 2024, Flexie Products Ltd. purchased a new machine for $78,000. The machine is estimated to have a five-year useful life and a $6,000 residual value. It is also estimated to have a total useful life of 9,000 hours. It is used 1,500 hours in the year ended December 31, 2024, and 1,950 hours in the year ended December 31, 2025. How much depreciation expense should Flexie Products record in 2025 under the straight-line depreciation method? a) $6,000 b) $16,800 c) $14,400 d) $15,600 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

118. On October 1, 2024, Flexie Products Ltd. purchased a new machine for $78,000. The machine is

Test Bank for Accounting Principles, Ninth Canadian Edition

estimated to have a five-year useful life and a $6,000 residual value. It is also estimated to have a total useful life of 9,000 hours. It is used 1,500 hours in the year ended December 31, 2024, and 1,950 hours in the year ended December 31, 2025. How much depreciation expense should Flexie Products record in 2024 under the double diminishing-balance depreciation method? a) $7,200 b) $7,800 c) $28,800 d) $31,200 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

119. On October 1, 2024, Flexie Products Ltd. purchased a new machine for $78,000. The machine is estimated to have a five-year useful life and a $6,000 residual value. It is also estimated to have a total useful life of 9,000 hours. It is used 1,500 hours in the year ended December 31, 2024, and 1,950 hours in the year ended December 31, 2025. How much depreciation expense should Flexie Products record in 2025 under the double diminishing-balance depreciation method? a) $19,680 b) $28,320 c) $31,200 d) $28,080 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

120. On October 1, 2024, Flexie Products Ltd. purchased a new machine for $78,000. The machine is estimated to have a five-year useful life and a $6,000 residual value. It is also estimated to have a total useful life of 9,000 hours. It is used 1,500 hours in the year ended December 31, 2024, and 1,950 hours in the year ended December 31, 2025. How much depreciation expense should Flexie Products record in 2024 under the units-of-production depreciation method? a) $12,000 b) $31,304

Test Bank for Accounting Principles, Ninth Canadian Edition

c) $13,000 d) $33,913 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

121. Which is NOT a method of depreciation? a) straight-line b) diminishing-balance c) specific-identification d) units-of-production Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

122. The balance in the Accumulated Depreciation account represents the a) cash fund to be used to replace long-lived assets. b) amount to be deducted from the cost of the long-lived asset to arrive at its fair value. c) amount charged to expense in the current period. d) amount charged to expense since the acquisition of the long-lived asset. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

123. Which one of the following items is NOT a consideration when recording periodic depreciation

Test Bank for Accounting Principles, Ninth Canadian Edition

expense on long-lived assets? a) residual value b) estimated useful life c) cash needed to replace the long-lived asset d) cost Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

124. Depreciation is the process of allocating the cost of a long-lived asset (such as property, plant, and equipment) over its service life in a(n) a) equal and equitable manner. b) accelerated and accurate manner. c) systematic and rational manner. d) conservative market-based manner. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

125. The carrying amount of an asset is equal to the a) asset's fair value less its cost. b) asset’s cost less depreciation expense. c) replacement cost of the asset. d) asset's cost less accumulated depreciation. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

126. When an asset is fully depreciated, the carrying amount of the asset will be a) nil. b) equal to the trade-in value. c) equal to the residual value. d) equal to the fair value. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

127. Depreciation is a process of a) asset devaluation. b) cost accumulation. c) cost allocation. d) asset valuation. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

128. In calculating depreciation, residual value is a) the fair value of a long-lived asset on the date of acquisition. b) subtracted from accumulated depreciation to determine the long-lived asset's depreciable cost. c) an estimate of what a long-lived asset could be sold for at the end of its useful life. d) the amount that a similar replacement asset is expected to cost at the end of the old asset’s useful life. Answer: c Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

129. When estimating the useful life of an asset, accountants do NOT consider a) the cost to replace the asset at the end of its useful life. b) obsolescence factors. c) expected repairs and maintenance. d) the intended use of the asset. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

130. Equipment was purchased for $15,000. Freight charges amounted to $700, and there was a cost of $2,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $3,000 residual value at the end of its five-year useful life. Depreciation expense each year using the straight-line method will be a) $3,540. b) $2,940. c) $2,460. d) $2,400. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

131. A truck was purchased for $15,000, and it was estimated to have a $3,000 residual value at the end of its useful life. Monthly depreciation expense of $250 was recorded using the straight-line method. The annual depreciation rate is a) 20%. b) 2%.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) 8%. d) 25%. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

132. A company purchased factory equipment on June 1, 2024, for $48,000. It is estimated that the equipment will have a $6,000 residual value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2024, is a) $4,800. b) $4,200. c) $2,450. d) $6,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

133. A company purchased office equipment for $10,000 and estimated a residual value of $2,000 at the end of its four-year useful life. The constant percentage to be applied against carrying amount each year if the double diminishing-balance method is used is a) 20%. b) 25%. c) 50%. d) 4%. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

134. The diminishing-balance method of depreciation produces a(n) a) decreasing depreciation expense each period. b) increasing depreciation expense each period. c) decreasing percentage rate each period. d) constant amount of depreciation expense each period. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

135. A company purchased a delivery truck for $60,000 at the beginning of year one. It is estimated that the truck will have a $10,000 residual value at the end of its estimated five-year useful life. If the company uses the double diminishing-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be a) $9,600. b) $24,000. c) $14,400. d) $12,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

136. A long-lived asset cost $24,000 and is estimated to have a $3,000 residual value at the end of its eight-year useful life. The annual depreciation expense recorded for the third year using the double diminishing-balance method would be a) $2,010. b) $3,375. c) $2,953. d) $2,297.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

137. A factory machine was purchased for $20,000 on March 1, 2024. It was estimated that it would have a $4,000 residual value at the end of its five-year useful life. It was also estimated that the machine would be run 25,000 hours in the five years. If the actual number of machine hours run in 2024 was 4,000 hours and the company uses the units-of-production method of depreciation, the amount of depreciation expense for 2024 would be a) $2,133. b) $2,560. c) $3,200. d) $4,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

138. Which of the following methods of calculating depreciation uses measures other than time? a) straight-line b) diminishing-balance c) units-of-production d) none of these Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

139. Under International Financial Reporting Standards, the models that companies can choose from to account for their long-lived assets are a) cost model and units-of-production model. b) units-of-production model and diminishing-balance model. c) revaluation model and straight-line model. d) cost model and revaluation model. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

140. Management should select the depreciation method that a) is easiest to apply. b) best measures the long-lived asset's fair value over its useful life. c) best measures the long-lived asset's contribution to revenue over its useful life. d) has been used most often in the past by the company. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

141. The depreciation method that applies a constant percentage to the carrying amount of an asset in calculating depreciation is a) straight-line. b) units-of-production. c) diminishing-balance. d) perpetual-fair value. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

142. On October 1, 2024, Marshwinds Wind Turbine Company places a new asset into service. The cost of the asset is $8,000 with an estimated five-year life and $2,000 residual value at the end of its useful life. What is the depreciation expense for 2024 if Marshwinds uses the straight-line method of depreciation? a) $300 b) $1,600 c) $400 d) $800 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

143. On October 1, 2024, Marshwinds Wind Turbine Company places a new asset into service. The cost of the asset is $8,000 with an estimated five-year life and $2,000 residual value at the end of its useful life. What is the carrying amount of the long-lived asset on the December 31, 2024, balance sheet assuming that Marshwinds uses the double diminishing-balance method of depreciation? a) $5,200 b) $6,000 c) $7,200 d) $7,600 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

144. Which depreciation method is most frequently used in businesses today? a) straight-line b) diminishing-balance c) units-of-production

Test Bank for Accounting Principles, Ninth Canadian Edition

d) revaluation Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

145. Bay of Fundy Company uses the units-of-production method in calculating depreciation. A new piece of equipment is purchased for $18,000 that will produce an estimated 100,000 units over its useful life. Estimated residual value at the end of its useful life is $2,000. What is the depreciable cost per unit? a) $1.60 b) $1.80 c) $0.16 d) $0.18 Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

146. Units-of-production is an appropriate depreciation method to use when a) it is impossible to determine the productivity of the asset. b) the asset's use will be constant over its useful life. c) the productivity of the asset varies significantly from one period to another. d) the company is a manufacturing company. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

147. The calculation of depreciation using the diminishing-balance method a) ignores residual value in determining the amount to which a constant rate is applied. b) multiplies a constant percentage times the previous year's depreciation expense. c) yields an increasing depreciation expense each period. d. multiplies a diminishing percentage times a constant carrying amount. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

148. Dorchester Company purchased a new van for floral deliveries on July 1, 2024. The van cost $20,000 with an estimated life of five years and $5,000 residual value at the end of its useful life. The double diminishing-balance method of depreciation will be used. What is the depreciation expense for 2024? a) $4,000 b) $3,000 c) $6,000 d) $8,000 Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

149. Dorchester Company purchased a new van for floral deliveries on July 1, 2023. The van cost $20,000 with an estimated life of five years and $5,000 residual value at the end of its useful life. The double diminishing-balance method of depreciation will be used. What is the balance of the accumulated depreciation account at the end of 2024? a) $4,800 b) $6,400 c) $10,400 d) $4,000 Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

150. Lois Ltd. purchased equipment for $30,000 on January 1, 2022, and will use the diminishingbalance method of depreciation. It is estimated that the equipment will have a three-year life and a $3,000 residual value at the end of its useful life. The amount of depreciation expense recognized in the year 2024 will be a) $6,000. b) $4,444. c) $4,800. d) $2,400. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

151. A long-lived asset was purchased on January 1 for $30,000 with an estimated residual value of $6,000 at the end of its useful life. The current year's depreciation expense is $3,000 calculated on the straight-line basis and the balance of the accumulated depreciation account at the end of the year is $15,000. The remaining useful life of the asset is a) 10 years. b) 8 years. c) 5 years. d) 3 years. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

152. The carrying amount of a long-lived asset is the difference between the a) replacement cost of the asset and its cost. b) cost of the asset and the amount of depreciation expense for the year. c) cost of the asset and the accumulated depreciation to date. d) proceeds received from the sale of the asset and its original cost. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

153. Use of straight-line depreciation in comparison to the diminishing-balance method results in a) a greater amount of depreciation in the earlier years of an asset’s useful life. b) a greater amount of depreciation in the later years of an asset’s useful life. c) an equal amount of depreciation over an asset’s total useful life. d) both b) and c). Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

154. Use of the units-of-production method of depreciation results in a) varying effects on profit as it depends on actual usage each year. b) equal effects on profit each year. c) the least effect on profit compared to other methods. d) the greatest effect on profit compared to other methods. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

155. Which of the following methods of depreciation results in the highest cash flow? a) straight-line b) diminishing-balance c) units-of-production d) All of these result in the same cash flow. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

156. It is appropriate to stop recording depreciation expense when the asset’s a) depreciable cost is less than its fair value. b) carrying amount exceeds its fair value. c) carrying amount equals its residual value. d) residual value equals total accumulated depreciation. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

157. The units-of-production method is ideal for equipment whose activity a) can be measured in units of output. b) can be measured in units of input. c) is consistent from year to year. d) is based on time. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

158. Which of the following terms describe an asset’s cost less its residual value? a) carrying amount b) net book value c) depreciation expense d) depreciable amount Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

159. Yogi Inc. purchased a specialized machine on April 1, 2024, for a total cost of $254,000 from Bubu Manufacturing. This machine is expected to become outdated and be replaced in 16 years at which time it will have a residual value of $25,000. What amount would be reported as depreciation expense for this machine on Yogi Inc.’s December 31, 2024, income statement if Yogi Inc. used the straight-line method of depreciation? Round answer to the nearest dollar. a) $15,875 b) $11,906 c) $10,734 d) $14,312 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation CPA: Financial Reporting AACSB: Analytic

160. A change in the estimated useful life of equipment requires a) a retroactive change in the amount of periodic depreciation recognized in previous years. b) that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset. c) that the amount of periodic depreciation be changed in the current year and in future years.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) that profit for the current year be increased. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

161. Ranger Company has decided to change the estimate of the useful life of an asset that has been in service for two years. Which of the following statements describes the proper way to revise a useful life estimate? a) Revisions in useful life are permitted if approved by the Chartered Professional Accountants. b) Retroactive changes must be made to correct previously recorded depreciation. c) Depreciation in future years only will be affected by the revision. d) Depreciation in both the current and future years will be affected by the revision. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

162. Copycat Copy Shop bought equipment for $16,000 on January 1, 2023. Copycat estimated the useful life to be four years with no residual value, and the straight-line method of depreciation was used. On December 31, 2024, prior to recording depreciation for that year, Copycat decides that the business will use the equipment for a total of five years. What is the depreciation expense for 2024? a) $6,000 b) $2,400 c) $3,000 d) $4,500 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate

Test Bank for Accounting Principles, Ninth Canadian Edition

revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

163. Annual depreciation expense needs to be revised if a) there is an impairment loss. b) repairs are completed to restore the asset to its prior condition. c) insurance premiums on the asset increase. d) worn out parts are replaced. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

164. Property, plant, and equipment are considered impaired if the carrying amount exceeds the asset’s a) depreciation expense. b) fair value. c) recoverable amount. d) accumulated depreciation. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

165. The revaluation model is allowed under IFRS mainly because it is useful in countries where a) there is a high inventory turnover. b) companies cannot estimate the fair value of assets. c) there is a high inflation rate. d) companies cannot determine an appropriate method of depreciation.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

166. The appropriateness of the depreciation method selected should be reviewed at least a) monthly. b) annually. c) every five years. d) every 10 years. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

167. When there is a change in the useful life of an asset, depreciation must be revised if you are using a) straight-line depreciation. b) units-of-production depreciation. c) diminishing-balance depreciation. d) any of the above depreciation methods. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

168. Beaches Ltd. reviews its assets every fiscal year for potential asset impairments. In the current year Beaches realizes through its impairment assessment that a specialized machine has a recoverable amount of $360,500. This asset carries a cost of $890,000 and up-to-date accumulated depreciation of $549,200. What amount would be reported as an impairment loss on their current income statement at year end? a) $0 b) $340,800 c) $360,500 d) $19,700 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

169. Under the revaluation method, the carrying amount of property, plant, and equipment is defined as a) cost less accumulated depreciation. b) fair value less accumulated depreciation less accumulated impairment losses. c) cost less depreciation expense less impairment loss. d) cost less depreciations expense. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

170. On August 1, 2009, just after its year end, Blossoms Beauties purchased equipment for $750,000. The company used straight-line depreciation to allocate the cost of this equipment, estimating a residual value of $75,000 and a useful life of 30 years. After 15 years of use, on August 1, 2024, the company was forced to replace the entire motor at a cost of $37,500 cash. The residual value was expected to remain at $75,000 but the total useful life was now expected to increase to 40 years. Which of the following is the correct journal entry to record depreciation for the year ended July 31, 2024?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) Depreciation Expense .................................................................................. Accumulated Depreciation–Equipment ................................................ b) Equipment .................................................................................................... Accumulated Depreciation–Equipment ................................................ c) Accumulated Depreciation–Equipment ...................................................... Depreciation Expense ............................................................................ d) Depreciation Expense .................................................................................. Accumulated Depreciation–Equipment ................................................

22,500 22,500 26,250 26,250 23,750 23,750 25,000 25,000

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic 171. On August 1, 2009, just after its year end, Blossoms Beauties purchased equipment for $750,000. The company used straight-line depreciation to allocate the cost of this equipment, estimating a residual value of $75,000 and a useful life of 30 years. After 15 years of use, on August 1, 2024, the company was forced to replace the entire motor at a cost of $37,500 cash. The residual value was expected to remain at $75,000 but the total useful life was now expected to increase to 40 years. Which of the following is the correct journal entry to record the cost of the addition on August 1, 2024? a) Repair Expense ............................................................................................. 37,500 Cash ........................................................................................................ 37,500 b) Equipment .................................................................................................... 37,500 Accumulated Depreciation–Equipment ................................................ 37,500 c) Depreciation Expense ................................................................................... 37,500 Cash ........................................................................................................ 37,500 d) Equipment .................................................................................................... 37,500 Cash ........................................................................................................ 37,500 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

172. On August 1, 2009, just after its year end, Blossoms Beauties purchased equipment for $750,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

The company used straight-line depreciation to allocate the cost of this equipment, estimating a residual value of $75,000 and a useful life of 30 years. After 15 years of use, on August 1, 2024, the company was forced to replace the entire motor at a cost of $37,500 cash. The residual value was expected to remain at $75,000 but the total useful life was now expected to increase to 40 years. Which of the following is the correct journal entry to record depreciation for the year ended July 31, 2025? a) Depreciation Expense .................................................................................. 17,813 Cash ........................................................................................................ 17,813 b) Equipment .................................................................................................... 23,750 Accumulated Depreciation–Equipment ................................................ 23,750 c) Depreciation Expense ................................................................................... 28,500 Cash ........................................................................................................ 28,500 d) Depreciation Expense .................................................................................. 15,000 Accumulated Depreciation .................................................................... 15,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

173. Which of the following is NOT required information to calculate new annual depreciation expense, at the time of a change? a) revised residual value b) asset’s original cost plus the accumulated depreciation to date, plus capital expenditures, minus any impairment losses c) asset’s original useful life minus the number of years used plus or minus the change in estimate d) asset’s carrying amount Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

174. Assume that on December 31, 2024, Ragpar Company reviews its equipment for possible

Test Bank for Accounting Principles, Ninth Canadian Edition

impairment. The equipment has a cost of $400,000 and accumulated depreciation of $100,000. The equipment’s recoverable amount is currently $250,000. How much is the impairment loss? a) $150,000 b) $100,000 c) $50,000 d) $0 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

175. A gain on disposal of an asset occurs when the proceeds of the sale are greater than the a) loan outstanding on the asset sold. b) fair value of the asset sold. c) carrying amount of the asset sold. d) the original cost of the asset sold. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

176. A gain or loss on disposal of a long-lived asset is determined by comparing the a) replacement cost of the asset with the asset's original cost. b) carrying amount of the asset with the asset's original cost. c) original cost of the asset with the proceeds received from its sale. d) carrying amount of the asset with the proceeds received from its sale. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

177. If a long-lived asset is sold before it is fully depreciated, and the proceeds received is less than the asset's carrying amount, a) a gain on disposal occurs. b) a loss on disposal occurs. c) there is no gain or loss on disposal. d) additional depreciation expense must be recorded. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

178. If a long-lived asset is sold and the carrying amount is higher than the proceeds received, a) profit will be increased. b) profit will be decreased. c) there will be no effect on profit. d) the current ratio will decrease. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

179. A company sells a long-lived asset that originally cost $150,000 for $50,000 on December 31, 2024. The accumulated depreciation account had a balance of $60,000 after the current year's depreciation of $15,000 had been recorded. The company should recognize a a) $100,000 loss on disposal. b) $40,000 gain on disposal. c) $40,000 loss on disposal. d) $25,000 loss on disposal. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

180. If disposal of a long-lived asset occurs during the year, depreciation is a) not recorded for the year. b) recorded for the whole year. c) recorded for the fraction of the year to the date of the disposal. d) not recorded if the asset is scrapped. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

181. If a fully depreciated long-lived asset is still used by a company, the a) estimated remaining useful life must be revised to calculate the correct revised depreciation. b) asset is removed from the books. c) accumulated depreciation account is removed from the books but the asset account remains. d) asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

182. Which of the following statements is NOT true when a fully depreciated long-lived asset is retired? a) The long-lived asset's carrying amount is equal to its estimated residual value. b) The accumulated depreciation account is debited. c) The asset account is credited.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) The long-lived asset's original cost equals its carrying amount. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

183. If a long-lived asset is retired before it is fully depreciated, and no residual or scrap value is received, a) a gain on disposal will be recorded. b) phantom depreciation must be taken as though the asset were still on the books. c) a loss on disposal will be recorded. d) no gain or loss on disposal will be recorded. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

184. If the carrying amount of an asset equals its sales value at the date of sale, a) a gain on disposal is recorded. b) no gain or loss on disposal is recorded. c) the long-lived asset is fully depreciated. d) a loss on disposal is recorded. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

185. A truck costing $47,000 was destroyed during a flood. At the date of the flood, the accumulated

Test Bank for Accounting Principles, Ninth Canadian Edition

depreciation on the truck was $22,000. An insurance cheque for $35,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a a) gain on disposal of $10,000. b) credit to the Truck account of $12,000. c) credit to the Accumulated Depreciation account for $22,000. d) gain on disposal of $25,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

186. On July 1, 2024, The Who Co. sells equipment for $22,000. The equipment originally cost $60,000, had an estimated 5-year life, and had an expected residual value of $10,000. The accumulated depreciation account had a balance of $35,000 on December 31, 2023, using the straight-line method. The gain or loss on disposal is a) $3,000 gain. b) $2,000 loss. c) $3,000 loss. d) $2,000 gain. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

187. In an exchange of assets, the new asset is recorded at a) the fair value of the asset given up. b) the fair value of the new asset. c) the carrying amount of the asset given up plus any cash paid (or less any cash received). d) the fair value of the asset given up plus any cash paid (or less any cash received). Answer: d Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

188. Big Wave Inc. exchanged an old vehicle for a new vehicle on August 31, 2024. The original cost of the vehicle was $45,000 on January 1, 2020. Depreciation was calculated using the straight-line method over a 10-year useful life, with an estimated residual value of $3,000. The fair value of the old vehicle on August 31, 2024, was $21,500. The list price of the new vehicle was $30,000. Big Wave received a $24,000 trade-in allowance from the dealership and paid $6,000 cash for the new vehicle. The new vehicle should be recorded on Big Wave’s books at a) $30,000. b) $27,500. c) $24,000. d) $23,500. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

189. Big Wave Inc. exchanged an old vehicle for a new vehicle on August 31, 2024. The original cost of the vehicle was $45,000 on January 1, 2020. Depreciation was calculated using the straight-line method over a 10-year useful life, with an estimated residual value of $3,000. The fair value of the old vehicle on August 31, 2024, was $21,500. The list price of the new vehicle was $30,000. Big Wave received a $24,000 trade in allowance from the dealership and paid $6,000 cash for the new vehicle. As a result of this transaction, the company would record which of the following? a) Dr. Loss on Disposal $3,900 b) Cr. Vehicles $23,500 c) Cr. Gain on Disposal $3,900 d) Cr. Cash $24,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

190. Mo Bounce Company's delivery truck, which originally cost $28,000, was destroyed by fire. At the time of the fire, the balance of the accumulated depreciation account amounted to $19,000. The company received a $16,000 reimbursement from its insurance company. The gain or loss as a result of the fire was a) $12,000 loss. b) $7,000 loss. c) $12,000 gain. d) $7,000 gain. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

191. A loss on disposal of a long-lived asset is reported in the financial statements a) as an increase to depreciation expense in the income statement. b) in the operating expenses section of the income statement. c) as a direct increase to the capital account on the balance sheet. d) as a direct decrease to the capital account on the balance sheet. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

192. The Breakfast Club Company purchased land and building on January 1, 2006, for a combined price of $285,000. The Breakfast Club Company allocated 75% of the purchase price to the building and 25% to the land to approximate their individual fair values. The building was depreciated using the double diminishing-balance method and accumulated depreciation to date was correctly calculated as $190,000. The land and building were subsequently sold on June 18, 2024, for a combined price of $650,000. What gain or loss on disposal of these assets would be reported in 2024? a) gain of $95,000 b) gain of $555,000

Test Bank for Accounting Principles, Ninth Canadian Edition

c) gain of $578,750 d) gain of $626,250 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

193. The Weekend Company owns specialized equipment with an original cost of $235,000. The company has fully depreciated the asset over the past five years and has now made the decision to retire the asset. Which journal entry would be required to record the retirement of this equipment? a) Debit Equipment and credit Accumulated Depreciation–Equipment for $235,000 b) Debit Depreciation Expense and credit Accumulated Depreciation–Equipment for $235,000 c) Debit Accumulated Depreciation–Equipment and credit Depreciation Expense for $235,000 d) Debit Accumulated Depreciation–Equipment and credit Equipment for $235,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

194. Floral Gifts purchased a truck on January 2, 2020, for $90,000. The truck had been depreciated on a straight-line basis with an estimated residual value of $5,000 and an estimated useful life of five years. Floral Gifts has a December 31 year end. Which of the following is the correct journal entry assuming that Floral Gifts retires the truck on January 2, 2025? a) Accumulated Depreciation–Vehicles ........................................................... 85,000 Loss on Disposal .......................................................................................... 5,000 Vehicles................................................................................................... 90,000 b) Depreciation Expense .................................................................................. 90,000 Accumulated Depreciation–Vehicles ..................................................... 85,000 Gain on Disposal .................................................................................... 5,000 c) Accumulated Depreciation–Vehicles ........................................................... 90,000 Vehicles................................................................................................... 90,000 d) Accumulated Depreciation–Vehicles ........................................................... 90,000 Gain on Disposal .................................................................................... 5,000 Vehicles................................................................................................... 85,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

195. Floral Gifts purchased a truck on January 2, 2020, for $90,000. The truck had been depreciated on a straight-line basis with an estimated residual value of $5,000 and an estimated useful life of five years. Floral Gifts has a December 31 year end. Which of the following is the correct journal entry assuming that Floral Gifts sells the truck on April 1, 2024, for $11,200 cash? a) Cash .............................................................................................................. 11,200 Accumulated Depreciation–Vehicles ........................................................... 78,800 Vehicles................................................................................................... 90,000 b) Cash .............................................................................................................. 11,200 Accumulated Depreciation–Vehicles ........................................................... 77,250 Loss on Disposal .......................................................................................... 1,550 Vehicles................................................................................................... 90,000 c) Accumulated Depreciation–Vehicles ........................................................... 90,000 Vehicles................................................................................................... 90,000 d) Cash .............................................................................................................. 11,200 Accumulated Depreciation–Vehicles ........................................................... 72,250 Loss on Disposal .......................................................................................... 6,550 Vehicles................................................................................................... 90,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

196. Floral Gifts purchased a truck on January 2, 2020, for $90,000. The truck had been depreciated on a straight-line basis with an estimated residual value of $5,000 and an estimated useful life of five years. Floral Gifts has a December 31 year end. Which of the following is the correct journal entry assuming that Floral Gifts sells the truck on October 1, 2024, for $11,200 cash? a) Cash .............................................................................................................. 11,200 Accumulated Depreciation–Vehicles ........................................................... 82,167 Gain on Disposal .................................................................................... 8,367

Test Bank for Accounting Principles, Ninth Canadian Edition

Vehicles................................................................................................... b) Cash .............................................................................................................. Accumulated Depreciation–Vehicles ........................................................... Loss on Disposal ........................................................................................... Vehicles................................................................................................... c) Cash .............................................................................................................. Accumulated Depreciation–Vehicles ........................................................... Gain on Disposal .................................................................................... Vehicles................................................................................................... d) Cash .............................................................................................................. Accumulated Depreciation–Vehicles ........................................................... Gain on Disposal .................................................................................... Vehicles...................................................................................................

85,000 11,200 77,250 1,550 90,000 11,200 80,750 1,950 90,000 11,200 82,167 3,367 90,000

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

197. Floral Gifts purchased a truck on January 2, 2020, for $90,000. The truck had been depreciated on a straight-line basis with an estimated residual value of $5,000 and an estimated useful life of five years. Floral Gifts has a December 31 year end. Which of the following is the correct journal entry assuming that Floral Gifts exchanges the old truck, plus $50,000 cash, for a new truck on July 1, 2024? The old truck has a fair value of $10,200. The new truck has a list price of $75,000, but the dealer gives Floral Gifts a $25,000 trade-in allowance on the old truck. a) Vehicles (cost of new) ................................................................................... 75,000 Accumulated Depreciation–Vehicles ........................................................... 76,500 Gain on Disposal .................................................................................... 11,500 Vehicles (cost of old) .............................................................................. 90,000 Cash ........................................................................................................ 50,000 b) Depreciation Expense .................................................................................. 8,500 Accumulated Depreciation–Vehicles ..................................................... 8,500 Vehicles (cost of new) ................................................................................... Accumulated Depreciation–Vehicles ........................................................... Loss on Disposal ........................................................................................... Vehicles (cost of old) .............................................................................. Cash ........................................................................................................ c) Depreciation Expense ................................................................................... Accumulated Depreciation–Vehicles .....................................................

60,200 76,500 3,300 90,000 50,000 12,617 12,617

Test Bank for Accounting Principles, Ninth Canadian Edition

Vehicles (cost of new) ................................................................................... Accumulated Depreciation–Vehicles ........................................................... Loss on Disposal ........................................................................................... Vehicles (cost of old) .............................................................................. Cash ........................................................................................................ d) Vehicles (cost of new)................................................................................... Accumulated Depreciation–Vehicles ........................................................... Gain on Disposal .................................................................................... Vehicles (cost of old) .............................................................................. Cash ........................................................................................................

60,200 77,917 1,883 90,000 50,000 75,000 77,917 12,917 90,000 50,000

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic 198. Floral Gifts purchased a truck on January 2, 2020, for $90,000. The truck had been depreciated on a straight-line basis with an estimated residual value of $5,000 and an estimated useful life of five years. Floral Gifts has a December 31 year end. Assuming there is no commercial substance, how much should the new long-lived asset be recorded for given that Floral Gifts exchanges the old truck for a new truck on July 1, 2024? a) The carrying amount of the old truck that was given up, plus any cash paid (or less any cash received). b) The list price of the new truck only. c) The carrying amount of the old truck only that was given up. d) The list price of the new truck, plus any cash paid (or less any cash received). Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposals of Property, Plant, and Equipment CPA: Financial Reporting AACSB: Analytic

199. Mining Plus Company invests $7 million in a mine that is estimated to have 5 million tonnes of ore and a $250,000 residual value. In the first year, 20,000 tonnes are extracted but only 7,500 tonnes are sold. How much is the depletion amount per tonne? a) $0.68 per tonne

Test Bank for Accounting Principles, Ninth Canadian Edition

b) $1.35 per tonne c) $0.71 per tonne d) $1.40 per tonne Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

200. Mining Plus Company invests $7 million in a mine that is estimated to have 5 million tonnes of ore and a $250,000 residual value. In the first year, 20,000 tonnes are extracted but only 7,500 tonnes are sold. How much is the total depletion for the year? a) $10,125 b) $10,500 c) $16,875 d) $27,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

201. Mining Plus Company invests $7 million in a mine that is estimated to have 5 million tonnes of ore and a $250,000 residual value. In the first year, 20,000 tonnes are extracted but only 7,500 tonnes are sold. How much is the depletion amount to be allocated to inventory? a) $16,875 b) $17,500 c) $10,125 d) $10,500 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

202. Mining Plus Company invests $7 million in a mine that is estimated to have 5 million tonnes of ore and a $250,000 residual value. In the first year, 20,000 tonnes are extracted but only 7,500 tonnes are sold. How much is the depletion amount to be allocated to cost of goods sold? a) $16,875 b) $17,500 c) $10,125 d) $10,500 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

203. Major Mines purchased a mine for $5.5 million that is estimated to have 40 million tonnes of ore and a $400,000 residual value. In the first year, 3 million tonnes of ore are extracted. Which of the following is the correct journal entry to record the depletion for the first year? a) Inventory ...................................................................................................... 412,500 Accumulated Depletion–Resource ........................................................ 412,500 b) Depletion Expense ....................................................................................... 412,500 Accumulated Depletion–Resource ........................................................ 412,500 c) Inventory....................................................................................................... 382,500 Accumulated Depletion–Resource ........................................................ 382,500 d) Depletion Expense ....................................................................................... 382,500 Accumulated Depletion–Resource ........................................................ 382,500 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

204. Natural resources are frequently referred to as wasting assets because a) they are worthless.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) they are physically extracted in operations and are replaceable only by an act of nature. c) there is a lot of inefficiency in their use in operations. d) there is a lot of spoilage when they are extracted. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

205. Natural resource depletion is a) a decrease in fair value of natural resources. b) the amount of spoilage that occurs when natural resources are extracted. c) the process of allocating the cost of natural resources extracted and sold to expense. d) the method used to record unsuccessful oil well explorations. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

206. Natural resource depletion is most often a function of a) the expected economic life of the natural resource. b) the expected period over which the resource is expected to be exhausted. c) the units of natural resource extracted during the period. d) the number of years expected to be in operations. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

207. All of the following are examples of wasting assets EXCEPT a a) coal mine. b) timber stand. c) logging truck. d) gold mine. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

208. The method most commonly used to calculate natural resource depletion is the a) straight-line method. b) diminishing-balance method. c) units-of-production method. d) revaluation method. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

209. In calculating natural resource depletion, residual value is a) always immaterial. b) ignored. c) impossible to estimate. d) included in the calculation. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

210. If a mining company extracts 1,500,000 tonnes in a period but only sells 1,200,000 tonnes, a) accumulated depletion on the mine is based on the 1,200,000 tonnes. b) depletion included in cost of goods sold is based on the 1,500,000 tonnes extracted. c) depletion included in cost of goods sold is based on the 1,200,000 tonnes extracted and sold. d) a separate accumulated depletion account is set up to record depletion on the 300,000 tonnes extracted but not sold. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

211. A coal company invests $12 million in a mine estimated to have 20 million tonnes of coal and no residual value. It is expected that the mine will be in operation for five years. In the first year, 1,000,000 tonnes of coal are extracted and sold. What is the depletion included in cost of goods sold for the first year? a) $600,000 b) $240,000 c) $60,000 d) It cannot be determined from the information provided. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

212. Depletion of natural resources is initially debited to a) Cost of Goods Sold. b) Inventory. c) Depletion Expense. d) Loss on Extraction of Resources. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

213. Which of the following would NOT be considered a natural resource? a) mineral deposit b) herd of cows c) gravel pit d) timberlands Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

214. On July 1, 2024, Yukon Minerals Co. purchased the mineral rights to a granite deposit for $700,000. It is estimated that the recoverable granite will be 400,000 tonnes. During 2024, 100,000 tonnes of granite was extracted and 60,000 tonnes were sold. The amount of the depletion expense to be included in cost of goods sold for 2024 would be a) $87,500. b) $52,500. c) $105,000. d) $175,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

215. The calculated annual depletion expense is initially debited to a) Inventory. b) Natural Resource Property.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Accumulated Depletion. d) Cash. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

216. Helios invested $6 million for the rights to explore and extract natural resources from land in Ukraine. The company estimated that a total of 1.5 million tonnes of ore would be extracted from the property. The company extracted 50,000 tonnes of ore in its first year of operations. What entry would be necessary to record depletion? a) Debit to Natural Resource Property and credit to Accumulated Depletion–Mineral Resources for $200,000 b) Debit to Inventory and credit to Accumulated Depletion–Mineral Resources for $200,000 c) Debit to Natural Resource Property and credit to Accumulated Depletion–Mineral Resources for $6,000,000 d) Debit to Inventory and credit to Accumulated Depletion–Mineral Resources for $6,000,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources CPA: Financial Reporting AACSB: Analytic

217. Which of the following assets has indefinite life? a) land improvements b) patent c) goodwill d) copyright Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

218. Which of the following statements is CORRECT? a) All research and development costs should be capitalized. b) Development costs are always capitalized. c) Research costs should always be expensed as incurred. d) All research and development costs should be expensed as incurred. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

219. Intangible assets are the rights and privileges that result from ownership of long-lived assets, many of which a) must be generated internally. b) are depreciable natural resources. c) have been exchanged at a gain. d) do not have physical substance. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

220. If an intangible asset with an indefinite life becomes impaired, the asset must be a) written down to cost. b) written down to fair value. c) sold at its net realizable value. d) No adjustment is required and a loss will be recorded when the intangible asset is sold. Answer: b Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

221. If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting a) Legal Expense. b) a Loss on Intangibles account. c) the Patent account. d) an operating expense account. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

222. The cost of successfully defending a patent in an infringement suit should be a) charged to Legal Expenses. b) deducted from the carrying amount of the patent. c) added to the cost of the patent. d) recognized as a loss in the current period. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

223. An asset that CANNOT be sold individually is a) a patent. b) goodwill. c) a copyright. d) a trade name.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

224. Goodwill can be recorded a) when customers keep returning because they are satisfied with the company's products. b) when the company acquires a good location for its business. c) when the company has exceptional management. d) only when an entire business is purchased. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

225. Which is NOT a characteristic of goodwill? a) It can be sold. b) It is never amortized. c) It is tested for impairment annually. d) It has indefinite life. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

226. On January 1, 2024, Keebler Company purchased the copyright to Bodine Computer Tutorials for $81,000. It is estimated that the copyright will have a useful life of five years with an estimated residual value of $6,000. The amount of amortization expense recognized for the year 2024 would be a) $16,200.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) $7,500. c) $15,000. d) $8,100. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

227. Which of the following is an intangible asset that has a finite life? a) licence b) patent c) trademark d) franchise Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

228. A franchise should be classified on the balance sheet as a) a current asset. b) a prepaid expanse. c) an intangible asset. d) property, plant, and equipment. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

229. A patent can be renewed a) every 20 years. b) only after its economic life has been exhausted. c) only if significantly defended in an infringement suit. d) A patent can never be renewed. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

230. Development costs a) are always expensed when incurred. b) cannot be recorded separately from research costs. c) can be capitalized if it can be shown that the costs will provide future benefits. d) are intangible assets that are not amortized. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

231. An intangible asset should a) be expensed immediately if it has a finite life. b) not be amortized if it has an indefinite life. c) be grouped together with property plant, and equipment for reporting purposes. d) be amortized over its useful life or legal life, whichever is longer. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

232. Copyrights are granted by the federal government a) for the life of the creator or 50 years, whichever is longer. b) for the life of the creator plus 50 years. c) for the life of the creator or 50 years, whichever is shorter. d) and therefore cannot be amortized. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

233. In recording the acquisition cost of an entire business, a) goodwill is recorded as the excess of cost over the fair value of net identifiable assets. b) assets are recorded at the seller's carrying amounts. c) goodwill, if it exists, is never recorded. d) goodwill is recorded as the excess of cost over the carrying amount of net identifiable assets. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

234. Research costs a) are classified as intangible assets. b) must be expensed when incurred under both IFRS and ASPE. c) should be included in the cost of the patent they relate to. d) are capitalized and then depreciated over a period not to exceed 40 years. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

235. Goodwill a) may be expensed upon purchase if desired. b) can be sold by itself to another company. c) can be purchased and charged directly to owner’s equity. d) should be recorded as an asset and carried on the balance sheet unless an impairment in value occurs. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

236. Which of the following is NOT an intangible asset that is reported on the balance sheet? a) patent b) internally developed trademarks c) licence d) copyrights Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

237. For an intangible asset with a finite life, the cost less residual value should be allocated over the a) estimated useful life. b) legal life. c) shorter of the estimated useful life and legal life. d) higher of the estimated useful life and legal life. Answer: c Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

238. Which of the following statements is most accurate with respect to goodwill? a) Goodwill is subject to annual amortization. b) Goodwill is subject to annual amortization and impairment testing. c) Goodwill is not amortized but is tested annually for impairment. d) Goodwill is not amortized or tested for impairment. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

239. Inventions ‘R’ Us purchased a patent for $30,000 cash on August 1, 2024. The patent has a legal life of 20 years and is expected to have a useful life of five years. One year later, the company spends an additional $5,000 cash to successfully defend an infringement suit in court. The company’s year end is July 31. Which of the following is the correct journal entry to record the purchase of the patent on August 1, 2024? a) Cash .............................................................................................................. 35,000 Patents .................................................................................................... 35,000 b) Patents .......................................................................................................... 30,000 Cash ........................................................................................................ 30,000 c) Patents .......................................................................................................... 35,000 Cash ........................................................................................................ 35,000 d) Cash .............................................................................................................. 30,000 Patents .................................................................................................... 30,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

240. Inventions ‘R’ Us purchased a patent for $30,000 cash on August 1, 2024. The patent has a legal life of 20 years and is expected to have a useful life of five years. One year later, the company spends an additional $5,000 cash to successfully defend an infringement suit in court. The company’s year end is July 31. Which of the following is the correct journal entry to record the year-end amortization at July 31, 2025? a) Accumulated Amortization–Patents ............................................................ 6,000 Accumulated Depreciation–Patents ...................................................... 6,000 b) Amortization Expense .................................................................................. 1,500 Accumulated Amortization–Patents...................................................... 1,500 c) Accumulated Amortization–Patents ............................................................ 1,500 Amortization Expense ............................................................................ 1,500 d) Amortization Expense .................................................................................. 6,000 Accumulated Amortization–Patents...................................................... 6,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

241. Inventions ‘R’ Us purchased a patent for $30,000 cash on August 1, 2024. The patent has a legal life of 20 years and is expected to have a useful life of five years. One year later, the company spends an additional $5,000 cash to successfully defend an infringement suit in court. The company’s year end is July 31. Which of the following is the correct journal entry to record the legal costs incurred on August 1, 2025? a) Legal Expense ............................................................................................... 5,000 Cash ........................................................................................................ 5,000 b) Amortization Expense .................................................................................. 5,000 Cash ........................................................................................................ 5,000 c) Patents .......................................................................................................... 5,000 Cash ........................................................................................................ 5,000 d) Amortization Expense .................................................................................. 5,000 Accumulated Amortization–Patents...................................................... 5,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

242. Inventions ‘R’ Us purchased a patent for $30,000 cash on August 1, 2024. The patent has a legal life of 20 years and is expected to have a useful life of five years. One year later, the company spends an additional $5,000 cash to successfully defend an infringement suit in court. The company’s year end is July 31. Which of the following is the correct journal entry to record the year-end amortization at July 31, 2026? a) Accumulated Amortization–Patents ............................................................ 6,000 Amortization Expense ............................................................................ 6,000 b) Amortization Expense .................................................................................. 7,250 Accumulated Amortization–Patents...................................................... 7,250 c) Amortization Expense .................................................................................. 5,800 Accumulated Amortization–Patents...................................................... 5,800 d) Amortization Expense .................................................................................. 6,000 Accumulated Amortization–Patents...................................................... 6,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

243. Blank Canvas purchased a patent for $42,000 cash on October 1, 2024, and management intends on using the patent starting December 1, 2024. The patent has a legal life of 20 years and is expected to have a useful life of six years. The company’s year end is December 31. How much is the year-end amortization at December 31, 2024? a) $7,000 b) $1,750 c) $175 d) $583 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

244. The following information is available for Bevel Supplies for three recent years: 2024 2023 2022 Total assets.............................................. $429,450 $389,550 $335,310 Net sales .................................................. 781,770 730,725 661,920 Profit ........................................................ 39,585 27,315 20,310 What is the asset turnover ratio for 2024? a) 1.82 times b) 0.10 times c) 0.09 times d) 1.91 times Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

245. The following information is available for Bevel Supplies for three recent years: 2024 2023 2022 Total assets.............................................. $429,450 $389,550 $335,310 Net sales .................................................. 781,770 730,725 661,920 Profit ........................................................ 39,585 27,315 20,310 What is the asset turnover ratio for 2023? a) 1.82 times b) 2.02 times c) 0.08 times d) 1.88 times Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

246. The following information is available for Bevel Supplies for three recent years: 2024 2023 2022 Total assets.............................................. $429,450 $389,550 $335,310 Net sales .................................................. 781,770 730,725 661,920

Test Bank for Accounting Principles, Ninth Canadian Edition

Profit ........................................................ What is the return on assets ratio for 2024? a) 9.2% b) 5.1% c) 9.7% d) 5.4%

39,585

27,315

20,310

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

247. The following information is available for Bevel Supplies for three recent years: 2024 2023 2022 Total assets.............................................. $429,450 $389,550 $335,310 Net sales .................................................. 781,770 730,725 661,920 Profit ........................................................ 39,585 27,315 20,310 What is the return on assets ratio for 2023? a) 7.0% b) 3.7% c) 5.3% d) 7.5% Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

248. Fern Greenhouses reported net sales of $1,300 million, profit of $95 million, and average total assets of $1,675 million in 2024. What are the company’s return on assets and asset turnover? a) 7.3% and 0.06 times b) 77.6% and 5.7 times c) 7.5% and 1.28 times d) 5.7% and 0.78 times Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

249. A high return on assets indicates a) a profitable company. b) the amount of sales generated by each dollar invested in total assets. c) new assets need to be purchased. d) the company may be in financial difficulty. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

250. For the year ended December 31, 2024, Akito Co. has net sales of $1,000,000 and profit of $290,000. Total assets on December 31, 2024, were $1,750,000 and total assets at December 31, 2024, are $1,245,000. Akito’s return on assets for 2024 is a) 19.4%. b) 23.3%. c) 66.8%. d) 80.3%. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

251. Natural resources are generally shown on the balance sheet under a) Intangible Assets.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Investments. c) Property, Plant, and Equipment. d) Owner's Equity. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

252. Which of the following statements concerning financial statement presentation is NOT correct? a) Intangible assets can be listed separately on the balance sheet. b) The balances of major classes of assets may be disclosed in the footnotes. c) The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes. d) The balances of all individual assets, as they appear in the subsidiary long-lived asset ledger, should be disclosed in the footnotes. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

253. Intangible assets a) are not reported on the balance sheet because they are expensed. b) are not reported on the balance sheet because they lack physical substance. c) should be reported as current assets on the balance sheet. d) should be reported as a separate classification on the balance sheet. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

254. A company has the following assets: Buildings and equipment, less accumulated depreciation of $2,500,000 ....... Copyrights, less accumulated amortization of $240,000 .................................. Goodwill .............................................................................................................. The total amount reported under property, plant, and equipment would be a) $12,000,000. b) $14,500,000. c) $17,000,000. d) $19,200,000.

$12,000,000 1,200,000 5,000,000

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

255. Asset turnover is calculated as follows: a) net sales divided by average total assets. b) property, plant, and equipment divided by total assets. c) long-lived assets divided by total sales. d) net sales divided by net long-lived assets. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

256. Which of the following statements is CORRECT with respect to the return on assets ratio? a) Return on assets is a measure of liquidity. b) It is calculated by dividing net sales by average total assets. c) It indicates the amount of net sales generated by each dollar invested in assets. d) A high return on assets indicates a profitable company. Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Illustrate the reporting and analysis of long-lived assets. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 257. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Long-lived assets Depreciation Carrying amount Residual value Straight-line method

F. G. H. I. J.

Units-of-production method Diminishing-balance method Operating expenditures Capital expenditures Capital cost allowance

___

1. Small expenditures that primarily benefit the current period

___

2. Long-lived resources that are used in operations and are NOT intended for resale

___

3. Cost less accumulated depreciation

___

4. An accelerated depreciation method used for financial statement purposes

___

5. Results in an equal amount of depreciation each period

___

6. Expected cash value of the asset at the end of its useful life

___

7. Process of allocating the cost of a depreciable asset over its useful life

___

8. Material expenditures that increase an asset's operating efficiency, productive capacity, or useful life

___

9. An accelerated depreciation method used for income tax purposes

___

10. Estimated useful life is expressed in terms of expected use

258. Match the items below by entering the appropriate code letter in the space provided.

Test Bank for Accounting Principles, Ninth Canadian Edition

A. B. C. D.

Gain on disposal Loss on disposal Trademark Natural resources

E. F. G. H.

Goodwill Depreciation Intangible assets Research costs

___

1. Process of allocating the cost of a depreciable asset to expense over its useful life

___

2. Occurs if proceeds of disposal exceed the carrying amount

___

3. When carrying amount of asset is greater than the proceeds received from its sale

___

4. Long-lived assets replaceable only by an act of nature

___

5. Can be identified only with a business as a whole

___

6. Examples are franchises and licences

___

7. A symbol that identifies a particular company or product

___

8. Must be expensed when incurred

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 257. 1.

10. F Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the cost of property, plant, and equipment. Section Reference: Property, Plant, and Equipment Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation Learning Objective: Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment. Section Reference: Revising Periodic Depreciation CPA: Financial Reporting AACSB: Analytic

258. 1.

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply depreciation methods to property, plant, and equipment. Section Reference: Depreciation Learning Objective: Demonstrate how to account for property, plant, and equipment disposals. Section Reference: Disposal of Property, Plant, and Equipment Learning Objective: Record natural resource transactions and calculate depletion. Section Reference: Natural Resources Learning Objective: Identify the basic accounting issues for intangible assets and goodwill. Section Reference: Intangible Assets and Goodwill CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 10 CURRENT LIABILITIES AND PAYROLL CHAPTER LEARNING OBJECTIVES 1.

Account for certain current liabilities. Liabilities are present obligations arising from past events, to make future payments of assets or services. Certain liabilities have certainty about their existence, amount, and timing—in other words, they have a known amount, payee, and due date. Examples of certain current liabilities include accounts payable, unearned revenues, operating lines of credit, notes payable, sales taxes, current maturities of long-term debt, and accrued liabilities such as property taxes, payroll, and interest.

Account for uncertain liabilities. Estimated liabilities exist, but their amount or timing is uncertain. As long as it is likely the company will have to settle the obligation, and the company can reasonably estimate the amount, the liability is recognized. Product warranties, customer loyalty programs, and gift cards result in liabilities that must be estimated. They are recorded as an expense (or as a decrease in revenue) and a liability in the period when the sales occur. These liabilities are reduced when repairs under warranty, redemptions, and returns occur. Gift cards are a type of unearned revenue because they result in a liability until the gift card is redeemed. Because some cards are never redeemed, it is necessary to estimate the liability and make adjustments. A contingency is an existing condition or situation that is uncertain, where it cannot be known if a loss (and a related liability) will result until a future event happens or does not happen. Under ASPE, a liability for a contingent loss is recorded if it is likely that a loss will occur and the amount of the contingency can be reasonably estimated. Under IFRS, the threshold for recording the loss is lower. It is recorded if a loss is probable. Under ASPE, these liabilities are called contingent liabilities, and under IFRS, these liabilities are called provisions. If it is not possible to estimate the amount, these liabilities are only disclosed. They are not disclosed if they are unlikely unless they could have a substantial impact on the entity.

Determine payroll costs and record payroll transactions. Payroll costs consist of employee and employer payroll costs. In recording employee costs, Salaries Expense is debited for the gross pay, individual liability accounts are credited for payroll deductions, and Salaries Payable is credited for net pay. In recording employer payroll costs, Employee Benefits Expense is debited for the employer’s share of Canada Pension Plan (CPP), Employment Insurance (EI), workers’ compensation, vacation pay, and any other deductions or benefits provided. Each benefit is credited to its specific current liability account. The objectives of internal control for payroll are (1) to safeguard company assets against unauthorized payments of payrolls, and (2) to ensure the accuracy of the accounting records pertaining to payrolls.

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare the current liabilities section of the balance sheet. The nature and amount of each current liability and contingency should be reported on the balance sheet or in the notes accompanying the financial statements. Traditionally, current liabilities are reported first and in order of liquidity.

Calculate mandatory payroll deductions (Appendix 10A). Mandatory payroll deductions include CPP, EI, and income taxes. CPP is calculated by multiplying pensionable earnings (gross pay minus the pay-period exemption) by the CPP contribution rate. EI is calculated by multiplying insurable earnings by the EI contribution rate. Federal and provincial income taxes are calculated using a progressive tax scheme and are based on taxable earnings and personal tax credits. The calculations are very complex and it is best to use one of the Canada Revenue Agency income tax calculation tools such as payroll deduction tables.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 Bellvine Inc. paid $8,400 for property taxes in the 2023 calendar year. In 2024, Bellvine received its property tax bill on May 1 for $9,300 which is payable on June 30, 2024. Instructions Calculate the prepaid or property taxes payable that Bellvine will report on its balance sheet if Bellvine’s year end is a) February 29, 2024 b) May 31, 2024 c) September 30, 2024 d) December 31, 2024 Solution 1 (10 min.) a) Property taxes payable ($8,400 x 2/12)....................................................

$1,400

Property taxes payable ($9,300 x 5/12)....................................................

$3,875

Prepaid property taxes ($9,300 x 3/12) ....................................................

$2,325

Both prepaid property taxes and property taxes payable are................

Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 2 MaryBlu Company billed its customers a total of $1,991,625 including HST of $229,125 for the month of November. Instructions Prepare the general journal entry to record the revenue and related liabilities for the month. Solution 2 (5 min.) Accounts Receivable ................................................................................ Sales .................................................................................................. HST Payable ...................................................................................... Bloomcode: Application

1,991,625 1,762,500 229,125

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Account for certain current liabilities. Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Exercise 3 On April 1, Cartman Company borrowed $90,000 from South Park Provincial Bank by signing a sixmonth, 6%, interest-bearing note. Cartman’s year end is August 31. Instructions Prepare the following entries associated with the note payable on the books of Cartman Company: a) The entry on April 1 when the note was issued. b) Any adjusting entries necessary on May 31 in order to prepare the quarterly financial statements. Assume no other interest-accrual entries have been made. c) The adjusting entry at August 31 to accrue interest. d) The entry to record payment of the note at maturity. Solution 3 (10 min.) a) Apr. 1 Cash......................................................................................... Notes Payable ................................................................. b)

May 31

Aug. 31

Oct. 1

90,000

Interest Expense ..................................................................... Interest Payable .............................................................. ($90,000 × 6% × 2/12)

900

Interest Expense ..................................................................... Interest Payable .............................................................. ($90,000 × 6% × 3/12)

1,350

Notes Payable ......................................................................... Interest Payable ($900 + $1,350) ............................................ Interest Expense ($90,000 x 6% x 1/12) .................................. Cash .................................................................................

90,000 2,250 450

Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 4

90,000

900

1,350

92,700

Test Bank for Accounting Principles, Ninth Canadian Edition

On January 31, 2024, Titan Techniques gave Matzushibi Motors a 90-day, 8%, $80,000 note payable to extend a past due account payable. Titan has a March 31 year end. Instructions Prepare the year-end adjusting entry to accrue interest and the entry to record payment of the note on April 30, 2024. Round to the nearest whole dollar. Solution 4 (10 min.) Mar. 31 Interest Expense .......................................................................... Interest Payable ................................................................... ($80,000 x 8% x 2/12) Apr.

Interest Expense .......................................................................... Interest Payable ........................................................................... Note Payable ................................................................................ Cash ...................................................................................... Interest expense = $80,000 x 8% x 1/12 = $533

1,067 1,067

533 1,067 80,000 81,600

Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 5 Merrygold Industrial purchased equipment costing $610,000 on September 30, 2024, by paying 10% down and signing a 6%, six-month note payable for the balance. Instructions a) Prepare journal entries to record the purchase of the equipment, the accrual of interest on December 31, and the payment of the note at maturity. Merrygold computes interest based on the number of months outstanding. b) Determine the balance of any liabilities associated with this transaction as at December 31, 2024. Solution 5 (15 min.) a) 2024 Sept. 30 Equipment ................................................................................... Cash ...................................................................................... Notes Payable ......................................................................

Dec.

Interest Expense .......................................................................... Interest Payable ...................................................................

610,000 61,000 549,000

8,235 8,235

Test Bank for Accounting Principles, Ninth Canadian Edition

($549,000 × 0.06 × 3/12) 2025 Mar. 31

Interest Expense .......................................................................... ($549,000 × 0.06 × 3/12) Interest Payable ........................................................................... Notes Payable .............................................................................. Cash ......................................................................................

8,235 8,235 549,000 565,470

b) Current liabilities on December 31, 2024: Notes Payable $549,000 Interest Payable 8,235 Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 6 Walters Accounting Company receives its annual property tax bill for the calendar year on May 1, 2024. The bill is for $32,000 and is payable on June 30, 2024. Walters paid the bill on June 30, 2024. The company prepares quarterly financial statements and had initially estimated that its 2024 property taxes would be $30,000. Instructions Prepare all the required journal entries for 2024 related to the property taxes, including quarterly accruals, assuming no entry is made on May 1. Solution 6 (15 min.) Mar. 31 Property Tax Expense ($30,000 × 3/12) ....................................... Property Tax Payable ........................................................... June 30

Sept. 30

Dec.

7,500 7,500

Property Tax Expense ($32,000 × 6/12 – $7,500) ........................ Property Tax Payable .................................................................. Prepaid Property Tax ($32,000 x 6/12) ........................................ Cash ......................................................................................

8,500 7,500 16,000

Property Tax Expense ($32,000 × 3/12) ....................................... Prepaid Property Tax ...........................................................

8,000

Property Tax Expense ($32,000 × 3/12) ....................................... Prepaid Property Tax ...........................................................

8,000

32,000

8,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 7 Marsh Company had the following transactions during March: Mar. 1 Purchased equipment by issuing a $16,000, six-month, 6% note payable. Interest is due at maturity. 5 Provided services to customers for $9,800 plus 13% HST; customers paid cash. 15 Purchased supplies on account from Grand and Toy for $7,500. Supplier terms are 2/10, n/30. 31 Paid the Grand and Toy account in full. Instructions a) Record the transactions. b) Record any adjusting entries required at March 31 related to these liabilities. Solution 7 (5 min.) a) Mar. 1 Equipment ................................................................................... Notes Payable ...................................................................... Mar.

Mar.

b) Mar.

16,000 16,000

Cash…………. .............................................................................. HST Payable ($9,800 x 13%) ................................................ Service Revenue ...................................................................

11,074

Supplies………. ........................................................................... Accounts Payable .................................................................

7,500

Accounts Payable ........................................................................ Cash… .................................................................................. .

7,500

Interest Expense ($16,000 x 6% x 1/12) ....................................... Interest Payable ...................................................................

Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting

1,274 9,800

7,500

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Taxation AACSB: Analytic

Exercise 8 Harry Therapeutic Company is located in Leduc, Alberta and is a retailer of hair removal supplies. Beginning inventory is $45,000, and Harry uses the perpetual inventory system. Alberta has GST of 5%. The following transactions took place during the month of September: Sept. 4 Harry purchased $35,000 of merchandise from Laser Cosmetics Corp. on account. 10 Harry sells $66,000 of hair removal products to a customer on credit terms n/30. The merchandise cost $42,000. 17 Harry pays for the merchandise purchased on September 4. 20 Harry receives the amount due from the September 10 sale. 30 Harry remits the appropriate amount of GST to the government for the month of September. Instructions Journalize the transactions above, including 5% GST on normal purchases and sales. Solution 8 (10 min.) Sept. 4 Merchandise Inventory .................................................................. GST Payable (net) ........................................................................... Accounts Payable ...................................................................

35,000 1,750

Sept. 10

Accounts Receivable ...................................................................... GST Payable (net) ................................................................... Sales ........................................................................................

69,300

Cost of Goods Sold ......................................................................... Merchandise Inventory...........................................................

42,000

Accounts Payable ........................................................................... Cash.........................................................................................

36,750

Cash ................................................................................................ Accounts Receivable...............................................................

69,300

GST Payable ................................................................................... Cash.........................................................................................

1,550

Sept. 10

Sept. 17

Sept. 20

Sept. 30

Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation

36,750

3,300 66,000

42,000

36,750

69,300

1,550

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 9 Stella Inc., which prepares annual financial statements, is preparing adjusting entries on December 31. Analysis indicates the following: 1. The company is the defendant in an employee discrimination lawsuit involving $50,000 of damages. Legal counsel believes it is unlikely that the company will have to pay any damages. 2. December 31 is a Friday. The employees of the company have been paid on Monday, December 27 for the previous week which ended on Friday, December 24. The company employs 30 people who earn $80 per day and 15 people who earn $120 per day. All employees work five-day weeks. 3. Employees are entitled to one day's vacation for each month worked. All employees described above in 2. worked the month of December. 4. The company is a defendant in a $750,000 product liability lawsuit. Legal counsel believes the company probably will have to pay the amount in full. 5. On November 1, Fiddler signed a $10,000, six-month, 8% note payable. No interest has been accrued to date. Instructions Prepare any adjusting entries necessary at the end of the year. Solution 9 (12 min.) 1. No entry—loss is not likely. 2.

Salaries Expense ....................................................................................... Salaries Payable ................................................................................ 30 × $80 × 5 = $12,000 15 × $120 × 5 = 9,000 $21,000

21,000

Employee Benefits Expense ..................................................................... Employee Benefits Payable [(30 × $80) + (15 × $120)] .....................

4,200

Loss due to Damages................................................................................ Litigation Liability .............................................................................

750,000

Interest Expense ($10,000 × 8% × 2/12) ................................................... Interest Payable ................................................................................

133

Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities Learning Objective: Determine payroll costs and record payroll transactions.

21,000

4,200

750,000

133

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Exercise 10 During April 2024, Crowe Company incurred the following transactions. This is Crowe’s first period of operations, and they plan to use the periodic method of accounting for inventory. Crowe reports under ASPE. Apr. 1 Purchased a new automobile for $36,500; the automobile was paid for with a two-year 5% note payable. Interest is due monthly on the 1st day of each month and the principal is due as follows: 50% due in 1 year, the remainder due in 2 years. 5 Sold merchandise to Customer A on account for $72,000 plus 13% HST; terms n/30. 6 Customer A returns one-half of the merchandise purchased on April 5 and receives a credit on account. 13 Customer A paid their account in full. 25 Sold merchandise to Customer B for $102,900 plus 13% HST; terms n/30. 28 Received $22,000 from Customer C for services to be provided in May. 30 Recorded any adjusting entries required related to April transactions. In addition to liabilities arising from the above transactions, Crowe’s Accounts Payable balance at April 30, 2024, is $65,000. Instructions a) Record the above transactions. b) Prepare the current liabilities portion of Crowe’s balance sheet at April 30, 2024. Solution 10 (25 min.) a) Apr. 1 Vehicles…… ................................................................................. Notes Payable ...................................................................... Apr.

Apr.

36,500 36,500

Accounts Receivable .................................................................... HST Payable ($72,000 x 13%) .............................................. Sales .....................................................................................

81,360

Sales Returns and Allowances ($72,000 x ½) .............................. HST Payable ($9,360 x ½) ............................................................ Accounts Receivable ............................................................

36,000 4,680

Cash ($81,360 – $40,680) ............................................................. Accounts Receivable ............................................................

40,680

Accounts Receivable ....................................................................

116,277

9,360 72,000

40,680

Test Bank for Accounting Principles, Ninth Canadian Edition

HST Payable ($102,900 x 13%) ............................................ Sales ..................................................................................... Apr.

Apr.

13,377 102,900

Cash…………. .............................................................................. Unearned Revenue ..............................................................

22,000

Interest Expense ($36,500 x 5% x 1/12) ....................................... Interest Payable ...................................................................

152

22,000

152

b) Crowe Company Balance Sheet (partial) April 30, 2024 Liabilities Current liabilities Accounts payable ..................................................................................... HST Payable ($9,360 – $4,680 + $13,377) ................................................. Interest payable ........................................................................................ Unearned revenue .................................................................................... Current portion of notes payable ($36,500 x ½) ...................................... Total current liabilities .............................................................................

$ 65,000 18,057 152 22,000 18,250 $123,459

Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Exercise 11 During the month of July, Happy Go Lucky Toy Company started a new promotion. The company offered to reward their customers for all sales made on Barbie dolls or Toy Trucks during July. For each sale made, the customer will receive a 2% reward of the sales price, which can be redeemed on future purchases until December of the current year. Happy Go Lucky Toy Company estimates that 50% of the rewards will be redeemed. The stand-alone value of the rewards is $3,000. During the month of July, $150,000 of Barbie dolls and Toy Trucks were sold. There was $455 worth of redemptions in August. Instructions a) Prepare the journal entries to record all transactions related to the reward promotion. b) Identify any liabilities that would be reported on the August 31, 2024, balance sheet.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 11 (10 min.) a) July 31 Cash......................................................................................... Sales ................................................................................ Unearned Revenue–Loyalty Program ............................

150,000 148,515* 1,485**

Stand-alone value of products sold $150,000 Stand-alone value of loyalty points 1,500 Total Value ........................................................................................................ $151,500 * Allocation to Toy sales ($150,000/$151,500) x $150,000 = ....... $148,515 **Allocation to Loyalty program ($1,500/$151,500) x $150,000 = ...... $1,485 Aug.

Unearned Revenue–Loyalty Program ......................................... Revenue from Rewards Program ...........................................

455

Unearned Revenue–Loyalty Program ($1,485 – $455) ............................

$1,030

455

Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 12 Duane Herman sells exercise machines for home use. The machines carry a four-year warranty. Past experience indicates that 6% of the units sold will be returned during the warranty period for repairs. The average cost of repairs under warranty is $45 for labour and $75 for parts per unit. During 2024, 2,500 exercise machines were sold at an average price of $800. During the year, 60 of the machines that were sold were repaired at the average price per unit. The opening balance in the Warranty Liability account is zero. Instructions a) Prepare the journal entry to record the repairs made under warranty. b) Prepare the journal entry to record the estimated warranty expense for the year. Determine the balance in the Warranty Liability account at the end of the year. Solution 12 (10 min.) a) Labour on repaired units: $45 × 60 = $2,700 Parts on repaired units: $75 × 60 = $4,500 Warranty Liability ..................................................................................... Repair Parts Inventory ...................................................................... Salaries Payable ................................................................................

7,200 4,500 2,700

Test Bank for Accounting Principles, Ninth Canadian Edition

To record honouring of 60 warranty contracts. b)

2,500 units × 6% = 150 units 150 units × ($45 + $75) = $18,000 Warranty Expense ..................................................................................... Warranty Liability.............................................................................. To record estimated cost of honouring 150 warranty contracts.

18,000 18,000

The balance in Warranty Liability at year end is $10,800 ($18,000 – $7,200), which equals the expected cost of honouring the 90 remaining warranty contracts. Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 13 MoTown Appliances sells built-in ranges for $1,400 each. The price includes a one-year warranty. During 2024, the company sold 1,650 ranges. On the basis of past experience, approximately 4% of units sold will require warranty replacement at an average cost of $450 per unit. The actual warranty costs paid by MoTown during 2024 were $25,000. Instructions a) Prepare journal entries to record the estimated warranty expense and the warranty payments during 2024. b) Assuming the liability has an unadjusted credit balance of $900, what is the 2024 adjusted liability balance? Solution 13 (5 min.) a) Warranty Expense................................................................................ Warranty Liability ........................................................................ (1,650 x .04 x $450 = $29,700) Warranty Liability ................................................................................ Cash .............................................................................................. b) Adjusted warranty liability balance = $900 + $29,700 – $25,000 = $5,600 Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities.

29,700 29,700

25,000 25,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 14 Filter Tanks Company sells iron filter tanks for $2,150 each. The price includes a two-year warranty. During 2024, the company sold 400 tanks. On the basis of past experience, the warranty costs are estimated to be $110 per tank. The actual warranty costs paid by Filter Tanks during 2024 were $27,500. Instructions a) Prepare journal entries to record the estimated warranty expense and the warranty payments during 2024. b) Assuming the liability has an unadjusted credit balance of $2,150, what is the 2024 adjusted liability balance? Solution 14 (5 min.) a) Warranty Expense................................................................................ Warranty Liability ........................................................................ (400 x $110 = $44,000) Warranty Liability ................................................................................ Cash ..............................................................................................

44,000 44,000

27,500 27,500

b) Adjusted warranty liability balance = $2,150 + $44,000 – $27,500 = $18,650 Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 15 Sean Screen Manufacturing began operations in January 2024. Sean manufactures and sells two different computer monitors. Monitor A is a flat panel high-definition monitor, which carries a two-year manufacturer's warranty against defects in workmanship. Sean's management project that 6% of the monitors will require repair during the first year of the warranty while approximately 8% will require repair during the second year of the warranty. Monitor A sells for $400. The average cost to repair a monitor is $80. Monitor B is a regular LED monitor that retails for $150. Sean has entered into an agreement with a local electronics firm who charges Sean $20 per monitor sold and then covers all warranty costs

Test Bank for Accounting Principles, Ninth Canadian Edition

related to this monitor. Sales and warranty information for 2024 is as follows: 1. Sold 2,000 monitors (800 monitor A and 1,200 monitor B); all sales were on account. 2. Actual warranty expenditures for monitor A were $4,000. Instructions a) Prepare journal entries that summarize the sales and any aspects of the warranty for 2024. b) Determine the balance in the Warranty Liability account at the end of 2024. Solution 15 (10 min.) a) To record sales Accounts Receivable ................................................................................ Sales (800 × $400) + (1,200 x $150) ...................................................

500,000 500,000

Related to the cost of the maintenance contract on monitor B Warranty Expense (1,200 × $20) ............................................................... Cash ...................................................................................................

24,000

To estimate cost of warranty on monitor A Warranty Expense (800 × 14% × $80) ....................................................... Warranty Liability..............................................................................

8,960

To record actual warranty costs on monitor A Warranty Liability ..................................................................................... Cash ...................................................................................................

4,000

24,000

8,960

4,000

$8,960 – $4,000 = $4,960

Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 16 Jet Fuel Ltd. has a customer rewards program. For every litre of gas Jet Fuel sells, the customer is awarded one point. Each point is worth $0.10 off the purchase of future goods. During the month of January, Jet Fuel had gas sales of $172,000 and sold 144,000 litres of gas. Jet Fuel estimates 60% of the points will be redeemed. During February, the actual value of the points redeemed is $7,250. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b)

Prepare the journal entry for the January sales. Prepare the journal entry for February reflecting the actual loyalty points redemption.

Solution 16 (10–13 min.) a) Cash........................................................................................................... Sales .................................................................................................. Unearned Revenue–Loyalty Program ..............................................

172,000

Stand-alone value of gas sold .......................................................................... Stand-alone value of loyalty points (144,000 x $0.10 x 60%) .........................

$172,000 8,640

Total Value ........................................................................................................

$180,640

* Allocation to Gas sales **Allocation to Loyalty program

163,773* 8,227**

($172,000/$180,640) x $172,000 = ....... $163,773* ($8,640/$180,640) x $172,000 = ...... $8,227**

b) Unearned Revenue–Loyalty Program...................................................... Revenue from Loyalty Program .....................................................

7,250 7,250

Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 17 Dejong’s Dry Cleaning had the following events occur during December, 2024. Dejong reports under ASPE. 1. Dejong signed a $40,000 loan guarantee on behalf of Dejong Junior’s. At December 31, Junior’s had drawn $10,000 of loan advances. Junior’s has sufficient assets to cover its liabilities. 2. Dejong was sued by an irate customer who said the trousers that Dejong had returned to him belonged to someone else. The customer is claiming $10,000,000 in damages for distress because he mistakenly wore the ill-fitting trousers to work and suffered discomfort and embarrassment as a result. Dejong’s lawyer has advised them that the likelihood of this claim succeeding is nil, and has offered to defend them at no charge. The Dejongs have already paid the claimant $100 for replacement of the missing trousers. 3. Dejong was sued for wrongful dismissal by a former employee. The employee is claiming $2,000 in lost wages. Dejong’s lawyer has advised them that the claim, if taken to trial, is likely to be upheld. 4. In early December, some dry cleaning fluid spilled and damaged equipment valued at $5,600. Dejong replaced the equipment, which is insured, and expects their insurance policy will reimburse at least $5,000 of the cost and possibly the entire amount. However, the exact amount

Test Bank for Accounting Principles, Ninth Canadian Edition

covered by insurance has not yet been determined. Instructions For each of the four situations above, evaluate the likelihood and measurability of any losses that Dejong may face. Indicate if any liability should be recorded or disclosed in Dejong’s December 31, 2024, financial statements. Solution 17 (10 min.) 1. The loan guarantee results in a contingency that is highly measurable (both the approved and current loan balances are known) but is unlikely to occur. The guarantee should be disclosed, but not recorded as a liability. 2.

The loss related to the lawsuit cannot be measured with any certainty. Common sense would suggest that if there were any loss over and above the $100 already paid, it would not be the $10,000,000 claimed by the plaintiff. In fact, since Dejong's have already paid for the missing garment, any further loss is likely to be minimal. Therefore, measurement is very uncertain. The likelihood of any loss occurring is very low, based on the information provided by the lawyer. This item need not be recorded nor disclosed.

The contingency is highly measurable, since a specific amount has been claimed. It is likely to occur based on information provided by the lawyer. The liability of $2,000 should be recorded.

If a loss was recorded on the disposal of the original equipment, then the insurance proceeds can be used to offset or eliminate this loss. Proceeds received in excess of this loss would reduce the cost of the new equipment rather than creating a gain. Since it is very likely that a settlement of at least $5,000 will be received, Dejong should record the estimated proceeds as a recovery of the damaged equipment to the extent of the original loss. Specific note disclosure could also be made in the notes to the financial statements.

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 18 Below are several accounting transactions recorded by Lucy, accounting clerk for B&B Industrial. 1. Loss from Liability .................................................................................... 500,000 Estimated Liability from Lawsuit ..................................................... 500,000 To set up a liability in which we are being sued for $500,000. The lawyers say it is unlikely that we will have to pay out this amount and the lawsuit will most likely be dismissed. I have set up the amount based on the best reasonable estimate. Even if the lawsuit is dismissed, this event will have a substantial negative effect on the company’s financial position. 2. No entry

Test Bank for Accounting Principles, Ninth Canadian Edition

B&B Industrial provided a guarantee on a loan for the company’s owner. The owner needed to obtain a large loan for medical purposes. No entry needed to account for the loan guarantee. No entry No entry needed to set up the reduction in wages that may be incurred due to employees going on strike. Loss from Decline in Sales ........................................................................ 150,000 Sales .................................................................................................. 150,000 To record the decline in sales due to a recession. Accounts Receivable ................................................................................ 365,000 Gain on Lawsuit ................................................................................ 365,000 To set up the amount that will be received when we win our lawsuit. No Entry No entry created for a lawsuit that we will most likely lose because a reasonable amount cannot be estimated.

Instructions For each transaction, determine if the accounting clerk correctly recorded the transaction. If you disagree, provide the correct transaction or disclosure requirement. Solution 18 1. Incorrect. No entry should be created. It is recommended to reverse the current entry and disclose the lawsuit due to the fact that the event could have a substantial negative effect on the company’s financial position. 2.

Correct. No entry is needed, however a loan guarantee should be disclosed even if the chances of having to pay is small.

Correct. No entry or disclosure is required for general risk contingencies that can affect anyone who is operating a business, such as strike, war, or recession.

Incorrect. No entry or disclosure is required for general risk contingencies that can affect anyone who is operating a business, such as strike, war, or recession.

Incorrect. No entry can be created since contingent gains are never recorded. Note disclosure may be appropriate if B&B believes the amount of $365,000 is significant.

Correct. No entry will be recorded. Since the amount cannot be reasonably estimated, it is only necessary to disclose the contingency in the notes to the financial statements.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 19 Amber Industries, a local concrete manufacturer, has encountered several situations during the 2024 fiscal year. The company follows ASPE. Identify whether each of the following possible contingencies should be recorded, disclosed, or not reported: 1. Amber is being sued by the municipality of Huntington for contaminating the town’s primary water source. If Amber is found responsible, the company will be required to remedy the waterway. Amber’s legal counsel believes there is a high likelihood that the company will be unsuccessful defending the suit. A specialist has estimated the restoration will cost between $1 million and $1.5 million. 2. Amber has guaranteed the debt of a related company in the amount of $2 million. The related company is currently in good financial health and is not intending to rely on Amber’s guarantee. 3. Amber has a history of lawsuits and has been found liable at least once in each of the past 5 years. Although Amber has not been sued in the current year, management would like to record a $50,000 provision for future lawsuits, which is the average payout over the past few years. 4. The government may expropriate Amber’s assets so that a new highway can be built. So far, there have been no discussions about exact amount but the government has assured Amber that the proceeds will exceed the assets’ net book value. 5. Amber is being sued for $500,000 for wrongful dismissal of a company executive. Solution 19 (10 min.) 1. Since it is likely that the company will lose and an amount can be reasonably estimated, a liability for a contingent loss should be recorded. 2.

Disclosure required.

No accrual or disclosure required as the transaction is not a result of a past event and therefore it does not meet the definition of a liability.

There will be a gain on expropriation if the proceeds exceed net book value. Contingent gains are never recorded. Disclosure would be appropriate considering the amount is likely significant.

If it is likely that the company will lose and the amount can be reasonably estimated, then this should be recorded as a contingent liability; otherwise, just disclose.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 20 Milner Company is preparing adjusting entries at December 31. An analysis reveals the following:

Test Bank for Accounting Principles, Ninth Canadian Edition

2. 3. 4.

During December, Milner Company sold 8,900 units of a product that carries a 60-day warranty. The sales for this product totalled $200,000. The company expects 5% of the units to need repair under the warranty and it estimates that the average repair cost per unit will be $30. The company has been sued by a disgruntled employee. Legal counsel believes it is likely that the company will have to pay $150,000 in damages. The company has been named as one of several defendants in a $350,000 damage suit. Legal counsel believes it is unlikely that the company will have to pay any damages. During December, ten employees earn vacation pay at a rate of 1 day per month. Their average daily wage is $160 per employee.

Instructions Prepare adjusting entries, if required, for each of the four items. Solution 20 (10 min.) 1. 8,900 units × 5% = 445 units expected to be defective. 445 units × $30 = $13,350 Warranty Expense ..................................................................................... Warranty Liability.............................................................................. 2.

An entry is required because the loss is likely and estimable. Loss due to Damages................................................................................ Litigation Liability .............................................................................

13,350 13,350

150,000 150,000

The loss is unlikely and does not require accrual or disclosure. No entry is required.

10 employees × $160 × 1 day = $1,600. Employee Benefits Expense ..................................................................... Employee Benefits Payable ..............................................................

1,600

Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

Exercise 21 The following unadjusted balances are taken from the trial balance of Jackson Equipment at December 31, 2024: Accounts payable………… ...................................................................... $53,700 Salaries payable………. ........................................................................... 2,200 Bank loan payable .................................................................................... 60,000 HST payable…………… ........................................................................... 14,800

1,600

Test Bank for Accounting Principles, Ninth Canadian Edition

Note payable, maturing March 31, 2025 .................................................. Note payable, maturing March 31, 2026 ..................................................

10,000 100,000

Jackson Equipment sells and installs security systems. Beginning on December 1, 2024, Jackson began offering a two-year product warranty. Based on research in the industry, Jackson’s management believes that 5% of security systems will require some warranty work and that the typical costs for systems requiring warranty work will be $875 during the first year and $325 during the second year. In December, Jackson supplied and installed 80 systems. Instructions a) Calculate and record Jackson’s warranty liability at December 31, 2024. b) Prepare the current liability portion of Jackson’s balance sheet at December 31, 2024. Solution 21 (12 min.) a) 80 systems x 5% = 4 will require work. Expected cost in first year (2025) = $875 x 4 .................................... ............... Expected cost in second year (2026) = $325 x 4 .............................. ...............

$3,500 1,300 $4,800

Entry to record: Warranty Expense……… ......................................................................... Warranty Liability.............................................................. ...............

4,800 4,800

b) Jackson Equipment Balance Sheet (partial) December 31, 2024 Liabilities Current liabilities Bank loan payable .................................................................................... Accounts payable ..................................................................................... Salaries payable ....................................................................................... HST payable…..…. ................................................................................... Notes payable ........................................................................................... Warranty liability ...................................................................................... Total current liabilities .............................................................................

$ 60,000 53,700 2,200 14,800 10,000 3,500 $144,200

Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 22 Haas Technologies' payroll for the monthly pay period ended September 25 amounted to $224,000. The following deductions were withheld from the employees’ salaries and wages: Federal and provincial income taxes ....................................................... $62,900 CPP ............................................................................................................ 11,088 EI................................................................................................................ 3,718 Union dues ................................................................................................ 2,500 United Way contributions ........................................................................ 1,000 Instructions Prepare the journal entries to record the monthly payroll ended September 25 and the employer’s benefits expense on the payroll. Round amounts to the nearest dollar. Solution 22 (10 min.) Sept. 25 Salaries Expense ....................................................................... Income Tax Payable .......................................................... CPP Payable ....................................................................... EI Payable .......................................................................... Union Dues Payable .......................................................... United Way Contributions Payable................................... Salaries Payable ................................................................ To record payroll for the month ended September 25. 25

224,000

Employee Benefits Expense...................................................... 16,293 CPP Payable ....................................................................... EI Payable ($3,718 × 1.4) .................................................... To record employer's benefits expense on September 25 payroll.

62,900 11,088 3,718 2,500 1,000 142,794

11,088 5,205

Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Exercise 23 Lawler Company's payroll for the week ended January 15 amounted to $52,000 for Office Salaries and $115,500 for Store Salaries. The following deductions were withheld from employees' salaries: Federal and provincial income taxes ....................................................... $50,260 CPP ............................................................................................................ 7,630

Test Bank for Accounting Principles, Ninth Canadian Edition

EI................................................................................................................ Union dues ................................................................................................ United Way................................................................................................

3,300 2,950 1,500

Instructions Prepare the journal entry to record the weekly payroll ended January 15 and also the employer’s benefits expense on the payroll. Solution 23 (10 min.) Jan. 15 Salaries Expense ....................................................................... Income Tax Payable .......................................................... CPP Payable ....................................................................... EI Payable .......................................................................... Union Dues Payable .......................................................... United Way Payable .......................................................... Salaries Payable ................................................................ To record payroll for the week ended January 15. 15

Employee Benefits Expense...................................................... CPP Payable ....................................................................... EI Payable ($3,300 × 1.4) .................................................... To record employer's benefits expense on January 15 payroll.

167,500 50,260 7,630 3,300 2,950 1,500 101,860

12,250

Exercise 24 The following payroll liability accounts are included in the ledger of the Mariah Company on December 31, 2023: Income Taxes Payable .............................................................................. $9,400 CPP Payable .............................................................................................. 1,600 EI Payable ................................................................................................. 1,800 Union Dues Payable ................................................................................. 800 Health Insurance Payable (Liberty Health) ............................................. 8,000 Canada Savings Bonds Payable ............................................................... 2,000 In January, the following transactions occurred: Jan. 9 Sent a cheque for $8,000 to Liberty Health. 14 Sent a cheque for $800 to the union treasurer for union dues.

7,630 4,620

Test Bank for Accounting Principles, Ninth Canadian Edition

15 22

Paid the Canada Revenue Agency income taxes withheld from employees, Employment Insurance due, and Canada Pension Plan contributions due. Sent a $2,000 cheque to the Bank of Canada for Canada Savings Bonds purchased on the payroll plan.

Instructions Journalize the January transactions. Solution 24 (15 min.) Jan. 9 Health Insurance Payable ........................................................... Cash ...................................................................................... 14

8,000 8,000

Union Dues Payable ..................................................................... Cash ......................................................................................

800

Income Tax Payable..................................................................... EI Payable..................................................................................... CPP Payable ................................................................................. Cash ......................................................................................

9,400 1,800 1,600

Canada Savings Bonds Payable .................................................. Cash ......................................................................................

2,000

800

12,800

2,000

Exercise 25 The payroll records of Fraser Foods Company provide the following data for the biweekly pay period ended July 12, 2021.

Employee Sally Bobby Curly

Gross Pay $1,800 1,500 1,280

Gross Pay to Date $23,400 19,500 16,640

CPP is 5.45% and EI is 1.58%. Instructions

CPP

$82.44 67.59 56.70

$29.88 24.90 21.25

Income Union Taxes Dues $510 465 380

$70 60 50

United Way $70 40 0

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b) c)

What is the net pay for each employee? Prepare the journal entry to accrue the employee payroll on July 12. Prepare the journal entry to record Jupiter’s payroll tax expense for July 12.

Solution 25 (20 min.) a) (b) EI

(b) Income Taxes

(b) Union Dues

(b) United Way

(a – c) Net Pay

$82.44

$29.88

$ 510

$ 70

$ 762.32

$1,037.68

19,500

67.59

24.90

465

657.49

842.51

16,640 Not relevant

56.70

21.25

380

507.95

772.05

$206.73

$76.03

$1,355

$180

$110

$1,927.76

$2,652.24

Emp.

(a) Gross Pay

Gross Pay to Date

(b) CPP

Sally

$1,800

$23,400

Bobby

1,500

Curly TOTAL

1,280 $4,580

b) July 12

c) July 12

Salaries Expense .......................................................................... CPP Payable ......................................................................... EI Payable ............................................................................. Income Tax Payable ............................................................. Union Dues Payable ............................................................. United Way Contributions Payable ..................................... Salaries Payable ...................................................................

4,580.00

313.17

206.73 76.03 1,355.00 180.00 110.00 2,652.24

206.73 106.44

Exercise 26 Trapper Company has the following data for the weekly payroll ended March 31:

Employee

Hours Worked

Hourly Rate

CPP Deduction

EI Deduction

Income Tax Withheld

Health Insurance

Test Bank for Accounting Principles, Ninth Canadian Edition

A B C D E

48 40 25 45 10

$25 25 13 15 13

$58.54 46.17 12.76 15.60 3.10

$23.50 18.80 6.11 12.83 2.44

$350.00 240.00 65.00 190.00 0.00

$10.00 15.00 5.00 15.00 5.00

Employees are paid 1.5 times the regular hourly rate for all hours worked over 44 hours per week. Trapper Company must make payments to the workers’ compensation plan equal to 2% of the gross payroll. In addition, Trapper matches the employees’ health insurance contributions and accrues vacation pay at a rate of 4%. Instructions a) Prepare the payroll register for the weekly payroll. b) Record the payroll and Trapper Company’s employee benefits. Solution 26 (20 min.) a) Health Insurance $10.00 15.00 5.00 15.00 5.00 $50.00

Total Deductions $442.04 319.97 88.87 233.43 10.54 $1,094.85

Salaries Expense .......................................................................... CPP Payable ......................................................................... EI Payable ............................................................................. Income Tax Payable ............................................................. Health Insurance Payable .................................................... Salaries Payable ...................................................................

3,387.50

Employee Benefits Expense ........................................................ CPP Payable ......................................................................... EI Payable ($63.68 x 1.4) ...................................................... Workers’ Compensation Payable ($3,387.50 x 2%) ............ Health Insurance Payable .................................................... Vacation Pay Payable ($3,387.50 x 4%) ...............................

478.57

Employee

Gross Pay

CPP

A B C D E TOTAL

$1,250.00 1,000.00 325.00 682.50 130.00 $3,387.50

$58.54 46.17 12.76 15.60 3.10 $136.17

$23.50 18.80 6.11 12.83 2.44 $63.68

b) Mar.

Mar.

Income Taxes $350.00 240.00 65.00 190.00 0.00 $845.00

Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting

Net Pay $807.96 680.03 236.13 449.07 119.46 $2,292.65

136.17 63.68 845.00 50.00 2,292.65

136.17 89.15 67.75 50.00 135.50

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Taxation AACSB: Analytic

Exercise 27 Edmonton Company prepares a payroll register for the week ended February 15. The totals from the register are presented below. (Note: for illustration purposes, there is only one employee.) Earnings: Regular .............................................................................................. $400.00 Overtime............................................................................................ 100.00 Gross.................................................................................................. $500.00 Deductions: CPP .................................................................................................... 21.42 EI ........................................................................................................ 9.15 Income taxes ..................................................................................... 76.20 United Way ........................................................................................ 10.00 Union dues ........................................................................................ 20.00 Total .................................................................................................. 136.77 Paid: Net pay .............................................................................................. $363.23 Account Debited: Salaries Expense .......................................................................................

500.00

Instructions Prepare journal entries to record a) the employee’s portion of the payroll on February 15. b) the employer’s portion of the payroll on February 15. c) payment of salaries on February 15. d) payment of payroll liabilities (excluding salaries) on their respective due dates. Solution 27 (20 min.) a) Feb. 15 Salaries Expense ..................................................................... CPP Payable.................................................................. EI Payable ..................................................................... Income Tax Payable ..................................................... United Way Contributions Payable ............................. Union Dues Payable ..................................................... Salaries Payable ...........................................................

500.00 21.42 9.15 76.20 10.00 20.00 363.23

b) Feb. 15

Employee Benefits Expense ................................................... CPP Payable ($21.42 × 1) .............................................. EI Payable ($9.15 × 1.4).................................................

34.23 21.42 12.81

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Feb. 15

Salaries Payable ..................................................................... Cash ..............................................................................

363.23

CPP Payable ($21.42 + $21.42) ............................................... EI Payable ($9.15 + $12.81) ..................................................... Income Tax Payable ............................................................... United Way Contributions Payable ........................................ Union Dues Payable ............................................................... Cash ..............................................................................

42.84 21.96 76.20 10.00 20.00

363.23

171.00

*Exercise 28 Assume that the payroll records of Crosby Oil Company provided the following information for the weekly payroll ended November 26, 2021: Federal and Year-to-Date Hourly Provincial Earnings Through Employee Hours Worked Pay Rate Income Tax Union Dues Previous Week C. White 44 $30 $240 $9 $67,000 J. Wozowski 46 10 65 5 23,200 K. Hurt 39 14 0 — 5,100 M. Khan 42 22 169 7 63,200 Additional information: All employees are paid overtime at time and a half for hours worked in excess of 44 per week. The CPP rate is 5.45% less a basic annual exemption of $3,500 per employee. The employment insurance deduction is 1.58%. Maximum pensionable earnings are $61,600 and maximum insured earnings for EI are $56,300. Instructions a) Prepare the payroll register for the pay period. b) Prepare general journal entries to record the payroll and payroll costs. Solution 28 (20 min.) a)

Test Bank for Accounting Principles, Ninth Canadian Edition

Crosby Oil Company Payroll Register Week Ended November 26, 2021

Employee C. White J. Wozowski K. Hurt M. Kahn

Earnings Total Gross Income Tax Hours Reg. Overtime Pay Payable 44 $1,320 — $1,320 $240 46 440 $30 470 65 39 546 — 546 0 42 924 ____ 924 169 $3,230 $30 $3,260 $474

Deductions CPP(1) — $21.95 26.09 — $48.04

EI(2) — $7.43 8.63 — $16.06

Union Net Pay $9 $1,071.00 5 370.62 — 511.28 7 748.00 $21 $2,700.90

(1)

Notes C. White reached maximum pensionable earnings............... J. Wozowski [$470 – ($3,500 ÷ 52 weeks)] × .0545......................... K. Hurt [$546 – ($3,500 ÷ 52 weeks)] × .0545......................... M. Kahn reached maximum pensionable earnings............... CPP Payable ..............................................................................

CPP Deduction $ 0 21.95 26.09 0 $48.04

(2)

Notes C. White reached maximum insurable earnings.................... J. Wozowski ($470 × .0158) ............................................................ K. Hurt ($546 × .0158) ............................................................ M. Kahn reached maximum insurable earnings.................... EI Payable ..................................................................................

EI Premium $ 0 7.43 8.63 0 $16.06

b) Nov. 26

Salaries Expense .......................................................................... Income Tax Payable ............................................................. CPP Payable ......................................................................... EI Payable ............................................................................. Union Dues Payable ............................................................. Salaries Payable ................................................................... To record weekly payroll.

3,260.00

70.52

Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll Learning Objective: Calculate mandatory payroll deductions (Appendix 10A).

474.00 48.04 16.06 21.00 2,700.90

48.04 22.48

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Payroll Deductions CPA: Financial Reporting AACSB: Analytic

*Exercise 29 Karen Blake’s salary earned in 2021 to November 30 was $62,000. Her salary in December 2021 was $6,000. Jim Fayad began working with the company on December 1 and will be paid his first month's salary of $5,000 on December 31. Income tax withholding for December for each employee is as follows: Karen Blake Jim Fayad Federal and Provincial Income Tax $1,920 $1,600 The following payroll tax rates are applicable: CPP(1) 5.45% EI 1.58% (1) Less a basic annual exemption of $3,500 per employee Instructions Record the payroll for the two employees at December 31 and record the employer's share of payroll tax expense for the December 31 payroll. Maximum pensionable earnings are $61,600 and maximum insured earnings for EI are $56,300. Solution 29 (15 min.) Dec. 31 Salaries Expense .......................................................................... Income Tax Payable ($1,920 + $1,600) ................................ CPP Payable(2) ....................................................................... EI Payable(3) .......................................................................... Salaries Payable ................................................................... To record December 31 payroll. CPP Payable(2) Karen Blake (Karen has reached the maximum pensionable earnings) ........ Jim Fayad(4) [($5,000 – ($3,500 ÷ 12 months)) × .0545] = .................................

11,000.00 3,520.00 256.60 79.00 7,144.40

$ 0.00 256.60 $256.60

EI Payable(3) Karen Blake (Karen has reached the maximum insured earnings) ................ Jim Fayad(4) ($5,000 × .0158) ............................................................................

$ 0.00 79.00 $79.00 (4) As Jim Fayad started work December 1, his salary has not yet reached the maximum for CPP or EI calculation. Employee Benefits Expense ........................................................ CPP Payable ......................................................................... EI Payable ($79.00 × 1.4) ......................................................

367.20 256.60 110.60

Test Bank for Accounting Principles, Ninth Canadian Edition

To record employer's share of benefits for Dec. 31 payroll. Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting AACSB: Analytic

*Exercise 30 Sally Smith earns a salary of $5,500 per month during 2021. Employment Insurance taxes (EI) are 1.58% of the first $56,300 in earnings. The Canada Pension Plan (CPP) rate is 5.45% of the first $61,600 in earnings, less a basic annual exemption of $3,500. During the year, $23,000 was withheld for income taxes. Instructions a) Prepare a journal entry summarizing the payment of Smith's total salary during the year. b) Prepare a journal entry summarizing the employer’s payroll tax expense on Smith's salary for the year. c) Determine the cost of employing Smith for the year. Solution 30 (10 min.) a) Salaries Expense ($5,500 × 12) ................................................................. Income Tax Payable .......................................................................... CPP Payable [($61,600 – $3,500) × 5.45%] ....................................... EI Payable ($56,300 × 1.58%) ............................................................ Salaries Payable ................................................................................ b)

Employee Benefits Expense ..................................................................... CPP Payable ...................................................................................... EI Payable ($889.54 × 1.4) ................................................................. The total cost of employment is $66,000 + $4,411.81 = $70,411.81

66,000.00 23,000.00 3,166.45 889.54 38,944.01 4,411.81 3,166.45 1,245.36

Test Bank for Accounting Principles, Ninth Canadian Edition

*Exercise 31 Harrison Company employees had the following earnings records at the end of August 2021: Earnings for August 31 Year-to-Date Earnings Pay Period Employee through Last Pay Period (one week pay period) L. Wilkins $68,400 $672 J. Bird 31,200 425 L. Bryant 16,750 248 K. James 10,110 196 D. Irving 22,800 330 Harrison's payroll for each employee includes 5.45% CPP on the maximum pensionable earnings of $61,600, less a basic annual exemption of $3,500, and an EI rate of 1.58% paid to a maximum of $56,300 annually. As well, $400 federal and provincial income taxes will be deducted from the combined employees' gross pay for the week. Instructions Prepare the journal entries to record a) the August 31 payroll accrual. b) the employer payroll tax expense for August 31. Solution 31 (15 min.) Employee

Salary

CPP (5.45%)

Calculation

EI (1.58%)

L. Wilkins J. Bird L. Bryant K. James D. Irving

$ 672.00 Exempt* Exempt* 425.00 $19.49 (425 – 67.31) x 5.45% $ 6.72 248.00 9.85 (248 – 67.31) x 5.45% 3.92 196.00 7.01 (196 – 67.31) x 5.45% 3.10 330.00 14.32 (330 – 67.31) x 5.45% 5.21 $1,871.00 $50.67 $18.95 *Wilkins has reached the maximum CPP and EI contributions for the year. CPP weekly exemption per employee = $3,500/52 weeks = $67.31 per week a) Aug.

b) Aug.

Salaries Expense .......................................................................... CPP Payable ......................................................................... EI Payable ............................................................................. Income Tax Payable ............................................................. Salaries Payable ...................................................................

1,871.00

Employee Benefits Expense ........................................................ EI Payable ($18.95 x 1.4) ...................................................... CPP Payable .........................................................................

77.20

Calculation 425 x 1.58% 248 x 1.58% 196 x 1.58% 330 x 1.58%

50.67 18.95 400.00 1,401.38

26.53 50.67

Test Bank for Accounting Principles, Ninth Canadian Edition

*Exercise 32 The payroll records of Jupiter Company provide the following data for the weekly pay period ended June 17:

Employee A B C

Gross Pay $860 720 680

Gross Pay to Date $16,000 17,350 15,100

Income Taxes $310 265 248

Medical Insurance Union Dues United Way $25 $20 $30 25 0 10 40 20 20

CPP is 5.45%, less a basic annual exemption of $3,500, and EI is 1.58% Instructions a) Prepare the general journal entry to accrue the employee payroll on June 17. b) Prepare the general journal entry to record Jupiter’s payroll tax expense for June 17. Solution 32 (15 min.) CPP weekly exemption = $3,500/52 weeks = $67.31 per week a) June 17 Salaries Expense .......................................................................... CPP Payable [$2,260 – ($67.31 x 3)] x 0.0545 ....................... EI Payable [2,260 x 0.0158] .................................................. Income Tax Payable ............................................................. Health Insurance Payable .................................................... Union Dues Payable ............................................................. United Way Contributions Payable ..................................... Salaries Payable ................................................................... b) June 17

Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions.

2,260.00 112.16 35.71 823.00 90.00 40.00 60.00 1,099.13

162.15 112.16 49.99

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Payroll Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting AACSB: Analytic

Exercise 33 Gloria Company’s December 31, 2024, adjusted trial balance includes the following accounts: Accounts payable ................................................................................... $29,400 Accounts receivable ................................................................................. 52,000 Interest payable ........................................................................................ 700 Bank loan payable ................................................................................... 10,000 Cash…………. .......................................................................................... 3,000 Income tax payable .................................................................................. 1,200 Inventory……………. ............................................................................... 27,000 Mortgage payable ................................................................................... 60,000 Notes payable…………. ........................................................................... 5,000 Prepaid expenses ................................................................................... 1,200 Other information: The mortgage payable is due in annual principal instalments of $4,000 per year. The note payable is due in full in 18 months’ time. Industry average working capital ratio is 2.5:1 Instructions a) Prepare the current liabilities section of Gloria’s December 31, 2024, balance sheet. b) Calculate and comment on Gloria’s working capital and current ratio. Solution 33 (15 min.) a) Gloria Company Balance Sheet (partial) December 31, 2024 Liabilities Current liabilities Bank loan payable .................................................................................... Accounts payable ..................................................................................... Interest payable ........................................................................................ Income tax payable .................................................................................. Current portion of mortgage payable...................................................... Total current liabilities .....................................................................

$10,000 29,400 700 1,200 4,000 $45,300

$83,200

Total current assets ($52,000 + $3,000 + $27,000 + $1,200) ....................

Test Bank for Accounting Principles, Ninth Canadian Edition

Less current liabilities .............................................................................. Working capital .........................................................................................

45,300 $37,900

Current ratio ($83,200 ÷ $45,300) = 1.84 Calculating Gloria’s working capital of $37,900 does not provide significant meaningful information since one cannot compare a monetary amount to those of companies of different sizes. By using a ratio such as the current ratio, one can compare Gloria to other companies and to the industry average. Although Gloria has a positive working capital, its current ratio is less than the industry average, suggesting Gloria has less liquidity than most of its competitors. Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Exercise 34 The following are all of the accounts with credit balances from Kupidy Company’s adjusted trial balance at December 31, 2024: Accounts payable ..................................................................................... $ 66,000 Accumulated depreciation–equipment .................................................. 31,500 Allowance for doubtful accounts ............................................................. 1,600 Bank loan payable .................................................................................... 25,000 C. Kupidy, capital ...................................................................................... 47,500 Gain on disposal ....................................................................................... 600 HST payable .............................................................................................. 1,900 Interest payable ........................................................................................ 2,100 Mortgage payable ..................................................................................... 290,000 Notes payable ........................................................................................... 18,000 Salaries payable ....................................................................................... 4,400 Sales .......................................................................................................... 458,000 Unearned revenue .................................................................................... 7,900 Other information: The mortgage is due in monthly principal payments of $1,000 plus interest. The note payable is a six-month, 10% note, interest due at maturity. Instructions Prepare the current liabilities section of Kupidy’s December 31, 2024, balance sheet.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 34 (10 min.) Kupidy Company Balance Sheet (partial) December 31, 2024 Liabilities Current liabilities Bank loan payable .................................................................................... Accounts payable ..................................................................................... Interest payable ........................................................................................ HST payable .............................................................................................. Salaries payable ....................................................................................... Unearned revenue .................................................................................... Notes payable ........................................................................................... Current portion of mortgage payable ($1,000 x 12) ................................ Total current liabilities .....................................................................

$ 25,000 66,000 2,100 1,900 4,400 7,900 18,000 12,000 $137,300

Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Exercise 35 On February 29, 2024, Fidanza Company has the following selected accounts after posting adjusting entries: Accounts payable ..................................................................................... $ 40,000 Notes payable, three-month, 6% ............................................................. 80,000 Accumulated depreciation–equipment .................................................. 14,000 Salaries payable ....................................................................................... 22,000 Notes payable, five-year, 8%, due 2028 ................................................... 30,000 Warranty liability ...................................................................................... 34,000 Employee benefits expense ..................................................................... 6,000 Interest payable ........................................................................................ 3,000 Mortgage payable ..................................................................................... 150,000 HST payable .............................................................................................. 15,000 Instructions a) Prepare the current liabilities section of Fidanza Company's balance sheet, assuming $25,000 of the mortgage is payable next year. (List liabilities in order of maturity.) b) Comment on Fidanza's liquidity, assuming total current assets are $400,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 35 (10 min.) a) Fidanza Company Partial Balance Sheet February 29, 2024 Current liabilities Accounts payable ..................................................................................... Salaries payable ....................................................................................... HST payable ............................................................................................. Interest payable ........................................................................................ Warranty liability ...................................................................................... Notes payable ........................................................................................... Current portion of mortgage payable...................................................... Total current liabilities ..................................................................... b)

$ 40,000 22,000 15,000 3,000 34,000 80,000 25,000 $219,000

The liquidity position looks favourable. If all current liabilities are paid out of current assets, there would still be $181,000 of current assets. The current assets are almost twice the current liabilities, and it appears as though Fidanza Company has sufficient current resources to meet current obligations when due.

Exercise 36 Mel’s Building Centre has three obligations outstanding on December 31, 2024, as follows: 1. Six-year, $75,000, 5%, note payable issued on December 31, 2022. Mel’s Building Centre is required to pay $12,500 plus interest on December 31 each year starting in 2023. 2. Five-year, $90,000, 4.5%, note payable issued on November 30, 2023. Mel’s Building Centre is required to pay $1,500 plus interest at the end of each month starting on December 31, 2023. 3. 20-year, $600,000, 3.75%, mortgage payable issued on April 1, 2007. Mel’s Building Centre is required to pay $2,500 plus interest at the end of each month starting on May 1, 2007. Instructions Calculate the amount of each note to be included in current and non-current liabilities on Mel’s Building Centre December 31, 2024, balance sheet. Ignore interest. Solution 36 (15 min.) 1. Note payable matures December 31, 2028, and therefore the debt will be outstanding throughout 2025. Obligation balance at December 31, 2024 = $50,000 [$75,000 – ($12,500 x 2 yrs.)]

Test Bank for Accounting Principles, Ninth Canadian Edition

Current portion = $12,500; Non-current portion = $37,500 ($50,000 – $12,500) 2.

Note payable matures November 30, 2028, and therefore the debt will be outstanding throughout 2025. Obligation balance at December 31, 2024 = $70,500 [$90,000 – ($1,500 x 13 mths.)] Current portion = $18,000 ($1,500 x 12 mths.); Non-current portion = $52,500 ($70,500 – $18,000)

Mortgage payable matures April 1, 2027, and therefore the debt will be outstanding throughout 2025. Obligation balance at December 31, 2024 = $70,000 [$600,000 – ($2,500 x 212 mths.)] Current portion = $30,000 (2,500 x 12 mths.); Non-current portion = $40,000 ($70,000 – $30,000)

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Exercise 37 Laabs Brewery has the following notes payable outstanding on October 31, 2024: 1. A five-year, 5%, $40,000 note payable issued on February 28, 2023. Laabs Brewery is required to pay $8,000 plus interest on February 28 each year starting in 2024. 2. A ten-month, 6%, $45,000 note payable issued on July 1, 2024. Interest and principal are payable at maturity. 3. A 30-month, 4%, $100,000 note payable issued on August 1, 2023. Laabs Brewery is required to pay $3,333.33 plus interest on the first day of each month starting on September 1, 2023. Instructions a) Calculate the current portion of each note payable at October 31, 2024. b) Calculate the non-current portion of each note payable at October 31,2024. c) Calculate any interest payable at October 31, 2024.Round to the nearest whole dollar. Solution 37 (20 min.) a) 1. Note payable is due February 28, 2028. Annual principal amount is $8,000, and therefore this would be classified as the current portion. The unpaid balance at October 31, 2024, is $32,000. 2. Note payable is due in ten months (May 1, 2025) and since this is less than one year the entire note balance of $45,000 is classified as a current liability. 3. Note payable is due February 1, 2026. Principal repayment = $3,333.33 per month x 12 months in fiscal 2025 = $40,000 as the current portion. The unpaid balance at October 31, 2024, is $53,333. b) 1.

The balance of the note (unpaid obligation less current portion) would be considered the noncurrent portion = $32,000 – $8,000 = $24,000

Test Bank for Accounting Principles, Ninth Canadian Edition

2. 3.

c) 1. 2. 3.

The entire note is considered a current liability. The unpaid balance of the note less the current portion would be considered the non-current portion = $53,333 – $40,000 = $13,333

Accrued interest = $32,000 x 8/12 x 5% = $1,067 Accrued interest = $45,000 x 4/12 x 6% = $900 Note payable is repayable on the first of every month so there would be an interest accrual required at October 31, 2024, for one month of interest. Note payable balance at October 1, 2024 = $100,000 – ($3,333.33 x 14 mths.) = $53,333 Accrued interest = $53,333 x 1/12 x 4% = $178

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 10 CURRENT LIABILITIES AND PAYROLL CHAPTER LEARNING OBJECTIVES 1.

Account for uncertain liabilities. Estimated liabilities exist, but their amount or timing is uncertain. As long as it is likely the company will have to settle the obligation, and the company can reasonably estimate the amount, the liability is recognized. Product warranties, customer loyalty programs, and gift cards result in liabilities that must be estimated. They are recorded as an expense (or as a decrease in revenue) and a liability in the period when the sales occur. These liabilities are reduced when repairs under warranty, redemptions, and returns occur. Gift cards are a type of unearned revenue because they result in a liability until the gift card is redeemed. Because some cards are never redeemed, it is necessary to estimate the liability and make adjustments. A contingency is an existing condition or situation that is uncertain, where it cannot be known if a loss (and a related liability) will result until a future event happens, or does not happen. Under ASPE, a liability for a contingent loss is recorded if it is likely that a loss will occur and the amount of the contingency can be reasonably estimated. Under IFRS, the threshold for recording the loss is lower. It is recorded if a loss is probable. Under ASPE, these liabilities are called contingent liabilities, and under IFRS, these liabilities are called provisions. If it is not possible to estimate the amount, these liabilities are only disclosed. They are not disclosed if they are unlikely unless they could have a substantial impact on the entity.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. A liability is defined as a past obligation, arising from present events to make future payments of assets or services. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

2. A future commitment is NOT considered a liability unless a present obligation also exists. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

3. Liabilities with a known amount, payee, and due date are often referred to as certain liabilities. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

4. An operating line of credit is a credit that is set up by a major supplier to assist the company with their purchases online. Answer: False Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

5. Collateral is usually required by a bank as protection in case the company is unable to repay the bank. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

6. Money borrowed on a line of credit is normally borrowed on a long-term basis. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

7. A bank overdraft is the same as an operating line of credit. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

8. Bank overdrafts will require a journal entry at the end of the year to record the amount.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

9. Prime rate refers to the rate that banks charge their worst customers. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

10. A note payable will result in more security of the debt obligation for the creditor than an account payable. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

11. A note payable must be payable within one year. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

12. If a note payable is payable in a term longer than one year, it will be classified as a non-current liability. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

13. A note payable must always have an interest rate attached to it. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

14. A $15,000, nine-month, 8% note payable requires an interest payment of $900 at maturity if no interest was previously paid. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

15. At its December 31 year end, Jamison Company recorded $200 interest payable on a $10,000, three-month, 5% note payable. The company’s financial statements will present notes payable of $10,200. Answer: False Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

16. Sales taxes apply to all sales. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

17. It is NOT necessary to prepare an adjusting entry to recognize the current maturity of long-term debt. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

18. Current maturities of long-term debt refer to the amount of interest on a note payable that must be paid in the current year. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

19. It is possible to have a prepaid property tax and a property tax expense recorded at the same time. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

20. The higher the sales tax rate, the more profit a retailer can earn. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

21. During the month, a company sells goods for a total of $113,000, which includes HST of $13,000; therefore, the company should recognize $100,000 in Sales Revenues and $13,000 in Sales Tax Payable. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

22. An estimated liability is a liability that is known to exist but whose amount and timing are uncertain. Answer: True Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

23. As long as it is likely the company will have to settle the obligation, and the company can reasonably estimate the amount, the liability is recognized. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

24. Warranty liabilities are estimated based on actual warranty costs incurred to date. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

25. After the warranty liability has been established, future costs will be recorded with a debit to Warranty Expense. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

26. Canadian Tire Money represents a liability for Canadian Tire.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

27. With a customer loyalty program, the cost of the program is usually shown as a sales discount and reported as a contra sales account. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

28. When a company issues a gift card, the company will record the gift card in revenue in the period in which it is sold. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

29. Contingencies are events with certain outcomes. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

30. Under IFRS, a provision is a liability of certain timing and amounts. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

31. Under ASPE, a contingent liability is defined as a liability that is contingent on the occurrence or non-occurrence of some future event. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

32. ASPE considers a liability to be a contingent liability as long as its ultimate existence depends on the outcome of a future event, even if the event is likely to occur. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

33. IFRS is generally regarded as having a higher threshold for recognizing liabilities. Answer: False Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

34. There are two types of payroll costs to a company: employee costs and employer costs. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

35. Gross pay, or earnings, is the total compensation earned by an employee. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

36. Payroll deductions may be mandatory or voluntary. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

37. Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) contributions, employment insurance (EI), and personal income taxes are mandatory payroll deductions.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

38. The employer incurs a payroll cost equal to the amount withheld from the employees' wages for personal income taxes. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

39. The higher the pay or earnings, the higher the amount of income taxes withheld. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

40. CPP is an example of a voluntary payroll deduction. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

41. Gross pay is the amount of net pay less any deductions. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

42. Employer payroll costs would include an amount deducted from the individual for income taxes. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

43. Workplace Health, Safety, and Compensation is a cost to both the employee and the employer. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

44. Each employer is required to pay an employee for sick days. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

45. Employer payroll costs will include both the gross wages of employees plus the employer costs of benefits. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

46. Employers are required by law to remit the mandatory payroll deductions to the Canada Revenue Agency on at least a monthly basis. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Taxation AACSB: Analytic

47. Under ASPE, current liabilities are the first category reported in the liability section of the balance sheet. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

48. Current liabilities are usually listed in order of liquidity. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

*49. CPP, EI, and income tax deductions are remitted to the CRA, usually on a quarterly basis. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 50. Most companies pay current liabilities a) out of current assets. b) by issuing interest-bearing notes payable. c) by issuing common shares. d) by creating non-current liabilities. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

51. A determinable liability is one that a) has uncertainty with the timing of the due date. b) has uncertainty about the amount that is owed. c) has a known payee. d) has an amount that is due within one year. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

52. A current liability is a debt that can reasonably be expected to be paid a) within one year. b) between 6 months and 18 months. c) out of currently recognized revenues. d) out of cash currently on hand. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

53. An operating line of credit a) is a non-current liability. b) is required by all companies. c) helps companies manage temporary cash shortages. d) is usually required by the bank in case a company is unable to repay a loan. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

54. All of the following are certain liabilities EXCEPT a) current maturities of long-term debt. b) operating lines of credit. c) a future commitment to purchase an asset. d) accounts payable. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

55. Certain liabilities involve no uncertainty about all of the following EXCEPT a) the existence of the liability. b) the amount of the liability. c) the eventual payment of the liability. d) all of these involve no uncertainty with respect to the certain liability. Answer: d Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

56. Operating line of credit borrowings usually a) are credited to a Notes Payable account. b) are reported as a non-current liability. c) are debited to the Cash account and result in a current liability. d) are required by all companies. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

57. With an interest-bearing note, the amount of assets received upon issue of the note is generally a) equal to the note's face value. b) greater than the note's face value. c) less than the note's face value. d) equal to the note's maturity value plus interest. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

58. A note payable is in the form of a) a contingency that is reasonably likely to occur. b) a written promissory note. c) an oral agreement. d) a standing agreement. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

59. The entry to record the proceeds upon issuing an interest-bearing note is a) Interest Expense Cash Notes Payable b) Cash Notes Payable c) Notes Payable Cash d) Cash Notes Payable Interest Payable Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

60. Bell Provincial Bank agrees to lend Griswold Brick Company $80,000 on January 1. Griswold Brick Company signs an $80,000, nine-month, 5% note. The entry made by Griswold Brick Company on January 1 to record the proceeds and issue of the note is a) Interest Expense .......................................................................................... 3,000 Cash ............................................................................................................. 77,000 Notes Payable ...................................................................................... 80,000 b) Cash ............................................................................................................. 80,000 Notes Payable ...................................................................................... 80,000 c) Cash ............................................................................................................. 80,000 Interest Expense .......................................................................................... 3,000 Notes Payable ...................................................................................... 83,000 d) Cash ............................................................................................................. 80,000 Interest Expense .......................................................................................... 3,000 Notes Payable ...................................................................................... 80,000 Interest Payable................................................................................... 3,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

61. Cutes National Bank agrees to lend Sunny Screen Company $80,000 on January 1. Sunny Screen Company signs an $80,000, nine-month, 5% note. What is the adjusting entry required if Sunny Screen Company prepares financial statements on June 30? a) Interest Expense .......................................................................................... 2,000 Interest Payable................................................................................... 2,000 b) Interest Expense .......................................................................................... 2,000 Cash ..................................................................................................... 2,000 c) Interest Payable .......................................................................................... 2,000 Cash ..................................................................................................... 2,000 d) Interest Payable .......................................................................................... 2,000 Interest Expense .................................................................................. 2,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

62. Cloudy Day Bank agrees to lend Sleep Dog Company $80,000 on January 1. Sleep Dog Company signs an $80,000, nine-month, 5% note. What entry will Sleep Dog Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30? a) Notes Payable ............................................................................................. 83,000 Cash ..................................................................................................... 83,000 b) Notes Payable ............................................................................................. 80,000 Interest Payable .......................................................................................... 3,000 Cash ..................................................................................................... 83,000 c) Interest Expense .......................................................................................... 3,000 Notes Payable ............................................................................................. 80,000 Cash ..................................................................................................... 83,000 d) Interest Payable .......................................................................................... 2,000 Notes Payable ............................................................................................. 80,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash .....................................................................................................

82,000

63. As interest is recorded on an interest-bearing note, the Interest Expense account is a) increased; the Notes Payable account is increased. b) increased; the Notes Payable account is decreased. c) increased; the Interest Payable account is increased. d) decreased; the Interest Payable account is increased. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

64. When an interest-bearing note matures, the balance in the Notes Payable account is a) less than the total amount repaid by the borrower. b) the difference between the maturity value of the note and the face value of the note. c) equal to the total amount repaid by the borrower. d) greater than the total amount repaid by the borrower. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

65. On October 1, Frank’s Accounting Service borrows $75,000 from National Bank on a $75,000, threemonth, 6% note. What entry must Frank’s Accounting make on December 31 before financial

Test Bank for Accounting Principles, Ninth Canadian Edition

statements are prepared? a) Interest Payable .......................................................................................... Interest Expense .................................................................................. b) Interest Expense .......................................................................................... Interest Payable................................................................................... c) Interest Expense .......................................................................................... Interest Payable................................................................................... d) Interest Expense .......................................................................................... Notes Payable ......................................................................................

1,125 1,125 4,500 4,500 1,125 1,125 1,125 1,125

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

66. On October 1, Asus Computers borrows $75,000 from Small Town Bank on a $75,000, three-month, 6% note. Assuming interest was accrued at December 31, the entry by Asus Computers to record payment of the note and accrued interest on January 1 is a) Notes Payable ............................................................................................. 76,125 Cash ..................................................................................................... 76,125 b) Notes Payable ............................................................................................. 75,000 Interest Payable .......................................................................................... 1,125 Cash ..................................................................................................... 76,125 c) Notes Payable ............................................................................................. 75,000 Interest Payable .......................................................................................... 4,500 Cash ..................................................................................................... 79,500 d) Notes Payable ............................................................................................. 75,000 Interest Expense .......................................................................................... 1,125 Cash ..................................................................................................... 76,125 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

67. Interest expense on an interest-bearing note is

Test Bank for Accounting Principles, Ninth Canadian Edition

a) always equal to zero. b) accrued over the life of the note. c) only recorded at the time the note is issued. d) only recorded at maturity when the note is paid. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

68. The entry to record the payment of an interest-bearing note at maturity after all interest expense has been recognized is a) Notes Payable Interest Payable Cash b) Notes Payable Interest Expense Cash c) Notes Payable Cash d) Notes Payable Cash Interest Payable Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

69. HST (harmonized sales tax) collected by a retailer is recorded by a) crediting HST Recoverable. b) debiting HST Expense. c) crediting HST Payable. d) debiting HST Payable. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

70. When HST is remitted to the Canada Revenue Agency, ______ is credited and ______ is debited. a) Cash; HST Payable b) Cash; Sales c) HST Expense; Cash d) HST Payable; Cash Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

71. The amount of sales tax (GST and PST, or HST) collected by a retail store when making sales is a) a miscellaneous revenue for the store. b) a current liability. c) not recorded because it is a tax paid by the customer. d) an increase in the profit of the company. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

72. Tony Tools Company has a December 31 year end. The company received its property tax bill for 2024 on March 1, 2024. According to the bill, taxes of $24,000 for the year ended December 31, 2024,

Test Bank for Accounting Principles, Ninth Canadian Edition

are due by April 30, 2024. On March 1, Tony will record property tax expense of a) $4,000. b) $8,000. c) $12,000. d) $24,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

73. Barker Company has a December 31 year end. The company received its property tax bill for 2024 on March 1, 2024. According to the bill, taxes of $24,000 for the year ended December 31, 2024 are due by April 30, 2024. On April 30, 2024, Barker will record which of the following entries? a) Dr. Cash; Cr. Property Tax Payable b) Dr. Property Tax Payable; Dr. Prepaid Property Tax; Cr. Cash c) Dr. Property Tax Expense; Cr. Property Tax Payable d) Dr. Property Tax Expense; Cr. Cash Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

74. Property taxes are generally based on a) income before tax. b) property values. c) gross sales. d) gross wages. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

75. The current portion of long-term debt should a) be paid immediately. b) be reclassified as a current liability. c) be classified as a non-current liability. d) not be separated from the non-current portion of debt. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

76. Sales taxes collected by a retailer are expenses a) of the retailer. b) of the customers. c) of the government. d) that are not recognized by the retailer until they are submitted to the government. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

77. A retailer that collects sales taxes is acting as an agent for the a) wholesaler. b) customer. c) taxing authority. d) chamber of commerce. Answer: c Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

78. Sales taxes collected by a retailer are reported as a) a contingent loss. b) revenues. c) expenses. d) current liabilities. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

79. A cash register tape shows cash sales of $1,000 and HST of $130. The journal entry to record this information is a) Cash ............................................................................................................. 1,000 Sales ..................................................................................................... 1,000 b) Cash ............................................................................................................. 1,130 Sales Tax Revenue ............................................................................... 130 Sales ..................................................................................................... 1,000 c) Cash ............................................................................................................. 1,000 Sales Tax Expense ....................................................................................... 130 Sales ..................................................................................................... 1,130 d) Cash ............................................................................................................. 1,130 Sales ..................................................................................................... 1,000 HST Payable......................................................................................... 130 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Taxation AACSB: Analytic

80. Jim's Pharmacy has collected $500 in HST during March. If sales taxes must be remitted to the Canada Revenue Agency monthly, what entry will Jim's Pharmacy make to show the March remittance? a) HST Expense ................................................................................................ 500 Cash ..................................................................................................... 500 b) HST Payable ................................................................................................ 500 Cash ..................................................................................................... 500 c) HST Expense ................................................................................................ 500 HST Payable......................................................................................... 500 d) No entry required. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

81. Examples of certain current liabilities include all of the following, EXCEPT a) current maturities of long-term debt. b) bank indebtedness from operating lines of credit. c) unearned revenues. d) contingencies. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

82. A company has negotiated a line of credit and has a negative (credit) balance in the Cash account at the end of the year. This amount can be called all of the following, EXCEPT a) bank indebtedness. b) operating line of credit.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) bank overdraft. d) bank advances. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

83. Fees accepted in advance from a client a) are considered earned revenues. b) increase income. c) are recorded as liabilities. d) have no impact on assets. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

84. Unearned revenue is initially recognized with a a) debit to Cash and credit to Revenue. b) debit to Cash and credit to Unearned Revenue. c) debit to Revenue and credit to Cash. d) debit to Unearned Revenue and credit to Cash. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

85. Which of the following journal entries would Robinson Company record on January 31 (the

Test Bank for Accounting Principles, Ninth Canadian Edition

company’s year end) given a $20,000, 60-month, 5% note payable, which was issued on December 1? Interest is payable the first day of each month, beginning January 1. a) Interest Expense .......................................................................................... 167 Interest Payable...................................................................................... 167 b) Interest Expense ........................................................................................... 83 Notes Payable ......................................................................................... 83 c) Interest Expense .......................................................................................... 83 Interest Payable...................................................................................... 83 d) Interest Payable............................................................................................ 167 Interest Expense ..................................................................................... 167 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

86. Which of the following journal entries would Robinson Company record, given cash register sales of $340,000 on May 4 and an HST tax rate of 13%? a) Cash .............................................................................................................. 340,000 Sales ....................................................................................................... 340,000 b) Cash .............................................................................................................. 340,000 HST Recoverable .......................................................................................... 44,200 Sales ....................................................................................................... 384,200 c) Cash .............................................................................................................. 384,200 Sales ....................................................................................................... 384,200 d) Cash .............................................................................................................. 384,200 Sales ....................................................................................................... 340,000 HST Payable............................................................................................ 44,200 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

87. On May 1, Robinson Company receives a property tax bill of $16,000 for the calendar year, which is due on June 30. Which of the following entries is correct to record the receipt of the bill on May 1?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) Property Tax Expense ................................................................................... Property Tax Payable ............................................................................. b) Property Tax Expense ................................................................................... Property Tax Payable ............................................................................. c) Property Tax Expense ................................................................................... Prepaid Property Taxes ................................................................................ Property Tax Payable ............................................................................. d) Property Tax Expense ................................................................................... Cash ........................................................................................................

5,333 5,333 16,000 16,000 8,000 8,000 16,000 16,000 16,000

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

88. On May 1, Robinson Company receives a property tax bill of $16,000 for the calendar year, which is due on June 30. Robinson updated their records upon receipt of the bill on May 1. Which of the following entries is correct to record the payment of the bill on June 30? a) Property Tax Expense ................................................................................... 10,667 Cash ........................................................................................................ 10,667 b) Property Tax Expense ................................................................................... 8,000 Cash ........................................................................................................ 8,000 c) Property Tax Payable .................................................................................... 5,333 Property Tax Expense ................................................................................... 2,667 Prepaid Property Taxes ................................................................................ 8,000 Cash ........................................................................................................ 16,000 d) Property Tax Expense ................................................................................... 16,000 Cash ........................................................................................................ 16,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting AACSB: Analytic

89. On May 1, Robinson Company receives a property tax bill of $16,000 for the calendar year and paid the bill on June 30, updating their records accordingly. Which of the following entries is correct to

Test Bank for Accounting Principles, Ninth Canadian Edition

record the year-end adjusting entry on December 31? a) Property Tax Expense ................................................................................... Cash ........................................................................................................ b) Property Tax Expense ................................................................................... Prepaid Property Taxes .......................................................................... c) Property Tax Payable .................................................................................... Prepaid Property Taxes .......................................................................... d) none of these

2,667 2,667 8,000 8,000 5,333 5,333

90. On October 1, 2024, Benson Company sells 5,000 microwaves at an average price of $500. The product includes a one-year warranty on parts. Based on past experience, it is expected that 2% will be defective, and that warranty repair costs will average $125 per unit. How much is the estimated warranty costs to accrue for this sale? a) $100 b) $3,125 c) $1,250 d) $12,500 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic 91. On October 1, 2024, Benson Company sells 5,000 microwaves at an average price of $500. The product includes a one-year warranty on parts. Based on past experience, it is expected that 2% will be defective, and that warranty repair costs will average $125 per unit. Which of the following is the correct entry to record the accrual for the warranty cost? a) Warranty Expense ......................................................................................... 3,125 Warranty Liability ................................................................................... 3,125 b) Warranty Expense......................................................................................... 100 Cash ........................................................................................................ 100

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Warranty Expense ......................................................................................... Warranty Liability ................................................................................... d) Warranty Expense......................................................................................... Cash ........................................................................................................

12,500 12,500 1,250 1,250

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

92. On October 1, 2024, Benson Company sells 5,000 microwaves at an average price of $500. The product includes a one-year warranty on parts. Based on past experience, it is expected that 2% will be defective, and that warranty repair costs will average $125 per unit. In 2024, warranty contracts were honoured on 40 units at a total cost of $5,000. Which of the following is the correct summary journal entry to record for the repairs? a) Warranty Expense ......................................................................................... 5,000 Warranty Liability ................................................................................... 5,000 b) Warranty Liability ......................................................................................... 5,000 Repair Parts Inventory (and/or Wages Payable).................................... 5,000 c) Warranty Liability ......................................................................................... 5,000 Cash ........................................................................................................ 5,000 d) Warranty Expense......................................................................................... 5,000 Repair Parts Inventory (and/or Wages Payable).................................... 5,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

93. On October 1, 2024, Benson Company sells 5,000 microwaves at an average price of $500. The product includes a one-year warranty on parts. Based on past experience, it is expected that 2% will be defective, and that warranty repair costs will average $125 per unit. In 2024, warranty contracts were honoured on 40 units at a total cost of $5,000. What is the remaining balance in the Warranty Liability account at the end of 2024? a) $5,000 b) $4,000

Test Bank for Accounting Principles, Ninth Canadian Edition

c) $12,500 d) $7,500 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

94. Food Plus Corp. has a rewards program whereby customers get 1 point for every $10 spent on groceries. Each point is redeemable for a $1 discount toward the future purchase of groceries. During the month of May, Food Plus sells goods worth $50,000 and consequently rewards customers 5,000 points. Based on past history, Food Plus estimates that 90% of the rewards will be redeemed. Therefore, it is expected that 4,500 points will be redeemed with a stand-alone value of $4,500. A portion of the $50,000 of sales is to be allocated to the rewards program based on the total standalone value of $54,500 ($50,000 + $4,500). What is the revenue allocation for the current sales? a) $54,500 b) $45,872 c) $4,128 d) $50,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

95. Which of the following is NOT considered an estimated liability? a) accrued wages b) gift card promotions c) warranties d) customer loyalty programs Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

96. Bass Bay Marina has a customer loyalty program at its gas dock. For every litre of gasoline purchased, the customer receives a redemption reward, which can be used to purchase products in the company’s retail marine store. In July, the marina sold 100,000 litres of gasoline. The entry to record the liability for the July sales would be a credit to ______. a) Unearned Revenue–Loyalty Program b) Sales Discounts c) Cash d) Refund Liability Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

97. Bass Bay Marina has a customer loyalty program at its gas dock. For every litre of gasoline purchased, the customer receives a redemption reward of 0.15% of the pre-tax sales, which can be used to purchase products in the company’s retail marine store. In July, Susan Smith purchases and uses $10 of reward money. What entry will Bass Bay Marina record for this transaction: (ignore taxes). a) Revenue from Rewards Program................................................................ 10 Unearned Revenue–Loyalty Program ................................................ 10 b) Unearned Revenue–Loyalty Program ........................................................ 10 Revenue from Rewards Program ........................................................ 10 c) Revenue from Rewards Program................................................................ 10 Redemption Expense .......................................................................... 10 d) Redemption Expense .................................................................................. 10 Revenue from Rewards Program ........................................................ 10 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

98. The accounting for warranty costs is based on the concept of matching expenses with revenues, which requires that the estimated cost of honouring warranty contracts should be recognized as an expense a) when the product is brought in for repairs. b) in the period in which the product was sold. c) at the end of the warranty period. d) only if the repairs are expected to be made within one year. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

99. Cameron Company sold 2,000 units of its product for $500 each in 2024. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $100 per unit. In 2024, warranty contracts are honoured on 40 units for a total cost of $4,000. What amount should Cameron Company record in 2024 for warranty expense? a) $6,000 b) $4,000 c) $2,000 d) $30,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

100. Cameron Company sold 2,000 units of its product for $500 each in 2024. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $100 per unit. In 2024, warranty contracts are honoured on 40 units for a total cost of $4,000. What amount will be reported on Cameron Company's balance sheet as Estimated Warranty Liability on December 31, 2024, assuming a zero balance on December 31, 2023? a) $4,000 b) $6,000 c) $2,000

Test Bank for Accounting Principles, Ninth Canadian Edition

d) The amount cannot be determined. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

101. Product warranties are promises made by the ______ to repair or replace the product if it is defective or does NOT perform as intended. a) buyer b) employees c) manufacturer d) government Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

102. Warranties are also known as a) certain liabilities. b) customer loyalty programs. c) contingencies. d) guarantees. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

103. Under the expense approach, the warranty liability is measured using

Test Bank for Accounting Principles, Ninth Canadian Edition

a) the estimated future cost of servicing the product warranty. b) actual costs of past years’ repairs. c) the estimated sales of past years. d) the estimated past returns of products. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

104. The warranty liability account will be carried from year to year and will be increased by a) current year’s repairs to non-warranty products. b) current year’s estimated warranty expense. c) prior years’ estimated warranty expense. d) current year’s actual warranty expense. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

105. Loyalty programs are designed to a) decrease sales. b) increase inventory levels. c) increase sales. d) decrease cost of goods sold. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

106. The Unearned Revenue–Loyalty Program account is reported as a a) current asset. b) contra sales account. c) current liability. d) non-current liability. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

107. Under ASPE, a contingent liability must be accrued in the financial statements if a) it can be reasonably estimated and is unlikely to occur. b) it can be reasonably estimated and is likely to occur. c) it is likely to occur but cannot be reasonably estimated. d) the amount of the potential loss is greater than the balance in the Cash account. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

108. Under ASPE, the following should NOT be disclosed in notes to the financial statements. a) If the contingency is unlikely and the chance of occurrence is small. b) If the contingency is likely but the amount of the loss cannot be reasonably estimated. c) If the likelihood of occurrence of the contingent liability is not determinable. d) If the contingency is unlikely but it could have a substantial negative effect on the company’s financial position. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

109. If a liability is dependent on a future event, it is called a a) potential loss. b) hypothetical loss. c) probabilistic loss. d) contingent loss. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

110. Under ASPE, a contingency that is NOT likely to occur a) should be disclosed in the financial statements. b) must be accrued as a loss. c) does not need to be disclosed unless the loss would result in a substantial negative effect on the company's financial position. d) is recorded as a contingent loss. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

111. Disclosure of a contingent loss is usually made a) parenthetically, in the body of the balance sheet. b) parenthetically, in the body of the income statement. c) in a note to the financial statements. d) in the management discussion section of the financial statement. Answer: c Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

112. If it is likely that a company will lose a lawsuit and the amount can be reliably estimated, then the company must a) record the asset. b) disclose only in the notes to the financial statements. c) not record or disclose any information. d) record the loss and the liability. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

113. Under ASPE, a liability for a contingent loss is recorded if both of the following conditions are met: a) Chance of occurrence is high and amount cannot be estimated. b) Amount is reasonably estimated and the chance of occurrence is low. c) Chance of occurrence is low and amount is determinable. d) Chance of occurrence is high and amount can be reasonably estimated. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

114. Under IFRS, a liability is recorded if the chance of occurrence is a) uncertain. b) probable. c) unlikely. d) undeterminable.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

115. Under ASPE, only ______ contingent losses are recognized. a) likely b) probable c) uncertain d) unlikely Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

116. Under IFRS, the term used for a recorded uncertain liability is a) contingent liability. b) undeterminable liability. c) provision. d) estimated liability. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

117. The following are general risk contingencies that can affect anyone who is operating a business and are NOT usually reported in the notes to the financial statements, EXCEPT a) war.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) strike. c) lawsuit. d) recession. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

118. Which of the following is NOT an example of an estimated liability? a) contingencies b) employee pension benefits c) payroll deductions d) warranties Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

119. Kenneth Mole Company sold $10,000 worth of luggage with a one-year warranty. The company estimates that 2% of the sales will result in a warranty payout. Kenneth Mole Company should a) recognize only warranty expense at the time of sale. b) recognize only warranty expense at the time warranty work is performed. c) recognize warranty expense and warranty liability at the time of sale. d) recognize warranty expense at the time warranty work is performed and warranty liability at the time of sale. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

120. Payroll deductions are also frequently called a) net payments. b) withholdings. c) CPP contributions. d) gross payments. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

121. The amount of income tax withheld from an individual’s payroll is determined by three variables. Which one of the following is NOT a variable? a) employee’s net pay b) number of income tax deductions claimed by the employee c) length of the pay period d) employee’s gross pay Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

122. Gross earnings a) is the net compensation received by employees. b) is the total wage cost for an employee. c) excludes any bonuses paid to employees. d) is the total compensation earned by an employee. Answer: d Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

123. The employer’s share of personal income tax is ______ the employee’s share. a) higher than b) marginally lower than c) equal to d) Employers are not required to share in this cost. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

124. The employer’s share of Canada Pension Plan is ______ the employee’s share. a) higher than b) lower than c) equal to d) Employers are not required to share in this cost. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

125. Which one of the following payroll costs does NOT result in an expense for the employer? a) CPP (Canada Pension Plan) b) Federal and provincial personal income tax c) Employment Insurance (EI) d) QPP (Quebec Pension Plan) Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

126. Jill Cole’s regular rate of pay is $10 per hour with one and one-half times her regular rate for any hours that exceed 44 hours per week. She worked 52 hours last week. Her gross wages were a) $520. b) $440. c) $560. d) $880. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

127. Many companies calculate overtime at a) the worker's regular hourly wage. b) 1.25 times the worker's regular hourly wage for hours over 42 per week. c) 1.5 times the worker's regular hourly wage for hours over 44 per week. d) 2.5 times the worker's regular hourly wage for hours over 37.5 per week. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

128. Ann Parks has worked 44 hours this week. Six of these 44 hours were on the weekend. Her regular hourly wage is $15 per hour with one and one-half times her regular rate for weekend work. What are Ann's gross wages for the week?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) $660 b) $705 c) $990 d) $795 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

129. The designated collection agency for payroll deductions is a) the Canada Revenue Agency. b) Employment Canada. c) Health and Welfare Canada. d) HRDC. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

130. The journal entry to record the payroll for a period will include a credit to Salaries Payable for the gross a) amount less all payroll deductions. b) amount of all paycheques issued. c) pay less taxes payable. d) pay less voluntary deductions. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

131. Paid absences and post-employment benefits a) are supplemental benefits for injured workers. b) are rights to receive compensation for future absences when certain conditions of employment are met. c) must be accrued for. d) are paid to retired or terminated employees. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

132. Post-retirement benefits consist of payments by employers to retired employees for a) health care and life insurance only. b) health care and pensions only. c) life insurance and pensions only. d) health care, life insurance, and pensions. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

133. The paid absence that is most commonly accrued is a) voting leave. b) vacation time. c) maternity leave. d) disability leave. Answer: b Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

134. Berman Company has 10 employees who each earn $180 per day. If they accumulate vacation time at the rate of 1.5 vacation days for each month worked, the amount of vacation benefits that should be accrued at the end of each month is a) $180. b) $1,800. c) $2,700. d) $270. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

135. A payroll register is used to a) accumulate gross earnings for each pay period. b) determine source deductions. c) accumulate gross earnings, deductions, and net pay per employee for each pay period. d) determine budgeted payroll detail. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

136. The Workplace Health, Safety, and Compensation Plan a) provides a bonus to workers who have no accidents. b) is paid by the employee only. c) provides supplemental benefits for workers injured on the job. d) provides supplemental benefits for workers injured on the job or at home.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

137. Post-employment benefits are payments made by a) retired employees. b) terminated employees. c) employees. d) employers. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

138. On the income statement, employee benefits expense is combined with a) sales revenue. b) salaries expense. c) cost of goods sold. d) employer benefits expense. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

139. For small employers with perfect payroll deduction records, withholdings must be reported and remitted to the government a) monthly. b) annually.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) quarterly. d) bi-weekly. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

140. Following the end of a calendar year, an employer is required to provide each employee with a) a personal income tax credits return (TD1). b) a payroll register. c) a statement of remuneration paid (T4). d) a medical history form. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

141. Employers are required to withhold income taxes from employees each pay period. Identify the variable that is NOT used to determine the amount withheld. a) the employee's gross earnings b) the size of the company the employee is working for c) the number of credits claimed by the employee for themselves and dependents d) the length of the pay period Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

142. The deduction that is paid equally by the employer and employee is the a) federal income tax. b) Workplace Health, Safety, and Compensation Plan deduction. c) Employment Insurance (EI) deduction. d) Canada or Quebec Pension Plan deduction. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

143. The employer should record payroll deductions as a) current liabilities. b) non-current liabilities. c) employee advances receivable. d) employee advances payable. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

144. The amount an employee earns before any deductions is referred to as a) net pay. b) net income. c) taxable income. d) gross pay. Answer: d Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

145. A company’s gross salaries amount to $5,000 for the week ended April 6. The following amounts are deducted from the employees’ wages: CPP of $275, EI of $92, income tax of $1,985, and health insurance of $425. Assume employees are paid in cash on April 13. How much is the credit to Cash? a) $2,648 b) $7,777 c) $3,015 d) $2,223 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

146. A company’s gross salaries amount to $5,000 for the week ended April 6. The following amounts are deducted from the employees’ wages: CPP of $275, EI of $92, income tax of $1,985, and health insurance of $425. Assume employees are paid in cash on April 13. How much is the debit to Salaries Expense? a) $3,015 b) $5,000 c) $2,648 d) $5,367 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

147. A company’s gross salaries amount to $5,000 for the week ended April 6. The following amounts are deducted from the employees’ wages: CPP of $275, EI of $92, income tax of $1,985, and health insurance of $425. In addition, the company accrues employer’s payroll costs on the same day as it

Test Bank for Accounting Principles, Ninth Canadian Edition

records payroll. Assume vacation days are accrued at an average rate of 4% of the gross payroll and that the health insurance is 100% funded by the employees. How much is the debit to Employee Benefits Expense? a) $604 b) $1,029 c) $567 d) $792 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

148. Which of the following are NOT mandatory payroll deductions? a) CPP contributions b) United Way c) EI premiums d) Income tax Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting AACSB: Analytic

149. Which of the following is NOT an employer payroll cost? a) WSIB b) EI c) Income tax d) CPP Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

150. The following selected items were included in East Boat Enterprises’ adjusted trial balance at November 30, 2024: Accounts payable................... $25,250 Accounts receivable ............... 15,100 Accrued liabilities .................. 9,350 Bank indebtedness ................ 5,200 Merchandise inventory .......... 42,900 Prepaid expenses................... 6,000 Unearned revenue ................. 3,250 Warranty liability ................... 4,625 What would be reported as current liabilities on the balance sheet? a) $47,675 b) $38,325 c) $42,475 d) $33,700 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

151. The current ratio should never be interpreted without also looking at the a) debt to total assets and receivables turnover ratios. b) profit margin and return on assets ratios. c) inventory turnover and acid-test ratios. d) receivables turnover and inventory turnover ratios. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

152. Current liabilities a) are listed as the last category in the liabilities section of the balance sheet. b) are listed in descending order of amount. c) are listed in ascending order of amount. d) are listed separately in terms of the main types. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

153. On June 30, 2024, Branson Supplies has a $100,000 balance in notes payable, which includes a sixmonth, 4% $32,000 note payable due on October 31, 2024; a one-year, 5%, $13,000 note payable due on May 31, 2025, and a three-year, 4.5%, $55,000 note payable due on April 30, 2027. How much will Branson Supplies report in the current liabilities section of their balance sheet on June 30, 2024 related to notes payable? a) $100,000 b) $45,000 c) $32,000 d) $13,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

154. On June 30, 2024, Branson Supplies has a $100,000 balance in notes payable, which includes a sixmonth, 4% $32,000 note payable due on October 31, 2024; a one-year, 5%, $13,000 note payable due on May 31, 2025, and a three-year, 4.5%, $55,000 note payable due on April 30, 2027. How much will Branson Supplies report in the current liabilities section of their balance sheet on December 31, 2024 related to notes payable? a) $13,000 b) $45,000 c) $32,000 d) $100,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

155. The relationship between current liabilities and current assets is a) useful in determining income. b) useful in evaluating a company's short-term debt-paying ability. c) called the matching principle. d) useful in determining the amount of a company's long-term debt. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

156. The relationship of current assets to current liabilities is used in evaluating a company's a) profitability. b) revenue-producing ability. c) short-term debt-paying ability. d) long-range solvency. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

157. Muffin Company issued a five-year, interest-bearing note payable for $50,000 on January 1, 2023. Each January the company is required to pay $10,000 principal on the note. How will this note be reported on the December 31, 2024, balance sheet? a) Long-term debt, $50,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Long-term debt, $40,000 c) Long-term debt, $30,000; Long-term debt due within one year, $10,000 d) Long-term debt of $40,000; Long-term debt due within one year, $10,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

158. Under ASPE, current liabilities are usually listed a) after long-term debt on the balance sheet. b) in order of liquidity on the balance sheet. c) in order of maturity on the balance sheet. d) in increasing order of magnitude on the balance sheet. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

159. Current maturities of long-term debt a) require an adjusting entry. b) are optionally reported on the balance sheet. c) can be properly classified during balance sheet preparation, with no adjusting entry required. d) are not considered to be current liabilities. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

160. The current portion of long-term debt a) refers to the portion of long-term debt due within one year. b) is separated from the long-term portion for proper presentation. c) must be disclosed on the statement of financial position. d) all these answers are correct. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

161. On December 31, 2024, Indiglow Company has a five-year note payable of $450,000. Of that balance, $90,000 will be paid within one year from the balance sheet date. How much of the note payable should Indiglow Company report as a long-term liability when they prepare the December 31, 2024, statement of financial position? a) $360,000 b) $450,000 c) $90,000 d) $540,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the current liabilities section of the balance sheet. Section Reference: Financial Statement Presentation CPA: Financial Reporting AACSB: Analytic

*162. Employee contributions under the Canada Pension Plan are 5.45% of pensionable earnings. Pensionable earnings deduct a basic yearly exemption of $3,500 and impose a maximum ceiling of $61,600. Marco earns $1,000 per week. What amount of CPP will be deducted each week from Marco’s pay? a) $54.50 b) $50.83 c) $3,166.45 d) $44.36 Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*163. The employer is currently required to withhold a premium of 1.58% on insured earnings to a maximum earnings ceiling of $56,300. Dallas Reimer earns $1,000 per week. What amount of Employment Insurance (EI) will be deducted from Dallas’s pay each week? a) $15.80 b) $0 c) $889.54 d) $25.62 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*164. The employer is currently required to pay a premium for Employment Insurance (EI) on pensionable earnings of a) 1.58% to a maximum earnings ceiling of $$56,300 times 1.4 the employee contribution. b) 1.58% to a maximum earnings ceiling of $56,300. c) 1.4% to a maximum earnings ceiling of $56,300. d) 1.58%. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

*165. Employees claim non-refundable credits for income tax withholding on a) form (TD1). b) form (T4). c) form (T1). d) form (PD7A). Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*166. Self-employed individuals pay both the employee’s and the employer’s share of a) CPP. b) EI. c) Income taxes. d) Union dues. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*167. In most cases, insurable earnings are a) maximum earnings. b) net earnings. c) pensionable earnings. d) gross earnings. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*168. The higher the gross pay or earnings, the a) higher amount of taxes withheld. b) lower amount of taxes withheld. c) lower amount of pensionable earnings. d) lower amount of union dues. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*169. An employee receives a biweekly gross salary of $2,000. The employee’s deductions include income tax of $218, CPP of $92, EI of $37, and union dues of $50. The employer’s share of the deductions includes CPP of $92 and EI of $52. What is the total amount of Salaries plus Employee Benefits Expense that the company would record as a result of the employee's biweekly salary? a) $1,653 b) $2,000 c) $2,144 d) $2,347 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*170. Ferris Party Rental has 10 employees who earned a total of $25,000 in March ($2,500 each). The applicable rates for CPP and EI are 5.45% and 1.58% , respectively. Income tax withholdings amount to $6,600. The net pay of the 10 employees during March is a) $16,642.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) $17,037. c) $25,000. d) $18,400. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*171. Blue Collar Company pays salaries on a weekly basis. The payroll for the week ended April 6, 2021, includes the details for the following employee: Employee Name Weekly Earnings Claim Code Bosellini, Isabelle $1,000 4 How much is the mandatory EI payroll deduction? a) $82.60 b) $15.80 c) $47.90 d) $50.83 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*172. Blue Collar Company pays salaries on a weekly basis. The payroll for the week ended April 6, 2021, includes the details for the following employee: Employee Name Weekly Earnings Claim Code Bosellini, Isabelle $1,000 4 How much is the mandatory CPP payroll deduction? a) $82.60 b) $15.80 c) $47.90 d) $50.83

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*173. Blue Collar Company pays salaries on a weekly basis. The payroll for the week ended April 6, 2021, includes the details for the following employee: Employee Name Weekly Earnings Claim Code Bosellini, Isabelle $1,000 4 How much is the mandatory federal tax payroll deduction? a) $82.60 b) $15.80 c) $47.90 d) $50.83 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*174. Blue Collar Company pays salaries on a weekly basis. The payroll for the week ended April 6, 2021, includes the details for the following employee: Employee Name Weekly Earnings Claim Code Bosellini, Isabelle $1,000 4 How much is the mandatory Ontario provincial tax payroll deduction? a) $82.60 b) $15.80 c) $47.90 d) $50.83 Answer: c Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

*175. Blue Collar Company pays salaries on a weekly basis. The payroll for the week ended April 6, 2021, includes the details for the following employee: Employee Name Weekly Earnings Claim Code Bosellini, Isabelle $1,000 4 How much is the employee’s net pay considering mandatory payroll deductions only and assuming Blue Collar is in Ontario? a) $869.50 b) $818.67 c) $802.87 d) $853.70 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate mandatory payroll deductions (Appendix 10A). Section Reference: Payroll Deductions CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.

Current liability Note payable Statement of Remuneration Paid (Form T4) Sales taxes Contingent liability Federal and provincial income taxes, CPP, and EI

176. An obligation in the form of a written promissory note

G. H. I. J.

Canada Pension Plan (CPP) Employment Insurance Post-retirement benefits Pension plan

____

Answer: B Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

177. Taxes levied on sales to customers

____

Answer: D Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

178. A debt that can reasonably be expected to be paid from current assets Answer: A Bloomcode: Knowledge Difficulty: Easy

____

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Account for certain current liabilities. Section Reference: Certain Current Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

179. A potential liability that may become an actual liability in the future

____

Answer: E Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for uncertain liabilities. Section Reference: Uncertain Liabilities CPA: Financial Reporting CPA: Taxation AACSB: Analytic

180. Levied on employees by the federal and provincial governments

____

Answer: F Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

181. An agreement whereby an employer provides benefits to employees after they retire

____

Answer: I Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

182. A payroll cost designed to provide income protection for a limited period of time to employees who are temporarily laid off

____

Answer: H Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

183. A form showing employment income, CPP contributions, EI premiums, and income tax deducted for the year, in addition to other voluntary deductions

____

Answer: C Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

184. This plan provides supplementary disability, retirement, and death benefits to qualifying Canadians

____

Answer: G Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

185. Payments by employers to retired employees

____

Answer: J Bloomcode: Knowledge Difficulty: Easy Learning Objective: Determine payroll costs and record payroll transactions. Section Reference: Payroll CPA: Financial Reporting CPA: Taxation AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 11 FINANCIAL REPORTING CONCEPTS CHAPTER STUDY OBJECTIVES 1. Explain the importance of having a conceptual framework of accounting, and list the key components. The conceptual framework ensures that there is a consistent and coherent set of accounting standards. Key components of the conceptual framework are the: (1) objective of financial reporting; (2) elements of the financial statements; (3) qualitative characteristics; (4) recognition and measurement concepts; and (5) foundational concepts, assumptions, and constraints.

2. Explain the objective of financial reporting, and define the elements of the financial statements. The objective of financial reporting is to provide useful information for investors and creditors in making decisions in their capacity as capital providers. The elements are assets, liabilities, equity, revenue, and expense. Each element has a specific definition. The definitions provide important guidance on when an element should be recognized.

3. Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. The fundamental qualitative characteristics are relevance and faithful representation. Financial information has relevance if it makes a difference in a decision. Materiality is an important component of relevance. An item is material when it is likely to influence the decision of a reasonably careful investor or creditor. Information is faithfully represented when it shows the economic reality and is complete, neutral, and free from material error. The enhancing qualitative characteristics are comparability, verifiability, timeliness, and understandability. Comparability enables users to identify the similarities and differences between companies. The consistent use of accounting policies from year to year is part of the comparability characteristic. Information is verifiable if two knowledgeable and independent people would generally agree that it faithfully represents the economic reality. Timeliness means that financial information is provided when it is still highly useful for decision-making. Understandability enables reasonably informed users to interpret and comprehend the meaning of the information provided in the financial statements.

4. Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. General recognition criteria require that elements be recognized in the financial statements when it is probable that any economic benefit associated with the item will flow to or from the business and the item has a cost or value that can be measured or estimated with a reasonable amount of reliability. There are two approaches to revenue recognition: (1) contract-based and (2) earnings. The contract-based approach requires that revenue be recognized when promised goods or services are transferred and the amount reflects the consideration the business expects to receive. The earnings approach requires that revenue be recognized when the earnings process is complete,

Test Bank for Accounting Principles, Ninth Canadian Edition

the risks and rewards of ownership have been transferred, and the amount can be reliably measured. Expenses are recognized when there is a decrease in an asset or increase in a liability, excluding transactions with owners, which result in a decrease in owners’ equity. Four measurements used in accounting are (1) historical cost, (2) current cost, (3) realizable value, and (4) present value. Incorrect application of the basic recognition and measurement concepts can lead to material misstatements in the financial statements. Incorrect application can be due to error or intentional misstatement.

5. Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. The foundational concepts, assumptions, and constraints form the bedrock of accounting and are used to achieve the objective of financial reporting. The reporting entity concept requires that accounting for a reporting entity’s activities be kept separate and distinct from the accounting for the activities of its owner and all other reporting entities. The going concern assumption assumes that the company will continue operating for the foreseeable future. The monetary unit concept means that money is the common denominator of economic activity. The periodicity concept guides businesses in dividing up their economic activities into distinct time periods. The cost constraint is a pervasive constraint that ensures the value of the information provided is greater than the cost of providing it. The full disclosure concept requires companies to fully disclose circumstances and events that make a difference to financial statement users.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 The conceptual framework for accounting discusses the following: Code: A Objective of Financial Reporting B Qualitative Characteristics of Accounting Information C Elements of Financial Statements Instructions For each item below, indicate the area of the conceptual framework that pertains to that item by selecting the appropriate code. Example: C Asset (An asset is an element of financial statements.) ____ 1. Information that is helpful in assessing management’s performance ____ 2. Owners' equity ____ 3. Timeliness ____ 4. Neutral ____ 5. Expense ____ 6. Confirmatory value ____ 7 Faithful representation ____ 8 Comparability/consistency ____ 9. Information that is useful in making resource allocation decisions ____ 10 Full disclosure principle Solution 1 (5 min.) 1. A 2.

Test Bank for Accounting Principles, Ninth Canadian Edition

10. B Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Exercise 2 For each item below, indicate whether the item is a(an) (1) Fundamental Qualitative Characteristic, (2) Enhancing Qualitative Characteristic, (3) Element of the Financial Statements, (4) Concept, or (5) Constraint. Example: (3)_Asset (An asset is an element of financial statements.) ____ a) Relevance ____ b) Comparability ____ c) Cost-Benefit ____ d) Timeliness ____ e) Revenue ____ f) Owner’s equity ____ g) Faithful representation ____ h) Going concern ____ i) Reporting entity ____ j) Monetary unit Solution 2 (5 min.) a) (1) b)

(2)

Test Bank for Accounting Principles, Ninth Canadian Edition

(5)

(2)

(3)

(1)

(4)

Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Exercise 3 Presented below are some business transactions that occurred during 2024 for Kilgana Company: 1. A heavy-duty stapler costing $25 is being depreciated over 5 years. The following entry was made: Depreciation Expense—Stapler ............................................................... 5 Accumulated Depreciation—Stapler ............................................... 5 2. The owner of Kilgana Company took a vacation to France and charged the travel expenses to the company. The following entry was made: Travel Expense.......................................................................................... 4,000 Cash ................................................................................................... 4,000 3. An account receivable has been deemed a bad debt. The following entry was made:

Test Bank for Accounting Principles, Ninth Canadian Edition

Allowance for Doubtful Accounts ............................................................ 9,000 Accounts Receivable ......................................................................... 9,000 Merchandise Inventory with a cost of $420,000 is reported at its fair value of $510,000. The following entry was made: Merchandise Inventory............................................................................. 90,000 Gain on Fair Value Adjustment of Inventory .................................... 90,000 Equipment worth $75,000 was acquired at a cost of $60,000 from a company that was going out of business. The following entry was made: Equipment ................................................................................................ 75,000 Cash ................................................................................................... 60,000 Revenue ............................................................................................ 15,000

Instructions For each situation above, identify the assumption, concept, or constraint that has been violated, if any. If the entry is incorrect, prepare the entry that should have been made, if any. Solution 3 (10 min.) 1. The stapler will last more than one year but its cost is not material. Thus, the materiality constraint should be implemented and capitalizing and depreciating the stapler is not appropriate. At the time of purchase, the correct journal entry is: Supplies .................................................................................................... 25 Cash ...................................................................................................

This treatment violates the economic entity concept. The owner should take this as drawings (or possibly as a receivable showing the owner owes the money to the company) by the following entry: Owner’s Drawings..................................................................................... 4,000 Cash ................................................................................................... 4,000

No violation of generally accepted accounting principles.

This is a violation of the cost concept. The inventory should not be written up to its fair value. No journal entry should have been made. The inventory should be reported at the lower of cost and net realizable value, which is cost in this case.

This is a violation of the cost concept. The asset has been recorded at its estimated fair value, not its acquisition cost. The entry should have been: Equipment ................................................................................................ 60,000 Cash ................................................................................................... 60,000

Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Exercise 4 An inexperienced accountant for Can’t Add Company recorded the following transactions in the records of the company for the year ended December 31, 2024. The controller has questioned the appropriateness of the entries since she thinks that they have not been recorded in accordance with generally accepted accounting principles. Profit for the year, including the entries described below, is $200,000. 1. On January 1, the company president, the owner of the company, took a personal vacation trip to the Gaspé. The trip cost $3,000. The accountant recorded the entry as follows: Travel Expense.......................................................................................... 3,000 Accounts Payable.............................................................................. 3,000 2. The company purchased on account a wastebasket on December 31 at a cost of $20. The accountant made the following entry: Equipment ................................................................................................. 20 Accounts Payable............................................................................... 20 3. Merchandise inventory that cost $14,000 had a current net replacement value of $22,000. The accountant made the following entry as a result: Merchandise Inventory.............................................................................. 8,000 Revenue.............................................................................................. 8,000 4. Equipment with a fair market value of $15,000 was acquired in a liquidation sale for cash at a cost of $10,000. The accountant recorded the transaction as follows: Equipment ................................................................................................. 15,000 Cash .................................................................................................... 10,000 Revenue.............................................................................................. 5,000 5. Can’t Add uses the allowance method. A customer's account receivable for $17,000 was uncollectible and the following entry was made: Bad Debt Expense...................................................................................... 17,000 Accounts Receivable .......................................................................... 17,000 Instructions a) For each of the above entries, indicate the concept or constraint that was violated. b) Determine the correct profit for 2024.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 4 (15 min.) a) 1. Economic entity concept 2.

Materiality constraint

Cost concept

Matching concept

b) Item 1. 2. 3. 4. 5.

Concept or Constraint Economic entity Materiality Cost Cost Matching Total understatement Uncorrected profit Corrected profit

Profit (Overstatement)/Understatement $ 3,000 (20) (8,000) (5,000) 17,000 6,980 200,000 $206,980

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Exercise 5 The following are independent situations observed by Aqua Company’s senior accountant at

Test Bank for Accounting Principles, Ninth Canadian Edition

December 31, 2024, the company’s year end. Aqua Company has not adopted the revaluation model for accounting for long-lived assets. 1. Aqua purchased land in February at a cost of $60,000 for the purpose of expanding the size of their parking lot, although this project has not yet been started at year end. Due to increases in real estate values, this land has a value of $100,000 by year end. An entry to record this increase in value has been recorded, crediting “Gain on Land.” 2. One of the items making up Aqua ’s total current assets of $354,000 is an amount of $1,400 for Supplies. The company owner asks one of the accounting staff whether she thinks this balance is correct. The staff person takes two days of work time to count the actual supplies on hand and another day to research the exact cost of the items, and subsequently adjusts the balance of Supplies to its exact balance of $1,425. As a result of this task, the month-end financial statements are submitted to the company’s lender two days after the reporting deadline. 3. A $96,300 payment for a 12-month insurance policy effective March 1, 2024, had been debited to Insurance Expense. 4. Included in Accrued Interest Payable is interest on a $200,000, 3% note payable. Interest has been paid to December 2, 2024. Accrued interest payable was calculated and recorded as $500 by applying the following formula: $200,000 x 3% x 1÷12. However, the accountant was concerned because part of December’s interest has already been paid and the formula included a full month’s accrual. He therefore reduces the accrued interest payable by $33 ($200,000 x 3% x 2/365). 5. On January 15, 2025, before the financial statement preparation for December 31, 2024, had been completed, a fire destroyed Aqua’s warehouse, which had a carrying value of $1,500,000, and inventory with a cost of $900,000. The lost assets are insured, but will result in a six-month interruption in business while being reconstructed. No mention of this event is found in the financial statements. 6. The company completed its year-end inventory count and the controller noticed that obsolete inventory had been included in the physical count and that it was valued at its original cost less an obsolescence factor of 10%. When the controller asked how long the inventory had been on hand, he was told that it was four years old; most of their inventory is six months old. Instructions For each of the events, indicate the accounting assumption, concept, or constraint that has been violated and provide your reason. Prepare the correcting entry required, or if no entry is required, explain what other change, if any, should be made to ensure that Aqua’s financial statements comply with GAAP. Solution 5 (10 min.) 1. The cost concept has been violated. Assets used in the business should be reported at cost unless an impairment has occurred. To correct this, the entry is: Gain on Land ............................................................................................. 40,000 Land ................................................................................................... 40,000 2.

The cost constraint has been violated. The benefit of the more precise information (that the Supplies are worth $1,425 not $1,400) has come at a cost of delayed financial reporting. The benefit is not worth the cost of missing the reporting deadline.

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The matching concept has been violated. The expense should be matched with the months during which the policy is in place. To correct this, the prepaid portion should be recorded: Prepaid Insurance ($96,300 x 2/12).......................................................... 16,050 Insurance Expense ............................................................................ 16,500

The materiality concept has been violated. The $33 difference is unlikely to affect the decisions being made by users of the financial statements. It is not necessary to make an entry as the difference is immaterial.

The full disclosure principle has been violated. Because this information is critical to users of the financial statements to assess the financial viability of the company, it should be included as a note to the financial statements. No entry is required, just the additional note disclosure.

The expense recognition criterion states that expenses are recognized when there is a decrease in an asset. The obsolete inventory has clearly declined in value and thus an expense should be recognized.

Exercise 6 Generally accepted accounting principles include the following assumptions, concepts, constraints, and recognition criteria: A Going concern assumption B Economic entity concept C Revenue recognition criteria D Expense recognition criteria (Matching) E Full disclosure F Cost concept

Test Bank for Accounting Principles, Ninth Canadian Edition

G H

Cost constraint Materiality constraint

The following independent situations occurred in different companies: 1. One-third of the company's sales were made to a related party and this fact is disclosed in the financial statements. 2. The company's inventory's cost is $50,000 which they have to liquidate and the goods can only be sold at auction for $30,000. The inventory is reported at $50,000 on the company's balance sheet. 3. A company's accountant notices that the Petty Cash account was not adjusted prior to preparing the year-end financial statements and the account balance is incorrect by $13.52. However, the accountant decides to release the financial statements without making the correction. 4. The proprietor of an unincorporated business maintains two bank accounts and two sets of accounting records—one for household expenses, and the other for business purposes. 5. The company records revenue when services are provided, not when the customers pay for the service. 6. A company has a large number of accounts receivable that individually have small balances. In order to determine the allowance for doubtful accounts, the company uses an estimate based on past experience rather than taking the time to evaluate the collectibility of individual accounts. 7. Insurance expense is recorded each month, although the insurance policy covers a full year and is paid annually. 8. A patent with an indefinite life has an original cost of $12,500 although the company was recently offered $1,000,000 by another company who wants to buy it. 9. Interest is payable semi-annually and is recorded only when paid, with no adjustment at year end even though payment dates do not coincide with the year-end date. 10. A former employee has sued the company for a large amount, but no mention is made of this case in the financial statements. 11. After obtaining an independent appraisal that indicated a significant increase in value over original cost, the company restated its land at the higher amount. The company has not adopted the revaluation model for accounting for long-lived assets. 12. The company accountant recently spent two days calculating the accrued utilities expense on 130 individual apartments for the last few days of the year. In the past, the amounts were estimated. 13. The company's sales are made on credit, but to keep accounting costs down, sales are recorded when the customer accounts are paid. 14. When preparing financial statements, the company's policy is to record all correcting entries, whether the correction is for $200,000 or $2. 15. The proprietor's babysitting costs are recorded in the company expense accounts. 16. All assets are restated at their liquidation values. Instructions For each of the situations, identify the assumption, concept, constraint, or recognition criteria that provides the best explanation by selecting the appropriate code. Each code will be used more than once; however, each situation only has one correct answer.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 6 (10 min.) 1. E 2.

10. E 11. F 12. G 13. C 14. H 15. B 16. A Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Exercise 7 A number of unrelated transactions recorded by Abba Company are as follows: 1. At year end, the depreciation expense is calculated as $10,000, which results in a net book value that is $14,000 greater than the equipment’s liquidation value: Impairment Loss ....................................................................................... 14,000 Depreciation Expense............................................................................... 10,000 Accumulated Depreciation ............................................................... 24,000 2. The proprietor of Abba paid for her household cleaning costs out of the business bank account: Cleaning Expense ..................................................................................... 140 Cash ................................................................................................... 140 3. A customer pays for November services in October. The October entry is: Cash........................................................................................................... 525 Service Revenue ................................................................................ 525 4. Abba guaranteed the loan of a related party, Provincial Corp., and Provincial defaulted on its loan. In December, the bank demanded payment of $100,000 from Abba, who negotiated to make the payments in four equal monthly instalments, the first of which was made in December. The following entry was recorded by Abba when the December payment was made. No further information was provided in its financial statements because it is probable that Provincial will be able to make the remainder of the payments. Loss on Loan Guarantee ........................................................................... 25,000 Cash ................................................................................................... 25,000 Instructions For each of the above situations, identify the accounting assumption, concept, constraint, or recognition criteria that has been violated. Prepare the correct journal entry as it should have been made. If no entry should have been made, or if additional financial statement disclosure is required, explain. Solution 7 (8 min.) 1. The going concern assumption has been violated. The liquidation values of assets are relevant to the financial statement user only if the company actually has a plan to liquidate the assets. The original entry should have been: Depreciation Expense............................................................................... 10,000 Accumulated Depreciation—Equipment ......................................... 10,000 2.

The economic entity concept has been violated. The owner’s personal expenses should not be recorded as business expenses. If company funds are used to pay personal expenses, the payment should be recorded as a receivable from the owner, as follows: Owner’s Drawings..................................................................................... 140

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Cash ...................................................................................................

140

The revenue recognition criteria have been violated. The revenue should be recognized in November, not October. The payment should have been recorded as follows: Cash........................................................................................................... 525 Unearned Revenue ........................................................................... 525

The full disclosure concept has been violated. No entry is required because the additional loss is unlikely to occur. However, the fact that there is a possibility of additional losses should be disclosed.

Exercise 8 For each of the independent situations described below, list the assumption, characteristic, concept, or constraint that has been violated, if any. List only one term for each case. 1. The Who Company reports only current assets and current liabilities on its balance sheet. Intangible assets and a 20-year mortgage payable are reported as current assets and a current liability, respectively. Liquidation of the company is unlikely. 2. Gabi Company is in its third year of operation and has yet to issue financial statements. (Do not use full disclosure principle.) 3. Griffin Company is carrying inventory at its net realizable value of $110,000. The inventory had an original cost of $135,000. 4. Paul Company expenses some office equipment that is inexpensive even though it has a useful life that exceeds one year. 5. Singh Corporation has selected FIFO as its inventory cost flow formula during the current year. Next year it plans to change to the weighted average cost formula. Solution 8 (5 min.) 1. Going concern assumption

Test Bank for Accounting Principles, Ninth Canadian Edition

2. Timeliness 3. No violation (qualitative characteristic – relevance and faithful representation) 4. No violation (materiality constraint) 5. Consistency (qualitative characteristic) Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Exercise 9 The following are independent situations observed by Mersey’s senior accountant at December 31, 2024, the company’s year end. Mersey has not adopted the revaluation model for accounting for longlived assets. 1. The draft financial statements include an item listed under non-current assets “Human resources” but there is no financial amount included. 2. Mersey’s employees are paid a bonus based on profit. Mersey’s management would like to minimize the amount of bonus paid, and so they instructed a junior accountant to write down inventory by $1,000,000 to cost of goods sold. Their argument is that the “fire sale” value of the inventory would be lower than recorded cost by this amount. Mersey has no intention of liquidating the inventory under such circumstances, but expects to sell the inventory in the normal course of business at amounts significantly above cost. 3. A building being constructed for a customer was 90% complete, and accordingly 90% of the related revenue had been correctly included in sales for the year. The total projected cost of construction is $600,000. Of the $540,000 cost of the project incurred to date, $200,000 has been expensed to cost of goods sold. 4. Mersey owns 5% of the shares of Liverpool Investments. A note to Liverpool’s financial statements describes a valuable new patent registered by Liverpool and the anticipated profits that are expected to result. A junior accountant at Mersey recorded an entry to debit Patents and credit Revenue for $220,000, which is 5% of the amount at which Liverpool has recorded the cost of the patent. 5. In November, Mersey entered into a service contract to provide maintenance services to a client

Test Bank for Accounting Principles, Ninth Canadian Edition

for a fee of $20,000 per month. On signing the contract, the client paid Mersey a $40,000 deposit on services to be provided. The term of the contract is from December 15, 2024, through December 15, 2025. The $40,000 deposit was recorded as Service Revenue. Instructions For each of the events, indicate an accounting assumption, concept, constraint, or recognition criteria that has been violated and provide your reason. Prepare the correcting entry required, or if no entry is required, explain what other change, if any, should be made to ensure that Mersey’s financial statements comply with GAAP. Solution 9 (10 min.) 1. Under the general recognition criterion, an item will be included in the financial statements if it can be measured and if a reasonable basis of measurement can be met. This item is not an asset and should not be included on the balance sheet. No entry is required, but the reference should be removed from the balance sheet. 2.

The going concern assumption has been violated. The financial statements should be prepared on the assumption that the business will continue unless there are concrete liquidation plans. This means the inventory should be reported at the lower of cost and net realizable value. The entry to correct this is: Merchandise Inventory............................................................................. 1,000,000 Cost of Goods Sold............................................................................ 1,000,000

The matching concept has been violated. Since 90% of the revenue has been recognized, so should 90% of the costs. To correct this, the following entry is required: Cost of Goods Sold [($600,000 x 90%) – $200,000] .................................. 340,000 Inventory ........................................................................................... 340,000

The economic entity concept has been violated. Because Liverpool and Mersey are two separate legal entities, no part of Liverpool’s assets should be included in the financial statements of Mersey. To correct this, the following entry is required: Revenue .................................................................................................... 220,000 Patents .............................................................................................. 220,000

The revenue recognition criterion has been violated. Revenue should be recognized when the service is provided to the client. To correct this, the following entry is required: Service Revenue ....................................................................................... 30,000 Unearned Revenue ........................................................................... 30,000 Total deposit $40,000 less amount earned in December ($40,000 x 0.5/2 months)

Test Bank for Accounting Principles, Ninth Canadian Edition

financial reporting situations. Section Reference: Recognition and Measurement Criteria Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Exercise 10 The following are independent situations observed by Dino Industrial’s senior accountant at December 31, 2024, the company’s year end: 1. Dino has parts inventory for use in its construction department (not for resale). The inventory includes over 1,500 different items, with between 10 and 100 of each item in stock. The cost of the individual items ranges from $0.30 to $1.50. In the past, the inventory quantities have been estimated by weighing the parts bins. This year, the accountant had the individual items counted and priced to provide more precise information. The total estimated value of the items is $45,000, which is material in total. It took four staff a full day to count the inventory at a cost of $1,000 in labour costs, and it would have taken two staff a half day to complete the estimate by weighing at a cost of $250. After the count, an entry of $27 was needed to reduce the inventory balance to actual. The entry was debited to Construction Supplies Expense. 2. Goods with a sales price of $55,000 were shipped to a customer FOB shipping point. The goods were picked up by the shipping company on December 31, 2024, and delivered to the customer on January 2, 2025. The customer’s invoice was prepared and recorded in January 2025. 3. Prepaid expenses include $12,000 in prepaid rent related to the long-term lease of a branch office. When the lease was signed four years ago, Dino had to pay a $6,000 deposit, which comprises the final month’s rent. Rental rates have since doubled in that location, so an entry has been recorded to reflect this value as follows: debit Prepaid Rent $6,000 and credit Rent Expense $6,000. The junior accountant’s argument for making this entry is that the company has benefited from the long-term lease and the financial statements should reflect this benefit. 4. One of the owners of Dino purchased a vacation property for $190,000 with company funds. The transaction was recorded as a debit to Property, Plant, and Equipment, and a credit to Cash. Instructions For each of the events, indicate the accounting assumption, concept, constraint, or recognition criteria that has been violated and provide your reason. Prepare the correcting entry required, or if no entry is required, explain what other change, if any, should be made to ensure that Dino’s financial statements comply with GAAP. Solution 10 (10 min.) 1. The cost constraint has been violated. Dino has just spent $750 ($1,000 – $250) more than necessary to make an adjustment of $27 without providing significantly better information than the estimate process provided. There is no need to make another entry, but Dino should not repeat this process in the future. 2.

The terms of the sale “FOB shipping point” means the customer has accepted ownership at the

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time the shipping begins. The revenue recognition criterion is met when the goods are shipped. To record this entry in December 2024 as required, Dino should record the following entry: Accounts Receivable ................................................................................ 55,000 Sales Revenue ................................................................................... 55,000 3.

The cost concept has been violated. The prepaid rent should be reported at its original cost. In order to correct this, the entry made by the accountant should be reversed as follows: Rent Expense ............................................................................................ 6,000 Prepaid Rent ..................................................................................... 6,000

The economic entity concept has been violated. Only assets that are for the benefit of the business should be recorded in the company’s financial statements. To correct this, the following entry is required: Owner’s Drawings..................................................................................... 190,000 Property, Plant, and Equipment ...................................................... 190,000

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Exercise 11 A number of unrelated transactions recorded by Frame Company are as follows: 1. At the end of the month, obsolete worthless inventory was valued at $17,000. No entry was made. 2. Frame, which owns an art gallery, purchases a valuable painting for $40,000 in November, and sells it in January, which is after the company’s year end. The entry made when the painting is purchased is: Cost of Goods Sold ................................................................................... 40,000 Cash ................................................................................................... 40,000 3. Equipment was purchased for $8,000 from a store that is going out of business. The equipment was appraised at $10,000. Equipment ................................................................................................ 10,000 Cash ................................................................................................... 8,000 Retained Earnings ............................................................................. 2,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions For each of the above situations, identify the accounting assumption, concept, constraint, or recognition criteria that has been violated. Prepare the correct journal entry as it should have been made. If no entry should have been made, or if additional financial statement disclosure is required, explain. Solution 11 (8 min.) 1. The expense recognition criterion has been violated. Where an asset has declined in value, an expense should be recognized. The entry should be: Cost of Goods Sold ................................................................................... 17,000 Inventory ........................................................................................... 17,000 2.

Matching has been violated. The cost of goods sold should be recorded in the same period that the revenue occurs. The correct entry to record the purchase of the painting is: Merchandise Inventory............................................................................. 40,000 Cash ................................................................................................... 40,000

The cost concept is violated. The equipment should have been recorded at the amount the company paid for it as follows: Equipment ................................................................................................ 8,000 Cash ................................................................................................... 8,000

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Exercise 12 For each of the independent situations described below, list the assumption, concept, constraint, or recognition criteria that has been violated, if any. List only one term for each case. 1. Madeline Coombs, P.Eng, had the engineering company’s accountant prepare her personal tax return. She paid the accountant using company funds and debited the company’s Professional Fees account. 2. Rufinno Company does not use an account for allowance for doubtful accounts. Instead, accounts receivable are written off directly to Bad Debt Expense if they remain unpaid after 24 months.

Test Bank for Accounting Principles, Ninth Canadian Edition

Equipment is carried at its fair value on the Finnaco Company balance sheet, which is $25,000 higher than cost. Finnaco has not adopted the revaluation model for accounting for long-lived assets. Depreciation Expense for Shimmers Company is $15,000. The company will have a net loss of $12,000 if the depreciation is recorded, but a profit of $3,000 if depreciation is deferred a year. The decision is made to defer the depreciation to next year, which is expected to be more profitable. The land of Ralley Company is appraised at $200,000 more than its cost. The new accountant for the company recommends booking the appraised value and showing a gain from revaluation on the income statement. Ralley Company has not adopted the revaluation model for accounting for long-lived assets.

Solution 12 (5 min.) 1. Economic entity concept 2.

Matching concept

Cost concept

Matching concept

Cost concept

Exercise 13 Match the following qualitative characteristics of financial statements to the appropriate code: Code: A Faithful representation B Timeliness C Neutral D Verifiable E Relevance F Complete

Test Bank for Accounting Principles, Ninth Canadian Edition

1. 2. 3. 4. 5. 6.

Information is available to decision makers before the information loses its ability to influence decisions. Accounting information reports the economic reality of a transaction, not its legal form. All of the information necessary to show the economic reality of transactions is provided. Information makes a difference in a decision. Users are assured that the financial information shows the economic reality of the transaction. Information is free from bias that is intended to attain a predetermined result.

Solution 13 (5 min.) 1. B 2.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

Exercise 14 Comfort King Ltd. sells central air units and furnaces to local residents as well as ongoing maintenance plans. Jack Frost agreed to an arrangement with Comfort King to purchase a central air package for $4,000 on May 1, 2024. In addition to the sale, the arrangement includes installation, maintenance on the central air unit for two years, and a one-time furnace cleaning, which will occur when the central air unit is installed. Jack Frost is receiving a great deal as the full contract price represents the stand-alone value of the central air unit. Comfort King also provides installation, central air maintenance, and furnace cleaning services separately to its customers as follows: installation fee $400, annual central air maintenance fee $250, and furnace cleaning fee $100. Comfort King installed the unit and cleaned the furnace on May 20, 2024, and was immediately paid the agreed-upon price by Jack Frost. Instructions Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so.

Test Bank for Accounting Principles, Ninth Canadian Edition

1. Is there a contract? 2. What is the performance obligation? 3. What is the transaction price? 4. Is there a need to allocate the selling price? 5. Has the performance obligation been satisfied? Solution 14 (15 min.) 1. Yes. Comfort King and Jack Frost entered into an agreement to purchase a central air package on May 1, 2024 for $4,000. 2.

There are multiple performance obligations in this arrangement – sale of the central air unit, furnace cleaning, and a two-year maintenance plan for the central air unit.

The transaction price is $4,000.

Since there are multiple performance obligations, we must allocate the transaction price based on their stand-alone market values as follows:

Performance Obligation Sale of central air unit Installation of unit Furnace cleaning Maintenance

Stand-alone value $4,000 400 100 ($250 x 2) 500 $5,000

% of total stand-alone value 80% 8% 2% 10% 100%

Contract Price $4,000 4,000 4,000 4,000

Allocation of contract price $3,200 320 80 400 $4,000

The sale of the air central air unit, installation, and furnace cleaning have all been completed on May 20, 2024, when the unit was delivered and installed, and the furnace was cleaned. The obligation to perform annual maintenance on the central air unit has not been completed. This aspect will be completed on an annual basis as the maintenance term lapses.

Conclusion: Point of revenue recognition: Sale of central air unit – $3,200 on May 20, 2024 Installation of unit – $320 on May 20, 2024 Furnace cleaning – $80 on May 20, 2024 Annual maintenance on central air - $200 at the end of each year (i.e., May 20, 2025 and 2026) Bloomcode: Analysis Difficulty: Medium Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 15 Comfort King Ltd. sells central air units to local residents as well as ongoing maintenance plans. Jack Frost agreed to an arrangement with Comfort King to purchase a central air package for $4,000 on May 1, 2024. In addition to the sale, the arrangement includes unit installation and maintenance on the central air unit for two years. Jack Frost is receiving a great deal as the full contract price represents the stand-alone value of the central air unit. Comfort King also provides installation and central air maintenance separately to its customers as follows: installation fee $400 and annual central air maintenance fee $250. Comfort King installed the unit on May 20, 2024, and was immediately paid the agreed-upon price by Jack Frost. Instructions Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so. 1. Is there a contract? 2. What is the performance obligation? 3. What is the transaction price? 4. Is there a need to allocate the selling price? 5. Has the performance obligation been satisfied? Solution 15 (15 min.) 1. Yes. Comfort King and Jack Frost entered into an agreement to purchase a central air package on May 1, 2024 for $4,000. 2.

There are multiple performance obligations in this arrangement – sale of the central air unit and a two-year maintenance plan for the central air unit.

The transaction price is $4,000.

Since there are multiple performance obligations, we must allocate the transaction price based on their stand-alone market values as follows:

Performance Obligation Sale of central air unit Installation of unit Maintenance

Stand-alone value $4,000 400 ($250 x 2) 500 $4,900

% of total stand-alone value 81.63% 8.17% 10.2% 100%

Contract Price $4,000 4,000 4,000

Allocation of contract price $3,265 327 408 $4,000

The sale of the air central air unit and its installation have been completed on May 20, 2024, when the unit was delivered and installed. The obligation to perform annual maintenance on the central air unit has not been completed. This aspect will be completed on an annual basis as the maintenance term lapses.

Test Bank for Accounting Principles, Ninth Canadian Edition

Conclusion: Point of revenue recognition: Sale of central air unit – $3,265 on May 20, 2024 Installation of unit – $327 on May 20, 2024 Annual maintenance on central air – $204 at the end of each year (i.e., May 20, 2025 and 2026) Bloomcode: Analysis Difficulty: Medium Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Exercise 16 Comfort King Ltd. sells central air units to local residents. Jack Frost agreed to an arrangement with Comfort King to purchase a central air unit for $4,000 on May 1, 2024. In addition to the sale, the arrangement includes unit installation, which was completed on May 20, 2024. Comfort King only provides installation services for its customers who purchase new units. Comfort King was immediately paid the agreed-upon price by Jack Frost. Instructions Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so. 1. Is there a contract? 2. What is the performance obligation? 3. What is the transaction price? 4. Is there a need to allocate the selling price? 5. Has the performance obligation been satisfied? Solution 16 (10 min.) 1. Yes. Comfort King and Jack Frost entered into an agreement to purchase a central air unit on May 1, 2024 for $4,000. 2.

There are two performance obligations in this arrangement, to supply and install the central air unit.

The transaction price is $4,000.

Although there are two performance obligations, the installation costs are imbedded into the total contract price and cannot be separated since Comfort King does not provide these services on a stand-alone basis. Furthermore, the delivery and installation of the central air unit occurs simultaneously so there is no need to separate the two components.

Test Bank for Accounting Principles, Ninth Canadian Edition

The sale of the air central air unit and its installation have been completed on May 20, 2024, when the unit was delivered and installed, and therefore revenue can be realized at that time.

Conclusion: Point of revenue recognition: Sale of central air unit and installation – $4,000 on May 20, 2024 Bloomcode: Analysis Difficulty: Medium Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Exercise 17 The following transactions occurred during 2024: 1. A washing machine is delivered to the customer in October. Six instalment payments of $175 per month begin the following March. Ignore interest considerations. 2. Goods are sold FOB shipping point. An item with a retail value of $5,000 is loaded onto the truck on June 30, but not unloaded until July 3 because the recipient delayed paying the freight bill until then. The vendor prepares and mails the invoice to the customer on July 10. 3. A computer network system and related cables are delivered to the customer's premises on March 31. Installation is completed by April 30, after which the system is ready for use. The vendor provides monthly support and upgrades for four months following the month of installation (through end of August). The value of the system and cables is $25,000, the value of the installation services is $11,000, and the value of the monthly support totals $3,000. 4. Goods are sold FOB destination. An order with an invoice total of $2,500 is loaded onto the truck February 28 and delivered on March 1. 5. A customer prepays for six oil changes for a total of $480. During November, two oil changes are completed for this customer. Instructions Identify in which month revenue should be recognized in each situation. If revenue should be recognized in more than one month, calculate the amounts that apply to each relevant month. Solution 17 (10 min.) 1. Because the goods have been delivered to the customer, the full sales price of $175 x 6 = $1,050 should be recognized in October. 2.

The $5,000 revenue should be recognized in June because that is the period in which the customer accepted ownership in accordance with the terms of the sale “FOB shipping point.”

The revenue for sale of the system ($25,000) and installation ($11,000) should be recognized in

Test Bank for Accounting Principles, Ninth Canadian Edition

April because that is when the service is complete and the goods become available for use by the customer. The monthly support should be recognized at the rate of $3,000 ÷ 4 = $750 per month from May through August. 4.

The $2,500 revenue should be recognized in March because that is the period in which the customer accepted ownership in accordance with the terms of the sale “FOB destination.” Therefore, the vendor has legal title to the goods until delivered to the destination.

During November, service revenue of $160 ($480÷6 x 2 = $160) should be recognized because that is when that proportion of the services were provided.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Exercise 18 Spanish Marine Supplies is a marine supplier of tugboat engines. As part of the selling process, the company will install the tugboat engine, conduct sea trials on the engine, provide any servicing required on the engine for the first year of operation, and not require a payment from the client until 60 days after the client’s acceptance of the engine. The engine will remain the property of Spanish until the first payment is made, even though the boat is not the property of Spanish. The company’s customers frequently ask Spanish to customize the engines to suit their needs. These customization changes can be extensive and may take several months. Instructions Comment on when you think the company should recognize revenue. Solution 18 (5 min.) Revenue is recognized when all of the following conditions are met: 1. The seller has transferred to the buyer the significant risks and rewards of ownership. 2.

The seller does not have control over the goods or continuing managerial involvement.

The amount of revenue can be reliably measured.

It is probable there will be an increase in economic resources.

Costs relating to the sale of the goods can be reliably measured.

If there is no customization, then the company could recognize revenue when the customer makes the payment at the end of 60 days and assumes legal title to the engine. If there is customization, then the

Test Bank for Accounting Principles, Ninth Canadian Edition

revenue would be not be able to be recognized until all of the work has been completed, the revenue is known, and the customer has accepted and paid for the engine. Bloomcode: Analysis Difficulty: Medium Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Exercise 19 Target Security Company provides surveillance services to numerous corporate customers. The company has recently signed a new surveillance contract with Martin Manufacturing on January 1 for a period of one month at a cost of $500. On January 31, Target completed the contract and invoiced Martin for the full contract price due in 30 days. Instructions Complete the following steps to determine if the appropriate criteria have been met for Target to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Target can recognize the revenue and when it would be appropriate to do so. 1. Is there a contract? 2. What is the performance obligation? 3. What is the transaction price? 4. Is there a need to allocate the selling price? 5. Has the performance obligation been satisfied? Solution 19 (10 min.) 1. Yes. Target and Martin signed a contract for one month of surveillance services for consideration of $500. 2.

There is only one performance obligation – to provide one month of services.

The transaction price is $500.

Since there is only one performance obligation, the entire transaction price will be allocated to the one-month surveillance service.

Yes. Target completed the contract on January 31 as this was the stated period of service agreed under the contract. Target now has a right to receive payment of $500 from Martin.

Conclusion: All five steps of the contract-based approach to revenue recognition are complete on January 31, and therefore full revenue of $500 should be recorded on this date. Bloomcode: Analysis

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Exercise 20 Ed Sullivan Sailing Ltd. sold $175,500 of boat parts on credit in September. A total of 30% of the goods were shipped FOB destination and 70% were shipping FOB shipping point. At September 30, $25,000 of the goods that were FOB destination, were in transit. During September the company collected $100,000 cash from its customers. The company estimates that about 2% of the sales will become uncollectible and that about 8% of the sales will be returned by the customer. How much revenue should the company recognize for the month? Solution 20 (10 min.) Sales.................................................................................................................. Deduct goods in transit .................................................................................... Gross sales ........................................................................................................ Less sales returns and allowances ($150,500 * 8%) ........................................ Net sales ...........................................................................................................

175,500 25,000 150,500 12,040 138,460

Bloomcode: Application Difficulty: Medium Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Exercise 21 In the following transactions, indicate when revenue should be recognized: 1. In September, Fenwick College collects tuition revenue for the term from students. The term runs from September through December. 2. Cantel Company sells merchandise with terms of 2/10, n/30, FOB destination. 3. The Ottawa Senators sell season tickets to games in Canadian Tire Centre. Fans can purchase the tickets at any time, although the season doesn’t officially begin until September. It runs from September through May. 4. Air Canada sells you a refundable airline ticket in September for your flight home at Thanksgiving. 5. The College Bookstore has the following return policy for textbook sales: “Textbooks (new and used) may be returned for seven calendar days from the start of classes. After that time, textbooks (new and used) may be returned within 48 hours of purchase.” Solution 21 (10 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

The revenue should be recognized on a time period basis, which means a certain amount of revenue will be earned each month. Revenue is recognized as the service is performed.

The revenue for this sale will be recognized when the goods are delivered to the customer.

The ticket revenue will be recognized on a game-by-game basis. As the game occurs, the revenue for the ticket sales for that game will be recognized.

The revenue will not be recognized until the service is provided, which is when the flight occurs in October.

If the bookstore has been in business for a long time, then it would be able to accurately predict the textbook return and thus will be able to use a % of sales for sales returns and allowances, and recognize revenue when the books are sold.

Exercise 22 For each of the independent situations described below, list the assumption, concept, constraint, or recognition criteria that has been violated and describe the appropriate treatment. 1. Rideau Industrial purchased land that was listed for $75,000. The company worked very hard in negotiations and both parties agreed on a purchase price of $69,500. Rideau’s accountant has recorded the land on the books at $75,000 because she felt this was the most representative fair value at the time of purchase. 2. Melissa’s Hair Salon purchases many different hair and cosmetic supplies to be used within the salon and sold to customers. Melissa only has one credit card that she uses to make personal and business purchases. She often gets confused which purchases are for business purposes, so she records all credit card transactions through the salon. 3. Kimmy Furniture operates in a small town and often sells on credit without any detailed credit checks. The company sold merchandise to Fenton last year and he failed to pay the amount owing, so Kimmy wrote off his account. Kimmy has recently made another sale to Fenton on credit for $6,000 without any security on the transaction. Kimmy records all sale transactions once the goods are delivered and title passes. 4. Cut & Clarity Diamonds is a Canadian company that reports its financial statements in Canadian dollars. The company often sells its diamonds to customers in the United States and receives U.S. dollars. Cut & Clarity records the U.S. dollar amounts within the accounting records without any currency exchange. Solution 22 (10 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

Cost principle – GAAP requires that initial measurement be made at cost. Although the asking price for the land was $75,000, Rideau only paid $69,500, which represents the company’s cost. Rideau should adjust the accounting records and reduce the land value to its cost of $69,500.

Reporting entity – GAAP requires business transactions to be recorded separately from personal transactions. Melissa should reconcile her credit card statements to isolate the personal transactions and exclude these from the business. It should also be recommended that Melissa acquire a business credit card to facilitate this task.

Revenue recognition – Although the goods are delivered and legal title has passed to Fenton, collectibility is not reasonably assured due to past history with this customer and the lack of credit verification. As a result, under the earnings approach, revenue should not be recorded until Fenton pays Kimmy. Kimmy should reverse the sale entry.

Monetary unit – Since Cut & Clarity Diamond’s functional currency is Canadian dollars, all U.S. dollar transactions should be translated to Canadian dollars when recorded in the accounting records. Cut & Clarity should make a correcting entry to record the proper amount in Canadian dollars based on the current rate in effect on the date of the transaction.

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. Not every country uses the same conceptual framework or set of accounting standards. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

2. IFRS will be the standard for all Canadian companies. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

3. Going forward, there will be two sets of accounting standards for Canadian for-profit companies. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

4. The conceptual framework will not be able to guide decisions about what to present in the financial statements. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

5. A conceptual framework ensures we have a coherent set of standards. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

6. The conceptual framework ensures that existing standards and practices are clear and consistent. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

7. Canadian and international standards are based on specific rules for accounting. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

8. Canadian accounting standards are based mainly on principles rather than rules because it is impossible to create a rule for every situation. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

9. Revenues are decreases in assets or increases in liabilities that result in a decrease in equity, other than those relating to contributions by owners. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

10. The elements of financial statements are the key ratios that a company will use to manage its business. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

11. The main objective of financial reporting is to provide useful information for decision-making.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

12. The main users of financial reporting are the employees of a company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

13. Capital providers are some of the main users of financial reporting. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

14. To make decisions about allocating capital, users look for information in the financial statements about a company’s ability to maintain relationships with key customers. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the

Test Bank for Accounting Principles, Ninth Canadian Edition

financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

15. Claims on economic resources are defined as assets. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

16. An error is considered to be a material error if the error in the accounting information could have an impact on an investor’s or creditor’s decision. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

17. Under IFRS, a company can never change its accounting policies. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

18. In order for information to be useful in decision-making, the information must demonstrate relevance and faithful representation. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

19. Accounting information has relevance if it makes a difference in a decision. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

20. Predictive value confirms or corrects prior expectations. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

21. Confirmatory value helps users forecast future events. Answer: False Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

22. Accounting information is complete if it includes all information necessary to show the economic reality of the transaction. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

23. Accounting information is neutral if it makes a difference in a decision. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

24. Comparability means that a company uses the same accounting principles and methods from year to year. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

25. Consistency occurs when companies with similar circumstances use the same accounting principles. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

26. Information is verifiable if two knowledgeable and independent people would generally agree that it faithfully represents the economic reality. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

27. Timeliness means that accounting information is provided when it is still highly useful for decisionmaking. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

28. Understandability enables users to have timely information that is useful for decision makers.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

29. Understandability is greater when the information is classified, characterized, and presented clearly and concisely. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

30. The qualitative characteristic that should be first applied is that of relevance. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

31. The enhancing qualitative characteristics, such as comparability and timeliness, must be applied first before the characteristic of relevance in order to provide the most usefulness to the decision makers. Answer: False Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

32. Full disclosure means that the financial statements must be accompanied by notes to the financial statements. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

33. Faithful representation means that accounting information reports on the economic reality of a transaction, not its legal form. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

34. In the year of a change in an accounting policy, the change and its impact must be disclosed in the notes to the financial statements. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

35. Relevance and faithful representation are the two fundamental characteristics that financial information must have in order to be considered useful. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

36. Using the contract-based approach to revenue recognition, the entity will record revenue at the amount that it expects to receive. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

37. Revenue recognition criteria state that revenue is recognized at the same time that a decrease in an asset is recognized or an increase in a liability is recognized for profit-generating activities. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

38. One of the conditions of recognizing revenue from the sale of goods is that costs relating to the sale

Test Bank for Accounting Principles, Ninth Canadian Edition

of the goods can be reliably measured. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

39. If goods are shipped FOB destination, the selling company can recognize revenue when the goods are shipped. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

40. If goods are shipped FOB shipping point, the selling company cannot recognize the revenue until the goods are received at their destination. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

41. Revenue can be recognized before the service has been fully provided. Answer: True Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

42. One of the conditions that must be met for revenue to be recognized is that the amount of the revenue can be reliably measured. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

43. If a company provides refunds to customers for goods returned, revenue is recognized at the time of the return of the goods. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

44. Using the contract-based approach to revenue recognition in right-of-return situations, the entity would record revenue at the amount that it expects to receive. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

45. Using the earnings approach to revenue recognition, the entity would record a credit to the “refund liability” account for the estimated amount of returned goods. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

46. Under the contract-based approach, a company can recognize revenue when it has transferred a promised good or service to a customer. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

47. A contractor fixing an overhead door and replacing several parts including springs and tracks is an example of multiple performance obligations. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

48. The expense-recognition criteria states that expenses are recognized when there is an increase in an asset or decrease in a liability, excluding transactions with owners. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

49. There is a direct association between cost of goods sold and sales revenue. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

50. If it is not possible to determine the future benefits arising from expenditures, then the costs will be capitalized. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

51. When an asset ceases to have future value, it should be expensed. Answer: True Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

52. The cost model to report property, plant, and equipment is where the carrying value on the balance sheet is the fair value less accumulated depreciation. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

53. Fair value is the amount of cash expected to be collected if the asset is sold. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

54. Management bonuses based on profit may encourage management to overstate profits. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

55. When estimating amounts for accruals, it is not important that the estimate is supportable or verifiable because it is just an estimate. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

56. If a company is not a going concern, then its assets will be presented at their net realizable value. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

57. If the company is a going concern, the classification of assets and liabilities as current and noncurrent would not matter. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

58. It is an underlying assumption that financial statements are prepared as if the company is not a going concern.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

59. The cost constraint exists to ensure that the value of the information is more than the cost of providing it. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

60. An item is material when it is unlikely to influence the decision of a reasonably careful investor or creditor. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 61. The conceptual framework of accounting a) ensures that existing standards and practices are clear and consistent. b) makes it possible to respond quickly to new issues. c) increases the usefulness of the financial information presented in financial reports. d) All of the choices are correct. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

62. The conceptual framework does NOT include a) the objective of financial reporting. b) elements of financial statements. c) recognition and measurement criteria. d) specific standards to be followed in preparing financial statements. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

63. Canadian accountants rely on ______ to help them apply the conceptual framework to specific situations. a) the Canada Business Corporations Act b) identifiable rules c) the rules of the Income Tax Act d) professional judgement Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

64. The organization that is working toward uniformity in accounting practices throughout the world is the a) World Bank. b) United Nations. c) International Accounting Standards Board. d) National Commission on Fraudulent Financial Reporting. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

65. Which statement below is NOT true? a) The conceptual framework includes specific rules for every situation. b) The conceptual framework ensures the existing standards and practices are clear and consistent. c) The conceptual framework provides guidance in responding to new issues and developing new standards. d) The conceptual framework increases financial statement users’ understanding of and confidence in the financial statements. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

66. Not every country uses the same conceptual framework. This lack of uniformity has arisen because a) there are not enough members in the professional body. b) no time is available to complete the framework. c) there are differences in legal and governmental systems. d) financial statements do not need to be comparable. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

67. Which of the following is a reason for the lack of uniformity in accounting standards between countries? a) differences in legal systems b) differences in the process for developing standards c) differences in governmental requirements d) All of the choices are correct. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

68. Which of the following is NOT prescribed by the conceptual framework of accounting? a) functions of financial accounting statements b) goals of financial accounting statements c) limits of financial accounting statements d) nature of financial accounting statements Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list

Test Bank for Accounting Principles, Ninth Canadian Edition

the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

69. The conceptual framework of accounting does NOT a) guide decisions on how to communicate information. b) guide decisions on how to report economic events. c) provide specific guidance for any element of the financial statements. d) guide decisions on what to present in financial statements. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

70. The conceptual framework does NOT a) assist accountants in the application of accounting standards. b) ensure that existing standards and practices are clear and consistent. c) provide guidance in responding to new issues and developing new standards. d) decrease financial statement users’ understanding of and confidence in the financial statements. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

71. Canadian and international accounting standards are primarily based upon a) general principles. b) general principles and specific rules, respectively. c) specific rules and general rules, respectively. d) specific rules.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

72. Qualitative characteristics a) do not include relevance. b) ensure presented information is useful. c) do not include faithful representation. d) determine how financial information is reported. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting CPA: Financial Reporting AACSB: Analytic

73. Which component in the conceptual framework is a present obligation that results in a transfer of resources from a business? a) revenues b) expenses c) assets d) liabilities Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

74. Which component in the conceptual framework arises from an increase in assets or a decrease in liabilities, other than those relating to contributions of owners? a) revenues b) expenses c) assets d) liabilities Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

75. Which component in the conceptual framework provides financial information about a business that is useful to existing and potential investors and lenders? a) equity b) objective of financial reporting c) assets d) liabilities Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

76. Which component in the conceptual framework arises from decreases in assets or increases in liabilities, other than those relating to distributions to owners? a) revenues b) expenses c) assets d) liabilities Answer: b Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

77. Which component in the conceptual framework applies to the requirement to show economic performance in the financial statements? a) equity b) liabilities c) assets d) objective of financial reporting Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

78. Which one of the following is the main objective of financial reporting according to the conceptual framework? a) to provide information that will increase the value of the company b) to provide information in assessing future cash flows c) to provide information about the company’s capital providers d) to provide financial information that is useful to existing and potential investors, and creditors in making decisions about a business Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

79. The objective of financial reporting is to provide information that is mainly useful to

Test Bank for Accounting Principles, Ninth Canadian Edition

a) governmental taxing bodies. b) employees and labour unions. c) investors and creditors. d) internal and external auditors. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

80. The overriding criterion in evaluating the accounting information to be presented is a) fairness. b) legality. c) management's goals. d) decision usefulness. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

81. Financial statements are designed to provide information about all of the following, except a) the economic resources, obligations, and equity of the entity. b) changes in economic resources, obligations, and equity of the entity. c) management performance evaluations. d) economic performance of the entity. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

82. In order to assess the financial performance of a company, the financial statements must a) be prepared on a monthly basis. b) provide information on management’s use of the company’s resources. c) be audited annually. d) provide information concerning changes in the company’s share price. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

83. ______ play(s) a fundamental role in the efficient functioning of the economy by providing capital (cash) to businesses. a) Managers b) Employees c) Capital providers d) IASB Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting CPA: Financial Reporting AACSB: Analytic

84. In the conceptual framework for IFRS, which one of the following is NOT a qualitative characteristic of useful accounting information? a) relevance b) faithful representation c) conservatism d) comparability

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

85. In order for accounting information to be relevant, it must a) have very little cost. b) have predictive or confirmatory value. c) be comparable. d) be used by a lot of different firms. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

86. If accounting information has confirmatory value, it a) has been verified by an external audit. b) is prepared on an annual basis. c) confirms or corrects prior expectations. d) is neutral in its representations. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

87. If accounting information has predictive value, it is useful in making predictions about

Test Bank for Accounting Principles, Ninth Canadian Edition

a) the economic environment the company operates in. b) world events that impact the economy. c) future interest rates and foreign currency exchange rates. d) future events of a company. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

88. Relevant accounting information a) is information that has been audited. b) must be reported within one year. c) has been objectively determined. d) is information that is capable of making a difference in a decision. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

89. Which of the following is NOT a qualitative characteristic associated with faithful representation? a) complete b) comparability c) neutrality d) free from material error Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

90. A company can change to a new accounting principle if management can justify that the new principle results in a) more relevant and faithful representation of the financial presentation in the statements. b) a higher profit. c) a lower profit for tax purposes. d) less likelihood of clerical errors. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

91. Which is NOT necessary to ensure that faithful representation is achieved? a) Accounting information is reported on a cash basis. b) Accounting information is free from material error. c) Accounting information is complete. d) Accounting information is neutral. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

92. Which of the following statements is NOT true? a) Consistency means using the same accounting principles from year to year within a company. b) Faithful representation is the quality of information that gives assurance that all amounts reported are known with certainty. c) Relevant accounting information must be capable of making a difference in a decision. d) Accounting standards for private entities have four principal qualitative characteristics.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

93. Qualitative characteristics associated with relevant accounting information are a) consistency, faithful representation, and timeliness. b) predictive value, confirmatory value, and materiality. c) neutrality, predictive value, and reliability. d) going concern, cost principle, and materiality. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

94. An item is considered to be material if a) the assets would be larger than the liabilities. b) the information would change an investor’s mind. c) the company has a loss. d) the company has never paid a dividend. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

95. Accounting information is neutral if

Test Bank for Accounting Principles, Ninth Canadian Edition

a) it is free from bias. b) the amount of assets equals the amount of liabilities. c) the trial balance balances. d) all of the information is present to show the economic reality of the transaction. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

96. The qualitative characteristics should be applied in which order? a) relevance, comparability, and then faithful representation b) faithful representation, relevance, and then comparability c) timeliness, faithful representation, and then comparability d) relevance, faithful representation, and then comparability Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

97. The summary of significant accounting policies footnoted in the financial statements would NOT normally discuss a) depreciation methods. b) board of directors’ salaries. c) method of inventory costing. d) revenue recognition policies. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

98. Notes to the financial statements are required because the most important objective of financial reporting is to a) provide information to the taxing authorities. b) obtain uniformity with foreign countries. c) provide information useful for decision-making. d) provide information about the board of directors. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

99. The information provided in the notes that accompany financial statements is required because of the a) cost principle. b) full disclosure principle. c) matching principle. d) revenue recognition principle. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

100. The level of disclosure contained in the notes to the financial statements is limited by the a) cost versus the benefit of providing the disclosures. b) accounting policies selected by the business. c) time period assumption. d) going concern assumption.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

101. Which of the following is an important component of relevance? a) materiality b) verifiability c) consistency d) comparability Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

102. Information that is prepared free from bias is considered a) complete. b) neutral. c) comparable. d) verifiable. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

103. Information is understandable when it is understood by users a) who have a reasonable understanding of financial reporting. b) who have a reasonable knowledge of business and economic activities. c) because the information provided is classified, and presented clearly and concisely. d) All of the choices are correct. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

104. In following the application of the qualitative characteristics, which characteristic would be immediately applied after the relevance characteristic? a) faithful representation b) comparability c) timeliness d) understandability Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

105. Under ASPE, the characteristic which ensures that when preparing financial statements, accountants should choose the accounting treatment or estimate that will be least likely to overstate assets, revenues, and gains and the least likely to understate liabilities, expenses, and losses is a) conservatism. b) understandability. c) comparability. d) relevance. Answer: a Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

106. Which of the following is a term that best describes the influence an item has on the decision of a reasonably careful investor or creditor? a) verifiability b) relevance c) understandability d) materiality Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

107. Under ASPE, conservatism is similar to the ______ concept for IFRS, simply meaning managing with care, economy, and frugality. a) neutrality b) understandability c) comparability d) prudence Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

108. Which of the following is NOT related to materiality? a) relevance

Test Bank for Accounting Principles, Ninth Canadian Edition

b) verifiability c) benefit versus cost constraint d) cost constraint Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

109. Which of the following is a qualitative characteristic under both IFRS and ASPE? a) relevance b) verifiability c) faithful representation d) timeliness Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

110. Which of the following is NOT a qualitative characteristic under ASPE? a) understandability b) timeliness c) reliability d) relevance Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

111. Which of the following is NOT a qualitative characteristic under IFRS? a) comparability b) verifiability c) reliability d) understandability Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information CPA: Financial Reporting AACSB: Analytic

112. Under IFRS, probable, relating to recognition criteria, is interpreted as a) a greater than 50% chance of occurrence. b) a high chance of occurrence. c) a 100% chance of occurrence. d) a 75% or more chance of occurrence. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

113. Under ASPE, probable, relating to recognition criteria, is interpreted as a) a greater than 50% chance of occurrence. b) a high chance of occurrence. c) a 100% chance of occurrence. d) a 75% or more chance of occurrence. Answer: b Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

114. Which of the following is NOT an example of an expense that directly relates to revenue? a) bad debt expense b) warranty expense c) cost of goods sold d) interest expense Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

115. Which of the following is true? a) Realizable value measures assets at the amount of cash or equivalent that would have to be paid if the same or an equivalent asset had to be purchased in the current period. b) Market value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. c) Present value measures assets and liabilities at the future value of future cash inflows or outflows. d) Fair value measures assets at the amount of cash or equivalent that could currently be obtained by selling the asset in an orderly disposal less any estimated costs necessary to complete the asset and estimated costs necessary to make the sale. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

116. Which of the following is NOT a measurement method? a) monetary value b) present value c) fair value d) historical cost Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

117. Which of the following is NOT a component of the five-step framework to the contract-based approach of revenue recognition? a) Determining the transaction price in the overall contract. b) Allocating the transaction price evenly through the contract. c) Identifying the contract with a customer. d) Identifying the performance obligations in the contract. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

118. Which of the following is NOT an indication that control over goods or services has transferred at a point in time? a) Customer has accepted the goods or service. b) Customer has legal title to the goods. c) Identifying the contract with a customer. d) Business has a right to payment. Answer: c Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

119. Which of the following is a situation indicating that control over goods or services transfers over a period of time? a) Customer accepts delivery and installation of an alarm system. b) Contractor constructing an office building. c) Customer purchases a mattress and picks it up immediately. d) Customer pays a contract plumber immediately after having their laundry connections fixed. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

120. Which revenue recognition method would most likely be used by a retailer? a) point of sale b) upon cash collection c) during production d) upon delivery Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

121. Retailers who sell a product with a warranty period can recognize revenue a) when the warranty period has expired. b) at the point of sale if the warranty amount can be estimated. c) when cash is collected.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) when the exact cost of the items sold is known. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

122. Which of the following is a situation indicating that control over goods or services has transferred at a point in time? a) Customer accepts delivery and installation of an alarm system. b) Contractor constructing an office building. c) A warranty service that provides support for a period of two years. d) Customer purchases season tickets to the Wolves football team. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

123. Which of the following would be an example of multiple performance obligations? a) Customer accepts delivery for a new outdoor spa tub. b) Contractor is hired to fix an overhead door and replaces several parts including springs and tracks. c) Customer purchases a new gas range and two-year extended warranty. d) Customer purchases a family pack of tickets to the Wolves football team that includes multiple tickets for the same game. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

124. Sam Baker enters into a contract with Pit Company to purchase a gas fireplace unit. The sale agreement is for a total price of $3,000 and includes delivery of the unit, installation, and a two-year warranty. Installation successfully occurred on November 1, 2024. Pit Company often sells this gas fireplace for $2,500 and offers installation and warranty services at $500 and $300, respectively. Using the stand-alone fair values, what amount would be recorded as revenue on November 1, 2024, under the contract-based approach to revenue recognition? Round to the nearest whole dollar. a) $2,727 b) $2,500 c) $2,273 d) $3,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

125. One criterion for recognition of revenue is to recognize revenue when a) cash is collected. b) collection is not assured. c) the seller does not have control over the goods. d) all sales returns have been returned. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

126. At the time of acquisition, long-lived assets are recorded at a) amortized cost. b) lower of cost and market. c) fair market value.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) cost. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

127. There are several ways the recognition and measurement concepts can be violated. Which one of the following would NOT necessarily be considered a violation? a) intentional misstatement of estimates b) failure to record a revenue or expense c) recognition of revenue or expense in the incorrect accounting period d) a change in an accounting policy Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting AACSB: Analytic

128. Which of the following is NOT a criterion pertaining to revenue recognition for the sale of goods under the earnings approach? a) Amount of returns is known with certainty. b) Collection is reasonably assured. c) Amount of the revenue can be reliably measured. d) Significant risks and rewards of ownership have been transferred to the buyer. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

129. When a private company is reporting under ASPE, and under the going concern assumption, the company will be reporting their equipment assets at a) original cost. b) net realizable value. c) original cost less accumulated depreciation. d) undepreciated capital cost. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

130. The cost constraint a) means that assets and revenues should be estimated at the lower end of their range. b) means that assets and revenues should be estimated at the higher end of their range. c) means the value of the information is not less than the cost to produce the information. d) means the information would influence the decisions of a user of the financial information. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

131. Which of the following is a constraint in financial reporting? a) cost b) comparability c) consistency d) going concern Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

132. A common application of the cost constraint is I. recording assets at cost. II. not disclosing information that is immaterial and unnecessary in the notes. III. use of the FIFO cost flow assumption for inventory valuation. a) I b) II c) III d) I and II Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

133. Financial statements are prepared for an economic business unit that is separate and distinct from its owners. This is referred to as a) the going concern assumption. b) the objective of financial reporting. c) a cost constraint. d) the economic entity concept. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

134. A persuasive constraint that ensures the value of the information provided is greater than the costs of providing it is the a) financial reporting objective constraint. b) cost constraint. c) going concern constraint. d) economic entity constraint. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

135. Which of the following violates the monetary unit concept when measuring, recording, and reporting financial information? a) Canadian dollar b) U.S. dollar c) customer loyalty d) Euros Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

136. Canadian GAAP allows private companies the choice to adopt ASPE instead of IFRS since the cost to private companies of providing financial statements prepared under IFRS is often greater than the benefits. This statement is an example of which of the following concepts and constraints? a) cost constraint b) materiality constraint c) full disclosure concept d) reporting entity concept Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

137. Users of private companies’ financial statements generally require a) more information than users of public companies’ financial statements. b) less information than users of public companies’ financial statements. c) more disclosures than IFRS. d) the same information as users of public companies’ financial statements. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

138. Information that is disclosed in the notes to the financial statements generally a) does not give supplementary detail. b) does not explain recorded transactions. c) does not supply new information. d) can explain unrecorded transactions Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

139. Accrual accounting is closely related to the a) periodicity concept.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) reporting entity concept. c) going concern assumption. d) monetary unit concept. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

140. Jane’s Jean Company has been hit hard by the “stay at home orders” by the province due to the COVID-19 pandemic. Jane is not confident that she will be able to carry on long enough to fulfil her company’s objectives and commitments. Which foundational concept/assumption is applicable to Jane’s situation? a) periodicity concept b) full disclosure concept c) going concern assumption d) reporting entity concept Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

141. LMNOP Company, located in Ontario, is a public company that trades its shares on a U.S. stock exchange. According to the monetary unit concept, the company’s financial information should a) be reported in a combination of U.S. and Canadian dollars. b) be reported in Canadian dollars only for the first year. c) include the recognition of elements that cannot be quantified. d) be reported in Canadian or U.S. dollars. Answer: d Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 142. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F. G.

Relevance Confirmatory value Comparability Verifiability Economic entity concept Going concern assumption Percentage-of-completion method

H. I. J. K. L. M.

Cost benefit IASB Revenue recognition criteria Revaluation model Complete Conceptual framework

___

1. A coherent system of interrelated objectives and fundamentals that can lead to consistent standards

___

2. Standard-setting body that is responsible for developing IFRS

___

3. The carrying value of property, plant, and equipment is its fair value less accumulated depreciation less subsequent impairment losses.

___

4. Economic events can be identified with a particular business.

___

5. Appropriate for certain long-term construction contracts

___

6. Assumes a company will exist long enough to carry out its existing objectives and commitments

___

7. The cost of producing the information does not exceed the value of the information.

___

8. Information that has a bearing on a decision

Test Bank for Accounting Principles, Ninth Canadian Edition

___

9. Two knowledgeable and independent people would agree that information is faithfully represented.

___

10. When information confirms or corrects prior expectations

___

11. Different companies using the same accounting principles

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12. Financial information includes all necessary information to show the economic reality of the underlying transactions or events.

___

13. This criterion allows revenue to be recognized when there is an increase in assets or decrease in liabilities from profit-generating activities.

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 1.

10. B 11. C 12. L 13. J Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the importance of having a conceptual framework of accounting, and list the key components. Section Reference: The Conceptual Framework of Accounting Learning Objective: Explain the objective of financial reporting, and define the elements of the financial statements. Section Reference: The Objective of Financial Reporting Learning Objective: Apply the fundamental and enhancing qualitative characteristics of the conceptual framework to financial reporting situations. Section Reference: Qualitative Characteristics of Useful Financial Information Learning Objective: Apply the recognition and measurement criteria of the conceptual framework to financial reporting situations. Section Reference: Recognition and Measurement Criteria Learning Objective: Apply the foundational concepts, assumptions, and constraints of the conceptual framework to financial reporting situations. Section Reference: Foundational Concepts, Assumptions, and Constraints CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 12 ACCOUNTING FOR PARTNERSHIPS CHAPTER STUDY OBJECTIVES 1. Describe the characteristics of the partnership form of business organization. The main characteristics of a partnership are (1) the association of individuals, (2) mutual agency, (3) coownership of property, (4) limited life, and (5) unlimited liability for a general partnership.

2. Account for the formation of a partnership. When a partnership is formed, each partner’s initial investment should be recorded at the assets’ fair value at the date of their transfer to the partnership. If accounts receivable are contributed, both the gross amount and an allowance for doubtful accounts should be recorded. Accumulated depreciation is not carried forward into a partnership.

3. Allocate and record profit or loss to partners. Profit or loss is divided based on the profit and loss ratio, which may be any of the following: (1) a fixed ratio; (2) a ratio based on beginning, ending, or average capital balances; or (3) salary and interest allowances and the remainder in a fixed ratio.

4. Prepare partnership financial statements. The financial statements of a partnership are similar to those of a proprietorship. The main differences are that (1) the statement of owners’ equity is called the statement of partners’ equity, and (2) each partner’s capital account is usually reported on the balance sheet or in a supporting schedule.

5. Account for the admission of a partner. The entry to record the admission of a new partner by purchase of a partner’s interest affects only partners’ capital accounts. The entry to record the admission by investment of assets in the partnership (1) increases both net assets and total capital, and (2) may result in the recognition of a bonus to either the old partners or the new partner.

6. Account for the withdrawal of a partner. The entry to record a withdrawal from the firm when payment is made from partners’ personal assets affects only partners’ capital accounts. The entry to record a withdrawal when payment is made from partnership assets (1) decreases net assets and total capital, and (2) may result in recognizing a bonus to either the departing partner or the remaining partners.

7. Account for the liquidation of a partnership. When a partnership is liquidated, it is necessary to record (1) the sale of noncash assets, (2) the allocation of the gain or loss on realization based on the profit and loss ratio, (3) the payment of partnership liabilities, (4) the removal of any capital deficiency

Test Bank for Accounting Principles, Ninth Canadian Edition

either by repayment or by allocation to the other partners, and (5) the distribution of cash to the partners based on their capital balances.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 Three types of partnerships were described in the text. Explain how limited partnerships (LP) and limited liability partnerships (LLP) differ from each other and from a traditional partnership. Solution 1 (5 min.) The differences among the three types of partnerships are with respect to the roles of the partners and their liability for losses: Traditional partnership – All partners have equal authority to conduct business on behalf of the partnership, and all partners have equal liability for losses that may be incurred. Thus, if there are insufficient partnership assets to settle liabilities, individual partners may be required to pay the debts out of their personal assets. Limited partnership – A general partner manages the business of the partnership and has unlimited liability. The other (limited) partners are primarily investors, and are not active in the management of the business. If losses occur, the limited partners’ liability and losses are restricted to the amount that they initially invested in the partnership. Limited liability partnership – All partners may conduct business on behalf of the partnership. However, if losses occur that are a result of a specific partner’s negligence, the liability of the other partners is limited to their share of partnership assets. Only the partner whose negligence caused the loss is personally liable beyond his or her share of partnership assets. Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

Exercise 2 Arnold Black and Sam Smith operate separate auto repair shops as proprietorships. On January 1, 2024, they decide to combine their separate businesses to form Black Smith Auto Repair, a partnership. Information from their separate balance sheets is presented below: Black Auto Repair Smith Auto Repair Cash...................................................................................... $5,000 $10,000 Accounts receivable ............................................................ 8,000 5,000 Allowance for doubtful accounts ........................................ 1,000 500 Accounts payable ................................................................ 3,000 6,000 Notes payable ...................................................................... — 5,000 Salaries payable .................................................................. 1,000 500 Equipment ........................................................................... 12,000 26,000 Accumulated depreciation—equipment ............................ 2,000 4,000

Test Bank for Accounting Principles, Ninth Canadian Edition

It is agreed that the expected realizable value of Black's accounts receivable is $5,000 and Smith's receivables is $4,000. The fair value of Black's equipment is $15,000 and Smith's equipment is $24,000. It is further agreed that the new partnership will assume all liabilities of the proprietorships with the exception of the notes payable on Smith's balance sheet that he will pay himself. Instructions Prepare the journal entries necessary to record the formation of the partnership. Solution 2 (15 min.) Cash .................................................................................................................. Accounts Receivable ........................................................................................ Equipment ........................................................................................................ Allowance for Doubtful Accounts ............................................................ Salaries Payable ....................................................................................... Accounts Payable ..................................................................................... A. Black, Capital ........................................................................................ To record A. Black's investment. Cash .................................................................................................................. Accounts Receivable ........................................................................................ Equipment ........................................................................................................ Allowance for Doubtful Accounts ............................................................ Salaries Payable ....................................................................................... Accounts Payable ..................................................................................... S. Smith, Capital ....................................................................................... To record S. Smith's investment.

5,000 8,000 15,000 3,000 1,000 3,000 21,000

10,000 5,000 24,000 1,000 500 6,000 31,500

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

Exercise 3 On January 1, 2023, Steve Furlong and Mark Pippy agreed to pool their assets and form a partnership called F&P Computing. They agree to share all profits equally and make the following initial investments: Pippy Furlong Cash .................................................... $10,000 $30,000 Accounts receivable ........................... 6,000 4,000 Allowance for doubtful accounts ....... 1,500 500 Furniture ............................................. 24,000 29,000

Test Bank for Accounting Principles, Ninth Canadian Edition

On December 31, 2023, the partnership reported a loss for the year of $19,500. On January 1, 2024, Furlong and Pippy agreed to accept Nicholas Adams into the partnership by purchasing 20% of Pippy’s interest in the partnership and 30% of Furlong’s interest. The partnership agreement is amended to provide for the following sharing of profit and losses: Adams Pippy Furlong Salary allowance ........................ $20,000 $30,000 $60,000 Remaining ratio .......................... 5 3 2 For the year ended December 31, 2024, profit was $350,000. Instructions a) Journalize the following transactions: (1) the initial contributions to the partnership by Furlong and Pippy on January 1, 2023. (2) the allocation of the loss to the partners at the end of December 2023. (3) the purchase of the partnership interest by Adams on January 1, 2024. b) Prepare a schedule to show the division of profit at December 31, 2024. Solution 3 (10 min.) a) (1) 2023 Jan. 1 Cash......................................................................................... Accounts Receivable............................................................... Furniture ................................................................................. Allowance for Doubtful Accounts ................................ S. Furlong, Capital ........................................................ 1

30,000 4,000 29,000 500 62,500

Cash......................................................................................... Accounts Receivable............................................................... Furniture ................................................................................. Allowance for Doubtful Accounts ................................ M. Pippy, Capital...........................................................

10,000 6,000 24,000

S. Furlong, Capital .................................................................. M. Pippy, Capital ..................................................................... Income Summary .........................................................

9,750 9,750

S. Furlong, Capital [$62,500 – $9,750) × 30%] ........................ N. Adams, Capital .........................................................

15,825

M. Pippy, Capital [($38,500 – $9,750) × 20%] ......................... N. Adams, Capital .........................................................

5,750

1,500 38,500

(2) Dec. 31

(3) 2024 Jan. 1

19,500

15,825

5,750

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Division of Profit Year Ended December 31, 2024 Adams Pippy Profit Salary allowance Profit remaining for allocation Fixed ratio Adams ($240,000 × 5 ÷ 10) Pippy ($240,000 × 3 ÷ 10) Furlong ($240,000 × 2 ÷ 10) Profit remaining for allocation Division of profit

$20,000

$30,000

Furlong $60,000

Total $350,000 110,000 240,000

120,000 72,000 48,000 ___________ ___________ ___________ $140,000 $102,000 $108,000

240,000 _________0 $350,000

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

Exercise 4 On January 1, 2023, Jacky Wu and Tim Lee decided to form a partnership, dividing all profits and losses equally and by making the following investments: ........................................................... Wu Lee Cash .................................................. $150,000 $0 Land .................................................. 0 65,000 Building ............................................. 0 120,000 Furniture ........................................... 35,000 0 On December 31, 2023, the partnership reported a profit for the year of $28,000. On January 1, 2024, Wu and Lee agreed to accept Jody Smith into the partnership by purchasing 25% of partnership interest for $165,000 cash. The partnership agreement is amended to provide for the following sharing of profit and losses: Wu Lee Smith Salary allowance ........................ $60,000 $60,000 $30,000 Remaining ratio .......................... 1/3 1/3 1/3 For the year ended December 31, 2024, profit was $330,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Journalize the following transactions: (1) the initial contributions to the partnership by Wu and Lee on January 1, 2023. Use a single compound entry. (2) the allocation of the profit to the partners at the end of December 2023. (3) the purchase of the partnership interest by Smith on January 1, 2024. b) Prepare a schedule to show the division of profit at December 31, 2024. Solution 4 (10 min.) a) (1) 2023 Jan. 1 Cash......................................................................................... Land ........................................................................................ Building ................................................................................... Furniture ................................................................................. J. Wu, Capital .................................................................. T. Lee, Capital..................................................................

150,000 65,000 120,000 35,000 185,000 185,000

(2) Dec. 31

Income Summary ................................................................... J. Wu, Capital .................................................................. T. Lee, Capital..................................................................

28,000 14,000 14,000

(3) Partnership capital balance after admission of Smith = $185,000 + $185,000 + $28,000 + $165,000 = $563,000. J. Smith, Capital = $563,000 x 25% = $140,750. Bonus to old partners = $165,000 - $140,750 = $24,250. 2024 Jan. 1

Cash......................................................................................... J. Smith, Capital .............................................................. J. Wu, Capital ($24,250 x 50%) ........................................ T. Lee, Capital..................................................................

165,000 140,750 12,125 12,125

b) Division of Profit Year Ended December 31, 2024 Wu Lee Profit Salary allowance Profit remaining for allocation Fixed ratio Wu ($180,000 × 1/3) Lee ($180,000 × 1/3) Smith ($180,000 × 1/3) Profit remaining for allocation Division of profit

$60,000

Smith $30,000

Total $330,000 150,000 180,000

60,000 60,000 ___________ ___________ $120,000 $120,000

60,000 _________ $90,000

180,000 _________0 $330,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 5 Max Baer and Jimmy Choo are two proprietors who decide to merge their businesses into a partnership on January 1, 2024. The assets each contributed to the partnership are as follows:

Cash Accounts receivable Allowance for doubtful accounts Equipment Accumulated depreciation— equipment

Max Baer Book Value Fair Value $3,000 $3,000 8,000 7,500 (500)

Jimmy Choo Book Value Fair Value $500 $500 0 0 0 0 30,000 10,000 (18,000)

During the year ended December 31, 2024, the business, Bear-Chew Pet Services, had revenues of $180,000, rent expenses of $12,000, depreciation expense of $2,500, and other operating expenses of $8,400. Other than depreciation expense, all revenues and expenses incurred by the business were for cash. As well, cash of $7,500 was collected on the accounts receivable, with the remainder of the accounts receivable written off. The partnership agreement specifies that Max and Jimmy will share the partnership profit equally. During the year, Max withdrew $40,000 for personal use, and Jimmy withdrew $28,000. Instructions a) Prepare the journal entry to record the two partners’ contributions on January 1, 2024. b) Prepare the partnership’s income statement, statement of partners’ equity, and balance sheet at December 31, 2024. Solution 5 (25 min.) a) January 1, 2024 Cash ($3,000 + $500) ......................................................................................... Accounts Receivable ........................................................................................ Equipment ........................................................................................................ Allowance for Doubtful Accounts ............................................................

3,500 8,000 10,000 500

Test Bank for Accounting Principles, Ninth Canadian Edition

M. Baer, Capital......................................................................................... J. Choo, Capital.........................................................................................

10,500 10,500

b) Bear-Chew Pet Services Income Statement Year ended December 31, 2024 Revenue Expenses Rent expense Depreciation expense Other operating expenses Profit for the year

Capital, January 1, 2024 Add: Investments Profit Less: Drawings Capital, December 31, 2024

$180,000 $12,000 2,500 8,400

Bear-Chew Pet Services Statement of Partners' Equity Year ended December 31, 2024 M. Baer $ — 10,500 78,550 89,050 40,000 $49,050

J. Choo $ — 10,500 78,550 89,050 28,000 $61,050

22,900 $157,100

Total $ — 21,000 157,100 178,100 68,000 $110,100

Bear-Chew Pet Services Balance Sheet December 31, 2024 Assets Current assets Cash

$102,600

Equipment Less: Accumulated depreciation—equipment

$10,000 2,500

Total assets

7,500 $110,100

Liabilities and Partners' Equity Partners' equity M. Baer, capital J. Choo, capital

$49,050 61,050

Cash: = $3,500 + $7,500 + $180,000 – $12,000 – $8,400 – $40,000 – $28,000 = $102,600

$110,100

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

Exercise 6 Peter and Paul have a partnership agreement that includes the following provisions regarding sharing profit or loss: 1. A salary allowance of $30,000 to Peter and $15,000 to Paul. 2. An interest allowance of 10% on capital balances at the beginning of the year. 3. The remainder to be divided 30% to Peter and 70% to Paul. The capital balances on January 1, 2024, for Peter and Paul were $80,000 and $100,000, respectively. During 2024, the Peter and Paul Merchandising Partnership had sales of $330,000, cost of goods sold of $190,000, and operating expenses of $60,000. Instructions Prepare an income statement for the Peter and Paul Merchandising Partnership for the year ended December 31, 2024. As a part of the income statement, include a division of profit to each of the partners. Solution 6 (15 min.) PETER AND PAUL MERCHANDISING PARTNERSHIP Income Statement Year Ended December 31, 2024 Sales................................................................................................................................. Cost of goods sold ........................................................................................................... Gross profit ...................................................................................................................... Operating expenses ........................................................................................................ Profit for the year ............................................................................................................ Division of Profit Peter Profit .............................................................. Salary allowance ........................................... $30,000 Profit remaining for allocation ..................... Interest allowance Peter ($80,000 × 10%) ............................ 8,000 Paul ($100,000 × 10%) ........................... Profit remaining for allocation .....................

Paul $15,000

10,000

$330,000 190,000 140,000 60,000 $ 80,000

Total $80,000 45,000 35,000

18,000 17,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Fixed ratio Peter ($17,000 × 30%) ............................ Paul ($17,000 × 70%) ............................. Profit remaining for allocation ..................... Profit allocated to partners...........................

5,100 ______ $43,100

11,900 ______ $36,900

17,000 0 $80,000

Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

Exercise 7 Pac-link Technologies is a partnership owned and operated by Tom Kennedy and Mike McConnell. To recognize the fact that the partners have invested significantly different amounts of capital and that Tom works full time, while Mike works only part time, the partnership agreement states that the profit will be allocated as follows: An interest allowance of 3% of each partner’s beginning capital balance plus a salary allowance of $85 per hour worked. Any remaining profit or loss after calculation of these allowances will be allocated equally. At January 1, 2024, Tom’s capital account balance was $15,000 and Mike’s was $20,000. During the year ended December 31, 2024, Tom worked 1,200 hours and Mike worked 550 hours. Instructions a) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2024 is $196,000. b) Calculate each partner’s share of profit assuming that profit for the year ended December 31, 2024 is $88,000. Solution 7 (15 min.) a) Kennedy Profit Interest allowance $15,000 x 3% $20,000 x 3% Profit remaining for allocation Salary allowance 1,200 hours x $85 550 hours x $85 Profit remaining for allocation Fixed ratio $46,200 ÷ 2 Profit remaining for allocation Profit allocated to partners

McConnell

Total $196,000

$ 600

1,050 194,950

46,750

148,750 46,200

23,100

$125,550

$70,450

46,200 0 $196,000

$ 450

102,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Kennedy Profit Interest allowance $15,000 x 3% $20,000 x 3% Profit remaining for allocation Salary allowance 1,200 hours x $85 550 hours x $85 Profit (deficiency) remaining for allocation Fixed ratio ($61,800) ÷ 2 Profit remaining for allocation Profit allocated to partners

McConnell

Total $88,000

$ 600

1,050 86,950

46,750

148,750

$ 450

102,000

(61,800) (30,900)

(30,900)

$71,550

$16,450

(61,800) 0 $88,000

Exercise 8 Laroche, Kennedy, and White formed a partnership on January 1, 2024. Laroche invested $40,000, Kennedy $30,000, and White $50,000. Laroche will manage the store and work 40 hours per week in the store. Kennedy will work 20 hours per week in the store, and White will not work. Each partner withdrew 30 percent of his profit distribution during 2024. Other than the profit distribution to a partner, there were no withdrawals of cash. Instructions Calculate the partners' capital balances at the end of 2024 under the following independent conditions: (Hint: use T accounts to determine each partner's capital balance.) a) Profit is $80,000 and the profit ratio is Laroche 40%, Kennedy 35%, and White 25%. b) Profit is $100,000 and the partnership agreement specifies a salary of $35,000 to Laroche and $20,000 to Kennedy. Any remaining amount is to be shared equally among the partners. c) Profit is $35,000 and the partnership agreement provides for (a) a salary of $20,000 to Laroche and $20,000 to Kennedy, (b) interest on beginning capital balances at the rate of 6%, and (c) any remaining profit or loss is to be shared by Laroche 50%, Kennedy 35%, and White 15%. Solution 8 (25 min.) a)

Test Bank for Accounting Principles, Ninth Canadian Edition

Laroche, Capital 9,600 40,000 32,000 62,400

Laroche Kennedy White

Kennedy, Capital 8,400 30,000 28,000 49,600

Profit % $80,000 × 40 80,000 × 35 80,000 × 25

Distribution % $32,000 × 30 28,000 × 30 20,000 × 30 $80,000

White, Capital 6,000 50,000 20,000 64,000

Drawings $9,600 8,400 6,000 $24,000

b) Laroche, Capital 15,000 40,000 50,000 75,000

Kennedy, Capital 10,500 30,000 35,000 54,500

White, Capital 4,500 50,000 15,000 60,500

Salary Remainder Total

Laroche $35,000 15,000 $50,000

Kennedy $20,000 15,000 $35,000

White $0 15,000 $15,000

Total $55,000 45,000 $100,000

× 30% = Drawings

$15,000

$10,500

$4,500

$30,000

c) Laroche, Capital 4,890 40,000 16,300 51,410

Kennedy, Capital 5,259 30,000 17,530 42,271

White, Capital 351 50,000 1,170 50,819

Salary Interest Remainder ($12,200) Total

Laroche $20,000 2,400 (6,100) $16,300

Kennedy $20,000 1,800 (4,270) $17,530

White $0 3,000 (1,830) $1,170

Total $40,000 7,200 (12,200) $35,000

× 30% = Drawings

$4,890

$5,259

$351

$10,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 9 The condensed, adjusted trial balance of the Mario and Luigi Partnership as at December 31, 2024, appears below: MARIO AND LUIGI PARTNERSHIP Adjusted Trial Balance December 31, 2024 Debit Credit Current assets................................................................................................... $25,000 Equipment ........................................................................................................ 80,000 Accounts payable ............................................................................................. $7,000 Long-term debt ................................................................................................ 44,000 Mario, capital .................................................................................................... 26,000 Mario, drawings ................................................................................................ 270,000 Luigi, capital ..................................................................................................... 18,000 Luigi, drawings ................................................................................................. 245,000 Service revenue ................................................................................................ 593,000 Operating expenses ......................................................................................... 68,000 $688,000 $688,000 The partnership agreement stipulates that a division of partnership profit or loss is to be made as follows: 1. A salary allowance of $310,000 to Mario and $250,000 to Luigi. 2. The remainder is to be divided equally. Instructions a) Prepare a schedule that shows the division of profit to each partner. b) Prepare the closing entries for the division of profit and for the drawings accounts at December 31, 2024. Solution 9 (15 min.) a) Schedule for division of profit: Service revenue ........................................................................................ Less: Operating expenses ......................................................................... Profit .........................................................................................................

Profit Salary allowance Deficiency remaining for allocation Fixed ratio Mario ($35,000) × 50% Luigi ($35,000) × 50% Deficiency remaining for allocation Division of profit b)

Dec 31

$593,000 68,000 $525,000

Mario

Luigi

$310,000

$250,000

Total $525,000 560,000 (35,000)

(17,500) ___________ $292,500

(17,500) ___________ $232,500

Income Summary ...................................................................

525,000

(35,000) _________0 $525,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Mario, Capital .................................................................. Luigi, Capital ................................................................... To close profit to capital. Mario, Capital .......................................................................... Luigi, Capital ........................................................................... Mario, Drawings .............................................................. Luigi, Drawings ................................................................ To close drawings accounts to capital.

292,500 232,500 270,000 245,000 270,000 245,000

Exercise 10 Joanne and Diane have a partnership in The Luxury Flooring Company. The partnership agreement includes the following provisions regarding sharing profit or loss: 1. A salary allowance of $90,000 to Joanne and $65,000 to Diane. 2. An interest allowance of 7% on capital balances at the beginning of the year. 3. The remainder to be divided 60% to Joanne and 40% to Diane. The capital balances on January 1, 2024, for Joanne and Diane were $480,000 and $1,000,000, respectively. During 2024, The Luxury Flooring Company had sales of $1,200,000, cost of goods sold of $417,000, and operating expenses of $335,000. Instructions Prepare an income statement for The Luxury Flooring Company for the year ended December 31, 2024. As a part of the income statement, include a division of profit to each of the partners. Solution 10 (15 min.) THE LUXURY FLOORING COMPANY Income Statement Year Ended December 31, 2024 Sales................................................................................................................................. Cost of goods sold ........................................................................................................... Gross profit ...................................................................................................................... Operating expenses ........................................................................................................ Profit for the year ............................................................................................................ Division of Profit Joanne Profit ..............................................................

Diane

$1,200,000 417,000 783,000 335,000 $448,000

Total $448,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Salary allowance ........................................... $90,000 Profit remaining for allocation ..................... Interest allowance Joanne ($480,000 × 7%) ........................ 33,600 Diane ($1,000,000 × 7%) ........................ Profit remaining for allocation ..................... Fixed ratio Joanne ($189,400 × 60%) ...................... 113,640 Diane ($189,400 × 40%) ......................... Profit remaining for allocation .....................___________ Profit allocated to partners........................... $237,240

$65,000

155,000 293,000 33,600 70,000 189,400

70,000

113,640 75,760 0 $448,000

75,760 ___________ $210,760

Exercise 11 The following condensed adjusted trial balance relates to Loud & Proud Music at December 31, 2024, a partnership formed by Simon Loud and Willard Proud. LOUD & PROUD MUSIC Adjusted Trial Balance December 31, 2024 Current assets................................................................................................... Property, plant, and equipment ...................................................................... Current liabilities .............................................................................................. Long-term debt ................................................................................................ Loud, capital ..................................................................................................... Loud, drawings ................................................................................................. Proud, capital ................................................................................................... Proud, drawings ............................................................................................... Sales revenue ................................................................................................... Operating expenses .........................................................................................

Debit $125,000 30,000

Credit

$20,000 85,000 50,000 20,000 75,000 15,000 370,000 410,000 $600,000

$600,000

The partnership agreement stipulates that a division of partnership profit or loss is to be made as follows: 1. A salary allowance of $40,000 to Loud and $50,000 to Proud. 2. The remainder is to be divided equally. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b)

Prepare a schedule that shows the division of profit/loss to each partner. Prepare the closing entries for the division of profit/loss and for the drawings accounts at December 31, 2024.

Solution 11 (15 min.) a) Schedule for division of profit (loss): Sales .......................................................................................................... Less: Operating expenses ......................................................................... Loss ...........................................................................................................

Loss Salary allowance Deficiency remaining for allocation Fixed ratio Loud ($130,000) × 50% Proud ($130,000) × 50% Deficiency remaining for allocation Division of loss b)

Dec 31

$370,000 410,000 $(40,000)

Loud

Proud

$40,000

$50,000

Total ($40,000) 90,000 (130,000)

(65,000) ____________ $(25,000)

(65,000) ___________ $(15,000)

Loud, Capital........................................................................... Proud, Capital ......................................................................... Income Summary............................................................ To close loss to capital. Loud, Capital........................................................................... Proud, Capital ......................................................................... Loud, Drawings ............................................................... Loud, Drawings ............................................................... To close drawings accounts to capital.

(130,000) __________0 $(40,000)

25,000 15,000 40,000 20,000 15,000 20,000 15,000

Exercise 12 Waterworks Solutions is a partnership owned by M. Malcolm and H. Williams. At January 1, 2024, the partner’s capital accounts were M. Malcolm, $24,750 and H. Williams $18,450. During 2024, Williams contributed to the business equipment with a fair value of $8,400. Each partner withdrew $75,000 during the year and profit was $212,850. The partners share profit on a 2:1 ratio (Malcolm: Williams). Instructions a) Prepare the statement of partners’ equity for the year ended December 31, 2024.

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare a partial balance sheet, showing the partners’ equity section.

Solution 12 (25 min.) a)

Capital, January 1, 2024 Add: Investments Profit for the year Less: Drawings Capital, December 31, 2024

Waterwork Solutions Statement of Partners' Equity Year Ended December 31, 2024 M. Malcolm $24,750 — 141,900 166,650 75,000 $91,650

H. Williams $18,450 8,400 70,950 97,800 75,000 $22,800

Total $43,200 8,400 212,850 264,450 150,000 $114,450

Calculations: Profit: $212,850 x 2/3 = $141,900; $212,850 x 1/3 = $70,950 b) Waterwork Solutions Partial Balance Sheet December 31, 2024 Partners' Equity Partners' equity M. Malcolm, capital H. Williams, capital

$91,650 22,800

114,450

Exercise 13 Bob Spade and Ken Lundy have formed the partnership Art World, and have capital balances of $120,000 and $105,000, respectively on January 1, 2024. On June 1, 2024, Lundy invested an additional $20,000. Also, during the year, Spade withdrew $16,000 and Lundy withdrew $22,000. Sales for the year amounted to $850,000 and operating expenses were $520,000. After taking salary allowances of $60,000 and $90,000, respectively, Spade and Lundy share any remaining profit and losses on a 40% and 60% ratio, respectively. Instructions a) Prepare a schedule that shows the division of profit to each partner.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) c)

Prepare the closing entries at December 31, 2024, for the Art World partnership (close sales and operating expenses in one entry). Prepare a statement of partners' equity for 2024.

Solution 13 (15 min.) a) Division of Profit Spade

Lundy

Profit ($850,000 – $520,000) ...................................... Salary allowance ....................................................... $60,000 $90,000 Profit remaining for allocation.................................. Fixed ratio Spade ($180,000 × 40%)..................................... 72,000 Lundy ($180,000 × 60%) ..................................... 108,000 Profit remaining for allocation.................................. ___________ ___________ Division of profit ........................................................ $132,000 $198,000 b)

Sales .......................................................................................................... Operating Expenses .......................................................................... Income Summary.............................................................................. Income Summary ..................................................................................... B. Spade, Capital ............................................................................... K. Lundy, Capital ............................................................................... B. Spade, Capital ...................................................................................... K. Lundy, Capital....................................................................................... B. Spade, Drawings ........................................................................... K. Lundy, Drawings ...........................................................................

Total $330,000 150,000 180,000

180,000 _________0 $330,000

850,000 520,000 330,000 330,000 132,000 198,000 16,000 22,000 16,000 22,000

c) Art World Partnership Statement of Partners' Equity Year Ended December 31, 2024 B. Spade Capital, January 1 ............................................ $120,000 Add: Additional Investment .......................... Profit ...................................................... 132,000 252,000 Less: Drawings ................................................ 16,000 Capital, December 31 ...................................... $236,000 Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting

K. Lundy $105,000 20,000 198,000 323,000 22,000 $301,000

Totals $225,000 20,000 330,000 575,000 38,000 $537,000

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 14 Jane Zhou, Ron Higgins, and Liz O’Neill are three partners who operate ZHO Consulting, which has a June 30 year end. For the year ended June 30, 2024, the partnership had revenue of $380,000 and operating expenses of $176,000. Information about the partnership accounts is as follows: Partner J. Zhou R. Higgins L. O’Neill Capital account, July 1, 2023 $40,000 $35,000 $20,000 Additional investment January 1, 2024 10,000 10,000 5,000 Drawings during year ended June 30, 2024 70,000 50,000 25,000 Profit allocation percentage 40% 30% 30% Instructions a) Prepare the Statement of Partners’ Equity for the year ended June 30, 2024. b) Prepare a partial balance sheet at June 30, 2024, showing the Partners’ Equity section. c) Prepare closing entries for the June 30, 2024 year end. Solution 14 (25 min.) a)

Capital, July 1, 2023 Add: Investments Profit Less: Drawings Capital, June 30, 2024

ZHO Consulting Statement of Partners' Equity Year Ended June 30, 2024 J. Zhou R. Higgins $40,000 $35,000 10,000 10,000 81,600 61,200 131,600 106,200 70,000 50,000 $61,600 $56,200

L. O'Neill $20,000 5,000 61,200 86,200 25,000 $61,200

Total $ 95,000 25,000 204,000 324,000 145,000 $179,000

Calculations: Profit: $380,000 − 176,000 = $204,000 $204,000 x 40% = $81,600; $204,000 x 30% = $61,200

b) ZHO Consulting Partial Balance Sheet June 30, 2024 Partners' Equity Partners' equity J. Zhou, capital R. Higgins, capital L. O'Neill, capital

$61,600 56,200 61,200

$179,000

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Revenue ............................................................................................................ Income Summary .....................................................................................

380,000 380,000

Income Summary ............................................................................................. Operating Expenses..................................................................................

176,000

Income Summary ............................................................................................. J. Zhou, Capital ......................................................................................... R. Higgins, Capital ................................................................................... L. O’Neill, Capital ......................................................................................

204,000

J. Zhou, Capital ................................................................................................ R. Higgins, Capital ............................................................................................ L. O’Neill, Capital .............................................................................................. J. Zhou, Drawings ..................................................................................... R. Higgins, Drawings ................................................................................. L. O’Neill, Drawings ..................................................................................

70,000 50,000 25,000

176,000

81,600 61,200 61,200

70,000 50,000 25,000

Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

Exercise 15 Marty Cummerford and Jane Wheeler have formed the MCJW partnership, and have capital balances of $65,000 and $50,000, respectively on January 1, 2024. On June 1, 2024, Wheeler invested an additional $35,000. Also, during the year, Cummerford withdrew $30,000 and Wheeler withdrew $34,000. Sales for the year amounted to $300,000 and operating expenses were $220,000. After taking salary allowances of $30,000 and $20,000, respectively, Cummerford and Wheeler share any remaining profit and losses on a 3:1 basis. Instructions a) Prepare a schedule that shows the division of profit to each partner. b) Prepare the closing entries at December 31, 2024, for the MCJW partnership (close sales and operating expenses in one entry). c) Prepare a statement of partners' equity for 2024. Solution 15 (15 min.) a) Division of Profit

Test Bank for Accounting Principles, Ninth Canadian Edition

Cummerford Profit .......................................................................... Salary allowance ....................................................... $30,000 Profit remaining for allocation.................................. Fixed ratio Cummerford ($30,000 × 75%) ............................ 22,500 Wheeler ($30,000 × 25%) ................................... Profit remaining for allocation.................................. _________ Division of profit ........................................................ $52,500 b)

Wheeler $20,000

7,500 _________ $27,500

Sales .......................................................................................................... Operating Expenses .......................................................................... Income Summary.............................................................................. Income Summary ..................................................................................... M. Cummerford, Capital ................................................................... J. Wheeler, Capital ............................................................................ M. Cummerford, Capital ........................................................................... J. Wheeler, Capital .................................................................................... M. Cummerford, Drawings ................................................................ J. Wheeler, Drawings ........................................................................

Total $80,000 50,000 30,000

30,000 ________0 $80,000

300,000 220,000 80,000 80,000 52,500 27,500 30,000 34,000 30,000 34,000

c) MCJW Partnership Statement of Partners' Equity Year Ended December 31, 2024 M. Cummerford Capital, January 1 ............................................ $65,000 Add: Additional Investment .......................... Profit ...................................................... 52,500 117,500 Less: Drawings ................................................ 30,000 Capital, December 31 ...................................... $87,500

J. Wheeler $50,000 35,000 27,500 112,500 34,000 $78,500

Totals $115,000 35,000 80,000 230,000 64,000 $166,000

Exercise 16 Julie Harris, William Gosse, and Regina Ryan started a partnership to provide mobile tax services. The partners’ capital account at the beginning of 2024 was Harris, $120,000; Gosse, $180,000; and Ryan,

Test Bank for Accounting Principles, Ninth Canadian Edition

$90,000. The partnership agreement states that the partners will share profit equally. On December 31, 2024, the partnership reported a loss of $21,000 for the year. During the year, Harris withdrew $80,000 and Gosse withdrew $140,000. Ryan did not make any withdrawals. On January 1, 2025, the partners had a major disagreement as to the direction of the partnership and decided to liquidate the business. The December 31, 2024, balance sheet showed the following balances: Cash.................................................................. $26,000 Machinery (net) ................................................ 169,000 Accounts payable ............................................ 46,000 Partners’ capital .............................................. 149,000 On January 1, 2025, the machinery was sold for proceeds of $133,000. Instructions Prepare the journal entries to record the following: a) The allocation of the loss to the partners on December 31, 2024. b) The closing of the drawings accounts on December 31, 2024. c) The sale of the machinery, the allocation of any gain or loss on realization, the payment of liabilities, and the distribution of cash to the partners on January 1, 2025. Solution 16 (15 min.) a) 2024 Dec 31 J. Harris, Capital ........................................................................ W. Gosse, Capital ....................................................................... R. Ryan, Capital ......................................................................... Income Summary .............................................................. b) Dec

J. Harris, Capital ........................................................................ W. Gosse, Capital ....................................................................... J. Harris, Drawings............................................................. W. Gosse, Drawings ...........................................................

7,000 7,000 7,000 21,000

80,000 140,000 80,000 140,000

Balances Sale of machinery and allocation of

HARRIS, GOSSE, AND RYAN PARTNERSHIP Liquidation Schedule January 1, 2025 Noncash Accounts Harris, Cash Assets Payable Capital* $26,000 $169,000 $46,000 $33,000

Gosse, Capital* $33,000

Ryan, Capital* $83,000

Test Bank for Accounting Principles, Ninth Canadian Edition

$36,000 loss Remaining balances Paid liabilities Remaining balances

133,000 159,000

(169,000) 0

(46,000) __________0 $113,000 $ 0

_______0 46,000

(12,000) 21,000

(46,000) ________0 $ 0 $21,000

*Capital Account Balances: ............................................... Balance, Jan. 1, 2024 ......................................................... Withdrawals....................................................................... Loss .................................................................................... Balance, Dec. 31, 2024.......................................................

(12,000) 21,000

________0 ________0 $21,000 $71,000

Harris 120,000 (80,000) (7,000) 33,000

Gosse 180,000 (140,000) (7,000) 33,000

Cash........................................................................................................... Loss on Disposal ....................................................................................... Machinery ..........................................................................................

133,000 36,000

Machinery (net) Sale proceeds Loss on sale of machinery 2025 Jan.

Ryan 90,000 — (7,000) 83,000

169,000

$169,000 133,000 $ 36,000 ÷ 3 = $12,000

J. Harris, Capital ........................................................................ W. Gosse, Capital ....................................................................... R. Ryan, Capital ......................................................................... Loss on Realization............................................................

12,000 12,000 12,000

Accounts Payable ...................................................................... Cash ...................................................................................

46,000

J. Harris, Capital ........................................................................ W. Gosse, Capital ....................................................................... R. Ryan, Capital ......................................................................... Cash ................................................................................... ** ($133,000+$26,000 – $46,000)

21,000 21,000 71,000

(12,000) 71,000

Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

36,000

46,000

113,000**

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 17 At September 30, 2024, C. Saber and J. Wong, the two partners of City Landscaping, had capital account balances of $25,000 each. D. Walker joined the partnership on September 30, 2024, and received a 1/3 interest in the partnership in exchange for a capital contribution of $40,000. For the year ended September 30, 2025, City Landscaping had profit of $126,000, which is allocated equally to the three partners. Withdrawals during the year were $18,000 each by Saber and Wong, and $14,000 by Walker. Instructions a) Record the transaction on September 30, 2024, admitting Walker into the partnership. b) Calculate the balance of each partner’s capital account after the transaction. c) Prepare the statement of partners’ equity for the year ended September 20, 2025. Solution 17 (20 min.) a) Cash .................................................................................................................. D. Walker, Capital ..................................................................................... C. Saber, Capital ....................................................................................... J. Wong, Capital ........................................................................................

40,000 30,000 5,000 5,000

Calculations Total capital of existing partnership ($25,000 x 2) .......................................... Investment by new partner, D. Walker ............................................................ Total capital of new partnership .....................................................................

$50,000 40,000 $90,000

D. Walker’s share of equity ($90,000 x 1/ 3) .....................................................

$30,000

Bonus [($40,000 – $30,000) x 50%] each to Saber and Wong .........................

$5,000 each

b) Capital accounts after admission of D. Walker: D. Walker (calculated in part a) ................................................................ C. Saber and J. Wong (each) ($25,000 + $5,000) ......................................

$30,000 30,000

c) City Landscaping Statement of Partners' Equity Year ended September 30, 2025

Capital, Oct. 1, 2024 Add: Profit for the year Less: Drawings Capital, Sep. 30, 2025

C. Saber $30,000 42,000 72,000 18,000 $54,000

J. Wong $30,000 42,000 72,000 18,000 $54,000

D. Walker $30,000 42,000 72,000 14,000 $58,000

Total $90,000 126,000 216,000 50,000 $166,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

Exercise 18 At March 31, 2024, Mira Olynik and J.P. Dalton, the two partners of Kanko Datamatics, had capital account balances of $150,000 each. Sarah Lumas joined the partnership on March 31, 2024 and received a 1/3 interest in the partnership in exchange for a capital contribution of $175,000. For the year ended March 31, 2025, Kanko Datamatics had profit of $450,000, which is allocated equally to the three partners. Withdrawals during the year were $75,000, $90,000, $60,000 by Olynik, Dalton, and Lumas, respectively. Instructions a) Record the transaction on March 31, 2024 admitting Lumas into the partnership (round to whole dollars). b) Calculate the balance of each partner’s capital account after the transaction. c) Prepare the statement of partners’ equity for the year ended March 31, 2025. Solution 18 (20 min.) a) Cash .................................................................................................................. S. Lumas, Capital ...................................................................................... J.P. Dalton, Capital ................................................................................... M. Olynik, Capital ......................................................................................

175,000 158,334 8,333 8,333

Calculations Total capital of existing partnership ($150,000 x 2) ........................................ Investment by new partner, S. Lumas ............................................................. Total capital of new partnership .....................................................................

$300,000 175,000 $475,000

S. Lumas’ share of equity ($475,000 x 1/3) ......................................................

$158,334 (rounded up)

Bonus [($175,000 – $158,334) x 50%] each to Olynik and Dalton ................... b) Capital accounts after admission of S. Lumas: S. Lumas (calculated in part a)................................................................. M. Olynik and J.P. Dalon (each) ($150,000 + $8,333) ...............................

$8,333 each

$158,334 158,333

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Kanko Datamatics Statement of Partners' Equity Year Ended March 31, 2025

Capital, April 1, 2024 Add: Profit for the year Less: Drawings Capital, March 31, 2025

M. Olynik $158,333 150,000 308,333 75,000 $233,333

J.P. Dalton $158,333 150,000 308,333 90,000 $218,333

S. Lumas $158,334 150,000 308,334 60,000 $248,334

Total $475,000 450,000 925,000 225,000 $700,000

Exercise 19 The following information is available regarding CGG Company’s partnership accounts at December 31, 2024, before completion of the closing entries: A. Choudrey, Capital............................................................................... $70,000 N. Gilker, Capital..................................................................................... 45,000 R. Godfrey, Capital.................................................................................. 20,000 A. Choudrey, Drawings ........................................................................... 50,000 N. Gilker, Drawings ................................................................................. 28,000 R. Godfrey, Drawings .............................................................................. 35,000 Income Summary (shared equally among partners) ............................ 180,000 No new contributions were made during 2024. Godfrey wishes to withdraw from the partnership January 1, 2025. Instructions a) Prepare the statement of partners’ equity for the year ended December 31, 2024. b) Prepare the January 1, 2025 entry to record Godfrey’s withdrawal under each of the following three independent alternatives: (i) Choudrey and Gilker each pay Godfrey $10,000 out of their personal accounts and each receives one-half of Godfrey’s equity. (ii) Godfrey is paid $100,000 out of partnership cash.

Test Bank for Accounting Principles, Ninth Canadian Edition

(iii) Godfrey is paid $40,000 out of partnership cash. Solution 19 (20 min.) a)

Capital, Jan. 1, 2024 Profit for the year Less: Drawings Capital, Dec. 31, 2024

CGG Company Statement of Partners' Equity Year Ended December 31, 2024 A. Choudrey N. Gilker $70,000 $45,000 60,000 60,000 130,000 105,000 50,000 28,000 $80,000 $77,000

b) (i) R. Godfrey, Capital............................................................................................ A. Choudrey ($45,000 x ½) ........................................................................ N. Gilker..................................................................................................... b) (ii) R. Godfrey, Capital............................................................................................ A. Choudrey, Capital ($100,000 – $45,000) x ½................................................ N. Gilker, Capital............................................................................................... Cash........................................................................................................... b) (iii) R. Godfrey, Capital............................................................................................ A. Choudrey, Capital ($40,000 – $45,000) x ½ .......................................... N. GIlker, Capital ....................................................................................... Cash...........................................................................................................

R. Godfrey $20,000 60,000 80,000 35,000 $45,000

Total $135,000 180,000 315,000 113,000 $202,000

45,000 22,500 22,500

45,000 27,500 27,500 100,000

45,000 2,500 2,500 40,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

Exercise 20 Jamie Burns and Janet Coombs have capital accounts of $540,000 and $420,000, respectively. Craig Franklin and Holly Bird are to join the partnership. Franklin invests $82,500 in the partnership for which he receives a capital credit of $82,500. Bird purchases a one-half interest from Burns for $230,000 and a one-fourth interest from Coombs for $100,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Prepare the journal entries to record the admission of Franklin and Bird to the partnership. b) Determine the capital balances of the partners after the admission of Franklin and Bird. Solution 20 (10 min.) a) Cash........................................................................................................... C. Franklin, Capital............................................................................ J. Burns, Capital........................................................................................ J. Coombs, Capital.................................................................................... H. Bird, Capital .................................................................................. b)

82,500 82,500 270,000 105,000 375,000

J. Burns ($540,000 – $270,000) ................................................................. $270,000 J. Coombs ($420,000 – $105,000) ............................................................. 315,000 C. Franklin ................................................................................................. 82,500 H. Bird ....................................................................................................... 375,000 Total Capital ...................................................................................... $1,042,500

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

Exercise 21 Petra Stone and Pam Peach are partners who share profit on a 3:2 basis, and on July 1, their capital account balances are $165,000 and $136,000, respectively. On July 1, Bobby Jo is admitted to the partnership. Instructions Prepare the entry to record Bobby’s admission to the partnership under the following independent situations: a) Bobby purchases 50% of Petra’s partnership interest from him for $115,000. b) Bobby purchases a 1/3 interest in the partnership by contributing cash of $96,500. c) Bobby purchases a 1/3 interest in the partnership by contributing cash of $167,900. Solution 21 (15 min.) a) P. Stone, Capital ($165,000 × 50%) .................................................................. B. Jo, Capital ............................................................................................. To record admission of Jo by purchase. b) Cash ..................................................................................................................

82,500 82,500

96,500

Test Bank for Accounting Principles, Ninth Canadian Edition

P. Stone, Capital ............................................................................................... P. Peach, Capital............................................................................................... B. Jo, Capital ............................................................................................. Calculations Total capital of existing partnership ($165,000 + $136,000) ........................... Investment by new partner, B. Jo.................................................................... Total capital of new partnership ..................................................................... New partner’s capital credit ($397,500 x 1/ 3) ................................................. Bonus to new partner ($132,500 – $96,500) .................................................... Allocate bonus to new partner B. Jo: P. Stone ($36,000 x 3÷ 5)........................................................................... P. Peach ($36,000 x 2÷ 5) .......................................................................... c) Cash .................................................................................................................. P. Stone, Capital ....................................................................................... P. Peach, Capital ....................................................................................... B. Jo, Capital .............................................................................................

21,600 14,400 132,500

$301,000 96,500 $397,500 $132,500 $36,000 $21,600 14,400

167,900 6,960 4,640 156,300

Calculations: Total capital of existing partnership ($165,000 + $136,000) ........................... Investment by new partner, B. Jo.................................................................... Total capital of new partnership ..................................................................... New partner’s capital credit ($468,900 x 1/3).................................................. Bonus to existing partners ($167,900 – $156,300) .......................................... Allocate bonus to existing partners: P. Stone ($11,600 x 3÷ 5)........................................................................... P. Peach ($11,600x 2÷ 5) ...........................................................................

$36,000

$301,000 167,900 $468,900 $156,300 $11,600 $6,960 4,640

$11,600

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

Exercise 22 Tim Tarrant and Jim Edmonds share partnership profit on a 3:2 basis. They have capital balances of $170,000 and $90,000, respectively, when J.T. Ryder is admitted to the partnership. Instructions Prepare the journal entry to record the admission of Ryder under each of the following independent

Test Bank for Accounting Principles, Ninth Canadian Edition

assumptions: a) Ryder invests $100,000 for a 25% ownership interest. b) Ryder invests $40,000 for a 25% ownership interest. c) Ryder invests an amount that gives him a 20% ownership interest. Solution 22 (20 min.) a) Cash........................................................................................................... J.T. Ryder, Capital ............................................................................. T. Tarrant, Capital (3÷ 5 × $10,000)................................................... J. Edmonds (2÷ 5 × $10,000) .............................................................

100,000 90,000 6,000 4,000

Total capital of existing partnership ........................................................ Investment by new partner, Ryder .......................................................... Total capital of new partnership..............................................................

$260,000 100,000 $360,000

Ryder 's capital credit ($360,000 × 25%) ..................................................

$90,000

Investment by new partner, Ryder .......................................................... Ryder's capital credit................................................................................ Bonus to existing partners .......................................................................

$100,000 90,000 $ 10,000

Cash........................................................................................................... T. Tarrant, Capital ($35,000 × 3÷ 5) .......................................................... J. Edmonds ($35,000 × 2÷ 5) ..................................................................... J.T. Ryder, Capital .............................................................................

40,000 21,000 14,000

$260,000 40,000 $300,000

Ryder's capital credit ($300,000 × 25%) ...................................................

$75,000

Investment by new partner, Ryder .......................................................... Ryder's capital credit................................................................................ Bonus to Ryder .........................................................................................

$40,000 75,000 (35,000)

Cash........................................................................................................... J.T. Ryder, Capital .............................................................................

65,000

$260,000 ÷ 0.80 = $325,000; $325,000 – $260,000 = $65,000 Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting

75,000

65,000

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 23 The Felix and Morris Partnership has capital account balances as follows: Felix, Capital .................................................... $145,000 Morris, Capital.................................................. 160,000 The partners share profit and losses in the ratio of 60% to Felix and 40% to Morris. Instructions Prepare the journal entry on the books of the partnership to record the admission of Singh as a new partner under the following three independent circumstances (round to whole dollars): a) Singh pays $80,000 to Felix and $95,000 to Morris for one-half of each of their ownership interests in a personal transaction. b) Singh invests $150,000 in the partnership for a one-third interest in partnership capital. c) Singh invests $1,000,000 in the partnership for a one-third interest in partnership capital. Solution 23 (20 min.) a) Felix, Capital ($145,000 × 50%) ................................................................ Morris, Capital ($160,000 × 50%) .............................................................. Singh, Capital .................................................................................... To record admission of Singh by purchase.

72,500 80,000 152,500

Total net assets and total capital of the partnership do not change. b)

Cash........................................................................................................... Felix, Capital ............................................................................................. Morris, Capital........................................................................................... Singh, Capital .................................................................................... To record admission of Singh and bonus.

150,000 1,000 667

Total capital of existing partnership ($145,000 + $160,000) ................... Investment by new partner, Singh........................................................... Total capital of new partnership..............................................................

$305,000 150,000 $455,000

Singh's capital credit = $455,000 × 1/ 3 = $151,667 Singh's investment ........................................................................... Singh's capital credit ........................................................................ Bonus to new partner .......................................................................

$150,000 151,667 $ 1,667

Allocate bonus to new partner: Felix (60% × $1,667) .......................................................................... Morris (40% × $1,667)........................................................................

151,667

$1,000 667 $1,667

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash........................................................................................................... Felix, Capital...................................................................................... Morris, Capital ................................................................................... Singh, Capital .................................................................................... To record Singh's admission and bonus to old partners.

1,000,000 339,000 226,000 435,000

Total capital of existing partnership ($145,000 + $160,000) ................... $ 305,000 Investment by new partner, Singh........................................................... 1,000,000 Total capital of new partnership.............................................................. $1,305,000 Singh's capital credit = $1,305,000 × 1/ 3 = ..............................................

$435,000

Bonus to existing partners ($1,000,000 – $435,000) = .............................

$565,000

Allocation to existing partners Felix ($565,000 × 60%) ...................................................................... Morris ($565,000 × 40%)....................................................................

$339,000 226,000 $565,000

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

Exercise 24 Mickey Mice, Donald Dack, and Elmer Fadd have capital balances of $150,000, $105,000, and $75,000, respectively, and they share profit on a 4:3:3 basis. Instructions Journalize the withdrawal of Dack from the partnership under each of the following circumstances: a) Dack is paid $105,000 in cash from partnership assets. b) Dack is paid $115,500 in cash from partnership assets. c) Dack is paid $73,500 in cash from partnership assets. Solution 24 (10 min.) a) D. Dack, Capital......................................................................................... Cash ................................................................................................... b)

D. Dack, Capital......................................................................................... M. Mice, Capital (4 ÷ 7 × $10,500) ............................................................. E. Fadd, Capital (3 ÷ 7 × $10,500).............................................................. Cash ...................................................................................................

105,000 105,000 105,000 6,000 4,500 115,500

Test Bank for Accounting Principles, Ninth Canadian Edition

D. Dack, Capital......................................................................................... M. Mice, Capital (4 ÷ 7 × $31,500) ...................................................... E. Fadd, Capital (3 ÷ 7 × $31,500) ...................................................... Cash ...................................................................................................

105,000 18,000 13,500 73,500

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

Exercise 25 Karen Halls, Xiu Lin, and George Andino have capital balances of $108,000, $164,000, and $72,000, respectively, and their profit ratios are 4:2:4. Instructions Record the withdrawal of Andino from the partnership under each of the following independent assumptions: a) Andino is paid $72,000 from partnership assets. b) Andino is paid $96,000 from partnership assets. c) Andino is paid $54,000 from partnership assets. Solution 25 (10 min.) a) G. Andino, Capital ..................................................................................... Cash ................................................................................................... b)

72,000 72,000

G. Andino, Capital ..................................................................................... K. Halls, Capital ($24,000 × 4 ÷ 6) ............................................................. X. Lin, Capital ($24,000 × 2 ÷ 6) ................................................................. Cash ...................................................................................................

72,000 16,000 8,000

G. Andino, Capital ..................................................................................... K. Halls, Capital ($18,000 × 4 ÷ 6) ...................................................... X. Lin, Capital ($18,000 × 2 ÷ 6) ......................................................... Cash ...................................................................................................

72,000

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

96,000

12,000 6,000 54,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 26 Baker, Gregg, and Stine share profit and losses in a ratio of 4:1:5, respectively. The capital account balances of the partners are as follows: Baker, Capital .................................................. $150,000 Gregg, Capital .................................................. 90,000 Stine, Capital ................................................... 60,000 Instructions Prepare the journal entry on the books of the partnership to record the withdrawal of Stine under the following independent circumstances: a) The partners agree that Stine should be paid $70,000 by the partnership for his interest. b) The partners agree that Stine should be paid $45,000 by the partnership for his interest. c) Baker agrees to pay Stine $40,000 for one-half of his capital interest and Gregg agrees to pay Stine $40,000 for one-half of his capital interest in personal transactions among the partners. Solution 26 (15 min.) a) Stine, Capital ............................................................................................ Baker, Capital ........................................................................................... Gregg, Capital ........................................................................................... Cash ................................................................................................... To record withdrawal and bonus to Stine. Bonus to Stine $10,000 ($70,000 – $60,000) Allocation to reduce remaining partners' capital: Baker (4 ÷ 5 × $10,000) .............................................................................. Gregg (1 ÷ 5 × $10,000) ..............................................................................

Stine, Capital ............................................................................................ Baker, Capital .................................................................................... Gregg, Capital.................................................................................... Cash ................................................................................................... To record withdrawal of Stine and bonus to remaining partners. Bonus to remaining partners $15,000 ($60,000 – $45,000) Allocation to increase remaining partners' capital: Baker (4 ÷ 5 × $15,000) .............................................................................. Gregg (1 ÷ 5 × $15,000) ..............................................................................

60,000 8,000 2,000 70,000

$8,000 2,000 $10,000 60,000 12,000 3,000 45,000

$12,000 3,000 $15,000 60,000 30,000 30,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Total net assets and total capital of the partnership do not change. Bloomcode: Application Difficulty: Medium Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

Exercise 27 Jabar Hassan, Mohammed Badoo, and Sanji Patel have capital balances of $650,000, $500,000, and $425,000, respectively, and they share profit on a 5:3:2 basis. Instructions Journalize the withdrawal of Sanji from the partnership under each of the following independent circumstances: a) Sanji is paid $425,000 in cash from partnership assets. b) Sanji is paid $450,000 in cash from partnership assets. c) Sanji is paid $400,000 in cash from partnership assets. Solution 27 (10 min.) a) S. Patel, Capital......................................................................................... Cash ................................................................................................... b)

425,000 425,000

S. Patel, Capital......................................................................................... J. Hassan, Capital (5 ÷ 8 × $25,000) .......................................................... M. Badoo, Capital (3 ÷ 8 × $25,000) .......................................................... Cash ...................................................................................................

425,000 15,625 9,375

S. Patel, Capital......................................................................................... J. Hassan, Capital (5 ÷ 8 × $25,000) .................................................. M. Badoo, Capital (3 ÷ 8 × $25,000)................................................... Cash ...................................................................................................

425,000

450,000

15,625 9,375 400,000

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic Exercise 28 At June 30, Fine Balance Partnership is liquidated. Just before the liquidation, Fine Balance has cash of $2,800, equipment of $45,000, accumulated depreciation of $31,000, accounts payable of $6,000,

Test Bank for Accounting Principles, Ninth Canadian Edition

and the following partner capital accounts: R. Mistry $9,000; M. Mohal $1,800. Partners share in profit or losses equally. Upon liquidation, the equipment is sold for $10,000 cash, the accounts payable are paid in full, and any remaining cash is distributed to the partners. If a partner’s capital account is in a deficit balance, they will contribute the necessary cash to the partnership to cover it. Instructions Calculate how much cash will be paid to, or received from, each partner upon liquidation. Solution 28 (5 min.) Proceeds of sale of equipment ........................................................................ Less net book value ($45,000 – $31,000) ......................................................... Loss on sale of equipment ...............................................................................

$ 10,000 (14,000) $(4,000)

Cash available for distribution: Beginning cash ................................................................................................. Sale of equipment ............................................................................................ Payment of accounts payable ......................................................................... Cash available ..................................................................................................

$2,800 10,000 (6,000) $6,800

Capital accounts after allocation of loss, and amounts to paid/received: R. Mistry $9,000 – ($4,000 x ½) will receive ...................................................... M. Mohal $1,800 – ($4,000 x ½) deficiency to be paid ..................................... Net cash distributed (received) .......................................................................

$7,000 (200) $6,800

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

Exercise 29 The RAD Partnership is to be liquidated and the ledger shows the following: Cash.................................................................. $15,000 Noncash assets ................................................ 80,000 Liabilities.......................................................... 20,000 Reed, Capital.................................................... 30,000 Ales, Capital ..................................................... 40,000 Dent, Capital .................................................... 5,000 Reed, Ales, and Dent's profit ratios are 6:3:1, respectively. Instructions Prepare separate entries to record the liquidation of the partnership assuming that the noncash

Test Bank for Accounting Principles, Ninth Canadian Edition

assets are sold for $50,000 in cash. Solution 29 (15 min.) Cash........................................................................................................... Loss on Realization ................................................................................... Noncash Assets .................................................................................

50,000 30,000 80,000

Reed, Capital ($30,000 × 6 ÷ 10) ............................................................... Ales, Capital ($30,000 × 3 ÷ 10) ................................................................. Dent, Capital ($30,000 × 1 ÷ 10) ................................................................ Loss on Realization ...........................................................................

18,000 9,000 3,000

Liabilities................................................................................................... Cash ...................................................................................................

20,000

Reed, Capital ($30,000 – $18,000) ............................................................ Ales, Capital ($40,000 – $9,000) ................................................................ Dent, Capital ($5,000 – $3,000)................................................................. Cash ($15,000 + $50,000 – $20,000) ..................................................

12,000 31,000 2,000

30,000

20,000

45,000

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

Exercise 30 The ABC Partnership is to be liquidated and you have been hired to prepare a schedule of cash payments for the partnership. Partners A, B, and C share profit and losses in the ratio of 6:2:2, respectively. Assume the following: 1. Equipment was sold for $80,000. 2. Liabilities were paid in full. 3. The remaining cash was distributed to the partners. (If any partner has a capital deficiency, assume that the partner is unable to make up the capital deficiency.) ABC PARTNERSHIP Trial Balance Immediately Prior to Liquidation Cash........................................................................................................... $ 10,000 Equipment ................................................................................................ 120,000 Liabilities................................................................................................... A, Capital ................................................................................................... B, Capital ................................................................................................... C, Capital ................................................................................................... ___________

$ 35,000 21,000 38,000 36,000

Test Bank for Accounting Principles, Ninth Canadian Edition

$130,000

Instructions Using the above information, calculate the following: a) Cash available to be distributed to all partners. b) Any gain or loss on sale of noncash assets. c) The amount of cash to be received by each partner upon liquidation. Solution 30 (15 min.) a) Cash to be distributed Beginning balance ..................................................................................... Proceeds from sale of equipment .............................................................

Less: Payment of liabilities ........................................................................ Cash to be distributed to partners ............................................................

$10,000 80,000 90,000 35,000 $55,000

Loss on sale of equipment Carrying amount........................................................................................ Proceeds .................................................................................................... Loss on disposal ........................................................................................

$120,000 80,000 $ 40,000

Distribution to partners Beginning balance Less: Share of loss of equipment Allocation of capital deficiency Cash to be distributed to each partner

Share of Loss

A B C

6/10 × $(40,000) = 2/10 × $(40,000) = 2/10 × $(40,000) =

A, Capital $21,000 (24,000) (3,000) 3,000 __ ____0

B, Capital $38,000 (8,000) 30,000 (1,500) $28,500

C, Capital Total $36,000 $95,000 (8,000) (40,000) 28,000 55,000 (1,500) _________ $26,500 $55,000

$(24,000) (8,000) (8,000) $(40,000)

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

Exercise 31 Sam Bilbo and Edmond Lewis who operate the Shire Partnership have decided to liquidate their business and retire. Sam and Edmond allocate profit and losses on a 3:2 basis, respectively. At December 31, 2023, after all closing entries have been made, the trial balance of the partnership

Test Bank for Accounting Principles, Ninth Canadian Edition

shows the following account balances: Cash .................................................................................................................. Merchandise inventory .................................................................................... Accounts payable ............................................................................................. Bank loan .......................................................................................................... S. Bilbo, Capital ................................................................................................ E. Lewis, Capital ...............................................................................................

$2,000 52,000 $8,000 15,000 26,000 5,000

The inventory is sold on January 1, 2024 for cash, and the liabilities are paid. Both partners have the resources to cover deficits (if any) in their capital accounts. Instructions a) Assuming the inventory is sold for $25,000, calculate the balance in each partner’s capital account after allocating the gain or loss on sale of inventory and payment of the liabilities. Prepare the entry to record the receipt of cash from, or payment of cash to, each partner to liquidate the partnership. b) Assuming the inventory is sold for $57,000, calculate the balance in each partner’s capital account after allocating the gain or loss on sale of inventory and payment of the liabilities. Prepare the entry to record the receipt of cash from, or payment of cash to, each partner to liquidate the partnership. Solution 31 (20 min.) a) Proceeds on sale of inventory.......................................................................... Cost ................................................................................................................... Loss on sale ......................................................................................................

$25,000 (52,000) $27,000

Capital account balances after recording of loss: S. Bilbo $26,000 – (3/5 x $27,000) ............................................................. E. Lewis $5,000 – (2/5 x $27,000) ..............................................................

$9,800 (5,800)

Cash available before final payments ($2,000 + $25,000 – $8,000 – $15,000 = $4,000) Cash .................................................................................................................. E. Lewis, Capital ........................................................................................

5,800

S. Bilbo, Capital ................................................................................................ Cash...........................................................................................................

9,800

b) Proceeds on sale of inventory.......................................................................... Cost ................................................................................................................... Gain on sale ...................................................................................................... Capital account balances after recording of gain:

5,800

9,800

$57,000 (52,000) $ 5,000

Test Bank for Accounting Principles, Ninth Canadian Edition

S. Bilbo $26,000 + (3/5 x $5,000) ............................................................... E. Lewis $5,000 + (2/5 x $5,000) ................................................................

$29,000 7,000

Cash available before final payments ($2,000 + $57,000 – $8,000 – $15,000) = $36,000 S. Bilbo, Capital ................................................................................................ E. Lewis, Capital ............................................................................................... Cash........................................................................................................... Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

29,000 7,000 36,000

Test Bank for Accounting Principles, Ninth Canadian Edition

either by repayment or by allocation to the other partners, and (5) the distribution of cash to the partners based on their capital balances.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. All provinces in Canada have a partnership act that sets out the basic rules for the forming and operating of partnerships. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

2. A partnership is a relationship between people who do business with the intention of making a profit. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

3. A partnership must make a profit. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

4. A partnership may be based on a handshake. Answer: True Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

5. A partnership must have a legal written agreement. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

6. A partnership is NOT an accounting entity for financial reporting purposes. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

7. Two proprietorships cannot combine and form a partnership. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

8. A partnership is taxed as a single legal entity. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

9. In a limited liability partnership, all the partners have limited liability for the debts of the partnership. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

10. A partner pays income tax on the amount of money he or she withdrew from the partnership during the year. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

11. A partnership has unlimited life. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

12. Mutual agency means that each partner acts for the partnership when he or she does partnership business. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

13. When a partner exceeds his or her authority and the act looks appropriate for the partnership, the act is NOT binding on the other partners and the partnership. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

14. Each partner is jointly and severally liable for only their portion of the partnership liabilities. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

15. In a limited partnership, the amount of debt that a partner is liable for is the amount of capital that they have contributed to the partnership. Answer: True Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

16. Because of the unlimited liability of partners in a partnership, it is easier for a partnership to gain large amounts of investment capital. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

17. A partnership is more difficult to form than a corporation. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

18. A corporation is subject to less government restrictions than a partnership. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

19. When assets are rolled into a partnership, the value that they are allocated in the partnership is the same as the value in the previous entity.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

20. When a long-lived asset is contributed to a partnership by a partner, the entry will record the fair value of the asset and the accumulated depreciation that has accumulated on it. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

21. When accounts receivable are contributed to a partnership, they are valued at their expected realizable value. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

22. The investment of an asset into a partnership should be recorded at the higher value of the asset’s original cost or the asset’s fair value. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

23. Partnership profit or loss must be divided equally in a partnership. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

24. Partnership profit or loss must be divided according to the formulas that are outlined in the partnership agreement. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

25. A profit allocation in a partnership may be allocated in a different ratio than a loss allocation. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

26. When profit is allocated in a 2:1 ratio, it means that one partner will get 2/3 of the profit. Answer: True Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

27. When profit is allocated in a 3:2:1 ratio, it means that one partner will get 50% of the profit. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

28. Partners are never allocated a salary in a partnership. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

29. A partner may receive interest on their partnership account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

30. Salaries to partners and interest on partner’s capital balances are expenses of the partnership. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

31. Partnership profit/loss allocation is determined in accordance with the partnership agreement. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

32. In the financial statements of a partnership, a separate statement of the division of partnership profit or loss is prepared. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

33. A detailed listing of all the assets invested by a partner in a partnership appears on the Statement of Partners' Equity. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

34. The balance sheet for a partnership is the same as for a proprietorship. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

35. If a new partner is purchasing the interests of an existing partner, the purchase price passes directly from the new partner to the old partner and does NOT flow through the partnership. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

36. The admission of a new partner may result in a bonus to the existing partners. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

37. The admission of a new partner may result in a bonus to the new partner from the existing partners. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

38. A withdrawal of a partner may result in a payment from the remaining partners’ personal assets. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

39. A partner may only withdraw from a partnership on a voluntary basis. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

40. In the withdrawal of a partner, a payment from the partnership assets will affect only the remaining partners’ personal assets. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

41. When a partner withdraws from a partnership, asset revaluations should be recorded for the remaining assets in the partnership. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

42. A bonus to the departing partner may be paid if the fair value of the partnership assets is less than their carrying amount. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

43. The departing partner may have to pay a bonus to the partnership if the remaining partners are anxious to remove the partner. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

44. A bonus to a departing partner may be paid if there is unrecorded goodwill resulting from the partnership’s superior earnings record. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

45. A bonus to the remaining partners may be paid if the recorded assets are overvalued. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

46. If a partnership is dissolved, an asset does NOT legally return to the partner who originally contributed it. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

47. The procedures for withdrawal of a partner from a partnership must be specified in the partnership agreement. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

48. At the death of a partner, the partnership is dissolved. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the withdrawal of a partner.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

49. The liquidation of a partnership is done to ensure that the fair value of the remaining assets is recorded accurately. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

50. No capital deficiency means that all partners have credit balances prior to the final distribution of cash. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

51. In the liquidation of a partnership, the sale of noncash assets for cash is called revaluation. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 52. A partnership a) is an association of one or more partnerships. b) pays income tax on partnership profit. c) has a limited life. d) is not an accounting entity for financial reporting purposes. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

53. A general partner in a limited partnership a) has unlimited liability for all partnership debts. b) is always the general manager of the firm. c) is the partner who lacks a specialization. d) is liable for partnership liabilities only to the extent of that partner's capital equity. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

54. The individual assets invested by a partner in a partnership a) revert back to that partner if the partnership liquidates. b) determine that partner's share of profit or loss for the year. c) are jointly owned by all partners. d) determine the scope of authority of that partner. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

55. Which one of the following would NOT be considered a disadvantage of the partnership form of organization? a) limited life b) unlimited liability c) mutual agency d) ease of formation Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

56. A limited liability partnership is designed to a) protect innocent partners from the negligent acts of employees working on behalf of the partners. b) ensure all partners get an equal share of partnership earnings. c) allow partners to enter into several different partnerships simultaneously. d) protect partners from the negligence claims resulting from the acts of other partners. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

57. Which of the following is NOT a principal characteristic of the partnership form of business organization? a) mutual agency b) association of individuals c) limited liability d) limited life Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

58. Which of the following statements is true regarding the form of a legally binding partnership contract? a) The partnership contract must be in writing. b) The partnership contract may be based on a handshake. c) The partnership contract may be implied. d) The partnership contract cannot be oral. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

59. Which of the following statements is true regarding a partnership? a) A partnership is taxed as a separate entity. b) Only professionals, such as doctors and lawyers, may form a partnership. c) A partnership must file an information return that reports the partnership profit and the partners’ share in that profit. d) A partner’s income tax is based on the amount of money the partner withdrew from the partnership during the year. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

60. Which of the following statements about a partnership is correct? a) The personal assets of a partner are included in the partnership accounting records.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) A partnership is required to file an income tax return. c) Each partner's share of profit is taxable to the partnership. d) A partnership represents an accounting entity for financial reporting purposes. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

61. In a partnership, mutual agency means a) each partner acts on his own behalf when engaging in partnership business. b) any act of any partner is binding on all other partners. c) an act by a partner is judged as binding on all other partners, providing the act appears to be appropriate for the partnership. d) that partners are mutually respectful of each other. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

62. A partnership agreement generally contains all of the following, except a) the names and capital contributions of all the partners. b) the expected life of the partnership. c) the rights and duties of all partners. d) the basis for sharing profit or loss among the partners. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

63. The partner in a limited partnership that has unlimited liability is referred to as the a) lead partner. b) head partner. c) general partner. d) unlimited partner. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

64. Limited partnerships a) must have at least one general partner. b) guarantee that a partner will receive a return. c) guarantee that a partner will get back their original investment. d) are only permitted in Ontario. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

65. Which of the following statements about partnerships is incorrect? a) Partnership assets are co-owned by partners. b) If a partnership is terminated, the assets do not legally revert to the original contributor. c) If the partnership agreement does not specify the manner in which profit is to be shared, it is distributed according to capital contributions. d) Each partner has a claim on assets equal to the balance in the partner's capital account. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

66. All of the following are correct, except a) a partnership is a legal entity. b) the partnership can sue or be sued. c) the personal assets, liabilities, and transactions of the partners are recorded in the partnership. d) the partnership must file an information tax return. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

67. If division of profits in a partnership is NOT specified, profit (loss) is assumed to be a) allocated to general partners first. b) allocated based on capital contribution. c) held within the partnership. d) allocated equally. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

68. Which of the following is NOT an advantage of the partnership form of business? a) mutual agency b) ease of formation c) ease of decision making d) freedom from governmental regulations and restrictions Answer: a Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

69. Which of the following statements is incorrect regarding a partnership agreement? a) Common law provinces are governed by the Partnership Act. b) Oral agreements are preferable to written articles. c) It should specify the different relationships that are to exist among the partners. d) It should state procedures for submitting disputes to arbitration. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

70. Which of the following is considered an advantage of a general partnership? a) Partnerships have an indefinite life. b) Partners cannot make routine business decisions without consent from other partners. c) Partnerships allow for combining skills and resources. d) Partners have limited liability. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

71. Which of the following is a factor that should be included in a partnership agreement? a) the basis for sharing profit or loss b) procedures for the withdrawal, or addition, of a partner c) the rights and duties of all partners d) All of the choices are correct. Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

72. Which of the following is true? a) A partnership is not an accounting entity. b) A partnership can sue and be sued. c) The personal assets, liabilities, and transactions of the partners are included in the accounting records of the partnership. d) A partnership cannot own property. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

73. Partner A invests a building in the partnership that is valued at $200,000 and the building is later sold at a gain of $15,000. How is the gain treated? a) The gain is allocated evenly among the number of partners in the business. b) Partner A receives the entire gain. c) The gain is allocated according to the proportionate share of each partner’s investment in the business. d) The gain becomes part of the partnership profit which is shared among the partners according to their profit and loss ratios. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

74. Which of the following is NOT true about the profit of a partnership? a) Each partner is not required to report his or her share of the partnership profit on their personal

Test Bank for Accounting Principles, Ninth Canadian Edition

income tax returns. b) The profit of a partnership is not taxed as a separate entity. c) A partnership must file an information tax return. d) A partner’s profit is taxed at his/her personal income tax rate. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

75. Which of the following is true? a) Each partner is severally but not jointly liable for all partnership liabilities. b) Each partner is jointly and severally liable for all partnership liabilities. c) Each partner is not liable for partnership liabilities as a partnership is a separate legal entity. d) Each partner is jointly but not severally liable for all partnership liabilities. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

76. Which of the following is a disadvantage of the general partnership form of business organization? a) mutual agency b) easily formed c) fewer government regulations d) easier decision making Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

77. Which of the following is NOT a difference between a partnership and proprietorship? a) formation of a partnership b) dividing the partnership profit or loss c) following ASPE d) preparing partnership financial statements Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

78. Which of the following is NOT true about each partner’s initial investment? a) It must be recorded in the partnership record. b) It should be recorded at the assets’ fair value. c) The value must be agreed to by all partners. d) It should be recorded at the assets’ historical cost. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

79. Assume that P. Smith and J. Windsor combine their proprietorships on January 2 to start a partnership named S & W Supplies. Smith and Windsor each have the following assets: P. Smith J. Windsor Book Value Fair Value Book Value Fair Value Cash $10,000 $10,000 $15,000 $15,000 Accounts Receivable 30,000 30,000 Allowance for Doubtful Accounts 2,500 4,000 Equipment 40,000 32,500 Accumulated Depreciation 5,000 Which of the following journal entries is correct to record the investment by P. Smith in the partnership? a) Cash .............................................................................................................. 10,000 Equipment .................................................................................................... 40,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accumulated Depreciation .................................................................... P. Smith, Capital ..................................................................................... b) Cash .............................................................................................................. Equipment .................................................................................................... Accumulated Depreciation .................................................................... P. Smith, Capital ..................................................................................... c) Cash .............................................................................................................. Equipment .................................................................................................... P. Smith, Capital ..................................................................................... d) Cash .............................................................................................................. Equipment .................................................................................................... P. Smith, Capital .....................................................................................

5,000 45,000 10,000 40,000 7,500 42,500 10,000 32,500 42,500 10,000 35,000 45,000

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

80. Assume that P. Smith and J. Windsor combine their proprietorships on January 2 to start a partnership named S & W Supplies. Smith and Windsor each have the following assets: P. Smith J. Windsor Book Value Fair Value Book Value Fair Value Cash $10,000 $10,000 $15,000 $15,000 Accounts Receivable 30,000 30,000 Allowance for Doubtful Accounts 2,500 4,000 Equipment 40,000 32,500 Accumulated Depreciation 5,000 Which of the following journal entries is correct to record the investment by J. Windsor in the partnership? a) Cash .............................................................................................................. 15,000 Accounts Receivable..................................................................................... 30,000 Allowance for Doubtful Accounts .......................................................... 4,000 J. Windsor, Capital.................................................................................. 41,000 b) Cash .............................................................................................................. 15,000 Accounts Receivable..................................................................................... 30,000 Allowance for Doubtful Accounts .......................................................... 2,500 J. Windsor, Capital.................................................................................. 42,500 c) Cash .............................................................................................................. 15,000 Accounts Receivable..................................................................................... 26,000 J. Windsor, Capital.................................................................................. 41,000 d) Cash .............................................................................................................. 15,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts Receivable..................................................................................... J. Windsor, Capital..................................................................................

27,500 42,500

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

81. Assume that P. Smith and J. Windsor combine their proprietorships on January 2 to start a partnership named S & W Supplies. Smith and Windsor each have the following assets: P. Smith J. Windsor Book Value Fair Value Book Value Fair Value Cash $? $? $15,000 $15,000 Accounts Receivable 30,000 30,000 Allowance for Doubtful Accounts 2,500 4,000 Equipment 40,000 32,500 Accumulated Depreciation 5,000 P. Smith will also contribute the amount of cash required to make his investment equal to J. Windsor. How much cash must P. Smith contribute? a) $6,000 b) $8,500 c) $12,500 d) $15,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

82. Each partner’s initial noncash investment in the partnership should be recorded at the a) fair value of the assets at the date of their transfer into the business. b) fair value of the assets at the date the partnership begins operations. c) original cost of the assets at the time they were purchased by the contributing partner. d) carrying amount of the assets at the date of their transfer into the partnership. Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

83. Stella Bella invests personally owned equipment, which originally cost $30,000 and has accumulated depreciation of $6,000, in the Bella and Duck partnership. Both partners agree that the fair value of the equipment was $25,000. The entry made by the partnership to record Bella's investment should be a) Equipment .................................................................................................... 30,000 Accumulated Depreciation—Equipment............................................... 6,000 S. Bella, Capital ...................................................................................... 24,000 b) Equipment .................................................................................................... 24,000 S. Bella, Capital ...................................................................................... 24,000 c) Equipment .................................................................................................... 25,000 Accumulated Depreciation—Equipment............................................... 6,000 Gain on Purchase of Equipment ............................................................ 1,000 S. Bella, Capital ...................................................................................... 30,000 d) Equipment .................................................................................................... 25,000 S. Bella, Capital ...................................................................................... 25,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

84. Piccard is investing in a partnership with Borg. Piccard contributes equipment that originally cost $21,000, has a carrying amount of $14,000, and a fair value of $16,000. The entry that the partnership makes to record Piccard’s initial contribution includes a a) debit to Equipment for $14,000. b) debit to Equipment for $21,000. c) debit to Equipment for $16,000. d) credit to Accumulated Depreciation for $7,000. Answer: c Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

85. A partner contributes, as part of their initial investment, accounts receivable with an allowance for doubtful accounts. Which of the following reflects a proper treatment? a) The allowance for doubtful accounts must be recorded at its book value. b) The allowance account may be set up on the books of the partnership because it relates to the existing accounts that are being contributed. c) The allowance account should not be carried onto the books of the partnership. d) The accounts receivable and allowance should not be recorded on the books of the partnership because a partner must invest cash in the business. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

86. In a limited liability partnership, a partner has unlimited liability a) for the negligent acts of the other partners. b) for only his or her share of capital contributed. c) for the actions of employees whom they directly supervise and control. d) only during the first five years of the partnership. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

87. There are three accounting issues where there are some differences between partnerships and proprietorships. Which one of the following is NOT a difference? a) Private partnerships may follow ASPE. b) formation of a partnership

Test Bank for Accounting Principles, Ninth Canadian Edition

c) preparing partnership financial statements d) dividing the partnership profit and loss Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

88. Partnerships are sometimes publicly accountable enterprises and these entities must follow a) ASPE. b) IFRS. c) partnership accounting standards. d) public sector accounting standards. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

89. Jody Johnson and Ben Bear formed a partnership on September 1. Jody contributed cash of $100,000 and furniture with a cost of $50,000 and fair value of $28,000. Ben contributed cash of $70,000 and equipment with a cost of $75,000 and a fair value of $50,000. The appropriate amount to be credited to each partner’s capital account on September 1 is a) J. Johnson, Capital = $128,000; B. Bear, Capital = $120,000. b) J. Johnson, Capital = $150,000; B. Bear, Capital = $145,000. c) J. Johnson, Capital = $150,000; B. Bear, Capital = $120,000. d) J. Johnson, Capital = $128,000; B. Bear, Capital = $145,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for the formation of a partnership. Section Reference: Forming a Partnership CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

90. The Peppa and Duggy partnership agreement stipulates that profits and losses will be shared equally after salary allowances of $80,000 for Peppa and $40,000 for Duggy. At the beginning of the year, Peppa's capital account had a balance of $80,000, while Duggy's capital account had a balance of $70,000. Profit for the year was $100,000. The balance of Duggy's capital account at the end of the year after closing is a) $70,000. b) $40,000. c) $120,000. d) $100,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

91. Ms. Manchester, Mr. Robertson, and Ms. Allison formed a partnership with a 4:2:1 partnership on profit. Mr. Robertson will receive what percentage of the profit at the end of the year? a) 20% b) 33% c) 50% d) 29% Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

92. At the end of December 2024, Ray Telsenburg, a partner in Telsenburg-Goldblum Company, had a balance in his drawings account of $18,000. Ray’s capital account at the beginning of 2024 was $80,000. $5,000 of partnership profit was allocated to Ray in 2024. The entry to close Ray’s drawings account at the end of 2024 would include a a) debit to Income Summary for $18,000. b) credit to Telsenburg, Capital for $13,000. c) debit to Telsenburg, Capital for $18,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) credit to Telsenburg, Capital for $5,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

93. The partnership of Melissa and Janet reports profit of $30,000. The partners share equally in profit and losses. The entry to record the partners' share of profit will include a a) credit to Income Summary for $30,000. b) credit to Melissa, Capital for $15,000. c) debit to Janet, Capital for $15,000. d) credit to Melissa, Drawings for $15,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

94. Partner A receives $60,000 and Partner B receives $40,000 in a split of $100,000 profit. Which expression does NOT reflect the profit-splitting arrangement? a) 3:2 b) 3/5 and 2/5 c) 6:4 d) 2:1 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

95. Ms. Drew, Mr. Fraser, and Ms. Percy had a 1:2:3 partnership split on profit in their partnership. In 2024, the partnership had a profit of $150,000. How much would Ms. Drew receive as her share of the profit? a) $15,000 b) $50,000 c) $75,000 d) $25,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

96. A profit ratio based on capital balances might be appropriate when a) service is a primary consideration. b) some, but not all, partners plan to work in the business. c) funds invested in the partnership are considered the critical factor. d) little profit is expected. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

97. The profit of the Miskell and Leblanc partnership is $30,000. The partnership agreement specifies that Miskell and Leblanc have a salary allowance of $8,000 and $12,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $20,000. Any remaining profit or loss is shared equally. What is Miskell's share of the $30,000 profit? a) $8,000 b) $10,000 c) $11,000 d) $13,000 Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

98. The profit of the Miskell and Leblanc partnership is $30,000. The partnership agreement specifies that Miskell and Leblanc have a salary allowance of $8,000 and $12,000, respectively. The partnership agreement also specifies an interest allowance of 10% on capital balances at the beginning of the year. Each partner had a beginning capital balance of $20,000. Any remaining profit or loss is shared equally. What is the balance of Leblanc's Capital account at the end of the year after profit has been distributed? a) $34,000 b) $32,000 c) $37,000 d) $35,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

99. The profit of the Busch and Ford partnership is $45,000. The partnership agreement specifies that profits and losses will be shared equally after salary allowances of $25,000 (Busch) and $10,000 (Ford) have been allocated. At the beginning of the year, Busch's Capital account had a balance of $50,000 and Ford's Capital account had a balance of $65,000. What is the balance of Ford's Capital account at the end of the year after profits and losses have been distributed? a) $65,000 b) $10,000 c) $75,000 d) $80,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

100. Lesley Arsenault and Darcy Campbell formed a partnership by contributing $80,000 and $100,000, respectively. The company reported net income of $78,000 in its first year of operations. Assuming the partners share profits and losses based on the beginning of year capital balances, how much would be distributed to each partner? a) L. Arsenault = $34,667; D. Campbell = $43,333 b) L. Arsenault = $80,000; D. Campbell = $100,000 c) L. Arsenault = $39,000; D. Campbell = $39,000 d) L. Arsenault = $78,000; D. Campbell = $78,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

101. Kindrob Company reports profit of $144,000 for the year ended May 31, 2024. The partnership agreement specifies (1) salary allowances of $60,000 for K. Kindle and $48,000 for M. Roberts, (2) an interest allowance of 4% based on average capital account balances, and (3) sharing any remainder on a 60:40 basis (60% to Kindle, 40% to Roberts). Average capital account balances for the year were $80,000 for Kindle and $60,000 for Roberts. How much is the profit allocated to Kindle? a) $63,200 b) $81,440 c) $78,240 d) $75,040 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic 102. Kindrob Company reports profit of $144,000 for the year ended May 31, 2024. The partnership agreement specifies (1) salary allowances of $60,000 for K. Kindle and $48,000 for M. Roberts, (2) an interest allowance of 4% based on average capital account balances, and (3) sharing any remainder on a 60:40 basis (60% to Kindle, 40% to Roberts). Average capital account balances for the year were

Test Bank for Accounting Principles, Ninth Canadian Edition

$80,000 for Kindle and $60,000 for Roberts. How much is the profit allocated to Roberts? a) $50,400 b) $60,160 c) $62,560 d) $12,160 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

103. Kindrob Company reports profit of $144,000 for the year ended May 31, 2024. The partnership agreement specifies (1) salary allowances of $60,000 for K. Kindle and $48,000 for M. Roberts, (2) an interest allowance of 4% based on average capital account balances, and (3) sharing any remainder on a 60:40 basis (60% to Kindle, 40% to Roberts). Average capital account balances for the year were $80,000 for Kindle and $60,000 for Roberts. Which of the following reflects the correct closing entry for profit? a) Income Summary ......................................................................................... 144,000 K. Kindle, Capital .................................................................................... 81,440 M. Roberts, Capital ................................................................................. 62,560 b) Income Summary ......................................................................................... 144,000 K. Kindle, Capital .................................................................................... 93,600 M. Roberts, Capital ................................................................................. 50,400 c) K. Kindle, Capital .......................................................................................... 93,600 M. Roberts, Capital ....................................................................................... 50,000 Income Summary ................................................................................... 144,000 d) Income Summary ......................................................................................... 144,000 K. Kindle, Capital .................................................................................... 83,840 M. Roberts, Capital ................................................................................. 60,160 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

104. Kindrob Company reports profit of $144,000 for the year ended May 31, 2024. The partnership

Test Bank for Accounting Principles, Ninth Canadian Edition

agreement specifies (1) salary allowances of $60,000 for K. Kindle and $48,000 for M. Roberts, (2) an interest allowance of 4% based on average capital account balances, and (3) sharing any remainder on a 60:40 basis (60% to Kindle, 40% to Roberts). Average capital account balances for the year were $80,000 for Kindle and $60,000 for Roberts. How much is the profit remaining for allocation after salary and interest allowances? a) $33,120 b) $30,400 c) $144,000 d) $36,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

105. Assume Blooming Ideas has a profit of $64,000 for the year and that the partners, L. Francis and M. Nickles, share profit and loss equally. Further assume that drawings for the year were $16,000 for Francis and $12,000 for Nickles. Which of the below entries would be correct to close out profit? a) Income Summary ......................................................................................... 36,000 L. Francis, Capital ................................................................................... 18,000 M. Nickles, Capital .................................................................................. 18,000 b) Income Summary ......................................................................................... 64,000 L. Francis, Capital ................................................................................... 32,000 M. Nickles, Capital .................................................................................. 32,000 c) L. Francis, Capital ......................................................................................... 18,000 M. Nickles, Capital ........................................................................................ 18,000 Income Summary ................................................................................... 36,000 d) L. Francis, Capital ......................................................................................... 32,000 M. Nickles, Capital ........................................................................................ 32,000 Income Summary ................................................................................... 64,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

106. The capital accounts of Freddie Kim and Maria Spatton, partners in Imagine Plus, had balances of $160,000 and $190,000, respectively, on January 1, 2024. During the year, Kim invested an additional $30,000 and each partner withdrew $100,000. Profit for the year was $300,000 and was shared equally between the partners. How much is the closing capital for Freddie Kim at December 31, 2024? a) $90,000 b) $240,000 c) $80,000 d) $390,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic 107. The capital accounts of Freddie Kim and Maria Spatton, partners in Imagine Plus, had balances of $160,000 and $190,000, respectively, on January 1, 2024. During the year, Kim invested an additional $30,000 and each partner withdrew $100,000. Profit for the year was $300,000 and was shared equally between the partners. How much is the closing capital for Maria Spatton at December 31, 2024? a) $340,000 b) $90,000 c) $80,000 d) $240,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic 108. The capital accounts of Freddie Kim and Maria Spatton, partners in Imagine Plus, had balances of $160,000 and $190,000, respectively, on January 1, 2024. During the year, Kim invested an additional $30,000 and each partner withdrew $100,000. Profit for the year was $300,000 and was shared equally between the partners. How much is the total closing capital for the partnership at December 31, 2024? a) $580,000 b) $180,000 c) $480,000 d) $300,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

109. Which of the following does NOT change capital in a partnership? a) additional investments by owners b) payment of accounts payable c) drawings d) division of the partnership profit or loss Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic 110. The division of the partnership profit or loss a) is a financial statement. b) is not disclosed as a separate schedule. c) is not disclosed in a note to the financial statement. d) is a schedule. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

111. The Statement of Partners' Equity explains a) the amount of legal liability of each of the partners. b) the types of assets invested in the business by each partner. c) how the partnership will be capitalized if a new partner is admitted to the partnership.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) the changes in each partner's capital account and in total partnership capital during a period. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

112. All of the following are required to prepare a statement of partners’ equity, except a) a list of all assets initially transferred into the partnership. b) the partnership income statement. c) the opening balance in the partners’ capital accounts. d) the balance in the partners’ drawings accounts. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

113. Which of the following would NOT cause an increase in partnership capital? a) drawings b) profit c) additional capital investment by the partners d) initial capital investment by the partners Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

114. Barbara Elliott is one of the partners in Elliott & Wan. Her drawings during the year were $10,000. She made an additional capital investment of $5,000 and her share of the loss for the year was $2,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

Her ending capital balance was $40,000. What was Barbara's beginning capital balance? a) $45,000 b) $37,000 c) $47,000 d) $52,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

115. Kelly Chaytor started the year with a capital balance of $28,000. During the year, her share of partnership profit was $16,000 and she withdrew $4,000 from the partnership for personal use. She made an additional capital contribution of $5,000 during the year. The amount of Kelly Chaytor's capital balance that will be reported on the year-end balance sheet will be a) $33,000. b) $49,000. c) $29,000. d) $45,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

116. The Statement of Partners' Equity for The Allied Centre reported the following information in total: Capital, January 1 ..................................................................... $60,000 Additional investment............................................................... 20,000 Drawings .................................................................................... 40,000 Profit ...................................................................................... 50,000 The partnership has three partners: Hum, Pippy, and Collis with ending capital balances in a ratio of 40:20:40. What are the respective ending balances of the three partners? a) Hum, $40,000; Pippy, $20,000; Collis, $40,000 b) Hum, $36,000: Pippy, $18,000; Collis, $36,000 c) Hum, $68,000; Pippy, $34,000; Collis, $68,000

Test Bank for Accounting Principles, Ninth Canadian Edition

d) Hum, $48,000; Pippy, $24,000; Collis, $48,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

117. On January 1, 2024, the opening balances in the Ho-Hum partnership were Ho, $12,000 and Hum, $14,000. During the year, the partnership earned $80,000. Profit is split equally between the partners. Ho worked a significant amount during the year and withdrew $50,000. Hum was mainly a silent partner and withdrew only $10,000. At the end of the year, after all accounts have been closed, the balance in Hum’s capital account was a) $19,000. b) $44,000. c) $54,000. d) $4,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

118. The partners' drawings accounts are a) reported on the income statement. b) reported on the balance sheet. c) closed to Income Summary. d) closed to the partners' capital accounts. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

119. A change in total partners’ capital may occur from all of the following, except a) additional capital investments in the partnership. b) drawings by the partners. c) the use of partnership cash to pay out a retiring partner. d) the use of partnership cash to purchase new office equipment. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

120. As in a proprietorship, changes in capital for a partnership may result from three causes. Which one of the following is NOT a cause for change? a) additional investments by owner b) drawings c) allocating profit to the owner or owners d) collection of account receivable Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

121. All of the following will result in a change in capital, except a) additional investments by owner. b) drawings. c) partner share of the profit or loss. d) acquisition of land. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare partnership financial statements.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Partnership Financial Statements CPA: Financial Reporting AACSB: Analytic

122. Rich and Poore have partnership capital balances of $160,000 and $120,000, respectively. Poore negotiates to sell his partnership interest to Claudio for $140,000. Rich agrees to accept Claudio as a new partner. The partnership entry to record this transaction is a) Cash .............................................................................................................. 140,000 Claudio, Capital ...................................................................................... 140,000 b) Poore, Capital ............................................................................................... 140,000 Claudio, Capital ...................................................................................... 140,000 c) Cash .............................................................................................................. 20,000 Poore, Capital ............................................................................................... 120,000 Claudio, Capital ...................................................................................... 140,000 d) Poore, Capital ............................................................................................... 120,000 Claudio, Capital ...................................................................................... 120,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

123. Frodo and Merry share partnership profits and losses in the ratio of 6:4. Frodo's capital account balance is $80,000 and Merry’s capital account balance is $50,000. Pippen is admitted to the partnership by investing $90,000 and is to receive a 25% ownership interest. Frodo, Merry, and Pippen's capital balances after Pippen's investment will be Frodo Merry Pippen a) $80,000 $50,000 $90,000. b) $101,000 $64,000 $55,000. c) $99,000 $66,000 $55,000. d) $97,500 $67,500 $55,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

124. Sung and Ping have partnership capital account balances of $180,000 and $140,000, respectively and share profits and losses equally. Luing is admitted to the partnership by investing $80,000 for a one-fourth ownership interest. The balance of Ping's capital account after Luing is admitted is a) $150,000. b) $130,000. c) $160,000. d) $175,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

125. The admission of a new partner to an existing partnership a) may be accomplished only by investing assets in the partnership. b) requires purchasing the interest of one or more existing partners. c) causes a legal dissolution of the existing partnership. d) is almost always accompanied by the liquidation of the business. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

126. When a partnership interest is purchased from an existing partner, a) each partner’s capital account is affected. b) the transaction is a personal transaction between the purchaser and the selling partner(s). c) the buyer receives equity equal to the amount of cash paid. d) all partners will receive some part of the purchase price. Answer: b Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

127. Wooley and Murley each sell 1/3 of their partnership interest to Downer, receiving $20,000 each. At the time of the admission, each partner has a $60,000 capital balance. The entry to record the admission of Downer will show a a) debit to Cash for $40,000. b) credit to Downer, Capital for $60,000. c) debit to Murley, Capital for $60,000. d) debit to Wooley, Capital for $20,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

128. Eaton and Fields sell 1/4 of their partnership interest to O’Reilly receiving $25,000 each. At the time of admission, Eaton and Fields each had a $45,000 capital balance. The admission of O’Reilly will cause the net partnership assets to a) increase by $50,000. b) remain at $90,000. c) decrease by $50,000. d) remain at $140,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

129. Crosby and Malkin sell to Staal a 1/3 interest in the Crosby-Malkin partnership. Staal will pay Crosby and Malkin each personally, $60,000 for admission into the partnership. Before this transaction, Crosby and Malkin show capital balances of $45,000 each. The journal entry to record the admission of Staal will

Test Bank for Accounting Principles, Ninth Canadian Edition

a) show a debit to Cash of $120,000. b) not show a debit to Cash. c) show a debit to Malkin, Capital for $60,000. d) show a credit to Staal, Capital for $120,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

130. Hill invests $30,000 in cash (admission by investment) in the Morgan-Carr partnership to acquire a 1/4 interest. In this case, a) the accounting will be the same as a purchase of an interest. b) the total net assets of the new partnership are unchanged from the previous partnership. c) the total capital of the new partnership is greater than the total capital of the old partnership. d) Hill's profit ratio will automatically be 1/4. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

131. Which of the following is correct when admitting a new partner into an existing partnership? Purchase of an Interest Admission by Investment a) Total net assets unchanged unchanged b) Total capital increased unchanged c) Total net assets unchanged increased d) Total capital unchanged unchanged Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

132. When admitting a new partner by investment, a bonus to old partners a) is usually unjustified because carrying amounts clearly reflect partnership net worth. b) is sometimes justified because goodwill may exist and it is not reflected in the accounts. c) results if the debit to cash is less than the new partner's capital credit. d) results if the debit to cash is equal to the new partner's capital credit. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

133. When admitting a new partner by investment, a bonus to old partners is allocated on a) the basis of capital balances. b) the basis of the original investment of the old partners. c) the basis of profit ratios before the admission of the new partner. d) the basis of the salaries of the old partners. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

134. A bonus to a new partner a) is prohibited by IFRS. b) results when the new partner's capital credit is less than his or her investment of assets in the firm. c) may occur when recorded carrying amounts are lower than fair values. d) results when the new partner's capital credit is greater than his or her investment of assets in the firm. Answer: d Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

135. A bonus to a new partner will a) increase the capital balances of existing partners based on their profit ratios before the admission of the new partner. b) increase the capital balances of existing partners based on their profit ratios after the admission of the new partner. c) decrease the capital balances of existing partners based on their profit ratios before the admission of the new partner. d) decrease the capital balances of existing partners based on their capital balances before the admission of the new partner. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

136. The investment of assets in a partnership by a partner increases both the partnership’s a) total assets and current liabilities. b) net assets and total capital. c) total capital and revenue. d) current assets and non-current liabilities. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

137. Accounting for the admission of a new partner by purchase of a partner’s interest will a) not affect total assets, liabilities, and capital. b) increase total assets and total capital. c) increase total capital.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) decrease total capital. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

138. Dana Peters was admitted to partnership with a 20% ownership interest after investing $30,000 cash. The partnership capital before the admission of Peters was $130,000. Which of the following best describes the impact on the capital accounts from this transaction? a) Peters will pay a bonus of $4,000 to the old partners. b) Peters will pay a bonus of $2,000 to the old partners. c) Peters will receive a bonus of $2,000 from the old partners. d) Peters will receive a bonus of $4,000 from the old partners. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

139. S. Primrose and B. Adora have a partnership in which they share profit and loss equally. There is an $80,000 balance in each of the capital accounts. Which of the following is the correct journal entry to record assuming Primrose and Adora agree to admit M. Houston as a new one-fourth interest partner? Houston pays $32,000 in cash directly to each partner. a) Cash .............................................................................................................. 32,000 M. Houston, Capital ................................................................................ 32,000 b) S. Primrose, Capital ...................................................................................... 20,000 B. Adora, Capital ........................................................................................... 20,000 M. Houston, Capital ................................................................................ 40,000 c) Cash .............................................................................................................. 32,000 S. Primrose, Capital................................................................................ 16,000 B. Adora, Capital ..................................................................................... 16,000 d) S. Primrose, Capital ...................................................................................... 38,400 B. Adora, Capital ........................................................................................... 38,400 M. Houston, Capital ................................................................................ 76,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

140. S. Primrose and B. Adora have a partnership in which they share profit and loss equally. There is an $80,000 balance in each of the capital accounts. Which of the following is the correct journal entry to record assuming Primrose and Adora agree to admit M. Houston as a new one-fourth interest partner? Houston contributes $64,000 to the partnership. a) Cash .............................................................................................................. 64,000 S. Primrose, Capital................................................................................ 4,000 B. Adora, Capital ..................................................................................... 4,000 M. Houston, Capital ................................................................................ 56,000 b) S. Primrose, Capital ...................................................................................... 32,000 B. Adora, Capital ........................................................................................... 32,000 M. Houston, Capital ................................................................................ 64,000 c) Cash .............................................................................................................. 64,000 M. Houston, Capital ................................................................................ 64,000 d) Cash .............................................................................................................. 64,000 S. Primrose, Capital................................................................................ 32,000 B. Adora, Capital ..................................................................................... 32,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

141. In a purchase of a partner’s interest, a) the partnership is a participant in the transaction and no cash is contributed to the partnership. b) the partnership is not a participant in the transaction and cash is contributed to the partnership. c) the partnership is a participant in the transaction and cash is contributed to the partnership. d) the partnership is not a participant in the transaction and no cash is contributed to the partnership. Answer: d Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

142. Which of the following is true when admitting a new partner by purchase of a partner’s interest? a) There may be a bonus to the new or old partner(s). b) The price paid is negotiated by the individuals involved. c) The new partner pays the partnership. d) The total capital of the partnership changes. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic

143. Which of the following is true when admitting a new partner by an investment in assets in the partnership? a) This is a personal transaction between the new partner and one or more of the existing partners. b) There cannot be a bonus to the new or old partner(s). c) The new partner pays the existing partner(s) personally. d) There is an increase in both the net assets and total capital of the partnership. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner CPA: Financial Reporting AACSB: Analytic 144. A. Blige, V. Smith, and X. Lu have a partnership in which they share profit and loss equally. There is an $80,000 balance in each capital account. Which of the following is the correct entry to record the withdrawal of Lu from the partnership assuming Blige and Smith each pay Lu $50,000 out of their personal assets? a) X. Lu, Capital ................................................................................................. 50,000 Cash ........................................................................................................ 50,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) A. Blige, Capital ............................................................................................ V. Smith, Capital ........................................................................................... X. Lu, Capital ........................................................................................... c) X. Lu, Capital ................................................................................................. A. Blige, Capital ............................................................................................. V. Smith, Capital ........................................................................................... Cash ........................................................................................................ d) X. Lu, Capital ................................................................................................. A. Blige, Capital ...................................................................................... V. Smith, Capital .....................................................................................

40,000 40,000 80,000 40,000 5,000 5,000 50,000 80,000 40,000 40,000

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

145. A. Blige, V. Smith, and X. Lu have a partnership in which they share profit and loss equally. There is an $80,000 balance in each capital account. Which of the following is the correct entry to record the withdrawal of Lu from the partnership assuming Lu is paid $60,000 of partnership cash? a) X. Lu, Capital ................................................................................................. 60,000 Cash ........................................................................................................ 60,000 b) X. Lu, Capital ................................................................................................. 80,000 Cash ........................................................................................................ 60,000 A. Blige, Capital ...................................................................................... 10,000 V. Smith, Capital ..................................................................................... 10,000 c) X. Lu, Capital ................................................................................................. 40,000 A. Blige, Capital ............................................................................................. 10,000 V. Smith, Capital ........................................................................................... 10,000 Cash ........................................................................................................ 60,000 d) X. Lu, Capital ................................................................................................. 80,000 A. Blige, Capital ...................................................................................... 40,000 V. Smith, Capital ..................................................................................... 40,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

146. Which of the following is true when there is a withdrawal by payment from a partner’s personal assets? a) Payment to the departing partner is made directly from the partnership. b) There may be a bonus to the old partner(s). c) Partnership assets are not involved in any way, and total capital does not change. d) Both partnership net assets and total capital decrease. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

147. Which of the following is true when there is a withdrawal by payment from the partnership’s assets? a) Both partnership net assets and total capital decrease. b) Payment to the departing partner is made directly from the remaining partners’ personal assets. c) Partnership assets are not involved in any way, and total capital does not change. d) Asset revaluations should be recorded. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

148. A. Blige, V. Smith, and X. Lu have a partnership in which they share profit and loss equally. There is an $80,000 balance in each capital account. What is the capital balance of A. Blige assuming Blige and Smith each pay Lu $50,000 out of their personal assets for Lu’s withdrawal from the partnership? a) $80,000 b) $30,000 c) $40,000 d) $120,000 Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

149. Travis, Jennifer, and Henry have partnership capital account balances of $150,000, $300,000, and $70,000, respectively. The profit-sharing ratio is Travis, 50%; Jennifer, 40%; and Henry, 10%. Travis wishes to withdraw from the partnership and it is agreed that partnership assets of $120,000 will be used to pay Travis for her partnership interest. The balances of Jennifer's and Henry's Capital accounts after Travis's withdrawal would be a) Jennifer, $300,000; Henry, $70,000. b) Jennifer, $324,000; Henry, $76,000. c) Jennifer, $276,000; Henry, $64,000. d) Jennifer, $285,000; Henry, $55,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

150. Ace, Bell, and Cole have partnership capital account balances of $90,000 each. Profit and losses are shared on a basis of 3:2:1 for Ace, Bell, and Cole, respectively. Cole agrees to sell three-fourths of his ownership interest to Ace for $55,000 and one-fourth to Bell for $20,000. Ace and Bell will use personal assets to purchase Cole's interest. The partnership's entry to record Cole's withdrawal from the partnership would be a) Cole, Capital ................................................................................................. 75,000 Cash ........................................................................................................ 75,000 b) Cole, Capital ................................................................................................. 75,000 Ace, Capital ............................................................................................. 55,000 Bell, Capital ............................................................................................ 20,000 c) Cole, Capital.................................................................................................. 90,000 Ace, Capital ............................................................................................. 67,500 Bell, Capital ............................................................................................ 22,500 d) Ace, Capital ................................................................................................... 56,250 Bell, Capital................................................................................................... 18,750 Cole, Capital ........................................................................................... 75,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

151. When a partner withdraws from the firm, which of the following reflects the correct partnership effects? Payment from Payment from Partners' Personal Assets Partnership Assets a) Total net assets decreased decreased b) Total capital decreased decreased c) Total net assets unchanged decreased d) Total capital unchanged unchanged Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

152. Which of the following is NOT a necessary action that the partnership must take upon the death of a partner? a) Determine the profit or loss for the year to date. b) Discontinue business operations. c) Close the books. d) Prepare financial statements. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

153. When a partner withdraws by payment from the other partner’s personal assets, the impact on net assets is a) no change in net assets. b) net assets will increase by the buyout amount. c) net assets will decrease by the buyout amount. d) net assets will decrease by the amount of the departed partner’s capital account. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the withdrawal of a partner. Section Reference: Withdrawal of a Partner CPA: Financial Reporting AACSB: Analytic

154. The Jackson-Chan partnership is terminated when creditor claims exceed partnership assets by $30,000. Chan is a millionaire and Jackson has no personal assets. Jackson's partnership interest is 75% and Chan's is 25%. Creditors a) must collect their claims equally from Chan and Jackson. b) may collect the entire $30,000 from Chan. c) must collect their claims 75% from Jackson and 25% from Chan. d) may not require Chan to use his personal assets to satisfy the claims. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

155. In accounting for the liquidation of a partnership, any gain or loss on the realization of noncash assets should be allocated a) first to creditors and the remainder to partners. b) to the partners on the basis of their capital balances. c) to the partners on the basis of their profit-sharing ratio. d) only after all creditors have been paid. Answer: c Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

156. In the liquidation of a partnership, any partner who has a capital deficiency a) has a personal debt to the partnership for the amount of the deficiency. b) is automatically terminated as a partner. c) will receive a cash distribution only on the basis of his or her profit-sharing ratio. d) is not obligated to make up the capital deficiency. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

157. Partners A, B, and C have capital account balances of $60,000 each. The profit and loss ratio is 5:2:3, respectively. In the process of liquidating the partnership, noncash assets with a carrying amount of $50,000 are sold for $20,000. The balance of Partner B's Capital account after the sale is a) $45,000. b) $51,000. c) $54,000. d) $66,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

158. The partners' profit and loss sharing ratio is 2:3:5, respectively.

Assets

D, E, AND F PARTNERSHIP Balance Sheet December 31, 2024 Liabilities and Partners' Equity

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash Equipment Accum. dep.—equipment

$35,000 90,000 (15,000)

Liabilities $40,000 D, Capital 30,000 E, Capital 25,000 F, Capital 15,000 Total $110,000 Total $110,000 If the D, E, and F Partnership is liquidated by selling the equipment for $45,000 and creditors are paid in full, what is the amount of cash that can be distributed to each partner? a) D, $24,000; E, $16,000; F, $0 b) D, $14,000; E, $21,000; F, $5,000 c) D, $20,000; E, $25,000; F, $5,000 d) D, $30,000; E, $25,000; F, $15,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

159. The partners' profit and loss sharing ratio is 2:3:5, respectively. D, E, AND F PARTNERSHIP Balance Sheet December 31, 2024 Assets Liabilities and Partners' Equity Cash $35,000 Liabilities $40,000 Equipment 90,000 D, Capital 30,000 Accum. dep.—equipment (15,000) E, Capital 25,000 F, Capital 15,000 Total $110,000 Total $110,000 If the D, E, and F Partnership is liquidated by selling the equipment for $125,000, and creditors are paid in full, what is the total amount of cash that Partner D will receive in the distribution of cash to partners? a) $10,000 b) $39,000 c) $40,000 d) $25,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

160. The partners' profit and loss sharing ratio is 2:3:5, respectively. D, E, AND F PARTNERSHIP Balance Sheet December 31, 2024 Assets Liabilities and Partners' Equity Cash $35,000 Liabilities $40,000 Equipment 90,000 D, Capital 30,000 Accum. dep.—equipment (15,000) E, Capital 25,000 F, Capital 15,000 Total $110,000 Total $110,000 If the D, E, and F Partnership is liquidated and the equipment is worthless, the creditors will look to what partner's personal assets for settlement of the creditors' claims? a) the personal assets of Partner E b) the personal assets of Partners D and F c) the personal assets of Partners D, E, and F d) The personal assets of the partners are not available for partnership debts. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

161. If a partner has a capital deficiency and does NOT have the personal resources to eliminate it, a) the creditors will have to absorb the capital deficiency. b) the other partners will absorb the capital deficiency on the basis of their respective capital balances. c) the other partners will have to absorb the capital deficiency on the basis of their respective profitsharing ratios. d) neither the creditors nor the other partners will have to absorb the capital deficiency. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

162. The liquidation of a partnership a) cannot be a voluntary act of the partners. b) terminates the business. c) eliminates those partners with a capital deficiency. d) cannot occur unless all partners approve. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

163. The liquidation of a partnership is a process containing the following steps: 1. Pay partnership liabilities in cash. 2. Allocate the gain or loss on realization to the partners based on their profit ratios. 3. Sell noncash assets for cash and recognize a gain or loss on realization. 4. Distribute remaining cash to partners on the basis of their remaining capital balances. Identify the proper sequencing of the steps in the liquidation process. a) 3, 2, 4, 1 b) 3, 2, 1, 4 c) 1, 3, 2, 4 d) 1, 4, 3, 2 Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

164. In the final step of the liquidation process, remaining cash is distributed to partners a) on an equal basis. b) on the basis of the profit ratios. c) on the basis of the remaining capital balances. d) regardless of capital deficiencies. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

165. In the liquidation process, if a capital account shows a deficiency, a) the partner with a deficiency has an obligation to the partnership for the amount of the deficiency. b) it may be written off to a "Loss" account. c) it is disregarded until after the partnership books are closed. d) it can be written off to a "Gain" account. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

166. The liquidation of a partnership ends the business. It involves a) selling noncash assets. b) paying liabilities. c) distributing any remaining assets to partners. d) All of the choices are correct. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

167. A capital deficiency exists when a) two or more partners have a credit balance in their capital accounts. b) at least one partner has a debit balance in their capital account. c) all partners have a zero balance in their capital accounts. d) at least one partner has a credit balance in their capital account.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

168. A capital deficiency may be caused by a) recurring losses. b) excess drawings. c) losses from realization during liquidation. d) All of the choices are correct. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

169. A partnership liquidation situation where one or more of the partners’ capital accounts have a debit balance is referred to as a) a capital deficiency. b) no capital deficiency. c) a gain on realization. d) a loss on realization. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

170. P. Singh, M. Bogue, and K. Nikolaj, LLP, dissolved their partnership as at August 31. Before liquidation, the three partners shared profit and losses in the ratio of 3:2:4. After the books were closed

Test Bank for Accounting Principles, Ninth Canadian Edition

on August 31, the following summary accounts remained: Cash $12,000 P. Singh, Capital $60,000 Noncash assets 220,000 M. Bogue, Capital 40,000 Accounts payable 50,000 K. Nikolaj, Capital 82,000 On September 24, the partnership sold the remaining noncash assets for $148,000 and paid the liabilities. If there is a capital deficiency, none of the partners will be able to pay it. Which of the following is the correct journal entry to record the sale of noncash assets? a) Cash .............................................................................................................. 148,000 Accounts Payable ......................................................................................... 50,000 Loss on Realization ....................................................................................... 22,000 Noncash Assets ...................................................................................... 220,000 b) Noncash Assets ............................................................................................ 220,000 Gain on Realization ................................................................................ 22,000 Accounts Payable ................................................................................... 50,000 Cash ........................................................................................................ 148,000 c) Cash .............................................................................................................. 148,000 Noncash Assets ...................................................................................... 148,000 d) Cash .............................................................................................................. 148,000 Loss on Realization ...................................................................................... 72,000 Noncash Assets ...................................................................................... 220,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

171. P. Singh, M. Bogue, and K. Nikolaj, LLP, dissolved their partnership as at August 31. Before liquidation, the three partners shared profit and losses in the ratio of 3:2:4. After the books were closed on August 31, the following summary accounts remained: Cash $12,000 P. Singh, Capital $60,000 Noncash assets 220,000 M. Bogue, Capital 40,000 Accounts payable 50,000 K. Nikolaj, Capital 82,000 On September 24, the partnership sold the remaining noncash assets for $148,000 and paid the liabilities. If there is a capital deficiency, none of the partners will be able to pay it. Which of the following is the correct journal entry to record the allocation of any gain or loss on realization? a) Gain on Realization ...................................................................................... 72,000 P. Singh, Capital...................................................................................... 24,000 M. Bogue, Capital ................................................................................... 16,000 K. Nikolaj, Capital ................................................................................... 32,000 b) P. Singh, Capital............................................................................................ 24,000 M. Bogue, Capital.......................................................................................... 16,000

Test Bank for Accounting Principles, Ninth Canadian Edition

K. Nikolaj, Capital ......................................................................................... Loss on Realization ................................................................................ c) Gain on Realization ....................................................................................... P. Singh, Capital...................................................................................... M. Bogue, Capital ................................................................................... K. Nikolaj, Capital ................................................................................... d) P. Singh, Capital............................................................................................ M. Bogue, Capital.......................................................................................... K. Nikolaj, Capital ......................................................................................... Loss on Realization ................................................................................

32,000 72,000 122,000 40,667 27,111 54,222 40,667 27,111 54,222 122,000

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

172. P. Singh, M. Bogue, and K. Nikolaj, LLP, dissolved their partnership as at August 31. Before liquidation, the three partners shared profit and losses in the ratio of 3:2:4. After the books were closed on August 31, the following summary accounts remained: Cash $12,000 P. Singh, Capital $60,000 Noncash assets 220,000 M. Bogue, Capital 40,000 Accounts payable 50,000 K. Nikolaj, Capital 82,000 On September 24, the partnership sold the remaining noncash assets for $148,000 and paid the liabilities. If there is a capital deficiency, none of the partners will be able to pay it. Which of the following is the correct journal entry to record the payment of liabilities? a) Accounts Payable ......................................................................................... 50,000 Cash ........................................................................................................ 50,000 b) Accounts Payable ......................................................................................... 50,000 P. Singh, Capital...................................................................................... 16,667 M. Bogue, Capital ................................................................................... 11,111 K. Nikolaj, Capital ................................................................................... 22,222 c) Cash .............................................................................................................. 50,000 Accounts Payable ................................................................................... 50,000 d) Cash .............................................................................................................. 148,000 Accounts Payable ......................................................................................... 50,000 Loss on Realization ....................................................................................... 22,000 Noncash Assets ...................................................................................... 220,000 Answer: a Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

173. P. Singh, M. Bogue, and K. Nikolaj, LLP, dissolved their partnership as at August 31. Before liquidation, the three partners shared profit and losses in the ratio of 3:2:4. After the books were closed on August 31, the following summary accounts remained: Cash $12,000 P. Singh, Capital $60,000 Noncash assets 220,000 M. Bogue, Capital 40,000 Accounts payable 50,000 K. Nikolaj, Capital 82,000 On September 24, the partnership sold the remaining noncash assets for $148,000 and paid the liabilities. If there is a capital deficiency, none of the partners will be able to pay it. Which of the following is the correct journal entry to record the distribution of cash to the partners? a) Cash .............................................................................................................. 110,000 P. Singh, Capital...................................................................................... 36,000 M. Bogue, Capital ................................................................................... 24,000 K. Nikolaj, Capital ................................................................................... 50,000 b) P. Singh, Capital............................................................................................ 32,667 M. Bogue, Capital.......................................................................................... 21,778 K. Nikolaj, Capital ......................................................................................... 43,555 Cash ........................................................................................................ 98,000 c) P. Singh, Capital ............................................................................................ 36,000 M. Bogue, Capital.......................................................................................... 24,000 K. Nikolaj, Capital ......................................................................................... 50,000 Cash ........................................................................................................ 110,000 d) Cash .............................................................................................................. 98,000 P. Singh, Capital...................................................................................... 32,667 M. Bogue, Capital ................................................................................... 21,778 K. Nikolaj, Capital ................................................................................... 43,555 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

174. Which of the following is true regarding capital deficiencies? a) The partners do not have a legally enforceable claim against the partner with the capital deficiency. b) If a partner with a capital deficiency is unable to pay the amount owed to the partnership, the

Test Bank for Accounting Principles, Ninth Canadian Edition

partners with debit balances must absorb the loss. c) The loss is allocated based on the profit and loss ratios between the partners whether with credit or debit balances. d) If the partner with the capital deficiency pays the amount owed to the partnership, the deficiency is eliminated. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 175. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Mutual agency Unlimited liability Partnership agreement Profit ratio Statement of Partners' Equity

___

Each partner is personally and individually liable for partnership debts.

___

Each partner can bind the partnership so long as the action appears to be appropriate for the partnership.

___

Written or verbal contract establishing duties and responsibilities of partners

___

The basis for sharing profit and losses

___

Explains changes in individual partner's capital accounts during a period.

___

Results in an increase in total net assets and total capital of the partnership.

___

Total net assets and total capital of the partnership do not change.

___

The sale of noncash assets

___

Ends both the legal and economic life of the entity.

___ 10.

Capital account with a debit balance

F. G. H. I. J.

Admission by investment Purchase of an interest Partnership liquidation Capital deficiency Realization

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 1.

10. I Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of the partnership form of business organization. Section Reference: Partnership Form of Organization Learning Objective: Allocate and record profit or loss to partners. Section Reference: Dividing Partnership Profit or Loss Learning Objective: Prepare partnership financial statements. Section Reference: Partnership Financial Statements Learning Objective: Account for the admission of a partner. Section Reference: Admission of a Partner Learning Objective: Account for the liquidation of a partnership. Section Reference: Liquidation of a Partnership CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 13 INTRODUCTION TO CORPORATIONS CHAPTER STUDY OBJECTIVES 1. Identify and discuss characteristics of the corporate form of organization. The major characteristics of a corporation are as follows: separate legal existence, limited liability of shareholders, transferable ownership rights, ability to acquire capital, continuous life, government regulations, and corporate income tax. Corporations must be incorporated federally or provincially, and may have shareholders of different classes. Each class of share carries different rights and privileges. The rights of common shareholders are restricted to the right to elect the board of directors, to receive a proportionate share of dividends, if declared, and to receive the remaining assets if the corporation is liquidated. Corporations are managed by the board of directors.

2. Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. When shares are issued, the entire proceeds from the issue become legal capital and are credited to the Common Shares account. When shares are issued for noncash assets or services, the fair value of the consideration received is used if it can be determined. If not, the fair value of the consideration given up is used. The accounting for preferred shares is similar to the accounting for common shares. Preferred shares typically do not have voting rights but do have priority over common shares to receive: 1. dividends, and 2. assets, if the company is liquidated. The dividend is specified and may be cumulative or noncumulative. Cumulative preferred shares must be paid dividends for the current year as well as any unpaid dividends from previous years before the common shares receive dividends. Noncumulative preferred shares lose the right to unpaid dividends from prior years. In addition, preferred shares may be convertible, redeemable, and/or retractable. Convertible preferred shares allow their holder to convert them into common shares at a specified ratio. Redeemable preferred shares give the corporation the right to redeem the shares for cash; retractable preferred shares give the shareholder the right to convert the shares to cash.

3. Prepare a corporate income statement. Corporate income statements are similar to the income statements for proprietorships and partnerships, with one exception. Income tax expense must be determined based on profit before tax and is reported on the income statement. Profit before tax less income tax expense is equal to profit for the year.

4. Explain and demonstrate the accounting for cash dividends. Dividends are similar to drawings in that they are a distribution of profit to the owners (shareholders). Entries for cash dividends are required at the declaration date and the payment date. Cash dividends reduce assets and shareholders’ equity (retained earnings). Preferred shareholders are paid their dividends first before the common shareholders are entitled to any dividends.

Test Bank for Accounting Principles, Ninth Canadian Edition

5. Prepare a statement of retained earnings and closing entries for a corporation. Retained earnings are increased by profit, and decreased by losses and dividends. Companies reporting under ASPE are required to prepare a statement of retained earnings showing the beginning balance, changes during the year, and ending balance of Retained Earnings. In a corporation, the Income Summary and dividends accounts are closed to Retained Earnings.

6. Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Within the shareholders’ equity section of the balance sheet, all corporations will report contributed capital and retained earnings. Within contributed capital, two classifications may be shown if applicable: 1. share capital and 2. contributed surplus. Corporations reporting under IFRS will also have another component in shareholders’ equity, which will be introduced in Chapter 14. Return on equity is calculated by dividing profit by average shareholders’ equity. It is an important measure of a company’s profitability.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 The following is a list of characteristics applicable to corporations: 1. Separate legal entity 2. Limited liability of shareholders 3. Transferable ownership rights 4. Ability to acquire capital 5. Continuous life 6. Government regulations 7. Potential for additional tax 8. Potential for deferred or reduced tax Instructions For each characteristic determine if it is an Advantage (A) or Disadvantage (D) to being incorporated. Solution 1 (5 min.) 1. A 2.

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

Exercise 2 For each of the following statements, indicate whether the statement applies to a proprietorship, a partnership, a private corporation, or a public corporation. (Select the most likely one).

Test Bank for Accounting Principles, Ninth Canadian Edition

1. 2. 3.

4. 5.

The business is owned by many people all over the world. A part-time business is owned and operated by a single individual. Six lawyers have joined their resources to operate a law practice. A business owned by two brothers pays dividends to its owners. One disadvantage of this form of business is that co-owners may create liability for each other. This business form is a separate legal entity, and has only one shareholder. The list of owners of this business changes frequently, as shareholders buy and sell shares of the entity. A business that is owned by one person and is not required to file separate tax returns.

Private corp. Private corp.

Public corp. Public corp.

Part.

Private corp.

Public corp.

Prop.

Part.

Private corp.

Public corp.

Prop.

Part.

Private corp.

Public corp.

Prop.

Part.

Private corp.

Public corp.

Prop.

Part.

Private corp.

Public corp.

Prop.

Part.

Private corp.

Public corp.

Prop.

Part.

Prop.

Part.

Prop.

Solution 2 (5 min.) 1. 2. 3.

4. 5.

Public corp. Prop. Part. Private corp. Part. Private corp. Public corp.

Test Bank for Accounting Principles, Ninth Canadian Edition

A business that is owned by one person and is not required to file separate tax returns.

Prop.

Exercise 3 Sneeky Corporation is authorized to issue an unlimited number of common shares and 1,500,000 preferred shares. During 2024, its first year of operation, the company had profit of $250,000. The following share transactions occurred: Jan. 1 Paid the province $2,250 for incorporation fees. Use Legal Fees Expense. Jan. 15 Issued 500,000 of $1 cumulative preferred shares at $8 per share. Jan. 30 Lawyers for the company accepted 750 common shares as payment for legal services provided in helping the company incorporate. The legal services are estimated to have a value of $6,300. The shares were actively trading at $11.50 per share. July 2 Issued 100,000 common shares for land. The land had an asking price of $925,000, with no known fair value. The shares are currently selling on the Toronto Stock Exchange at $8.50 per share. Instructions a) Journalize the transactions for Sneeky Corporation. b) Prepare the shareholders’ equity section of the balance sheet. Sneeky has a December 31 year end. Solution 3 (25 min.) a) Jan. 1 Legal Fees Expense ........................................................................ Cash......................................................................................... 15

July 2

2,250 2,250

Cash ................................................................................................ Preferred Shares .....................................................................

4,000,000

Legal Fees Expense ........................................................................ Common Shares .....................................................................

6,300

Land ................................................................................................ Common Shares (100,000 x $8.50) .........................................

850,000

b) SNEEKY CORPORATION

4,000,000

6,300

850,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Partial Balance Sheet December 31, 2024 Shareholders’ equity Share capital $1 cumulative preferred shares, 2,000,000 shares authorized, 500,000 shares issued .......................................... Common shares, unlimited number of shares authorized, 100,750 shares issued .......................................... Total share capital ...................................................................................... Retained earnings............................................................................................... Total shareholders’ equity .........................................................................

$4,000,000 856,300 4,856,300 250,000 $5,106,300

Bloomcode: Application Difficulty: Medium Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 4 McGregor Corporation is authorized to issue an unlimited number of common shares and 500,000 preferred shares. During 2024, its first year of operation, the company had profit of $305,000. The following share transactions occurred: June 1 Paid the province $1,800 for incorporation fees. Use Legal Fees Expense. June 5 Issued 100,000 of $4 cumulative preferred shares at $22 per share. July 25 Lawyers for the company accepted 250 common shares as payment for legal services provided in helping the company incorporate. The legal services are estimated to have a value of $4,500. The shares were actively trading at $20 per share. Oct. 18 Issued 45,000 common shares for land. The land had an asking price of $850,000, with no known fair value. The shares are currently selling on the Toronto Stock Exchange at $18 per share. Instructions a) Journalize the transactions for McGregor Corporation assuming the company follows IFRS. b) Prepare the shareholders’ equity section of the balance sheet at December 31, 2024. Solution 4 (25 min.) a) June 1 Legal Fees Expense ........................................................................

1,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash......................................................................................... 5

July 25

Oct. 18

1,800

Cash ................................................................................................ Preferred Shares .....................................................................

2,200,000

Legal Fees Expense ........................................................................ Common Shares .....................................................................

4,500

Land ................................................................................................ Common Shares (45,000 x $18) ..............................................

810,000

2,200,000

4,500

810,000

b) MCGREGOR CORPORATION Partial Balance Sheet December 31, 2024 Shareholders’ equity Share capital $4 cumulative preferred shares, 500,000 shares authorized, 100,000 shares issued. ......................................... Common shares, unlimited number of shares authorized, 45,250 shares issued. ........................................... Total share capital ...................................................................................... Retained earnings............................................................................................... Total shareholders’ equity .........................................................................

$2,200,000 814,500 3,014,500 305,000 $3,319,500

Exercise 5 The following selected transactions pertain to RWE Corporation: Jan. 3 Issued 100,000 common shares for $25 cash per share. Feb. 10 Issued 6,000 common shares in exchange for special-purpose equipment appraised at $159,000. RWE Corporation's common shares have been actively traded on the stock exchange at $27 per share.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Journalize the transactions. Solution 5 (5 min.) January 3 Cash ................................................................................................................... Common Shares (100,000 × $25)............................................................... To record issue of common shares. February 10 Equipment ........................................................................................................ Common Shares ....................................................................................... To record issue of shares for equipment.

2,500,000 2,500,000

159,000 159,000

Exercise 6 On January 1, 2024, Wally Wholesale Ltd. has 25,000 common shared issued for a total of $62,500, and no other shares or contributed capital. During 2024, Wally had the following transactions: Jan. 15 Issued 15,000 common shares for $2.50 each. Mar. 31 Settled an account for legal expenses by issuing 2,500 shares. The value of the legal services was $5,000. Sept. 30 Issued 9,000 shares in exchange for equipment with a fair value of $22,500. Instructions a) Record the transactions. b) Calculate the total number of shares issued and average cost per share of the common shares at the end of 2024. Round the average to two decimal places. Solution 6 (10 min.) a) Jan. 15 Cash ................................................................................................ Common Shares ..................................................................... Mar. 31

Sept. 30

37,500 37,500

Legal Fees Expense ........................................................................ Common Shares .....................................................................

5,000

Equipment ...................................................................................... Common Shares .....................................................................

22,500

5,000

22,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Number of shares = 25,000 + 15,000 + 2,500 + 9,000 = 51,500 Total cost = $62,500 + $37,500 + $5,000 + $22,500 = $127,500 Average cost per share = $127,500 ÷ 51,500 = $2.48 per share.

Exercise 7 The following selected transactions pertain to Blooms Corporation: Aug. 20 Issued 40,000 common shares for $35 cash per share. Nov. 3 Issued 1,000 common shares in exchange for equipment required for the shop with an appraised value of $75,000. Blooms Corporation's common shares have been actively traded on the Toronto Stock Exchange at $82 per share. Instructions Journalize the transactions. Solution 7 (5 min.) August 20 Cash ................................................................................................................... Common Shares (40,000 × $35)................................................................. To record issue of common shares. November 3 Equipment ........................................................................................................ Common Shares ....................................................................................... To record issue of shares for equipment.

1,400,000 1,400,000

75,000 75,000

Exercise 8 During its first year of operations, Millwoods Enterprises Limited had the following transactions

Test Bank for Accounting Principles, Ninth Canadian Edition

related to its common shares: Jan. 5 Issued 5,000 common shares to Michelle Vogel for $1 each. Mar. 15 Issued 10,000 common shares in exchange for equipment transferred from Vogel. The equipment was valued at $40,000. Apr. 10 Issued 3,500 shares to a consulting firm for management consulting services as settlement of a $14,000 invoice. Sept. 30 Issued 4,000 common shares to Renee Vogel for $5 each. Instructions a) Journalize the share transactions. b) Calculate the average cost of the common shares of Millwoods Enterprises Limited at December 31. Round to two decimal places. Solution 8 (10 min.) a) Jan. 5 Cash (5,000 x $1) ............................................................................. Common Shares (5,000 shares) ............................................. Mar. 15

Apr. 10

Sept. 30

5,000 5,000

Equipment ...................................................................................... Common Shares (10,000 shares) ...........................................

40,000

Consulting Expense ........................................................................ Common Shares (3,500 shares) .............................................

14,000

Cash (4,000 x $5) ............................................................................. Common Shares (4,000 shares) .............................................

20,000

40,000

14,000

20,000

Total shares issued = 5,000 + 10,000 + 3,500 + 4,000 = 22,500 Total cost = $5,000 + $40,000 + $14,000 + $20,000 = $79,000 Average cost per share = $79,000 ÷ 22,500 = $3.51

Exercise 9 The following items were shown on the balance sheet of McKean Corporation on December 31, 2024: Shareholders’ equity Share capital $2 preferred shares, redeemable at $120, cumulative,

Test Bank for Accounting Principles, Ninth Canadian Edition

20,000 shares authorized, 6,000 shares issued .................................. Common shares, no par value, unlimited number of shares authorized, ? shares issued................................................................. Total share capital ...................................................................................... Retained earnings............................................................................................... Total shareholders' equity .........................................................................

$ 120,000 1,200,000 1,320,000 500,000 $1,820,000

Instructions Complete the following statements and show your calculations. All of the common shares were issued at $5 per share. a) The number of common shares issued was ______. b) The preferred shares dividend is $______ per share. c) It would cost the company $______ to redeem 1,000 preferred shares. d) The average issue price of the preferred shares was $______. e) The total amount of cash and other assets paid to McKean Corporation in exchange for share capital at December 31, 2024, was $______. Solution 9 (10–15 min.) a) The number of common shares issued was 240,000. $1,200,000 ÷ $5 issue price = 240,000 shares issued. b)

The preferred shares dividend is $2 per share.

It would cost the company $120,000 to redeem 1,000 preferred shares. 1,000 shares × $120 per share = $120,000.

The average issue price of the preferred shares was $20. $120,000 ÷ 6,000 shares = $20 per share.

The total amount of cash and other assets paid to McKean Corporation in exchange for share capital at December 31, 2024, was $1,320,000.

Exercise 10 Gabriellle Ltd. was incorporated February 1, 2024, and is authorized to issue an unlimited number of preferred and common shares. The company entered into the following transactions during the year: Feb. 10 Issued 30,000 common shares for $23 per share.

Test Bank for Accounting Principles, Ninth Canadian Edition

Feb. 21 Mar. 16 Sept. 10 Oct. 1

Issued 700 common shares to the company’s lawyer as payment for a bill of $18,000 for services performed in helping the company to incorporate. Issued 1,000 convertible preferred shares for $95 per share. Issued 5,000 convertible preferred shares for $105 per share. Converted 1,000 preferred shares into common shares. One preferred share is convertible into 4 common shares. The fair values of the common and preferred shares are $25 and $102 respectively.

Instructions Prepare the journal entries to record the above transactions. Solution 10 (15 min.) Feb. 10 Cash .............................................................................................. Common Shares (30,000 × $23) ........................................... 21

Mar. 16

Sept. 10

Oct.

690,000 690,000

Legal Fees Expense ...................................................................... Common Shares ...................................................................

18,000

Cash .............................................................................................. Preferred Shares (1,000 × $95) .............................................

95,000

Cash .............................................................................................. Preferred shares (5,000 × $105) ...........................................

525,000

Preferred Shares .......................................................................... Common Shares................................................................... ($620,000 ÷ 6,000 preferred shares) x 1,000= $103,333

103,333

18,000

95,000

525,000

103,333

Exercise 11 Ashwill Ltd. was incorporated July 1, 2023. The company is authorized to issue an unlimited number of preferred and common shares. The company entered into the following transactions during its fiscal year ended June 30, 2024: July 10 Issued 100,000 common shares for $12.50 per share. July 15 Issued 400,000 common shares for $13 per share. Sept. 30 Issued 30,000 common shares in return for a warehouse. The common shares were trading for $15.50 on the date the warehouse was acquired. The fair value of the warehouse on that date was $450,600.

Test Bank for Accounting Principles, Ninth Canadian Edition

Mar. 16

Issued 1,000 preferred shares for $95 per share.

Instructions Record the above transactions. Solution 11 (15 min.) July 10 Cash .............................................................................................. Common Shares ................................................................... (100,000 shares × $12.50) 15

Sept. 30

Mar. 16

1,250,000 1,250,000

Cash .............................................................................................. Common Shares ................................................................... (400,000 shares × $13)

5,200,000

Building ........................................................................................ Common Shares ...................................................................

450,600

Cash .............................................................................................. Preferred Shares .................................................................. (1,000 shares × $95)

95,000

5,200,000

450,600

95,000

Exercise 12 Lee Holdings Ltd. was incorporated on January 2, 2024, and on that date issued 50,000 common shares for cash at $1 each. On April 30, Lee issued 1,000 preferred, $3 cumulative preferred shares, convertible to common shares at the rate of 6 common shares for one preferred share. The preferred shares were issued for $18 each. On October 15, 600 of the preferred shares were converted to common shares. On that date, the fair value was $3.50 for the common shares and $22 for the preferred shares. Instructions Journalize the share transactions described. Solution 12 (15 min.) Jan. 2 Cash (50,000 x $1) ........................................................................ Common Shares ...................................................................

50,000

Apr. 30

18,000

Cash (1,000 x $18) ........................................................................

50,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Preferred Shares .................................................................. Oct. 15

Preferred Shares .......................................................................... Common Shares ................................................................... (600 x $18)

18,000 10,800 10,800

Exercise 13 Sonoma Lakes Ltd. (SLL) has the following authorized share capital: Unlimited Common voting shares 500,000 Class A, $5 cumulative preferred shares 500,000 Class B, $10 noncumulative preferred shares During 2024, its first year, SLL had the following share transactions for cash: Jan. 1 Issued 50,000 common shares for $100,000. Mar. 12 Issued 1,000 Class A preferred shares for $60,000. Apr. 30 Issued 20,000 common shares for $2.50 per share. June 20 Issued 3,000 Class B preferred shares for $70 per share. SLL did not declare any dividends during 2024. On December 31, 2025, a dividend of $3 per share was declared on preferred shares issued. Instructions a) Journalize the share transactions. b) Calculate the number of common shares issued at December 31, 2024. c) Calculate the amount of the December 31, 2025, total dividend declared and the amount of dividends in arrears after declaring the dividend. Solution 13 (15 min.) a) Jan. 1 Cash .............................................................................................. Common Shares ................................................................... Mar. 12

Apr. 30

100,000 100,000

Cash .............................................................................................. Class A Preferred Shares ......................................................

60,000

Cash (20,000 × $2.50) ...................................................................

50,000

60,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Common Shares ................................................................... June 20

Cash (3,000 x $70) ........................................................................ Class B Preferred Shares ......................................................

50,000 210,000 210,000

Common shares issued = 50,000 + 20,000 = 70,000

Number of preferred shares issued = 1,000 + 3,000 = 4,000 Total dividends = $3 x 4,000 = $12,000 Dividends in arrears on Class A = 1,000 x ($5 – $3) = $2,000 for 2024 + $5,000 for 2025 = $7,000 No dividends are in arrears on the Class B shares because they are noncumulative.

Exercise 14 Solo Corporation issued 1,000, no par value, convertible preferred shares at $100 per share. Each share is convertible into 10 common shares. When the fair values of the two classes of shares are $131 and $13, respectively, 150 preferred shares are converted into common shares. Instructions a) Journalize the conversion of the 150 shares. b) Repeat a) assuming that the market values at conversion are $210 and $20, respectively. Solution 14 (5–9 min.) a) Preferred Shares............................................................................................... Common Shares (150 × $100) .................................................................. To record conversion of 150 preferred shares into 1,500 common shares. b)

15,000 15,000

The entry will be the same as in a) above. Fair values of the shares at the time of the transaction are not considered in recording the conversion.

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 15 Lea Corp. declared $35,000 in dividends in 2024. Share capital consists of 1,100 common shares and 3,700, $2 preferred shares. Dividends have not been paid on the preferred shares since 2021. Instructions Determine the dividends to be paid on the preferred shares assuming: a) the preferred shares are cumulative. b) the preferred shares are noncumulative. Solution 15 (5–9 min.) a) Preferred Preferred dividends in arrears (2 years × $2 × 3,700 shares) ..................... Preferred dividend—2024 ........................................................................... Total preferred dividend ............................................................................ b)

Preferred Preferred dividend—2024 ...........................................................................

$14,800 7,400 $22,200

$7,400

Exercise 16 Raven Corporation is authorized to issue 2,000,000, common shares. During its first three years of operation, Raven issued 1,200,000 shares at $15 per share. In 2024, Raven issued an additional 5,000 shares in return for equipment with a fair value of $75,000. The market price of the shares was $16 at the time of the sale. Instructions a) How many shares are authorized at the end of 2024? b) How many shares are issued at the end of 2024? c) What is the value of the Common Shares account at the end of 2024? Solution 16 (10 min.) a) 2,000,000 shares are authorized. b)

1,205,000 shares are issued.

The value of the Common Shares account is

Test Bank for Accounting Principles, Ninth Canadian Edition

1,200,000 shares × $15 = *Fair value of equipment =

$18,000,000 75,000 $18,075,000 *Must use fair value of asset acquired of $75,000. Therefore the issue price of the shares is $75,000 ÷ 5,000 shares = $15 per share. Bloomcode: Application Difficulty: Medium Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

Exercise 17 In its first year of operations, Snake Corporation had the following transactions relating to its convertible preferred shares and common shares. The preferred dividend rate is $2 per share. Jan. 1 Issued 10,000 common shares at $10 per share. Feb. 1 Issued 3,000 preferred shares for $41 per share. July 1 Declared and paid annual preferred dividends. Nov. 1 Converted 1,000 preferred shares to common shares when the fair value of the preferred shares was $42 and the fair value of the common shares was $20. One share of preferred is convertible to 4 common shares. Instructions a) Journalize the transactions. b) Indicate the amount to be reported for (1) preferred shares and (2) common shares at the end of the year. Solution 17 (8–12 min.) a) Jan. 1 Cash .............................................................................................. Common Shares ................................................................... Issued 10,000 shares at $10 per share

100,000

Feb. 1

123,000

Cash Dividends—Preferred.......................................................... Cash ...................................................................................... Declared and paid annual dividends: 3,000 shares at $2 per share

6,000

Preferred Shares ..........................................................................

41,000

July 1

Nov. 1

100,000

123,000

6,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Common Shares ................................................................... Converted 1,000 preferred shares to 10,000 common shares: 1,000 at $41 per share b)

41,000

(1) Preferred shares: $123,000 – $41,000 = $82,000 (2) Common shares: $100,000 + $41,000 = $141,000

Exercise 18 Solid Ltd. was incorporated on January 4, 2024, and is authorized to issue an unlimited number of common shares and $5 noncumulative preferred shares. The company entered into the following transactions during the year: Jan. 6 Issued 9,000 common shares for $12 per share. Jan. 10 Issued 450 common shares to the company’s accountants as payment for a bill of $6,000 for services performed in helping the company to incorporate. The most recent value of Solid’s shares was on the issuance dated January 6. Mar. 22 Issued 400 convertible preferred shares for $52 per share. May 1 Issued 1,000 convertible preferred shares for $68 per share. Dec. 12 Converted 500 preferred shares into common shares. One preferred share is convertible into 4 common shares. The fair value of the common and preferred shares are $26 and $110 respectively. Instructions a) Prepare the journal entries to record the above transactions. b) Prepare a partial balance sheet for Solid Ltd. at December 31, 2024, highlighting the shareholders’ equity section. Assume the company reported net income of $78,000 in its first year of operations. Solution 18 (15 min.) a) Jan. 6 Cash .............................................................................................. Common Shares (9,000 × $12) ............................................. 10

Mar. 22

108,000 108,000

Accounting Fees Expense ............................................................ Common Shares ...................................................................

6,000

Cash .............................................................................................. Preferred Shares (400 × $52)................................................

20,800

6,000

20,800

Test Bank for Accounting Principles, Ninth Canadian Edition

May

Dec. 12

Cash .............................................................................................. Preferred Shares (1,000 × $68) .............................................

68,000

31,714

68,000

31,714

b) SOLID LTD. Partial Balance Sheet December 31, 2024 Shareholders’ equity Share capital $5 noncumulative, convertible preferred shares, unlimited shares authorized, 900 shares issued. ................................................ Common shares, unlimited number of shares authorized, 11,450 shares issued. ........................................... Total share capital ...................................................................................... Retained earnings............................................................................................... Total shareholders’ equity .........................................................................

$ 57,086 145,714 202,800 78,000 $280,800

Bloomcode: Application Difficulty: Medium Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 19 Bancroft Holdings Inc. has authorized share capital of an unlimited number of common shares and 1,000,000 preferred, $3 cumulative preferred shares. At January 1, 2024, the balances in its share capital accounts were $45,000 in common shares representing 15,000 shares and $30,000 in preferred shares representing 1,000 shares. The retained earnings balance on that date was $180,000. Profit for the year ended December 31, 2024, was $24,000. There were no dividends in arrears at January 1, 2024, and no dividends were declared during 2024. During 2024, Bancroft had the following share transactions: Mar. 1 Issued 4,000 common shares for $5 each. June 30 Issued 500 preferred shares for $11 each. Sept. 1 Issued 60,000 common shares in exchange for land valued at $285,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Journalize the share transactions. b) Prepare the equity section of Bancroft’s balance sheet at December 31, 2024, and describe any disclosure requirements related to share capital. c) Calculate return on equity for 2024 (round to one decimal place) Solution 19 (25 min.) a) Mar. 1 Cash (4,000 x $5) .......................................................................... Common Shares ................................................................... June 30

Sept. 1

20,000 20,000

Cash (500 x $11) ........................................................................... Preferred Shares ..................................................................

5,500

Land.............................................................................................. Common Shares ...................................................................

285,000

5,500

285,000

b) BRANCROFT HOLDINGS INC. Partial Balance Sheet December 31, 2024 Shareholders' equity Share capital $3-cumulative preferred shares, 1,000,000 shares authorized, 1,500 shares issued ............................................................................. Common shares, unlimited number of shares authorized, 79,000 shares issued ........................................................................... Total share capital ...................................................................................... Retained earnings ($180,000 + $24,000) ............................................................ Total shareholders' equity .........................................................................

$ 35,500 350,000 385,500 204,000 $589,500

Note: Dividends of $3 per share on preferred shares at December 31, 2024, are in arrears. c)

Beginning equity = $45,000 + $30,000 + $180,000 = $255,000 Average equity = ($255,000 + $589,500) ÷ 2 = $422,250 Return on equity = $24,000 ÷ $422,250 = 5.7%

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 20 RD Holdings Ltd., which has authorized share capital of an unlimited number of common shares and 1,000,000 preferred shares, had the following share transactions during 2024, its first year of operations: Jan. 2 Issued 30,000 common shares at $0.10 each. Jan. 5 Issued 50,000 common shares to Roy Daines in exchange for equipment valued at $5,000. Jan. 31 Issued 1,000,000 common shares to Rachel Daines in exchange for merchandise inventory valued at $15,000, land valued at $30,000, and a building valued at $55,000. Mar. 31 Issued 60,000 to Gilmore Law Firm in exchange for legal services. It is assumed that the market price of RD Holdings’ shares is unchanged since January 2. Dec. 1 Issued 20,000 of $2 preferred shares for $20 per share. Instructions a) Record the 2024 share transactions. b) Prepare the share capital section of RD Holdings' balance sheet at December 31, 2024. Solution 20 (15 min.) a)

Jan. 2

Jan. 15

Jan. 31

Mar. 31

Dec. 1

Cash ................................................ Common Shares .....................

3,000

Equipment ..................................... Common Shares .....................

5,000

Merchandise Inventory .................. Land................................................ Building .......................................... Common Shares .....................

15,000 30,000 55,000

Legal Expense (60,000 x $0.10) ...... Common Shares .....................

6,000

Cash (20,000 x $20) ........................ 400,000 Preferred Shares ....................

No. of Common shares

$value of shares

3,000

30,000

$3,000

5,000

50,000

5,000

100,000

1,000,000

100,000

6,000

60,000

6,000

1,140,000

$114,000

400,000

b) RD HOLDINGS LTD. Partial Balance Sheet December 31, 2024

Test Bank for Accounting Principles, Ninth Canadian Edition

Share capital $2 preferred shares, 1,000,000 shares authorized, 20,000 issued .................... Common shares, unlimited number authorized, 1,140,000 issued .................. Total share capital ................................................................. ............................

$400,000 114,000 $514,000

Exercise 21 Duke Inc. was incorporated on July 1, 2024, with authorized share capital of 1,000,000 common shares and 500,000 $4 cumulative preferred shares, convertible to common shares at a rate of 30 common shares for each preferred share. During its first year of operations, Duke had profit of $126,000, and declared no dividends. Duke had the following transactions related to share capital during the year: July 1 2024 Issued 100,000 common shares for $2 each. July 1 2024 Issued 5,000 preferred shares for $75 each. Aug. 15 2024 Issued 10,000 common shares for legal services received, valued at $25,000. Dec. 1 2024 Issued 5,000 common shares at $2.25 each in exchange for equipment received. Mar. 8 2025 One-half of the preferred shares were converted to common shares. On this date, the fair value of the common shares was $3.10 and the preferred share value was $95. Instructions a) Prepare the entries to record the share transactions described above. b) Prepare the shareholders’ equity section of Duke’s balance sheet at June 30, 2025, the date of its first year end. c) Calculate the return on equity for the first year of operations (round to one decimal place). Use the July 1, 2024, share capital as the beginning balance for the purpose of calculating average shareholders’ equity. Solution 21 (20 min.) a) 2024 July 1 Cash (100,000 x $2) ...................................................................... Common Shares ................................................................... July 1

Cash (5,000 x $75) ........................................................................

200,000 200,000 375,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Preferred Shares .................................................................. Aug. 15

Dec. 1 2025 Mar. 8

375,000

Legal Expenses............................................................................. Common Shares ...................................................................

25,000

Equipment (5,000 x $2.25) ........................................................... Common Shares ...................................................................

11,250

Preferred Shares (2,500 x $75)..................................................... Common Shares ................................................................... ⟦(5,000 ÷ 2) x 30⟧ = 75,000 common shares)

187,500

25,000

11,250

187,500

b) DUKE INC. Partial Balance Sheet June 30, 2025 Shareholders' equity Share capital $4 cumulative preferred shares, 500,000 shares authorized, 2,500 shares issued ............................................................................. Common shares, 1,000,000 shares authorized, 190,000 shares issued (1) Total share capital ...................................................................................... Retained earnings............................................................................................... Total shareholders' equity .........................................................................

$187,500 423,750 611,250 126,000 $737,250

Calculations: (1) 100,000 + 10,000 + 5,000 + 75,000 = 190,000 $200,000 + $25,000 + $11,250 + $187,500 = $423,750 c)

Beginning shareholders’ equity = $200,000 + $375,000 = $575,000 Average shareholders’ equity = ($575,000 + $737,250) ÷ 2 = $656,125 Return on equity = $126,000 ÷ $656,125 = 19.2%

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 22 The following information is available from the accounting records of Jacob Consulting Ltd. for the year ended June 30, 2024: Fee discounts and allowances ......................................................................... $39,000 Fee revenue ...................................................................................................... 2,340,000 Interest revenue ............................................................................................... 9,000 Other operating expenses................................................................................ 885,000 Salaries expense ............................................................................................... 1,125,000 Instructions Prepare a corporate income statement for the year ended June 30, 2024. The company has a 30% income tax rate. Solution 22 (10 min.) JACOB CONSULTING LTD. Income Statement Year Ended June 30, 2024 Fee revenue ................................................................................................. Less: Fee discounts and allowances ........................................................... Net fee revenue.................................................................................... Operating expenses Salaries expense .................................................................................. $1,125,000 Other operating expenses ................................................................... 885,000 Profit from operations ................................................................................ Interest revenue .......................................................................................... Profit before income tax ............................................................................. Income tax expense ($300,000 × 30%)........................................................ Profit for the year ........................................................................................

$2,340,000 39,000 2,301,000

2,010,000 291,000 9,000 300,000 90,000 $ 210,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

Exercise 23 At December 31, 2024, Adore Corporation reports revenue of $6,432,000 and expenses of $4,568,000. The company has a tax rate of 30%. During the year, the company declared and paid dividends of $400,000. Instructions Prepare an income statement and record the adjustment to income taxes assuming no taxes have yet

Test Bank for Accounting Principles, Ninth Canadian Edition

been accrued. Solution 23 ADORE CORPORATION Income Statement Year Ended December 31, 2024 Revenue ............................................................................................................ Operating expenses ......................................................................................... Profit before income tax .................................................................................. Income tax expense ($1,864,000 x 30%) .......................................................... Profit for the year ............................................................................................. Income Tax Expense......................................................................................... Income Tax Payable .................................................................................

$6,432,000 4,568,000 1,864,000 559,200 $1,304,800 559,200 559,200

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

Exercise 24 For the year ended August 31, 2024, Zen Fitness Inc. had service revenue of $625,000; operating expenses of $265,000, and other expenses of $32,000. The company has a 20% tax rate and has previously accrued $25,000 in income taxes. Instructions a) Determine the income tax expense. b) Prepare an income statement. c) Prepare the entry to record the income taxes. Solution 24 a) Profit before income tax

Income tax expense

= (revenue – operating expenses – other expenses) = $625,000 – $265,000 – $32,000 = $328,000 = (profit before income tax) x 20% = $328,000 x 20% = $65,600

b) ZEN FITNESS INC. Income Statement Year Ended August 31, 2024

Test Bank for Accounting Principles, Ninth Canadian Edition

Revenue ............................................................................................................ Operating expenses ......................................................................................... Profit from operations ..................................................................................... Other expenses ................................................................................................. Profit before income tax .................................................................................. Income tax expense ......................................................................................... Profit for the year ............................................................................................. c) Income Tax Expense ($65,600 – $25,000) ........................................................ Income Tax Payable .................................................................................

$625,000 265,000 360,000 32,000 328,000 65,600 $262,400

40,600 40,600

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

Exercise 25 Below is a list of income statement accounts for Nepal Inc. as at December 31, 2024: Revenue ...................................................................................................................... Income Tax Expense................................................................................................... Other Expenses........................................................................................................... Salaries Expense......................................................................................................... Supplies Expense ....................................................................................................... Interest Expense .........................................................................................................

$5,960,000 875,625 97,500 850,000 410,000 1,100,000

Instructions a) Present the income statement in the correct order. b) What is the applicable tax rate for Nepal Inc.? Solution 25 a) NEPAL INC. Income Statement Year Ended December 31, 2024 Revenue ...................................................................................................................... Salaries expense ......................................................................................................... Supplies expense........................................................................................................ Profit from operations ............................................................................................... Interest expense ......................................................................................................... Other expenses ...........................................................................................................

$5,960,000 850,000 410,000 4,700,000 1,100,000 97,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Profit before income tax ............................................................................................ Income tax expense ................................................................................................... Profit for the year ....................................................................................................... b)

3,502,500 875,625 $2,626,875

$875,625 ÷ $3,502,500 = 25%

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

Exercise 26 Sawyer Corporation, a private company reporting under ASPE, has the following information available with respect to the company’s operations until December 31, 2024: 1. Collected $345,000 cash for service revenue earned. 2. Paid $125,000 salaries expense, $56,000 rent expense, and $5,000 insurance expense. 3. Purchased a new vehicle for $35,000 cash on January 1, 2024. This vehicle will be depreciated over 5 years with no salvage value. 4. Accrued $16,000 for income taxes during 2024. 5. On December 31, 2024, the following adjustments were completed: Service revenue earned but not yet collected in cash $22,500 Accrued interest expense $4,500 Accrued salaries expense $7,200 Mayer has a 20% income tax rate. Instructions Prepare an income statement and record the adjustment to income taxes. Solution 26 SAWYER CORPORATION Income Statement Year Ended December 31, 2024 Revenue (1) ....................................................................................................... Operating expenses: Salaries expense (2) .................................................................................. Rent expense ............................................................................................ Insurance expense .................................................................................... Depreciation expense (3) ......................................................................... Total operating expenses ......................................................................... Profit from operations ..................................................................................... Other expenses

$367,500 132,200 56,000 5,000 7,000 200,200 167,300

Test Bank for Accounting Principles, Ninth Canadian Edition

Interest expense ....................................................................................... Profit before taxes ............................................................................................ Income tax expense ($162,800 x 20%) ............................................................. Profit for the year .............................................................................................

4,500 162,800 32,560 $130,240

(1) =$345,000 + $22,500 (2) =$125,000 + $7,200 (3) =$35,000 ÷ 5 Income Tax Expense......................................................................................... Income Tax Payable ................................................................................. ($32,560 – $16,000)

16,560 16,560

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

Exercise 27 The trial balance of Terris Inc. for the year ended September 30, 2024, prior to recording of tax expenses, but after all other adjustments, is as follows. All accounts are their normal balance (debit or credit). Terris has a tax rate of 30%. Accounts payable ....................................................................................................... $ 80,000 Accounts receivable ................................................................................................... 40,000 Cash ............................................................................................................................ 50,000 Cash dividends ........................................................................................................... 7,000 Common shares ......................................................................................................... 30,000 Cost of goods sold ...................................................................................................... 175,000 Dividends payable ...................................................................................................... 4,000 Interest expense ......................................................................................................... 4,500 Inventory .................................................................................................................... 120,000 Operating expenses ................................................................................................... 92,300 Preferred shares ......................................................................................................... 25,000 Retained earnings, beginning balance ...................................................................... 11,900 Sales revenue ............................................................................................................. 320,000 Income taxes payable ................................................................................................ 100 Salaries payable ......................................................................................................... 17,800 Instructions Prepare the income statement and statement of retained earnings for Terris Inc. for the year ended September 30, 2024.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 27 (20 min.) TERRIS INC. Income Statement Year Ended September 30, 2024 Sales revenue ............................................................................................................. Cost of goods sold ...................................................................................................... Gross profit ................................................................................................................. Operating expenses ................................................................................................... Profit from operations ............................................................................................... Other expenses Interest expense ................................................................................................. Profit before income taxes ......................................................................................... Income tax expense ($48,200 x 30%) ......................................................................... Profit for the year .......................................................................................................

$320,000 175,000 145,000 92,300 52,700 4,500 48,200 14,460 $ 33,740

TERRIS INC. Statement of Retained Earnings Year Ended September 30, 2024 Balance, October 1, 2023 ........................................................................................... Add: Profit for the year .......................................................................................... Less: Cash dividends .............................................................................................. Balance, September 30, 2024 ....................................................................................

$11,900 33,740 45,640 7,000 $38,640

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

Exercise 28 The following information is taken from the trial balance of GlaxonSmith Supplies Ltd. at December 31, 2024, the company’s year end. GlaxonSmith has a 15% tax rate. Cash dividends ........................................................................................................... $ 7,500 Common shares ......................................................................................................... 9,000 Cost of goods sold ...................................................................................................... 65,000 Dividends payable ...................................................................................................... 2,500 Interest revenue ......................................................................................................... 300 Operating expenses ................................................................................................... 16,900

Test Bank for Accounting Principles, Ninth Canadian Edition

Preferred shares ......................................................................................................... Retained earnings, beginning balance ...................................................................... Sales revenue .............................................................................................................

10,000 3,100 90,000

Instructions Prepare the income statement and statement of retained earnings for GlaxonSmith for the year ended December 31, 2024. Solution 28 (20 min.) GLAXONSMITH SUPPLIES LTD. Income Statement Year Ended December 31, 2024 Sales revenue ............................................................................................................. Cost of goods sold ...................................................................................................... Gross profit ................................................................................................................. Operating expenses ................................................................................................... Profit from operations ............................................................................................... Other revenue Interest revenue ................................................................................................. Profit before income taxes ......................................................................................... Income tax expense ($8,400 x 15%) ........................................................................... Profit for the year .......................................................................................................

$90,000 65,000 25,000 16,900 8,100 300 8,400 1,260 $ 7,140

GLAXONSMITH SUPPLIES LTD. Statement of Retained Earnings Year Ended December 31, 2024 Balance, January 1, 2024 ........................................................................................... Add: Profit for the year .......................................................................................... Less: Cash dividends .............................................................................................. Balance, December 31, 2024 ......................................................................................

$3,100 7,140 10,240 7,500 $2,740

Exercise 29

Test Bank for Accounting Principles, Ninth Canadian Edition

Checkered Rides Inc. has a March 31, 2024, fiscal year end and a 35% income tax rate. The following information is available for its 2024 year end: 1. Performed $880,000 service revenue and paid $325,000 in salaries. Interest expense was $12,600. 2. Paid dividends in December 2023 of $14,000 that had been declared in November 2023. 3. On March 10, 2024, declared dividends of $19,000 payable April 30, 2024. 4. Recorded and remitted income taxes of $140,000 (related to 2024 fiscal year) during the year. 5. Issued common shares for $15,000 on January 31, 2024. 6. Retained earnings balance on April 1, 2023 was $67,000. Instructions a) Prepare an income statement and record the adjustment to income tax. b) Prepare a statement of retained earnings. Solution 29 a) CHECKERED RIDES INC. Income Statement Year Ended March 31, 2024 Revenue ............................................................................................................ Salaries expense ............................................................................................... Profit from operations ..................................................................................... Interest expense ............................................................................................... Profit before taxes ............................................................................................ Income tax expense ($542,400 x 35%) ............................................................. Profit for the year ............................................................................................. Income Tax Expense......................................................................................... Income Tax Payable ................................................................................. ($189,840 – $140,000)

$880,000 325,000 555,000 12,600 542,400 189,840 $352,560 49,840 49,840

b) CHECKERED RIDES INC. Statement of Retained Earnings Year Ended March 31, 2024 Retained earnings April 1, 2023 ................................................................................. Add: Profit for the year .......................................................................................... Less: Cash dividends .............................................................................................. Retained earnings, March 31, 2024 ............................................................................ Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements

$ 67,000 352,560 419,560 33,000 $386,560

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

Exercise 30 Maki and Leduc Inc. has recorded all necessary adjusting entries, except for income tax expense, at its fiscal year end August 31, 2024. The following information has been taken from the adjusted trial balance: Cash .................................................................................................................. 112,825 Inventory .......................................................................................................... 122,000 Sales.................................................................................................................. 960,000 Interest Expense ............................................................................................... 35,000 Notes Payable................................................................................................... 126,000 Unearned Revenue ........................................................................................... 33,000 Retained Earnings (September 1, 2023) .......................................................... 6,325 Salaries Expense............................................................................................... 110,000 Supplies Expense ............................................................................................. 25,000 Accounts Payable ............................................................................................. 45,000 Income Tax Payable ......................................................................................... 6,175 Income Tax Expense......................................................................................... 6,175 Common Shares ............................................................................................... 91,000 Accounts Receivable ........................................................................................ 122,000 Cost of Goods Sold ........................................................................................... 722,000 Insurance Expense ........................................................................................... 12,500____________ $1,267,500 $1,267,500 Maki and Leduc Inc. has a 15% tax rate. Instructions a) Prepare a multi-step income statement and the required journal entry to adjust income tax expense. b) Prepare a statement of retained earnings. c) Prepare closing entries. Solution 30 a) MAKI AND LEDUC INC. Income Statement Year Ended August 31, 2024 Sales.................................................................................................................. Cost of goods sold ............................................................................................ Gross profit .......................................................................................................

$960,000 722,000 238,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Operating expense Salaries expense ............................................................................................... Supplies expense.............................................................................................. Insurance expense ........................................................................................... Profit from operations ..................................................................................... Interest expense ............................................................................................... Profit before taxes ............................................................................................ Income tax expense ($55,500 x 15%) ............................................................... Profit for the year .............................................................................................

110,000 25,000 12,500 90,500 35,000 55,500 8,325 $ 47,175

Income Tax Expense......................................................................................... Income Tax Payable ................................................................................. ($8,325 – $6,175)

2,150 2,150

b) MAKI AND LEDUC INC. Statement of Retained Earnings Year Ended August 31, 2024 Retained earnings September 1, 2023....................................................................... Add: Profit for the year ..........................................................................................

$ 6,325 47,175

Retained earnings August 31, 2024 ...........................................................................

$53,500

c) Sales.................................................................................................................. Income Summary .....................................................................................

960,000

Income Summary ............................................................................................. Cost of Goods Sold ................................................................................... Salaries Expense ....................................................................................... Supplies Expense...................................................................................... Insurance Expense.................................................................................... Interest Expense ....................................................................................... Income Tax Expense .................................................................................

912,825

Income Summary ............................................................................................. Retained Earnings ....................................................................................

47,175

722,000 110,000 25,000 12,500 35,000 8,325

47,175

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 31 Austrian Limited is a private corporation reporting under ASPE. At December 31, 2024, its general ledger contained the following summary data: Sales............................................................................................................................ $1,200,000 Interest expense ......................................................................................................... 16,000 Operating expenses ................................................................................................... 275,000 Cost of goods sold ...................................................................................................... 625,000 Retained earnings January 1, 2024 ........................................................................... 497,000 Additional information: 1. In 2024, dividends of $35,000 were declared on July 1 and December 31 respectively. The dividends were paid on August 10, 2024 and January 15, 2025 respectively. 2. The company’s tax rate is 33%. Instructions a) Determine the income tax expense and prepare a multi-step income statement for 2024. b) Prepare a statement of retained earnings for 2024. Solution 31 a) Income tax expense ($1,200,000 – $625,000 – $275,000 – $16,000) x 33% = $93,720 AUSTRIAN LIMITED Income Statement Year Ended December 31, 2024 Sales............................................................................................................................ Cost of goods sold ...................................................................................................... Gross profit ................................................................................................................. Operating expenses ................................................................................................... Profit from operations ............................................................................................... Interest expense ......................................................................................................... Profit before taxes ...................................................................................................... Income tax expense ................................................................................................... Profit for the year .......................................................................................................

$1,200,000 625,000 575,000 275,000 300,000 16,000 284,000 93,720 $ 190,280

b) AUSTRIAN LIMITED Statement of Retained Earnings Year Ended December 31, 2024 Retained earnings, January 1, 2024 ..........................................................................

$497,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Add:

Profit for the year ..........................................................................................

Less: Cash dividends .............................................................................................. Retained earnings, December 31, 2024 .....................................................................

190,280 687,280 70,000 $617,280

Exercise 32 Jogger Inc. is a private corporation reporting under ASPE. At December 31, 2024, its adjusted trial balance contained the following summary data: Sales............................................................................................................................ $2,200,000 Interest expense ......................................................................................................... 120,000 Operating expenses ................................................................................................... 660,000 Cost of goods sold ...................................................................................................... 1,025,000 Retained earnings January 1, 2024 ........................................................................... 922,000 Additional information: 1. In 2024, dividends of $30,000 were declared on March 31, June 30, September 30, and December 31, respectively. The dividends were paid on April 9, 2024, July 10, 2024, October 4, 2024, and January 12, 2025, respectively. 2. The company’s tax rate is 25%. Instructions a) Determine the income tax expense and prepare a multi-step income statement for 2024. b) Prepare a statement of retained earnings for 2024. Solution 32 a) Income tax expense ($2,200,000 – $120,000 – $660,000 – $1,025,000) x 25% = $98,750 JOGGER INC. Income Statement Year Ended December 31, 2024 Sales............................................................................................................................ Cost of goods sold ...................................................................................................... Gross profit .................................................................................................................

$2,200,000 1,025,000 1,175,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Operating expenses ................................................................................................... Profit from operations ............................................................................................... Interest expense ......................................................................................................... Profit before taxes ...................................................................................................... Income tax expense ................................................................................................... Profit for the year .......................................................................................................

660,000 515,000 120,000 395,000 98,750 $ 296,250

b) JOGGER INC. Statement of Retained Earnings Year Ended December 31, 2024 Retained earnings, January 1, 2024 .......................................................................... Add: Profit .............................................................................................................. Less: Cash dividends .............................................................................................. Retained earnings, December 31, 2024 .....................................................................

$ 922,000 296,250 1,218,250 120,000 $1,098,250

Exercise 33 KBR Investments Inc. has issued 90,000 Class A $3 cumulative preferred shares and 45,000 Class B $5 noncumulative preferred shares. At the end of 2022, there were no dividends in arrears. During 2023, KBR paid dividends of $100,000 to its Class A shareholders. In January of 2024, KBR paid dividends of $120,000 to its Class A shareholders. On December 31, 2024, KBR declared dividends in an amount sufficient to pay out all of the remaining dividends in arrears plus the entire current year obligation including dividends on Class B shares, so that they can pay dividends on common shares. Instructions Calculate the dividends declared for Class A and for Class B shareholders on December 31, 2024. Solution 33 (10 min.) Annual dividends on Class A shares = $3 × 90,000 .......................................... $270,000 Dividends paid on Class A shares in 2023 .......................................................... (100,000) Dividends in arrears Dec 31, 2023 .................................................................... 170,000 Dividends paid on Class A shares in 2024 ........................................................ Annual dividends on Class A shares for 2024 ..................................................

(120,000) 270,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Dividends in arrears on Class A shares at Dec 31, 2024 ..................................

$320,000

Because Class B shares are noncumulative there are no dividends in arrears. Dividends declared on December 31, 2024: Class A preferred shares ................................................................................... Class B preferred shares $5 x 45,000 ............................................................... Total dividends on preferred shares ...............................................................

$320,000 225,000 $545,000

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

Exercise 34 Trainor Corporation was organized on January 1, 2023. During its first year, the corporation issued 20,000 preferred shares with a $0.30 dividend entitlement and 200,000 common shares, both at $1 per share. At December 31, the corporation’s year end, Trainor declared the following cash dividends: Preferred shares Common shares 2023 $0.25 per share $0.00 2024 as required by terms $0.05 per share 2025 as required by terms $0.15 per share Instructions a) Calculate the total dividends and the amount paid to each class of shares, assuming the preferred dividend is not cumulative. b) Calculate the total dividends and the amount paid to each class of shares, assuming the preferred dividend is cumulative. c) Journalize the declaration of the cash dividend at December 31, 2025, using the assumption of part b). Solution 34 (10 min.) a) Preferred 2023 $5,000 2024 6,000 2025 6,000 b) 2023 2024 2025

Preferred $5,000 7,000 6,000

Common $ -010,000 30,000

Total $ 5,000 16,000 36,000

Common $ -010,000 30,000

Total $ 5,000 17,000 36,000

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Cash Dividends—Preferred .............................................................................. Cash Dividends—Common .............................................................................. Dividends Payable ....................................................................................

6,000 30,000 36,000

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

Exercise 35 Umbrello Plastics Limited reports the following shareholders' equity as at December 31, 2024: Preferred shares, $5, cumulative, 250,000 shares authorized, 80,000 shares issued ........................................................................... $2,400,000 Common shares, unlimited shares authorized, 216,000 shares issued ......................................................................... 1,050,000 Retained earnings ................................................................................................ 6,400,000 Total shareholders’ equity ......................................................................... $9,850,000 Instructions a) What was the average per share amount for common shares? (round to two decimal places) b) What was the average per share amount for preferred shares? (round to two decimal places) c) Assume no dividends were declared last year and the board of directors declares $1,600,000 in total dividends in 2024. Calculate the amount per share each class of shares will receive. (round to two decimal places) Solution 35 (10 minutes) a) $1,050,000 / 216,000 = $4.86 b) $2,400,000 / 80,000 = $30.00 c) Preferred shares: ($5 × 2 × 80,000) = $800,000; $800,000 / 80,000 = $10.00 Common shares: $1,600,000 – $800,000 = $800,000; $800,000 / 216,000 = $3.70 Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 36 Sandex Corporation's balance sheet reported the following shareholders' equity as at December 31, 2024: Shareholders’ Equity Share capital Preferred shares, $5 cumulative, 20,000 shares authorized, 8,000 issued, redemption value $85 per share ....................................................................................... $ 770,000 Common shares, unlimited shares authorized, 150,000 shares issued ......................................................................... 1,150,000 Total share capital ...................................................................................... $1,920,000 Retained earnings............................................................................................... 450,000 Total shareholders' equity ......................................................................... $2,370,000 Additional information: There is one year of dividends in arrears on the preferred shares. Sandex declared a total cash dividend of $100,000 on December 31, 2024. Instructions a) Determine the dividend allocation between common and preferred shares and record the declaration of the dividend. b) Calculate the average per share amount for common shares (round to two decimal places). Solution 36 (10 minutes) a) Preferred share dividend = $5 x 2 (1 year arrears + current year) x 8,000 shares = $80,000 Common share dividend = Remainder of available dividend = $100,000 – $80,000 = $20,000 Dec. 31

Cash Dividends—Preferred Shares ............................................. Cash Dividends—Common Shares .............................................. Dividends Payable................................................................

80,000 20,000 100,000

b) Average per share amount of common shares = $1,150,000 / 150,000 shares = $7.67 per share. Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

Exercise 37 On January 1, 2024, Hobbs Corporation had 60,000 common shares issued at $1 per share. During the

Test Bank for Accounting Principles, Ninth Canadian Edition

year, the following transactions occurred: Mar. 1 Issued 40,000 common shares for $600,000. June 1 Declared a cash dividend of $2 per share to shareholders of record on June 15. June 30 Paid the $2 cash dividend. Profit for 2024 amounted to $651,000. Instructions Prepare journal entries to record the above transactions including any appropriate closing entries. Solution 37 (10 min.) Mar. 1 Cash .............................................................................................. Common Shares ...................................................................

600,000

June 1

Cash Dividends—Common .......................................................... Dividends Payable................................................................ (100,000 × $2 = $200,000)

200,000

Dividends Payable ....................................................................... Cash ......................................................................................

200,000

Income Summary ........................................................................ Retained Earnings ................................................................

651,000

June 30

Dec. 31

600,000

200,000

651,000

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

Exercise 38 The shareholders' equity section of Yessir Corporation at December 31, 2023, included the following: $6 preferred shares, cumulative, 10,000 shares authorized, 8,000 shares issued .................................. $800,000 Common shares, 250,000 shares authorized, 200,000 shares issued ......................................................................... $2,000,000 Dividends were not declared on the preferred shares in 2023 and are in arrears. On September 15, 2024, the board of directors of Yessir Corporation declared dividends on the preferred shares for 2023 and 2024, to shareholders of record on October 1, 2024, payable on October 15, 2024. On November 1, 2024, the board of directors declared a $2 per share dividend on the common shares,

Test Bank for Accounting Principles, Ninth Canadian Edition

payable November 30, 2024, to shareholders of record on November 15, 2024. Instructions Prepare the journal entries that should be made by Yessir Corporation in 2024 on the dates indicated below: September 15 November 1 October 1 November 15 October 15 November 30 Solution 38 (12–15 min.) 2024 Sept. 15 Cash Dividends—Preferred.......................................................... Dividends Payable................................................................ To record declaration of dividends in arrears and the current year's preferred dividend (8,000 × $6 × 2 years). Oct.

Oct. 15

Nov. 1

96,000 96,000

No entry required. Dividends Payable ....................................................................... Cash ...................................................................................... To record payment of cash dividend.

96,000

Cash Dividends—Common .......................................................... Dividends Payable................................................................ To record declaration of cash dividend on common shares (200,000 × $2).

400,000

Nov. 15

No entry required.

Nov. 30

Dividends Payable ....................................................................... Cash ...................................................................................... To record payment of cash dividend.

96,000

400,000

400,000 400,000

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

Exercise 39 On January 1, 2024, Beach House Limited had 300,000 common shares issued at an average cost of $25 per share. During the year, the following transactions occurred: May 1 Issued 30,000 common shares for $720,000. June 1 Declared a cash dividend of $2.50 per share to shareholders of record on June 15.

Test Bank for Accounting Principles, Ninth Canadian Edition

June 25 June 30

Issued 15,000 common shares for $375,000. Paid the cash dividend declared on June 1.

Profit for 2024 amounted to $1,025,000. Instructions Prepare journal entries to record the above transactions assuming Beach House has a December 31 year end. Prepare the appropriate closing entries at December 31, 2024. Solution 39 (10 min.) May 1 Cash .............................................................................................. Common Shares ...................................................................

720,000

June 1

Cash Dividends—Common .......................................................... Dividends Payable................................................................ (330,000 × $2.50 = $825,000)

825,000

Cash .............................................................................................. Common Shares ...................................................................

375,000

Dividends Payable ....................................................................... Cash ......................................................................................

825,000

Income Summary ........................................................................ Retained Earnings ................................................................

1,025,000

Retained Earnings ........................................................................ Cash Dividends—Common ..................................................

825,000

June 25

June 30

Dec. 31

720,000

825,000

375,000

825,000

1,025,000

825,000

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

Exercise 40 At December 31, 2024, Cabot Corporation reports revenue of $3,500,000 and expenses of $2,300,000. During the year, the company declared and paid dividends of $400,000. The company had $1,500,000 in retained earnings at the beginning of 2024. Instructions a) Prepare the closing entries for 2024.

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare a statement of retained earnings for the year ended December 31, 2024.

Solution 40 (5 min.) a) Dec. 31 Revenue........................................................................................ Income Summary ................................................................. 31

3,500,000 3,500,000

Income Summary ........................................................................ Expenses...............................................................................

2,300,000

Income Summary ........................................................................ Retained Earnings ................................................................

1,200,000

Retained Earnings ........................................................................ Dividends ..............................................................................

400,000

2,300,000

1,200,000

400,000

b) CABOT CORPORATION Statement of Retained Earnings Year Ended December 31, 2024 Retained earnings, January 1, 2024 .......................................................................... Add: Profit for the year .......................................................................................... Less: Cash dividends .............................................................................................. Retained earnings December 31, 2024 ......................................................................

$1,500,000 1,200,000 2,700,000 400,000 $2,300,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

Exercise 41 Burbon Ltd. is a private company reporting under ASPE. The adjusted trial balance at its fiscal year end, December 31, 2024, is shown below: BURBON LTD. Adjusted Trial Balance December 31, 2024 Cash ............................................................................................................. Accounts receivable .................................................................................... Inventory .....................................................................................................

Debit $ 25,000 16,000 333,000

Credit

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepaid expenses ........................................................................................ Supplies ....................................................................................................... Equipment ................................................................................................... Accounts payable ........................................................................................ Income tax payable ..................................................................................... Unearned revenue....................................................................................... Common shares (56,000 issued) ................................................................. Retained earnings (January 1, 2024) .......................................................... Cash dividends ............................................................................................ Sales............................................................................................................. Cost of goods sold ....................................................................................... Depreciation expense ................................................................................. Interest expense .......................................................................................... Salaries expense .......................................................................................... Insurance expense ...................................................................................... Income tax expense .................................................................................... Rent expense ...............................................................................................

24,000 1,600 37,500 $ 36,000 72,000 86,000 56,000 19,900 5,600 772,000 445,000 7500 1,000 72,000 1,100 57,600 15,000_____________ $1,041,900 $1,041,900

Instructions a) Prepare a statement of retained earnings. b) Journalize the closing entries. Solution 41 a) BURBON LTD. Statement of Retained Earnings Year Ended December 31, 2024 Retained earnings, January 1, 2024 .......................................................................... Add: Profit for the year* ......................................................................................... Less: Cash dividends .............................................................................................. Retained earnings, December 31, 2024 ..................................................................... *($772,000 – 445,000 – 7,500 – 1,000 – 72,000 – 1,100 – 57,600 – 15,000) b) Sales.................................................................................................................. Income Summary ..................................................................................... Income Summary ............................................................................................. Cost of goods sold .................................................................................... Depreciation expense ............................................................................... Interest expense ....................................................................................... Salaries expense .......................................................................................

$ 19,900 172,800 192,700 5,600 $187,100

772,000 772,000 599,200 445,000 7,500 1,000 72,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Insurance expense .................................................................................... Income tax expense .................................................................................. Rent expense ............................................................................................

1,100 57,600 15,000

172,800

Retained Earnings ............................................................................................ Cash Dividends .........................................................................................

5,600

172,800

5,600

Exercise 42 The adjusted trial balance for Jurassic Furniture Inc. at December 31, 2024, is as follows: Jurassic Furniture Inc. Adjusted Trial Balance December 31, 2024 Cash ............................................................................................................. Accounts receivable .................................................................................... Prepaid insurance ....................................................................................... Prepaid rent ................................................................................................. Supplies ....................................................................................................... Equipment ................................................................................................... Accumulated depreciation—equipment .................................................... Furniture ...................................................................................................... Accumulated depreciation—furniture ....................................................... Accounts payable ........................................................................................ Salaries payable .......................................................................................... Income tax payable ..................................................................................... Unearned revenue....................................................................................... Cash dividends—Common shares .............................................................. Cash dividends—Preferred shares .............................................................. Retained earnings ....................................................................................... Sales revenue .............................................................................................. Salaries expense .......................................................................................... Depreciation expense ................................................................................. Rent expense ...............................................................................................

Debit $ 21,400 1,500 2,000 3,000 3,330 17,500

Credit

$ 5,200 25,000 4,250 8,400 2,200 2,000 6,700 10,000 5,000 52,567 37,500 14,387 4,500 5,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Insurance expense ...................................................................................... Income tax expense .................................................................................... Supplies expense......................................................................................... Advertising expense ....................................................................................

2,200 2,000 700 800 ___________ $118,817 $118,817

Instructions a) Prepare the closing journal entries for Jurassic Furniture Inc. at December 31, 2024. b) Prepare a post-closing trial balance. Solution 42 (10 min.) a) Dec 31 Sales Revenue ............................................................................... Income Summary .................................................................. To close revenue to income summary. 31

37,500 37,500

Income Summary ......................................................................... Salaries Expense ................................................................... Depreciation Expense ........................................................... Rent Expense ......................................................................... Insurance Expense ................................................................ Supplies Expense .................................................................. Advertising Expense .............................................................. Income tax Expense .............................................................. To close expenses to Income Summary.

30,087

Income Summary ......................................................................... Retained Earnings ................................................................. To close Income Summary to Retained Earnings.

7,413

Retained Earnings ......................................................................... Cash dividends—Common Shares ....................................... Cash dividends—Preferred Shares ....................................... To close dividends to Retained Earnings.

15,000

14,387 4,500 5,500 2,200 700 800 2,000

7,413

10,000 5,000

b) Jurassic Furniture Inc. Post-Closing Trial Balance December 31, 2024 Cash ............................................................................................................. Accounts receivable .................................................................................... Prepaid insurance ....................................................................................... Prepaid rent .................................................................................................

Debit $21,400 1,500 2,000 3,000

Credit

Test Bank for Accounting Principles, Ninth Canadian Edition

Supplies ....................................................................................................... 3,330 Equipment ................................................................................................... 17,500 Accumulated depreciation—equipment .................................................... Furniture ...................................................................................................... 25,000 Accumulated depreciation—furniture ....................................................... Accounts payable ........................................................................................ Salaries payable .......................................................................................... Income tax payable ..................................................................................... Unearned revenue....................................................................................... Retained earnings ....................................................................................... _________ $73,730

$5,200 4,250 8,400 2,200 2,000 6,700 _44,980 $73,730

Exercise 43 Byrne Corporation had the following accounts at January 1, 2024: Common shares, unlimited number of shares authorized, 7,000 shares issued ............................................................................. Preferred shares, $9.50 cumulative, unlimited number of shares authorized, 2,000 shares issued ......................................................... Retained earnings...............................................................................................

$197,000 63,500 $263,000

During the year, the company paid the preferred dividend and paid a $1.50 dividend to the common shareholders. The company had profit of $333,000. Instructions Prepare the shareholders’ equity section of the balance sheet at December 31, 2024. Solution 43 (10 min.) BYRNE CORPORATION Balance Sheet (Partial) December 31, 2024 Shareholders' equity Share capital $9.50 preferred shares, cumulative, unlimited number of shares authorized, 2,000 shares issued...................................... Common shares, unlimited number of shares authorized, 7,000 shares issued........................................................ Total share capital ................................................................................................

$ 63,500 197,000 260,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Retained earnings ($263,000 – $19,000 – $10,500 + $333,000) ................................... Total shareholders' equity ...................................................................................

566,500 $827,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 44 Nicco Corporation had the following accounts at January 1, 2024: Common shares, unlimited number of shares authorized, 18,000 shares issued ..................................................................................... Preferred shares, $4 cumulative, unlimited number of shares authorized, 1,000 shares issued ....................................................................................... Retained earnings.........................................................................................................

$180,000 50,000 $223,000

The company has profit of $79,000 in 2024 and paid $85,000 in dividends. Instructions a) Calculate the return on equity at December 31, 2024 (round to one decimal place). b) What does this ratio tell you about the corporation? Solution 44 (10 min.) a) Beginning balance in shareholders’ equity: $180,000 + $50,000 + $223,000 = $453,000 Ending balance in shareholders’ equity: $453,000 + $79,000 – $85,000 = $447,000 Return on equity = Profit ÷ Average shareholders’ equity $79,000 = ——————————–—— = 17.6% ($453,000 + $447,000) ÷ 2 b) This ratio tells us that the company is earning 17.6 cents on every dollar invested by the shareholders. Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 45 Cordoza Corporation had profit of $400,000 in 2024. Total shareholders’ equity was $1,400,000 at December 31, 2022; $1,500,000 at December 31, 2023; and $1,600,000 at December 31, 2024. Instructions Calculate return on equity for 2024 and explain what it means (round to one decimal place). Solution 45 (5–7 min.) Return on equity = Profit ÷ Average shareholders’ equity $400,000 ÷ [($1,500,000 + $1,600,000) ÷ 2] = 25.8% Return on equity is considered by many to be the most important measure of a firm’s profitability and efficiency. Cordoza Corporation earns a return of 25.8 cents on each dollar invested. This, in essence, is the rate of return shareholders are earning on their investment. It is used by management and investors to evaluate how many dollars were earned for each dollar invested by the shareholders. Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. Most of the largest Canadian companies are publicly held. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

2. A corporation is a legal entity that is combined with the owner’s economic circumstances. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

3. A corporation may be organized for the purpose of making a profit or may be not-for-profit. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

4. A public corporation is a corporation that does NOT issue its shares for sale to the public. Answer: False Difficulty: Easy Bloomcode: Knowledge Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

5. A corporation acts under its own name rather than in the name of its shareholders. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

6. Acts of the shareholders who are NOT official agents of a corporation can legally bind a corporation. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

7. Creditors have access to corporate assets only to have their claims repaid. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

8. A transfer of shares by a shareholder does NOT require the approval of either the corporation or other shareholders. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

9. The transfer of ownership rights between shareholders has no effect on the corporation’s operating activities. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

10. Organization costs are normally capitalized by public companies. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

11. Articles of incorporation form the corporation’s “constitution.” Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

12. The board of directors of a corporation legally owns the corporation.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

13. Companies can only be incorporated under the federal government. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

14. Profits may be either reinvested in a corporation or distributed to its shareholders as dividends. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

15. Dividends in a corporation are the equivalent of drawings in a proprietorship. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

16. Corporations must pay taxes as a legal entity. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

17. The shareholders of a corporation pay tax on corporate profit on an individual basis. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

18. One of the disadvantages of a corporation is that professional managers will run the company. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

19. One of the disadvantages of a corporation is that the company will have continuous life. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

20. Authorized share capital is the amount of the shares that are issued to the shareholders. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

21. The authorization of share capital does NOT result in a formal accounting entry. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

22. The authorization of share capital will have an immediate effect on assets and shareholders’ equity. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

23. Share capital may be distributed to shareholders as dividends. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

24. No par value shares are shares that have NOT been assigned any specific value. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

25. When shares are issued for services or noncash assets, the shares should be recorded at the fair value of the services or noncash assets. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

26. In cases where the fair value of the services and noncash assets cannot be reliably measured, the shares issued should be recorded at the amortized cost of the noncash assets. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

27. Shares can be issued only in exchange for cash. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

28. A corporation can issue more shares than it is authorized in its charter, if the board of directors approves of an increase in the number of authorized shares. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

29. Common shares usually have a cumulative dividend feature. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

30. A corporation must have preferred shares.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

31. One characteristic of preferred shares is a dividend preference. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

32. When a company is liquidated, the common shares will receive proceeds before the preferred shares. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

33. A cumulative dividend feature will mean that unpaid dividends from prior periods will be paid before the current dividend entitlement. Answer: True Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

34. Convertible preferred shares give common shareholders the option of exchanging their bonds for preferred shares. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

35. When a preferred share is exchanged for a common share, cash flow for the company is increased. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

36. A redeemable preferred share gives shareholders the option to redeem shares at their own option rather than the corporation’s option. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

37. Retained earnings are the cumulative profits or losses since incorporation that have been retained within the corporation. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

38. Income tax expense is added to income when determining profit. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

39. Income tax expense is shown on the income statement. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

40. Income taxes only affect the income statement. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a corporate income statement.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

41. Corporate income tax is based on the amount of retained earnings that a company has. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

42. Dividends in arrears are NOT considered a liability. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

43. There is no obligation to pay dividends until a dividend is declared by the board of directors. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

44. The statement that reflects the changes in retained earnings for the period is called a statement of retained earnings. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

45. Cash dividends are shown as an addition to the statement of retained earnings. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

46. The amount of dividends paid is reported on the statement of retained earnings. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

47. Retained earnings is a temporary account. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

48. A cash dividend account is NEVER closed during the closing process.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

49. When the retained earnings is in a debit balance it is called a “deficit.” Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

50. A dividend is a pro rata distribution of a portion of a corporation’s retained earnings to its shareholders. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

51. The primary consideration for the decision to declare dividends is whether the company made a profit in the current year. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

52. A company may NOT declare a dividend if there was a loss in the year. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

53. Dividends are distributed from retained earnings. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

54. Companies must have enough cash before they can declare a cash dividend. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

55. Under the Canada Business Corporations Act, a corporation cannot pay a dividend if it would then be unable to pay its liabilities. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

56. If the board of directors has NOT declared a dividend, then no liability exists. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

57. Journal entries are made on the date of declaration and on the date of record. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

58. The ownership of the shares is determined on the date of declaration. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

59. Declaration of cash dividends increases liabilities and decreases shareholders’ equity. Answer: True Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

60. At the end of each accounting year, the profit for the corporation will be closed into the account called Income Summary. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

61. Contributed capital of a company includes share capital and retained earnings. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

62. Under IFRS, there is a section in shareholders’ equity on the balance sheet called accumulated other comprehensive income. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

63. Retained earnings will be reported on financial statements within the share capital section. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

64. Return on equity can be calculated as average shareholders’ equity divided by profit. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

65. Return on equity will assist a company to measure its cash flow. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

66. Retained earnings are subtracted from share capital to arrive at total shareholders’ equity. Answer: False Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 67. The dominant form of business organization in Canada is a) the proprietorship. b) the partnership. c) the corporation. d) None of the choices is correct. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

68. Canadian Tire Corporation is an example of a a) not-for-profit corporation. b) publicly held corporation. c) privately held corporation. d) partnership. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

69. Shareholders of a corporation directly elect a) the president of the corporation. b) the board of directors. c) the controller of the corporation. d) all of the employees of the corporation. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

70. Which of the following Canadian companies must report under International Financial Reporting Standards? a) private companies b) not-for-profit corporations c) public companies d) partnerships Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

71. A factor that distinguishes the corporate form of organization from a sole proprietorship or partnership is that a a) corporation is organized for the purpose of making a profit. b) corporation is subject to numerous federal and provincial government regulations. c) corporation is an accounting economic entity. d) corporation’s temporary accounts are closed at the end of the accounting period. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

72. Which one of the following would NOT be considered an advantage of the corporate form of organization? a) limited liability of owners b) separate legal existence c) continuous life d) government regulation

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

73. The concept of a "separate legal existence" refers to which form of business organization? a) partnership b) proprietorship c) corporation d) limited partnership Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

74. The ways that a corporation can be classified by purpose are a) general and limited. b) profit and non-profit. c) provincial and federal. d) publicly held and privately held. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

75. The two ways that a corporation can be classified by ownership are a) publicly held and privately held. b) shares and non-shares. c) inside and outside.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) majority and minority. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

76. Which of the following would NOT be true of a privately held corporation? a) It generally has few shareholders. b) Its shares are regularly traded on the Toronto Stock Exchange. c) It does not offer its shares for sale to the general public. d) It is usually smaller than a publicly held company. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

77. Which of the following is NOT true of a corporation? a) It may buy, own, and sell property. b) It may sue and be sued. c) The acts of its owners bind the corporation. d) It may enter into binding legal contracts in its own name. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

78. Abraham Griffin has invested $800,000 in a privately held family corporation. The corporation does NOT do well and must declare bankruptcy. What amount does Griffin stand to lose?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) up to his total investment of $800,000 b) zero c) the $800,000 plus all personal assets the creditors demand d) $400,000 Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

79. Which of the following statements reflects the transferability of ownership rights in a corporation? a) If a shareholder decides to transfer ownership, they must transfer all of their shares. b) A shareholder may dispose of part or all of their shares. c) A shareholder must obtain permission of the board of directors before selling their shares. d) A shareholder must obtain permission from at least three other shareholders before selling their shares. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

80. A corporate board of directors generally a) selects officers. b) manages sales targets. c) makes everyday purchasing decisions. d) approves vacation periods for top management. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

81. All of the following are examples of organization costs except a) legal fees. b) accounting fees. c) directors’ fees. d) registration costs. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

82. The ability of a corporation to obtain capital is a) enhanced because of limited liability and ease of share transferability. b) less than a partnership. c) restricted because of the limited life of the corporation. d) about the same as a partnership. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

83. Which of the following statements concerning taxation is accurate? a) Partnerships pay provincial income taxes but not federal income taxes. b) Corporations pay federal income taxes but not provincial income taxes. c) Corporations pay federal and provincial income taxes. d) Income trusts pay federal income taxes but not provincial income taxes. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

84. Which of the following statements is NOT considered a disadvantage of the corporate form of organization? a) additional taxes b) government regulations c) limited liability of shareholders d) separation of ownership and management Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

85. Corporate tax rates are typically a) higher than personal rates. b) lower than personal rates. c) the same as personal rates. d) Corporations are not taxed; all income is taxed personally when distributed to shareholders. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

86. Which one of the following is NOT an ownership right of a shareholder in a corporation? a) to vote in the election of directors b) to declare dividends on the common shares c) to share in assets upon liquidation d) to share in corporate profit Answer: b Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

87. The articles of incorporation can contain all of the following, except a) the name of the proposed corporation. b) the purpose of the proposed corporation. c) the names and addresses of the incorporators. d) the names and addresses of the senior management team. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

88. If a corporation has only one class of shares, they are referred to as a) classless shares. b) preferred shares. c) limited liability shares. d) common shares. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

89. The term “residual claim” refers to a shareholder's right to a) receive dividends. b) share in assets upon liquidation. c) acquire additional shares when offered. d) exercise the right to vote. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

90. Private companies adhering to Canadian GAAP apply which of the following accounting framework(s)? a) ASPE b) IFRS c) ASPE or IFRS d) ASPE and IFRS Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

91. Which group of users is responsible for selecting the company’s operating policies and selecting officers such as the CEO? a) management b) shareholders c) board of directors d) chief financial officer Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

92. Which of the following is FALSE in relation to a private corporation? a) not available for the public to purchase shares b) also referred to as largely held corporation

Test Bank for Accounting Principles, Ninth Canadian Edition

c) generally smaller than public corporations d) held by a few shareholders Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

93. Which of the following is FALSE in relation to a public corporation? a) available for purchase by the general public b) also referred to as a publicly accountable enterprise c) generally larger than private corporations d) must follow either ASPE or IFRS Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

94. Which of the following is TRUE about a corporation? a) The corporation may borrow money and enter into legally binding contracts in its own name. b) The corporation cannot buy, own, and sell property. c) The corporation acts under the name of the owner(s). d) The corporation may not sue or be sued. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

95. Which of the following is TRUE in terms of shareholder liability in a corporation?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) The liability of each shareholder is unlimited. b) Shareholders can be made to pay for the company’s liabilities out of their personal assets. c) Limited liability is a significant disadvantage for a corporation. d) Creditors have access to a corporation’s assets only to satisfy any unpaid claims of a corporation. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

96. Which of the following is TRUE about ownership rights in a corporation? a) Transfer of shares is decided by the board of directors rather than the shareholder. b) The transfer of shares must be approved by the corporation. c) Ownership of a corporation is held in shares of capital. d) Transfer of ownership rights between shareholders affect the corporation’s operating activities. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and discuss characteristics of the corporate form of organization. Section Reference: The Corporate Form of Organization CPA: Financial Reporting AACSB: Analytic

97. Which of the following is regarded as contributed capital? a) share capital b) retained earnings c) earned capital d) All of the choices are correct. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

98. Authorized share capital a) is not indicated in a company’s articles of incorporation. b) results in a formal accounting entry. c) that is specified normally reflects the company’s initial need for capital and what it expects to need in the future. d) may not be specified as an unlimited number or a certain number of shares. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

99. Which of the following is FALSE regarding legal capital? a) Legal capital does not have to remain invested in the company. b) Legal capital cannot be distributed to shareholders. c) Retained earnings is not legal capital. d) Share capital is legal capital. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

100. Foundations Inc. follows ASPE and issues 15,000 shares on July 1 to acquire specially made machinery equipment. The appraised value of the equipment is $112,000 and the fair value of the shares issued is $7.50 per share. Foundations shares are not widely traded. Foundations should record this transaction by a) debiting Equipment for $112,000. b) debiting Common Shares for $112,000. c) debiting Equipment for $112,500. d) debiting Common Shares for $112,500.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

101. Foundations Inc. follows IFRS and issues 15,000 shares on July 1 to acquire specially made machinery equipment. The appraised value of the equipment is $112,000 and the fair value of the shares issued is $7.50 per share. Foundations shares are widely traded. Foundations should record this transaction by a) debiting Equipment for $112,000. b) debiting Common Shares for $112,000. c) debiting Equipment for $112,500. d) debiting Common Shares for $112,500. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

102. The impact of the company’s shares being sold among investors will a) cause total shareholders’ equity to increase. b) cause total assets to decrease. c) cause retained earnings to decrease. d) have no effect on the operating activities of the corporation. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

103. The authorization of share capital will a) cause shareholders’ equity to increase. b) cause the number of common shares issued to increase. c) cause the market price of the shares to fall. d) have no immediate effect on either assets or shareholders’ equity. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

104. Which of the following factors does NOT affect the initial market price of a share? a) the company's anticipated future earnings b) the legal capital of the share c) the current state of the economy d) the expected dividend rate per share Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

105. Which transaction will cause an increase in cash flow for the corporation? a) Preferred shares are exchanged for common shares. b) The company issues common shares for equipment. c) The company issues common shares for cash. d) One of the main shareholders sells his shares to his son. Answer: c Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

106. Issued shares are the number of a) authorized shares that have been sold. b) shares a corporation is legally able to sell. c) shares sold each year by the corporation. d) authorized shares in the corporation’s articles of incorporation. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

107. The authorized shares of a corporation a) only reflect the initial capital needs of the company. b) are determined by the company’s board of directors. c) are indicated in its articles of incorporation. d) must be recorded in a formal accounting entry. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

108. If Lee Inc. issues 1,000 common shares for $5 per share, a) Common Shares will be credited for $5,000. b) Gain on Sale of Shares will be credited for $5,000. c) Retained Earnings will be credited for $5,000. d) The transaction will be recorded only in a note to the financial statements.

Test Bank for Accounting Principles, Ninth Canadian Edition

109. Paris Corporation is a publicly held corporation whose shares, issued at $1 per share, are actively traded at $20 per share. The company issued 1,000 shares to acquire land recently appraised at $15,000. When recording this transaction, Paris will a) debit Land for $15,000. b) credit Common Shares for $20,000. c) debit Land for $20,000. d) credit Gain on Purchase of Land for $5,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

110. London Limited issued 2,000 common shares in payment of its lawyer's bill of $8,000. London Limited assured the lawyer that the shares would be worth $10,000 within one year. The bill was for services performed in helping the company incorporate. Southern should record this transaction by debiting a) Legal Fees Expense for $10,000. b) Legal Fees Expense for $8,000. c) Common Shares for $10,000. d) Common Shares for $8,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

111. Under IFRS, corporations that issue shares in return for noncash assets should record the transaction at a) the fair market value of the asset acquired. b) the original cost of the asset acquired. c) the fair market value of the common shares given up. d) the book value of the common shares given up. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

112. China Corporation has the following shareholders’ equity on December 31, 2024: Shareholders' equity Share capital $10 convertible preferred shares, 10,000 shares authorized, 5,000 shares issued $0,570,000 Common shares, no par value, 200,000 shares authorized, 90,000 shares issued 1,800,000 Total share capital 2,370,000 Retained earnings 450,000 Total shareholders’ equity $2,820,000 If 500 preferred shares are converted into common shares what is the dollar value of the common shares issued? a) $50,000 b) $57,000 c) $10,000 d) $9,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

113. New York Corporation has the following shareholders’ equity on December 31, 2024: Shareholders' equity Share capital $10 convertible preferred shares, 10,000 shares authorized, 5,000 shares issued $0,570,000 Common shares, no par value, 200,000 shares authorized, 90,000 shares issued 1,800,000 Total share capital 2,370,000 Retained earnings 450,000 Total shareholders’ equity $2,820,000 If one preferred share is convertible into 10 common shares, how many common shares are issued when 500 preferred shares are converted? a) 500 b) 50 c) 5,000 d) 5 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

114. Peru Corporation has the following shareholders’ equity on December 31, 2024: Shareholders' equity Share capital $10 convertible preferred shares, 10,000 shares authorized, 5,000 shares issued $0,570,000 Common shares, no par value, 200,000 shares authorized, 90,000 shares issued 1,800,000 Total share capital 2,370,000 Retained earnings 450,000 Total shareholders’ equity $2,820,000 What is the dividend amount payable to preferred shareholders in 2024 assuming no shares are converted? a) $50,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) $900,000 c) $100,000 d) $500,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

115. Which of the following is NOT generally a right or preference associated with preferred shares? a) the right to vote b) first claim to dividends c) preference to corporate assets in case of liquidation d) to receive dividends in arrears before common shareholders receive dividends Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

116. The feature that enables the preferred shareholders to exchange their preferred shares for common shares is the a) redeemable feature. b) cumulative preference. c) participating feature. d) convertible feature. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

117. If preferred shares are cumulative, the a) preferred dividends not declared in a given year are called dividends in arrears. b) preferred shareholders and the common shareholders receive equal dividends. c) preferred shareholders and the common shareholders receive the same total dollar amount of dividends. d) common shareholders will share in the preferred dividends. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

118. If convertible preferred shares are converted into common shares, a) a gain on conversion must be recorded if the legal capital of the preferred shares is greater than the legal capital of the common shares. b) a loss on conversion must be recorded if the legal capital of the preferred shares is less than the legal capital of the common shares. c) a gain or loss on conversion is not recognized or recorded. d) the fair value of the preferred shares on the date of conversion is credited to the Common Shares account. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

119. Preferred shares issued with the right of the shareholder to redeem the shares are referred to as a) redeemable preferred shares. b) retractable preferred shares. c) cumulative preferred shares.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) convertible preferred shares. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

120. Retractable preferred shares a) do not offer a repayment of principal. b) are presented in the liability section of the balance sheet. c) are presented in the equity section of the balance sheet. d) would be allocated between the liability and equity sections of the balance sheet depending on the exact terms of redemption or retraction. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

121. Toronto Corporation has 5,000 preferred shares that have been issued at $50 per share. Each share is convertible into one common share. When the market values of preferred shares are $55 and common shares are $75, respectively, the 5,000 shares are converted into common shares. The journal entry to record the conversion of the shares is a) Preferred Shares.................................................. 500,000 Common Shares............................................ 500,000 b) Preferred Shares ................................................. 375,000 Common Shares............................................ 375,000 c) Preferred Shares .................................................. 250,000 Common Shares............................................ 250,000 d) Preferred Shares ................................................. 75,000 Common Shares............................................ 75,000 Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

122. Alexandria Corporation has the following shareholders’ equity on July 31, 2024: Shareholders' equity Share capital $10 preferred shares, cumulative 10,000 shares authorized, 5,000 shares issued $2,000,000 Common shares, 600,000 shares authorized, 10,000 shares issued 300,000 Total share capital 2,300,000 Retained earnings 500,000 Total shareholders’ equity $2,800,000 The maximum number of common shares that Alexandria can issue is a) 10,000. b) 610,000. c) 600,000. d) Cannot be determined from the information provided. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

123. Under ASPE, corporations that issue shares in return for noncash assets should record the transaction at a) the fair market value of the asset acquired. b) the original cost of the asset acquired. c) the fair market value of the common shares given up. d) whichever is most reliable, fair value of assets acquired or fair value of shares issued. Answer: d Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

124. Corporations have a(n) a) limited life. b) indefinite life. c) limited legal life. d) legal life of 20 years. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

125. Which of the following best represents the guidance provided by IFRS when accounting for shares issued for noncash consideration? a) The transaction should be valued at the more reliably measurable amount of the fair value of the goods/services received or the fair value of the shares given up. b) The transaction should be valued at the fair value of the shares given up. c) The transaction should be valued at the fair value of the goods/services received. d) The transaction can be valued at management’s choice of either the fair value of the goods/services received or the fair value of the shares given up. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

126. Which of the following is NOT considered a typical feature of preferred shares?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) priority over common shareholder upon dividend distribution b) ability to elect the board of directors through voting rights c) potential to be converted into common shares d) preference to receive company assets upon liquidation Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital CPA: Financial Reporting AACSB: Analytic

127. ABC Industries has the following account balances: Retained earnings............................................ $75,000 Revenue ........................................................... $365,000 Operating expenses ......................................... $297,000 Interest expense .............................................. $17,500 Assume an income tax rate of 20%. What is the amount of income tax expense to be reported on the corporate income statement? a) $13,600 b) $15,000 c) $10,100 d) $73,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

128. Star Wars Industries has the following account balances: Retained earnings............................................ $75,000 Revenue ........................................................... $365,000 Operating expenses ......................................... $297,000 Interest expense .............................................. $17,500 On the corporate income statement what will be the amount reported as “profit” given an income tax rate of 20%? a) $40,400

Test Bank for Accounting Principles, Ninth Canadian Edition

b) $36,900 c) $50,500 d) $60,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

129. What is the correct journal entry to adjust for income tax expense? a) Retained Earnings Income Tax Payable b) Income Tax Expense Retained Earnings c) Operating Expense Income Tax Payable d) Income Tax Expense Income Tax Payable Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

130. Income tax expense is based on a) profit from operations. b) profit before income taxes. c) retained earnings balance. d) profit. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

131. Heinfell Inc. reported sales of $850,000, cost of goods sold of $510,000, and other expenses totalled $180,000. If the company’s corporate tax rate is determined to be 26%, how much would Heinfell report as income tax expense in the year? a) $41,600 b) $100,000 c) $118,400 d) $160,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

132. Heinfell Inc. reported sales of $850,000, cost of goods sold of $510,000, and other expenses totalled $180,000. Assuming Heinfell reported net income of $100,000 in the year, which of the following entries reflects Heinfell’s income tax expense? a) debit to Income Tax Payable and credit to Income Tax Expense for $60,000 b) debit to Income Tax Expense and credit to Income Tax Payable for $100,000 c) debit to Income Tax Expense and credit to Income Tax Payable for $60,000 d) debit to Income Tax Payable and credit to Income Tax Expense for $100,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

133. Pluto Inc. had service revenue of $700,000, operating expenses of $390,000, and interest expense of $28,000 for the year ended December 31, 2024. The company has a 30% income tax rate. How much is Pluto’s income tax expense? a) $197,400 b) $93,000 c) $210,000

Test Bank for Accounting Principles, Ninth Canadian Edition

d) $84,600 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

134. Pluto Inc. had service revenue of $700,000, operating expenses of $390,000, and interest expense of $28,000 for the year ended December 31, 2024. The company has a 30% income tax rate. Assuming Pluto has already made income tax instalments of $60,000, what is Pluto’s income tax expense? a) $48,600 b) $84,600 c) $24,600 d) $33,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

135. Pluto Inc. had service revenue of $700,000, operating expenses of $390,000, and interest expense of $28,000 for the year ended December 31, 2024. The company has a 30% income tax rate. Assuming Pluto has already made income tax instalments of $60,000, the company should record income taxes by a) debiting Income Tax Expense for $84,600. b) debiting Income Tax Expense for $33,000. c) debiting Income Tax Expense for $24,600. d) debiting Income Tax Expense for $48,600. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

136. Pluto Inc. had service revenue of $700,000, operating expenses of $390,000, and interest expense of $28,000 for the year ended December 31, 2024. The company has a 30% income tax rate. Assuming Pluto has made no instalments, the company should record income taxes by a) debiting Income Tax Expense for $84,600. b) debiting Income Tax Expense for $210,000. c) debiting Income Tax Expense for $93,000. d) debiting Income Tax Expense for $197,400. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

137. Pluto Inc. had service revenue of $700,000, operating expenses of $390,000, and interest expense of $28,000 for the year ended December 31, 2024. The company has a 30% income tax rate. Assuming Pluto has already made income tax instalments of $60,000, how much should Pluto report as profit (after-tax) for the year? a) $189,000 b) $84,600 c) $197,400 d) $217,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a corporate income statement. Section Reference: Corporate Income Statements CPA: Financial Reporting AACSB: Analytic

138. On December 15, 2024, the board of directors of Roller Inc. declared the annual preferred share dividend and a $0.50 common share dividend to shareholders of record on January 1. The dividend will be paid on January 31. The company has 15,000 $2 noncumulative preferred shares and 75,000 common shares. Which of the following journal entries should the company record on the date of declaration? a) Cash Dividends ............................................................................................. 45,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash ........................................................................................................ b) Cash Dividends—Preferred .......................................................................... Cash Dividends—Common .......................................................................... Dividends Payable .................................................................................. c) Cash Dividends ............................................................................................. Cash ........................................................................................................ d) Cash Dividends—Preferred .......................................................................... Cash Dividends—Common .......................................................................... Dividends Payable ..................................................................................

45,000 30,000 37,500 67,500 67,500 67,500 7,500 37,500 45,000

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

139. On December 15, 2024, the board of directors of Roller Inc. declared the annual preferred share dividend and a $0.50 common share dividend to shareholders of record on January 1. The dividend will be paid on January 31. The company has 15,000 $2 noncumulative preferred shares and 75,000 common shares. Which of the following journal entries should the company record on January 1? a) Cash Dividends ............................................................................................. 45,000 Cash ........................................................................................................ 45,000 b) Cash Dividends—Preferred .......................................................................... 30,000 Cash Dividends—Common .......................................................................... 37,500 Dividends Payable .................................................................................. 67,500 c) Dividends Payable ........................................................................................ 67,500 Cash ........................................................................................................ 67,500 d) no journal entry Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

140. On December 15, 2024, the board of directors of Roller Inc. declared the annual preferred share dividend and a $0.50 common share dividend to shareholders of record on January 1. The dividend will be paid on January 31. The company has 15,000 $2 noncumulative preferred shares and 75,000

Test Bank for Accounting Principles, Ninth Canadian Edition

common shares. Which of the following journal entries should the company record on January 31, 2025? a) Dividends Payable ........................................................................................ 67,500 Cash ........................................................................................................ 67,500 b) Cash Dividends ............................................................................................. 45,000 Dividends Payable .................................................................................. 45,000 c) Cash Dividends ............................................................................................. 45,000 Cash ........................................................................................................ 45,000 d) Cash .............................................................................................................. 67,500 Dividends Payable .................................................................................. 67,500 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

141. On the dividend payment date, a) there is no impact on assets. b) there is an impact on retained earnings. c) there is no impact on liabilities. d) there is no impact on shareholders’ equity. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic 142. A cumulative dividend feature stipulates that a) preferred shareholders must be paid only dividends in arrears, before common shareholders are paid any dividend. b) preferred and common shareholders must be paid dividends in arrears, before current year dividends are paid. c) preferred shareholders must be paid only current year dividends, before common shareholders are paid any dividend. d) preferred shareholders must be paid both current year and dividends in arrears, before common shareholders are paid any dividend.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

143. The advantage of debiting a Cash Dividends account, instead of Retained Earnings, is that a) no closing entry is required at the end of the accounting period. b) it allows users to pay the dividends much earlier. c) it makes it easy to keep track of the dividends declared. d) Cash Dividends is a permanent account whereas Retained Earnings is a temporary account. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

144. Dividends in arrears a) are always considered a liability. b) are a liability when they are declared. c) are never considered to be a liability. d) are paid to preferred shareholders only after common shareholders receive their dividends. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

145. Dividends in arrears on cumulative preferred shares a) never have to be paid. b) must be paid before common shareholders can receive a dividend.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) should be recorded as a current liability until they are paid. d) enable the preferred shareholders to share equally in corporate earnings with the common shareholders. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

146. Dividends in arrears on cumulative preferred shares a) are considered to be a non-current liability. b) are considered to be a current liability. c) only occur when preferred dividends have been declared. d) should be disclosed in the notes to the financial statements. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

147. Norton Corporation has the following shareholders’ equity on September 30, 2024: Shareholders' equity Share capital $10 preferred shares, cumulative 10,000 shares authorized, 5,000 shares issued $5,000,000 Common shares, 200,000 shares authorized, 10,000 shares issued 200,000 Total share capital 5,200,000 Retained earnings 570,000 Total shareholders’ equity $5,770,000 On September 15, 2024, Norton Corporation declared a $170,000 dividend to be paid on October 15 to shareholders of record on September 30. Assuming that the preferred dividends were last paid in 2022, the amount of dividends per common share for 2024 would be a) $17. b) $7. c) $0.10.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) $10. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

148. Norton Corporation has the following shareholders’ equity on September 30, 2024: Shareholders' equity Share capital $10 preferred shares, cumulative 10,000 shares authorized, 5,000 shares issued $5,000,000 Common shares, 200,000 shares authorized, 10,000 shares issued 200,000 Total share capital 5,200,000 Retained earnings 570,000 Total shareholders’ equity $5,770,000 On September 15, 2024, Norton Corporation declared a $170,000 dividend to be paid on October 15 to shareholders of record on September 30. Assuming that the preferred dividends were last paid in 2022, the total amount of the dividend paid to the preferred shareholders in 2024 would be a) $50,000. b) $0. c) $150,000. d) $100,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

149. Norton Corporation has the following shareholders’ equity on September 30, 2024: Shareholders' equity Share capital $10 preferred shares, cumulative 10,000 shares authorized, 5,000 shares issued $5,000,000 Common shares,

Test Bank for Accounting Principles, Ninth Canadian Edition

200,000 shares authorized, 10,000 shares issued 200,000 Total share capital 5,200,000 Retained earnings 570,000 Total shareholders’ equity $5,770,000 On September 15, 2024, Norton Corporation declared a $170,000 dividend to be paid on October 15 to shareholders of record on September 30. Assuming there were no dividends in arrears, the total amount of the dividend paid to the preferred shareholders in 2024 would be a) $50,000. b) $0. c) $170,000. d) $150,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

150. The statement of retained earnings a) reports the amount of dividends declared. b) reports the amount of dividends paid. c) reports the date dividends were declared. d) does not report dividends. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

151. The following information is available for Mobily Corporation. Retained earnings beginning balance ................................ $105,000 Dividends paid during the year ........................................... $167,000 Cash dividends declared ..................................................... $67,000 Revenue ............................................................................... $100,000 Expenses .............................................................................. $73,000 What is the ending retained earnings balance? a) $38,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) $65,000 c) $132,000 d) $145,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

152. What is the closing entry required for cash dividends? a) Cash Dividends Retained Earnings b) Retained Earnings Cash Dividends c) Income Summary Cash Dividends d) Cash Dividend Income Summary Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

153. Which one of the following is NOT necessary in order for a corporation to pay a cash dividend? a) adequate cash b) approval of shareholders c) declaration of dividends by the board of directors d) retained earnings Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

154. A distribution of a corporation’s profit to its shareholders is referred to as a) a shareholder bonus. b) wages and salaries expense. c) a share distribution. d) a dividend. Answer: d Bloomcode: Knowledge Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

155. The date on which a cash dividend becomes a binding legal obligation is on the a) declaration date. b) date of record. c) payment date. d) last day of the fiscal year end. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

156. The effect of the declaration of a cash dividend by the board of directors is to Increase Decrease a) Shareholders' equity Assets b) Assets Liabilities c) Liabilities Shareholders' equity d) Liabilities Assets Answer: c Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

157. The date at which ownership is determined for the purpose of determining who should receive a dividend is the a) declaration date. b) record date. c) payment date. d) ownership date. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

158. Dividends are declared out of a) Contributed Capital. b) Preferred Shares. c) Common Shares. d) Retained Earnings. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

159. On the dividend’s date of record a) a dividend becomes a current obligation. b) no entry is required. c) an entry may be required if there has been a change in shareholders since the last dividend declaration. d) Dividends Payable is debited.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

160. Dividends Payable is classified as a a) non-current liability. b) contra shareholders' equity account to retained earnings. c) current liability. d) non-operating expense. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

161. Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections: Total Assets Total Liabilities Total Shareholders' Equity a) Increase Decrease No change b) No change Increase Decrease c) Decrease Increase Decrease d) Decrease No change Increase Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

162. Which of the following statements about dividends is NOT accurate?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) Many companies declare and pay cash quarterly dividends. b) Low dividends may mean high investment returns. c) The board of directors is obligated to declare dividends. d) A legal dividend may not be a feasible one. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

163. DEN Inc. has 1,000, $6, cumulative preferred shares issued at $100, and 50,000 common shares issued at $1, at December 31, 2024. What is the annual dividend on the preferred shares? a) $60 per share b) $6,000 in total c) $600 in total d) $0.60 per share Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

164. Kean’s Pumping Ltd. has 20,000, $4, cumulative preferred shares issued at $150, and 100,000 common shares issued at $1, at December 31, 2024. If the board of directors declares a $60,000 dividend, the a) preferred shareholders will receive 1/10 of what the common shareholders will receive. b) preferred shareholders will receive the entire $60,000. c) $60,000 will be held as restricted retained earnings and paid out at some future date. d) preferred shareholders will receive $30,000 and the common shareholders will receive $30,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

165. Singh Inc. has 5,000, $8, noncumulative preferred shares issued at $100, and 20,000 common shares issued at $1, at December 31, 2024. There were no dividends declared in 2023. The board of directors declares and pays a $60,000 dividend in 2024. What is the amount of dividends received by the common shareholders in 2024? a) $0 b) $40,000 c) $60,000 d) $20,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

166. Assume that Company A is doing quite well and has healthy cash flows from operating activities. Its board of directors has decided to NOT pay any dividends to its shareholders for the foreseeable future. This is most likely because a) the company wishes to reinvest its cash for future growth opportunities. b) it would increase the company’s debt to equity ratio. c) it would reduce retained earnings. d) it would cause a mass selloff of the company’s shares. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

167. Accounting entries are required for dividends on which of the following two dates? a) date of declaration and the date of record b) date of record and the date of payment c) date of declaration and the date of payment d) date of record and the date of declaration

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends CPA: Financial Reporting AACSB: Analytic

168. Ursula Company declared dividends of $20,000 in fiscal 2024 and paid the $42,000 dividends that were declared in fiscal 2023. Ursula paid the 2024 dividends in early fiscal 2025. Which of the following journal entries would NOT be recorded in fiscal 2024? a) debit to Cash Dividends and credit to Dividends Payable for $20,000 b) debit to Dividends Payable and credit to Cash for $42,000 c) debit to Retained Earnings and credit to Cash Dividends for $20,000 d) debit to Dividends Payable and credit to Cash for $20,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

169. Retained earnings a) are unique to the corporate form of business. b) are an optional account in the partnership form of business. c) reflect cash paid in by shareholders to date. d) are closed at the end of the year. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

170. Retained earnings are a) always equal to the amount of cash that the corporation has generated from operations. b) a part of the contributed capital of the corporation. c) a part of the shareholders' claim on the total assets of the corporation. d) closed at the end of each accounting period. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

171. Tantramar Corporation has the following shareholders’ equity on July 31, 2023: Shareholders' equity Share capital $10 preferred shares, cumulative 10,000 shares authorized, 5,000 shares issued $2,000,000 Common shares, 600,000 shares authorized, 10,000 shares issued 300,000 Total share capital 2,300,000 Retained earnings 500,000 Total shareholders’ equity $2,800,000 Assume that during the following year the company had profit of $65,000 and declared and paid dividends of $15,000. The beginning balance of retained earnings on the statement of retained earnings for the year ended July 31, 2024, is a) $500,000. b) $565,000. c) $550,000. d) Cannot be determined from the information provided. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

172. Tantramar Corporation has the following shareholders equity on July 31, 2023:

Test Bank for Accounting Principles, Ninth Canadian Edition

Shareholders' equity Share capital $10 preferred shares, cumulative 10,000 shares authorized, 5,000 shares issued $2,000,000 Common shares, 600,000 shares authorized, 10,000 shares issued 300,000 Total share capital 2,300,000 Retained earnings 500,000 Total shareholders’ equity $2,800,000 Assume that on June 15, 2024, Tantramar paid the preferred dividend for the current year (there were no dividends in arrears) and paid a dividend of $2 to each common shareholder. The company earned $45,000 in profit during 2024. The July 31, 2024, financial statements will show an ending balance in retained earnings of a) $500,000. b) $545,000. c) $475,000. d) $430,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

173. Income statements for corporations are the same as the income statements for proprietorships, except for the reporting of a) cost of goods sold. b) income taxes. c) gross profit. d) other revenues and other expenses. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

174. Corporation income tax expense is

Test Bank for Accounting Principles, Ninth Canadian Edition

a) usually accrued in the adjusting entry process. b) not usually accrued because it is not known what the exact liability will be until the tax return is filed. c) not reported in a separate section of a corporate income statement. d) calculated using profit before income taxes in the previous fiscal year. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

175. A credit balance in retained earnings represents a) the amount of cash retained in the business. b) a claim on specific assets of the corporation. c) earnings retained for future use. d) the amount of shareholders' equity exempted from the shareholders' claim on total assets. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

176. The statement of retained earnings a) is required as part of the financial statements under ASPE. b) will show income taxes paid during the year. c) will never show losses. d) will, in some cases, fail to reconcile the beginning and ending retained earnings balances. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

177. Which of the following is NOT a component of the statement of retained earnings? a) net income b) dividends c) beginning balance of retained earnings d) preferred shares Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

178. Cash dividends a) paid increase retained earnings. b) declared reduce retained earnings. c) paid decrease retained earnings. d) declared increase retained earnings. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

179. On January 1, 2024, Shelley Inc. had a balance of $625,000 in its Retained Earnings account. During the year, it declared $175,000 of cash dividends and paid $100,000. Its profit after tax in 2024 was $210,000. What would the company’s closing retained earnings balance be on December 31, 2024? a) $660,000 b) $835,000 c) $735,000 d) $910,000 Answer: a Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

180. On January 1, 2024, Shelley Inc. had a balance of $625,000 in its Retained Earnings account. During the year, it declared $175,000 of cash dividends and paid $100,000. Its profit after tax in 2024 was $210,000. How much would the company record to close the Income Summary account to retained earnings? a) $110,000 b) $35,000 c) $735,000 d) $210,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

181. On January 1, 2024, Shelley Inc. had a balance of $625,000 in its Retained Earnings account. During the year, it declared $175,000 of cash dividends and paid $100,000. Its profit after tax in 2024 was $210,000. How much would the company record to close dividends to retained earnings? a) $275,000 b) $175,000 c) $75,000 d) $100,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

182. The closing process affects a) assets. b) liabilities.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) share capital. d) retained earnings. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of retained earnings and closing entries for a corporation. Section Reference: Reporting Retained Earnings CPA: Financial Reporting AACSB: Analytic

183. Which of the following is FALSE about contributed surplus? a) It is also known as additional contributed capital. b) The retirement of shares for more than the average per share amount is a common source. c) The excess of the actual share issue price over its par value is a common source. d) Donations of assets to the corporation is a common source. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

184. Which of the following is TRUE about contributed surplus? a) It is an asset account. b) It is also known as limited contributed capital. c) It is a liability account. d) A separate contributed surplus account is used for each source for recording purposes. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

185. The following information is available for The Benchmark Company Inc. for three recent years: 2024 2023 2022 Total shareholders’ equity $744,300 $721,648 $712,850 Profit 82,125 68,420 54,620 How much is the return on equity in 2024? a) 11.0% b) 10.1% c) 11.2% d)10.3% Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

186. The following information is available for The Benchmark Company Inc. for three recent years: 2024 2023 2022 Total shareholders’ equity $744,300 $721,648 $710,850 Profit 82,125 68,420 60,620 How much is the return on equity in 2023? a) 9.6% b) 9.5% c) 9.0% d) 8.5% Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

187. Which of the following is NOT true? a) The ending retained earnings balance becomes the opening balance for the next period. b) A deficit in retained earnings is reported as a deduction from shareholders’ equity.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) If total losses to date are greater than profit to date, retained earnings will have a debit balance. d) The normal balance of the Retained Earnings account is a debit. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

188. Two classifications appearing in the contributed capital section of the balance sheet are a) preferred shares and common shares. b) contributed capital and retained earnings. c) share capital and contributed surplus. d) share capital and retained earnings. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

189. Private companies following ASPE are required to disclose for each class of shares, a) the market value per share. b) the present value per share. c) the number of shares authorized. d) the number of shares issued. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

190. Return on equity is a ratio generally used to evaluate a) liquidity. b) solvency. c) profitability. d) all of the choices are correct. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

191. Return on equity a) is used by management to evaluate liquidity. b) calculates the rate of return shareholders are earning on their investment. c) represents the equity a common shareholder has in net assets of the corporation. d) is calculated by taking profit divided by this year’s shareholders’ equity. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

192. Profit for Sandos Inc. was $10,000 in 2024. Shareholders’ equity was $100,000 at December 31 2022, $200,000 at December 31, 2023, and $300,000 at December 31, 2024. Return on equity for 2024 is a) 5%. b) 4%. c) 3.3%. d) 10%. Answer: b Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

193. Which of the following terms represents a situation in which total losses and dividends to date are greater than total profit to date? a) net income b) deficit c) profit d) net loss Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

194. Which of the following is NOT considered a classification of contributed capital on the balance sheet? a) common shares b) contributed surplus c) retained earnings d) preferred shares Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 195. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E.

Authorized shares Dividends Redeemable preferred shares Share capital Retained earnings

F. G. H. I. J.

Noncumulative feature Issued shares Declaration date Return on equity Cumulative feature

___

Total number of each class of shares a corporation is allowed to issue.

___

A distribution of cash or shares by a corporation to its shareholders on a pro rata basis

___

The number of shares that have been issued by the corporation.

___

Preferred shareholders have a right to receive current and unpaid prior-year dividends before common shareholders receive any dividends.

___

Allow the issuing corporation to buy back its own shares at specified future dates and prices.

___

In a year when dividends are NOT declared, dividends for that year are lost to shareholders.

___

Profit retained in the corporation

___

The date when the board of directors formally declares a dividend and announces it to the shareholders.

___

Ratio used to measure a firm’s profitability and efficiency

___

10.

Amount paid or contributed to the corporation by a shareholder in exchange of shares of ownership.

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 1.

10. D Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain share capital and demonstrate the accounting for the issuance of common and preferred shares. Section Reference: Share Capital Learning Objective: Explain and demonstrate the accounting for cash dividends. Section Reference: Cash Dividends Learning Objective: Prepare the shareholders’ equity section of the balance sheet and calculate return on equity. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 14 CORPORATIONS: ADDITIONAL TOPICS AND IFRS CHAPTER STUDY OBJECTIVES 1. Explain how to account for stock dividends and stock splits, and compare their financial impact. Journal entries for stock dividends are required at the declaration and distribution dates. There is no journal entry for a stock split. Stock dividends reduce retained earnings and increase common shares, but have no impact on total shareholders’ equity. Both stock dividends and stock splits increase the number of shares issued. Stock dividends and splits reduce the fair value of the shares, but have no impact on the company’s financial position.

2. Explain how to account for the reacquisition of shares. When shares are reacquired, the average per share amount is debited to the Common Shares account. If the shares are reacquired at a price below the average per share amount, the difference is credited to a contributed surplus account. If the shares are reacquired at a price above the average per share amount, the difference is debited first to a contributed surplus account if a balance exists, and then to the Retained Earnings account.

3. Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Gains or losses on discontinued operations must be presented net of income tax after profit (or loss) from continuing operations. Companies following IFRS must prepare a statement of comprehensive income that reports all increases and decreases to shareholders’ equity during a period except changes resulting from the sale or repurchase of shares and from the payment of dividends. The statement of comprehensive income can be prepared on an all-inclusive basis, or can start with profit or loss as shown on a separate income statement.

4. Explain the different types of accounting changes and account for the correction of a prior period error. A change in an accounting estimate is not an error and only the current and future periods are revised. A change in accounting policy, from the method used in the previous year, is allowed only when there is a change in GAAP or if it results in the financial statements providing more reliable and relevant information. These changes are applied retrospectively when possible. If an error in a prior year’s profit is found after the temporary accounts have been closed and the statements have been issued, then beginning retained earnings is adjusted. This is shown in the financial statements as a correction to beginning retained earnings net of the related income tax impact.

5. Prepare a statement of changes in shareholders’ equity. A statement of changes in shareholders’ equity explains all of the changes in each of the shareholders’ equity accounts, and in total, for the reporting period. This includes changes in contributed capital (Common Shares, Preferred Shares,

Test Bank for Accounting Principles, Ninth Canadian Edition

and any other contributed surplus accounts), Retained Earnings, and Accumulated Other Comprehensive Income. The statement is required for companies reporting under IFRS.

6. Explain earnings and dividend performance and calculate performance ratios. Profitability measures that are used to analyze shareholders’ equity include return on equity (discussed in Chapter 13), earnings per share, the price-earnings ratio, and the payout ratio. Earnings (loss) per share is calculated by dividing profit (loss) available to the common shareholders by the weighted average number of common shares and is reported only under IFRS. The price-earnings ratio is calculated by dividing the market price per share by the earnings per share. The payout ratio is calculated by dividing cash dividends by profit.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 The following is information taken from the shareholders’ equity section of the projected summary financial statements of Deer Fly Corp. to December 31, 2024, prior to the board of directors’ meeting to decide on dividends or other share transactions related to its 10,000 issued common shares for the year. Total assets....................................................................................................... $560,000 Total liabilities .................................................................................................. $320,000 Shareholders' equity Common shares........................................................................................ 30,000 Retained earnings..................................................................................... 210,000 Total shareholders' equity ....................................................................... 240,000 Total liabilities and shareholders' equity ........................................................ $560,000 Common shares’ market value ........................................................................ $12.50 Instructions Prepare in three-column comparative format, the shareholders’ equity section as it would appear under each of the following possible options that the board is considering. Only one of the options will be chosen, so assume they are mutually exclusive. Describe any additional disclosure that would be required. a) The board declares a 20% stock dividend. b) The board approves a 3-for-1 stock split. Solution 1 (15 min.) Before change

Total assets

$560,000

$560,000 $560,000

Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders' equity

$320,000

$320,000 $320,000

30,000 210,000 240,000

55,000 185,000 240,000

Total liabilities and shareholders' equity

$560,000

$560,000 $560,000

30,000 210,000 240,000

Additional disclosure in each case would include the number of shares authorized and issued. In the case of b), this would be the only change in the equity section from before the split. Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

Exercise 2 During 2024, Zelda Corporation had the following transactions and events: 1. Issued preferred shares for cash. 2. Issued common shares for cash. 3. Completed a 2-for-1 stock split of the common shares. 4. Declared a stock dividend when the market value was higher than the issue price. 5. Declared a cash dividend. 6. Issued the common shares required by the stock dividend declaration in 4 above. Instructions Indicate the effect(s) of each of the foregoing items on the subdivisions of shareholders' equity. Present your answers in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect. Item

Share Capital

Retained Earnings

Total Shareholders’ Equity

Solution 2 (13–17 min.) Item Share Capital 1. I

Retained Earnings NE

Total Shareholders’ Equity I

Difficulty: Medium Bloomcode: Analysis Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

Exercise 3 Jenny OTB Corporation reports the following shareholders' equity as at December 31, 2024:

Test Bank for Accounting Principles, Ninth Canadian Edition

Preferred shares, $4, 500,000 shares authorized, 100,000 shares issued and outstanding ........................................ $1,300,000 Common shares, unlimited shares authorized, 190,000 shares issued and outstanding ........................................ 2,425,000 Retained earnings .................................................................................. 3,200,000 $6,925,000 Instructions a) Assume the board of directors declares dividends totalling $1,500,000 to the shareholders. The preferred shares are cumulative, and no dividends were declared after 2022. Calculate the amount per share each class of shares will receive. Round to two decimal places. b) Assume the board of directors authorizes a 2-for-1 split on the common shares. Calculate the number of shares outstanding after the split and the average per share amount for both classes of shares. Round to two decimal places. c) Assume the board of directors authorizes a 10% stock dividend on the common shares after the stock split. The current selling price of the common shares is $11. Prepare the journal entries to record the declaration and distribution of the stock dividend. Solution 3 (15 min.) a) Preferred ($4 × 2 × 100,000) = $800,000; $800,000 / 100,000 = $8.00 Common $1,500,000 – $800,000 = $700,000; $700,000 / 190,000 = $3.68 b) Common 190,000 × 2 = 380,000 shares outstanding Average per share amount: Preferred shares: $1,300,000 / 100,000 = $13.00 Common shares: $2,425,000 / 380,000 = $6.38 c) Stock Dividends ............................................................................................ Stock Dividends Distributable ............................................................... (380,000 × 0.10 × $11)

418,000

Stock Dividends Distributable ..................................................................... Common Shares.....................................................................................

418,000

Exercise 4 Harvey Hovercraft Inc. reported the following shareholders' equity:

Test Bank for Accounting Principles, Ninth Canadian Edition

Share capital: Preferred shares, 100,000 shares authorized, 21,500 shares issued and outstanding .......................................... $ 417,550 Common shares, unlimited shares authorized, 205,000 shares issued and outstanding ........................................ 792,400 Total share capital.......................................................................... 1,209,950 Retained earnings .................................................................................. 2,110,500 Total shareholders' equity ............................................................. $3,320,450 Instructions a) The board of directors declared a 5% common stock dividend when the market price of the shares was $20 per share. Prepare the necessary journal entries to record the declaration and distribution of the stock dividend. b) What effect did the stock dividend have on: i. total assets ii. total liabilities iii. total share capital iv. total shareholders' equity Solution 4 (10 min.) a) Stock Dividends.......................................................................................... Stock Dividends Distributable ............................................................ (205,000 × 0.05 × $20) Stock Dividends Distributable ................................................................... Common Shares ..................................................................................

205,000 205,000

b) i. no effect ii. no effect iii. increase of $205,000 iv. no effect Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

Exercise 5 Moe Money Solutions Inc. reports the following shareholders' equity as at December 31, 2024: Preferred shares, $4, 500,000 shares authorized, 100,000 shares issued and outstanding ........................................ $1,300,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Common shares, unlimited shares authorized, 190,000 shares issued and outstanding ........................................ Retained earnings ..................................................................................

2,425,000 3,200,000 $6,925,000

Instructions a) Assume the board of directors authorizes a 2-for-1 split on the common shares. Prepare the journal entry to record the stock split. b) Ignoring the requirements of a) above, assume the board of directors authorizes a 100% stock dividend on the common shares. The current selling price of the common shares is $7. Prepare the journal entries to record the declaration and distribution of the stock dividend. c) Calculate the number of shares outstanding after the 2-for-1 and after the 100% stock dividend. Comment on the impact on total shareholders’ equity for each option. Solution 5 (15 min.) a) No journal entry required for stock splits. b) Stock Dividends.......................................................................................... Stock Dividends Distributable ............................................................ (190,000 × 1.00 × $7)

1,330,000

Stock Dividends Distributable ................................................................... Common Shares ..................................................................................

1,330,000

c) 2-for-1 stock split: 190,000 × 2 = 380,000 shares outstanding 100% stock dividend: 190,000 × 1.00 = 380,000 shares outstanding The total impact on shareholders’ equity is the same under each option; however, the large stock dividend option would shift $1,330,000 from retained earnings to common share capital. Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

Exercise 6 Westcock Shipbuilding Ltd. has a December 31 year end. On January 1, 2024, the company had the following shareholder’s equity accounts. Preferred shares, $4 noncumulative, unlimited number authorized, 7,000 issued $ 850,000 Common shares, unlimited number authorized, 150,000 issued 2,250,000 Retained earnings 1,750,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accumulated other comprehensive income

22,000

Westcock had the following transactions during 2024: Jan. 31 Issued 700 preferred shares at $95 per share. Mar. 2 Reacquired 5,000 common shares at $16 a share. June 28 Announced a 3-for-1 stock split of the common shares. Immediately before the split, the share price was $13 a share. Sept. 15 Declared the annual dividend on the preferred shares for shareholders of record on September 30, payable October 15. Oct. 31 Declared a common dividend of $0.50 a share for shareholders of record on November 30. The dividend is payable on December 15. The company reported a profit of $450,000 and other comprehensive income of $15,000 for 2024. Instructions a) Record all of the transactions. b) Prepare the statement of changes in shareholders’ equity. Solution 6 (25 min.) a) Jan. 31 Cash .............................................................................................. Preferred Shares (700 x $95) ................................................ Mar.

Sept. 15

Oct.

Dec.

66,500 66,500

Common Shares (5,000 x $15*) ................................................... Retained Earnings ($80,000 – $75,000) ....................................... Cash ...................................................................................... *Average issue price = $2,250,000 / 150,000 shares = $15

75,000 5,000

Cash Dividends—Preferred.......................................................... Dividends Payable ($4 x 7,700) ............................................

30,800

Dividends Payable ....................................................................... Cash ......................................................................................

30,800

Cash Dividends—Common .......................................................... Dividends Payable (145,000 x 3 × $0.50)..............................

217,500

Dividends Payable ....................................................................... Cash ......................................................................................

217,500

80,000

30,800

217,500

b) WESTCOCK SHIPBUILDING LTD. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2024 Preferred Common Retained Accumulated

Total

Test Bank for Accounting Principles, Ninth Canadian Edition

Earnings

Balance, January 1 Issuance of shares Reacquired shares Cash dividends

$850,000 66,500

$2,250,000

$1,750,000

(75,000)

(5,000) (248,300)

Comprehensive income Balance, December 31

________ ___ $916,500

__________ __ $2,175,000

Other Comprehensiv e Income $22,000

$4,872,000 66,500 (80,000) (248,300)

___450,000

_15,000

___465,000

$1,946,700

$37,000

$5,075,200

Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 7 Shockey Electric Ltd. has a December 31 year end. On January 1, 2024, the company had the following shareholder’s equity accounts. Preferred shares, $2 noncumulative, unlimited number authorized, 20,000 issued $ 550,000 Common shares, unlimited number authorized, 80,000 issued 950,000 Retained earnings 1,075,000 Accumulated other comprehensive income 14,000 Shockey had the following transactions during 2024: Feb. 28 Issued 1,000 preferred shares at $36 per share. May 1 Reacquired 5,000 common shares at $12.50 a share. July 31 Announced a 2-for-1 stock split of the common shares. Immediately before the split, the share price was $12 a share. Sept. 1 Declared the annual dividend on the preferred shares for shareholders of record on September 15, payable on October 1. Dec. 1 Declared a common dividend of $1 a share for shareholders of record on December 15. The dividend is payable on December 30.

Test Bank for Accounting Principles, Ninth Canadian Edition

The company reported income of $710,000, including other comprehensive income of $12,000 for 2024. Instructions a) Record all of the transactions. Round to two decimal places. b) Prepare the statement of changes in shareholders’ equity. c) Calculate Shockey’s 2024 earnings per share. Solution 7 (30 min.) a) Feb. 28 Cash .............................................................................................. Preferred Shares (1,000 x $36) ............................................. May

Sept.

Oct.

Dec.

36,000 36,000

Common Shares (5,000 x $11.88*) .............................................. Retained Earnings ($62,500 – $59,400) ....................................... Cash (5,000 x $12.50)............................................................ *Average selling price = $950,000 / 80,000 shares = $11.88

59,400 3,100

Cash Dividends—Preferred.......................................................... Dividends Payable ($2 x 21,000) ..........................................

42,000

Dividends Payable ....................................................................... Cash ......................................................................................

42,000

Cash Dividends—Common .......................................................... Dividends Payable (75,000 x 2 × $1).....................................

150,000

Dividends Payable ....................................................................... Cash ......................................................................................

150,000

62,500

42,000

150,000

Balance, January 1 Issuance of shares Reacquisition of shares Cash dividends Comprehensive income Balance, December 31

SHOCKEY ELECTRIC LTD. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2024 Accumulated Other Preferred Common Retained Comprehensive Shares Shares Earnings Income $550,000 $950,000 $1,075,000 $14,000 36,000 (59,400) (3,100) (192,000) 698,000 12,000 $586,000 $890,600 $1,577,900 $26,000

Total $2,589,000 36,000 (62,500) (192,000) 710,000 $3,080,500

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Earnings available to common shareholders = $698,000 – $42,000 = $656,000 Weighted average number of common shares outstanding = 107,917 common shares (80,000 x 4 / 12) + (75,000 x 3 / 12) + (150,000 x 5 / 12) = 107,917 2024 EPS = $656,000 / 107,917 = $ 6.08 per share Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 8 Strict Fitness Ltd. has a December 31 year end. On January 1, 2024, the company had the following shareholder’s equity accounts. Preferred shares, $5 cumulative, unlimited number authorized, 5,500 issued $ 550,000 Common shares, unlimited number authorized, 160,000 issued 1,220,000 Retained earnings 2,215,000 Accumulated other comprehensive income 52,000 Strict Fitness had the following transactions during 2024: Jan. 31 Issued 40,000 common shares at $8.50 per share. Feb. 28 Issued 1,000 preferred shares at $110 per share. Mar. 31 Reacquired 20,000 common shares at $10 a share. June 1 Declared a 10% stock dividend on the common shares outstanding on June 1, to be distributed on June 30 to the shareholders of record on June 1. The fair value of the common shares on June 1 was $12 per share. Aug. 31 Issued 25,000 common shares at $13 per share. The company reported net income of $520,000 and comprehensive income of $592,000 for 2024. Instructions a) Record all of the transactions.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) c)

Prepare the statement of changes in shareholders’ equity. Calculate Strict Fitness’ 2024 earnings per share. (Hint: weighted average number of common shares outstanding has been correctly computed at 199,000 shares). Round to two decimal places.

Solution 8 (25 min.) a) Jan. 31 Cash .............................................................................................. Common Shares (40,000 x $8.50) ........................................ Feb.

Mar.

340,000 340,000

Cash .............................................................................................. Preferred Shares (1,000 x $110) ...........................................

110,000

Common Shares (20,000 x $7.80*) .............................................. Retained Earnings ........................................................................ Cash (20,000 x $10)...............................................................

156,000 44,000

110,000

200,000

*average per share amount = ($1,220,000 + $340,000) / (160,000 + 40,000) = $7.80 June

Stock Dividends (180,000* x 10% x $12) ..................................... Stock Dividends Distributable .............................................

216,000 216,000

*common shares outstanding at June 1 = 160,000 + 40,000 – 20,000 = 180,000 June 30

Aug.

Stock Dividends Distributable ..................................................... Common Shares ...................................................................

216,000

Cash .............................................................................................. Common Shares (25,000 x $13) ...........................................

325,000

216,000

325,000

Balance, January 1 Issuance of shares Reacquisition of shares Stock dividends Comprehensive income Balance, December 31 c)

STRICT FITNESS LTD. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2024 Accumulated Other Preferred Common Retained Comprehensive Shares Shares Earnings Income $550,000 $1,220,000 $2,215,000 $ 52,000 110,000 665,000 (156,000) (44,000) 216,000 (216,000) 520,000 72,000 $660,000 $1,945,000 $2,475,000 $124,000

Total $4,037,000 775,000 (200,000) -

592,000 $5,204,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Cumulative dividend entitled by preferred shareholders = $5 x 6,500 = $32,500 Earnings available to common shareholders = $520,000 – $32,500 = $487,500 Weighted average number of common shares outstanding = 199,000 2024 EPS = $487,500 / 199,000 = $2.45 per share Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of shares Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 9 Cheer Corporation reported the following information related to the year ended July 31, 2024: Accumulated other comprehensive income, August 1, 2023 $ 67,000 Cash dividends on preferred shares 23,000 Common shares, unlimited number authorized; 10,000 issued, August 31, 1,000,000 Contributed surplus resulting from prior years' repurchase of common 15,000 shares Profit for the year 434,000 Gain on fair value adjustments on equity investments (net of income taxes) 7,800 Comprehensive income 441,800 Preferred shares; $4 cumulative; 1,000,000 authorized, 4,000 issued 480,000 Retained earnings, August 1, 2023 710,250 Stock dividends on common shares 100,000 Overstatement of cost of goods sold in prior year (net of income taxes) 43,000 Instructions Prepare Cheer’s statement of comprehensive income, statement of changes in shareholders’ equity, and the shareholders’ equity section of Cheer’s balance sheet at July 31, 2024. Solution 9 (25 min.) CHEERS CORPORATION Statement of Comprehensive Income Year Ended July 31, 2024

Test Bank for Accounting Principles, Ninth Canadian Edition

Profit for the year Other comprehensive income Gain on fair value adjustments on equity investments Comprehensive income

$434,000 7,800 $441,800

CHEERS CORPORATION Statement of Changes in Shareholders’ Equity Year Ended July 31, 2024 Contributed Surplus, Accumulated Reacquisition Other Preferred Common of Common Retained Comprehensiv Shares Shares Shares Earnings e Income Balance, August 1, as previously reported Correction of prior period error Balance, August 1, as adjusted Stock dividends Cash dividends Comprehensive income Balance, July 31

Total

$480,000

$1,000,000

$15,000

$ 710,250

$67,000

$2,272,250

________ __

_________ ___

_________

43,000

_________

43,000

480,000

1,000,000

15,000

753,250

67,000

100,000 ________ __ $480,000

_________ ___ $1,100,000

(100,000) (23,000)

(23,000)

_________

434,000

7,800

441,800

$15,000

$1,064,250

$74,800

$2,734,050

CHEERS CORPORATION Partial Balance Sheet July 31, 2024 Shareholders' Equity Share capital Preferred shares, $4 cumulative, 1,000,000 authorized, 4,000 shares issued $ 480,000 Common shares, unlimited number of shares authorized, 10,000 shares issued 1,100,000 Total share capital 1,580,000 Contributed surplus _ 15,000 $1,595,000 Retained earnings 1,064,250 Accumulated other comprehensive income 74,800 Total shareholders' equity $2,734,050 Bloomcode: Application Difficulty: Medium

2,315,250

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 10 Brown Nose Corporation's shareholders' equity section at December 31, 2023, appears below: Shareholders' equity Common shares, no par value, 50,000 shares issued .......................................... $600,000 Retained earnings ................................................................................................. 150,000 Total shareholders' equity .............................................................................. $750,000 On June 30, 2024, the board of directors declared a 10% stock dividend, payable on July 31, 2024, to shareholders of record on July 15, 2024. The fair market value of Brown Nose Corporation's shares on June 30, 2024, was $12 per share. On December 1, 2024, the board of directors declared a 2-for-1 stock split effective December 15, 2024. Brown Nose Corporation's shares were selling for $16 on December 1, 2024, before the stock split was declared. Profit for 2024 was $225,000 and there were no cash dividends declared. Instructions a) Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split. b) Fill in the amount that would appear in the shareholders' equity section for Brown Nose Corporation at December 31, 2024, for the following items: 1. Common shares $____________ 2. Number of shares issued ____________ 3. Retained earnings $____________ 4. Total shareholders' equity $____________ Solution 10 (12–16 min.) a) June 30 Stock Dividends......................................................................... Stock Dividends Distributable .......................................... (50,000 × 10% × $12 = $60,000)

60,000 60,000

Test Bank for Accounting Principles, Ninth Canadian Edition

July

Stock Dividends Distributable .................................................. Common Shares ................................................................

60,000 60,000

There is no entry for the stock split. b)

Common shares ($600,000 + $60,000) ........................

$660,000

Number of shares issued (50,000 + 5,000) X 2 .............

110,000

Retained earnings ($150,000 + $225,000 – $60,000) ...

Total shareholders' equity ..........................................

$315,000 $975,000

Exercise 11 Mana Inc. had the following balances in its shareholders' equity at the beginning of the current year (January 1, 2024): Preferred shares ($1.50, cumulative*, 100,000 shares authorized, 5,000 shares issued) .................................................... $ 25,000 Common shares unlimited shares authorized, 8,000 shares issued ................ 160,000 Retained earnings............................................................................................... 92,000 Total shareholders' equity ................................................................................. $277,000 *two years of dividends are in arrears. During the year ended December 31, 2024, the following transactions took place: 1. On January 1, issued 9,000 common shares at $18 per share. 2. On July 1, declared a 10% stock dividend on the common shares, market price $18.50 per share. The dividend is to be paid on August 15 to shareholders of record on July 31. 3. On August 15, the company paid the stock dividend. 4. On September 15, Ryder’s board of directors declared a 4-for-1 stock split. During the year, the company had a profit of $85,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Prepare the journal entries to record the above transactions. Closing entries are not required. b) Prepare a statement of changes in shareholders’ equity for 2024. c) Prepare the shareholders’ equity section of the balance sheet at December 31, 2024. Solution 11 (20 min.) a) Jan. 1 Cash ........................................................................................... Common Shares (9,000 × $18 = $162,000) ........................ July

Aug.

162,000 162,000

Stock Dividends......................................................................... Stock Dividends Distributable .......................................... [(8,000 + 9,000) × 10% × $18.50]

31,450

Stock Dividends Distributable .................................................. Common Shares ................................................................

31,450

Balance, January 1 Issuance of shares Stock dividend Profit for the year Balance, December 31

MANA INC. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2024 Preferred Common Retained Shares Shares Earnings $25,000 $160,000 $ 92,000 162,000 31,450 (31,450) _________ __________ __85,000 $25,000 $353,450 $145,550

Total $277,000 162,000 __85,000 $524,000

c) MANA INC. Balance Sheet (Partial) December 31, 2024 Shareholders' equity Share capital $1.50 cumulative preferred shares, 100,000 shares authorized, 5,000 shares issued ............................................. Common shares, unlimited shares authorized, 74,800 shares issued ............................... Total share capital .................................................................. Retained earnings..................................................................................... Total shareholders’ equity ..................................................... Bloomcode: Synthesis Difficulty: Hard

$ 25,000 353,450 378,450 145,550 $524,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 12 On January 1, 2024, the following information appears in the records of Brown Holdings Inc.: Authorized shares: Unlimited number of common shares; 1,000,000, $5 preferred cumulative shares Retained earnings $485,000 Accumulated other comprehensive income $110,000 Common shares 120,000 issued; total cost $390,000 Preferred shares 10,000 issued; total cost $100,000 During the year, the company had the following transactions: Mar. 31 Declared cash dividends on common shares of $0.50 per share; payable to shareholders of record on April 10, and payable on April 25. June 30 Declared the entire annual dividend required on preferred shares, payable to shareholders of record on July 15, and payable on July 31. Sept. 15 Declared a 10% stock dividend to shareholders of record on October 5, and distributable on October 15. All dividends were paid or distributed on the due date. Market price of Brown’s common shares at various dates was as follows: Jan. 1 ............................ $10.00 Mar. 31.......................... 10.10 Apr. 10 .......................... 10.25 Apr. 25 .......................... 10.20 June 30......................... 10.30 July 15 .......................... 10.35 July 31 .......................... 10.25 Sept. 15 ........................ 10.50 Oct. 5 ............................ 10.45 Oct .15 .......................... 10.40 Dec. 31.......................... 10.60 At December 31, 2024, the accounting records indicate that Brown’s profit for 2024 was $350,000 and other comprehensive income, consisting of a gain on fair value adjustments on equity investments was $28,000. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b) c)

Journalize the dividend transactions. Prepare the statement of changes in shareholders’ equity for the year ended December 31, 2024. Prepare the shareholders’ equity section of Brown’s balance sheet at December 31, 2024.

Solution 12 (30 min.) a) Mar. 31 Cash Dividends—Common Shares .............................................. Dividends Payable................................................................ (120,000 x $0.50)

60,000

Apr.

Dividends Payable ....................................................................... Cash ......................................................................................

60,000

Cash Dividends—Preferred.......................................................... Dividends Payable................................................................ (10,000 x $5)

50,000

Dividends Payable ....................................................................... Cash ......................................................................................

50,000

Stock Dividends ........................................................................... Stock Dividends Distributable ............................................. (120,000 x 10% x $10.50)

126,000

Stock Dividends Distributable..................................................... Common Shares ...................................................................

126,000

June 30

July

Sept. 15

Oct.

60,000

50,000

126,000

b) BROWN HOLDINGS LTD. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2024 Accumulated Other Preferred Common Retained Comprehensive Shares Shares Earnings Income Balance January 1 $100,000 $390,000 $485,000 $110,000 Stock dividends 126,000 (126,000) Cash dividends (110,000) Comprehensive income ________ __________ _350,000 __28,000 __ Balance, December 31 $100,000 $516,000 $599,000 $138,000 c) BROWN HOLDINGS LTD. Partial Balance Sheet December 31, 2024

Total $1,085,000 (110,000) ___378,000 $1,353,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Shareholders' Equity Share capital $5 preferred shares, cumulative, 1,000,000 authorized, 10,000 shares issued Common shares, unlimited number of shares authorized, 132,000 shares issued

$ 100,000 516,000 616,000 599,000 138,000 $1,353,000

Retained earnings Accumulated other comprehensive income Total shareholders' equity

Bloomcode: Synthesis Difficulty: Hard Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 13 On January 1, 2023, Accounting For You Professional Corporation had $2,000,000 of common shares that were issued at $10 and retained earnings of $1,000,000. The corporation issued 100,000 common shares at $13 per share on July 1. On August 1, 2023, the company declared a $0.50 cash dividend to be paid on August 31, 2023, to shareholders of record on August 15, 2023. On December 15, the board of directors declared a 10% stock dividend to shareholders of record on December 31, 2023, payable on January 15, 2024. The market value of Accounting For You Professional Corporation shares was $15 per share on December 15 and $14 per share on December 31. Profit for 2023 was $500,000. Instructions a) Journalize the entries related to the above transactions. b) Prepare the shareholders' equity section of the balance sheet at December 31, 2023. c) Calculate the dividend payout ratio for 2023. Solution 13 (15–20 min.) a) July 1 Cash ........................................................................................... Common Shares (100,000 × $13) ...................................... Aug.

Aug.

1,300,000 1,300,000

Cash Dividends—Common [(200,000 + 100,000) × $0.50] ........ Dividends Payable .............................................................

150,000

Dividends Payable ..................................................................... Cash ...................................................................................

150,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Dec.

Stock Dividends (30,000* × $15) ............................................... Stock Dividends Distributable ..........................................

450,000 450,000

*($2,000,000 ÷ $10) + 100,000 × 10% = 30,000 shares Jan.

Stock Dividends Distributable .................................................. Common Shares ................................................................

450,000 450,000

b) ACCOUNTING FOR YOU PROFESSIONAL CORPORATION Partial Balance Sheet December 31, 2023 Shareholders' equity Share capital Common shares, no par value, 300,000 shares issued ............... Common stock dividends distributable ..................................... Total share capital ............................................................... Retained earnings* ............................................................................. Total shareholders' equity ...................................................

$3,300,000 450,000 3,750,000 900,000 $4,650,000

*$1,000,000 + $500,000 – $150,000 – $450,000 = $900,000 c)

Payout ratio = Cash dividends ÷ Profit = $150,000 ÷ $500,000 = 30%

Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 14 On January 1, 2024, Only You Merchandise Ltd. had 5,000 common shares issued for a total of $7,500, and no other shares or contributed capital. During 2024, Only You had the following transactions: Jan. 15 Issued 1,500 common shares for $1.50 each. Mar. 31 Settled an account for legal fees by issuing 3,000 shares. The value of the legal services was $5,000. June 30 Reacquired 1,700 shares for $2.00 each. Round the per share cost to two decimal places. Sept. 30 Issued 10,000 shares in exchange for equipment with a fair value of $22,500.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Record the transactions. b) Calculate the number and average price of common shares issued at the end of 2024. Solution 14 (10 min.) a) Jan. 15 Cash (1,500 x $1.50) ................................................................... Common Shares ................................................................ Mar.

June 30

2,250 2,250

Legal Fees Expense ................................................................... Common Shares ................................................................

5,000

Common Shares (1,700 x $1.55) ............................................... Retained Earnings ($3,400 – $2,635)......................................... Cash (1,700 x $2.00) ...........................................................

2,635 765

5,000

3,400

Average cost of shares = $1.55 ($7,500 + $2,250 + $5,000) ÷ (5,000 + 1,500 + 3,000) Sept. 30

Equipment ................................................................................. Common Shares ................................................................

22,500 22,500

Number of shares = 5,000 + 1,500 + 3,000 – 1,700 + 10,000 = 17,800 Total cost = $7,500 + $2,250 + $5,000 – $2,635 + $22,500 = $34,615 Average cost = $34,615 ÷ 17,800 = $1.94

Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

Exercise 15 12345678 Ontario Ltd., which has authorized share capital of an unlimited number of common shares, and no other authorized classes of shares, had the following share transactions during 2024, its first year of operations: Jan. 2 Issued 30,000 common shares at $0.10 each. Jan. 15 Issued 50,000 common shares to Doug Chevy in exchange for rent valued at $5,000. Jan. 31 Issued 1,000,000 common shares to Justin Hair in exchange for merchandise inventory valued at $15,000, land valued at $30,000, and a building valued at $55,000. Mar. 31 Issued 60,000 to Brown Law Firm in exchange for legal services. It is assumed that the market price of 12345678 Ontario’s shares is unchanged since January 2. Dec. 1 Reacquired the shares held by Brown Law Firm for $0.25 per share.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Record the 2024 share transactions. Solution 15 (15 min.)

Jan. 2

Jan. 31

Mar. 31

Dec. 1

Value of shares

3,000

30,000

$ 3,000

5,000

50,000

5,000

100,000

1,000,000

100,000

6,000

60,000

6,000

(60,000)

(6,000)

1,080,000

$108,000

3,000

Cash Common Shares

Jan. 15

No. of shares

Rent Expense Common Shares

5,000

Merchandise Inventory Land Building Common Shares

15,000 30,000 55,000

Legal Fees Expense (60,000 x $0.10) Common Shares

6,000

Common Shares (60,000 x $0.10) Retained Earnings ($15,000 – $6,000) Cash (60,000 x $0.25)

6,000 9,000 15,000

Exercise 16 During its first year of operations, Millwood Enterprises Inc. had the following transactions related to its common shares: Jan. 5 Issued 5,000 common shares to Michelle Vogel for $1 each. Mar. 15 Issued 10,000 common shares in exchange for equipment transferred from Vogel. The equipment was valued at $40,000. Apr. 10 Issued 3,500 shares to a consulting firm for training services as settlement of a $14,000 invoice. Sept. 30 Issued 4,000 common shares to Renee Vogel for $5 each. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b)

Journalize the share transactions. Calculate the average per share amount of the common shares of Millwood at December 31, 2024. Round to two decimal places.

Solution 16 (10 min.) a) Jan. 5 Cash (5,000 x $1) ........................................................................ Common Shares (5,000 shares) ........................................ Mar.

Apr.

Sept. 30

5,000 5,000

Equipment ................................................................................. Common Shares (10,000 shares) ......................................

40,000

Training Expense ....................................................................... Common Shares (3,500 shares) ........................................

14,000

Cash (4,000 x $5) ........................................................................ Common Shares (4,000 shares) ........................................

20,000

40,000

14,000

20,000

Total shares issued = 5,000 + 10,000 + 3,500 + 4,000 = 22,500. Total cost = $5,000 + $40,000 + $14,000 + $20,000 = $79,000. Average per share = $79,000 ÷ 22,500 = $3.51.

Exercise 17 Gabrial Ltd. was incorporated on February 1, 2024, and is authorized to issue an unlimited number of preferred and common shares. The company entered into the following transactions during the year: Feb. 10 Issued 30,000 common shares for $2.30 per share. Feb. 21 Issued 4,000 common shares to the company’s accountants as payment for a bill of $18,000 for services performed in helping the company to incorporate. Mar. 16 Issued 1,000 preferred shares for $95 per share. Sept. 10 Reacquired 3,000 common shares for $1.75 per share. Instructions Prepare the journal entries to record the above transactions. Round the per share cost to two decimal places. Solution 17 (15 min.) Feb. 10 Cash ........................................................................................... Common Shares (30,000 × $2.30) .....................................

69,000 69,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Feb.

Mar.

Sept. 10

Accounting Fees Expense ......................................................... Common Shares ................................................................

18,000

Cash ........................................................................................... Preferred Shares (1,000 × $95) ..........................................

95,000

Common Shares (3,000 × $2.56*) ............................................. Contributed Surplus—Reacquisition of Shares ................ Cash (3,000 × $1.75) ...........................................................

7,680

18,000

95,000

2,430 5,250

*Average per share amount: $87,000  34,000 = $2.56 Transaction Date Feb. 10 Feb. 21 Total

Total Number of Common Shares Issued 30,000 4,000 34,000

Total Proceeds of Issue $69,000 18,000 $87,000

Exercise 18 Lake Ltd. was incorporated on July 1, 2023. The company is authorized to issue an unlimited number of preferred and common shares. The company entered into the following transactions during its fiscal year ended June 30, 2024: July 10 Issued 100,000 common shares for $12.50 per share. July 15 Issued 400,000 common shares for $13 per share. Sept. 30 Issued 30,000 common shares in return for a warehouse. The common shares were trading for $15.50 on the date the warehouse was acquired. The fair value of the warehouse on that date was $450,600. Mar. 16 Issued 1,000 preferred shares for $95 per share. May 10 Reacquired 65,000 common shares for $15 per share. Instructions Record the above transactions. Solution 18 (15 min.) July 10 Cash ........................................................................................... Common Shares ................................................................

1,250,000 1,250,000

Test Bank for Accounting Principles, Ninth Canadian Edition

(100,000 shares × $12.50) July

Sept. 30

Mar.

May

Cash ........................................................................................... Common Shares ................................................................ (400,000 shares × $13)

5,200,000

Building ..................................................................................... Common Shares ................................................................

450,600

Cash ........................................................................................... Preferred Shares ................................................................ (1,000 shares × $95)

95,000

Common Shares (65,000 × $13.02*).......................................... Retained Earnings ($975,000 – $846,300)................................. Cash (65,000 × $15) ............................................................

846,300 128,700

5,200,000

450,600

95,000

975,000

*Average per share amount: $6,900,600  530,000 = $13.02 Transaction Date July 10 July 15 Sept. 30 Total

Total Number of Common Shares Issued 100,000 400,000 30,000 530,000

Total Proceeds of Issue $1,250,000 5,200,000 450,600 $6,900,600

Exercise 19 Lee Holdings Ltd. was incorporated on January 2, 2024, and on that date issued 50,000 common shares for cash at $1 each. On April 30, Lee issued 1,000 preferred, $3 cumulative preferred shares, convertible to common shares at the rate of 6 common shares for one preferred share. The preferred shares were issued for $18 each. On October 15, 600 of the preferred shares were converted to common shares. On that date, the market value was $1.50 for the common shares and $17.50 for the preferred shares. On December 15, 10,000 common shares were reacquired for $0.90 each. Instructions a) Journalize the share transactions described. Round the per share cost to two decimal places.

Test Bank for Accounting Principles, Ninth Canadian Edition

Calculate the number of issued shares and average per share amount of each class remaining at the end of the year.

Solution 19 (15 min.) a) Jan. 2 Cash (50,000 x $1) ........................................................................ Common Shares ................................................................... Apr.

Oct.

Dec.

50,000 50,000

Cash (1,000 x $18) ........................................................................ Preferred Shares ..................................................................

18,000

Preferred Shares .......................................................................... Common Shares ................................................................... (600 x $18)

10,800

Common Shares (10,000 x $1.13*) .............................................. Cash (10,000 x $0.90)............................................................ Contributed Surplus—Reacquisition of Common Shares ..

11,300

18,000

10,800

9,000 2,300

*Average per share amount: ($50,000 + $10,800) ÷ (50,000 + [6 x 600]) = $1.13 b)

Average per share amount of common shares (calculated in part a)) = $1.13 Number of common shares issued = 50,000 + 3,600 – 10,000 = 43,600 Average per share amount of preferred shares = issue price = $18.00 Number of preferred shares issued = 1,000 – 600 = 400

Exercise 20 Sonoma Lakes Ltd. (SLL), incorporated on January 1, 2024, has the following authorized share capital: Unlimited Common voting shares 500,000 Class A, $5 cumulative preferred shares 500,000 Class B, $10 noncumulative preferred shares During 2024, SLL had the following share transactions for cash: Jan. 1 Issued 50,000 common shares for $100,000. Mar. 12 Issued 1,000 Class A preferred shares for $60,000. Apr. 30 Issued 20,000 common shares for $2.50 per share. June 20 Issued 3,000 Class B preferred shares for $70 per share.

Test Bank for Accounting Principles, Ninth Canadian Edition

July 2

Reacquired 10,000 common shares for $3 per share.

SLL did not declare any dividends during 2024. On December 31, 2025, a dividend of $3 per share was declared on preferred shares issued. Instructions a) Journalize the share transactions. Round the per share cost to two decimal places. b) Calculate the number of common shares issued at December 31, 2024, and the average per share amount of the common shares. Solution 20 (15 min.) a) Jan. 1 Cash ........................................................................................... Common Shares ................................................................ Mar.

Apr.

June 20

July

100,000 100,000

Cash ........................................................................................... Class A Preferred Shares ...................................................

60,000

Cash ........................................................................................... Common Shares ................................................................

50,000

Cash ........................................................................................... Class B Preferred Shares ...................................................

210,000

Common Shares (10,000 x $2.14*) ............................................ Retained earnings ..................................................................... Cash (10,000 x $3.00) .........................................................

21,400 8,600

60,000

50,000

210,000

30,000

*Average per share amount: ($100,000 + $50,000) ÷ (50,000 + 20,000) = $2.14 b) Average per share amount is ($100,000 + $50,000 – $21,400) ÷ (50,000 + 20,000 – 10,000) = $2.14 Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

Exercise 21 Moreland Holdings Inc. has authorized share capital of an unlimited number of common shares and 1,000,000 $3 cumulative preferred shares. At January 1, 2024, the balances in its share capital accounts were $45,000 in common shares representing 15,000 shares and $30,000 in preferred shares representing 1,000 shares. The company had a balance of $50,000 in contributed surplus from

Test Bank for Accounting Principles, Ninth Canadian Edition

previous years’ repurchases of common shares. The retained earnings balance on that date was $180,000 and accumulated other comprehensive income was $62,000. Profit for the year ended December 31, 2024, was $24,000 and other comprehensive income items for the year were $5,000. There were no dividends in arrears at January 1, 2024, and no dividends were declared during 2024. During 2024, Moreland had the following share transactions: Mar. 1 Issued 4,000 common shares for $5 each. June 30 Issued 500 preferred shares for $11 each. Sept. 1 Issued 60,000 common shares in exchange for land valued at $285,000. Dec. 1 Reacquired 50,000 common shares for $5.25 each. Instructions a) Journalize the share transactions. Round the per share cost to two decimal places. b) Prepare the equity section of Moreland’s balance sheet at December 31, 2024, and describe any additional disclosure required related to share capital. Solution 21 (25 min.) a) Mar. 1 Cash .............................................................................................. Common Shares ................................................................... June 30

Sept.

Dec.

20,000 20,000

Cash .............................................................................................. Preferred Shares ..................................................................

5,500

Land.............................................................................................. Common Shares ...................................................................

285,000

Common Shares (50,000 x $4.43*) .............................................. Contributed Surplus—Reacquisition of Common Shares .......... Cash (50,000 x $5.25)............................................................

221,500 41,000

5,500

285,000

262,500

*Average per share amount of common shares: Total cost $45,000 + $20,000 + $285,000 = $$350,000 Number of shares 15,000 + 4,000 + 60,000 = 79,000 Average = $350,000 ÷ 79,000 = $4.43 b) MORELAND HOLDINGS INC. Partial Balance Sheet December 31, 2024 Shareholders' equity Share capital $3 preferred shares, cumulative shares, 1,000,000 authorized, 1,500 shares issued ...................................... Common shares, unlimited number of shares, 29,000 issued ................

$ 35,500 128,500 164,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Contributed surplus on repurchase of common shares ................................. Total contributed capital ................................................................................. Retained earnings ($180,000 + $24,000) .......................................................... Accumulated other comprehensive income ($62,000 + $5,000) .................... Total shareholders' equity ...............................................................

9,000 173,000 204,000 67,000 $444,000

Note: Dividends of $3 per share on preferred shares at December 31, 2024, are in arrears. Bloomcode: Synthesis Difficulty: Hard Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 22 Appier Corporation had the information listed below available in preparing an income statement for the year ended December 31, 2024. All amounts are before income taxes. Assume a 30% income tax rate for all items. Sales .......................................................................................................... $950,000 Profit from operation of discontinued cement division ......................... 130,000 Loss from disposal of cement division .................................................... (90,000) Operating expenses .................................................................................. 215,000 Rent revenue............................................................................................. 85,000 Cost of goods sold .................................................................................... 250,000 Instructions Prepare a multiple-step income statement in good form. Solution 22 (17–22 min.) APPIER CORPORATION Income Statement Year Ended December 31, 2024 Sales.................................................................................................................. Cost of goods sold ............................................................................................ Gross profit ....................................................................................................... Operating expenses ......................................................................................... Profit from operations ..................................................................................... Other revenues Rent revenue............................................................................................. Profit before income taxes ............................................................................... Income taxes .................................................................................................... Profit from continuing operations ...................................................................

$950,000 250,000 700,000 215,000 485,000 85,000 570,000 171,000 399,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Discontinued operations Profit from operation of discontinued cement division, net of $39,000 income taxes ............................................................. Loss from disposal of cement division, net of $27,000 income tax saving........... .......................................... Profit for the year .............................................................................................

$91,000 63,000

28,000 $427,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

Exercise 23 For the year ended December 31, 2024, Bandy Corporation reported the following information: Cost of goods sold .................................................................................... $ 450,000 Income tax expense .................................................................................. 60,000 Operating expenses .................................................................................. 386,000 Sales .......................................................................................................... 1,048,000 Sales returns and allowances .................................................................. 28,000 Loss on fair value adjustment on equity investments ............................ 10,400 Instructions Prepare the statement of comprehensive income for the year ended December 31, 2024, starting with profit. The company records gains and losses on its equity investments as other comprehensive income and has a 25% income tax rate. Solution 23 (5 min.) BANDY CORPORATION Statement of Comprehensive Income Year Ended December 31, 2024 Profit for the year*............................................................................................ Other comprehensive income (loss) Loss on fair value adjustment on securities, net of $2,600 of income tax savings ............................................................... Comprehensive income ...................................................................................

$124,000

(7,800) $116,200

*Profit = $1,048,000 – $28,000 – $450,000 – $386,000 – $60,000 = $124,000 Bloomcode: Application Difficulty: Medium Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

Exercise 24 The following information is available from the accounting records of DeWitt Engineering Ltd. for the year ended June 30, 2024: Fee discounts and allowances ....................................................................... $ 26,000 Fee revenue ..................................................................................................... 1,560,000 Interest revenue .............................................................................................. 6,000 Other operating expenses .............................................................................. 590,000 Salaries expense ............................................................................................. 750,000 Gain on fair value adjustments on equity investments ................................. 31,000 Instructions Prepare a combined statement of income and comprehensive income for the year ended June 30, 2024. The company has a 30% income tax rate and records gains and losses on equity investments as other comprehensive income. Solution 24 (10 min.) DEWITT ENGINEERING LTD. Statement of Income and Comprehensive Income Year Ended June 30, 2024 Fee revenue ...................................................................................................... Fee discounts and allowances ......................................................................... Net fee revenue......................................................................................... Operating expenses Salaries expense ....................................................................................... Other operating expenses ........................................................................

$1,560,000 26,000 1,534,000

$750,000 590,000

1,340,000

Profit from operations ..................................................................................... Interest revenue ...............................................................................................

194,000 6,000

Profit before income tax .................................................................................. Income tax expense (30%) ...............................................................................

200,000 60,000

Profit for the year .............................................................................................

140,000

Other comprehensive income Gain on fair value adjustment on equity investments, net of $9,300 income tax expense ............................................................

21,700

Comprehensive income ...................................................................................

$ 161,700

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 25 Jasper Corporation is preparing its year-end financial statements and needs your assistance evaluating the following items: 1. When recording the current year depreciation expense, the controller noticed that depreciation expense recorded in the prior year did not consider the residual value in the calculation. 2. Management has decided to change the method used to depreciate the company’s equipment from double-declining balance to the straight-line method because of a change in the pattern of benefits received from the assets. 3. Management has changed the rate used to calculate the company’s estimated warranty liability. 4. After defending a legal dispute relating to its patent, the company reduced the patent’s amortization period. Instructions a) Analyze each of the four events described above and identify the type of accounting change that has occurred. b) Indicate whether each event should be accounted for retrospectively or prospectively. Solution 25 (12–15 min.) a) and b) Event 1: Since the prior-year depreciation calculation failed to use the residual value, the prior-year depreciation expense and accumulated depreciation is incorrect. This represents an accounting error that should be accounted for retrospectively and the error corrected. Event 2: This represents a change in accounting policy by changing depreciation methods from double-declining balance to straight-line. A change in accounting policy should be accounted for retrospectively. Event 3: The change in the estimated warranty liability rate represents a change in estimate. A change in accounting estimate should be accounted for prospectively. Event 4: The reduction in useful life of the patent is a change in accounting estimate. A change in accounting estimate should be accounted for prospectively. Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the different types of accounting changes and account for the correction

Test Bank for Accounting Principles, Ninth Canadian Edition

of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

Exercise 26 During 2024, the following independent events occurred at Sarajavo Corporation on the dates indicated: 1. Sales were understated by $145,000 for 2023. This error was discovered on March 20 after the 2023 accounts had been closed. 2. On March 31, 2024, Sarajavo Corporation discovered that depreciation expense on factory equipment for the year ended December 31, 2023, had been recorded twice, for a total amount of $60,000 instead of the correct amount of $30,000. 3. On June 30, 2024, Sarajavo Corporation discovered that its 2023 cost of goods sold was overstated by $14,500 as a result of the inventory count. Assume Sarajavo has a 20% income tax rate. Instructions Prepare any journal entries required as a result of the information provided. Solution 26 (8–12 min.) 1. Mar. 20 Accounts Receivable ............................................................ Income Tax Payable ..................................................... Retained Earnings ........................................................ To record error from understated sales in 2023. 2.

Mar. 31

June 30

145,000 29,000 116,000

Accumulated Depreciation—Equipment ............................ Income Tax Payable ($30,000 x 20%) .......................... Retained Earnings ($30,000 – $24,000) ........................ To adjust depreciation error in a prior period.

30,000

Inventory .............................................................................. Income Tax Payable ..................................................... Retained Earnings ........................................................ To correct error from 2023 cost of goods sold.

14,500

6,000 24,000

2,900 11,600

Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 27 The following information is taken from the trial balance of GlaxonSmith Supplies Ltd. at December 31, 2024, the company’s year end. GlaxonSmith has a 25% tax rate. One of the entries making up the balance of retained earnings is an adjustment that was required due to the overstatement of prior year’s depreciation expense by $1,600, which is net of income taxes. Cash dividends ......................................... $ 9,500 Common shares ....................................... 9,000 Cost of goods sold .................................... 65,000 Dividends payable .................................... 2,500 Interest revenue ....................................... 300 Operating expenses ................................. 34,200 Preferred shares ....................................... 10,000 Retained earnings, beginning balance .... 3,100 Sales revenue ........................................... 145,000 Instructions Prepare the income statement and statement of retained earnings for GlaxonSmith for the year ended December 31, 2024, using the multiple-step format for the income statement. Solution 27 (20 min.) GLAXONSMITH SUPPLIES LTD. Income Statement Year Ended December 31, 2024 Sales revenue ................................................................................................... Cost of goods sold ............................................................................................ Gross profit ....................................................................................................... Operating expenses ......................................................................................... Profit from operations ..................................................................................... Other revenue Interest revenue ....................................................................................... Profit before income taxes ............................................................................... Income tax expense ($46,100 x 25%) ............................................................... Profit for the year ............................................................................................. GLAXONSMITH SUPPLIES LTD. Statement of Retained Earnings Year Ended December 31, 2024 Balance, January 1, 2024, as previously reported .......................................... Add: Adjustment to correct prior-year overstatement of expenses............... Balance, January 1, 2024, as restated ............................................................. Add: Profit for the year ..................................................................................... Less: Cash dividends ........................................................................................ Balance, December 31, 2024 ............................................................................

$145,000 65,000 80,000 34,200 45,800 300 46,100 11,525 $ 34,575

$ 1,500 1,600 3,100 34,575 37,675 9,500 $28,175

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 28 The following information is available for Reynolds Corporation: Retained earnings, December 31, 2023 ................................................... $1,500,000 Profit for the year ended December 31, 2024 .......................................... 250,000 The company accountant, in preparing financial statements for the year ended December 31, 2024, has discovered the following information: The company's previous bookkeeper had recorded an excess of depreciation expense on a machine in 2022 and 2023 by using the double diminishing-balance method of depreciation. The bookkeeper neglected to use the straight-line method of depreciation, which is the company's policy. The cumulative effect of the error on prior years was $9,000. Depreciation was calculated by the straightline method in 2024. Reynolds’ average tax rate is 22%. During 2024, Reynolds declared and paid cash dividends of $80,000. Instructions a) Calculate the impact on retained earnings. b) Prepare the statement of retained earnings for 2024. Solution 28 (12–15 min.) a) Retained earnings [$9,000 × (100% – 22%)] = $7,020 increase b) REYNOLDS CORPORATION Statement of Retained Earnings Year Ended December 31, 2024 Balance January 1, as reported ...................................................................................... Correction for overstatement of depreciation in prior period, net of income tax savings of $1,980 .................................................................................. Balance, January 1, as adjusted ..................................................................................... Add: Profit for the year .................................................................................................... Less: Dividends ................................................................................................................ Balance, December 31 ....................................................................................................

$1,500,000 7,020 1,507,020 250,000 (80,000) $1,677,020

Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

Exercise 29 Hanley Corporation is preparing its year-end financial statements and needs your assistance evaluating the following items: 1. Management has decided to switch from the FIFO inventory cost flow assumption to the weighted average cost formula. 2. It was discovered during the year-end inventory count that the prior-year inventory balance reported on the balance sheet incorrectly excluded inventory received in the warehouse while the year-end count was being performed. 3. Management decided to reduce the remaining useful life of its specialized equipment from 6 years to 4 years to reflect new information that suggests the equipment will be outdated earlier than originally expected. 4. Hanley began bidding on long-term contracts for the first time in the company’s history. Management decided to use the percentage of completion method to account for these long-term contracts. Instructions a) Analyze each of the four events described above and identify the type of accounting change that has occurred. b) Indicate whether each event above should be accounted for retrospectively or prospectively. Solution 29 (12–15 min.) a) and b) Event 1: This represents a change in accounting policy by changing inventory cost flow assumptions from FIFO to weighted average. A change in accounting policy should be accounted for retrospectively. Event 2: Since the prior-year inventory was incorrectly reported, this represents an accounting error that should be accounted for retrospectively and the error corrected through retained earnings. Event 3: The reduction in useful life of the specialized equipment represents a change in accounting estimate. A change in accounting estimate should be accounted for prospectively. Event 4: This situation represents the initiation of a new accounting policy. Therefore, no accounting change has occurred. The new policy will be adopted and applied prospectively. Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 30 The following accounts appear in the ledger of Pelham Inc. after the books are closed at December 31, 2024: Common shares, 750,000 shares authorized, 600,000 shares issued ................................ $ 600,000 Stock dividends distributable .............................................................................................. 120,000 $6 preferred shares, 15,000 shares authorized, 4,500 shares issued ................................. 450,000 Retained earnings ................................................................................................................ 1,200,000 Instructions Prepare the shareholders' equity section of the balance sheet at December 31, 2024. Solution 30 (15–20 min.) PELHAM INC. Balance Sheet (Partial) December 31, 2024 Shareholders' equity Share capital $6 preferred shares, 15,000 shares authorized, 4,500 shares issued ................................................................... Common shares, 750,000 shares authorized, 600,000 shares issued ............................................................... Stock dividends distributable .......................................................... Total share capital .................................................................... Retained earnings..................................................................................... Total shareholders' equity ........................................................

$ 450,000 $600,000 120,000

720,000 1,170,000 1,200,000 $2,370,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 31 On January 1, 2024, Chu Corporation had retained earnings of $422,000. During the year, Chu had the following selected transactions: 1. Declared cash dividends of $100,000. 2. Suffered a loss of $70,000. 3. Corrected understatement of 2023 profit because of an inventory error of $45,000. The company has a 30% income tax rate. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare a statement of retained earnings for the year. Solution 31 (15 min.) CHU CORPORATION Statement of Retained Earnings Year Ended December 31, 2024 Balance, January 1, as reported .......................................................................................... Correction for understatement of 2023 profit (inventory error), net of income tax expense of $13,500.......................................................................... Balance, January 1, as adjusted .......................................................................................... Less: Loss for the year .......................................................................................................... Less: Cash dividends ............................................................................................................ Balance, December 31 .........................................................................................................

$422,000 31,500 453,500 (70,000) 383,500 (100,000) $283,500

Exercise 32 Connolly Corporation had the following events during one fiscal year: 1. A stock dividend is declared on common shares. 2. The stock dividend is distributed. 3. Other comprehensive income for the year totals $350,000. 4. Cash dividends are declared. 5. The cash dividends are paid. 6. Profit for the year is $1,500,000. 7. Prior year’s profit had to be corrected to record additional revenue that had been earned, but has not yet been paid for by the customer. The additional revenue increases the amount of taxes payable on the prior year’s income. 8. Repurchased common shares for an amount less than their average cost. 9. One-third of the preferred shares are converted to common shares on a 1:10 ratio. Instructions Using the table provided, for each of the following financial statement categories, indicate the effect of the transaction as follows: The category is increased ............................................. + The category is decreased ............................................ – There is no effect on the category .............................. NE 1.

Test Bank for Accounting Principles, Ninth Canadian Edition

Current assets Current liabilities Common shares Preferred shares Other contributed capital Retained earnings Accumulated other comprehensive income Total shareholders’ equity Solution 32 (10 min.)

Current assets Current liabilities Common shares Preferred shares Other contributed capital Retained earnings Accumulated other comprehensive income Total shareholders’ equity

1. NE NE NE NE + –

2. NE NE + NE – NE

3. NE NE NE NE NE NE

4. NE + NE NE NE –

5. – – NE NE NE NE

6. NE NE NE NE NE +

7. + + NE NE NE +

8. – NE – NE + NE

9. NE NE + – NE NE

–

Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic Exercise 33 On January 1, 2024, Grieve Grocers Inc.’s retained earnings account had a deficit balance of $75,000. During the year ended December 31, 2024, the company’s second year of operations, Grieve had the following events that occurred in the sequence listed: 1. Declared and distributed a 10% stock dividend on common shares. Prior to the dividend, Grieve had 60,000 common shares issued for a total cost of $160,000, and the market value of the shares was $6.50 each. 2. Approved a two-for-one stock split. 3. Declared a cash dividend in the amount of $1 per share, which is payable 15 days after the company’s year end. 4. Profit for the year before taxes was $712,000. 5. Corrected the calculation of the prior year’s cost of goods sold, which had been reported as

Test Bank for Accounting Principles, Ninth Canadian Edition

$875,000 but which should have been $900,000, and adjusted the resulting tax savings. Incurred an other comprehensive loss of $174,500 (before income taxes).

Instructions Prepare Grieve’s statement of changes in shareholders’ equity for the year ended December 31, 2024, assuming that Grieve has an income tax rate of 25%. Solution 33 (10 min.) GRIEVE GROCERS INC. Statement of Changes in Shareholders’ Equity Year Ended December 31, 2024 Accumulated Retained Common Other Earnings Shares Comprehensive (Deficit) Income Balance, January 1, as previously $160,000 $(75,000) $ 0 reported Correction of prior period error __________ _(18,750) ____________ Balance, January 1, as adjusted 160,000 (93,750) Stock dividends (1) 39,000 (39,000) Cash dividends (2) (132,000) Comprehensive income __________ _534,000 (130,875) Balance, December 31 $199,000 $269,250 $(130,875)

Total

$ 85,000 (18,750) 66,250 (132,000) _403,125 $337,375

(1) 60,000 x 10% x $6.50 = $39,000 (2) [60,000 + (60,000 x 10%)] x 2 x $1 = $132,000 Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 34 At January 1, 2024, Stevenson Inc. had the following shares authorized and issued: Jan. 1 Common shares issued ....................................................................... 40,000 Common shares authorized ................................................................ Unlimited Jan. 1 Preferred shares issued ....................................................................... 1,000 $9 cumulative preferred shares authorized ....................................... 100,000 During 2024, Stevenson had the following share transactions: Feb. 1 Issued 5,000 preferred shares. Apr. 1 Issued 20,000 common shares. Aug. 1 Issued 18,000 common shares.

Test Bank for Accounting Principles, Ninth Canadian Edition

Dec. 1 Issued 6,000 common shares. On December 31, Stevenson declared a $9 per share dividend on all issued preferred shares. Stevenson’s 2024 profit was $435,000. Instructions a) Calculate the weighted average number of common shares in 2024. b) Calculate the profit available to common shareholders for 2024. c) Calculate the 2024 earnings per share. Solution 34 (20 min.) a) Date Actual Number Jan. 1 40,000 Apr. 1 20,000 Aug. 1 18,000 Dec. 1 6,000 84,000

Fraction 12/12 9/12 5/12 1/12

Weighted Average 40,000 15,000 7,500 500 63,000

Income available to common shareholders = $435,000 – ($9 x [1,000 + 5,000]) = $381,000.

EPS = $381,000 ÷ 63,000 = $6.05

Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 35 Bella Company had profit of $1,560,000 for the year ended December 31, 2024. At the beginning of the year, there were 400,000 common shares authorized, and 52,000 shares issued. In addition, during 2024, the company declared a dividend of $8.50 per share on its 10,000 preferred shares and issued 60,000 common shares on October 1. Instructions Calculate earnings per share for the year ended December 31, 2024. Round to two decimal places. Solution 35 (5 min.) Weighted average number of shares: Date Actual Number Jan. 1 52,000 Oct. 1 60,000 112,000

Fraction 12/12 3/12

Weighted Average 52,000 15,000 67,000

Test Bank for Accounting Principles, Ninth Canadian Edition

EPS =

Profit – preferred dividends $1,560,000 – $85,000 ________________________________ = —————————— = $22.01 per share. Common shares issued 67,000

Exercise 36 The market price of Holly Inc.’s common shares was $75 per share as quoted in today’s The Globe and Mail. Earnings per share were $5. Instructions Calculate the price-earnings ratio for Holly. If the price-earnings ratio is high, what can the ratio mean? Solution 36 (5 min.) Price earnings ratio = $75 ÷ $5 = 15 The price-earnings ratio tells us that Holly’s shares are trading at 15 times earnings. A high PE ratio can be one indication that the market believes the company has future growth potential. Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Exercise 37 At January 1, 2024, Morrisey Corporation had the following share capital. At that time no preferred dividends were in arrears: $2 preferred shares, cumulative, 500,000 shares authorized, 1,000 shares issued ....................................................... $650,000 Common shares, 1,000,000 shares authorized, 10,000 shares issued ......................................................................... 250,000 $900,000 On July 1, 2024, the board of directors declared and paid a $1.50 cash dividend on common shares, and the full annual dividend to which the preferred shareholders were entitled. On October 1, 2024, Morrisey sold an additional 80,000 common shares for proceeds of $280,000. The corporation earned

Test Bank for Accounting Principles, Ninth Canadian Edition

$65,000 during the year. Instructions a) Calculate Morrisey’s earnings per share for 2024. Round to two decimal places b) Calculate Morrisey’s dividend payout ratio for 2024. Round to one decimal place. Solution 37 (10 min.) a) ($65,000 – [$2 x 1,000]) ÷ 30,0001 = $2.10 b) 1

($1.50 x 10,000) ÷ [$65,000 – ($2 x 1,000)] = 23.8%

Weighted Average Number of Shares Date Actual Number Jan. 1 10,000 Oct. 1 80,000 90,000

Fraction 12/12 3/12

Weighted Average 10,000 20,000 30,000

Exercise 38 Groom Corporation had profit of $415,000 for the year ended December 31, 2024. On January 1, 2024, there were 90,000 common shares issued. Preferred dividends of $70,000 were declared and paid during 2024. Instructions Calculate the earnings per share for Groom Corporation for the year ended December 31, 2024. Round to two decimal places. Solution 38 (9–13 min.) Income available for common shareholders: $415,000 – $70,000 = $345,000 $345,000 ÷ 90,000 shares = $3.83 per share. Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 39 At December 31, 2024, Sookie Limited has $500,000 of $4, cumulative preferred shares issued at $100 per share and $3,000,000 of common shares issued at $10 per share. Sookie's profit for the year is $960,000. Instructions Calculate earnings per share for 2024 under the following independent situations. (Round to two decimals.) a) The dividend to preferred shareholders was declared, and there has been no change in the number of common shares during the year. b) The dividend to preferred shareholders was not declared. The preferred shares are cumulative. Solution 39 (9–12 min.) a) ($960,000 – $20,000*) ÷ 300,000 = $3.13 * $500,000 / $100 per share x $4/share = $20,000 b)

($960,000 – $20,000) ÷ 300,000 = $3.13 (Dividends on preferred shares that are cumulative must be deducted in the numerator, even if not declared.)

Exercise 40 At July 1, 2023, Peters Corporation had the following share capital: $2 preferred shares, cumulative*, 200,000 shares authorized, 50,000 shares issued ......................................................................... Common shares, 1,000,000 shares authorized, 100,000 shares issued.........................................................................................................

$ 800,000 2,500,000 $3,300,000

*The preferred dividends are 2 years in arrears. On January 1, 2024, the board of directors declared and paid a 15% stock dividend when the market price of common shares was $23.50. On April 1, 2024, the company sold an additional 1,000,000 common shares for proceeds of $5,680,000. The corporation earned $722,000 during the year and declared and paid a total of $186,000 in dividends. Instructions a) Calculate Peters Corporation’s earnings per share for the year ended June 30, 2024. Round to two decimal places.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) c)

Calculate Peters Corporation’s earnings per share for the year ended June 30, 2024, assuming there were no preferred dividends in arrears. Round to two decimal places. Calculate Peters Corporation’s earnings per share for the year ended June 30, 2024, assuming the preferred dividends are noncumulative and $50,000 cash dividends were declared and paid to the preferred shareholders during the year. Round to two decimal places.

Solution 40 (15–20 min.) a) ($722,000 – $100,000) ÷ 357,5001 = $1.74 The deduction from profit for cumulative preferred dividends is based on the current year dividend only—it is not affected by dividends in arrears. b)

($722,000 – $100,000) ÷ 357,5001 = $1.74

($722,000 – $50,000) ÷ 357,5001 = $1.88 When the preferred share dividends are noncumulative, the reduction in profit is limited to the amount of preferred share dividends actually declared during the year.

Weighted Average Number of Shares July 1 – Dec. 31 100,000 × 6/12 = Jan. 1 – Mar. 31 115,000 × 3/12 = Apr. 1 – June 30 1,115,000 × 3/12 = 1

50,000 28,750 278,750 357,500

Exercise 41 Ahab Fisheries Inc. has authorized share capital of an unlimited number of common shares and 300,000 $2 cumulative preferred shares. At January 1, 2024, 50,000 common shares had been issued at an average cost of $4 each. During 2024, 10,000 common shares were issued on April 1 for cash of $45,000 and on July 1, 20,000 were issued at $4.75 each. On December 15, a cash dividend of $0.50 per share on all common shares was declared, payable to shareholders of record on December 31, and payable on January 20, 2025. On January 1, 2024, the first preferred shares were issued and $600,000 was received for 80,000 preferred shares. On October 1, the annual dividends on the preferred shares were declared, payable to shareholders of record on October 15, and payable on October 28. Retained earnings on January 1, 2024, were $336,000 and accumulated other comprehensive income was $57,000. Ahab had profit of $323,000 in 2024, and other comprehensive income items totalling

Test Bank for Accounting Principles, Ninth Canadian Edition

$37,500. All dividends were paid on their due dates. On December 31, 2024, Ahab’s common shares were trading at $76.50. Instructions a) Calculate the profit available to common shareholders. b) Calculate the weighted average number of common shares in 2024. c) Calculate the earnings per share. Round to two decimal places. d) Calculate the price-earnings ratio at December 31, 2024. Round to one decimal place. Solution 41 (10 min.) a) Profit for the year...................................................................................... Less preferred dividends ($2 x 80,000) ....................................................

Weighted average number of shares 50,000 x 12/12 ........................................................................................... 10,000 x 9/12 ............................................................................................. 20,000 x 6/12 .............................................................................................

$323,000 (160,000) $163,000

50,000 7,500 10,000 67,500

EPS = Income available to common shareholders ÷ Weighted average number of shares EPS = $163,000 ÷ 67,500 = $2.41

Price-earnings ratio = Market price ÷ EPS $76.50 ÷ $2.41 = 31.7

Exercise 42 The following information is available for a fictitious Canadian public corporation: 2023 2024 Profit for the year $475,000 $500,000 Other comprehensive income (loss) $25,000 $(18,000) Preferred dividends declared (total) $50,000 $150,000 Common share dividends paid (per share) $0.65 $0.66 Weighted average number of common shares 163,000 171,000 Market price per common share $19.30 $18.63

2025 $612,000 $17,000 $150,000 $0.70 150,000 $22.10

Instructions For each of the three years, calculate the earnings per share, the price earnings ratio, and the dividend

Test Bank for Accounting Principles, Ninth Canadian Edition

payout ratio. Round to two decimal places. Solution 42 (15 min.) 2023

2024

2025

$475,000 50,000 $425,000

$500,000 150,000 $350,000

$612,000 150,000 $462,000

163,000 $2.61

171,000 $2.05

150,000 $3.08

Price-earnings ratio Market price EPS PE ratio

$19.30 $2.61 7.39

$18.63 $2.05 9.09

$22.10 $3.08 7.18

Dividend payout ratio Dividend per share EPS Payout ratio

$0.65 $2.61 24.90%

$0.66 $2.05 32.20%

$0.70 $3.08 22.73%

Earnings per share Profit for the year Preferred dividends Earnings available to common shareholders Weighted average common shares EPS

Test Bank for Accounting Principles, Ninth Canadian Edition

Comprehensive Income. The statement is required for companies reporting under IFRS.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. The most common type of dividend is a stock dividend. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

2. A stock dividend makes no difference to overall share capital of the company. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

3. A stock split will increase share capital. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

4. The effects of a stock split and a stock dividend are the same on the cash position of the company. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

5. A stock split will increase the number of shares of a company as will a stock dividend. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

6. At the declaration date, the stock dividend account is increased by the fair market value of the shares to be issued. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

7. A stock split will usually result in an increase in the market value of a share. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

8. In a 2-for-1 stock split, two old shares are exchanged for one new share. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

9. Only common shares are able to be split. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

10. A stock dividend will reduce retained earnings. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

11. A stock dividend is a distribution of another company’s shares to shareholders. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

12. Similar to cash dividends payable, stock dividends distributable represents an obligation to deliver company assets and should therefore be considered a liability. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

13. When a company reacquires its own shares at a price that is lower than the average issue price, there will be a loss on the reacquisition. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

14. When a company reacquires shares at a loss and there is no balance in contributed surplus, then there will be a debit to Retained Earnings for the amount of the loss. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

15. The acquisition of a corporation’s own shares increases total assets and shareholders’ equity. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

16. The reacquisition of common shares for a price lower than the average per share amount will result in a credit to “gain on the purchase of common shares.” Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

17. When shares are reacquired at a price below average per share amount, Retained Earnings will be debited. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

18. When shares are reacquired at a price above the average per share amount, the excess paid would be debited to Retained Earnings if the debit amount is greater than the balance in contributed Surplus. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

19. All companies following IFRS must report comprehensive income. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

20. Discontinued operations use the intraperiod tax allocation method. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

21. When an operation is discontinued, the disposal is reported in two parts; the profit (loss. from present operations and the profit (loss) from past operations. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

22. In reporting discontinued operations, the amounts on the income statement are shown net of tax. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

23. Under IFRS, a company has two options of reporting comprehensive income; an all-inclusive format or in a separate statement. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

24. Accumulated other comprehensive income is reported in the income statement under other income. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

25. Comprehensive income includes all changes in shareholders’ equity during a period with the exception of changes from the sale or repurchase of shares or the payment of dividends.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

26. Gains or losses, which bypass profit but affect shareholders’ equity, will be reported in the category of other comprehensive income. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

27. Continuing operations include components of an entity that have been disposed of by sale, abandonment, or spinoff, or are classified as assets held for sale. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

28. Retained earnings are always shown in before-tax amounts, NOT net of tax amounts. Answer: False Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

29. Prior period adjustments should be made for a change in accounting policy by the company. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

30. A correction of a prior period error would lead to restatement of the opening balance of retained earnings. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

31. Correction of errors would always result in a decrease in Retained Earnings. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

32. The correction of a prior period error would only affect the account in which the error has occurred. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

33. The change in 2011 from Canadian GAAP to either IFRS or ASPE required a retroactive change in a company’s financial statements. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

34. If a company starts using a new accounting method because of a change in circumstances. it is considered a change in accounting policy under IFRS. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

35. The statement of changes in shareholders’ equity discloses changes in total shareholders’ equity for the period including changes in each shareholders’ equity account.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

36. Common Stock Dividends Distributable is shown within the Share Capital subdivision of the statement of changes in shareholders' equity. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

37. Companies reporting under IFRS are required to prepare a statement of retained earnings. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

38. Earnings per share is only done for common shares. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

39. When calculating earnings per share, the amount of dividends payable to the common shareholders must be deducted from the profit of the company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

40. The price-earnings ratio is calculated as the EPS divided by the market price per share. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

41. The payout ratio would be important to shareholders whose goal in owning shares is growth in the market price of the share. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

42. The payout ratio is the cash dividends divided by the profit, expressed as a percentage. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

43. A constant payout ratio is more anticipated in a company with stable earnings. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

44. Annual preferred share dividends are always subtracted from profit in calculating earnings per share if they have a cumulative feature. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 45. Common Stock Dividends Distributable is classified as a) an asset account. b) a shareholders' equity account. c) an expense account. d) a liability account. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

46. The effect of a stock dividend is to a) decrease total assets and shareholders' equity. b) change the composition of shareholders' equity. c) decrease total assets and total liabilities. d) increase total shareholders’ equity. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

47. If a corporation declares a 10% stock dividend on its common shares, the account to be debited on the date of declaration is a) Common Stock Dividends Distributable. b) Common Shares. c) Cash. d) Stock Dividends (Retained Earnings). Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

48. Which one of the following events would NOT require a formal journal entry on a corporation's books? a) 2-for-1 stock split b) 100% stock dividend c) 2% stock dividend d) $1 per share cash dividend Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

49. Stock dividends and stock splits have the following effects on retained earnings: Stock Splits Stock Dividends a) increase no change b) no change decrease c) decrease decrease d) no change no change Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

50. Which of the following statements is correct?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) Stock dividends and stock splits both increase total shareholders’ equity. b) Stock dividends increase total shareholders’ equity. c) Stock splits increase total shareholders’ equity. d) Neither stock splits nor stock dividends affect total shareholders’ equity. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

51. What would be the effect of a stock dividend on the accounts of the company? a) an increase in current liabilities upon declaration b) an increase in retained earnings upon declaration c) a decrease in retained earnings upon declaration d) an increase in shareholders’ equity upon declaration Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

52. What would be the effect of a stock split on the accounts of the company? a) an increase in current liabilities upon declaration b) an increase in share capital upon declaration c) a decrease in retained earnings upon declaration d) an increase in the number of shares issued upon declaration Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

53. Which is the main difference between a stock split and a stock dividend? a) A stock dividend increases the number of shares issued. b) A stock dividend requires no cash outlay on the part of the company. c) A stock dividend reduces the amount of retained earnings in a company. d) A stock dividend makes no change in the amount of authorized shares of a company. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

54. At January 1, 2024, Eddy Corporation had the following share capital: $2 preferred shares, noncumulative, 500,000 shares authorized, 1,000 shares issued Common shares, 1,000,000 shares authorized, 10,000 shares issued

$650,000

250,000 $900,000 On February 16, 2024, the board of directors declared and paid a 10% common stock dividend. On July 31, 2024, the board declared a 3-for-1 stock split on the common shares. On its December 31, 2024, financial statements, Eddy Corporation will report how many common shares issued? a) 10,000 b) 11,000 c) 30,000 d) 33,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

55. The board of directors generally assigns a per share value to a stock dividend declared that is a) greater than the book value. b) at the discretion of the board of directors. c) equal to the issue price of the original share. d) equal to the fair market value per share. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

56. Corporations generally issue stock dividends in order to a) increase the market price per share. b) exceed shareholders’ dividend expectations. c) increase the marketability of the shares. d) decrease the amount of share capital in the corporation. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

57. A shareholder who receives a stock dividend would a) expect the market price per share to increase. b) own more shares. c) expect retained earnings to increase. d) expect the overall value of their shares to change. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

58. When stock dividends are distributed, a) Common Stock Dividends Distributable is decreased. b) Retained Earnings is decreased. c) Cash is decreased. d) No entry is necessary if it is a large stock dividend. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

59. At January 1, 2024, Ross Corporation had the following shareholders’ equity: Share capital $1 preferred shares, noncumulative, 25,000 shares authorized, 8,000 shares issued Common shares, 1,000,000 shares authorized, 50,000 shares issued

$160,000

750,000 910,000 Retained earnings 425,000 Total shareholders’ equity $1,335,000 On March 12, 2024, when the common shares had a market value of $18, the board of directors declared and paid a 10% common stock dividend. On July 31, 2024, the board declared a 2-for-1 stock split on the common shares. During the year, the company paid cash dividends of $80,000 and reported profit of $435,000. At its December 31 year end, the balance in share capital is a) $910,000. b) $1,000,000. c) $1,800,000. d) $2,000,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

60. At January 1, 2024, Bergeron Corporation had the following shareholders’ equity: Share capital $1 preferred shares, noncumulative, 25,000 shares authorized, 8,000 shares issued $160,000 Common shares, 1,000,000 shares authorized, 50,000 shares issued 750,000 910,000 Retained earnings 425,000 Total shareholders’ equity $1,335,000 On March 12, 2024, when the common shares had a market value of $18, the board of directors declared and paid a 10% common stock dividend. On July 31, 2024, the board declared a 2-for-1 stock split on the common shares. During the year, the company paid cash dividends of $80,000 and reported profit of $435,000. The number of common shares issued at December 31, 2024, is a) 55,000. b) 2,000,000. c) 100,000. d) 110,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

61. Hamilton Limited has 1,000 common shares issued at $100 that are currently trading at $200 per share. The entry to record the declaration of a 10% stock dividend is a) debit Common Stock Dividends Distributable $100,000, credit Retained Earnings $100,000. b) debit Retained Earnings $100,000, credit Cash $100,000. c) debit Stock Dividends $20,000, credit Common Stock Dividends Distributable $20,000. d) debit Common Stock Dividends Distributable $20,000, credit Common Shares $20,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their

Test Bank for Accounting Principles, Ninth Canadian Edition

financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

62. Identify the effect the declaration of a stock dividend has on total share capital, retained earnings, and shareholders’ equity. Total Share Capital Retained Earnings Shareholders’ Equity a) increase decrease decrease b) no effect increase increase c) decrease decrease no effect d) increase decrease no effect Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

63. Which of the following shows the proper effect of a stock split and a stock dividend? Item Stock Split Stock Dividend a) total share capital no change increase b) total retained earnings decrease decrease c) total shareholders’ equity no change increase d) total assets increase decrease Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

64. A stock split a) will increase the number of shares. b) will increase total contributed capital.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) will increase the total value of the shares. d) will have no effect on the value per share. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

65. Which of the following is a characteristic of neither a stock split nor a stock dividend? a) Cash flow is reduced. b) The number of shares issued increases. c) There is no change in shareholders’ equity. d) There is no change in the authorized share capital of the company. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

66. Bosh Inc. had 200,000 common shares before a stock split occurred and 400,000 shares after the stock split. The stock split was a) 2-for-4. b) 4-for-1. c) 1-for-4. d) 2-for-1. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

67. A stock dividend results in a) a decrease in shareholders’ equity. b) an increase in share capital. c) a decrease in assets. d) an increase in retained earnings. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

68. Assume that on June 30, Meschino Corporation declares a 10% stock dividend on its 100,000 common shares, to be distributed on August 5 to shareholders of record on July 20. Assume the fair value of its shares on June 30 is $15 per share and $16 on August 5. Which of the following is the correct entry to record the declaration of the stock dividend? a) Cash Dividends ............................................................................................. 160,000 Cash ........................................................................................................ 160,000 b) Stock Dividends ........................................................................................... 150,000 Dividends Payable.................................................................................. 150,000 c) Cash Dividends ............................................................................................. 160,000 Stock Dividends Distributable ............................................................... 160,000 d) Stock Dividends ........................................................................................... 150,000 Stock Dividends Distributable ............................................................... 150,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

69. Assume that on June 30, Meschino Corporation declares a 10% stock dividend on its 100,000 common shares, to be distributed on August 5 to shareholders of record on July 20. Assume the fair

Test Bank for Accounting Principles, Ninth Canadian Edition

value of its shares on June 30 is $15 per share and $16 on August 5. Which of the following is the correct entry to record the distribution of the stock dividend? a) Stock Dividends Distributable ..................................................................... 150,000 Common Shares..................................................................................... 150,000 b) Dividends Payable........................................................................................ 160,000 Common Shares..................................................................................... 160,000 c) Stock Dividends Distributable ..................................................................... 150,000 Cash ........................................................................................................ 150,000 d) Stock Dividends Distributable ..................................................................... 160,000 Stock Dividends ..................................................................................... 160,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

70. Assume that on June 30, Meschino Corporation declares a 10% stock dividend on its 100,000 common shares, to be distributed on August 5 to shareholders of record on July 20. Assume the fair value of its shares on June 30 is $15 per share and $16 on August 5. How much will total shareholders’ equity change on August 5? a) increase of $150,000 b) increase of $160,000 c) decrease of $150,000 d) no change Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

71. How does a stock dividend differ from a stock split? a) Stock dividends decrease share capital while stock splits increase share capital. b) Stock splits decrease share capital while stock dividends decrease retained earnings.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Stock dividends decrease retained earnings while stock splits do not affect any of the shareholders’ equity accounts. d) Stock splits do not affect the number of shares issued. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits CPA: Financial Reporting AACSB: Analytic

72. Lord Corporation reported having 50,000 common shares issued for a total share capital of $200,000 on its December 31, 2023, balance sheet. On February 15, 2024, it reacquired 8,000 of these shares. This is the first time Lord has reacquired any of its shares. Which of the following would be the correct entry to record the reacquisition of the shares assuming the company paid $28,000? a) Common Shares ........................................................................................... 32,000 Cash ........................................................................................................ 32,000 b) Contributed Surplus .................................................................................... 4,000 Cash.............................................................................................................. 28,000 Common Shares..................................................................................... 32,000 c) Cash .............................................................................................................. 28,000 Common Shares..................................................................................... 28,000 d) Common Shares ........................................................................................... 32,000 Contributed Surplus .............................................................................. 4,000 Cash ........................................................................................................ 28,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

73. Lord Corporation reported having 50,000 common shares issued for a total share capital of $200,000 on its December 31, 2023, balance sheet. On February 15, 2024, it reacquired 8,000 of these shares. This is the first time Lord has reacquired any of its shares. Which of the following would be the correct entry to record the reacquisition of the shares assuming the company paid $36,000? a) Common Shares ........................................................................................... 36,000 Cash ........................................................................................................ 36,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Contributed Surplus .................................................................................... Common Shares ........................................................................................... Cash ........................................................................................................ c) Common Shares ........................................................................................... Retained Earnings ........................................................................................ Cash ........................................................................................................ d) Common Shares ........................................................................................... Contributed Surplus .............................................................................. Cash ........................................................................................................

32,000 4,000 36,000 32,000 4,000 36,000 40,000

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

74. Mulberry Corp. reacquired 10,000 of its common shares at a market price of $2.50 per share. The average per share amount of the shares is $1.25. The entry to record the reacquisition would include a a) credit to Common Shares for $25,000. b) debit to Loss on Repurchase of Common Shares for $12,500. c) debit to Common Shares for $12,500. d) credit to Retained Earnings for $25,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

75. Mulberry Corp. reacquired 10,000 of its common shares at a market price of $1.50 per share. The average per share amount of the shares is $1.80. The entry to record the reacquisition would include a a) credit to Contributed Surplus for $3,000. b) debit to Loss on Repurchase of Common Shares for $3,000. c) credit to Common Shares for $15,000. d) debit to Retained Earnings for $18,000.

4,000 36,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

76. Mulberry Corp. reacquired 10,000 of its common shares at a market price of $2.50 per share. The average per share amount of the shares is $2.50. The entry to record the reacquisition would include a) a credit to Common Shares for $25,000. b) a debit to Common Shares for $25,000. c) a debit to Cash for $25,000. d) no entry. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

77. When a company repurchases its shares but does NOT retire them, these shares are said to be a) authorized and outstanding. b) authorized but unissued. c) redeemable. d) authorized and issued. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

78. The following information is available regarding a corporation’s common shares: authorized 30,000 shares; issued 10,000 at $100,000 and 15,000 at $175,000. The average per share amount of the

Test Bank for Accounting Principles, Ninth Canadian Edition

corporation’s shares is a) $10. b) $11. c) $11.67. d) $13.75. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

79. A company may reacquire its own shares for all of the following reasons, except a) to increase trading in the company’s shares in hopes of enhancing its market value. b) to reduce the number of shares issued, thereby increasing earnings per share. c) to hold the shares as a long-term investment. d) to have additional shares available for use in the acquisition of other companies. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

80. The entry to record the reacquisition of common shares at a cost higher than the average issue cost requires a a) debit to Common Shares. b) debit to Loss on Repurchase of Common Shares. c) credit to Common Shares. d) credit to Retained Earnings. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

81. The entry to record the reacquisition of common shares at a cost lower than the average issue cost requires a a) credit to Contributed Surplus—Reacquisition of Common Shares. b) credit to Contributed Capital. c) credit to Common Shares. d) credit to Retained Earnings. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

82. Ulrich Corporation has the following shareholders’ equity on December 31, 2024: Shareholders' equity Share capital $10 convertible preferred shares, 10,000 shares authorized, 5,000 shares issued $ 570,000 Common shares, 200,000 shares authorized, 90,000 shares issued 1,800,000 Total share capital 2,370,000 Retained earnings 450,000 Total shareholders’ equity $2,820,000 The average per common share amount is a) $9. b) $20. c) $11.40. d) $5.70. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

83. Armstrong Corporation has the following shareholders’ equity on December 31, 2024: Shareholders' equity Share capital $10 convertible preferred shares, 10,000 shares authorized, 5,000 shares issued $ 570,000 Common shares, 200,000 shares authorized, 90,000 shares issued 1,800,000 Total share capital 2,370,000 Retained earnings 450,000 Total shareholders’ equity $2,820,000 If 10,000 common shares were reacquired for $24 per share, the journal entry to record the transaction would a) credit Contributed Surplus—Reacquisition of Shares for $40,000. b) credit Retained Earnings for $40,000. c) credit Common Shares for $240,000. d) debit Common Shares for $200,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

84. Bruce Corporation has the following shareholders’ equity on December 31, 2024: Shareholders' equity Share capital $10 convertible preferred shares, 10,000 shares authorized, 5,000 shares issued $ 570,000 Common shares, 200,000 shares authorized, 90,000 shares issued 1,800,000 Total share capital 2,370,000 Retained earnings 450,000 Total shareholders’ equity $2,820,000 If 10,000 common shares were reacquired for $17 per share, the journal entry to record the transaction would a) credit Contributed Surplus for $30,000. b) debit Retained Earnings for $30,000. c) credit Common Shares for $170,000. d) debit Common Shares for $170,000. Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

85. Gold-digger Inc. has a total of 100,000 common shares issued and outstanding with a balance in its Common Shares account of $450,000. On February 8, Gold-digger reacquired 15,000 of its common shares at a market price of $4.25 per share. To record this reacquisition, Gold-digger would debit the Common Shares account for a) $67,500. b) $65,000. c) $63,750. d) $60,200. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of Shares CPA: Financial Reporting AACSB: Analytic

86. When the disposal of a significant business component occurs, the income statement should report the profit (or loss) from this event as a) other revenue or expense. b) cost of goods sold. c) discontinued operations, before tax. d) discontinued operations, net of tax. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

87. Which of the following statements apply to discontinued operations?

Test Bank for Accounting Principles, Ninth Canadian Edition

The operations and cash flows have been (or will be) eliminated from the ongoing operations of the company as a result of the disposal transaction. 2. The company must report the profit (loss) and gain (loss) on discontinued operations net of the applicable taxes. 3. Assets (net of any related liabilities) that are held for sale as discontinued operations are valued and reported on the balance sheet at the lower of their carrying amount and fair value (less any anticipated costs of selling). a) 1 and 2 b) 1 and 3 c) 2 and 3 d) 1, 2, and 3 Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

88. The general concept of “let the tax follow the profit or loss” is associated with a) revenue recognition criteria. b) Intraperiod tax allocation. c) the Canada Pension Plan. d) taxation of partnership income. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

89. All of the following are included in comprehensive income, except a) profit reported on the traditional income statement. b) income tax expense. c) dividends paid. d) gains and losses on equity investments.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

90. Under IFRS, which of the following is NOT a choice for the statement of comprehensive income? a) The company may use an all-inclusive format. b) Items may be reported on a before tax basis. c) The company may use a separate statement. d) Items must be reported on a net of tax basis. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

91. A prior period adjustment that corrects profit of a prior period requires that an entry be made to a) an income statement account. b) a current year revenue or expense account. c) the Retained Earnings account. d) an asset account Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

92. Comprehensive income includes

Test Bank for Accounting Principles, Ninth Canadian Edition

a) profit. b) gains and losses that bypass profit but affect shareholders’ equity. c) both a) and b) d) dividends paid to preferred shareholders. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

93. Under IFRS, the following account is included in the shareholders’ equity section of the balance sheet: a) Other Comprehensive Income. b) Accumulated Other Comprehensive Income. c) Contributed Comprehensive Income. d) Retained Comprehensive Income. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

94. Which of the following describes how comprehensive income should be reported? a) May be reported in a separate statement, as part of a complete set of financial statements. b) Should not be reported in the financial statements but should only be disclosed in the footnotes. c) May be reported in a separate statement, in a combined statement of earnings and comprehensive income, or within a statement of shareholders' equity. d) May be reported in a combined statement of earnings and comprehensive income or disclosed within a statement of shareholders' equity; separate statements of comprehensive income are not permitted. Answer: a Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

95. Big Money Inc. has sold its distribution division in the current year. Big Money has a $120,000 loss from operation of the distribution division and a gain on sale of the division’s assets of $40,000. Assuming Big Money has a tax rate of 30%, the results from discontinued operations reported on Big Money’s income statement is a a) loss of $44,000. b) loss of $56,000. c) loss of $80,000. d) loss of $84,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

96. Pia Ltd. reports comprehensive income in a single statement of comprehensive income. In 2024, the company reported profit before income tax of $600,000; a pre-tax loss on discontinued operations of $112,500; a pre-tax gain on the disposal of the assets from the discontinued operations of $45,000; and other comprehensive income from a holding gain on an investment asset of $21,000 before tax. The company has a 25% income tax rate. How much is the profit from continuing operations? a) $600,000 b) $399,375 c) $415,125 d) $450,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

97. Pia Ltd. reports comprehensive income in a single statement of comprehensive income. In 2024, the company reported profit before income tax of $600,000; a pre-tax loss on discontinued operations of $112,500; a pre-tax gain on the disposal of the assets from the discontinued operations of $45,000; and other comprehensive income from a holding gain on an investment asset of $21,000 before tax. The company has a 25% income tax rate. How much should be reported for discontinued operations? a) loss of $84,375 b) net loss of $50,625 c) gain of $33,750 d) net gain of $50,625 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

98. Pia Ltd. reports comprehensive income in a single statement of comprehensive income. In 2024, the company reported profit before income tax of $600,000; a pre-tax loss on discontinued operations of $112,500; a pre-tax gain on the disposal of the assets from the discontinued operations of $45,000; and other comprehensive income from a holding gain on an investment asset of $21,000 before tax. The company has a 25% income tax rate. How much is the profit for the company? a) $450,000 b) $382,500 c) $399,375 d) $403,500 Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

99. Pia Ltd. reports comprehensive income in a single statement of comprehensive income. In 2024, the company reported profit before income tax of $600,000; a pre-tax loss on discontinued operations of $112,500; a pre-tax gain on the disposal of the assets from the discontinued operations of $45,000; and other comprehensive income from a holding gain on an investment asset of $21,000 before tax. The company has a 25% income tax rate. How much should be reported as other comprehensive income? a) $15,750 b) $415,125 c) $21,000 d) $46,500 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

100. Pia Ltd. reports comprehensive income in a single statement of comprehensive income. In 2024, the company reported profit before income tax of $600,000; a pre-tax loss on discontinued operations of $112,500; a pre-tax gain on the disposal of the assets from the discontinued operations of $45,000; and other comprehensive income from a holding gain on an investment asset of $21,000 before tax. The company has a 25% income tax rate. How much should be reported as comprehensive income? a) $600,000 b) $399,375 c) $415,125 d) $450,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income CPA: Financial Reporting AACSB: Analytic

101. Tasos Corporation reported retained earnings of $7,695,000 at December 31, 2023. In 2024, the company earned $3 million of profit and declared and paid a $412,500 cash dividend. On March 7,

Test Bank for Accounting Principles, Ninth Canadian Edition

2024, Tasos found an error made in 2023 when it purchased land: the $412,500 cost of the land was debited to Legal Expense in error. Tasos’ income tax rate is 30%. How much should Tasos report on the statement of retained earnings as the adjusted retained earnings balance, January 1, 2024? a) $8,107,500 b) $7,983,750 c) $7,406,250 d) $7,695,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

102. Tasos Corporation reported retained earnings of $7,695,000 at December 31, 2023. In 2024, the company earned $3 million of profit and declared and paid a $412,500 cash dividend. On March 7, 2024, Tasos found an error made in 2023 when it purchased land: the $412,500 cost of the land was debited to Legal Expense in error. Tasos’ income tax rate is 30%. How much should Tasos report on the statement of retained earnings as the retained earnings balance, December 31, 2024? a) $10,983,750 b) $10,571,250 c) $10,695,000 d) $10,282,500 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

103. Tasos Corporation reported retained earnings of $7,695,000 at December 31, 2023. In 2024, the company earned $3 million of profit and declared and paid a $412,500 cash dividend. On March 7, 2024, Tasos found an error made in 2023 when it purchased land: the $412,500 cost of the land was debited to Legal Expense in error. Tasos’ income tax rate is 30%. Which of the following would be recorded to correct for the error made in 2023? a) credit to Land for $288,750

Test Bank for Accounting Principles, Ninth Canadian Edition

b) debit to Land for $412,500 c) debit to Land for $288,750 d) credit to Land for $412,500 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

104. Tasos Corporation reported retained earnings of $7,695,000 at December 31, 2023. In 2024, the company earned $3 million of profit and declared and paid a $412,500 cash dividend. On March 7, 2024, Tasos found an error made in 2023 when it purchased land: the $412,500 cost of the land was debited to Legal Expense in error. Tasos’ income tax rate is 30%. Which of the following would be recorded to correct for the error made in 2023? a) credit to Income Tax Payable for $288,750 b) debit to Income Tax Payable for $123,750 c) debit to Income Tax Payable for $288,750 d) credit to Income Tax Payable for $123,750 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

105. Tasos Corporation reported retained earnings of $7,695,000 at December 31, 2023. In 2024, the company earned $3 million of profit and declared and paid a $412,500 cash dividend. On March 7, 2024, Tasos found an error made in 2023 when it purchased land: the $412,500 cost of the land was debited to Legal Expense in error. Tasos’ income tax rate is 30%. Which of the following would be recorded to correct for the error made in 2023? a) debit to Retained Earnings for $288,750 b) credit to Retained Earnings for $536,250 c) credit to Retained Earnings for $288,750 d) debit to Retained Earnings for $536,250

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

106. Which of the following statements concerning a change in accounting policy is true? a) If a change in accounting policy is adopted retroactively, the company needs to restate closing retained earnings. b) If a change in accounting policy is adopted retroactively, the company needs to restate opening retained earnings. c) If a change in accounting policy is adopted prospectively, the company needs to restate closing retained earnings. d) If a change in accounting policy is adopted prospectively, the company needs to restate opening retained earnings. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

107. Prior period adjustments are reported a) in the notes to the current year's financial statements. b) on the current year's balance sheet. c) on the current year's income statement. d) on the current year's statement of retained earnings. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

108. A prior period adjustment for understatement of profit a) will be credited to the Retained Earnings account. b) will be debited to the Retained Earnings account. c) will show as a gain on the current year's income statement. d) will show as an asset on the current year's balance sheet. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

109. All of the following should occur as a result of a prior period adjustment, except a) the cumulative effect of the correction or change should be reported as an adjustment to opening retained earnings. b) all prior period financial statements should be corrected or restated. c) the effects of the change should be detailed and disclosed in a note to the financial statements. d) the unadjusted balance of retained earnings should be presented on the balance sheet. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

110. All of the following statements about changes in accounting policy are correct, except that they a) are sometimes required because of a change in accounting standards. b) do not result in changes to prior periods. c) are allowed if it results in the financial statements providing more relevant and reliable information. d) are implemented retroactively. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

111. The correction of a prior period error in which the cost of goods sold was understated would require which of the following? a) debit to Cost of Goods Sold b) credit to Cost of Goods Sold c) debit to Retained Earnings d) credit to Retained Earnings Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

112. When a change in accounting policy occurs, a) nothing should be done. b) the new policy should be used in reporting the results of operations of the current year, and the cumulative income effect net of tax should be reflected on the statement of retained earnings as an adjustment to the opening balance. c) the cumulative effect of the change in policy should be reflected on the income statement as at the beginning of the next year. d) the cumulative effect of the change in accounting policy should be classified as an extraordinary item on the income statement. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

113. The change to IFRS or to ASPE would have the following effect on the financial statements of the company: a) all financial statements would have to retroactively apply the new standards. b) all financial statements would have to proactively apply the new standards. c) the financial statements would remain the same, and the change would be explained in the notes to the financial statements. d) as this would be a change in circumstances, this change would be applied to present and future periods. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

114. Which of the following is NOT considered a type of accounting change? a) change in accounting policy b) correction of prior period error c) initiation of a new accounting policy d) change in accounting estimate Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes CPA: Financial Reporting AACSB: Analytic

115. Which of the following is considered a change in accounting policy? a) change in an asset’s useful life b) change in allowance for doubtful accounts c) change in inventory cost flow method d) change in an asset’s residual value Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

116. All of the following are normally found in a corporation’s shareholders’ equity section, except a) dividends in arrears. b) common shares. c) share capital. d) retained earnings. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

117. What is the total shareholder’s equity based on the following account balances? Common Shares................................................................ $600,000 Stock Dividends Distributable .......................................... 40,000 Retained Earnings ............................................................. 190,000 Preferred Shares ............................................................... 20,000 a) $620,000 b) $850,000 c) $770,000 d) $790,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

118. In the statement of changes in shareholders' equity, a) Stock Dividends Distributable will be classified as a contra account to Retained Earnings. b) Stock Dividends Distributable will appear in its own subsection of shareholders' equity. c) Preferred Shares and Common Shares appear under the subsection Share Capital. d) Dividends in Arrears will appear as a restriction of Retained Earnings. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

119. Companies following ASPE are required to prepare all of the following statements, except a) an income statement. b) a cash flow statement. c) a statement of changes in shareholders’ equity. d) a statement of retained earnings. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

120. Which of the following transactions would NOT be included in the statement of changes in shareholders’ equity? a) declaration of a stock dividend b) reacquisition of shares at a loss c) shares issued for cash d) gain on discontinued operations Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

121. The impact of a stock split on shareholders’ equity accounts is that a) the number of shares issued increases but there is no effect on equity account balances. b) Retained Earnings is decreased. c) Stock Dividends Distributable is decreased and Common Shares is increased. d) Retained Earnings is decreased and Stock Dividends Distributable is increased. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

122. On January 1, 2024, Canal Bridge Corporation had Common shares, unlimited number authorized, 750,000 issued for $1,500,000, Retained earnings of $600,000, and Accumulated other comprehensive income of $150,000. During the year ended December 31, 2024, the company issued 150,000 common shares for $450,000 cash, declared dividends of $75,000, and reported profit of $540,000 and a holding loss after tax on investment assets of $37,500 as other comprehensive income. How much should the company report on their statement of changes in shareholders’ equity for common shares? a) $1,500,000 b) $1,950,000 c) $1,200,000 d) $1,050,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

123. On January 1, 2024, Canal Bridge Corporation had Common shares, unlimited number authorized, 750,000 issued for $1,500,000, Retained earnings of $600,000, and Accumulated other comprehensive income of $150,000. During the year ended December 31, 2024, the company issued 150,000 common shares for $450,000 cash, declared dividends of $75,000, and reported profit of $540,000 and a holding loss after tax on investment assets of $37,500 as other comprehensive income.

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How much should the company report on their statement of changes in shareholders’ equity for retained earnings? a) $600,000 b) $1,065,000 c) $1,027,500 d) $1,140,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

124. On January 1, 2024, Canal Bridge Corporation had Common shares, unlimited number authorized, 750,000 issued for $1,500,000, Retained earnings of $600,000, and Accumulated other comprehensive income of $150,000. During the year ended December 31, 2024, the company issued 150,000 common shares for $450,000 cash, declared dividends of $75,000, and reported profit of $540,000 and a holding loss after tax on investment assets of $37,500 as other comprehensive income. How much should the company report on their statement of changes in shareholders’ equity for accumulated other comprehensive income? a) $150,000 b) $37,500 c) $187,500 d) $112,500 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

125. On January 1, 2024, Canal Bridge Corporation had Common shares, unlimited number authorized, 750,000 issued for $1,500,000, Retained earnings of $600,000, and Accumulated other comprehensive income of $150,000. During the year ended December 31, 2024, the company issued 150,000 common shares for $450,000 cash, declared dividends of $75,000, and reported profit of $540,000 and a holding loss after tax on investment assets of $37,500 as other comprehensive income. How much should the company report for total shareholders’ equity? a) $3,127,500

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b) $2,977,000 c) $3,015,000 d) $3,277,500 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

126. On January 1, 2024, Canal Bridge Corporation had Common shares, unlimited number authorized, 750,000 issued for $1,500,000, Retained earnings of $600,000, and Accumulated other comprehensive income of $150,000. During the year ended December 31, 2024, the company issued 150,000 common shares for $450,000 cash, declared dividends of $75,000, and reported profit of $540,000 and a holding loss after tax on investment assets of $37,500 as other comprehensive income. How much should the company report on their statement of changes in shareholders’ equity for total comprehensive income? a) $540,000 b) $577,500 c) $502,500 d) $112,500 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

127. Johnstone Limited, a publicly traded company, reported profit of $374,625 on its October 31 year-end income statement. The shareholders’ equity section of its balance sheet reported 4,500, $2 noncumulative preferred shares and 75,000 common shares. At the beginning of the fiscal year, 60,000 common shares had been issued, 22,500 more were issued on March 1, and 7,500 were repurchased on August 1. The preferred dividend was declared and paid during the year. The market price per share on October 31 was $60. How much is Johnstone’s earnings per share? a) $5.12 b) $5.00 c) $5.06 d) $4.88

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

128. Johnstone Limited, a publicly traded company, reported profit of $374,625 on its October 31 year-end income statement. The shareholders’ equity section of its balance sheet reported 4,500, $2 noncumulative preferred shares and 75,000 common shares. At the beginning of the fiscal year, 60,000 common shares had been issued, 22,500 more were issued on March 1, and 7,500 were repurchased on August 1. The preferred dividend was declared and paid during the year. The market price per share on October 31 was $60. How much is Johnstone’s price-earnings ratio? a) 0.1 b) 5.0 c) 60.0 d) 12.0 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

129. Johnstone Limited, a publicly traded company, reported profit of $374,625 on its October 31 year-end income statement. The shareholders’ equity section of its balance sheet reported 4,500, $2 noncumulative preferred shares and 75,000 common shares. At the beginning of the fiscal year, 60,000 common shares had been issued, 22,500 more were issued on March 1, and 7,500 were repurchased on August 1. The preferred dividend was declared and paid during the year. The market price per share on October 31 was $60. What is Johnstone’s weighted average number of common shares at October 31? a) 75,000 b) 82,500 c) 60,000 d) 73,125 Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

130. Which of the following is FALSE regarding the payout ratio? a) The payout ratio tells you what percentage of equity the company is distributing to its shareholders. b) The payout ratio is used to assess a company’s dividend-paying policy. c) The payout ratio is calculated by dividing cash dividends by profit. d) The payout ratio can also be expressed on a per-share basis. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

131. Earnings per share is normally only reported using a) preferred shares. b) retained earnings. c) common shares. d) dividends payable. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

132. At January 1, 2024, Queen Corporation had the following share capital: $2 preferred shares, noncumulative, 500,000 shares authorized, 15,000 shares issued Common shares, 1,000,000 shares authorized, 10,000 shares issued

$650,000 250,000

Test Bank for Accounting Principles, Ninth Canadian Edition

$900,000 On October 1, 2024, the company sold an additional 20,000 common shares for proceeds of $280,000. The corporation earned $150,000 during the year and declared $30,000 in dividends to preferred shareholders. For the purpose of calculating the earnings per share, the company’s weighted average number of common shares is a) 30,000. b) 17,500. c) 5,000. d) 15,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

133. At January 1, 2024, King Corporation had the following share capital: $2 preferred shares, noncumulative, 500,000 shares authorized, 15,000 shares issued Common shares, 1,000,000 shares authorized, 10,000 shares issued

$650,000

250,000 $900,000 On October 1, 2024, the company sold an additional 20,000 common shares for proceeds of $280,000. The corporation earned $150,000 during the year and declared $30,000 in dividends to preferred shareholders. Earnings per share for 2024 is a) $8.00. b) $10.00. c) $6.00. d) $5.00. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

134. At January 1, 2024, Pond Corporation had the following share capital: $2 preferred shares, noncumulative,

Test Bank for Accounting Principles, Ninth Canadian Edition

500,000 shares authorized, 15,000 shares issued Common shares, 1,000,000 shares authorized, 10,000 shares issued

$650,000

250,000 $900,000 On October 1, 2024, the company sold an additional 20,000 common shares for proceeds of $280,000. The corporation earned $150,000 during the year. Assuming no dividends were declared or paid in 2024 to either preferred or common shareholders, earnings per share for 2024 would be a) $8.00. b) $6.00. c) $7.50. d) $10.00. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

135. Maserati Ltd. had 250,000 common shares issued at January 1. The company issued 50,000 shares on June 1, issued 20,000 shares on September 30, and reacquired 30,000 shares on December 1. The weighted average number of shares for the year would be a) 281,667. b) 290,000. c) 268,330. d) 257,500. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

136. To calculate the weighted average number of common shares, any new shares issued during the year are a) treated as if they were outstanding the entire year. b) ignored and added to the opening balance of next year’s calculation. c) adjusted for the fraction of the year they are outstanding. d) subtracted from the number of common shares issued at the beginning of the year.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

137. Basic earnings per share and fully diluted earnings per share are calculated for a corporation a) with a complex capital structure. b) that has both preferred shares and common shares issued. c) that has cumulative preferred dividends in arrears. d) that has a disposal of a segment of the business and an extraordinary item reported on its income statement. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

138. To calculate earnings per share, preferred dividends declared a) should be subtracted from profit. b) should be added to profit. c) have no impact on the earnings per share calculation. d) must be added to the number of common shares issued. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

139. Blandon Corporation has 100,000 common shares and 10,000, $1 preferred shares currently issued. During the year, the company paid and declared a 10% stock dividend when the market price

Test Bank for Accounting Principles, Ninth Canadian Edition

of the common shares was $7.75. As well, the company paid the preferred dividend and paid $80,000 in cash to the common shareholders. If Blandon earned $360,000 during the year, its payout ratio is a) 22.9%. b) 46.5%. c) 22.2%. d) 32.0%. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

140. The ratio that indicates the percentage of earnings the company is distributing to shareholders is the a) price earnings ratio. b) earnings per share. c) debt to total assets ratio. d) payout ratio. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

141. Chan Inc. has a profit of $1,000,000 for 2024, and there are 400,000 common shares issued. Dividends declared and paid during the year amounted to $200,000 on the preferred shares and $300,000 on the common shares. The earnings per share for 2024 is a) $2.50. b) $0.75. c) $2.00. d) $1.25. Answer: c Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

142. The PE ratio tells us a) whether assets are liquid. b) whether debts are too high. c) the impact of inflation. d) whether the shares are a good investment in terms of earnings. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 143. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.

Change in accounting estimate Treasury shares Comprehensive income Change in accounting policy Payout ratio EPS

G. H. I. J. K. L.

Discontinued operations Weighted average number of shares Stock dividend Stock split Prior period adjustment Statement of changes in shareholders’ equity

____ 1.

A component of an enterprise that has been disposed of or is reclassified as “held for sale”

____ 2.

Any shares purchased or issued during the year are weighted by the fraction of the year they are outstanding

____ 3.

The increase or decrease of shares by a specified proportion

____ 4.

A corporation reacquires its own shares but does not retire or cancel them.

____ 5.

A pro rata distribution of the corporation's own shares to shareholders

____ 6.

All increases and decreases to shareholders’ equity except for those from share and dividend transactions

____ 7.

A change in estimates used because new information is available that indicates a change

____ 8.

The correction of an error in previously issued financial statements

____ 9.

The use of a policy in the current year that is different from the one used in the preceding year

Test Bank for Accounting Principles, Ninth Canadian Edition

____ 10.

Shows all of the changes in contributed capital, retained earnings, and accumulated other comprehensive income

____ 11.

A ratio that indicates the profit earned by each common share

____ 12.

This ratio indicates how much profit is paid out in the form of cash dividends.

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 1.

10. L 11. F 12. E Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for stock dividends and stock splits, and compare their financial impact. Section Reference: Stock Dividends and Stock Splits Learning Objective: Explain how to account for the reacquisition of shares. Section Reference: Reacquisition of shares Learning Objective: Prepare an income statement showing continuing and discontinued operations, and prepare a statement of comprehensive income. Section Reference: Comprehensive Income Learning Objective: Explain the different types of accounting changes and account for the correction of a prior period error. Section Reference: Accounting Changes Learning Objective: Prepare a statement of changes in shareholders’ equity. Section Reference: Reporting Changes in Shareholders’ Equity Learning Objective: Explain earnings and dividend performance and calculate performance ratios. Section Reference: Analyzing Shareholders’ Equity CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 15 NON-CURRENT LIABILITIES CHAPTER STUDY OBJECTIVES 1. Describe the characteristics of bonds. Debt offers the following advantages over equity: (1) shareholder control is not affected, (2) income tax savings result, (3) earnings per share may be higher, and (4) return on equity may be higher. Bonds are a common form of long-term debt issued by entities. Bonds have many different features and may be secured, unsecured, convertible, and callable. The terms of the bond are set forth in the bond indenture, and a bond certificate provides the specific information about the bond itself.

2. Calculate the price of a bond. Because interest rates fluctuate, the market price of a bond may vary. Bond pricing is determined using time value of money concepts. To calculate the price of a bond, it is necessary to calculate the present value of the following two cash flows associated with the bond: (1) the present value of the interest payments over the life of the bond and (2) the present value of the principal to be repaid. This calculation may be done using either present value tables or a financial calculator.

3. Account for bond transactions. When bonds are issued, the Bonds Payable account is credited for the bonds’ market value (present value). Bonds are issued at a discount if the market interest rate is higher than the contractual interest rate. Bonds are issued at a premium if the market interest rate is lower than the contractual interest rate. Bond discounts and bond premiums are amortized to interest expense over the life of the bond using the effective-interest method of amortization. Amortization of the bond discount or premium is the difference between the interest paid and the interest expense. Interest paid is calculated by multiplying the face value of the bonds by the contractual interest rate. Interest expense is calculated by multiplying the carrying amount of the bonds at the beginning of the interest period by the market interest rate. The amortization of a bond discount increases interest expense. The amortization of a bond premium decreases interest expense.

4. Account for the retirement of bonds. When bonds are retired at maturity, Bonds Payable is debited and Cash is credited. There is no gain or loss at retirement. When bonds are redeemed before maturity, it is necessary to (1) pay and record any unrecorded interest, (2) eliminate the carrying amount of the bonds at the redemption date, (3) record the cash paid, and (4) recognize any gain or loss on redemption.

Test Bank for Accounting Principles, Ninth Canadian Edition

5. Account for instalment notes payable. Instalment notes payable are repayable in a series of instalments. Each payment consists of (1) interest on the unpaid balance of the note, and (2) a reduction of the principal balance. These payments can be either (1) fixed principal plus interest payments or (2) blended principal and interest payments. With fixed principal payments, the reduction in principal is constant but the cash payment and interest decrease each period (as the principal decreases). With blended payments, the cash payment is constant but the interest decreases and the principal reduction increases each period.

6. Account for leases. For IFRS or a capital lease under ASPE, the lessee records the asset and the related obligation at the present value of the future lease payments on the balance sheet. The income statement reflects both the interest expense and depreciation expense. For an operating lease under ASPE, lease (or rental) payments are recorded as an expense by the lessee (renter).

7. Explain and illustrate the methods for the presentation and analysis of non-current liabilities. The current portion of debt is the amount of the principal that must be paid within one year of the balance sheet date. This amount is reported as a current liability in the balance sheet, and the remaining portion of the principal is reported as a non-current liability. The nature of each liability should be described in the notes accompanying the financial statements. A company’s long-term solvency may be analyzed by calculating two ratios. Debt to total assets indicates the proportion of company assets that is financed by debt. Interest coverage measures a company’s ability to meet its interest payments as they come due.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 The following list contains bond terms and terminology: Bond terms: a. premium b. face value c. discount d. mortgage bond e. market interest rate f. debentures g. sinking fund bond 1. A ______ is an example of a secured bond. 2. Unsecured bonds are also known as ______. 3. The ______ is the rate investors demand for lending funds. 4. The ______ is the amount of principal the issuing company must pay at the maturity date. 5. A bond secured by specific assets set aside to retire the bonds is called a ______. Instructions Match the bond terms to the correct terminology. Solution 1 (5 min.) 1. A mortgage bond is an example of a secured bond. 2. Unsecured bonds are also known as debentures. 3. The market interest rate is the rate investors’ demand for lending funds. 4. The face value is the amount of principal the issuing company must pay at the maturity date. 5. A bond secured by specific assets set aside to retire the bonds is called a sinking fund bond. Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

Exercise 2 On June 30, 2024, Gorgeous Inc. sold $1,200,000 (face value) of bonds. The bonds are dated June 30,

Test Bank for Accounting Principles, Ninth Canadian Edition

2024, pay interest semi-annually on December 31 and June 30, and will mature on June 30, 2027. The following schedule was prepared by the accountant for 2024: Semi-annual Interest to Interest Unamortized Carrying Interest Period

be Paid

Expense

Amortization

Dec. 31, 2024

$36,000

$45,484

$9,484

Amount $62,906 53,422

Amount of Bond $1,137,094 1,146,578

Instructions On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.) a) What is the contractual rate of interest for this bond issue? Round to one decimal place. b) What is the market rate of interest for this bond issue? Round to one decimal place. c) What was the selling price of the bonds as a percentage of the face value? Round to two decimal places. d) Prepare the journal entry to record the sale of the bond issue on June 30, 2024. e) Prepare the journal entry to record the payment of interest and amortization on December 31, 2024. Solution 2 (12–17 min.) a) $36,000 ÷ $1,200,000 x 2 =.03 × 2 = 6.0% b)

$45,484 ÷ $1,137,094 x 2 =.04 × 2 = 8.0%

$1,137,094 ÷ $1,200,000 =.9476. The bonds were sold at 94.76

June 30, 2024 Cash........................................................................................................... Bonds Payable ..................................................................................

December 31, 2024 Interest Expense ....................................................................................... Bonds Payable .................................................................................. Cash ...................................................................................................

1,137,094 1,137,094

45,484 9,484 36,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 3 On September 1, 2024, Bear Corporation issued $1,000,000, 6%, 10-year bonds. Interest is payable annually with the first payment due on September 1, 2025. Instructions a) For each of the following market rate assumptions, identify whether Bear would issue the bonds at face value, at a discount, or at a premium: (1) 5%, (2) 6%, and (3) 7%. b) Provide the appropriate journal entry on September 1, 2024, to record the issuance of the bonds if the market rate of interest is 7%. Round your answer to the nearest dollar. c) Assuming Bear has a December 31 year end, prepare the year-end adjusting entry to account for accrued interest on the bonds. Round your answer to the nearest dollar. Solution 3 (10 min.) a) (1) Market rate of interest of 5% is lower than the contractual rate = Premium (2) Market rate of interest of 6% is equal to the contractual rate = Face value (3) Market rate of interest of 7% is higher than the contractual rate = Discount b)

Sep. 1

Cash......................................................................................... Bonds Payable ................................................................

929,764 929,764

Calculation with PV tables: 1) PV of the maturity value = $1,000,000 x 0.50835 = .... $508,350 2) PV of annuity payments = $1,000,000 x 0.06 x 7.02358 =

421,415 $929,765

Calculation using calculator: 10N; 7I; –60,000PMT; –1,000,000FV; PV = $929,764 c)

Dec. 31

21,694 21,694

Exercise 4 On September 1, 2024, Imperial Corporation issued $1,000,000, 6%, 10-year bonds. Interest is payable

Test Bank for Accounting Principles, Ninth Canadian Edition

annually with the first payment due on September 1, 2025. Instructions a) Provide the appropriate journal entry on September 1, 2024, to record the issuance of the bonds if the market rate of interest is 5%. Round your answer to the nearest dollar. b) Assuming Imperial has a December 31 year end, prepare the 2024 year-end adjusting entry to account for accrued interest on the bonds. Round your answer to the nearest dollar. c) Prepare a partial balance sheet at December 31, 2024, for Imperial Corporation displaying all amounts related to the bonds. d) Prepare the journal entry on September 1, 2025, to record the first interest payment. Round your answer to the nearest dollar. e) Assume the bonds were redeemed for $1,050,000 at September 30, 2027, when the carrying amount was $1,035,000. Record the redemption of the bonds. Solution 4 (20 min.) 2024 a) Sep. 1 Cash......................................................................................... Bonds Payable ................................................................

1,077,217 1,077,217

Calculation with PV tables: 1) PV of the maturity value = $1,000,000 x 0.61391 = ..... $613,910 2) PV of annuity payments = $1,000,000 x 0.06 x 7.72173 =

463,304 $1,077,214

Calculation using calculation: 10N; 5I; –60,000PMT; –1,000,000FV; PV = $1,077,217 b)

Dec. 31

17,954 17,954

c) IMPERIAL CORPORATION Balance Sheet (partial) December 31, 2024 Current liabilities Interest payable ........................................................................................ $

17,954

Non-current liabilities Bonds payable .......................................................................................... $1,077,217 2025 d) Sep. 1

Interest Expense ..................................................................... Interest Payable ...................................................................... Bonds Payable ........................................................................ Cash .................................................................................

35,907 17,954 6,139 60,000

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Interest expense = $1,077,217 x 5% x 8 / 12 = $35,907 2027 e) Sep. 1

Bonds Payable ........................................................................ Loss on Bond Redemption ..................................................... Cash .................................................................................

1,035,000 15,000 1,050,000

Bloomcode: Application Difficulty: Medium Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 5 On September 1, 2024, Guss Corporation issued $1,000,000, 6%, 10-year bonds. Interest is payable annually with the first payment due on September 1, 2025. Instructions Prepare the appropriate journal entry to record the bond issuance on September 1, 2024, under each of the following market rate assumptions: a) 6%, b) 5%, and c) 7%. Round answers to the nearest dollar. Programmers: Insert link to present value tables Tolerance in amounts in b. and c. +/– 10 Solution 5 (10 min.) a) Sep. 1 Cash......................................................................................... Bonds Payable ................................................................

1,000,000

1,077,217

Sep. 1

Cash......................................................................................... Bonds Payable ................................................................

1,000,000

Calculation with PV tables: 1) PV of the maturity value = $1,000,000 x 0.61391 = .... $613,910 2) PV of annuity payments = $1,000,000 x 0.06 x 7.72173 = Calculation using calculation: 10N; 5I; –60,000PMT; –1,000,000FV; PV = $1,077,217

1,077,217

463,304 $1,077,214

Test Bank for Accounting Principles, Ninth Canadian Edition

Sep. 1

Cash......................................................................................... Bonds Payable ................................................................

929,764 929,764

Calculation with PV tables: 3) PV of the maturity value = $1,000,000 x 0.50835 = .... $508,350 4) PV of annuity payments = $1,000,000 x 0.06 x 7.02358 =

421,415 $929,765

Calculation using calculation: 10N; 7I; –60,000PMT; –1,000,000FV; PV = $929,764 Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

Exercise 6 On February 1, 2024, Ben Jensen Corporation issued $200,000, 5%, five-year bonds. Interest is payable semi-annually on August 1 and February 1. Instructions a) Prepare the journal entries that Ben Jensen would make on February 1 if it issued the bonds at (1) 100, (2) 98, and (3) 102. b) How much interest would Ben Jensen Corporation pay on August 1, 2024, under each of the three issue prices listed in a)? Solution 6 (10 min.) a) (1) Feb. 1 Cash ................................................................................... Bonds Payable ........................................................... (2) Feb. 1

(3) Feb. 1

200,000 200,000

Cash ($200,000 × 0.98) ....................................................... Bonds Payable ...........................................................

196,000

Cash ($200,000 × 1.02) ....................................................... Bonds Payable ...........................................................

204,000

196,000

204,000

Ben Jensen would pay interest of $5,000 ($200,000 × 5% × 6 ÷ 12) each semi-annual period regardless of the issue price. The cash paid for interest is based on the contractual interest rate. The interest expense would vary, depending on whether the bonds were issued at par, at a discount, or at a premium.

Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

Exercise 7 On January 1, 2024, Blindside Corporation issued $500,000, 5%, 10-year bonds dated January 1, 2024, to yield 4%. The bonds pay semi-annual interest on January 1 and July 1. Instructions Calculate the selling price of the bonds and prepare the journal entry to record the issue of the bonds. Round your answer to the nearest dollar. Solution 7 (5 min.) Present value of $500,000 received in 20 periods $500,000 x 0.67297 (n = 20, i = 2%) ................................................................... Present value of ($500,000 x 5% x 6 ÷ 12) received for 20 periods $12,500 x 16.35143 (n = 20, i = 2%) ................................................................... Total .................................................................................................................. January 1, 2024 Cash........................................................................................................... Bonds Payable .................................................................................. To record sale of bonds at a premium.

$336,485 204,393 $540,878

540,878 540,878

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

Exercise 8 On January 1, 2024, Shell Corporation issued $600,000, 9%, five-year bonds, dated January 1, 2024, at 104. The bonds pay interest semi-annually on January 1 and July 1. The company has a December 31 year end. Assume amortization of $1,700 and $2,100, respectively for the first two semi-annual interest periods. Instructions Prepare the journal entries that Shell Corporation would make related to the bond issue on the dates indicated below: January 1, 2024 July 1, 2024 December 31, 2024 January 1, 2025 Solution 8 (8–11 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

January 1, 2024 Cash ($600,000 x04%) ............................................................................... Bonds Payable .................................................................................. To record sale of bonds issued at a premium. July 1, 2024 Interest Expense ....................................................................................... Bonds Payable .......................................................................................... Cash ................................................................................................... To record semi-annual payment of interest and amortization of bond premium. December 31, 2024 Interest Expense ....................................................................................... Bonds Payable .......................................................................................... Interest Payable ................................................................................ To record accrued bond interest and amortization of bond premium. January 1, 2025 Interest Payable........................................................................................ Cash ................................................................................................... To record payment of bond interest liability.

624,000 624,000

25,300 1,700 27,000

24,900 2,100 27,000

27,000 27,000

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

Exercise 9 On January 1, 2024, Golf Corporation issued $900,000, 8%, five-year bonds dated January 1, 2024, to yield 9%. The bonds pay semi-annual interest on January 1 and July 1. The company has a December 31 year end. Instructions a) Calculate the selling price of the bonds (round final answer to the nearest $1,000). b) Prepare all the journal entries that Golf Corporation would make related to this bond issue from issue date through to January 1, 2025. Programmers: Insert link to present value tables Solution 9 (8–12 min.) a) Present value of $900,000 received in 10 periods $900,000 x 0.64393 (n = 10, i = 4.5%) ........................................................

$579,537

Test Bank for Accounting Principles, Ninth Canadian Edition

Present value of ($900,000 x 8% x 6 / 12) received for 10 periods $36,000 x 7.91272 (n = 10, i = 4.5%) .......................................................... Total ..........................................................................................................

284,858 $864,395

Rounded to nearest $1,000 ......................................................................

$864,000

b) January 1, 2024 Cash........................................................................................................... Bonds Payable .................................................................................. To record sale of bonds at a discount.

864,000

July 1, 2024 Interest Expense ($864,000 x 9% x 6 / 12) ................................................ Bonds Payable .................................................................................. Cash ................................................................................................... To record semi-annual payment of interest and amortization of bond discount. December 31, 2024 Interest Expense (($864,000 + $2,880) x 9% x 6 / 12) ............................... Bonds Payable .................................................................................. Interest Payable ................................................................................ To record accrued bond interest and amortization of bond discount. January 1, 2025 Interest Payable........................................................................................ Cash ................................................................................................... To record payment of bond interest liability.

864,000

38,880 2,880 36,000

39,010 3,010 36,000

36,000 36,000

Exercise 10 On January 1, 2024, Duck Work Corporation issued $900,000, 8%, 10-year bonds at face value. Interest is payable semi-annually on July 1 and January 1. Duck Work Corporation has a calendar year end. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare all entries related to the bond issue for 2024. Solution 10 (6–10 min.) 2024 Jan. 1 Cash .............................................................................................. Bonds Payable ..................................................................... July

Dec.

900,000 900,000

Interest Expense .......................................................................... Cash ...................................................................................... ($900,000 × 8% × 6 / 12 = $36,000)

36,000

Interest Expense .......................................................................... Interest Payable ...................................................................

36,000

Exercise 11 Numbered Company Inc. issued $600,000, 6%, 20-year bonds on January 1, 2024, at 102. Interest is payable semi-annually on July 1 and January 1. Numbered Company has a December 31 year end. Assume amortization of $250 and $260, respectively for the first two semi-annual interest periods. Instructions Prepare all journal entries made in 2024 related to the bond issue. Solution 11 (8–12 min.) Jan. 1 Cash ($600,000 × 102%) ............................................................... Bonds Payable ..................................................................... July

Dec.

612,000 612,000

Interest Expense .......................................................................... Bonds Payable ............................................................................. Cash ...................................................................................... ($600,000 × 6% × 6 / 12 = $18,000)

17,750 250

Interest Expense .......................................................................... Bonds Payable ............................................................................. Interest Payable ................................................................... ($600,000 × 6% × 6 / 12 = $18,000)

17,740 260

18,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 12 Chanti Limited issued $200,000, 6%, 10-year bonds on December 31, 2024, for $190,000. Interest is payable semi-annually on June 30 and December 31. Chanti has a December 31 year end. Amortization for the first semi-annual interest period is $360. Instructions Prepare the appropriate journal entries on a) December 31, 2024. b) June 30, 2025. Solution 12 (8–12 min.) a) 2024 Dec. 31 Cash .............................................................................................. Bonds Payable ..................................................................... b) 2025 June 30

Interest Expense .......................................................................... Bonds Payable ..................................................................... Cash ...................................................................................... ($200,000 × 6% × 6 / 12 = $6,000)

190,000 190,000

6,360 360 6,000

Exercise 13 On January 1, 2024, Kramer International Inc. issued $200,000, 9%, five-year bonds for $192,278. The bonds were sold to yield an effective interest rate of 10%. Interest is paid semi-annually on June 30 and December 31. The company uses the effective-interest method of amortization.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Prepare a bond discount amortization schedule that shows the amortization of the discount for the first two interest payment dates. Round to the nearest dollar. b) Prepare the journal entries that Kramer International would make on January 1, June 30, and December 31, 2024, related to the bond issue. Solution 13 (15–22 min.) a) KRAMER INTERNATIONAL INC. Bond Discount Amortization Effective-Interest Method—Semi-annual Interest Payments 9% Bonds Issued at 10% Interest Interest to Interest Discount Amortized Periods be Paid Expense Amortization Cost Jan. 1, 2024(Issue date) $192,278 June 30, 2024$9,000 $9,614 $614 192,892 Dec. 31, 2024 9,000 9,645 645 193,537 b)

January 1, 2024 Cash........................................................................................................... Bonds Payable .................................................................................. To record issue of bonds at a discount. June 30, 2024 Interest Expense ....................................................................................... Bonds Payable .................................................................................. Cash ................................................................................................... To record payment on interest and amortization of bond discount. December 31, 2024 Interest Expense ....................................................................................... Bonds Payable .................................................................................. Cash ................................................................................................... To record payment of interest and amortization of bond discount.

Exercise 14

192,278 192,278

9,614 614 9,000

9,645 645 9,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Prairie Corporation issued $100,000 of 10-year, 6% bonds payable on January 1, 2024, for $92,900, at a time when market interest rates were 7%. Interest is payable semi-annually on June 30 and December 31. On January 1, 2025, 20% of the bonds were redeemed at 101. Prairie has a December 31 year end and uses the effective-interest method in accounting for bonds payable. Instructions a) Record the issue of the bonds on January 1, 2024. b) Record the payment of interest on June 30 and December 31, 2024. Round your answer to the nearest dollar. c) Show how the bonds would be reported on Prairie’s December 31, 2024, balance sheet. d) Record the redemption of the bonds on January 1, 2025. Round your answer to the nearest dollar. Solution 14 (25 min.) a) Jan. 1, 2024 Cash ...................................................................................... Bonds Payable .............................................................. b) June 1, 2024

Dec. 31, 2024

92,900 92,900

Interest Expense ($92,900 x 7% x 6 /12) .............................. Bonds Payable ($3,252 – $3,000) ................................. Cash ($100,000 x 6% x 6 /12) ........................................

3,252

Interest Expense (($92,900 + $252) × 7% × 6 /12) ................ Bonds Payable ($3,260 – $3,000) ................................. Cash ..............................................................................

3,260

252 3,000

260 3,000

c) PRAIRIE CORPORATION Balance Sheet (partial) December 31, 2024 Non-current liabilities Bonds payable ($92,900 + $252 + $260) ................................................... d) Jan. 1, 2025

Bonds Payable ($93,412 x 20%) ........................................... Loss on Bond Redemption .................................................. Cash ($100,000 x 20% x 1.01) .......................................

$93,412

18,682 1,518 20,200

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Accounting for Bond Retirements Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 15 On January 1, 2024, Calli Ltd. issued $500,000 of 10-year, 6% bonds payable at 99. Interest is payable semi-annually on June 30 and December 31. Semi-annual amortization for this bond is $250. Instructions a) Record all entries required for this bond during 2024. b) Show how the bonds would be reported on Calli’s December 31, 2024, balance sheet. Solution 15 (10 min.) a) Jan. 1 Cash ($500,000 x 99%) ................................................................. Bonds Payable ..................................................................... June 30

Dec.

495,000 495,000

Interest Expense .......................................................................... Bonds Payable ..................................................................... Cash ($500,000 x 6% x 6 / 12) ...............................................

15,250

Interest Expense .......................................................................... Bonds Payable ..................................................................... Cash ($500,000 x 6% x 6 / 12) ...............................................

15,250

250 15,000

b) CALLI LTD. Balance Sheet (partial) December 31, 2024 Non-current liabilities Bonds payable, due 2034 .........................................................................

$495,500

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

Exercise 16 Swan Diver Inc. issued $400,000 of 20-year, 5% bonds payable on July 1, 2024, providing an effectiveinterest rate of 4.75%, for proceeds of $412,820. Interest is payable semi-annually on December 31 and June 30. Swan Diver’s year end is June 30 and the effective-interest method is used in accounting for bonds payable. Instructions a) Record the issuing of the bonds on July 1, 2024. b) Prepare an amortization table for the first year (two payments). Round your answer to the nearest dollar. c) Record the payments on December 31, 2024 and June 30, 2025. d) Show how the bond payable would be presented on Swan Diver’s June 30, 2025, balance sheet. Solution 16 (25 min.) a) July 1, 2024 Cash ...................................................................................... Bonds Payable ..............................................................

412,820 412,820

b) Semi-annual interest period July 1, 2024 Dec. 31, 2024 June 30, 2025 c) Dec. 31, 2024

June 30, 2025

(A) Interest payment ($400,000 x 5% x 6 / 12) 10,000 10,000

(B) Interest expense (D x 4.75% x 6 / 12)

(D) Carrying Amount of Bond = $412,820 – (C)

196 200

$412,820 412,624 412,424

9,804 9,800

Interest Expense................................................................... Bonds Payable ..................................................................... Cash ..............................................................................

9804 196

9800 200

d) SWAN DIVER INC. Balance Sheet (partial) June 30, 2025 Non-current liabilities

10,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Bonds payable ..........................................................................................

$412,424

Exercise 17 Moxy’s Restaurant Supplies Ltd. issued $1,800,000, 7%, 10-year bonds on January 1, 2024. Interest is payable semi-annually on July 1 and January 1. Moxy’s year end is December 31. Assume the market rate for similar bonds is 8%. (Use the following present value factors: present value of $1 = 0.45639; present value of annuity = 13.59033) Instructions Prepare all necessary journal entries (rounding to the nearest dollar) for Moxy’s on the following dates: a) January 1, 2024. b) July 1, 2024. c) December 31, 2024. d) January 1, 2025. Solution 17 (15 min.) a) 2024 Jan. 1 Cash .............................................................................................. 1,677,693 Bonds Payable ..................................................................... Present value of $1.8M received in 10 years @ 8% market value $1.8M x 0.45639 = $821,502 Present value of annuity ($1.8M x 7% x 6/12 = $63,000) $63,000 x 13.59033 = $856,191 Total PV = $821,502 + $856,191 = 1,677,693 b) 2024 July 1

Interest Expense*......................................................................... Bonds Payable ..................................................................... Cash** ................................................................................... *($1,677,693 x 8% x 6 / 12 = $67,108) **($1,800,000 × 7% × 6 / 12 = $63,000)

1,677,693

67,108 4,108 63,000

Test Bank for Accounting Principles, Ninth Canadian Edition

c) 2024 Dec. 31

d) 2025 Jan. 1

Interest Expense*......................................................................... Bonds Payable ..................................................................... Interest Payable** ................................................................ *($1,677,693 + $4,108) x 8% x 6 / 12 = $67,272) **($1,800,000 × 7% × 6 / 12 = $63,000)

67,272

Interest Payable ........................................................................... Cash ......................................................................................

63,000

4,272 63,000

63,000

Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

Exercise 18 The board of directors of Bobcat Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issue of $4,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issue of 200,000 common shares for $20 per share. Bobcat Corporation currently has 100,000 common shares issued at a book value of $20 each and retained earnings of $750,000. The income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $800,000 if the new factory equipment is purchased. Assume that the debt or equity will be issued at the beginning of the year. Instructions a) Prepare a schedule that shows the expected profit, earnings per share, and return on equity (using year-end balances) under each of the plans that the board of directors is considering. Round ratios to two decimal places. b) If the board of directors’ stated goal is to maximize the common shareholders’ return, which alternative is preferable? If the board’s stated goal is to maximize solvency, which alternative is preferable? Solution 18 (14–18 min.) a)

Profit before interest and taxes ................................................ Interest expense ($4,000,000 × 6%) .......................................... Profit before income taxes ........................................................ Income tax expense (30%) ........................................................ Profit for the year ......................................................................

Plan #1 Issue Bonds $800,000 240,000 560,000 168,000 $392,000

Plan #2 Issue Shares $800,000 — 800,000 240,000 $560,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Issued shares .............................................................................

100,000

300,000

Earnings per share.....................................................................

$3.92

$1.87

Equity Common shares (currently) 100,000 x $20 ............................... New shares (200,000*$20)......................................................... Retained earnings, beginning ................................................... Current year profit..................................................................... Total shareholders’ equity ........................................................

$2,000,000 -0750,000 392,000 $3,142,000

$2,000,000 4,000,000 750,000 560,000 $7,310,000

Return on ending equity ...........................................................

12.48%

7.67%

The first alternative (issuing bonds) is preferable if the goal is maximization of shareholder return, as evidenced by the return on equity. However, this alternative will result in a higher debt to assets ratio, which indicates less solvency.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

Exercise 19 United Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are: 1. Issue 50,000 common shares at $50 per share. 2. Issue $2,500,000, 5%, 10-year bonds at face value. It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 30% and has 100,000 common shares issued prior to the new financing. Instructions Determine the effect on profit and earnings per share (round ratio to two decimal places) for these two methods of financing. Solution 19 (10–15 min.) The alternative effects on net income and earnings per share are as follows: Issue Shares Profit before interest and taxes .................................................. $900,000 Interest expense (5% × $2,500,000) ............................................ — Profit before income taxes .......................................................... 900,000

Issue Bonds $900,000 125,000 775,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Income tax expense (30%) .......................................................... Profit for the year ........................................................................

270,000 $630,000

232,500 $542,500

Issued shares ...............................................................................

150,000

100,000

Earnings per share.......................................................................

$4.20

$5.43

Profit is higher if the equipment is financed through the issue of shares. However, earnings per share is lower because of the additional number of common shares. Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

Exercise 20 Three plans for financing a $20,000,000 corporation are under consideration by its organizers. The bonds will be issued at their face value and the income tax rate is 20%.

6% Bonds $8 Preferred shares, issued at $100 Common shares, issued at $10 Total

Plan 1 — — $20,000,000 $20,000,000

Plan 2 — $10,000,000 10,000,000 $20,000,000

Plan 3 $10,000,000 5,000,000 5,000,000 $20,000,000

It is estimated that profit before interest and taxes will be $4,000,000. Instructions For each plan, determine the expected profit and the earnings per share (round ratio to two decimal places). Prior to obtaining financing, there are no common shares outstanding. Solution 20 (14–19 min.) Plan 1 Plan 2 Profit before interest and income tax .............................. $4,000,000 $4,000,000 Deduct interest on bonds (10,000,000 × 6%).................... 0 0 Profit before income tax............................................ 4,000,000 4,000,000 Deduct income tax (20%) .................................................. (800,000) (800,000) Net income................................................................. 3,200,000 3,200,000 Dividends on preferred shares.......................................... _____________ (800,000)* Net income available to common shareholders .............. $3,200,000 $2,400,000 *$10,000,000/$100 per share x $8 **$5,000,000/$100 per share x $8

Plan 3 $4,000,000 (600,000) 3,400,000 (680,000) 2,720,000 (400,000)** $2,320,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Common shares issued .....................................................

2,000,000

1,000,000

500,000

Earnings per share.............................................................

$1.60

$2.40

$4.64

Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

Exercise 21 United Holdings Inc. requires $5,000,000 in new financing in order to expand its operations. The management team is in discussion about the best way to finance the expansion and has asked you, their accountant, for assistance. In order to provide them with the information they need, you analyze the following two options: 1. Issue 1,000,000 common shares at $5, which is the current market price of United’s 2,000,000 issued common shares. 2. Issue $5,000,000 of 10-year, 4% bonds at par. United currently has no bonds payable issued. The financing would be required at the beginning of the next fiscal year. United’s tax rate is 30%. The management team projects profit of $1,750,000 before financing costs and taxes. They are interested in comparing the net income after tax, the earnings per share, and the return on ending equity under each alternative. The management team’s goal is to maximize return on equity in the first year. United’s shareholders’ equity is currently $17,500,000. Instructions Calculate the amounts requested by the management team and present the two alternatives in comparative format. Recommend which alternative should be chosen. Round ratios to two decimal places. Solution 21 (10 min.) Issue shares $ 1,750,000

Issue bonds $ 1,750,000 (200,000)

Profit before taxes ............................................................. Income tax expense (30%) ................................................ Profit for the year ..............................................................

1,750,000 525,000 $1,225,000

1,550,000 465,000 $1,085,000

Return on equity Equity ................................................................................. ROE ....................................................................................

22,500,000* 5.44%

17,500,000 6.20%

Profit before financing ...................................................... Less interest ............................................................... $5,000,000 x 4%

Test Bank for Accounting Principles, Ninth Canadian Edition

Earnings per share Number of shares .............................................................. EPS ..................................................................................... *(1,000,000 x $5 per share + $17,500,000)

3,000,000 $0.41

2,000,000 $0.54

Because management’s goal is to maximize return on equity in the near future, the bond issue should be chosen. Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

Exercise 22 Southern Merchandising Inc. is considering new financing to pay out $2,500,000 of existing 10% bonds payable at the beginning of the next fiscal year. The company wants to maximize ROE in the new year. They are considering three alternatives of dealing with the matter: 1. Do not pay out the existing bonds; 2. Issue a 5% bond payable at a face value of $2,500,000, or issue 250,000 common shares at $10. Other information about Southern: ▪ Southern’s tax rate is 25%. ▪ Southern currently has $4,000,000 in shareholders’ equity prior to any new share issue. ▪ Southern’s average profit before financing costs and taxes is $800,000. ▪ A one-time penalty of $150,000 will be incurred to pay out the 10% bonds early, which is fully tax deductible. Instructions Calculate the following amounts for Southern, compare all three alternatives, and make a recommendation, assuming the goal is to maximize return on ending equity for the next year. Round ratio to one decimal place. Existing bonds Profit before interest and taxes Interest expense Bond payout penalty Profit before taxes Income tax expense Profit for the year Shareholders’ equity Return on equity

5% bonds

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 22 (15 min.)

Profit before interest and taxes Interest expense Bond payout penalty Profit before taxes Income tax expense (25%) Profit for the year Shareholders’ equity Return on equity

Existing bonds $ 800,000 (250,000) 550,000 (137,500) 412,500 4,000,000 10.3%

5% bonds $ 800,000 (125,000) (150,000) 525,000 (131,250) 393,750 4,000,000 9.8%

Shares $ 800,000

800,000 (200,000) 600,000 6,500,000 9.2%

Because Southern’s goal is to maximize return on equity for the next year, the choice should be to not pay out the bonds at this time. However, the payout penalty is a one-time cost and, in the future, ROE will be greater with the 5% bonds. If management takes a more long-term view, the issue of replacement bonds would be the better choice. Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

Exercise 23 Presented below are two independent situations: a) Bison Corporation redeemed $300,000 of its bonds on June 30, 2024, at 102. The carrying amount of the bonds on the retirement date was $275,400. The bonds pay semi-annual interest and the interest payment due on June 30, 2024, has been made and recorded. b) Maiden Inc. redeemed $400,000 of its bonds at 96 on June 30, 2024. The carrying amount of the bonds on the retirement date was $393,000. The bonds pay semi-annual interest and the interest payment due on June 30, 2024, has been made and recorded. Instructions For each of the independent situations, prepare the journal entry to record the retirement of the bonds. Solution 23 (13–16 min.) a) June 30 Bonds Payable ............................................................................. Loss on Bond Redemption .......................................................... Cash ...................................................................................... b)

275,400 30,600 306,000

Test Bank for Accounting Principles, Ninth Canadian Edition

June 30

Bonds Payable ............................................................................. Gain on Bond Redemption .................................................. Cash ......................................................................................

393,000 9,000 384,000

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

Exercise 24 Presented below are two independent situations: a) On December 31, 2024, Legault Corporation had $1,000,000, 8% bonds payable issued. The bonds pay interest on January 1 and June 1 of each year, and mature on January 1, 2034. On January 2, 2025, Legault redeemed 60% of these bonds at 101. The carrying amount of the entire bond issue on the retirement date was $1,026,000. The interest payment due on January 1, 2025, has been made and recorded. b) Antonio Inc. redeemed $500,000 of its bonds at 98 on December 31, 2024. The carrying amount of the bonds on the retirement date was $497,500. The bonds pay semi-annual interest and the interest payment due on December 31, 2024, has been made and recorded. Instructions For each of the independent situations, prepare the journal entry to record the retirement of the bonds. Solution 24 (13–16 min.) a) 2025 Jan. 2 Bonds Payable ($1,026,000 x 60%).............................................. Cash ($600,000 x 1.01).......................................................... Gain on Bond Redemption .................................................. ($615,600 – $606,000 = $9,600) b) 2024 Dec. 31

Bonds Payable ............................................................................. Cash ($500,000 x 0.98).......................................................... Gain on Bond Redemption .................................................. ($490,000 – $497,500 = $7,500)

Bloomcode: Application Difficulty: Medium Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

615,600 606,000 9,600

497,500 490,000 7,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 25 Jashanpreet Industries Limited (JIL) issued $1,800,000, 8%, 20-year bonds on January 1, 2024 and received proceeds of $2,200,000. Interest is payable semi-annually on July 1 and January 1. JIL’s year end is December 31. Assume the market rate for similar bonds is 6%. Instructions a) Prepare all necessary journal entries for JIL during 2024. b) Prepare a partial balance sheet for JIL on December 31, 2024, showing all areas affected by this bond transaction. Solution 25 (15 min.) a) 2024 Jan. 1 Cash .............................................................................................. Bonds Payable ..................................................................... July

Dec.

2,200,000 2,200,000

Interest Expense*......................................................................... Bonds Payable ............................................................................. Cash** ................................................................................... *($2,200,000 x 6% x 6 / 12 = $66,000) **($1,800,000 × 8% × 6 / 12 = $72,000)

66,000 6,000

Interest Expense*......................................................................... Bonds Payable ............................................................................. Interest Payable** ................................................................ *($2,200,000 – $6,000) x 6% x 6 / 12 = $65,820) **($1,800,000 × 8% × 6 / 12 = $72,000)

65,820 6,180

72,000

b) JIL BALANCE SHEET (PARTIAL) DECEMBER 31, 2024 Current liabilities Interest Payable........................................................................................ $

72,000

Non-current liabilities Bonds payable* ........................................................................................ $2,187,820 *Carrying value of bonds payable at December 31, 2024 = $2,200,000 – $6,000 – $6,180 = $2,187,820 Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 26 Everywhere Inc. issues a $350,000, 4%, 20-year mortgage note payable on December 31, 2024, to obtain needed financing for the construction of a building addition. The terms provide for semiannual blended payments of $12,795 on June 30 and December 31. Instructions a) Prepare the journal entries to record the mortgage loan on December 31, 2024, and the first instalment payment. b) Will the amount of principal reduction in the second instalment payment be more or less than with the first instalment payment? Solution 26 (5–8 min.) a) Dec. 31 Cash .............................................................................................. Mortgage Note Payable ....................................................... June 30

Interest Expense .......................................................................... Mortgage Note Payable ............................................................... Cash ...................................................................................... ($350,000 × 4% × 6 / 12 = $7,000)

350,000 350,000 7,000 5,795 12,795

The amount of principal reduction will increase with each instalment payment.

Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

Exercise 27 Hanna Manufacturing Limited receives $240,000 on January 1, 2024, when it issues a 6%, three-year note payable to finance the purchase of equipment. The terms provide for annual payments each December 31. The first payment is due December 31, 2024. Instructions Prepare the journal entries to record the note and the first two instalment payments assuming:

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b)

the payment is a fixed principal payment of $80,000. Round to the nearest whole dollar. the payment is a blended payment of $89,786.76. Round to two decimal places.

Solution 27 (15–20 min.) a)

Semi-annual Interest Period Jan. 1, 2024 Dec. 31, 2024 Dec. 31, 2025

(A) Cash Payment

(B) Interest Expense (D) × 6%

$94,400 89,600

$14,400 9,600

$80,000 80,000

(D) Principal Balance (D) – (C) $240,000 160,000 80,000

Issue of Note 2024 Jan. 1 Cash .............................................................................................. Notes Payable ......................................................................

240,000

First Instalment Payment 2024 Dec. 31 Interest Expense ($240,000 × 6%) ............................................... Notes Payable .............................................................................. Cash ......................................................................................

14,400 80,000

Second Instalment Payment 2025 Dec. 31 Interest Expense ($160,000 × 6%) ............................................... Notes Payable .............................................................................. Cash ......................................................................................

9,600 80,000

240,000

94,400

89,600

Semi-annual Interest Period Jan. 1, 2024 Dec. 31, 2024 Dec. 31, 2025

(A) Cash Payment

(B) Interest Expense (D) × 6%

$89,786.76 89,786.76

$14,400.00 9,876.79

$75,386.76 79,909.97

(D) Principal Balance (D) – (C) $240,000.00 164,613.24 84,703.27

Issue of Note 2024 Jan. 1 Cash .............................................................................................. 240,000.00 Notes Payable ...................................................................... 240,000.00

14,400.00 75,386.76 89,786.76

Test Bank for Accounting Principles, Ninth Canadian Edition

Second Instalment Payment 2025 Dec. 31 Interest Expense [($240,000 – $75,386.76) × 6%]........................ Notes Payable ............................................................................. Cash ......................................................................................

9,876.79 79,909.97 89,786.76

Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

Exercise 28 Novacore Manufacturing Inc. intends to finance the acquisition of new manufacturing equipment that costs $150,000 by issuing a five-year, 3.5% note payable. The note would be issued on January 1, 2024. Novacore’s year end is December and the note would require annual payments on December 31. The finance company has given Novacore the choice of making blended payments of $33,222, or making fixed payments of $30,000 plus interest. Instructions a) Assuming the blended payment option is selected, prepare the amortization table for the first two years of the note payable. Record the issue of the note and the December 31, 2024, payment under this alternative. b) Assuming the fixed principal payment option is selected, prepare the amortization table for the first two years of the note payable. Record the December 31, 2024, payment under this alternative. Solution 28 (20 min.) a) Semi-annual interest period Jan. 1, 2024 Dec. 31, 2024 Dec. 31, 2025 Jan. 1, 2024

Dec. 31, 2024

(A) Cash payment

(B) Interest expense = (D) x 3.5%

$33,222 33,222

$5,250 4,271

(D) Principal balance = (D) – (C) $ 150,000 122,028 93,077

$27,972 28,951

Equipment ............................................................................ Notes Payable...............................................................

150,000

Interest Expense................................................................... Notes Payable ...................................................................... Cash ..............................................................................

5,250 27,972

150,000

33,222

Test Bank for Accounting Principles, Ninth Canadian Edition

Semi-annual interest period Jan 1, 2024 Dec 31, 2024 Dec 31, 2025 Dec. 31, 2024

(A) Cash payment = (B) + (C)

(B) Interest expense = (D) x 3.5%

$35,250 34,200

$5,250 4,200

$30,000 30,000

(D) Principal balance = (D) – (C) $150,000 120,000 90,000

5,250 30,000 35,250

Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

Exercise 29 On July 1, 2024, Gismo Distributors Inc. finances the purchase of a new pickup truck by making a cash down payment of $5,000 and issuing a $30,000 two-year, 10% note payable for the balance. The note is payable in four equal semi-annual blended payments of $8,460 due on December 31, and June 30 of each year. Instructions a) Record the purchase of the truck. b) Prepare the amortization table for the note payable. Round interest expense in the final year to clear the remaining balance. c) Record the first and last payments made on the note. Solution 29 (25 min.) a) Jul. 1, 2024 Vehicles................................................................................. Cash .............................................................................. Notes Payable...............................................................

35,000 5,000 30,000

b) Semi-annual interest period July 1, 2024 Dec. 31, 2024 June 30, 2025 Dec. 31, 2025 June 30, 2026

(A) Cash payment

(B) Interest expense = (D) x 10% x 6 / 12

$8,460 8,460 8,460 8,460

$1,500 1,152 787 *401

$6,960 7,308 7,673 8,059

(D) Principal balance = (D) – (C) $ 30,000 23,040 15,732 8,059

Test Bank for Accounting Principles, Ninth Canadian Edition

* Round to clear remaining balance c) Dec. 31, 2024

June 30, 2026

1,500 6,960

401 8,059

8,460

Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

Exercise 30 Millet Sales Corp., a private company, is planning to acquire new computers with a total value of $60,000 on January 1, 2024. They have a choice of leasing the computers for a three-year period, or purchasing them and financing the purchase by issuing a note payable. Details of the two alternative arrangements are as follows: Lease option: Three annual lease payments of $22,446 due on December 31 of each year. Millet would purchase the computers at the end of the three years for $2.00. Financing option: Millet would make a down payment of $10,000 and issue a 6%, three-year note payable for the remaining balance, with annual blended payments of $18,705 required on December 31 of each year. Instructions a) Is the lease arrangement an operating or capital lease? Explain your choice. Record any entry required on January 1, 2024. b) Prepare the amortization table for the note payable. Record any entry required on January 1, 2024. Solution 30 (15 min.) a) This is a capital lease because of the option to purchase the system at a very reduced price at the end of the lease. Jan. 1, 2024

Leased Asset—Equipment ................................................... Lease Liability ...............................................................

60,000 60,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Semi-annual interest period Jan. 1, 2024 Dec. 31, 2024 Dec. 31, 2025 Dec. 31, 2026 Jan. 1, 2024

(A) Cash payment $18,705 18,705 18,705

(B) Interest expense = (D) x 6% $3,000 2,058 1,057

(D) Principal balance = (D) – (C)

$15,705 16,647 17,648

$ 50,000 34,295 17,648 0

Equipment ............................................................................ Notes Payable............................................................... Cash ..............................................................................

60,000 50,000 10,000

Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 31 Lalapalooza Corporation issues a $600,000, 5%, five-year note payable on January 1, 2024. The terms provide for semi-annual blended payments of $68,555 on July 1 and January 1. Instructions a) Prepare the journal entries to record the note on January 1, 2024, and the first instalment payment. b) Assuming Lalapalooza has a December 31 year end, prepare the 2024 year-end adjusting entry to account for accrued interest on the note payable. Round your answer to the nearest dollar. c) Prepare a partial balance sheet at December 31, 2024, for Lalapalooza Corporation displaying all amounts related to the note payable. Solution 31 (20 min.) a) Jan. 1 Cash .............................................................................................. Notes Payable ...................................................................... July

b) Dec. 31

600,000 600,000

Interest Expense .......................................................................... Notes Payable .............................................................................. Cash ...................................................................................... ($600,000 × 5% × 6 / 12 = $15,000)

15,000 53,555

Interest Expense ..........................................................................

13,661

68,555

Test Bank for Accounting Principles, Ninth Canadian Edition

Interest Payable ................................................................... ($600,000 – $53,555) x 5% x 6/12 = $13,661

13,661

c) LALAPALOOZA CORPORATION Balance Sheet (partial) December 31, 2024 Current liabilities Interest payable ...................................................................................... Current portion of notes payable ............................................................

$ 13,661 111,160

Non-current liabilities Notes payable ...........................................................................................

$435,285

Calculations Total carrying value of note payable at December 31, 2024 = $600,000 – $53,555 = $546,445 Current Portion: Principal repayment due within one year = $54,894 + $56,266 = $111,160 (see calculations below) January 1, 2025 = $54,894 ($68,555 – $13,661) July 1, 2025 = ($600,000 – $53,555 – $54,894) x 5% x 6/12 = $12,289 interest expense $68,555 – $12,289 = $56,266 Non-current portion = $546,445 – $111,160 = $435,285 Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 32 Presented below are three different aircraft lease transactions that occurred for Canada Airways in 2024. All the leases start on January 1, 2024. In no case does Canada receive title to the aircraft during or at the end of the lease period. Canada Airways is a private company using ASPE. Lessor Zorowski Insurance Lloyd Leasing Chan Leasing Type of property 747 Aircraft 727 Aircraft L-1011 Aircraft Yearly rental $6,589,186 $4,205,863 $2,851,861 Lease term 15 years 20 years 12 years Estimated economic life 25 years 25 years 25 years Fair market value of

Test Bank for Accounting Principles, Ninth Canadian Edition

leased asset Present value of lease rental payments

$61,000,000

$42,000,000

$32,000,000

$56,000,000

$36,000,000

$20,000,000

Instructions Which of the above leases are operating leases and which are finance leases? Explain your answer. Solution 32 (8–10 min.) The Zorowski Insurance and Lloyd Leasing leases are finance leases since they meet one of the three criteria; i.e., the present value of the lease payments amounts to more than 90% of the fair market value of the leased asset and the lease term exceeds 75% of the economic life, respectively. The Chan Leasing lease is an operating lease since it meets none of the criteria. Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 33 Lance Corporation, a public corporation, entered into the following transactions: 1. On January 1, 2024, Gagne Car Rental leased a car to Lance Corporation for one year. Terms of the operating lease call for monthly payments of $550. 2. On January 1, 2024, Lance Corporation entered into an agreement to lease 20 machines with a fair market value of $160,000 from Wells Corporation. The terms of the lease agreement require an initial payment of $50,000 and then three annual rental payments of $60,000 beginning on December 31, 2024. The present value of the three rental payments is $149,211. Instructions a) Identify each lease as either operating or finance. b) Prepare the appropriate journal entries to be made by Lance Corporation on January 1 related to the lease transactions. Solution 33 (3–9 min.) a) 1. This lease is operating, as none of the criteria for capitalization appear to exist. 2. This lease is a finance lease under IFRS. b) 2024 1. Jan. 1, 2024

Rent Expense ........................................................................ Cash ..............................................................................

550

Right-of-Use Asset ................................................................ Lease Liability ...............................................................

199,211

550

149,211

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash ..............................................................................

50,000

Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 34 Mantra Corporation, a private company, has acquired equipment on January 1, 2024, by engaging in a five-year lease transaction that requires annual lease payments of $48,000 beginning January 1, 2024. Instructions Prepare the journal entries to record the lease inception at January 1, 2024 assuming: a) The lease is classified as an operating lease. b) The lease is classified as a capital lease and the present value of the minimal lease payments has been determined to be $200,154. Solution 34 (5 min.) a) Jan 1, 2024 Rent Expense ........................................................................ Cash ..............................................................................

48,000 48,000

b) Leased Asset—Equipment ................................................... Lease Liability ............................................................... Cash ..............................................................................

200,154 152,154 48,000

Bloomcode: Application Difficulty: Medium Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 35 Windemere Merchandising Corp., a private company, provides automobiles for its sales agents. The typical automobile has a retail value of $40,000 and in the past Windemere has purchased the automobiles, paying 10% on the financing. Now Windemere is considering leasing the automobiles instead, and has been offered one of two alternative lease arrangements. The lease arrangements would begin on June 1, 2024. Alternative 1: The automobile is leased for $320 per month on a one-year term, with renewal possible for a second

Test Bank for Accounting Principles, Ninth Canadian Edition

year on similar terms. Each month’s lease payment is due at the beginning of the month. Alternative 2: The automobile is leased for five years (60 months) with a $5,000 down payment and monthly payments of $675 due on the last day of each month. At the end of the 60 months, Windemere would have the option of purchasing the automobile for $1. Instructions a) For Alternative 1, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2024. b) For Alternative 2, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2024. Solution 35 (10 min.) a) This is an operating lease. There is no commitment that Windemere will acquire ownership of the automobile under the terms of this lease. June 1, 2024

Rent Expense ........................................................................ Cash ..............................................................................

320 320

b) This is a capital lease because Windemere will have an option to purchase the asset at the end of the lease term at much below its fair value (bargain purchase option). Jun 1, 2024

Leased Asset—Vehicles ........................................................ Lease Liability ............................................................... Cash ..............................................................................

40,000 35,000 5,000

Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 36 Kemba Corporation, a private company, has acquired equipment with a fair market value of $145,000 on January 1, 2024, by engaging in a five-year lease transaction that requires annual lease payments of $24,000 beginning January 1, 2024. The leased asset will revert back to the lessor after the lease term. Kemba has the option to purchase the equipment at the end of the lease term at the equipment’s fair market value at that time. The economic life of the asset is eight years and the present value of the minimum lease payments is $100,077. Instructions Analyze the details of this transaction and determine whether it should be classified as an operating or a finance lease in accordance with ASPE.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 36 (5 min.) Criteria: 1. Transfer of ownership and option to buy – The leased asset will revert back to the lessor after the lease term and no bargain purchase option exists since Kemba would pay fair market value for the equipment. The criterion is not met. 2. The lease term is 62.5% (5/8 years) of the leased asset’s economic life. This is below the 75% mark, and therefore this criterion is not met. 3. The present value of the minimum lease payments represents 69% ($100,077 / $145,000). This does not exceed 90% of the fair value of the leased property, and therefore this criterion is not met. Conclusion: Since none of the above criteria have been, this leased equipment would be classified as an operating lease. Bloomcode: Analysis Difficulty: Medium Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

Exercise 37 The adjusted trial balance for Raines Corporation at the end of the 2024 fiscal year contained the following accounts: Bonds payable, 5% ......................................................................... $460,000 Interest payable .............................................................................. 20,000 Lease liability .................................................................................. 50,000 Mortgage note payable, 6%, due 2033 .......................................... 80,000 Accounts payable ........................................................................... 120,000 Other information: The mortgage note is payable in monthly payments of $700 principal plus interest. Instructions a) Prepare the non-current liabilities section of the balance sheet. b) Indicate the proper balance sheet classification for the accounts listed above that do not belong in the non-current liabilities section. Solution 37 (4–7min.) a) Non-current liabilities Bonds payable 5% ............................................................................ Mortgage note payable ($80,000 – ($700 x 12)) ............................... Lease liability .................................................................................... Total non-current liabilities ...................................................... b)

$460,000 71,600 50,000 $581,600

Interest payable ($20,000), accounts payable ($120,000), and the current portion of the mortgage

Test Bank for Accounting Principles, Ninth Canadian Edition

payable ($700 x 12 = $8,400) should be classified as current liabilities. Bloomcode: Application Difficulty: Medium Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 38 Excerpts from Chung Corporation’s income statement and balance sheet for 2024 are presented below: 2024 Income Statement Detail 2024 Balance Sheet Detail Sales............................................... $110,000 Cash .......................................... $ 10,000 Cost of Goods Sold ........................ 50,000 Accounts Receivable ................ 100,000 Gross Profit .................................... 60,000 Inventory .................................. 90,000 Interest Expense ............................ 10,000 Accounts Payable..................... 20,000 Profit Before Taxes ........................ 50,000 Bank Loan Payable .................. 30,000 Income Tax .................................... 15,000 Shareholders’ Equity ............... 150,000 Profit for the year .......................... $ 35,000 Instructions a) Calculate the interest coverage ratio. b) Calculate the debt to total assets ratio. c) What do the two ratios tell you? Solution 38 (5–7 min.) a)

Interest coverage ratio

(Profit + Interest expense + Income taxes) = —————————————————————— (Interest expense) $35,000 + $10,000 + $15,000 = ————————————— = 6 $10,000

Debt to total assets ratio

The interest coverage ratio measures the ability of the company to meet interest payments when they are due. The debt to total assets ratio indicates the fraction or percentage of total assets that are owed to creditors.

Bloomcode: Application Difficulty: Medium

= Total Liabilities ÷ Total Assets = $50,000 / $200,000 = 25%

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 39 Company A has a high debt to total assets ratio and a high interest coverage ratio. Company B has a low debt to total assets ratio and a high interest coverage ratio. Company C has a high debt to total assets ratio and a low interest coverage ratio. Company D has a low debt to total assets ratio and a low interest coverage ratio. Instructions Based solely on the information provided above, which company or companies would you consider loaning money to? Explain your reasoning. Solution 39 (8–10 min.) Company B is the most solvent and the best choice to loan money to. A low debt to total assets ratio means that the company has a smaller proportion of debt compared to total assets than the other companies. A high interest coverage ratio means that the company has sufficient profit to cover its interest payments. Company D may also be worthy to consider loaning money to as long as its interest coverage ratio is sufficient to cover any interest payments that may come due. Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 40 The following is a summarized balance sheet of Falcon Corporation at December 31, 2024. All amounts are in $000’s. Current assets................................................................................................... $ 1,000 Property, plant, and equipment ...................................................................... 15,000 Total assets....................................................................................................... 16,000 Current liabilities .............................................................................................. Long-term debt ................................................................................................ Total liabilities ..................................................................................................

$ 650 9,500 10,150

Test Bank for Accounting Principles, Ninth Canadian Edition

Shareholders' equity Common shares ............................................................................................... Retained earnings ............................................................................................ Total shareholders' equity ............................................................................... Total liabilities and equity ...............................................................................

4,000 1,850 5,850 $16,000

Falcon requires additional financing of $5,000,000 to finance an expansion of its business. The two choices are: Alternative 1: Issue a 20-year, $5,000,000 5% bond payable at face value. Alternative 2: Issue 250,000 common shares at $20 each. In Falcon’s industry, a safe debt to total assets ratio is considered to be between 50% and 60%. Falcon’s board of directors is risk averse. Assume that the financing is made at the beginning of the year. Instructions a) Calculate the debt to total assets ratio under the two proposed financing methods. b) Make a recommendation to Falcon on the better financing alternative and explain your choice. Round ratios to one decimal place. Solution 40 (10 min.) a) Debt – no change..................................................... Debt – new ($10,150 + $5,000) ................................ Total assets – before change .................................. Total assets – after change ($16,000 + $5,000) ....... Debt to total assets ................................................. b)

Current $10,150

Issue bonds

Issue shares $10,150

$15,150 16,000 63.4%

21,000 72.1%

21,000 48.3%

The debt to total assets ratio that results from the issue of bonds (72.1%) is significantly higher than the level considered safe. Since the board is risk averse, the issue of shares is the better choice.

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

5. Account for instalment notes payable. Instalment notes payable are repayable in a series of instalments. Each payment consists of (1) interest on the unpaid balance of the note, and (2) a

Test Bank for Accounting Principles, Ninth Canadian Edition

reduction of the principal balance. These payments can be either (1) fixed principal plus interest payments or (2) blended principal and interest payments. With fixed principal payments, the reduction in principal is constant but the cash payment and interest decrease each period (as the principal decreases). With blended payments, the cash payment is constant but the interest decreases and the principal reduction increases each period.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. Non-current liabilities such as bonds payable and instalment notes payable are financial liabilities because there is a contract between two or more parties to pay cash in the future. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

2. Debt that is NOT current is non-current. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

3. One of the main decisions of a company considering financing is whether to issue debt or equity. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

4. When equity is issued, shareholder control is NOT affected. Answer: False Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

5. When equity is issued instead of debt, the company will have an income tax savings. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

6. When debt is issued instead of equity, earnings per share may be higher. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

7. Return on equity is often higher under debt financing because shareholders’ equity is proportionately lower than profit. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

8. Equity financing is riskier than debt financing because interest must be paid regularly and the principal must be paid on maturity.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

9. Most companies choose to issue debt because earnings per share and return on equity may be higher. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

10. Financial leverage refers to the practice of borrowing at one rate and investing at another. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

11. Dividends are tax deductible by the company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

12. Debt financing will mean the company will pay less corporate income tax. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

13. A bond issued by a corporation may be issued without the permission of the board of directors of the company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

14. Bond issuances are more common in the first quarter of a company’s fiscal year. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

15. The face value of a bond is the amount of cash that the borrower receives at the start of the bond. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

16. The contractual interest rate and the market interest rate on a bond will always be equal. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

17. The maturity date of the bond is the date that the first interest payment is due. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

18. The market rate of interest is the rate that investors demand for lending their money. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

19. Unsecured bonds have specific assets of the issuer pledged as collateral for the bonds. Answer: False Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

20. Bonds that mature in instalments are called term bonds. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

21. Financial leverage is said to be negative if the rate of return is higher than the rate of borrowing. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

22. The contractual interest rate and the market interest rate on the bond will always be equal if the bond’s present value equals the face value of the bond. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

23. The present value of a bond is the value at which the bond would sell in the marketplace. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

24. The current market value of the bond is equal to the future value of all the present cash flows. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

25. The present value of bonds always equals the face value of the bonds if the market interest rate equals the contractual interest rate at the time of the issuance of the bonds. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

26. If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

27. If bonds are issued at a discount, the issuing corporation will repay an amount less than the face amount of the bonds on the maturity date. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

28. If $180,000, 9% bonds are issued on January 1, and pay interest semi-annually, the amount of interest paid on July 1, will be $8,100. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

29. If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual rate of interest. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

30. When a bond discount is allocated to interest expense over the life of the bond, this process is called amortizing the discount. Answer: True Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

31. Under the effective-interest method, the amount of premium or discount amortized is constant every period. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

32. The effective-interest method of amortization results in varying amounts of amortization and interest expense per period, but a constant rate of interest. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

33. The amortization of a bond premium increases the amount of interest expense reported each period. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

34. A gain on redemption is recorded when the cash paid is more than the carrying amount of the bond. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

35. When a bond is retired, a gain is recorded when the cash paid is less than the carrying amount. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

36. If $100,000 face value bonds with a carrying value of $95,200 are redeemed at 97, a loss on redemption will be recorded. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

37. A fixed interest rate means that the interest rate is constant for the entire length of the note payable. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for instalment notes payable.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

38. Notes Payable are often traded on stock exchanges. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

39. One of the differences between notes payable and bonds payable is that most notes are payable in a series of periodic payments, while bonds are normally repayable in full at maturity. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

40. Instalment notes with blended payments are repayable in variable periodic amounts that include the principal and the interest. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

41. The decision on the classification of a lease between an operating lease and capital lease depends on the economic reality of the transaction rather than the legal form of the lease agreement.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

42. In an operating lease, substantially all of the benefits and risks of ownership are transferred to the lessee. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

43. Under a capital lease, both an asset and a liability will be shown on the balance sheet. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

44. Under IFRS, if the present value of the lease payments amounts to substantially all of the fair value of the leased property, the lease will be classified as an operating lease. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

45. Under IFRS, if the leased asset is for a low value asset, an entity may elect an exemption to NOT record the leased assets and lease liabilities on its balance sheet. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

46. Under ASPE, a rental lease is called a capital lease. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

47. Under ASPE, a lease is an operating lease if the lease term is equal to 75% or more of the economic life of the leased property. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

48. Under ASPE, if the benefits and risks of ownership are NOT transferred to the lessee and from an economic point of view the lease is a rental agreement, the lease is classified as an operating lease. Answer: True Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

49. Off-balance sheet financing occurs when the liabilities are kept off a company’s balance sheets such as in the case of a non-current operating lease. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

50. Under ASPE, a lease arrangement where the lessor transfers substantially all risks and benefits of ownership, the lease should be classified as an operating lease. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

51. Debt to total assets measures the percentage of total assets that is financed by creditors rather than shareholders. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

52. Financing by creditors is less risky than financing provided by shareholders. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

53. The debt to total assets is calculated by dividing total assets by total liabilities. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

54. The interest coverage ratio indicates the company’s ability to meet interest payments as they come due. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 55. From the standpoint of the issuing company, a disadvantage of using bonds as a means of longterm financing is that a) bond interest is deductible for tax purposes. b) interest must be paid on a periodic basis regardless of earnings. c) income to shareholders may increase as a result of trading on the equity. d) the bondholders do not have voting rights. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

56. Which of the following is the exception to the category non-current liability? a) accounts payable b) mortgage payable c) bond payable d) note payable (due in five years) Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

57. Which of the following is NOT affected by issuing equity? a) shareholder control b) amount of corporate income tax paid by a company c) earnings per share d) return on equity Answer: b Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

58. Which is a major shortcoming of issuing debt instead of equity? a) Shareholder control is not affected. b) Income tax payable will be less. c) Interest must be paid regularly. d) Dividends are not tax deductible. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

59. Shareholders of a company may be reluctant to finance expansion through issuing more equity because a) leveraging with debt is always a better idea. b) their earnings per share may decrease. c) the price of the shares will automatically decrease. d) dividends must be paid on a periodic basis. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

60. Which of the following is a disadvantage of issuing bonds instead of common shares? a) Shareholder control is not affected. b) The principal of the debt must be repaid at maturity. c) Income to common shareholders may increase. d) Earnings per share may increase. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

61. If a corporation issued $4,000,000 in bonds that pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%? a) $2,000,000 b) $60,000 c) $200,000 d) $140,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

62. Common examples of non-current liabilities include all of the following except a) bonds payable. b) instalment notes payable. c) finance lease. d) accounts payable. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

63. Earnings per share is usually higher under debt financing because a) more common shares are issued. b) interest expense reduces profit. c) no additional common shares are issued.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) interest expense increases profit. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

64. Even if it is riskier to issue debt, most companies still choose to do this because a) money that is borrowed increases earnings per share. b) it produces a higher return on equity. c) it does not affect shareholder control. d) All of the choices are correct. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

65. Which of the following statements is correct in regards to financial leverage? a) Financial leverage is said to be ‘negative’ if the rate of return is higher than the borrowing rate. b) Financial leverage is said to be ‘positive’ if the rate of return is lower than the rate of borrowing. c) Financial leverage is borrowing at one rate and investing at a different rate. d) Financial leverage can decrease the return on equity. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

66. Unsecured bonds are bonds that a) are of good quality and have a high credit risk.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) are registered in the name of the owner. c) are considered speculative and have a high risk of default. d) are issued by companies with a good credit rating. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

67. Bonds that can be retired by the issuer at a stated dollar amount before they mature are known as a) term bonds. b) redeemable bonds. c) debentures. d) AAA bonds. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

68. Bonds that are issued against the general credit of the issuer are termed a) market value bonds. b) redeemable bonds. c) debentures. d) junk bonds. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

69. Within a corporation, formal approval is required by the ______ before bonds can be issued. a) chief executive officer b) board of directors c) controller d) provincial government Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

70. The contractual rate of interest is always stated as a(n) a) monthly rate. b) daily rate. c) semi-annual rate. d) annual rate. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

71. When authorizing bonds to be issued, the board of directors does NOT specify the a) total number of bonds authorized to be sold. b) contractual interest rate. c) selling price. d) total face value of the bonds. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

72. Bonds Coupon Maturity Date Bombardier 7.350 Dec. 22/26 The contractual interest rate of the Bombardier bonds is a) less than the market rate of interest. b) greater than the market rate of interest. c) equal to the market rate of interest. d) not determinable.

Bid $ 103.12

Yield % 6.35

Bid $ 103.12

Yield % 6.35

Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

73. Bonds Coupon Maturity Date Bombardier 7.350 Dec. 22/26 On the day of trading referred to above, a) the bond will mature on Dec. 22 or Dec. 26. b) bonds with market prices of $7.35 were traded. c) the bond is selling for 103.12% of face value. d) the bond sold for $6.35. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

74. A $1,000 face value bond with a quoted price of 97 is selling for a) $1,000. b) $970. c) $907. d) $97. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

75. If the market rate of interest is greater than the contractual rate of interest, bonds will sell a) at a premium. b) at face value. c) at a discount. d) only after the stated rate of interest is increased. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

76. The market rate of interest is often called the a) stated rate. b) effective rate. c) coupon rate. d) contractual rate. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

77. If bonds are issued at a discount, it means that the a) financial strength of the issuer is suspect. b) market interest rate is higher than the contractual interest rate. c) market interest rate is lower than the contractual interest rate. d) bondholder will receive effectively less interest than the contractual rate of interest.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

78. Bonds are usually sold in small denominations; as a result, a) bonds will not attract investors. b) bonds must be sold in one transaction. c) bonds attract many investors. d) only one investor may purchase all the bonds. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

79. If the contractual interest rate on a bond is 9% and interest is paid semi-annually, the interest paid semi-annually is a) 9%. b) 18%. c) 4.5%. d) 0%. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

80. The market value of bonds depends on various factors. Which of the following is NOT a factor affecting the market value? a) credit rating of the bond issuer

Test Bank for Accounting Principles, Ninth Canadian Edition

b) dates of semi-annual interest payments c) length of time until amounts are received d) market interest rates Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic 81. Which of the following is NOT a common example of non-current liabilities? a) bonds payable b) accounts payable c) instalment notes payable d) lease obligations Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

82. Bonds may be issued to thousands of investors in denominations of a) hundreds. b) thousands. c) millions. d) None of the choices is correct. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

83. Which of the following is NOT an advantage of debt over equity financing? a) Return on equity may be lower. b) Income tax savings results. c) Earnings per share may be higher. d) Shareholder control is not affected. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

84. Companies do NOT rely exclusively on debt, rather than equity financing, because a) debt is less risky. b) interest does not need to be paid regularly. c) it decreases earnings per share. d) principal must be paid at maturity. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

85. Financial leverage a) is negative if the rate of return is higher than the rate of borrowing. b) is positive if the rate of borrowing is higher than the rate of return. c) is negative if the rate of return is lower than the rate of borrowing. d) is positive if the rate of return is lower than the rate of borrowing. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

86. On January 1, 2024, Ferocious Ltd. issues $600,000 of 10-year, 4% bonds to yield a market interest rate of 5%. Interest is paid semi-annually on January 1 and July 1. What is the issue price of the bonds? a) $648,665 b) $600,000 c) $553, 233 d) $649,054 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

87. On January 1, 2024, Sylol Inc. issues $800,000 of 10-year, 5% bonds to yield a market interest rate of 4%. Interest is paid semi-annually on January 1 and July 1. What is the issue price of the bonds? a) $835,930 b) $800,000 c) $737,643 d) $865,406 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

88. On January 1, 2024, M & M Inc. issues $700,000 of 10-year, 4% bonds to yield a market interest rate of 4%. Interest is paid semi-annually on January 1 and July 1. What is the issue price of the bonds? a) $700,000 b) $825,756 c) $928,920 d) $672,000 Answer: a Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

89. If the market interest rate is lower than the contractual interest rate, a) the bond is issued at a premium. b) the bond is issued at face value. c) the bond is issued at a discount. d) the bond is issued at par value. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

90. The sale of bonds at a discount indicates that a) the issuer’s financial strength is questionable. b) the market interest rate is greater than the contractual interest rate. c) the issuer’s financial strength is superior. d) the investor will pay more than the face value of the bond. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

91. The present value of a bond is also known as its a) face value. b) market price. c) future value. d) deferred value. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

92. If the market rate of interest is 5%, a $10,000, 6%, 10-year bond that pays interest semi-annually would sell at an amount a) less than face value. b) equal to the face value. c) greater than face value. d) that cannot be determined. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

93. The present value of a $10,000, 5-year bond, will be less than $10,000 if the a) contractual rate of interest is less than the market rate of interest. b) contractual rate of interest is greater than the market rate of interest. c) bond is redeemable. d) contractual rate of interest is equal to the market rate of interest. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

94. A total of $5 million, 5%, 10-year bonds are issued at face value. Interest will be paid semiannually. When calculating the market price of the bond, the present value of a) $500,000 received for 10 periods must be calculated. b) $5 million received in 10 periods must be calculated.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) $5 million received in 20 periods must be calculated. d) $250,000 received for 10 periods must be calculated. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

95. Which of the following factors is NOT considered in establishing the present value of a bond? a) face value to be repaid at maturity b) market interest rate c) contractual interest rate d) cost of previously issued bonds Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

96. If the market rate of interest on similar bonds is paying interest at a rate of 6% when the bond issue has a contractual rate of 5%, the bonds will be issued at a) face value. b) a discount. c) a premium. d) par value. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

97. Sleepingdog Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2024, at 97. The journal entry to record the issue will show a a) debit to Cash for $1,000,000. b) credit to Discount on Bonds Payable for $30,000. c) credit to Bonds Payable for $1,000,000. d) debit to Cash for $970,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

98. The interest expense recorded on an interest payment date is increased a) by the amortization of premium on bonds payable. b) by the amortization of discount on bonds payable. c) only if the bonds were sold at face value. d) only if the market rate of interest is less than the stated rate of interest on that date. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

99. The carrying value of bonds will equal the market price a) at the close of every trading day. b) at the end of the fiscal period. c) on the date of issue. d) every six months on the date interest is paid. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

100. If bonds have been issued at a discount, over the life of the bonds, the a) carrying amount of the bonds will decrease. b) carrying amount of the bonds will increase. c) interest expense will decrease, if the discount is being amortized on an effective-interest basis. d) unamortized discount will increase. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

101. On January 1, 2024, $1,000,000, five-year, 5% bonds, were issued for $957,349. The interest rate in effect when the bonds were issued was 6%. Interest is paid semi-annually on January 1 and July 1. What would be the amount of discount amortized on July 1, 2024? a) $2,000 b) $3,720 c) $9,400 d) $2,350 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

102. On January 1, 2024, $1,000,000, five-year, 5% bonds, were issued for $957,349. The interest rate in effect when the bonds were issued was 6%. Interest is paid semi-annually on January 1 and July 1. What would be the amount of discount amortized on January 1, 2025? a) $2,000 b) $4,700 c) $3,832 d) $7,710

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

103. On January 1, 2024, $1,000,000, five-year, 5% bonds, were issued for $957,349. The interest rate in effect when the bonds were issued was 6%. Interest is paid semi-annually on January 1 and July 1. What would be the carrying amount of the bonds on January 1, 2025? a) $1,000,000 b) $957,345 c) $961,069 d) $964,901 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

104. On January 1, 2024, $1,000,000, five-year, 5% bonds, were issued for $957,349. The interest rate in effect when the bonds were issued was 6%. Interest is paid semi-annually on January 1 and July 1. How much interest is paid at each interest payment date? a) $25,000 b) $50,000 c) $30,000 d) $60,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

105. A corporation issued $200,000, 10%, five-year bonds on January 1, 2024 for $216,222, which reflects an effective-interest rate of 8%. Interest is paid semi-annually on January 1 and July 1. The amount of bond interest expense to be recognized on July 1, 2024, is a) $10,000. b) $8,000. c) $10,811. d) $8,649. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

106. When bonds are issued at a discount, the a) applicable interest rate used to calculate interest expense is the prevailing market interest rate on the date of each interest payment date. b) carrying amount of the bonds will decrease each period. c) interest expense will not be a constant dollar amount over the life of the bond. d) interest paid to bondholders will be the stated rate on the date the bonds are issued. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

107. When bonds are issued at a premium, the a) amount of premium amortized will get larger with successive amortization. b) carrying amount of the bonds will increase with successive amortization. c) interest paid to bondholders will increase after each interest payment date. d) interest rate used to calculate interest expense will be the contractual rate. Answer: a Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

108. When the discount on bonds is amortized, the annual interest expense will a) remain the same over all interest periods. b) increase each interest period. c) decrease each interest period. d) fluctuate depending on the market rate of interest. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

109. The sale of bonds at a premium indicates a) investors want to purchase the bonds because of the issuing company’s financial strength. b) the contractual rate of interest is less than the market rate of interest. c) the bond issuer requires more cash. d) the contractual rate of interest is higher than the market rate of interest. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

110. There are three steps required to calculate amortization using the effective-interest method. Which one of the following is NOT a required step? a) Calculate interest expense on the carrying amount of the bonds. b) Calculate interest expense on the fair value of the bonds. c) Calculate bond interest paid. d) Calculate the amortization amount. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

111. Bonds reported at carrying amount are reported at a) the face value of the bond plus the unamortized premium or minus the unamortized discount. b) the face value of the bond minus the unamortized premium or plus the unamortized premium. c) the face value. d) the price at which they were issued. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

112. The effective-interest method is required for a) companies reporting under IFRS. b) companies reporting under ASPE. c) both IFRS and ASPE. d) private companies. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

113. What impact will the amortization of a bond discount have on reported interest expense? a) no impact b) increase c) increase or decrease depending on the carrying amount d) decrease

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

114. On January 1, 2024, Ferocious Ltd. issues $600,000 of 10-year, 4% bonds to yield a market interest rate of 5%. Interest is paid semi-annually on January 1 and July 1. What would be the amount of discount amortized on January 1, 2025? a) $1,831 b) $3,754 c) $3,617 d) $1,877 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

115. On January 1, 2024, Sylol Inc. issues $800,000 of 10-year, 5% bonds to yield a market interest rate of 4%. Interest is paid semi-annually on January 1 and July 1. What would be the amount of premium amortized on January 1, 2025? a) $2,692 b) $5,491 c) $2,746 d) $5,384 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

116. On January 1, 2024, M & M Inc. issues $700,000 of 10-year, 4% bonds to yield a market interest rate of 4%. Interest is paid semi-annually on January 1 and July 1. What would be the carrying amount on January 1, 2025? a) $700,000 b) $714,000 c) $686,000 d) $672,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

117. A corporation issued $200,000, 10%, five-year bonds on January 1, 2024 for $216,222, which reflects an effective-interest rate of 8%. Interest is paid semi-annually on January 1 and July 1. How much is the amount amortized on January 1, 2025? a) $8,595 b) $1,405 c) $2,756 d) $16,222 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

118. A corporation issued $200,000, 10%, five-year bonds on January 1, 2024 for $216,222, which reflects an effective-interest rate of 8%. Interest is paid semi-annually on January 1 and July 1. How much is the bond’s carrying amount on July 1, 2024? a) $214,871 b) $213,466 c) $200,000 d) $216,222 Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues CPA: Financial Reporting AACSB: Analytic

119. Jessy Inc. issued $100,000, five-year bonds at a discount. Prior to maturity, when the bonds’ amortized cost is $99,200, the company redeems the bonds at 97. Which of the following is the correct entry to record the redemption of the bonds? a) Bonds Payable .............................................................................................. 2,200 Cash ........................................................................................................ 2,200 b) Bonds Payable .............................................................................................. 99,200 Gain on Redemption .............................................................................. 2,200 Cash ........................................................................................................ 97,000 c) Cash .............................................................................................................. 3,000 Bonds Payable ........................................................................................ 3,000 d) Loss on Redemption .................................................................................... 2,200 Cash .............................................................................................................. 97,000 Bonds Payable ........................................................................................ 99,200 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic 120. Jessy Inc. issued $100,000, five-year bonds at a discount. Prior to maturity, when the bonds’ amortized cost is $99,200, the company redeems the bonds at 101. Which of the following is the correct entry to record the redemption of the bonds? a) Bonds Payable .............................................................................................. 1,800 Cash ........................................................................................................ 1,800 b) Bonds Payable .............................................................................................. 101,000 Gain on Redemption .............................................................................. 1,800 Bonds Payable ........................................................................................ 99,200 c) Cash .............................................................................................................. 1,000 Bonds Payable ........................................................................................ 1,000 d) Bonds Payable .............................................................................................. 99,200 Loss on Redemption .................................................................................... 1,800 Cash ........................................................................................................ 101,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic 121. Which of the following is FALSE when redeeming a bond between semi-annual interest payment dates? a) Eliminate the carrying amount of the bonds. b) Record a gain on redemption if the cash paid is more than the carrying amount of the bonds. c) Record the cash paid. d) Record the amortization of any premium or discount. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

122. If bonds with a face value of $100,000 are redeemed at 90 before maturity when the carrying amount is $92,000, what would be the resulting gain or loss on the transaction? a) loss of $2,000 b) loss of $ 9,200 c) gain of $9,200 d) gain of $2,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

123. If bonds with a face value of $100,000 are redeemed at 92 before maturity when the carrying

Test Bank for Accounting Principles, Ninth Canadian Edition

amount is $92,000, what would be the resulting gain or loss on the transaction? a) loss of $8,000 b) loss of $7,360 c) gain of $8,000 d) no gain or loss Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

124. The sale of bonds above face value a) is a rare occurrence. b) will cause the total cost of borrowing to be less than the bond interest paid. c) will cause the total cost of borrowing to be more than the bond interest paid. d) will have no net effect on Interest Expense by the time the bonds mature. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

125. When recording a retirement of bonds, a company must account for all of the following, except a) the payment of cash to the bondholders. b) the removal of the bond from the company’s accounting records. c) the recognition of any gain or loss on redemption. d) the receipt of cash from the bondholders. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

126. If there is a loss on bonds redeemed before maturity, it is a) debited directly to Retained Earnings. b) reported as "Other Expenses" on the income statement. c) reported as a reduction in interest revenue on the income statement. d) debited to Interest Expense, as a cost of financing. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

127. A company should retire bonds early only if a) interest rates have risen significantly. b) it has sufficient cash. c) shareholders agree to the retirement. d) the bonds were initially sold at a discount. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

128. If bonds with a face value of $20,000 are redeemed before maturity when the carrying amount of the bonds is $18,000, the entry to record the redemption will include a debit to a) Bonds Payable for $20,000. b) Bonds Payable for $18,000. c) Interest Payable for $2,000. d) Bonds Payable equal to the market price of the bonds on the date of conversion. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the retirement of bonds.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

129. The carrying amount of a bond sold at a discount equals a) the face value of the bond less the loss on redemption. b) the face value of the bond. c) the face value of the bond less the unamortized discount. d) the initial market value of the bond. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

130. A $300,000 bond was retired at 98 when the carrying amount of the bond was $296,000. The entry to record the retirement would include a a) gain on bond redemption of $4,000. b) loss on bond redemption of $2,000. c) loss on bond redemption of $4,000. d) gain on bond redemption of $2,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

131. Ten $1,000 bonds with a carrying amount of $12,800 are retired at 105 after paying semi-annual interest. The entry to record the redemption is a) Bonds Payable .............................................................................................. 12,800 Gain on Bond Redemption .................................................................... 2,300 Cash ........................................................................................................ 10,500 b) Bonds Payable.............................................................................................. 10,500 Gain on Bond Redemption .................................................................... 500 Cash ........................................................................................................ 10,000

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Bonds Payable .............................................................................................. Loss on Bond Redemption ........................................................................... Cash ........................................................................................................ d) Bonds Payable.............................................................................................. Cash ........................................................................................................

10,000 500 10,500 12,800 12,800

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

132. If bonds are redeemable, the company will pay the bondholders an amount that was specified at the date of issue, which is known as a) the maturity value. b) the contractual rate. c) the redemption price. d) the issue price. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

133. Which of the following is necessary when bonds are redeemed? a) Record the gain or loss on redemption. b) Record the cash paid. c) Eliminate the carrying amount of the bonds. d) All of these choices are necessary. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

134. If bonds with a face value of $100,000 are redeemed at 98 before maturity when the carrying amount is $92,000, what would be the resulting gain or loss on the transaction? a) loss of $1,840 b) loss of $6,000 c) gain of $6,000 d) gain of $1,840 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements CPA: Financial Reporting AACSB: Analytic

135. Which is one of the main differences between a note payable and a bond payable? a) a fixed maturity date b) interest payments c) security d) a note payable is not traded on a public stock exchange Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

136. Which of the following statements pertaining to fixed-rate non-current instalment notes payable is correct? a) Blended payments result in the same amount of principal being paid at every payment date. b) When blended payments are made, a progressively larger portion of the payment goes toward the principal while a progressively smaller portion of the payment goes toward the interest. c) When blended payments are made, a progressively smaller portion of the payment goes toward the principal while a progressively larger portion of the payment goes toward the interest. d) Blended payments do not apply to non-current instalment notes payable. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

137. A mortgage note payable with a fixed interest rate requires the borrower to make blended principal and interest payments over the term of the loan. Each instalment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each instalment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal. Portion Allocated to Interest Expense Portion Allocated to Principal a) increases increases b) increases decreases c) decreases decreases d) decreases increases Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

138. The entry to record an instalment payment on a non-current note payable is a) Mortgage Notes Payable Cash b) Interest Expense Cash c) Mortgage Notes Payable Interest Expense Cash d) Bonds Payable Cash Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

139. On January 1, 2024, BFG Limited issues a $27,232, 5%, three-year note payable. The note calls for three annual payments of $10,000, blended principal and interest. The first payment is to be made on December 31, 2024. On December 31, 2025, BFG will report interest expense of a) $1,000. b) $1,362. c) $930. d) $10,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

140. On January 1, 2024, Lee Limited issues a $27,232, 5%, three-year note payable. The note calls for three annual payments of $10,000, blended principal and interest. The first payment is to be made on December 31, 2024. The total amount of interest that will be paid over the term of the loan is a) $2,768. b) $930. c) $10,000. d) $2,291. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

141. Prime is the interest rate that a) a bank charges their least creditworthy customers. b) a bank charges their most creditworthy customers. c) remains constant for the entire time of the note. d) is applied only to non-current instalment notes payable and no other forms of debt.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

142. With both types of instalment notes payable, the reduction in principal for the next year must be reported as a) a non-current liability. b) a non-current asset. c) a current liability. d) a current asset. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

143. Pie Company issued a $240,000, 5%, 20-year note payable on January 1, 2024, with repayment terms of equal monthly instalments plus interest at the beginning of every month with the first payment due on February 1, 2024. What amount would represent the December 31, 2024, year-end accrued interest expense rounded to the nearest dollar? a) $954 b) $1,000 c) $1,500 d) $11,490 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

144. Bird Nest Inc. issued a $240,000, 5%, 20-year note payable on January 1, 2024, with repayment terms of equal monthly instalments plus interest at the beginning of every month with the first payment due on February 1, 2024. What amount would represent the equal monthly instalments? a) $600 b) $1,000 c) $6,000 d) $12,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

145. Fancy Pants Inc. issued a $180,000, 5%, 10-year note payable on January 1, 2024, with repayment terms of equal monthly instalments that include principal plus interest. How much interest expense would Fancy Pants record for the first payment? a) $1,500 b) $750 c) $900 d) $75 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

146. Fancy Pants Inc. issued a $180,000, 5%, 10-year note payable on January 1, 2024, with repayment terms of equal monthly instalments plus interest at the beginning of every month with the first payment due on February 1, 2024. What amount would represent the equal monthly instalments? a) $1,500 b) $1,000 c) $4,500 d) $18,000 Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

147. Fancy Pants Inc. issued a $180,000, 5%, 10-year note payable on January 1, 2024, with repayment terms of equal monthly instalments plus interest at the beginning of every month with the first payment due on February 1, 2024. How much interest expense would Fancy Pants record for the first payment? a) $9,000 b) $75 c) $900 d) $750 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

148. Fancy Pants Inc. issued a $180,000, 5%, 10-year note payable on January 1, 2024, with repayment terms of equal monthly instalments plus interest at the beginning of every month with the first payment due on February 1, 2024. How much would the cash payment be on February 1, 2024? a) $1,500 b) $2,250 c) $750 d) $1,575 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

149. Fancy Pants Inc. issued a $180,000, 5%, 10-year note payable on January 1, 2024, with repayment

Test Bank for Accounting Principles, Ninth Canadian Edition

terms of equal monthly instalments that include principal plus interest. How much would the cash payments be each period? a) $1,500 b) $9,026 c) $18,415 d) $1,909 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable CPA: Financial Reporting AACSB: Analytic

150. Which of the following is TRUE about leases? a) For all leases less than one year, IFRS requires the lessee to report right-of-use assets and the related lease liabilities on the balance sheet. b) The right-of-use asset is recorded at the present value of the lease payments excluding direct costs or restorative costs. c) Leased assets are not depreciated. d) When a lease payment is recorded, a portion of each lease payment is allocated to the interest expense related to the lease liability. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

151. Which of the following is FALSE about depreciating leased assets? a) Depreciation is calculated using the lesser of the life of the asset or lease term. b) If the entity does not expect to take ownership, then the asset is depreciated over the estimated life of the asset. c) Leased assets are depreciated. d) If the entity expects to take ownership at the end of the lease, then the asset is depreciated over the useful life of the asset. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

152. Morrison Company, a public company reporting under IFRS, leases an excavator. At the end of the lease, ownership of the excavator transfers to Morrison Co. Morrison agrees to pay $25,000 per year and the payments are due at the end of each year. Morrison determines the present value of the lease payments is $92,500 and direct costs are $2,300. Morrison should record the right-of-use asset for a) $92,500. b) $90,200. c) $94,800. d) $25,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

153. Under ASPE, the leasing of a car as an instalment purchase arrangement is an example of a a) capital lease. b) right-of-use asset. c) operating lease. d) None of the choices is correct. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

154. Which of the following is NOT true? a) A lease contract generally requires regular payments to settle the lease liability. b) A portion of each lease payment is allocated to the interest expense related to the lease liability.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) The amount of the interest is determined by multiplying the outstanding lease liability by the interest rate. d) The entry to record monthly lease payments includes a debit to a Leased Asset account. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

155. A lease where the intent is temporary use of the property by the lessee and there is no transfer of ownership is called a) off-balance sheet financing. b) an operating lease. c) a capital or finance lease. d) a purchase of property. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

156. Which of the following is NOT a condition that would require the recording of a lease contract as a capital lease for a company reporting under ASPE? a) The lease transfers ownership of the property to the lessee. b) The lease term equals the asset’s useful life. c) The lease term is less than 75% of the economic life of the leased property. d) The present value of the lease payments equals or exceeds 90% of the fair value of the leased property. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

157. Under IFRS, which of the following would determine the recorded value of the leased asset on the balance sheet? a) the market value b) the replacement value c) the sum of the lease payments d) the present value of the lease payments, as well as any direct costs or expected restoration costs Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

158. In a lease contract, a) the owner of the property is called the lessee. b) the presence of a bargain purchase option indicates that it is a capital lease under ASPE. c) the renter of the property is called the lessor. d) there is always a transfer of ownership at the end of the lease term. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

159. Which of the following statements concerning leases is true? a) Leases are favoured by lessees. b) The appearance of the account, Leased Asset, on the balance sheet, signifies an operating lease. c) The portion of a lease liability expected to be paid in the next year is reported as a current liability. d) Present value is irrelevant in accounting for leases. Answer: c Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

160. Under IFRS, for all leases greater than one year, the a) lessee must report the leased assets and the related lease liability on its balance sheet. b) lessee must report the leased asset only on its balance sheet. c) lease may be classified as an operating lease. d) recording of a lease liability is optional—that is, the off-balance sheet approach can be elected. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

161. Under ASPE, the amount capitalized for a capital lease is the a) sum of the lease payments over the life of the lease. b) fair market value of the leased asset on the date the lease is signed. c) present value of the lease payments. d) future value of the asset as at the lease termination date. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

162. If the lessee has an option to purchase the leased asset at a price that is significantly below its fair value, this is considered a) the lease term. b) the purchase price. c) the bargain purchase option. d) an operating lease. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

163. Under ASPE, a lease is generally classified as a capital lease if the lease term is equal to ______ or more of the economic life of the leased property. a) 75% b) 90% c) 100% d) 25% Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

164. Which of the following conditions would NOT be considered by companies reporting under ASPE when determining if a lease should be classified as a capital lease or an operating lease? a) transfer of ownership b) a bargain purchase option c) the present value of the lease payments is equal to or greater than 90% of the purchase price d) specialized asset Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

165. After it is acquired, the lessee depreciates the leased asset a) over the life of the lease. b) over the economic life of the asset.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) The lessee does not depreciate the leased asset because the lessee does not have legal title to the asset. d) only at the end of the lease term if the lessee takes legal title to the asset. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

166. Leased equipment that is classified as a capital lease would be initially recorded as a) a debit to Equipment Rent/Lease Expense and a credit to Cash. b) a debit to the Leased Asset – Equipment and a credit to Cash. c) a debit to Equipment Rent/Lease Expense and a credit to Lease Liability. d) a debit to the Leased Asset – Equipment and a credit to Lease Liability. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Account for leases. Section Reference: Lease Liabilities CPA: Financial Reporting AACSB: Analytic

167. The ratio that measures the percentage of total assets provided by creditors is the a) interest coverage ratio. b) debt to total assets ratio. c) return on assets ratio. d) receivables turnover ratio. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

168. The interest coverage ratio measures the ability of the company to a) meet interest payments as they become due. b) turn over inventory. c) collect overdue accounts. d) earn a profit. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

169. An increase in the interest coverage ratio indicates primarily that the corporation’s a) solvency has improved. b) solvency has deteriorated. c) liquidity has deteriorated. d) liquidity has improved. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

170. At Reilly Company’s year end of September 30, 2024, the company has an instalment note payable with a total outstanding balance of $660,000 to be repaid evenly each month plus interest over the next five years. How much would Reilly report for this item on the September 30, 2024, balance sheet under non-current liabilities? a) $660,000 b) $132,000 c) $528,000 d) $11,000 Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

171. The following selected information has been provided from the December 31, 2024, year-end results of Will Smith Company: Revenues - $1,725,000; Operating Expenses - $955,000; Interest Expense - $48,900; Income Tax Expense - $216,330. The interest coverage ratio for Will Smith Company at December 31, 2024, would be a) 14.7 times. b) 11.3 times. c) 10.3 times. d) 15.7 times. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

172. Brooklyn Ltd. reported the following selected data at December 31, 2024 and 2023:

Total assets Total liabilities Interest expense Income tax expense Profit for the year

2024 $620,000 401,000 15,000 28,900 98,000

How much is Brooklyn Ltd.’s debt to total assets for 2024? a) 67.1% b) 1.55 times c) 63.2% d) 64.7% Answer: d

2023 $635,000 392,000 11,000 26,400 90,000

Test Bank for Accounting Principles, Ninth Canadian Edition

173. Brooklyn Ltd. reported the following selected data at December 31, 2024 and 2023:

Total assets Total liabilities Interest expense Income tax expense Profit for the year

2024 $620,000 401,000 15,000 28,900 98,000

2023 $635,000 392,000 11,000 26,400 90,000

How much is Brooklyn Ltd.’s debt to total assets for 2023? a) 63.2% b) 61.7% c) 1.62 times d) 63.5% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

174. Brooklyn Ltd. reported the following selected data at December 31, 2024 and 2023:

Total assets Total liabilities Interest expense Income tax expense Profit for the year

2024 $620,000 401,000 15,000 28,900 98,000

How much is Brooklyn Ltd.’s interest coverage ratio for 2024? a) 9.46 times

2023 $635,000 392,000 11,000 26,400 90,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) 6.53 times c) 7.53 times d) 8.46 times Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

175. Brooklyn Ltd. reported the following selected data at December 31, 2024 and 2023:

Total assets Total liabilities Interest expense Income tax expense Profit for the year

2024 $620,000 401,000 15,000 28,900 98,000

2023 $635,000 392,000 11,000 26,400 90,000

How much is Brooklyn Ltd.’s interest coverage for 2023? a) 10.58 times b) 9.18 times c) 11.58 times d) 8.18 times Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

176. Which of the following is TRUE regarding solvency ratios? a) It is better to have a low interest coverage ratio. b) The higher the debt to total assets, the greater risk the company may be unable pay its maturing obligations. c) EBIT, which is the numerator used in the formula to calculate the interest coverage ratio, stands for

Test Bank for Accounting Principles, Ninth Canadian Edition

“earnings before income taxes.” d) Short-term creditors and investors are interested in solvency ratios. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 177. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.

Secured bonds Debenture bonds Financial leverage Premium on bonds payable Discount on bonds payable Effective-interest method of amortization

G. H. I. J. K. L. M.

Blended payments Bonds Contractual rate Capital lease Operating lease Redeemable bonds Interest coverage

____

Borrowing at one rate and investing at a different rate.

____

Bonds that have specific assets pledged as collateral.

____

Bonds that can be retired by the company before they mature.

____

A debt security that is traded on organized exchanges.

____

Occurs when the contractual rate of interest is greater than the market rate of interest.

____

Unsecured bonds issued against the general credit of the borrower.

____

Used to determine the amount of interest the borrower pays and the investor receives.

____

Occurs when the contractual rate of interest is less than the market rate of interest.

____

Fixed debt payments resulting in an increasingly larger portion of each payment being credited toward principal and a smaller portion toward interest over time.

____ 10.

A contractual arrangement that transfers the risks and rewards of ownership to the lessee.

Test Bank for Accounting Principles, Ninth Canadian Edition

____ 11.

A contractual arrangement that gives the lessee temporary use of property where the risks and rewards of ownership are not transferred.

____ 12.

Produces a periodic interest expense equal to a constant percentage of the carrying amount of the bonds.

_____ 13. Indicates the company’s ability to meet interest payments as they come due.

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 1.

10. J 11. K 12. F 13. M Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the characteristics of bonds. Section Reference: Bonds Payable Learning Objective: Calculate the price of a bond. Section Reference: Bond Pricing Learning Objective: Account for bond transactions. Section Reference: Accounting for Bond Issues Learning Objective: Account for the retirement of bonds. Section Reference: Accounting for Bond Retirements Learning Objective: Account for instalment notes payable. Section Reference: Instalment Notes Payable Learning Objective: Account for leases. Section Reference: Lease Liabilities Learning Objective: Explain and illustrate the methods for the presentation and analysis of noncurrent liabilities. Section Reference: Statement Presentation and Analysis CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 16 INVESTMENTS CHAPTER STUDY OBJECTIVES 1. Identify reasons to invest, and classify investments. Companies purchase debt and equity securities of other companies for two main reasons: (1) for non-strategic reasons as a source of investment income, and (2) for strategic reasons, such as gaining control of a competitor, influencing strategic alliances, or moving into a new line of business. Non-strategic investments are debt and equity securities that are purchased for purposes of earning interest or dividend revenue or of selling them in the short term at a gain. Investments purchased for selling in the short term are called trading investments and are reported at fair value. Debt investments reported at amortized cost may be short-term or long-term. Strategic investments are always investments in equity securities and are classified as long-term investments.

2. Demonstrate the accounting for debt investments that are reported at amortized cost. Companies reporting under IFRS report debt investments purchased for the purposes of earning interest income at amortized cost. Companies reporting under ASPE may report all investments in debt instruments at amortized cost or at fair value if a fair value can be reliably determined. Debt investments include money-market instruments, bonds, and similar items. Entries are required to record the (1) acquisition, (2) interest revenue, and (3) maturity or sale. Interest revenue is recognized as it accrues and any discount or premium is amortized using the effective-interest method under IFRS. Companies reporting under ASPE will use the effective-interest method but are permitted to use other methods.

3. Demonstrate the accounting for fair value investments. Under IFRS, debt and equity investments held for trading purposes and investments that do not meet the criteria for amortized cost or fair value through other comprehensive income are reported at fair value through profit or loss. Fair value through profit or loss is a “catch-all” classification for investments. When using this measurement method, adjustments to the fair value of assets are included in the calculation of profit or loss on the income statement or statement of comprehensive income. Certain investments in equity may be classified as fair value through other comprehensive income and are reported at fair value each reporting period. However, holding gains or losses from fair value adjustments are included in other comprehensive income on the statement of comprehensive income. Under ASPE, any investment that has a quoted market price may be accounted for using fair value through profit or loss; otherwise, cost or amortized cost is used. An equity investment may be in either preferred or common shares of another corporation. Entries are required to record the (1) acquisition, (2) investment revenue, (3) fair value adjustments, and (4) sale.

Test Bank for Accounting Principles, Ninth Canadian Edition

4. Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Strategic investments are long-term investments in common shares of another company. The accounting for strategic investments is based on how much influence the investor has over the operating and financial affairs of the issuing corporation (the investee). The investor company is usually considered not to have significant influence over the investee company when it owns less than 20% of the investee. In this case, the investor company reports the investment in the investee company at either fair value through profit or loss or, under IFRS, fair value through other comprehensive income. When there is significant influence (ownership is usually 20% or more), the investee is called an associate. The equity method is used to account for investments with significant influence. The equity method records investment revenue when profit is reported by the associate and increases the investor’s investment account accordingly. Dividends that are received reduce the value of the investment account. Under ASPE, companies can elect to report investments with significant influence at fair value if there is a quoted market price. In the absence of a quoted market price, significant influence investments may be reported using the equity method or cost. When a company controls the common shares of another company (that is, its ownership is usually greater than 50%), consolidation is required and consolidated financial statements are prepared.

5. Explain how investments are reported in the financial statements. Investments held for trading purposes and classified as fair value through profit or loss are presented in the current assets section of the balance sheet. This includes equity investments and short- and long-term debt investments as long as they have been purchased with the intent to resell. Debt investments reported at amortized cost, maturing within 12 months of the balance sheet date, are also reported in current assets. Debt instruments reported at amortized cost with maturity dates of longer than 12 months from the balance sheet date and equity investments that are purchased for strategic purposes are reported in non-current assets. Gains and losses resulting from investments classified as fair value through profit or loss are reported in the income statement and are presented in other revenues or other expenses. Gains and losses resulting from equity investments classified as fair value through other comprehensive income are reported in other comprehensive income, then closed to accumulated other comprehensive income in the shareholders’ equity section of the balance sheet.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 For each item listed below, determine if it is a non-strategic investment (NS) or a strategic investment (S). 1. Bonds 2. Term deposits 3. Equity investment purchased to trade 4. Short-term debt instrument held to earn interest 5. Treasury bill 6. Preferred shares 7. Long-term debt instrument held to earn interest 8. Short-term debt instrument purchased to trade 9. 60% of the common shares of the investee 10. Money-market funds Solution 1 1. NS 2. NS 3. NS 4. NS 5. NS 6. NS 7. NS 8. NS 9. S 10. NS Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 2 Following are four independent situations describing the investments of four businesses: 1. At the end August each year, Summer BBQ Sales (SBS) has excess cash on hand. Management purchases 180-day term deposits (TD), which earn interest at 4% and which will mature in late February, just in time to purchase inventory for the next barbeque season. However, if the cash is needed earlier, the TDs will be cashed in early. SBS has no other investments. 2. Miller Distributors is active in a number of industries. Recently, Miller purchased 10% of the voting shares of Helen’s Home Decorating Supplies, with the intention that if additional shares of Helen’s become available, Miller will purchase enough shares to exercise voting control over Helen’s and will then merge the two companies. Consequently, Miller’s management has elected to exclude gains and losses on this investment from profit or loss. 3. Cole’s Computers will invest excess cash by making private loans to employees up to $2,000 in order to generate interest income while assisting employees. The employees sign two-year interest-bearing promissory notes and make monthly instalments including interest. At Cole’s year end, total notes receivable from employees were $8,950. Unless the loans are in default, Cole does not expect to collect the loans before their maturity date. 4. Joudrey Holdings has accounts with several online brokers, and frequently buys and sells public company securities in an attempt to generate extra income. At Joudrey’s year end, it owned shares in Big Rock Brewing Inc., Home Depot Canada, and Rogers Communications Inc. Instructions a) For each situation, indicate if the investment is a strategic or non-strategic investment. b) For each situation, indicate if the investment should be reported at amortized cost, fair value, or reported using the equity method. c) For each situation, indicate if the investment should be reported in current assets or long-term assets. Solution 2 (10 min.) 1. Non-strategic – Short-term debt instrument – these are short-term investments that the company intends to hold for less than one year to earn interest, but may be willing to sell prior to maturity. This investment should be reported at amortized cost and should be reported as a current asset. 2.

Strategic – Fair value – long-term strategic investment, but insufficient shares to exert significant influence, and uncertain about whether they will be held indefinitely. This investment should be valued at fair value and shown as a long-term asset.

Non-strategic debt instrument – held for to earn interest – Cole’s has both the intention and ability to hold these fixed-term debt investments to their maturity dates. There is no ready market for them so they cannot be classed as trading. This investment should be valued at amortized cost and shown as a non-current asset if the due date is beyond one year.

Non-strategic trading – short-term investment, readily marketable, and held for the purpose of short-term profits. This investment should be valued at fair value and shown as a current asset.

Bloomcode: Analysis

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

Exercise 3 Assuming that none of these are cash equivalents, for each of the following investments owned by Kowanda Industries, use the table provided to indicate whether it is most likely to be a) A non-strategic or a strategic investment; b) Classified as current assets or non-current assets; and c) measured by which method. Investment

a) Non-strategic or strategic?

b) Current assets, or Non-current assets

c. Measurement method

a) Non-strategic or

b) Current assets or

c) Measurement

10-year bonds; purchased and held with the intention of using the proceeds at the bond maturity to replace existing equipment that is expected to have a 10-year life. Common shares of a supplier purchased with the intention of electing a representative to the supplier’s board of directors. The supplier is a private corporation. The shares owned by Kowanda comprise 15% of the total shares. Common shares purchased on the TSX on the expectation that the trading price will increase in the near future, at which time they will be sold. 90-day treasury bill purchased with excess cash, with the knowledge that the cash will be required in 90 days to pay for inventory. 30-day, US-dollar money-market funds purchased for resale. Solution 3 (10 min.) Investment

Test Bank for Accounting Principles, Ninth Canadian Edition

strategic? 10-year bonds; purchased and held with the intention of using the proceeds at the bond maturity to replace existing equipment that is expected to have a 10-year life. Common shares of a supplier purchased with the intention of electing a representative to the supplier’s board of directors. The supplier is a private corporation. The shares owned by Kowanda comprise 15% of the total shares. Common shares purchased on the TSX on the expectation that the trading price will increase in the near future, at which time they will be sold. 90-day treasury bill purchased with excess cash, with the knowledge that the cash will be required in 90 days to pay for inventory. 30-day, US-dollar money-market funds purchased for resale.

Non-strategic

Non-current assets Non-current assets

method Amortized cost

Strategic

Non-current assets

Fair value

Non-strategic

Current assets

Fair value

Non-strategic

Current assets

Amortized cost

Non-strategic

Current assets

Amortized cost

Bloomcode: Analysis Difficulty: Medium Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

Exercise 4 On July 2, 2024, Algoma Corp. purchased at 101, $100,000 of 6%, 10-year bonds issued by Shield Inc., with the intention of holding the bonds to earn interest income. The bonds pay interest semi-annually on January 1 and July 1. Both companies have December 31 year ends. The relevant amortization amount for the period ended December 31, 2024, is $50. Instructions a) Record the purchase of the bond by Algoma and record any entries it will make related to this investment for the year end December 31, 2024. b) Record the issue of the bond by Shield and record any entries they will make related to this liability for the year end December 31, 2024.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) d)

Record the receipt of interest by Algoma on January 1, 2025. Record the payment of interest by Shield on January 1, 2025.

Solution 4 (10 min.) a) July 2 Investments at Amortized Cost ................................................... Cash ...................................................................................... Dec. 31

b) July 2

Dec. 31

c) Jan. 1

d) Jan

101,000 101,000

Interest Receivable ($100,000 x 6% x 6÷12) ................................ Investments at Amortized Cost ........................................... Interest Revenue ..................................................................

3,000

Cash .............................................................................................. Bonds Payable .....................................................................

101,000

Interest Expense .......................................................................... Bonds Payable ............................................................................. Interest Payable ...................................................................

2,950 50

Cash .............................................................................................. Interest Receivable ..............................................................

3,000

Interest Payable ........................................................................... Cash ......................................................................................

3,000

50 2,950

101,000

3,000

Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

Exercise 5 Hidden Village Inc. had the following transactions during the year ended December 31, 2024. The debt investments were purchased to earn interest income. Jan. 1 Invested $10,000 in a money-market fund. Mar. 31 Notified by fund manager that interest of $125 had been added to the money-market fund. Apr. 1 Purchased a 182-day treasury bill maturing on September 30 for $58,600. June 30 Notified by fund manager that interest of $125 had been added to the money-market fund. July 31 Cashed the money-market fund and received $10,290. Aug 1 Purchased a 6-month, 3% term deposit for $15,000. Sept. 30 Received $59,500 at maturity of treasury bill.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Record the transactions and prepare any December 31, 2024, adjusting entries. Round to the nearest dollar. Solution 5 (15 min.) Jan. 1 Investments at Amortized Cost, Money Market Fund ................... Cash......................................................................................... Mar. 31

Apr.

June 30

July 31

Aug. 1

Sept. 30

Dec. 31

10,000 10,000

Investments at Amortized Cost, Money Market Fund .................. Interest Revenue.....................................................................

125

Investments at Amortized Cost, Treasury Bill ............................... Cash.........................................................................................

58,600

Investments at Amortized Cost, Money Market Fund ................... Interest Revenue.....................................................................

125

Cash ................................................................................................ Investments at Amortized Cost, Money Market Fund ........... ($10,000 + $125 + $125) Interest Revenue ($10,290 – $10,250) ....................................

10,290

Investments at Amortized Cost, Term Deposit ............................. Cash.........................................................................................

15,000

Cash ................................................................................................ Investments at Amortized Cost, Treasury bill ....................... Interest Revenue ($59,500 – $58,600) ....................................

59,500

Interest Receivable ($15,000 x 3% x 5 ÷ 12) ................................... Interest Revenue..................................................................... (Interest on term deposit)

188

125

58,600

125

10,250 40

15,000

58,600 900

188

Exercise 6 The Old Country Company purchased the following instruments during the year. Assume the company’s fiscal year end is January 31, 2025.

Test Bank for Accounting Principles, Ninth Canadian Edition

Dec. 1, 2024

Purchased a $5,000 120-day treasury bill for $4,935. The treasury bill is trading at a market rate of interest of 4% annually. Feb. 1, 2025 Purchased at 101 a $15,000, 5% ,5-year Laurentian Bank of Canada bond. Interest is paid semi-annually. The market rate of interest was 3.5%. The bonds were purchased to trade. Mar. 31, 2025 Treasury bill matured. Aug. 1, 2025 Received interest on the Laurentian Bank of Canada bond. Aug. 2, 2025 Sold the Laurentian Bank of Canada bond at 99. Instructions Record the above transactions and any necessary adjusting entries for The Old Country Company required at January 31, 2025. Round to the nearest dollar. Solution 6 Dec. 1 Investments at Amortized Cost, Treasury bill ............................... Cash......................................................................................... Jan. 31

Feb. 1

Mar. 31

Aug. 1

Aug. 2

4,935 4,935

Investments at Amortized Cost, Treasury bill ............................... Interest Revenue (5,000 x 4% x 2÷12).....................................

Investments at FVTPL ($15,000 x 1.01) .......................................... Cash.........................................................................................

15,150

Investments at Amortized Cost, Treasury bill ............................... Interest Revenue ($5,000 – ($4,935 + $33) .............................

Cash ................................................................................................ Investments at Amortized Cost, Treasury bill .......................

5,000

Cash (15,000 x 5% x 6 ÷ 12) ............................................................. Investment Income or Loss ....................................................

375

Cash ($15,000 x .99) ........................................................................ Investment Income or Loss ............................................................ Investments at FVTPL .............................................................

14,850 300

15,150

5,000

375

15,150

Exercise 7

Test Bank for Accounting Principles, Ninth Canadian Edition

On January 1, 2024, Space Sports Inc. purchased a 10-year, $100,000 bond, paying interest of 7% semi-annually every January 1 and July 1. The market rate of interest for similar bonds is 6%. Space has the intention of holding the bonds to maturity and earning interest income. The company follows IFRS and has a December 31 year end. Instructions a) Record the purchase of the bonds on January 1, 2024. b) Record the first interest payment on July 1, 2024. c) Prepare the necessary journal entry at year end to accrue interest income. d) Record the interest payment on January 1, 2025. Round all answers to the nearest dollar. Solution 7 (10 min.) a) Jan. 1 Investments at Amortized Cost ................................................... 2024 Cash ......................................................................................

107,439 107,439

Financial calculator: 20N; 3I; 3,500PMT; 100,000FV; PV = $107,439 b) July 1

c) Dec. 31

Cash .............................................................................................. Investments at Amortized Cost ........................................... Interest Revenue ($107,439 x 6% x 6 / 12) ...........................

3,500

Interest Receivable ...................................................................... Investment at Amortized Cost ............................................. Interest Revenue ($107,162 x 6% x 6 / 12) ...........................

3,500

277 3,223

285 3,215

Carrying value of bond = $107,439 – $277 = $107,162 d) Jan. 1 2025

Cash .............................................................................................. Interest Receivable ..............................................................

3,500 3,500

Exercise 8 On September 1, O’Hara Corporation had the following investments classified as held for trading

Test Bank for Accounting Principles, Ninth Canadian Edition

purposes: $50,000, 5% FMC Co. bond, purchased previously by O’Hara at 101. Interest on the bond is payable semi-annually on January 1 and July 1. $100,000 3% Government of Canada bond, previously purchased by O’Hara at 98. Interest on the bond is payable semi-annually on March 31, and September 30. During the month of September, the following transactions took place: Sept. 1: Purchased $40,000 4% Alpha Inc. bond at 99. Interest is payable annually on August 31. Sept. 30: Received interest on Government of Canada bond. Sept. 30: Sold the Government of Canada bond at 97. Sept. 30: Fair value on FMC Co. bond is $52,500 and fair value of Alpha Inc. bond is $38,700. Instructions Record the transactions that occurred in September and prepare any adjusting entries required at September 30. O’Hara Corporation is a public company and has a September 30 year end. Round to the nearest dollar. Solution 8 (10 min.) Sept. 1 Investments at FVTPL ($40,000 x 99%) .......................................... Cash.........................................................................................

39,600

Sept. 30

Cash ($100,000 x 3% x 6÷12) .......................................................... Investment Income or Loss ....................................................

1,500

Cash ................................................................................................ Investment Income or Loss ............................................................ Investments at FVTPL .............................................................

97,000 1,000

Interest Receivable......................................................................... Investment Income or Loss ....................................................

758

Sept. 30

FMC $50,000 x 5% x 3÷12 = Alpha $40,000 x 4% x 1÷12 = Total Sept. 30

Sept. 30

39,600

1,500

98,000

758

$625 133 $758

Investments at FVTPL ($50,500 – $52,500). ................................... Investment Income or Loss ....................................................

2,000

Investment Income or Loss ($39,600 – $38,700) ........................... Investments at FVTPL .............................................................

900

Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting

2,000

900

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 9 Clarke Inc., a public company, had the following transactions pertaining to debt investments held for trading purposes: Jan. 1 Purchased 70, 4%, $1,000 Redding Corp. bonds for $70,000. Interest is payable semiannually on July 1 and January 1 July 1 Received semi-annual interest on Redding Corp. bonds. 1 Sold 35 Redding Corp. bonds for $38,000. Dec. 31 Redding Corp. bonds were trading at 101. Instructions a) Journalize the transactions. b) Prepare the required adjusting entries at December 31. Solution 9 (10–15 min.) a) Jan. 1 Investments at FVTPL..................................................................... Cash ................................................................................. July 1

b) Dec. 31

Dec. 31

70,000 70,000

Cash ($70,000 × 4% × 6 ÷ 12) .......................................................... Investment Income or Loss....................................................

1,400

Cash ................................................................................................ Investments at FVTPL ............................................................ Investment Income or Loss ($38,000 – $35,000) ...................

38,000

Interest Receivable ($35,000 × 4% × 6 ÷ 12)................................... Investment Income or Loss....................................................

700

Investment at FVTPL (35 x $1,000 x 1.01) – $35,000 ...................... Investment Income or Loss....................................................

350

1,400

35,000 3,000

700

350

Exercise 10 The following transactions were made by Nemo Inc., a public company. Assume all investments are held for trading.

Test Bank for Accounting Principles, Ninth Canadian Edition

June 2 July 1 30 Sept. 15 Dec. 31 31 31

Purchased 200 Searching Corporation common shares for $45 per share. Purchased 200 Finding Corporation bonds for $220,000. Received a cash dividend of $2 per share from Searching Corporation. Sold 60 shares of Searching Corporation for $50 per share. Received semi-annual interest cheque for $11,000 from Finding Corporation. Received a cash dividend of $2 per share from Searching Corporation. The shares of Searching Corporation are worth $60 each on this date. The bonds are worth $237,000.

Instructions Journalize the transactions and required adjusting journal entries at December 31, the company’s fiscal year end. Solution 10 (12–17 min.) June 2 Investments at FVTPL (200 × $45) .................................................. Cash......................................................................................... To record purchase of 200 common shares of Searching Corporation. July 1

Sept. 15

Dec. 31

9,000 9,000

Investments at FVTPL..................................................................... Cash......................................................................................... To record purchase of 200 Finding Corporation bonds.

220,000

Cash (200 shares x $2) .................................................................... Investment Income or Loss .................................................... To record receipt of cash dividend.

400

Cash (60 × $50)................................................................................ Investments at FVTPL (60 × $45) ............................................ Investment Income or Loss .................................................... To record sale of Searching Corporation shares.

3,000

Cash ................................................................................................ Investment Income or Loss .................................................... To record receipt of interest on Finding Corporation bonds.

11,000

Cash (140 × $2)................................................................................ Investment Income or Loss .................................................... To record receipt of cash dividend.

280

Investments at FVTPL (140 x $60) – (140 x $45) ............................. Investment Income or Loss .................................................... To record gain on fair value adjustment on Searching Corporation shares.

2,100

Investment at FVTPL ($220,000 – $237,000) ..................................

17,000

220,000

400

2,700 300

11,000

280

2,100

Test Bank for Accounting Principles, Ninth Canadian Edition

Investment Income or Loss .................................................... To record gain on fair value adjustment on Finding Corporation bonds.

17,000

Exercise 11 Bristols Corp. had the following transactions related to investments held for trading: Jan. 1 Purchased 1,050 Stout Inc. shares for $10,605. June 1 Received cash dividends of $0.30 per share on the Stout shares. Sept. 15 Sold 500 Stout shares for $5,400. Dec. 1 Received cash dividends of $ 040 per share on the Stout shares. On December 31, the shares of Stout Inc. were trading for $9.10 each. Instructions a) Journalize the transactions. b) Indicate the income statement and/or comprehensive income effects of the transactions. Solution 11 (10–15 min.) a) Jan. 1 Investments at FVTPL..................................................................... Cash......................................................................................... June 1

Sept. 15

Dec. 1

Dec. 31

10,605 10,605

Cash (1,050 × $0.30) ........................................................................ Investment Income or Loss ....................................................

315

Cash ................................................................................................ Investment Income or Loss .................................................... Investments at FVTPL [500 × ($10,605 ÷ 1,050)] ....................

5,400

Cash (550 × $0.40)........................................................................... Investment Income or Loss ....................................................

220

Investment Income or Loss ............................................................ Investments at FVTPL .............................................................

550

315

350 5,050

220

Investment Income or Loss is reported under Other Revenues on the income statement.

Bloomcode: Application

550

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

Exercise 12 On January 1, 2024, YBZ Airlines purchased common shares of Bombardier Inc. for $220,000 to hold as a short-term trading investment. On December 31, 2024, this investment now has a market value of $235,000. On June 1, 2025, YBZ Airlines sells their Bombardier shares for $225,000. Prepare the required entry. Solution 12 (10 min.) Jan. 1, 2024 Investments at FVTPL ............................................................. Cash .................................................................................

220,000 220,000

Dec. 31, 2024 Investments at FVTPL ............................................................. Investment Income or Loss ............................................

15,000

June 1, 2025

225,000 10,000

Cash......................................................................................... Investment Income or Loss .................................................... Investments at FVTPL .....................................................

15,000

235,000

Exercise 13 On January 5, 2024, Blacksmith Limited purchased the following portfolio of securities to be held for trading purposes: 300 McRae Corporation common shares for $4,200 500 Gupta Corporation common shares for $10,000 600 May Corporation common shares for $19,800 On June 30, 2024, Blacksmith received the following cash dividends: McRae Corporation .......................................... $2.00 per share Gupta Corporation .......................................... $1.00 per share May Corporation .............................................. $2.25 per share On November 15, 2024, Blacksmith sold 100 May Corporation common shares for $4,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

On December 31, 2024, the market value of the securities held by Blacksmith is as follows: Per Share McRae Corporation common shares ...................... $15 Gupta Corporation common shares ....................... 18 May Corporation common shares .......................... 35 Instructions Prepare the appropriate journal entries that Blacksmith Limited should make on the following dates: January 5, 2024; June 30, 2024; November 15, 2024; and December 31, 2024. Solution 13 (20–25 min.) January 5, 2024 Investments at FVTPL ............................................................................... Cash ................................................................................................... To record purchase of trading investments. June 30, 2024 Cash........................................................................................................... Investment Income or Loss .............................................................. To record cash dividends received.

34,000 34,000

2,450* 2,450

*300 × $2 = $600; 500 × $1 = $500; and 600 × $2.25 = $1,350. November 15, 2024 Cash........................................................................................................... Investment Income or Loss .............................................................. Investment at FVTPL ......................................................................... To record sale of 100 May Corporation common shares. December 31, 2024 Investments at FVTPL ............................................................................... Investment Income or Loss .............................................................. To value trading investments at market value*. * Security McRae Corporation Gupta Corporation May Corporation Total

Investment Portfolio Shares Cost 300 $ 4,200 500 10,000 500 16,500 $30,700

Bloomcode: Synthesis Difficulty: Hard Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting

4,000 700 3,300

300 300

Market value $ 4,500 9,000 17,500 $31,000

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 14 Riley Holdings, a public company, purchased the following investments on September 1, 2024: 8,000 common shares of Jasper Public Co., which trade on the TSX, were purchased at $10. Riley purchased the shares with the intention of selling them immediately if the value increases or if cash is needed for other business purposes. 7,500 common shares of Tasha Pet Grooming Ltd. were purchased for $75,000. This investment represents 30% of the common shares of Tasha. Riley will be able to elect two directors to Tasha’s board of directors and so expects to influence the direction of the company. At December 31, 2024, Riley’s year end, the following information about these investments is available: Jasper Public Co. shares are trading on the TSX at $11.25. Tasha’s reported $90,000 in net income for the period September 1 through December 31, 2024, and paid no dividends during this period. Instructions a) Record each of the purchases on September 1, 2024. b) Record any adjusting entries required on December 31, 2024, related to these investments. Solution 14 (15 min.) a) Investments at FVTPL (8,000 × $10) ......................................................... Cash ...................................................................................................

80,000 80,000

Investment in Associate ........................................................................... Cash ...................................................................................................

75,000

Investments at FVTPL [8,000 shares x ($11.25 – $10.00)] ........................ Investment Income or Loss ..............................................................

10,000

Investment in Associate ($90,000 x 30%)................................................. Income from Investment in Associate .............................................

27,000

75,000

b) 10,000

Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

27,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 15 Pigeau Ltd. purchased 42,000 common shares of Lindsay Corporation for $1,000,000. During the year, Lindsay Corporation reported profit of $500,000 and paid dividends of $125,000. On December 31, Pigeau’s year end, Lindsay Corporation's common shares had a market value of $25 per share. Instructions a) Assuming that the 42,000 shares represent a 15% interest in Lindsay Corporation and are classified by management as FVTPL investments: 1. Prepare the journal entry to record the investment in Lindsay shares. 2. Prepare any entries that Pigeau should make in accounting for its investment in Lindsay shares during the year. 3. At what amount is this investment reported on Pigeau’s December 31 balance sheet? b) Repeat requirement a) above except assume that the 42,000 common shares represent a 25% interest in Lindsay Corporation that provides Pigeau with significant influence over Lindsay and are accounted for as a long-term equity investment. c) Repeat requirement a) above except assume that the 42,000 common shares represent a 25% interest in Lindsay Corporation but Pigeau does not have significant influence over Lindsay, and Pigeau elects to account for the investment as fair value through other comprehensive income. Solution 15 (16–21 min.) a) Fair Value through Profit/Loss 1. Investments at FVTPL ....................................................................... Cash ........................................................................................... To record purchase of 42,000 shares of Lindsay Corporation. 2.

3. b)

1,000,000

Cash ($125,000 × 15%) ...................................................................... Investment Income or Loss....................................................... To record dividends received.

18,750

Investments at FVTPL [($42,000 x $ 25) – $1,000,000] ..................... Investment Income or Loss....................................................... To adjust Lindsay Corp. Investment to fair value.

50,000

18,750

50,000

The investment is a current asset reported at its fair value, $1,050,000 (42,000 x $25).

Equity Method 1. Investment in Associate.................................................................... Cash ........................................................................................... To record purchase of 42,000 shares of Lindsay Corporation. 2.

1,000,000

Investment in Associate ($500,000 × 25%)....................................... Income from Investment in Associate ...................................... To record 25% equity in Lindsay's net income.

1,000,000 1,000,000

125,000 125,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash ($125,000 × 25%) ...................................................................... Investment in Associate ............................................................ To record dividends received. 3.

31,250

The investment is a non-current asset and is reported at $1,093,750 ($1,000,000 + $125,000 – $31,250).

c) Fair Value through Other Comprehensive Income 1. Investment at FVTOCI ....................................................................... Cash ........................................................................................... To record purchase of 42,000 shares of Lindsay Corporation. 2.

31,250

1,000,000 1,000,000

Cash ($125,000 × 15%) ...................................................................... Dividend Revenue ..................................................................... To record dividends received.

18,750

Investment at FVTOCI ....................................................................... OCI—Holding Gain/Loss ............................................................

50,000

18,750

50,000

The investment is a non-current asset and is reported at its fair value, $ 1,050,000 (42,000 x $25).

Exercise 16 Information pertaining to long-term equity investments in 2024 by Trader Corporation follows: Acquired 17% of the 250,000 common shares of the public company The Stone Inc. at $8 per share on January 1, 2024. On July 1, The Stone declared and paid a cash dividend of $2 per share. On December 31, The Stone 's reported profit was $654,000 for the year. The fair value of The Stone’s shares at December 31 was $8.50. Assume that the company has elected to report the gains/losses resulting from the fair value adjustments in other comprehensive income. Obtained significant influence over Webster Corporation by buying 30% of Webster's 100,000 common shares at $22 per share on January 1, 2024. On June 15, Webster declared and paid a cash dividend of $1.75 per share. On December 31, Webster's reported profit was $250,000. The fair value of the Webster shares at the end of December 31 was $23.50.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Prepare all necessary journal entries for 2024 for Trader Corporation. Solution 16 (15–20 min.) Jan. 1 Investments at FVTOCI (250,000 × 17% × $8) ................................ Cash.........................................................................................

340,000

Jan. 1

Investment in Associate (100,000 × 30% x $22) ............................. Cash.........................................................................................

660,000

Cash (30,000 × $1.75) ...................................................................... Investment in Associate .........................................................

52,500

Cash (42,500 × $2)........................................................................... Dividend Revenue ...................................................................

85,000

Investment in Associate ($250,000 × 30%) .................................... Income from Investment in Associate ...................................

75,000

Investment at FVTOCI [($8.50 – $8.00) x 42,500] ........................... OCI—Holding Gain/Loss .........................................................

21,250

June 15

July 1

Dec. 31

340,000

660,000

52,500

85,000

75,000

21,250

Exercise 17 On July 1, 2023, Roberts Corp., a public company, purchased as a long-term investment 20% of the common shares of Ellison Inc. for $340,000. Both of the companies have June 30 year ends. For the year ended June 30, 2024, Ellison reported profit of $225,000 and paid total dividends of $80,000 on April 30, 2024. The market price of the shares of Ellison was $350,000. Instructions a) Assuming that 20% ownership does not give Roberts significant influence over Ellison, and that the company chooses to report gains/losses resulting from the fair value adjustments in other comprehensive income: i) Record the purchase of the shares. ii) Prepare any other entries that Roberts will record during the year ended June 30, 2024, related to its investment in Ellison.

Test Bank for Accounting Principles, Ninth Canadian Edition

iii) Determine what amounts will be reported in Roberts’ June 30, 2024, balance sheet, income statement, and/or statement of comprehensive income related to its investment in Ellison. Assuming that 20% ownership provides Roberts with significant influence over Ellison: i) Record the purchase of the shares. ii) Prepare any other entries that Roberts will record during the year ended June 30, 2024, related to its investment in Ellison. iii) Determine what amounts will be reported in Roberts’ June 30, 2024, balance sheet and income statement related to its investment in Ellison.

Solution 17 (15 min.) a) (i) July 1, 2023 Investments at FVTOCI ........................................................... Cash ................................................................................. (ii) Apr. 30, 2024

340,000 340,000

Cash ($80,000 x 20%) .............................................................. Dividend Revenue ...................................................................

16,000

June 30, 2024 Investments at FVTOCI ($350,000 – $340,000)....................... OCI—Holding Gain/Loss .................................................

10,000

16,000

10,000

(iii) Balance sheet Non-current asset Investments at FVTOCI. ..........................................................

$350,000

Income statement Dividend revenue....................................................................

$16,000

Other comprehensive income Other Comprehensive Income—holding gains (losses) ........

$10,000

b) (i) July 1, 2023

Investment in Associate ......................................................... Cash .................................................................................

340,000

Cash ($80,000 x 20%) .............................................................. Investment in Associate..................................................

16,000

June 30, 2024 Investment in Associate ($225,000 x 20%)............................. Income from Investment in Associate ...........................

45,000

(ii) Apr. 30, 2024

(iii)

340,000

16,000

45,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Balance sheet Non-current asset Investment in Associate ($340,000 + $45,000 – $16,000) ......

$369,000

Income statement Income from Investment in Associate ...................................

$45,000

Exercise 18 On January 1, 2024, Grasper Inc. purchased 20% (20,000 shares) of the outstanding common shares of Bella Inc. for $500,000. On December 31, 2024, Bella’s year end, the company reported profits of $355,000 and paid total dividends of $62,000 on August 31, 2024. Bella Inc. shares were trading at $26.50 per share on December 31, 2024. Grasper has a December 31 year end. Instructions a) Assuming that 20% ownership does not give Grasper significant influence over Bella, and that the company chooses to report gains/losses resulting from the fair value adjustments in other comprehensive income: i) Record the purchase of the shares. ii) Prepare any other entries that Grasper will record during the year ended December 31, 2024, related to its investment in Bella. iii) Determine what amounts will be reported in Grasper’s December 31, 2024, balance sheet, income statement and/or statement of comprehensive income related to its investment in Bella. b) Assuming that 20% ownership provides Grasper with significant influence over Bella: i) Record the purchase of the shares. ii) Prepare any other entries that Grasper will record during the year ended December 31, 2024, related to its investment in Bella. iii) Determine what amounts will be reported in Grasper’s December 31, 2024, balance sheet and income statement related to its investment in Bella. Solution 18 (15 min.) a)

Test Bank for Accounting Principles, Ninth Canadian Edition

(i) Jan. 1, 2024

(ii) Aug. 31, 2024

Dec. 31, 2024

Investments at FVTOCI ........................................................... Cash .................................................................................

500,000

Cash ($62,000 x 20%).............................................................. Dividend Revenue ...........................................................

12,400

Investments at FVTOCI [(20,000 x $26.50) – $500,000].......... OCI—Holding Gain or Loss ..............................................

30,000

500,000

12,400

30,000

(iii) Balance sheet Non-current asset Investments at FVTOCI ...........................................................

$530,000

Income statement Dividend revenue ...................................................................

$12,400

Other comprehensive income Other comprehensive income—holding gain or (loss) .........

$30,000

b) (i) Jan. 1, 2024

Investment in Associate ......................................................... Cash .................................................................................

500,000

Cash ($62,000 x 20%).............................................................. Investment in Associate..................................................

12,400

Investment in Associate ($355,000 x 20%) ............................ Income from Investment in Associate ...........................

71,000

(ii) Aug. 31, 2024

Dec. 31, 2024

500,000

12,400

71,000

(iii) Balance sheet Non-current asset Investment in Associate ($500,000 + $71,000 – $12,400) ......

$558,600

Income statement Income from Investment in Associate ...................................

$71,000

Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

Exercise 19 Bellson Ltd. classifies investments in preferred and common shares as held for trading. During 2024, Bellson Ltd. had the following transactions: Jan. 1 Purchased 200, $8 cumulative preferred shares of Xena Corp. for $95 each. Apr. 15 Purchased 5,000 shares of Canadian Tire on the TSX at $10 each. June 30 Received semi-annual dividends from Xena. Oct. 15 Sold one-half of the Canadian Tire shares at $9.50 each. Dec. 31 Received the balance of the Xena dividends for 2024. On December 31, Bellson’s year end, the Xena Corp preferred shares are trading at $98 per share and the Canadian Tire shares are trading at $9.25 per share. Instructions a) Record the transactions and prepare any adjusting entries required at December 31, 2024. b) Determine the amounts to be reported on Bellson’s balance sheet and income statement at December 31, 2024 related to its investment in equity securities. Solution 19 (20 min.) a) Jan. 1 Investments at FVTPL (200 shares x $95) ...................................... Cash......................................................................................... Apr. 15

June 30

Oct. 15

Dec. 31

19,000 19,000

Investments at FVTPL (5,000 shares x $10) ................................... Cash.........................................................................................

50,000

Cash (200 shares x $8 x ½).............................................................. Investment Income or Loss ....................................................

800

Cash (5,000 x ½ x $9.50) ................................................................. Investment Income or Loss ............................................................ Investments at FVTPL (5,000 x ½ x $10) .................................

23,750 1,250

Cash (200 shares x $8 x ½).............................................................. Investment Income or Loss ....................................................

800

Investment Income or Loss ($44,000 – $42,725) ........................... Investments at FVTPL. ............................................................

1,275

50,000

800

25,000

800

1,275

Test Bank for Accounting Principles, Ninth Canadian Edition

Xena Shares – 200 shares ............................................................... Canadian Tire – 2,500 shares .........................................................

Cost $19,000 25,000 $44,000

b) Balance sheet Current assets Investments at FVTPL.....................................................................

$42,725

Income statement Investment Income or Loss ............................................................

$(925)

Market $19,600 23,125 $42,725

Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

Exercise 20 On March 31, 2024, its year end, Avonic Corp. had the following investments in equity securities: Security Cost Market Value Common shares of Big Box Inc. ............................................................. $ 70,500 $85,000 Preferred shares of XAB Co. ................................................................... 100,000 98,000 One year later, Avonic still owned the same securities, and at that time, the market values were: Common shares of Big Box Inc. ............................................................. $ 70,500 $ 80,000 Preferred shares of XAB Co. ................................................................... 100,000 105,000 Instructions Assuming that Avonic is holding these investments for trading purposes: a) Prepare the adjusting entry at March 31, 2025, to report the portfolio at market value (Avonic uses only one account to record and report transactions for the portfolio of investments). b) Determine the amounts and presentation that will be reported in the March 31 financial statements of Avonic related to these investments. Solution 20 (10 min.) a) Mar. 31 Investments at FVTPL ..................................................................... Investment Income or Loss....................................................

2,000 2,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Beginning market value of portfolio ($85,000 + $98,000) ............................... Ending market value of portfolio ($80,000 + $105,000) .................................. Increase in the year ..........................................................................................

$183,000 185,000 $ 2,000

b) Balance sheet Current assets Investments at FVTPL.....................................................................

2025 $185,000

Income statement Other income Investment Income or Loss ............................................................

2024 $183,000

$2,000

Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

Exercise 21 During 2024, Christenson Company had the following transactions relating to its investments held for trading: Feb. 1 Purchased 1,500 common shares of Ken Corp. for $12 each. May 20 Purchased 3,400 shares of Cassandra Corp. for $22 each. July 1 Received dividends totalling $800 from Ken Corp. Sept.10 Sold 1,000 shares of the investment in Cassandra Corp. for $20.50 per share. Nov. 30 Sold 800 shares Cassandra Corp. for $22.50 per share. On December 31, Christenson’s year end, the Ken Corp. shares are trading at $10 and the Cassandra Corp. shares are trading at $24. Instructions a) Record the transactions and prepare any adjusting entries required at December 31, 2024. b) Determine the amounts to be reported on Christenson’s balance sheet and income statement at December 31, 2024, related to its investment in equity securities. Solution 21 (20 min.) a) Feb. 1 Investments at FVTPL (1,500 shares x $12) ................................... Cash......................................................................................... May 20

Investments at FVTPL (3,400 shares x $22) ...................................

18,000 18,000 74,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash......................................................................................... July 1

Sept. 10

Nov. 30

Dec. 31

74,800

Cash ................................................................................................ Investment Income or Loss ....................................................

800

Cash (1,000 x $20.50) ...................................................................... Investment Income or Loss ............................................................ Investments at FVTPL (1,000 x $22) .......................................

20,500 1,500

Cash (800 x $22.50) ......................................................................... Investment Income or Loss .................................................... Investments at FVTPL (800 x $22) ..........................................

18,000

Investments at FVTPL..................................................................... Investment Income or Loss ....................................................

200

Ken Corp. – 1,500 shares ................................................................ Cassandra Corp. – 1,600 shares .....................................................

800

22,000

400 17,600

200 Cost $18,000 35,200 $53,200

b) Balance sheet Current assets Investments at FVTPL.....................................................................

$53,400

Income statement Investment Income or Loss ............................................................

$(100)

Market $15,000 38,400 $53,400

Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

Exercise 22 Jeremy Evan’s Company purchased 35% of the common shares outstanding of Gabi Ltd. on September 1, 2024, allowing them to exercise significant influence. Jeremy acquired 50,000 common shares at a total price of $275,000. Gabi declared and paid a cash dividend totalling $250,000 on November 30. Gabi reported profit of $419,000 on December 31. The fair value of the Gabi Ltd. shares at the end of December 31 was $6.75 per share.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Prepare all necessary journal entries for 2024 for Wallace Corporation. Solution 22 (10–15 min.) Sept. 1 Investment in Associate ................................................................. Cash.........................................................................................

275,000

Nov. 30

Cash ($250,000 x 35%).................................................................... Investment in Associate. ........................................................

87,500

Investment in Associate ($419,000 × 35%) .................................... Income from Investment in Associate. ..................................

146,650

Dec. 31

275,000

87,500

146,650

Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

Exercise 23 On January 1, 2024, Montgomery Engine Corporation paid $410,000 to purchase 25% of the outstanding voting shares of Joyce Global Corporation over which it exercises significant influence. Montgomery Engine applies IFRS and therefore the equity method is used to account for the investment. The following data relate to this investment. 2024 - Dividends received from Joyce Global amounted to $25,000. - Net income reported by Joyce Global was $250,000. - Current market value of Joyce Global investment on December 31, 2024, was $365,000. 2025 - Dividends received from Joyce Global amounted to $25,000. - Net income reported by Joyce Global was $295,000. - Current market value of Joyce Global investment on December 31, 2025, was $430,000. Instructions Prepare all journal entries for 2024 and 2025 relating to Montgomery Engine Corporation’s investment in Joyce Global Corporation. Solution 23 (15 min.) 2024 Investment in Associate ................................................................. Cash......................................................................................... Cash ................................................................................................

410,000 410,000 25,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Investment in Associate .........................................................

25,000

Investment in Associate ($250,000 x 25%) .................................... Income from Investment in Associate ...................................

62,500

Cash ................................................................................................ Investment in Associate .........................................................

25,000

Investment in Associate ($295,000 x 25%) .................................... Income from Investment in Associate ...................................

73,750

62,500

2025 25,000

73,750

Exercise 24 Robinsons Corp. acquired 25% of Malcolm Limited for $800,000 on January 1, 2024. Robinsons will apply the equity method to account for the investment as they can exercise significant influence over Malcolm Limited. During 2024, Malcolm Limited earned $500,000 and paid dividends of $125,000. Instructions a) Prepare the journal entries required to record the acquisition, and the transactions during 2024. b) Determine the carrying value of the investment in Malcolm Limited as at December 31, 2024. Solution 24 (10 min.) a) Investment in Associate ................................................................. Cash.........................................................................................

800,000 800,000

Cash ($125,000 × 25%) ................................................................... Investment in Associate .........................................................

31,250

Investment in Associate ($500,000 × 25%) .................................... Income from Investment in Associate ...................................

125,000

b) Investment in Associate at Dec. 31, 2024 $800,000 + $125,000 –$31,250 = $893,750 Bloomcode: Application Difficulty: Medium

31,250

125,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain how to account for strategic investments and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. Companies purchase investments as a strategic investment with the intention of establishing and maintaining a long-term operating relationship with another company. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

2. The purpose of a strategic investment is to generate investment income. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

3. When investing excess cash for short periods of time, corporations usually invest in shares of other companies. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

4. A short-term debt instrument that is held to earn interest will be valued at fair value on the balance sheet. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

5. For companies reporting under IFRS, a short-term debt instrument that is held for trading will be valued at fair value on the balance sheet. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

6. An equity investment that is held for trading will be valued at cost on the balance sheet. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

7. If an investment is valued at an amount that is most relevant to the type of investment, it will allow investors to better predict future cash flows of the company. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

8. The degree of influence determines how a strategic investment is classified. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

9. Investments in equity securities bought for the purposes of trading are reported at amortized cost. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

10. Investments that are purchased principally for selling in the near future are called trading investments. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

11. The purpose of the investment is the most important factor in determining the balance sheet classification and measurement method. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

12. At acquisition, a debt instrument is recorded at its fair value on the date of purchase. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

13. If a debt instrument is sold before maturity, then a gain is recorded if the cash received is less than the carrying amount of the instrument. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

14. A treasury bill is normally recorded at the face value of the instrument. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

15. A Treasury bill will be shown at its amortized cost on the balance sheet.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

16. If a bond investment that is held to earn interest is sold before maturity, an entry must be made to update any unrecorded interest and amortization of the discount or premium. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

17. When a bond investment that is held to earn interest is sold, a gain will be recorded when the amortized cost of the bond is less than the cash received. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

18. When a debt instrument is reported at amortized cost, the interest revenue is calculated by multiplying the market rate of interest by the carrying value of the investment. Answer: True Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

19. Interest revenue is reported under other revenues on the income statement. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

20. The purchaser of the bonds, or the bondholder, is known as the investor. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

21. If there is a bond premium, interest revenue is increased by the amortization amount. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

22. Under IFRS, companies have the choice to use the effective-interest method or straight-line method to amortize any discounts or premiums and record interest revenue. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

23. Under IFRS, all investments held for trading are valued at amortized cost on the balance sheet. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

24. A fair value adjustment at the balance sheet date is required only on investments that will be sold within 30 days of the balance sheet date. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

25. Under IFRS, investments reported at fair value may include investments in common shares, preferred shares, and debt investments. Answer: True Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

26. Under ASPE, only debt instruments will be reported at fair value. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

27. The advantage of using fair value for investments held for trading is that it allows users to better predict future cash flows. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

28. Dividend revenue is reported under revenues from operations on the income statement. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

29. Companies reporting under IFRS will report all investments in debt instruments at amortized cost. Answer: False

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

30. If the market rate changes after a public company purchases bonds to trade, the bonds’ carrying amount will NOT change. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

31. Fair value through profit and loss means that fair value adjustments are recorded as holding gains and losses on the income statement, and are therefore included in the determination of either a profit or loss for a company. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

32. For a company reporting under IFRS, if it holds less than 20% of a strategic investment and does NOT exercise significant influence on the investment, then the investment will be accounted for using the equity method. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

33. Generally, if an investor holds more than 50% of a strategic investment, then the investor will prepare consolidated financial statements. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

34. Under IFRS, if an investor holds less than 20% of a strategic investment but holds a majority of seats on the board of directors of the investment, then the investment should be valued at fair value. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

35. If an investor owns more than 20% of an investee's common shares, it is presumed that the investor has significant influence over the investee’s decisions. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

36. Under IFRS, a strategic investment in which the company does NOT exercise significant influence may report any holding gains or losses from changes in the fair value as other comprehensive income. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

37. When a dividend is received from a strategic investment over which the company exercises significant influence, the dividend will reduce the amount of the strategic investment asset account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

38. The profit earned by an investee over which the company exercises significant influence will NOT affect the value of the strategic investment asset account. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

39. Under ASPE, if there is NOT an active market for an equity instrument that has no significant influence, the investment will be reported at fair value.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

40. When an investment is accounted for under the equity method, the payment of a dividend by the associate will reduce the amount shown on the balance sheet of the investor. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

41. Investments held for trading may be classified as either long-term or current based solely on the maturity date of the underlying investment. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

42. Treasury bills will be shown at amortized cost on the balance sheet. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

43. A strategic investment by a public company over which the company does NOT exercise significant influence will be reported at cost on the balance sheet. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

44. For a company reporting under IFRS, a strategic investment over which the company exercises significant influence will be reported at fair value on the balance sheet. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

45. One of the differences between IFRS and ASPE is that under ASPE there is no other comprehensive income. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

46. All equity securities that are purchased for strategic purposes are classified as non-current assets. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 47. Which of the following would NOT normally be considered a motive for making an equity investment in another corporation? a) to invest surplus cash b) use of the investment for expanding its own operations c) use of the investment to diversify its own operations d) an increase in the amount of dividend revenue from the equity investment Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

48. All of the following are examples of money-market investments, except a) money-market funds. b) term deposits. c) Treasury bills. d) shares of a privately held corporation. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

49. Which of the following is the most accurate? a) Non-strategic investments maintain a long-term operating relationship with another company. b) Non-strategic investments are purchased to generate investment income. c) Preferred shares and common shares are debt instruments. d) Strategic investments are always short-term instruments. Answer: b Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

50. Which of the following is a true statement regarding an investment in short-term debt instruments? a) The instruments usually do not pay interest. b) They are often made when the company has surplus cash on hand. c) This type of investment is never traded in the securities market. d) A chequing account is a type of short-term debt investment. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

51. Short-term and long-term debt instruments purchased to earn interest are reported at a) cost. b) unamortized cost. c) fair value. d) amortized cost. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

52. For companies reporting under IFRS, debt instruments purchased to trade are reported on the balance sheet at a) amortized cost. b) cost. c) fair value. d) lower of cost and market.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

53. All of the following are considered debt instruments, except a) term deposits. b) treasury bills. c) bonds. d) preferred shares. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

54. Which of the following statements is INCORRECT with regards to non-strategic instruments? a) They can be debt instruments. b) They maintain an operating relationship with another company. c) They can be equity instruments. d) They generate investment income. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

55. Excess cash may be invested for the long term to a) generate dividend income on bonds. b) generate interest income on bonds. c) generate interest income on shares.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) generate additional operating income. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

56. Debt and equity securities that are purchased for the purpose of selling in the short term at a gain are referred to as a) debt instruments. b) equity instruments. c) long-term instruments. d) trading investments. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

57. Short-term debt instruments that are held to earn interest income are recorded as a) current assets at amortized cost. b) non-current assets at amortized cost. c) current assets at fair value. d) non-current assets at fair value. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

58. Long-term debt instruments held to earn interest income are recorded as

Test Bank for Accounting Principles, Ninth Canadian Edition

a) current assets at amortized cost. b) non-current assets at amortized cost. c) current assets at fair value. d) non-current assets at fair value. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

59. Short- or long-term debt instruments held for trading are recorded as a) current assets at amortized cost. b) non-current assets at amortized cost. c) current assets at fair value. d) non-current assets at fair value. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

60. Equity instruments held for trading are recorded as a) current assets at amortized cost. b) non-current assets at amortized cost. c) current assets at fair value. d) non-current assets at fair value. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

61. Companies make strategic investments for several reasons. Which of the following reasons is INCORRECT? a) to speculate that their investment will increase in value and result in a gain when it is sold b) to become a part of a different industry c) to expand operations d) to eliminate competition Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

62. The valuation method for investments under ASPE is a) amortized cost. b) unamortized cost. c) fair value. d) both a) and c) Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

63. Pelli Corp., a public company reporting under IFRS, purchased common shares of a company, to be sold if the share price increases. What type of investment has Pelli made and how should it be reported? a) strategic; amortized cost b) non-strategic; fair value c) strategic; fair value d) non-strategic; amortized cost Answer: b Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

64. Pelli Corp., a public company reporting under IFRS, purchased bonds to earn interest income. What type of investment has Pelli made and how should it be reported? a) strategic; amortized cost b) non-strategic; fair value c) strategic; fair value d) non-strategic; amortized cost Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

65. Pelli Corp., a public company reporting under IFRS, purchased a bond with the intent to resell at a gain. What type of investment has Pelli made and how should it be reported? a) strategic; amortized cost b) non-strategic; fair value c) strategic; fair value d) non-strategic; amortized cost Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

66. Pelli Corp., a public company reporting under IFRS, purchased a treasury bill that will mature in 90 days to earn interest. What type of investment has Pelli made and how should it be reported? a) strategic; amortized cost b) non-strategic; fair value c) strategic; fair value d) non-strategic; amortized cost

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

67. Which of the following is NOT true about fair value through other comprehensive income (FVTOCI)? a) This model is used under IFRS only. b) Applies only to investments in debt securities that management intends to hold to maturity to collect principal and interest payments (contractual cash flows). c) Applies to investments in debt securities where management’s objective is to both collect contractual cash flows and sell the investments. d) Applies to investments in equity securities designated by management to this classification that is not held for trading. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments CPA: Financial Reporting AACSB: Analytic

68. On January 1, 2024, Dandel Corp. purchased 10-year, 4% Bento Corp. bonds with a face value of $50,000 for $46,103 to earn interest. The market interest rate is 5%. Interest is payable semi-annually on July 1 and January 1. Which of the following is the correct entry to record the purchase? a) Investments at Amortized Cost .................................................................... 50,000 Cash ........................................................................................................ 50,000 b) Bonds Payable .............................................................................................. 50,000 Investment at Amortized Cost ............................................................... 46,103 Investment Income or Loss .................................................................... 3,897 c) Investments Income or Loss ........................................................................ 50,000 Cash ........................................................................................................ 50,000 d) Investments at Amortized Cost.................................................................... 46,103 Cash ........................................................................................................ 46,103 Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

69. On January 1, 2024, Dandel Corp. purchased a $30,000, 120-day treasury bill for $28,600. Which of the following is the correct entry to record the purchase? a) Investments at Amortized Cost .................................................................... 28,600 Cash ........................................................................................................ 28,600 b) Treasury Bill.................................................................................................. 30,000 Investments at Amortized Cost ............................................................. 28,600 Investment Income or Loss .................................................................... 1,400 c) Investments at Amortized Cost .................................................................... 30,000 Cash ........................................................................................................ 30,000 d) Cash .............................................................................................................. 28,600 Investments at Amortized Cost ............................................................. 28,600 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

70. On January 1, 2024, Dandel Corp. purchased 10-year, 4% Bento Corp. bonds with a face value of $50,000 for $46,103 to earn interest. The market interest rate is 5%. Interest is payable semi-annually on July 1 and January 1. On July 1, Dandel received semi-annual interest on the investment in Bento Corp. Which of the following is the correct entry to record the interest received by Dandel? a) Interest Receivable ....................................................................................... 1,153 Interest Revenue .................................................................................... 1,153 b) Cash .............................................................................................................. 1,000 Interest Revenue .................................................................................... 1,000 c) Cash .............................................................................................................. 1,000 Investments at Amortized Cost .................................................................... 153 Interest Revenue .................................................................................... 1,153 d) Cash .............................................................................................................. 1,153 Investments at Amortized Cost ............................................................. 1,153

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

71. On January 1, 2024, Dandel Corp. purchased a $30,000, 120-day treasury bill for $28,600. On July 30, Dandel received cash for the maturity of the treasury bill. Which of the following is the correct entry to record the receipt of cash? a) Cash .............................................................................................................. 28,600 Investments at Amortized Cost ............................................................. 28,600 b) Cash .............................................................................................................. 30,000 Investments at Amortized Cost ............................................................. 30,000 c) Investments at Amortized Cost .................................................................... 30,000 Cash ........................................................................................................ 30,000 d) Cash .............................................................................................................. 30,000 Investments at Amortized Cost ............................................................. 28,600 Interest Revenue .................................................................................... 1,400 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

72. On January 1, 2024, Dandel Corp. purchased 10-year, 4% Bento Corp. bonds with a face value of $50,000 for $46,103 to earn interest. The market interest rate is 5%. Interest is payable semi-annually on July 1 and January 1. On July 1, Dandel received semi-annual interest on the investment in Bento Corp. Which of the following is the correct entry to record the adjusting entry for the accrual of interest on December 31, Dandel’s year end? a) Interest Receivable ....................................................................................... 1,000 Investments at Amortized Cost .................................................................... 156 Interest Revenue .................................................................................... 1,156 b) Interest Receivable ....................................................................................... 1,000 Interest Revenue .................................................................................... 1,000 c) Cash .............................................................................................................. 1,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Investments at Amortized Cost .................................................................... Interest Revenue .................................................................................... d) Interest Receivable ....................................................................................... Investments at Amortized Cost .............................................................

156 1,156 1,156 1,156

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

73. On January 1, 2024, Windows and Doors Ltd. purchased at face value, a $1,000, 5% bond that pays interest on January 1 and July 1. Windows and Doors has a calendar year end. The entry for the receipt of interest on July 1, 2024, is a) Cash .............................................................................................................. 25 Interest Revenue .................................................................................... 25 b) Cash .............................................................................................................. 50 Interest Revenue .................................................................................... 50 c) Interest Receivable ....................................................................................... 25 Interest Revenue .................................................................................... 25 d) Interest Receivable ...................................................................................... 50 Interest Revenue .................................................................................... 50 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

74. On January 1, 2024, Manny Manufacturing Ltd. purchased at face value, a $1,000, 5% bond that pays interest on January 1 and July 1. Manny Manufacturing has a calendar year end. The adjusting entry on December 31, 2024, is a) none required. b) Cash .............................................................................................................. 25 Interest Revenue .................................................................................... 25 c) Interest Receivable ....................................................................................... 25

Test Bank for Accounting Principles, Ninth Canadian Edition

Interest Revenue .................................................................................... d) Interest Receivable ...................................................................................... Long-term Investment ...........................................................................

25 25 25

75. On January 1, 2024, Peter Plumbing Ltd. purchased at face value, a $1,000, 5% bond that pays interest on January 1 and July 1. Peter Plumbing has a calendar year end. The entry for the receipt of interest on January 1, 2025, is a) Cash .............................................................................................................. 50 Interest Revenue .................................................................................... 50 b) Cash .............................................................................................................. 50 Interest Receivable ................................................................................ 50 c) Cash .............................................................................................................. 25 Interest Revenue .................................................................................... 25 d) Cash .............................................................................................................. 25 Interest Receivable ................................................................................ 25 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

76. On January 1, Wendy Welding Ltd. purchases a $100,000 150-day treasury bill for $97,560. The treasury bills are trading at a market rate of interest of 6% annually. The entry to record the investment is a) Cash .............................................................................................................. 97,560 Investment at Amortized Cost—Treasury Bill ....................................... 97,560 b) Investment at Amortized Cost—Treasury Bill ............................................. 100,000 Discount ................................................................................................. 2,440 Cash....................................... ................................................................. 97,560

Test Bank for Accounting Principles, Ninth Canadian Edition

c) Investment at Amortized Cost—Treasury Bill ............................................. Cash ........................................................................................................ d) Cash .............................................................................................................. Discount............................................................ ...................................... Investment at Amortized Cost—Treasury Bill .......................................

97,560 97,560 97,560 2,440 100,000

77. Any premium or discount on an investment in bonds to earn interest is amortized a) to interest expense over the remaining term of the bonds. b) only if the effective-interest method is used. c) to interest revenue over the remaining term of the bonds. d) only if the investor owns 20% or more of the bonds. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

78. Instruments that mature within 12 months of the balance sheet date are a) long-term debt instruments. b) fair value instruments. c) short-term debt instruments. d) unamortized instruments. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

79. Which of the following statements is INCORRECT with regard to treasury bills? a) They are issued by the federal government. b) They are unsafe investments with maturity dates of up to 5 years. c) They are purchased at a discount. d) They generate interest income. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

80. Interest income is calculated by multiplying the a) market rate of interest by the face value of the investment. b) contract rate of interest by the face value of the investment. c) market rate of interest by the carrying value of the investment. d) stated interest rate by the carrying value of the investment. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

81. Regardless of the bonds’ purchase price, their amortized cost at maturity will equal a) face value. b) face value less premium amounts. c) purchase price. d) face value plus discount amounts. Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

82. Losses and gains on the sale of FVTPL instruments are reported on a) the income statement under current operations. b) the balance sheet with long-term investments. c) the income statement under other revenue and expenses. d) the balance sheet with short-term investments. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

83. On October 1, Sally Sailing Ltd. purchased a $10,000, 150-day treasury bill for $9,756. Similar treasury bills are trading on the market at a rate of 6% annually. Assuming Sally Sailing has a December 31 year end, the amount accrued as interest revenue on the treasury bill at December 31 is a) $146. b) $160. c) $195. d) $200. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

84. Which of the following is a true statement about the accounting for investments held for trading under IFRS? a) The investment is initially recorded at fair value. b) Gains and losses are recorded in OCI when the market value is different from the purchase price. c) The accounting for trading investments is the same as the accounting for short-term investments in debt instruments purchased to earn interest. d) The investment is initially recorded at face value. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

85. Vlad Corporation sells 100 common shares being held as a trading investment. The shares were acquired six months ago at a cost of $50 a share. Vlad sold the shares for $40 a share. The entry to record the sale is a) Cash .............................................................................................................. 4,000 Investment Income or Loss .......................................................................... 1,000 Investments at FVTPL ............................................................................ 5,000 b) Cash .............................................................................................................. 5,000 Investment Income or Loss ................................................................... 1,000 Investments at FVTPL ............................................................................ 4,000 c) Cash .............................................................................................................. 4,000 Investments at FVTPL ............................................................................ 4,000 d) Investments at FVTPL .................................................................................. 4,000 Investment Income or Loss .......................................................................... 800 Cash ........................................................................................................ 4,800 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

86. Investments held for trading in equity instruments are reported on the balance sheet at a) amortized cost. b) cost.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) fair value. d) lower of cost and fair value. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

87. Investments held for trading are adjusted to fair value when a) there is a change in fair value. b) the decline is thought to be permanent. c) both a) and b) d) Trading investments should never be recorded at fair value. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

88. If a bond investment is sold at a price that is greater than the amortized cost of the bond a) a loss is reported on the balance sheet. b) a gain is reported on the balance sheet. c) a gain is reported on the income statement. d) a loss is reported on the income statement. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

89. In recognizing a decline in the market value of a FVTPL investment, the Investment Income or Loss

Test Bank for Accounting Principles, Ninth Canadian Edition

account is debited a) because management intends to realize this loss in the near future. b) to reflect the fair value of the investment on the balance sheet. c) because the company is no longer a going concern. d) because there is a permanent decline in the fair value. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

90. At the end of Players Corporation's fiscal year, its portfolio of FVTPL investments purchased during the year is as follows: Security Cost Market Value A Common shares $10,000 $12,000 B Common shares 8,000 5,000 $18,000 $17,000 At the end of the year, Players Corporation normally would a) make no entry. b) increase the investment accounts to market value. c) report a loss on the income statement for $3,000 under "Other Expenses." d) report a loss on the income statement for $1,000 under "Other Expenses." Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

91. At the end of McDougal Corporation's fiscal year, its portfolio of FVTPL investments is as follows: Security Cost Market Value A Common shares $10,000 $12,000 B Common shares 8,000 5,000 $18,000 $17,000 McDougal subsequently sells B common shares for $10,000. What entry is made to record the sale? a) Cash .............................................................................................................. 10,000 Investments at FVTPL ............................................................................ 10,000

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Cash .............................................................................................................. Investments at FVTPL ............................................................................ c) Cash .............................................................................................................. Investments at FVTPL ............................................................................ Investment Income/Loss ....................................................................... d) Cash .............................................................................................................. Investments at FVTPL ............................................................................ Investment Income or Loss ...................................................................

8,000 8,000 10,000 8,000 2,000 10,000 5,000 5,000

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

92. If the cost of an investment held for trading exceeds its fair value by $$40,000, the entry to recognize the loss a) is not required since the share prices will likely rebound in the long run. b) will show a debit to an expense account in the operating section of the income statement. c) will show a credit to a contra asset account that appears in the shareholders' equity section of the balance sheet. d) will show a debit to a holding gain or loss account that appears in the other expenses section of the income statement. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

93. Which of the following statements is correct? a) A debt instrument purchased to earn interest will be valued at fair value. b) A debt instrument purchased to earn interest will be valued at amortized cost. c) Gains or losses on FVTPL investments are not recorded until the trading investments are sold and the gains or losses are realized. d) All gains and losses on fair value adjustments arising from FVTPL investments are reported under other comprehensive income.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

94. Lopez Company purchased 1,000 common shares of George Company on August 1 for $16 per share. At December 31, Lopez’s year end, George’s shares are selling for $20.50 and George reported net income of $160,000. Assuming Lopez accounts for the investment using FVTPL, the adjustment to the investment account at year end would be a) credit to Investments at FVTPL for $20,500. b) debit to Investments at FVTPL for $16,000. c) credit to Investments at FVTPL for $4,000. d) debit to Investments at FVTPL for $4,500. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

95. On January 2, 2024, Marine Corporation purchased an investment in Bianca Corp. $40,000, fiveyear, 3% bonds at par for trading purposes. Which of the following is the correct transaction to record the purchase of the investment? a) Investment in Associate ............................................................................... 40,000 Cash ........................................................................................................ 40,000 b) Investment at FVTOCI .................................................................................. 40,000 Cash ........................................................................................................ 40,000 c) Bonds ............................................................................................................ 40,000 Cash ........................................................................................................ 40,000 d) Investments at FVTPL................................................................................... 40,000 Cash ........................................................................................................ 40,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

96. On March 1, 2024, Marine Corporation purchased 10,000 common shares of Boardwalk Inc. for $3 each, which management designated as an FVTOCI investment. Which of the following is the correct transaction to record the purchase? a) Investment in Associate ............................................................................... 30,000 Cash ........................................................................................................ 30,000 b) Investments at FVTOCI ................................................................................. 30,000 Cash ........................................................................................................ 30,000 c) Common Shares ........................................................................................... 30,000 Cash ........................................................................................................ 30,000 d) Investments at FVTPL................................................................................... 30,000 Cash ........................................................................................................ 30,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

97. On January 2, 2024, Marine Corporation purchased an investment in Bianca Corp. $40,000, fiveyear, 3% bonds at par for trading purposes. On July 1, 2024, Marine Corporation received semi-annual interest on the bonds. Which of the following is the correct transaction to record the interest? a) Cash .............................................................................................................. 600 Dividend Revenue .................................................................................. 600 b) Cash .............................................................................................................. 600 Investments at FVTPL ............................................................................ 600 c) Cash .............................................................................................................. 600 Investment Income or Loss .................................................................... 600 d) Cash .............................................................................................................. 600 Interest Receivable ................................................................................. 600 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

98. On January 2, 2024, Marine Corporation purchased an investment in Bianca Corp. $40,000, fiveyear, 3% bonds at par for trading purposes. On July 1, 2024, Marine Corporation received semi-annual interest on the bonds and then on July 2, 2024, Marine Corp. sold half of the Bianca Corp. bonds for $25,000. Which of the following is the correct transaction to record the sale? a) Cash .............................................................................................................. 25,000 Investments at FVTPL ............................................................................ 20,000 Investment Income or Loss .................................................................... 5,000 b) Cash .............................................................................................................. 25,000 Investments at FVTPL ............................................................................ 25,000 c) Cash .............................................................................................................. 25,000 Investment Income or Loss .................................................................... 25,000 d) Cash .............................................................................................................. 25,000 Investments at FVTPL ............................................................................ 5,000 Gain on Disposal .................................................................................... 20,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

99. On January 2, 2024, Marine Corporation purchased an investment in Bianca Corp. $40,000, fiveyear, 3% bonds at par for trading purposes. On July 1, 2024, Marine Corporation received semi-annual interest on the bonds and then on July 2, 2024, Marine Corp. sold half of the Bianca Corp. bonds for $25,000. On December 31, the remaining Bianca Corp. bonds’ fair value was $20,500. Which of the following is the correct transaction to record the adjusting entry for the fair value of the bonds? a) Investments at FVTPL ................................................................................... 5,500 Investment Income or Loss .................................................................... 5,500 b) Investments at FVTPL................................................................................... 500 Investments Income or Loss .................................................................. 500 c) Cash .............................................................................................................. 500 Investment Income or Loss .................................................................... 500 d) Investment Income or Loss .......................................................................... 20,500 Investments at FVTPL ............................................................................ 20,500 Answer: b Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments CPA: Financial Reporting AACSB: Analytic

100. Marie Inc., a public company, acquired 30% of the 500,000 common shares of Furnica Corp. for $4 per share on January 2, 2024. Assuming the company uses the equity method, which of the following entries should Marie Inc. prepare to record the acquisition? a) Common Shares ........................................................................................... 600,000 Cash ........................................................................................................ 600,000 b) Investment in Associate ............................................................................... 600,000 Cash ........................................................................................................ 600,000 c) Investments at FVTPL ................................................................................... 600,000 Cash ........................................................................................................ 600,000 d) Common Shares ........................................................................................... 600,000 Accounts Payable ................................................................................... 600,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

101. Marie Inc., a public company, acquired 30% of the 500,000 common shares of Furnica Corp. for $4 per share on January 2, 2024. On September 30, Furnica paid a $0.25 per share dividend. Assuming the company uses the equity method, which of the following entries should Marie Inc. prepare to record the cash receipt of the dividend? a) Cash .............................................................................................................. 37,500 Investment in Associate ......................................................................... 37,500 b) Investment in Associate ............................................................................... 37,500 Cash ........................................................................................................ 37,500 c) Investments at FVTPL ................................................................................... 37,500 Cash ........................................................................................................ 37,500 d) Cash .............................................................................................................. 37,500 Income from Investment in Associate ................................................... 37,500 Answer: a Bloomcode: Application Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

102. Marie Inc., a public company, acquired 30% of the 500,000 common shares of Furnica Corp. for $4 per share on January 2, 2024. On September 30, Furnica paid a $0.25 per share dividend and reported profit of $325,000 for the year. Assuming the company uses the equity method, which of the following entries should Marie Inc. prepare to record its share of Furnica’s profit? a) Cash .............................................................................................................. 97,500 Investment in Associate ......................................................................... 97,500 b) Income from Investment in Associate ......................................................... 97,500 Investment in Associate ......................................................................... 97,500 c) Investments at FVTPL ................................................................................... 97,500 Income from Investment in Associate ................................................... 97,500 d) Investment in Associate ............................................................................... 97,500 Income from Investment in Associate ................................................... 97,500 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

103. Oops Inc., a private company, acquired 30% of the 500,000 common shares of Copy Corp. for $4 per share on January 2, 2024. Assuming the company uses the cost method, which of the following entries should Oops Inc. prepare to record the acquisition? a) Common Shares ........................................................................................... 600,000 Cash ........................................................................................................ 600,000 b) Investments at FVTPL................................................................................... 600,000 Cash ........................................................................................................ 600,000 c) Investment in Associate ............................................................................... 600,000 Cash ........................................................................................................ 600,000 d) Common Shares ........................................................................................... 600,000 Accounts Payable ................................................................................... 600,000 Answer: c Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

104. Oops Inc., a private company, acquired 30% of the 500,000 common shares of Copy Corp. for $4 per share on January 2, 2024. On September 30, Copy paid a $0.25 per share dividend and reported profit of $325,000 for the year. Assuming the company uses the cost method, which of the following entries should Oops Inc. prepare to record the cash receipt of the dividend? a) Cash .............................................................................................................. 37,500 Investment in Associate ......................................................................... 37,500 b) Investment in Associate ............................................................................... 37,500 Cash ........................................................................................................ 37,500 c) Investments at FVTPL ................................................................................... 37,500 Cash ........................................................................................................ 37,500 d) Cash .............................................................................................................. 37,500 Dividend Revenue .................................................................................. 37,500 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

105. Pine Inc. owns 25% of Tantramar Sand and Gravel and has significant influence over the company’s operations. During the year, Tantramar had a net income of $240,000 and paid a dividend of $45,000. The balance on Pine’s balance sheet for this investment would a) increase by $ 240,000. b) increase by $195,000. c) decrease by $48,750. d) increase by $48,750. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

106. Which of the following investments would most likely NOT be valued at fair value on a company’s books? a) equity investments held for trading b) debt investment held for trading c) strategic investments held by companies reporting under IFRS with less than 20% ownership d) strategic investments held by companies reporting under IFRS with more than 20% ownership Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

107. For accounting purposes, the method used to account for long-term equity investments in common shares is determined by a) the amount paid for the shares by the investor. b) the extent of an investor's influence on the operating and financial affairs of the investee. c) whether the shares have paid dividends in past years. d) whether the acquisition of the shares by the investor was "friendly" or "hostile." Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

108. If an investor owns less than 20% of the common shares of another corporation as a long-term investment, a) the equity method of accounting for the investment should be employed. b) no dividends can be expected. c) it is presumed that the investor has relatively little influence on the investee.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) it is presumed that the investor has significant influence on the investee. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

109. If the fair value method is used to account for a long-term investment in common shares and fair value changes are reported through other comprehensive income, dividends received should be a) credited to the Long-Term Investment account. b) credited to the Dividend Revenue account. c) debited to the Long-Term Investment account. d) recorded only when 20% or more of the shares are owned. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

110. For companies reporting under IFRS, if 10% of the common shares of an investee company are purchased as a long-term investment, the investment is reported a) at fair value. b) using the equity method. c) using consolidated financial statements. d) determined by agreement with whomever owns the remaining 90% of the shares. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

111. For companies reporting under ASPE, a long-term investment in shares will most likely be reported at fair value when the a) investor owns more than 50% of the investee's shares. b) investor has significant influence on the investee and the shares held by the investor are marketable equity securities. c) company elects to report the investment at fair value. d) investor's influence on the investee is insignificant and there is a quoted market price. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

112. When an investor reporting under IFRS owns more than 20% of the common shares of a corporation, it is generally presumed that the investor a) has insignificant influence over the investee and that the fair value method should be used to account for the investment. b) should apply the cost method in accounting for the investment. c) will prepare consolidated financial statements. d) has significant influence over the investee and that the equity method should be used to account for the investment. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

113. Under the equity method of accounting for long-term investments in common shares, when a dividend is received from the investee company, a) the Dividend Revenue account is credited. b) the Investment in Associate account is increased.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) the Investment in Associate account is decreased. d) no entry is necessary. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

114. On January 1, 2024, Bull Corporation purchased 25% of the common shares of Dozer Corporation for $200,000. During 2024, Dozer Corporation reported profit of $80,000 and paid cash dividends of $40,000. The balance of the Investment in Associate—Dozer Corp. account on the books of Bull Corporation at December 31, 2024, is a) $200,000. b) $210,000. c) $220,000. d) $190,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

115. Under the equity method, the Investment in Associate account is increased when the a) investee company reports a profit. b) investee company pays a dividend. c) investee company reports a loss. d) equity investment is sold at a gain. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

116. On January 1, 2024, Freeman Corporation purchased 40% of the common shares of Freightways International Ltd. During 2024, Freeman paid dividends of $80,000 and Freightways paid dividends of $50,000. Assuming Freeman has no other equity investments, the year-end balance in Freeman’s Dividend Income account would be a) $0. b) $80,000. c) $50,000. d) $20,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

117. Which of the following is the correct match concerning an investor's influence on the operations and financial affairs of an investee? % of Investor Ownership Presumed Influence a) less than 20% significant b) more than 20% significant c) more than 50% insignificant d) more than 20% controlling Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

118. Which of the following is the correct match concerning the appropriate guideline under IFRS for accounting for long-term equity investments in common shares?

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b) c) d)

% of Investor Ownership Accounting Guidelines less than 20% fair value more than 20% fair value more than 50% fair value or equity method more than 20% consolidated financial statements

Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

119. If fair value is used to account for an equity investment in common shares under IFRS, a) it is presumed that the investor has insignificant influence on the investee. b) the earning of a profit by the investee is considered a proper basis for recognition of income by the investor. c) profit of the investee is not considered earned by the investor until dividends are declared by the investee. d) the investment account will remain at cost. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

120. If a company acquires a 40% common share interest in another company, a) the equity method is usually applicable. b) all influence is classified as controlling. c) the cost method is always applicable. d) the ability to exert significant influence over the activities of the investee does not exist. Answer: a Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

121. On January 1, 2024, Goyeche Corporation purchased 30% of the common shares of Grafenburg Limited for $400,000. During 2024, Grafenburg Limited paid cash dividends of $60,000 and had profit of $300,000. During the same period, Goyeche earned $500,000 and paid dividends of $125,000. Both corporations have a December 31 year end. Immediately following the acquisition, the balance in Goyeche’s Investment in Associate—Grafenburg account is a) $472,000. b) $400,000. c) $460,000. d) $340,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

122. On January 1, 2024, Goyeche Corporation purchased 30% of the common shares of Grafenburg Limited for $400,000. During 2024, Grafenburg Limited paid cash dividends of $60,000 and had profit of $300,000. During the same period, Goyeche earned $500,000 and paid dividends of $125,000. Both corporations have a December 31 year end. On December 31, 2024, the balance in Goyeche’s Investment in Associate—Grafenburg Common Shares account is a) $472,000. b) $640,000. c) $400,000. d) $192,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

123. On January 1, 2024, Goyeche Corporation purchased 30% of the common shares of Grafenburg Limited for $400,000. During 2024, Grafenburg Limited paid cash dividends of $60,000 and had profit of $300,000. During the same period, Goyeche earned $500,000 and paid dividends of $125,000. Both corporations have a December 31 year end. Assuming Grafenburg is Goyeche’s only equity investment on its December 31, 2024, income statement, Goyeche would report which of the following? a) dividend revenue, $18,000 b) dividend revenue, $60,000 c) income from investment in Grafenburg, $300,000 d) income from investment in Grafenburg, $90,000 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

124. Under the equity method, the Investment in Associate account is credited when the a) associate reports a profit. b) associate reports a net loss. c) investment is originally acquired. d) associate reports profit and when the investment is originally acquired. Answer: b Bloomcode: Comprehension Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

125. Company B has a strategic investment in Company A. Company B owns 5% of the common shares of A and it does NOT have influence over A. How should the investment in the common shares of Company A be reported in B’s books? a) The Investment in A should be shown at unamortized cost on B’s balance sheet. b) The Investment in A should be shown at cost on B’s balance sheet.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) The investment in A should be shown at fair value on B’s balance sheet. d) The Investment in A should be shown at the net realizable value on B’s balance sheet. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

126. Darby Inc. purchased 30% of the outstanding common shares of LME Company for $840,000. On March 31, LME’s year end, the company reported net income of $540,000. The appropriate adjustment to the investment account would be a) debit to Investment in Associate—ABC Company for $162,000. b) debit to Investment in Associate—ABC Company for $252,000. c) debit to Investment in Associate—ABC Company for $540,000. d) no adjustment necessary. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

127. Short-term debt investments are most likely listed on the balance sheet immediately below a) cash. b) inventory. c) accounts receivable. d) prepaid expenses. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

128. Grindstone Island Millstones purchased a strategic investment in Dorchester Drilled Wells. Grindstone holds 15% of Dorchester; it has no significant influence on Dorchester. Dividends that are paid from Dorchester to Grindstone should be reported as a) an increase in the investment on the balance sheet. b) a decrease in the investment on the balance sheet. c) other expenses on the income statement. d) other revenues on the income statement. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

129. Which of the following would NOT be reported under "Other Revenues" on the income statement? a) loss on the sale of a strategic investment b) dividend revenue c) interest revenue d) investment income Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

130. The balance in the Investment Income or Loss account will a) appear on the balance sheet as a contra asset. b) appear on the income statement in the non-operating section. c) appear as a deduction in the shareholders' equity section. d) not be shown in the financial statements until the securities are sold. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

131. The measurement method required under IFRS for a debt security held to earn interest income such as money-market instruments is a) the equity method. b) amortized cost using the effective-interest method. c) the fair value method. d) the straight-line method. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

132. The measurement method required under IFRS for an equity investment designated by management as OCI that is NOT held for trading purposes, such as common shares of another company, is a) the fair value through profit and loss method. b) amortized cost using the effective-interest method. c) the fair value through OCI method. d) the equity method. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

133. The measurement method required under ASPE for a strategic investment with significant influence with 20% to 50% ownership in the common shares of another company is a) the fair value through profit and loss method if quoted market price available.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) consolidation. c) the fair value through OCI method. d) the amortized cost using the effective-interest method. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

134. The measurement method required under IFRS for a strategic investment with significant influence with 20% to 50% ownership in the common shares of another company is a) the fair value through profit and loss method. b) consolidation. c) the fair value through OCI method. d) the equity method. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

135. Which of the following is NOT classified as a current asset? a) money-market investments b) investments at fair value through profit or loss held-for-trading purposes c) treasury bill investment at amortized cost d) equity securities that are purchased for strategic purposes Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain how investments are reported in the financial statements. Section Reference: Reporting of Investments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 136. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F.

Investments at FVTPL Subsidiary company Equity method Investee Fair value Consolidated financial statements

G. H. I. J. K.

Parent company Strategic investment Significant influence Long-term investment Investment Income or Loss

____

The issuer of a bond

____

Securities that are held for resale in the near future, hopefully at a gain

____

Debt instrument, held to earn interest income, that does not mature within the next year

____

An investment in equity securities that is purchased to influence or control another

____

Amount for which an investment could be sold for in the market

____

The investor has control over an investee.

____

The Equity Investment in Common Shares account is adjusted for profit and dividends received.

____

Normally exists when the investor owns 20% or more of the investee’s voting shares

____

Financial statements that present the assets and liabilities of the parent and the subsidiary company

____ 10.

Entity whose shares are owned by the parent company

Test Bank for Accounting Principles, Ninth Canadian Edition

_____ 11.

An investment in which there is intention of establishing and maintaining a long-term operating relationship

_____ 12.

Accounting entries are required to adjust the investment’s carrying value for any increase and decrease in its fair value.

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 1.

10.

11.

12.

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify reasons to invest, and classify investments. Section Reference: Classifying Investments Learning Objective: Demonstrate the accounting for debt investments that are reported at amortized cost. Section Reference: Accounting for Debt Investments Reported at Amortized Cost Learning Objective: Demonstrate the accounting for fair value investments. Section Reference: Accounting for Fair Value Investments Learning Objective: Explain how to account for strategic investments, and demonstrate the accounting for strategic investments with significant influence. Section Reference: Accounting for Strategic Investments CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 17 THE CASH FLOW STATEMENT CHAPTER STUDY OBJECTIVES 1. Discuss the usefulness, content, and format of the cash flow statement. The cash flow statement gives information about the cash receipts and cash payments resulting from a company’s operating, investing, and financing activities during the period. In general, operating activities include the cash effects of transactions that affect profit. Investing activities generally include cash flows resulting from changes in long-term asset items. Financing activities generally include cash flows resulting from changes in long-term, liability and shareholders’ equity items.

2. Prepare a cash flow statement using the indirect method. There are four steps to prepare a cash flow statement: (1) Determine the net cash provided (used) by operating activities. In the indirect method, this is done by converting profit from an accrual basis to a cash basis. (2) Analyze the changes in long-term asset accounts and record them as investing activities, or as significant noncash transactions. (3) Analyze the changes in long-term liability and equity accounts and record them as financing activities, or as significant noncash transactions. (4) Prepare the cash flow statement and determine the net increase or decrease in cash.

3. Prepare the operating section of the cash flow statement using the direct method. The operating section of the cash flow statement can be prepared using the direct method. The direct method is generally preferred by investors because it provides more detailed information as to the sources and uses of cash. While this method also converts profit from an accrual to a cash basis, it reports the cash receipts from customers, cash receipts from interest, dividends and loans, as well as cash payments to suppliers, employees, interest, taxes, and operating expense.

4. Analyze the cash flow statement. The cash flow statement must be read along with the other financial statements in order to adequately assess a company’s financial position. In addition, it is important to understand how the net change in cash is affected by each type of activity—operating, investing, and financing— especially when different companies are being compared. Free cash flow is a measure of solvency: it indicates how much of the cash that was generated from operating activities during the current year is available after making necessary payments for capital expenditures. It is calculated by subtracting the cash used by investing activities from the cash provided by operating activities.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 Selected transactions of Humble Landings, a private corporation reporting under ASPE, are listed below: 1. Common shares are sold for cash. 2. Bonds payable are issued for cash at a discount. 3. Interest receivable on a short-term note receivable is collected. 4. Merchandise is sold to customers for cash. 5. Accounts payable are paid in cash. 6. Equipment is purchased by signing a three-year, 6% note payable. 7. Cash dividends on common shares are declared and paid. 8. 100 shares of XYZ common shares are purchased for cash. 9. Land is sold for cash at carrying amount. 10. Bonds payable are converted into common shares. Instructions Classify each transaction as either a) an operating activity, b) an investing activity, c) a financing activity, or d) a noncash investing and financing activity. Solution 1 (5 min.) 1. c financing activity 2.

financing activity

operating activity

noncash investing and financing activity

financing activity

investing activity

10. d

noncash investing and financing activity

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

Exercise 2 Mimico Ltd. , a public corporation, had the following transactions: Transaction 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Paid account payable, $7,500. Sold equipment with a cost of $7,500 and a carrying amount of $4,200 for $2,250. Prepaid insurance for one year, $5,400. Provided services for cash, $11,250. Collected accounts receivable, $13,050. Purchased a patent for $600,000. Purchased inventory for cash, $24,000. Repurchased common shares with a cost of $135,000 for $142,500. Converted preferred shares with a cost of $75,000 to common shares. Acquired an automobile valued at $67,500 by entering into a finance lease.

Classification O

Cash inflow or outflow – $7,500

Instructions Complete the above table (as demonstrated by item 1) indicating: a) Whether each transaction should be classified as an Operating (O), Investing (I) or Financing (F) activity; and b) The amount of cash inflow (+), outflow (–), or if it has no effect on cash (NE). Solution 2 (10 min.)

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Transaction

Classification

Cash inflow or outflow – $7,500

+ 2,250

O O O I O

– 5,400 + 11,250 + 13,050 – 600,000 – 24,000

– 142,500

Bloomcode: Application Difficulty: Medium Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

Exercise 3 Selected transactions of Rudiment Inc., a public corporation reporting under IFRS, are listed below: 1. Furniture was sold for cash. 2. Inventory was purchased for cash. 3. Bond investment receivable was collected. 4. Equipment was acquired by signing a five-year lease agreement. 5. Dividends were paid in cash. 6. Issued 10,000 common shares to acquire land. 7. Accounts payable were paid. 8. Paid one-year of insurance in advance. 9. Repaid a portion of the company’s long-term mortgage payable. 10. Collected accounts receivable. Instructions Classify each transaction as either a) an operating activity, b) an investing activity, c) a financing activity, or d) a noncash investing and financing activity. Solution 3 (5 min.) 1. Investing activity 2.

Operating activity

Investing activity

Noncash investing and financing activity

Financing activity

Noncash investing and financing activity.

Operating activity

Financing activity

10. Operating activity Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

Exercise 4 Assuming a cash flow statement is prepared using the indirect method, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the cash flow statement. Code Cash flows from operating activities A Add to profit D Deduct from profit IA Cash flows from investing activities FA Cash flows from financing activities Category 1. Common shares are issued for cash. _______ 2. Merchandise inventory increased during the period. _______ 3. Depreciation expense recorded for the period. _______ 4. Building was purchased for cash. _______ 5. Bonds payable were acquired and retired at their carrying value. _______ 6. Accounts payable decreased during the period. _______ 7. Prepaid expenses decreased during the period. _______ 8. Investment in common shares of another company were acquired for cash. _______ 9. Land is sold for cash at an amount equal to carrying amount. _______ 10. Loss on sale of equipment was recorded on the income statement. _______ Solution 4 (8–12 min.) Category FA

Common shares are issued for cash.

Merchandise inventory increased during the period.

Depreciation expense recorded for the period.

Building was purchased for cash.

Bonds payable were acquired and retired at their carrying value.

Accounts payable decreased during the period.

Prepaid expenses decreased during the period.

Investment in common shares of another company were acquired for cash.

Test Bank for Accounting Principles, Ninth Canadian Edition

Land is sold for cash at an amount equal to carrying amount.

10. Loss on sale of -equipment was recorded on the income statement.

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Exercise 5 Dysons Tools Inc. reported retained earnings of $927,200 at June 30, 2024, its most recent year end. On July 1, 2023, the opening retained earnings had been $950,000. During the year ended June 30, 2024, Dysons Tools declared stock dividends on common shares and cash dividends on preferred shares. The stock dividends resulted in a reduction of retained earnings of $400,000. Profit for the year was $450,000 and total comprehensive income was $497,000. Instructions Calculate the amount of cash dividends on the preferred shares. Solution 5 (5 min.) Retained earnings, beginning...................................................................................... Add: Profit for the year ................................................................................................. Less: Stock dividends................................................................................................... Subtotal ........................................................................................................................ Less: Reported retained earnings, ending .................................................................. Difference is cash dividends declared on preferred shares ........................................ Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Exercise 6 Rock Support Inc.’s current assets and liabilities at December 31, 2024 are as follows: 2024 2023 Accounts payable $18,400 $11,500 Accounts receivable 8,500 12,000 Cash 39,200 21,400 Interest payable 220 1,250 Inventory 10,200 18,000 Prepaid expenses 400 500 Salaries payable 2,200 4,100 Taxes payable 1,150 910

$ 950,000 450,000 1,400,000 (400,000) 1,000,000 (927,200) $ 72,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Rock Support had profit of $68,000 in 2024. Included in the calculation of profit is depreciation of building and equipment in the amount of $22,500. Instructions Prepare the operating section of Rock Support’s cash flow statement for the year ended December 31, 2024, using the indirect method. Solution 6 (10 min.) ROCK SUPPORT INC. Cash Flow Statement (partial) Year Ended December 31, 2024 Operating activities Profit for the year ................................................................................................ Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ................................................................................. $22,500 Decrease in accounts receivable ................................................................ 3,500 Decrease in inventory ................................................................................. 7,800 Decrease in prepaid expenses .................................................................... 100 Increase in accounts payable ..................................................................... 6,900 Increase in taxes payable............................................................................ 240 Decrease in interest payable ...................................................................... (1,030) Decrease in salaries payable ...................................................................... (1,900) Net cash provided by operating activities .........................................

$ 68,000

38,110 $106,110

Exercise 7 Tracks Holdings Ltd.’s comparative balance sheet at December 31, 2024, is presented below. Tracks’ profit for the year was $88,510. Land was acquired for future expansion. Equipment and a long-term strategic investment were purchased during the year, but none were sold. Dividends were paid to the common shareholders. TRACKS HOLDINGS LTD. Balance Sheet December 31, 2024 2024 2023 Assets Cash ............................................................................................................................. $148,220$ 65,000 Accounts receivable ..................................................................................................... 82,100 68,900 Prepaid expenses ......................................................................................................... 8,300 6,300 Land ............................................................................................................................. 50,000 – Building and equipment .............................................................................................. 72,000 60,000 Less: accumulated depreciation ................................................................................. (17,000) (12,000)

Test Bank for Accounting Principles, Ninth Canadian Edition

Long-term investment ................................................................................................. Total assets ..........................................................................................................

14,000 $357,620

– $188,200

Liabilities and Shareholders' Equity Accounts payable ......................................................................................................... Interest payable ........................................................................................................... Salaries payable ........................................................................................................... Long-term debt ............................................................................................................ Common shares ........................................................................................................... Retained earnings ........................................................................................................ Total liabilities and shareholders' equity ...........................................................

$ 47,000 250 510 108,000 10,000 191,860 $357,620

$ 52,900 – 950 16,000 10,000 108,350 $188,200

Instructions a) Determine cash flow provided (used) by operating activities using the indirect method. Show all calculations. b) Determine cash flow provided (used) by investing activities. Show all calculations. c) Determine cash flow provided (used) by financing activities. Show all calculations. Solution 7 (25 min.) a) Cash provided by operating activities: Profit for the year Depreciation Accounts receivable Accounts payable Prepaid expenses Salaries payable Interest payable Cash provided by operating activities b)

Ending

Beginning

$(17,000) 82,100 47,000 8,300 510 250

$(12,000) 68,900 52,900 6,300 950 –

Cash used by investing activities: Land Investment Building and equipment – cost Cash used by investing

Change $88,510 5,000 (13,200) (5,900) (2,000) (440) 250 $72,220

Ending $50,000 14,000 72,000

Beginning – – $60,000

Cash provided by financing activities: Change in retained earnings Less profit Difference is dividends Share capital Long-term debt Cash provided by financing activities

Ending $191,860

Beginning $108,350

10,000 108,000

10,000 16,000

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method.

Change $83,510 (88,510) (5,000) – 92,000 $87,000

Change $(50,000) (14,000) (12,000) (76,000)

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Exercise 8 Fly Incorporated reported profit of $250,000 for the current year. Depreciation recorded on buildings and equipment amounted to $80,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows: End of Year Beginning of Year Cash ...................................................................... $20,000 $15,000 Accounts receivable ............................................. 19,000 32,000 Inventories ........................................................... 50,000 65,000 Prepaid expenses ................................................. 7,500 5,000 Accounts payable ................................................. 12,000 18,000 Income tax payable.............................................. 1,600 1,200 Instructions Prepare the operating activities section of the cash flow statement using the indirect method. Solution 8 (10–15 min.) Profit for the year ......................................................................................................... Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense.......................................................................................... Decrease in accounts receivable......................................................................... Decrease in inventories ....................................................................................... Increase in prepaid expenses .............................................................................. Decrease in accounts payable ............................................................................ Increase in income tax payable .......................................................................... Net cash provided by operating activities..................................................

$250,000 80,000 13,000 15,000 (2,500) (6,000) 400 $349,900

Exercise 9 Realtree Supplies Inc.’s current assets and liabilities at December 31, 2024, are as follows: 2024 2023 Accounts payable $8,400 $11,500 Accounts receivable 18,500 12,000 Cash 30,100 5,000 Interest payable 1,750 1,250 Inventory 4,500 8,500 Prepaid expenses 800 900 Salaries payable 1,600 3,000 Taxes payable 550 1,550

Test Bank for Accounting Principles, Ninth Canadian Edition

Realtree Supplies had profit of $83,500 in 2024. Included in the calculation of profit is depreciation of building and equipment in the amount of $45,000 and amortization of a patent in the amount of $1,000. Instructions Prepare the operating section of Realtree Supplies’ cash flow statement for the year ended December 31, 2024, using the indirect method. Solution 9 (10 min.) REALTREE SUPPLIES INC. Cash Flow Statement (partial) Year Ended December 31, 2024 Operating activities Profit for the year ................................................................................................ Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ................................................................................. $45,000 Amortization expense ................................................................................. 1,000 Increase in accounts receivable ................................................................. (6,500) Decrease in inventory ................................................................................. 4,000 Decrease in prepaid expenses .................................................................... 100 Decrease in accounts payable .................................................................... (3,100) Decrease in taxes payable .......................................................................... (1,000) Increase in interest payable ....................................................................... 500 Decrease in salaries payable ...................................................................... (1,400) Net cash provided by operating activities .........................................

$ 83,500

38,600 $122,100

Exercise 10 Dad’s Cookies Corporation prepared the tabulation below for the current year: Profit for the year ................................................................................................................................ Adjustments to reconcile profit to net cash provided by operating activities: Depreciation expense, $35,000 ................................................................................................. Increase in accounts receivable, $80,000 ................................................................................. Decrease in inventory, $13,000 ................................................................................................. Loss on sale of equipment, $4,000 ............................................................................................ Increase in accounts payable, $5,600 ....................................................................................... Decrease in interest receivable, $4,000 .................................................................................... Increase in prepaid expenses, $6,000 ....................................................................................... Decrease in income tax payable, $1,500 ................................................................................... Gain on sale of land, $5,000 .......................................................................................................

$400,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Net cash provided (used) by operating activities ..................................................................... Instructions Show how each item should be reported in the cash flow statement and the total cash provided (used) by operating activities prepared using the indirect method. Use parentheses for deductions. Solution 10 (10–14 min.) Profit for the year ................................................................................................................................ Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense................................................................................................................. Increase in accounts receivable ................................................................................................. Decrease in inventory ................................................................................................................. Loss on sale of equipment ......................................................................................................... Increase in accounts payable ..................................................................................................... Decrease in interest receivable .................................................................................................. Increase in prepaid expenses ..................................................................................................... Decrease in income tax payable ................................................................................................ Gain on sale of land .................................................................................................................... Net cash provided by operating activities.........................................................................

$400,000 35,000 (80,000) 13,000 4,000 5,600 4,000 (6,000) (1,500) (5,000) $369,100

Exercise 11 The comparative balance sheets for Jellystone Park Corporation appear below: JELLYSTONE PARK CORPORATION Comparative Balance Sheet Dec. 31, 2024 Assets Cash .................................................................................................. Accounts receivable ......................................................................... Prepaid expenses ............................................................................. Inventory .......................................................................................... Long-term investment in bonds ...................................................... Equipment........................................................................................ Accumulated depreciation—equipment ......................................... Total assets............................................................................

$ 23,000 18,000 6,000 27,000 -060,000 (18,000) $116,000

Dec. 31, 2023

$ 12,000 14,000 9,000 18,000 18,000 30,000 (14,000) $87,000

Liabilities and Shareholders' Equity Accounts payable ............................................................................. Bonds payable ................................................................................. Common shares ............................................................................... Retained earnings ............................................................................

$ 21,000 37,000 40,000 18,000

$ 9,000 45,000 23,000 10,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Total liabilities and shareholders' equity .............................

$116,000

$87,000

Additional information: 1. Profit for the year ended December 31, 2024, was $20,000. 2. Cash dividends of $12,000 were declared and paid during the year. 3. Long-term investments in bonds that had an amortized cost of $18,000 were sold for $16,000. Instructions Prepare a cash flow statement for the year ended December 31, 2024, using the indirect method. Solution 11 (25–30 min.) JELLYSTONE PARK CORPORATION Cash Flow Statement Year Ended December 31, 2024 Operating activities Profit for the year ................................................................................................ Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ................................................................................. Loss on sale of long-term investment in bonds ......................................... Increase in accounts receivable ................................................................. Decrease in prepaid expenses .................................................................... Increase in inventory .................................................................................. Increase in accounts payable ..................................................................... Net cash provided by operating activities .........................................

$20,000

$ 4,000 2,000 (4,000) 3,000 (9,000) 12,000

Investing activities Sale of long-term investment in bonds .............................................................. Purchase of equipment ....................................................................................... Net cash used by investing activities..........................................................

$16,000 (30,000)

Financing activities Issue of common shares ...................................................................................... Retirement of bonds payable.............................................................................. Payment of cash dividends ................................................................................. Net cash used by financing activities .........................................................

$17,000 (8,000) (12,000)

Net increase in cash ..................................................................................................... Cash, January 1 ............................................................................................................ Cash, December 31 ...................................................................................................... Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Exercise 12

8,000 28,000

(14,000)

(3,000) 11,000 12,000 $23,000

Test Bank for Accounting Principles, Ninth Canadian Edition

The following information is available for Umbrella Corporation for the year ended December 31, 2024: Collection of principal on long-term loan to a supplier ............................................................ $40,000 Acquisition of equipment for cash ............................................................................................. 15,000 Proceeds from the redemption of long-term investment at carrying value ............................ 27,000 Issue of common shares for cash ............................................................................................... 25,000 Depreciation expense................................................................................................................. 25,000 Redemption of bonds payable at amortized cost ..................................................................... 24,000 Payment of cash dividends ........................................................................................................ 14,000 Profit for the year ....................................................................................................................... 30,000 Purchase of land by issuing bonds payable .............................................................................. 40,000 In addition, the following information is available from the comparative balance sheet for Umbrella at the end of 2023 and 2024: 2024 2023 Cash ..................................................................................................................... $102,000 $14,000 Accounts receivable (net) .................................................................................... 20,000 15,000 Prepaid insurance ............................................................................................... 17,000 13,000 Total current assets .................................................................................... $139,000 $42,000 Accounts payable ................................................................................................ Salaries payable .................................................................................................. Total current liabilities................................................................................

$25,000 4,000 $29,000

$19,000 7,000 $26,000

Instructions Prepare Umbrella's cash flow statement for the year ended December 31, 2024, using the indirect method. Solution 12 (22–27 min.) UMBRELLA CORPORATION Cash Flow Statement Year Ended December 31, 2024 Operating activities Profit for the year ................................................................................................ Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation ................................................................................................ Increase in accounts receivable ................................................................. Increase in prepaid insurance .................................................................... Increase in accounts payable ..................................................................... Decrease in salaries payable ...................................................................... Net cash provided by operating activities ......................................... Investing activities Collection of long-term loan ............................................................................... Proceeds from the redemption of long-term investment .................................. Purchase of equipment ....................................................................................... Net cash provided by investing activities ...................................................

$30,000

$25,000 (5,000) (4,000) 6,000 (3,000)

19,000 49,000

$40,000 27,000 (15,000) 52,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Financing activities Issue of common shares ...................................................................................... Redemption of bonds .......................................................................................... Payment of dividends ......................................................................................... Net cash used by financing activities .........................................................

$25,000 (24,000) (14,000)

Net Increase in cash ..................................................................................................... Cash, January 1 .......................................................................................................... Cash, December 31 ......................................................................................................

14,000

(13,000) 88,000

Note: Noncash investing and financing activities Purchase of land by issuing bonds ....................................................................

$102,000

$40,000

Bloomcode: Application Difficulty: Hard Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Exercise 13 Fisheries Processing Corporation prepared the following income statement and comparative balance sheet for 2024: FISHERIES PROCESSING CORPORATION Income Statement Year Ended December 31, 2024 Sales .................................................................................................................................................... Cost of goods sold ............................................................................................................................... Gross profit .......................................................................................................................................... Depreciation expense ......................................................................................................................... Other operating expenses .................................................................................................................. Interest expense.................................................................................................................................. Loss on sale of land ............................................................................................................................. Income before taxes ........................................................................................................................... Income taxes ....................................................................................................................................... Profit for the year ................................................................................................................................

$1,800,000 880,000 920,000 227,000 197,000 165,000 120,000 211,000 70,800 $ 140,200

FISHERIES PROCESSING CORPORATION Comparative Balance Sheet December 31 2024 Assets Cash ............................................................................................................ $ 385,200$ 200,000 Accounts receivable .................................................................................... 640,000 Merchandise inventory ............................................................................... 2,336,000 Property, plant, and equipment ................................................................. 880,000 Less: Accumulated depreciation ................................................................ (787,000) Goodwill ...................................................................................................... 219,000

2023

670,000 2,090,000 800,000 (560,000) 219,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Total assets .........................................................................................

$3,673,200

$3,419,000

Liabilities and Shareholders' Equity Accounts payable ........................................................................................ Other accrued payables .............................................................................. Dividends payable ...................................................................................... Income tax payable..................................................................................... Note payable (long-term) ........................................................................... Bonds payable ............................................................................................ Common shares .......................................................................................... Retained earnings ....................................................................................... Total liabilities and shareholders' equity ..........................................

$ 389,000 160,000 80,000 27,000 180,000 900,000 1,600,000 337,200 $3,673,200

$ 265,000 240,000 80,000 42,000 560,000 400,000 1,600,000 232,000 $3,419,000

Additional data: 1. Equipment was purchased for $400,000. 2. Land was sold for cash proceeds of $200,000. 3. The company sold bonds of $500,000 and made $380,000 of principal payments on notes payable. Instructions Prepare a cash flow statement for 2024, using the indirect method. Solution 13 (25–30 min.) FISHERIES PROCESSING CORPORATION Cash Flow Statement—Indirect Approach Year Ended December 31, 2024 Operating activities Profit for the year ................................................................................................ Adjustments to reconcile profit to net cash provided (used) by operating activities Depreciation expense ................................................................................. Loss on sale of land ..................................................................................... Decrease in accounts receivable ................................................................ Increase in merchandise inventory ............................................................ Increase in accounts payable ..................................................................... Decrease in income tax payable ................................................................. Decrease in other accrued payables ..........................................................

$140,200

227,000 120,000 30,000 (246,000) 124,000 (15,000) (80,000) 160,000 300,200

Cash provided by operating activities ............................................... Investing activities Proceeds from sale of land .................................................................................. Purchase of equipment ....................................................................................... Cash used by investing activities ................................................................

$200,000 (400,000)

Financing activities Proceeds from sale of bonds ............................................................................... Payment on notes payable ................................................................................. Payment of cash dividend (1).............................................................................. Cash provided by financing activities ........................................................

$500,000 (380,000) (35,000)

(200,000)

85,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Net Increase in cash ..................................................................................................... Cash balance, January 1 .............................................................................................. Cash balance, December 31 ........................................................................................ (1)

185,200 200,000 $385,200

Retaining Earnings Beginning $232,000 + Net income $140,200 = $372,200 $372,200 less cash dividend = $337,200 ending balance Cash dividend = $372,200 – $337,200 = $35,000

Exercise 14 A comparative balance sheet for Sleeping Dog Corporation is presented below: SLEEPING DOG CORPORATION Comparative Balance Sheet December 31 2024

2023

Assets Cash ............................................................................................................... $ 19,000 Accounts receivable (net) ............................................................................................ Inventory ...................................................................................................................... Prepaid insurance ........................................................................................................ Land .................................................................................................................. 18,000 Equipment.................................................................................................................... Accumulated depreciation .......................................................................................... Total assets ..........................................................................................................

$ 14,000 80,000 20,000 22,000 40,000 70,000 (20,000) $209,000

60,000 (13,000) $195,000

$ 11,000 27,000 140,000 31,000 $209,000

$ 6,000 19,000 115,000 55,000 $195,000

60,000 24,000 10,000

Additional information: 1. Loss for 2024 is $20,000. 2. Cash dividends of $4,000 were declared and paid in 2024. 3. Land was sold for cash at a loss of $10,000. This was the only land transaction during the year. 4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash. 5. $12,000 of bonds were retired during the year at carrying value. 6. Equipment was acquired for common shares. The fair value of the equipment at the time of the exchange was $25,000. Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Prepare a cash flow statement for the year ended 2024 using the indirect method. Solution 14 (22–27 min.) SLEEPING DOG CORPORATION Cash Flow Statement Year Ended December 31, 2024 Operating activities Loss for the year ................................................................................................. Adjustments to reconcile loss to net cash used by operating activities: Depreciation a) ............................................................................................ Loss on sale of land b) ................................................................................. Increase in accounts receivable ................................................................. Decrease in inventory ................................................................................. Increase in prepaid insurance .................................................................... Increase in accounts payable ..................................................................... Net cash used by operating activities ................................................

$(20,000)

$17,000 10,000 (20,000) 4,000 (12,000) 5,000

Investing activities Proceeds from the sale of land b) ....................................................................... Proceeds from the sale of equipment ................................................................ Net cash provided by investing activities ...................................................

$12,000 5,000

Financing activities Retirement of bonds payable.............................................................................. Issue of bonds payable c) .................................................................................... Payment of dividends ......................................................................................... Net cash provided by financing activities ..................................................

$(12,000) 20,000 (4,000)

4,000 (16,000)

17,000

4,000 5,000 14,000 $19,000

Note: Noncash investing and financing activities Purchase of equipment through issue of common shares ................................

$25,000

Accumulated depreciation December 31, 2023 ................................................. Accumulated depreciation December 31, 2024 ................................................. Difference .......................................................................................................... Add: Accumulated depreciation on equipment sold ......................................... Depreciation expense..........................................................................................

$13,000 20,000 7,000 10,000 $17,000

Cost of land sold .................................................................................................. Less: Loss on sale of land .................................................................................... Proceeds from sale of land ..................................................................................

$22,000 (10,000) $12,000

Bonds Payable 2024 ............................................................................................ Bonds Payable 2023 ............................................................................................

$27,000 19,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Difference .......................................................................................................... Plus bonds retired ............................................................................................... Bonds issued........................................................................................................

8,000 12,000

$20,000

Exercise 15 Chinatown Industries Ltd.’s 2024 single-step income statement and comparative balance sheet are provided below: CHINATOWN INDUSTRIES LTD. Income Statement Year Ended December 31, 2024 Revenue ........................................................................................................................ $920,000 Expenses Cost of goods sold ............................................................................................... $493,500 Salaries ................................................................................................................ 189,000 Depreciation expense.......................................................................................... 25,000 Other operating expenses ................................................................................... 73,500 Interest expense .................................................................................................. 13,000 Income taxes........................................................................................................ 18,000 812,000 Profit for the year ......................................................................................................... $108,000 CHINATOWN INDUSTRIES LTD. Balance Sheet December 31 2024

2023

Assets Cash ............................................................................................................................. Accounts receivable ..................................................................................................... Inventory ...................................................................................................................... Prepaid expenses ......................................................................................................... Land ............................................................................................................................. Building and equipment .............................................................................................. Accumulated depreciation .......................................................................................... Total assets ..........................................................................................................

$ 14,000 29,000 13,500 2,000 250,000 497,000 (150,000) $655,500

$ 10,000 24,000 17,000 2,000 250,000 422,000 (125,000) $600,000

Liabilities and Shareholders' Equity Accounts payable ......................................................................................................... Taxes payable .............................................................................................................. Interest payable ........................................................................................................... Salaries payable ........................................................................................................... Long-term debt ............................................................................................................ Common shares ........................................................................................................... Retained earnings ........................................................................................................ Total liabilities and shareholders' equity ...........................................................

$ 25,900 1,000 1,500 8,000 234,000 120,000 265,100 $655,500

$ 22,400 3,000 2,500 5,000 260,000 100,000 207,100 $600,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Additional information: 1. No new long-term debt was taken during the year. 2. New equipment was purchased, and none was sold. 3. Common shares were issued for cash. 4. Cash dividends were paid to common shareholders. Instructions Prepare the cash flow statement for 2024 using the indirect method. Solution 15 (30 min.) CHINATOWN INDUSTRIES LTD. Cash Flow Statement Year Ended December 31, 2024 Operating activities Profit for the year ................................................................................................ Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ................................................................................. Increase in accounts receivable ................................................................. Decrease in inventory ................................................................................. Increase in accounts payable ..................................................................... Decrease in taxes payable .......................................................................... Decrease in interest payable ...................................................................... Increase in salaries payable ........................................................................ Net cash provided by operating activities .........................................

$108,000

$25,000 (5,000) 3,500 3,500 (2,000) (1,000) 3,000

Investing activities Purchase of equipment ($497,000 – $422,000) ................................................... Net cash used by investing activities..........................................................

$(75,000)

Financing activities Cash dividends paid (1) ....................................................................................... Repayment of long term debt ............................................................................. Common shares issued for cash ......................................................................... Net cash used by financing activities .........................................................

$(50,000) (26,000) 20,000

10,000

(1)

Change in retained earnings ($265,100 – $207,100) ........................................... Less profit ............................................................................................................ Difference is dividends ........................................................................................

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method.

27,000 135,000

(75,000)

(56,000) 4,000 $14,000 $ 58,000 (108,000) $(50,000)

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Exercise 16 The comparative balance sheets for Dingdong Corporation appear below: DINGDONG CORPORATION Comparative Balance Sheet Dec. 31, 2024 Assets Cash ................................................................................................................... $ 68,200 Accounts receivable .......................................................................................... 10,000 Inventory ........................................................................................................... 32,900 Prepaid expenses .............................................................................................. 9,000 Equipment......................................................................................................... 30,000 Accumulated depreciation—equipment .......................................................... (17,000) Total assets............................................................................................. $133,100 Liabilities and Shareholders' Equity Accounts payable .............................................................................................. Bonds payable .................................................................................................. Common shares ................................................................................................ Retained earnings ............................................................................................. Total liabilities and shareholders' equity ..............................................

Dec. 31, 2023

$ 5,600 50,000 23,000 54,500 $133,100

$ 20,800 16,300 30,200 6,000 60,000 (19,800) $113,500

$ 15,000 40,000 23,000 35,500 $113,500

Additional information: 1. Profit for the year ended December 31, 2024, was $39,000. 2. Cash dividends of $20,000 were declared and paid during the year. 3. Equipment with cost of $30,000 and accumulated depreciation of $11,500 was sold for proceeds of $22,000. 4. Depreciation of property, plant, and equipment for the year was properly recorded at $8,700. Instructions a) Prepare a cash flow statement for the year ended December 31, 2024, using the indirect method. b) Calculate free cash flow. Solution 16 (25–30 min.) DINGDONG CORPORATION Cash Flow Statement Year Ended December 31, 2024 a) Operating activities Profit for the year ................................................................................................ Adjustments to reconcile profit to net cash provided (used) by operating activities: Depreciation expense ................................................................................. Gain on sale of equipment ..........................................................................

$39,000

$8,700 (3,500)

Test Bank for Accounting Principles, Ninth Canadian Edition

Decrease in accounts receivable ................................................................ Increase in prepaid expenses ..................................................................... Increase in inventory .................................................................................. Decrease in accounts payable .................................................................... Net cash provided by operating activities .........................................

6,300 (3,000) (2,700) (9,400)

Investing activities Proceeds on sale of equipment .......................................................................... Net cash provided by investing activities ...................................................

$22,000

Financing activities Issuance of bonds payable .................................................................................. Payment of cash dividends ................................................................................. Net cash used by financing activities .........................................................

10,000 (20,000)

(3,600) 35,400

22,000

(10,000)

47,400 20,800 $68,200

Free cash flow = Cash provided (used) by operating activities – Cash used (provided) by investing activities = $35,400 + $22,000 = $57,400 Note: Cash was provided by investing activities, not used. Therefore, add these two numbers. Bloomcode: Synthesis Difficulty: Hard Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Exercise 17 Mason Ltd. had total operating expenses of $180,000 in 2024, which included depreciation expense of $30,000. Also, during 2024, prepaid expenses increased by $7,500 and accrued liabilities decreased by $10,050. Instructions Calculate the amount of cash payments for operating expenses in 2024, using the direct method. Solution 17 (5–8 min.) Operating expenses ..................................................................................................... Cash Payments: Noncash depreciation expense ................................................................................... Increase in prepaid expenses ...................................................................................... Decrease in accrued liabilities ..................................................................................... Cash payments for operating expenses ...................................................................... Bloomcode: Application Difficulty: Medium

$180,000 (30,000) 7,500 10,050 $167,550

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

Exercise 18 The general ledger of Hubert Corporation provides the following information: End of Year Beginning of Year Accounts Receivable ........................................ $125,000 $ 94,000 Inventory........................................................... 280,000 210,000 Accounts Payable ............................................. 130,000 65,000 The company's net sales for the year were $2,850,000 and cost of goods sold amounted to $1,650,000. Instructions Calculate the following: a) Cash receipts from customers. b) Cash payments to suppliers. Solution 18 (8–12 min.) a) Cash receipts from customers Sales – Increase in accounts receivable $2,850,000 – $31,000 = $2,819,000 b)

Cash payments to suppliers First calculate the amount of purchases: Beginning inventory ...................................................................... Add: Purchases ............................................................................ Less: Ending inventory ................................................................... Cost of goods sold .........................................................................

$210,000 ? ? 280,000 $1,650,000

Cost of goods sold = $210,000 + Purchases – $280,000 = $1,650,000. Therefore, Purchases = $1,720,000. Amount of cash payments to suppliers = Purchases – Increase in accounts payable = $1,720,000 – $65,000 = $1,655,000. Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

Exercise 19 The following information has been gathered by the accountant for Sangsters Clothing Ltd.: Information related to sales and customers: Credit sales made in the year ..............................................................................

$200,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash sales in the year .......................................................................................... Accounts receivable, beginning .......................................................................... Accounts receivable, ending ...............................................................................

19,500 8,200 9,900

Information related to merchandise: Cost of goods sold ............................................................................................... Inventory, beginning ........................................................................................... Inventory, ending ................................................................................................ Accounts payable to suppliers, beginning ......................................................... Accounts payable to suppliers, ending ...............................................................

$71,000 2,500 5,400 3,800 3,100

Information related to employees: Salaries expense reported .................................................................................. Vacation pay expense reported .......................................................................... Accrued salaries payable, beginning .................................................................. Accrued salaries payable, ending ....................................................................... Accrued vacation pay payable, beginning .......................................................... Accrued vacation pay payable, ending ...............................................................

$40,000 2,600 1,750 1,800 0 800

Instructions a) Determine cash received from customers. b) Determine cash paid to suppliers. c) Determine cash paid to employees. Solution 19 (10 min.) a) $200,000 + $19,500 + $8,200 – $9,900 = $217,800 (Cash received from customers) b)

$71,000 – $2,500 + $5,400 + $3,800 – $3,100 = $74,600 (Cash paid to suppliers)

$40,000 + $2,600 + $1,750 – $1,800 – $800 = $41,750 (Cash paid to employees)

Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

Exercise 20 The income statement of Meaney Inc. for the year ended December 31, 2024, reported the following condensed information: Service revenue ................................................................................................. 600,000 Operating expenses .......................................................................................... 360,000 Profit from operations ...................................................................................... 240,000 Income tax expense .......................................................................................... 60,000 Profit for the year .............................................................................................. $180,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Meaney's balance sheet contained the following comparative data at December 31: 2024 Accounts receivable ...................................................................... $50,000 Accounts payable .......................................................................... 35,000 Income tax payable ....................................................................... 1,000

2023 $65,000 30,000 3,000

Meaney has no depreciable assets. Accounts payable pertains to operating expenses. Instructions Prepare the operating activities section of the cash flow statement using the direct method. Solution 20 (9–14 min.) MEANEY INC. Cash Flow Statement Year Ended December 31, 2024 Operating activities Cash receipts from customers ($600,000 + $15,000) .......................................... Cash payments: For operating expenses ($360,000 – $5,000) .............................................. For income tax ($60,000 + $2,000) .............................................................. Net cash provided by operating activities..................................................

$615,000 $355,000 62,000

417,000 $198,000

Exercise 21 The income statement of Stewart Limited is shown below: STEWART LIMITED Income Statement Year Ended December 31, 2024 Sales ............................................................................................................................. ...................... Cost of goods sold ........................................................................................................ ...................... Gross profit ................................................................................................................... ...................... Operating expenses Selling and administrative expenses .................................................................. .... $1,400,000 Depreciation expense.......................................................................................... 120,000 Profit for the year ......................................................................................................... Additional information: 1. Accounts receivable decreased $300,000 during the year. 2. Inventory decreased $175,000 during the year. 3. Prepaid expenses increased $200,000 during the year.

$9,000,000 5,400,000 3,600,000

1,520,000 $2,080,000

Test Bank for Accounting Principles, Ninth Canadian Edition

4. 5.

Accounts payable to merchandise suppliers increased $160,000 during the year. Accrued expenses payable increased $120,000 during the year.

Instructions Prepare the operating activities section of the cash flow statement for the year ended December 31, 2024, using the direct method. Solution 21 (15–20 min.) STEWART LIMITED Cash Flow Statement Year Ended December 31, 2024 Operating activities Cash receipts from customers ...................................................................... (1) Cash payments: To suppliers ...................................................................................... $5,065,000 (2) For operating expenses ................................................................... 1,480,000 (3) Net cash provided by operating activities .............................. (1)

Sales .......................................................................................................... Add: Decrease in accounts receivable ..................................................... Cash receipts from customers .................................................................

$9,000,000 300,000 $9,300,000

(2)

Cost of goods sold .................................................................................... Deduct: Decrease in inventory ................................................................ Purchases ................................................................................................. Deduct: Increase in accounts payable ..................................................... Cash payments to suppliers .....................................................................

$5,400,000 175,000 5,225,000 160,000 $5,065,000

(3)

Operating expenses, exclusive of depreciation ....................................... Add: Increase in prepaid expenses .......................................................... Deduct: Increase in accrued expenses payable....................................... Cash payments for operating expenses ..................................................

$1,400,000 200,000 (120,000) $1,480,000

$9,300,000

6,545,000 $2,755,000

Exercise 22 The following information has been gathered by the accountant for Greenhouse Ltd.: Information related to sales and customers: Credit sales made in the year .............................................................................. $666,000 Cash sales in the year .......................................................................................... 89,400 Accounts receivable, beginning .......................................................................... 30,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts receivable, ending ...............................................................................

38,400

$251,000 22,600 40,200 17,600 27,800

$131,000 9,200 5,800 8,800 800 1,500

Instructions a) Determine cash received from customers. b) Determine cash paid to suppliers. c) Determine cash paid to employees. Solution 22 (10 min.) a) $666,000 + $89,400 + $30,000 – $38,400 = $747,000 (Cash received from customers) b)

$251,000 – $22,600 + $40,200 + $17,600 – $27,800 = $258,400 (Cash paid to suppliers)

$131,000 + $9,200 + $5,800 – $8,800 + $800 – $1,500 = $136,500 (Cash paid to employees)

Exercise 23 During 2024, McBride Distributors Inc. had the following transactions and events: Accounts payable paid ................................................................................................ Accounts receivable collected ..................................................................................... Depreciation expense .................................................................................................. Cash, January 1, 2024 .................................................................................................. Cash, December 31, 2024 ............................................................................................. Cash sales ..................................................................................................................... Interest paid on mortgage payable ............................................................................. Income taxes paid ........................................................................................................

$199,300 479,700 13,500 82,000 23,500 90,000 16,000 4,800

Test Bank for Accounting Principles, Ninth Canadian Edition

Inventory purchased on credit .................................................................................... Issued a long-term note payable ................................................................................. Profit for the year ......................................................................................................... Operating expenses paid ............................................................................................. Principal payments made on mortgage payable ........................................................ Proceeds on sale of used equipment .......................................................................... Purchased a new building ........................................................................................... Salaries paid ................................................................................................................. Signed operating lease, annual payments will be ...................................................... Stock dividend declared ..............................................................................................

207,400 240,000 82,200 72,000 8,500 2,500 384,000 186,100 45,000 46,000

Instructions Prepare McBride’s cash flow statement for the year ended December 31, 2024, using the direct method. Solution 23 (25 min.) MCBRIDE DISTRIBUTORS INC. Cash Flow Statement Year Ended December 31, 2024 Operating activities Cash receipts from customers ($479,700 + $90,000) .......................................... Cash payments To suppliers ................................................................................................. For operating expenses .............................................................................. For interest .................................................................................................. For taxes ...................................................................................................... To employees .............................................................................................. Net cash provided by operating activities .........................................

$569,700 $199,300 72,000 16,000 4,800 186,100

Investing activities Proceeds from sale of equipment ....................................................................... Purchase of building............................................................................................ Net cash used by investing activities..........................................................

2,500 (384,000)

Financing activities Proceeds of note payable.................................................................................... Payments on mortgage payable ......................................................................... Net cash provided by financing activities ..................................................

240,000 (8,500)

Net decrease in cash .................................................................................................... Cash, January 1 .......................................................................................................... Cash, December 31 ......................................................................................................

82,000

478,200 91,500

(381,500)

231,500 (58,500) $23,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 24 Quality Kitchen Company’s 2024 single-step income statement and comparative balance sheet are provided below: QUALITY KITCHEN COMPANY Income Statement Year Ended December 31, 2024 Revenue ........................................................................................................................ Expenses Cost of goods sold ............................................................................................... Salaries ................................................................................................................ Other operating expense..................................................................................... Depreciation expense.......................................................................................... Interest ................................................................................................................. Income taxes........................................................................................................ Profit for the year .........................................................................................................

$920,000 $493,500 189,000 73,500 25,000 13,000 18,000

812,000 $108,000

QUALITY KITCHEN COMPANY Balance Sheet December 31 2024

2023

Assets Cash .............................................................................................................................. Accounts receivable ..................................................................................................... Inventory ...................................................................................................................... Prepaid expenses ......................................................................................................... Land .............................................................................................................................. Building and equipment—cost .................................................................................... Accumulated depreciation .......................................................................................... Total assets ..........................................................................................................

$ 14,000 29,000 13,500 2,000 250,000 497,000 (150,000) $655,500

$ 10,000 24,000 17,000 2,000 250,000 422,000 (125,000) $600,000

Liabilities and Shareholders' Equity Accounts payable ......................................................................................................... Taxes payable .............................................................................................................. Interest payable ........................................................................................................... Salaries payable ........................................................................................................... Long-term debt ............................................................................................................ Common shares ........................................................................................................... Retained earnings ........................................................................................................ Total liabilities and shareholders' equity ...........................................................

$ 25,900 1,000 1,500 8,000 234,000 120,000 265,100 $655,500

$ 22,400 3,000 2,500 5,000 260,000 100,000 207,100 $600,000

Additional information: 1. No new long-term debt was taken during the year. 2. New equipment was purchased, and none was sold. 3. Common shares were issued for cash. 4. Cash dividends were paid to common shareholders. 5. All operating expenses were paid in the period incurred. Instructions Prepare the cash flow statement for 2024 using the direct method.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 24 (30 min.) QUALITY KITCHEN COMPANY Cash Flow Statement Year Ended December 31, 2024 Operating activities Cash receipts from customers (1) ....................................................................... Cash payments To suppliers (2)............................................................................................ To employees (3) ......................................................................................... For other operating expenses ..................................................................... For taxes (4) ................................................................................................. For interest (5) ............................................................................................. Net cash provided by operating activities .........................................

$915,000 $486,500 186,000 73,500 20,000 14,000

$(75,000)

Financing activities Cash dividends paid (6) ....................................................................................... Repayment of long term debt ............................................................................. Common shares issued for cash ......................................................................... Net cash used by financing activities .........................................................

$(50,000) (26,000) 20,000

10,000

(1)

(2)

(3)

(4)

(5)

(6)

780,000 135,000

(75,000)

(56,000) 4,000 $14,000

Revenue ............................................................................................................... Increase in accounts receivable ($29,000 – $24,000) .........................................

$920,000 (5,000)

$915,000

Cost of goods sold ............................................................................................... Decrease in inventory ($17,000 – $13,500) ......................................................... Increase in accounts payable ($25,900 – $22,400) .............................................

$493,500 (3,500) (3,500)

$486,500

Salaries ................................................................................................................ Increase in salaries payable ($8,000 – $5,000) ....................................................

$189,000 (3,000)

$186,000

Tax expense ......................................................................................................... Decrease in taxes payable ($3,000 – $1,000) ......................................................

$18,000 2,000

$20,000

Interest expense .................................................................................................. Decrease in interest payable ($2,500 – $1,500) ..................................................

$13,000 1,000

$14,000

$58,000 (108,000)

Bloomcode: Application

$(50,000)

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

Exercise 25 The financial statements of Granger Inc. appear below: GRANGER INC. Comparative Balance Sheet December 31 2024

2023

$ 23,000 31,000 32,000 50,000 (20,000) $120,000

34,000 15,000 78,000 (24,000) $126,000

Accounts payable ......................................................................................................... Income tax payable...................................................................................................... Bonds payable ............................................................................................................. Common shares ........................................................................................................... Retained earnings ........................................................................................................ Total liabilities and shareholders’ equity ...........................................................

$ 20,000 10,000 7,000 39,000 44,000 $120,000

$ 23,000 8,000 33,000 24,000 38,000 $126,000

GRANGER INC. Income Statement Year Ended December 31, 2024 Sales ............................................................................................................................. Cost of goods sold ........................................................................................................ Gross profit ................................................................................................................... Operating expenses ..................................................................................................... Profit from operations ................................................................................................. Interest expense........................................................................................................... Profit before income taxes .......................................................................................... Income tax expense ..................................................................................................... Profit for the year .........................................................................................................

$470,000 400,000 70,000 36,000 34,000 4,000 30,000 10,000 $ 20,000

Assets Cash ............................................................................................................... $ 27,000 Accounts receivable ..................................................................................................... Merchandise inventory ................................................................................................ Property, plant, and equipment .................................................................................. Accumulated depreciation .......................................................................................... Total assets .......................................................................................................... Liabilities and Shareholders' Equity

The following additional data were provided: 1. Dividends declared and paid were $14,000. 2. During the year, equipment was sold for $12,000 cash. This equipment cost $28,000 originally and had a carrying amount of $12,000 at the time of sale. 3. All depreciation expense is in the operating expenses category. 4. All sales and purchases are on account. 5. Accounts payable pertain to merchandise suppliers.

Test Bank for Accounting Principles, Ninth Canadian Edition

All operating expenses except for depreciation were paid in cash.

Instructions a) Prepare a cash flow statement for Granger Inc. using the direct method. b) Calculate free cash flow. Solution 25 (22–28 min.) a) GRANGER INC. Cash Flow Statement Year Ended December 31, 2024 Operating activities Cash receipts from customers ($470,000 + $3,000) ............................................ Cash payments: To suppliers ................................................................................................. For operating expenses .............................................................................. For interest expense ................................................................................... For income taxes ($10,000 – $2,000) .......................................................... Net cash provided by operating activities .........................................

$473,000 $420,000 (1) 24,000 (2) 4,000 8,000 456,000 17,000

Investing activities Sale of equipment ............................................................................................... Net cash provided by investing activities ...................................................

$12,000

Financing activities Redemption of bonds payable ............................................................................ Issue of common shares ...................................................................................... Payment of cash dividends ................................................................................. Net cash used by financing activities .........................................................

$(26,000) 15,000 (14,000)

12,000

(25,000) 4,000 23,000 $27,000

(1)

Cost of goods sold ............................................................................................... Add: Increase in inventory................................................................................... Purchases .......................................................................................................... Add: Decrease in accounts payable .................................................................... Cash payments to suppliers ................................................................................

$400,000 17,000 417,000 3,000 $420,000

(2)

Operating expenses ............................................................................................. Less: Depreciation expense ................................................................................. Cash payments for operating expenses .............................................................

$36,000 (12,000) (3) $24,000

(3)

$24,000 – $16,000 = $8,000 balance in accumulated depreciation after sale. Ending balance $20,000 – $8,000 = $12,000 depreciation expense.

Free cash flow = Cash provided (used) by operating activities – Cash used (provided) by investing activities = $17,000 + $12,000 = $29,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Note: Cash was provided by investing activities, not used. Therefore, add these two numbers. Bloomcode: Synthesis Difficulty: Hard Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Exercise 26 Condensed financial data of Inglis Corporation appear below: INGLIS CORPORATION Comparative Balance Sheet December 31 2024

2023

Assets Cash ............................................................................................................................. $ 82,000$ 35,000 Accounts receivable ..................................................................................................... 25,000 53,000 Inventories ................................................................................................................... 180,000 132,000 Prepaid expenses ......................................................................................................... 19,000 25,000 Investments ................................................................................................................. 90,000 75,000 Property, plant, and equipment .................................................................................. 310,000 250,000 Accumulated depreciation .......................................................................................... (65,000) (60,000) Total assets .......................................................................................................... $641,000 $510,000 Liabilities and Shareholders' Equity Accounts payable ......................................................................................................... Accrued expenses payable .......................................................................................... Bonds payable ............................................................................................................. Common shares ........................................................................................................... Retained earnings ........................................................................................................ Total liabilities and shareholders’ equity ........................................................... INGLIS CORPORATION Income Statement Year Ended December 31, 2024 Sales ............................................................................................................................. Less: Cost of goods sold ............................................................................................... Operating expenses (excluding depreciation) ................................................... Depreciation expense.......................................................................................... Income taxes........................................................................................................ Interest expense .................................................................................................. Loss on sale of equipment .................................................................................. Profit for the year ......................................................................................................... Additional information: 1. New equipment costing $85,000 was purchased for cash in 2024.

$ 93,000 19,000 140,000 245,000 144,000 $641,000

$ 75,000 24,000 160,000 170,000 81,000 $510,000

$490,000 $290,000 60,000 17,000 15,000 18,000 3,000

403,000 $ 87,000

Test Bank for Accounting Principles, Ninth Canadian Edition

2. 3. 4. 5.

Old equipment costing $25,000 was sold for $10,000 cash when the carrying amount was $13,000. Bonds with a face value of $20,000 were converted into $20,000 of common shares. A cash dividend of $24,000 was declared and paid during the year. Accounts payable pertain to merchandise purchases.

Instructions a) Prepare a cash flow statement for the year using the direct method. b) Calculate free cash flow. Solution 26 (25–30 min.) a) INGLIS CORPORATION Cash Flow Statement Year Ended December 31, 2024 Operating activities Cash receipts from customers ($490,000 + $28,000) .................................................. Cash payments: To suppliers ................................................................................................. For operating expenses .............................................................................. For income taxes ......................................................................................... For interest expense ................................................................................... Net cash provided by operating activities .........................................

$518,000 $320,000 (1) 59,000 (2) 15,000 18,000 412,000 106,000

Investing activities Purchase of investments ..................................................................................... Purchase of equipment ....................................................................................... Sale of equipment ............................................................................................... Net cash used by investing activities..........................................................

(15,000) (85,000) 10,000

Financing activities Issue of common shares ...................................................................................... Payment of cash dividends ................................................................................. Net cash provided by financing activities ..................................................

55,000 (24,000)

(90,000)

31,000

Net increase in cash ..................................................................................................... Cash, January 1 ............................................................................................................ Cash, December 31 ...................................................................................................... Note: Noncash investing and financing activities Conversion of bonds payable into common shares ...................................................

47,000 35,000 $ 82,000

$20,000

(1)

Cost of goods sold ............................................................................................... Add: Increase in inventories ................................................................................ Purchases ............................................................................................................ Deduct: Increase in accounts payable ................................................................ Cash payments to suppliers ................................................................................

$290,000 48,000 338,000 (18,000) $320,000

(2)

Operating expenses .............................................................................................

$60,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Deduct: Decrease in prepaid expenses ............................................................... Add: Decrease in accrued expenses payable ...................................................... Cash payments for operating expenses ............................................................. b)

(6,000) 5,000 $59,000

Free cash flow = Cash provided by operating activities – Cash used by investing activities = $106,000 – $90,000 = $16,000

Bloomcode: Synthesis Difficulty: Hard Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Exercise 27 The financial statements of Tulloch Inc. appear below: TULLOCH INC. Comparative Balance Sheet December 31 2024

2023

Assets Cash ............................................................................................................... $ 60,000 Accounts receivable ..................................................................................................... Inventory ...................................................................................................................... Property, plant, and equipment .................................................................................. Accumulated depreciation .......................................................................................... Total assets ..........................................................................................................

$ 39,000 47,000 76,000 102,000 (65,000) $220,000

35,000 55,000 134,000 (71,000) $192,000

Liabilities and Shareholders' Equity Accounts payable ......................................................................................................... Income tax payable...................................................................................................... Bonds payable ............................................................................................................. Common shares ........................................................................................................... Retained earnings ........................................................................................................ Total liabilities and shareholders’ equity ...........................................................

$ 28,000 12,000 0 60,000 120,000 $220,000

$ 35,000 4,000 35,000 60,000 58,000 $192,000

TULLOCH INC. Income Statement Year Ended December 31, 2024 Sales ............................................................................................................................. Cost of goods sold ........................................................................................................ Gross profit ................................................................................................................... Operating expenses ..................................................................................................... Profit from operations ................................................................................................. Interest expense........................................................................................................... Profit before income taxes .......................................................................................... Income tax expense .....................................................................................................

$660,000 390,000 270,000 110,000 160,000 14,000 146,000 44,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Profit for the year .........................................................................................................

$102,000

The following additional data were provided: 1. Dividends declared and paid were $$40,000. 2. During the year, equipment was sold for $15,000 cash. This equipment cost $32,000 originally and had a carrying amount of $15,000 at the time of sale. 3. All depreciation expense is in the operating expenses category. 4. All sales and purchases are on account. 5. Accounts payable pertain to merchandise suppliers. 6. All operating expenses except for depreciation were paid in cash. Instructions a) Prepare a cash flow statement for Tulloch Inc. using the direct method. b) Calculate free cash flow. Solution 27 (22–28 min.) a) TULLOCH INC. Cash Flow Statement Year Ended December 31, 2024 Operating activities Cash receipts from customers ($660,000 + $35,000 – $47,000) .......................... Cash payments: To suppliers ................................................................................................. For operating expenses .............................................................................. For interest expense ................................................................................... For income taxes ($44,000 + $4,000 – $12,000) .......................................... Net cash provided by operating activities .........................................

$648,000 $418,000 (1) 99,000 (2) 14,000 36,000 567,000 81,000

$15,000

Financing activities Redemption of bonds payable ............................................................................ Payment of cash dividends ................................................................................. Net cash used by financing activities .........................................................

$(35,000) (40,000)

39,000

15,000

(75,000) 21,000 $ 60,000

(1)

$390,000 21,000 411,000 7,000 $418,000

(2)

Operating expenses .............................................................................................

$110,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Less: Depreciation expense ................................................................................. Cash payments for operating expenses ............................................................. (3)

(11,000) (3) $ 99,000

$71,000 – $17,000 = $54,000 balance in accumulated depreciation after sale. Ending balance $65,000 – $54,000 = $11,000 depreciation expense.

Free cash flow = Cash provided (used) by operating activities – Cash used (provided) by investing activities = $81,000 + $15,000 = $96,000 Note: Cash was provided by investing activities, not used. Therefore, add these two numbers. Bloomcode: Synthesis Difficulty: Hard Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Exercise 28 The following information is taken from the cash flow statements for two competing companies in the same industry, one of which is approximately 10 times larger than the other: Household Furniture Commercial Corp. Furniture Inc. Cash provided (used) by operating activities $(120,000) $ 33,000 Cash provided (used) by investing activities 500,000 (120,000) Cash provided (used) by financing activities (250,000) 100,000 Cash increase in the year 130,000 13,000 Cash, beginning of period 120,000 12,000 Cash, end of period 250,000 25,000 Instructions Which company do you believe is in a better financial condition? Which company appears to be in a growth phase, and which is not growing? Explain the basis for your conclusions. Solution 28 (5 min.) Household Furniture’s operations are not generating cash; instead, it appears it is selling investments (positive cash flow from investing) to provide sufficient cash to cover debt payments (negative cash flow for financing). Although Commercial Furniture is a much smaller company, its operations are generating positive cash flow, which makes it appear to be in a better financial condition. Commercial is increasing its investments through new financing, which is characteristic of a growing company, so it is the one that is in the growth phase. Household is not growing, since it is divesting itself of assets. Bloomcode: Evaluation Difficulty: Hard Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 29 The following information is taken from the financial statements for two competing companies in the same industry: Northern RV Sales Leisure Products Inc. Ltd. Profit for the year $3,000,000 $3,100,000 Cash provided (used) by operating activities 1,220,000 (860,000) Cash provided (used) by investing activities (500,000) (750,000) Cash provided (used) by financing activities (150,000) 800,000 Instructions Calculate the free cash flow for each company. Explain the significance of this figure in evaluating the relative financial strength of the two companies. Solution 29 (5 min.) Free cash flow Northern $1,220,000 − $500,000 = $720,000 Leisure −$(860,000) – $750,000 = $(1,610,000) (negative) Leisure’s free cash flow is negative, so it is not able to finance its current year’s reinvestment in productive capacity through operations. This is a cause for concern, further reinforced by the fact that it appears to have been further subsidizing these reinvestments with cash on hand, since the financing activities have not produced nearly enough cash to cover this shortfall in free cash flow. Northern’s free cash flow is positive and has been sufficient to increase cash and to make reductions in its financing. Bloomcode: Evaluation Difficulty: Hard Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Exercise 30 For the years ended December 31, 2024, and 2023, Janelle Corporation reported the following selected information in its financial statements: 2024 2023 Cash provided by operating activities $ 400,000 $ 340,000 Cash used by investing activities 237,000 250,000 Cash provided by financing activities 600,000 700,000 Profit for the year 154,000 170,000 Other comprehensive income (loss) 10,000 (4,500) Instructions a) Calculate free cash flow for 2024 and 2023. b) How is it possible that Janelle Corporation can have cash provided by operating activities of $400,000 for 2024 and only report profit of $154,000?

Test Bank for Accounting Principles, Ninth Canadian Edition

Comment on the changes in free cash flow from 2023 to 2024 and suggest how the company might improve its free cash flow in the future.

Solution 30 (10–15 min.) a) Free cash flow = Cash provided by operating activities – Cash used by investing activities 2024 = $400,000 – $237,000 = $163,000 2023

= $340,000 – $250,000 = $90,000

Cash flow from operating activities can increase because of increased cash receipts or decreased cash payments. These cash flows may or may not result in accrual-based revenues and expenses. Cash flow and profit do not have a direct correlation in any one period. In addition, depreciation expense could be higher in 2024.

Free cash flow, which is the discretionary cash Janelle has available for debt repayment or capacity expansion, has increased from 2023 to 2024. Janelle can further increase it by increasing cash from operating activities. Cash from operating activities can be increased by finding ways to increase profit (for example reducing expenses), or by increasing efforts to collect accounts receivable more quickly and ensuring inventory is not overstocked. Alternatively, the company could delay expenditures on investing activities such as capital expenditures, which would also increase free cash flow.

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

4. Analyze the cash flow statement. The cash flow statement must be read along with the other financial statements in order to adequately assess a company’s financial position. In addition, it is important to understand how the net change in cash is affected by each type of activity—operating, investing, and financing—especially when different companies are being compared. Free cash flow is a measure of solvency: it indicates how much of the cash that was generated from operating activities during the current year is available after making necessary payments for capital expenditures. It is calculated by subtracting the cash used by investing activities from the cash provided by operating activities.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. The sustainability of a business is linked to its ability to generate cash. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

2. The cash flow statement gives information on the operating, gross profit, and investing activities of a company. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

3. Accrual based accounting allows investors to better evaluate a company’s ability to generate cash flow. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

4. The cash flow statement is the only statement that shows the flow of cash in a company. Answer: True Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

5. Cash equivalents include money market instruments that are due within one year. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

6. The use of cash to purchase cash equivalents would be reported on the cash flow statement as an investing activity. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

7. Operating activities of a company show the cash effects of revenues and expense transactions. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

8. Financing activities include the purchasing and disposing of investments and long-lived assets and lending money and collecting the loans.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

9. Under ASPE, receipt of interest and dividends are classified as an operating activity. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

10. Under ASPE, payment of interest to lenders of debt is considered an operating activity because the item is reported on the income statement where the results of operations are shown. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

11. Under IFRS, companies must report interest and dividends received as an operating activity. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

12. An issuance of debt to purchase long-lived assets would be an investing activity. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

13. The cash flow statement is an optional statement when preparing the financial statements of a company. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

14. In order to determine whether a company is financially sound or NOT, it is essential to understand its cash flows. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

15. The information in the cash flow statement should help customers and employees evaluate the company’s financial position. Answer: True Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

16. Companies reporting under IFRS have a choice where to classify interest and investments. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

17. Under ASPE, dividends are classified as financing activities. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

18. Significant investing and financing activities that do NOT affect cash are NOT reported in the body of the cash flow statement. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

19. Significant noncash investing and/or financing activities are presented in the body of the cash flow statement.

Test Bank for Accounting Principles, Ninth Canadian Edition

20. A comparative income statement is required in order to prepare a cash flow statement. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

21. A comparative balance sheet is required in order to prepare a cash flow statement. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

22. The first step in preparing the cash flow statement is to determine the net cash provided by operating activities. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

23. In preparing the net cash provided by operating activities, profit must first be converted from a cash basis to an accrual basis. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

24. The amount of cash flow from operations will be the same under the indirect method or the direct method. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

25. To calculate the net cash provided by operating activities under the indirect method, profit is adjusted for items which do NOT affect cash. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

26. In the indirect method of calculating cash flow from operations, depreciation, as a noncash expense, would be added back to profit. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

27. All gains and losses from investing activities must be eliminated from profit in order to arrive at net cash from investing activities. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

28. When accounts receivable increase during the year, revenues on an accrual basis are lower than revenues on a cash basis. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

29. When accounts receivable decrease during the year, more cash was collected during the period than was recorded as revenue. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

30. Showing a decrease in accounts receivable as an addition on the cash flow statement implies that a company can increase its cash by collecting its receivables. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

31. If the balance of prepaid insurance increases during a period, it indicates more cash was expended for insurance than is reported in the income statement. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

32. Using the indirect method, an increase in accounts payable during a period is deducted from profit in calculating cash provided by operating activities. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

33. An increase in a current liability account will be deducted from the net cash provided by operating activities. Answer: False Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

34. Regardless of whether the indirect or direct method is used to calculate operating activities, investing and financing activities are measured and reported in the same way. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

35. When bonds are issued in exchange for land, the cash flow from investing activities would decrease. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

36. When accumulated depreciation is increased during the period, the amount of cash flow from investing activities would increase. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

37. When a long-lived asset is sold, only the proceeds from the sale of the asset are reported in the investing activities. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

38. The purchase of a building for cash would be reported in the financing section of the cash flow statement. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

39. When common shares are issued in exchange for land, the transaction is reported in both the financing and investing sections of the cash flow statement. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

40. The payment of a cash dividend by a company reporting under ASPE will result in a reduction of the amount of cash provided by financing activities. Answer: True Bloomcode: Comprehension Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

41. The cash flow statement must always balance to the change in the cash position of the company during the period. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

42. The cash flow statement covers the same period of time as the income statement and the statements of comprehensive income, retained earnings, and changes in shareholders’ equity. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

43. The investing activities are presented in the cash flow statement before the operating and financing activities. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

44. The direct method of calculating cash flows from operating activities converts total profit from an

Test Bank for Accounting Principles, Ninth Canadian Edition

accrual basis to a cash basis. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

45. Under the direct method, when accounts receivable increase during the period, it means that less cash was collected from customers than was recorded as revenue by the company. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

46. In the direct method, when prepaid expenses decrease from the previous period, then the cash paid for operating activities will be higher than the amount reported on the income statement. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

47. In the direct method, cash payments to employees would include the salary expense reported in the income statement plus any decrease during the period in salaries payable. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

48. In the direct method, cash payments for interest would include the interest expense minus a decrease in interest payable during the period. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

49. The indirect method and direct method only apply when calculating the cash flow from investing activities. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

50. By reporting cash receipts and cash payments, the direct method provides information that is useful to investors and creditors in predicting future cash flows that is NOT available under the indirect method. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

51. An increase in accounts receivable in the year would increase the total cash receipts from

Test Bank for Accounting Principles, Ninth Canadian Edition

customers reported on the cash flow statement using the direct method. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

52. A profitable company would always have a positive cash flow. Answer: False Bloomcode: Comprehension Difficulty: Hard Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

53. A company with a stronger operating cash flow would be more favourable to an investor than one with a stronger cash flow from investments. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

54. If a company is a startup company, the expectation would be that there would be negative cash used by investing and operating activities and positive cash provided by financing activities. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

55. A company that has stable profit would expect to have a positive cash flow from investing activities and a negative cash flow from financing activities. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

56. Free cash flow is a measure of discretionary cash flow of a company. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

57. Free cash flow is the amount of cash provided by investing activities reduced by the amount of cash provided by operating activities. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 58. The information in a cash flow statement will help users assess all of the following, except a) the company’s ability to generate future cash flows. b) the company’s ability to pay dividends and meet obligations. c) the company’s ability to turn over its accounts receivable. d) the reasons for the difference between profit and cash provided or used by operating activities. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

59. The cash flow statement is used to a) provide only information about the investing and financing activities during a period. b) prove that revenues exceed expenses if there is a profit. c) provide information about the cash receipts and cash payments during a period. d) facilitate banking relationships. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

60. The cash flow statement will NOT report the a) amount of cheques outstanding at the end of the period. b) sources of cash in the current period. c) uses of cash in the current period. d) change in the cash balance for the current period. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

61. Which of the following characteristics does NOT apply to cash equivalents? a) short term b) highly liquid c) readily convertible into cash d) highly sensitive to interest rate changes Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

62. Cash outflows from operating activities of a private company reporting under ASPE include all of the following, except payments to a) suppliers for inventory. b) employees for services. c) lenders for interest. d) shareholders for dividends. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

63. Under IFRS, companies have a choice on the classification of interest received. Which of the following outlines the choice? a) Interest received must be included in operating activities. b) Interest received must be included in either operating or financing activities. c) Interest received must be included in either operating or investing activities. d) Interest received must be included in investing activities. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

64. On the cash flow statement, cash inflows from the sale of bonds is reported as a(n) a) operating activity. b) financing activity. c) investing activity. d) significant noncash investing activity. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

65. The acquisition of land by issuing common shares is a) a noncash transaction that is not reported in the body of a cash flow statement. b) a cash transaction and would be reported in the body of a cash flow statement. c) a noncash transaction that would be reported in the body of a cash flow statement. d) only reported if the cash flow statement is prepared using the direct method. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

66. The order of presentation of activities on the cash flow statement is a) operating, investing, and financing. b) operating, financing, and investing. c) financing, operating, and investing. d) financing, investing, and operating.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

67. Financing activities involve a) lending money. b) acquiring investments. c) issuing debt. d) acquiring long-lived assets. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

68. Investing activities include a) collecting cash on loans made. b) obtaining cash from creditors. c) issuing shares to investors. d) repaying money previously borrowed. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

69. Sale of an asset at a loss will affect which activities? a) Operating activity will have the loss added to profit; investing will increase for the proceeds on the sale.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) Operating activity will have the loss subtracted from profit; investing activities will increase for the proceeds on the sale. c) Operating activity will have the loss added to profit; financing activities will increase for the proceeds on the sale. d) Operating activity will have the loss subtracted to profit; financing activities will increase for the proceeds on the sale. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

70. Under IFRS, cash receipts from interest and dividends are classified as a) financing activities. b) investing activities. c) operating activities. d) either operating or investing activities. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

71. All of the following are examples of significant noncash activities, except a) the issue of common shares to purchase an asset. b) the write off of an uncollectible account receivable. c) the issue of debt to purchase an asset. d) the conversion of bonds into common shares. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

72. Which of the following transactions does NOT affect cash during a period? a) write off of an uncollectible account b) collection of an account receivable c) issue of common shares d) issue of notes payable Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

73. Significant noncash transactions would NOT include a) conversion of bonds into common shares. b) asset acquisition through issue of note payable. c) reacquisition of common shares. d) exchange of property, plant, and equipment. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

74. The cash flow statement classifies cash receipts and cash payments into three types of activities. Which of the following is considered one of the activities reported in the cash flow statement? a) revenue generating activities b) promoting activities c) financing activities d) expansion activities Answer: c Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

75. Typical cash payments classified under operating activities include all of the following, except a) payments to suppliers for inventory. b) payments to employees for services. c) payments to lenders for interest. d) payments to make loans to other companies. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

76. Typical cash payments classified under investing activities include all of the following, except a) payments to purchase debt or equity investments. b) payments to employees for services. c) payments to purchase property, plant, and equipment. d) payments to provide loans to other companies. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

77. For companies reporting under ASPE, typical cash payments classified under financing activities will include the following payment: a) to redeem long-term debt or reacquire shares. b) to employees for services. c) to lenders for interest. d) to provide loans to other companies. Answer: a

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

78. All of the following are examples of significant noncash activities, except a) issue debt in exchange for assets. b) issue common shares in exchange for assets. c) exchange of property, plant, and equipment. d) issuance of bonds for cash to purchase assets. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

79. The following title would be present in the cash flow statement when there is a negative cash flow for the financing activities: a) cash flows from financing activities. b) net cash used by financing activities. c) net cash flows from financing activities. d) net cash provided by financing activities. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic 80. Which of the following represents a cash inflow from operating activities? a) government for taxes b) interest and dividends earned on investments c) lenders for interest

Test Bank for Accounting Principles, Ninth Canadian Edition

d) suppliers for inventory Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

81. Which of the following represents a cash outflow from operating activities? a) sale of goods b) interest and dividends earned on investments c) sale of services d) suppliers for inventory Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

82. Which of the following represents a cash inflow from investing activities? a) sale of investment in equity securities b) loans to other entities c) purchase of property, plant, and equipment d) purchase investment in debt securities Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

83. Which of the following is applicable to operating activities? a) the principal payment on a blended monthly mortgage payment

Test Bank for Accounting Principles, Ninth Canadian Edition

b) issue of debt to purchase assets c) the interest payment on a blended monthly mortgage payment d) proceeds from sale of property, plant, and equipment Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

84. Which of the following would be classified under financing activities? a) conversion of debt or preferred shares to common shares b) issue of debt to purchase assets c) exchange of property, plant, and equipment d) reacquisition of shares Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Discuss the usefulness, content, and format of the cash flow statement. Section Reference: Reporting of Cash Flows CPA: Financial Reporting AACSB: Analytic

85. Madagascar Corporation reported an opening balance of $219,000 and an ending balance of $202,500 in its Equipment account and an opening balance of $70,500 and an ending balance of $93,000 in its Accumulated Depreciation—Equipment account. During the year, it sold equipment with a cost of $31,500 for cash at a gain on the sale of $1,500. It also purchased equipment for cash. It recorded depreciation expense of $46,500. How much cash was received from the sale of the equipment? a) $7,500 b) $1,500 c) $24,000 d) $9,000 Answer: d Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic 86. Madagascar Corporation reported an opening balance of $219,000 and an ending balance of $202,500 in its Equipment account and an opening balance of $70,500 and an ending balance of $93,000 in its Accumulated Depreciation—Equipment account. During the year, it sold equipment with a cost of $31,500 for cash at a gain on the sale of $1,500. It also purchased equipment for cash. It recorded depreciation expense of $46,500. How much cash was paid for the equipment? a) $31,500 b) $24,000 c) $15,000 d) $9,000 Answer: c Bloomcode: Analysis Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

87. Which of the following is usually NOT a source to prepare the cash flow statement? a) income statement b) examine the Cash account and sort per activity c) additional information d) comparative balance sheet Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

88. Which of the following is TRUE to arrive at net cash provided (used) by operating activities? a) A gain on sale is added back to profit. b) The proceeds from sale are added back to profit. c) Depreciation expense is deducted from profit. d) A loss on sale is added back to profit.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

89. Which of the following is TRUE to arrive at net cash provided (used) by operating activities? a) An increase in accounts receivable is deducted from profit. b) A decrease in inventory is deducted from profit. c) A decrease in accounts payable is added back to profit. d) An increase in income tax payable is deducted from profit. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

90. If a company has both an inflow and outflow of cash related to property, plant, and equipment, the a) two cash effects can be netted and presented as one item in the investing activities section. b) cash inflow and cash outflow should be reported separately in the investing activities section. c) two cash effects can be netted and presented as one item in the financing activities section. d) cash inflow and cash outflow should be reported separately in the financing activities section. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

91. In preparing a cash flow statement, a conversion of bonds into common shares will be reported in a) the financing section. b) the investing section. c) a separate schedule or note to the financial statements.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) the shareholders' equity section. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

92. Which one of the following items is NOT generally used in preparing a cash flow statement? a) statement of comprehensive income b) comparative balance sheets c) current income statement d) additional information Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

93. Which one of the following items is NOT necessary in preparing a cash flow statement? a) Determine the change in cash. b) Determine the cash provided or used by operating activities. c) Determine the cash provided or used by financing activities. d) Determine the estimated uncollectible accounts receivable. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

94. If accounts receivable have increased during the period, a) revenues on an accrual basis are less than revenues on a cash basis.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) revenues on an accrual basis are greater than revenues on a cash basis. c) revenues on an accrual basis are the same as revenues on a cash basis. d) expenses on an accrual basis are greater than expenses on a cash basis. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

95. If accounts payable have increased during a period, a) revenues on an accrual basis are less than revenues on a cash basis. b) expenses on an accrual basis are less than expenses on a cash basis. c) expenses on an accrual basis are greater than expenses on a cash basis. d) expenses on an accrual basis are the same as expenses on a cash basis. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

96. Which one of the following affects cash during a period? a) recording depreciation expense b) declaration of a cash dividend c) write off of an uncollectible account receivable d) payment of an accounts payable Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

97. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is a) added to profit. b) deducted from profit. c) ignored because it does not affect cash. d) not reported on a cash flow statement. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

98. Neo Corporation reported profit of $30,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000, and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is a) $25,000. b) $45,000. c) $29,000. d) $30,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

99. Highchair Limited reported a net loss of $10,000 for the year ended December 31, 2024. During the year, accounts receivable decreased $5,000, merchandise inventory increased $8,000, accounts payable increased by $10,000, and depreciation expense of $5,000 was recorded. During 2024, operating activities a) used net cash of $2,000. b) used net cash of $8,000. c) provided net cash of $2,000. d) provided net cash of $8,000. Answer: c

Test Bank for Accounting Principles, Ninth Canadian Edition

100. Starting with profit and adjusting it for items that affected reported profit but which did NOT affect cash is called the a) direct method. b) indirect method. c) allocation method. d) cost-benefit method. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

101. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is a) deducted from profit. b) added to profit. c) ignored because it does not affect profit. d) ignored because it does not affect expenses. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

102. Using the indirect method, depreciation expense for the period a) is deducted from profit. b) causes cash to increase. c) causes cash to decrease.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) is added to profit. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

103. In developing the cash flows from operating activities, most companies in Canada prefer to a) use the direct method. b) use the indirect method. c) present both the indirect and direct methods in their financial reports. d) prepare the operating activities section on the accrual basis. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

104. Which of the following would be subtracted from profit using the indirect method? a) depreciation expense b) an increase in accounts receivable c) an increase in accounts payable d) a decrease in prepaid expenses Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

105. Which of the following would be added to profit using the indirect method? a) an increase in accounts receivable

Test Bank for Accounting Principles, Ninth Canadian Edition

b) an increase in prepaid expenses c) depreciation expense d) a decrease in accounts payable Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

106. Which of the following would NOT be an adjustment to profit using the indirect method? a) depreciation expense b) an increase in prepaid insurance c) an increase in inventories d) an increase in land Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

107. In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as a) a subtraction from profit. b) an addition to profit. c) an addition to cash flow from investing activities. d) a subtraction from cash flow from investing activities. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

108. Which of the following adjustments to convert profit to net cash provided by operating activities is correct? Add to Profit Deduct from Profit a) Accounts Receivable increase decrease b) Prepaid Expenses increase decrease c) Inventory decrease increase d) Income Taxes Payable decrease increase Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

109. Which of the following adjustments to convert profit to net cash provided by operating activities is INCORRECT? Add to Profit Deduct from Profit a) Accounts Receivable decrease increase b) Prepaid Expenses increase decrease c) Inventory decrease increase d) Accounts Payable increase decrease Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

110. A company had profit of $230,000. Depreciation expense is $26,000. During the year, Accounts Receivable and Inventory increased $15,000 and $40,000, respectively. Prepaid Expenses and Accounts Payable decreased $2,000 and $4,000, respectively. There was also a loss on the sale of equipment of $3,000. How much cash was provided by operating activities? a) $196,000 b) $202,000 c) $276,000 d) $288,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

111. On the cash flow statement using the indirect method, a loss on the sale of equipment will a) be added to profit in the operating section. b) be deducted from profit in the operating section. c) appear as an inflow of cash in the investing section. d) appear as an outflow of cash in the investing section. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

112. If $200,000 of bonds are issued during the year but $120,000 of old bonds are retired during the year, the cash flow statement will show a(n) a) net increase in cash of $80,000. b) net decrease in cash of $80,000. c) increase in cash of $200,000 and a decrease in cash of $120,000. d) net gain on retirement of bonds of $80,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

113. Which of the following changes in retained earnings during a period will be reported in the financing activities section of the cash flow statement? 1. Declaration of a cash dividend paid during the period.

Test Bank for Accounting Principles, Ninth Canadian Edition

2. Profit for the period. a) 1 b) 2 c) neither 1 nor 2 d) both 1 and 2 Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

114. When using the indirect method, which of the following would NOT be needed to determine net cash provided by operating activities? a) depreciation expense b) change in accounts receivable c) payment of cash dividends d) change in prepaid expenses Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

115. When equipment is sold for cash, the amount received is reflected as a cash a) inflow in the operating section. b) inflow in the financing section. c) inflow in the investing section. d) outflow in the operating section. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

116. If there is a net decrease in cash, we say that cash was a) “provided” by that activity. b) “used” by that activity. c) “generated” by that activity. d) “absorbed” by that activity. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

117. Issuing bonds for land is a) reported in the operating section. b) reported in the financing section. c) not reported in the cash flow statement. d) reported in the investing section. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

118. The indirect and direct methods of preparing the cash flow statement are identical except for the a) significant noncash activity section. b) operating activities section. c) investing activities section. d) financing activities section. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

119. When preparing the financial statements for 2024 using the direct method, Marc Martin, CFO for Maverick Mania Inc., noticed that during the year the company sold equipment with an original cost of $50,000 for cash proceeds of $18,000. At the time of the sale, the equipment had a carrying amount of $20,000. Maverick Mania uses the direct method to prepare its cash flow statement. On the 2024 cash flow statement, the company should report a) cash proceeds from investing activities, $20,000. b) cash proceeds from operating activities, $18,000. c) cash proceeds from investing activities, $18,000. d) cash proceeds from operating activities, $20,000. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

120. When preparing the financial statements for 2024 using the direct method, Bart Butler, CFO for Bartender Inc., noticed that during the year the company sold equipment with an original cost of $50,000 for cash proceeds of $18,000. At the time of the sale, the equipment had a carrying amount of $20,000. Bartender uses the direct method to prepare its cash flow statement. The loss on the sale of equipment will a) be added to profit in the operating section of the cash flow statement. b) be deducted from profit in the operating section of the cash flow statement. c) be shown as a cash outflow from investing activities. d) not be included in the cash flow statement as it is a noncash charge. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

121. Cash receipts from customers are greater than sales revenue when there is

Test Bank for Accounting Principles, Ninth Canadian Edition

a) an increase in accounts receivable. b) a decrease in accounts receivable. c) an increase in cost of goods sold. d) a decrease in cost of goods sold. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

122. Schneider Corporation reports a $15,000 increase in inventory and a $5,000 increase in accounts payable during the year. Cost of goods sold for the year was $150,000. The cash payments made to suppliers were a) $150,000. b) $160,000. c) $130,000. d) $145,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

123. Barney Day Inc. had credit sales of $800,000. The beginning accounts receivable balance was $40,000 and the ending accounts receivable balance was $140,000. What were the cash collections from customers during the period? a) $900,000 b) $800,000 c) $700,000 d) $840,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

124. Barker Inc. had cash sales of $300,000 and credit sales of $500,000. The accounts receivable balance increased $10,000 during the year. How much cash did Barker receive from its customers during the year? a) $790,000 b) $810,000 c) $490,000 d) $510,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

125. Claudia Clay Limited had a cost of goods purchased of $250,000. The comparative balance sheet analysis revealed a $10,000 decrease in inventory and a $20,000 increase in accounts payable. What were Claudia Clay's cash payments to suppliers? a) $230,000 b) $220,000 c) $260,000 d) $280,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

126. Rice Export Corp. had an increase in inventory of $40,000. The cost of goods sold was $90,000. There was a $5,000 decrease in accounts payable from the prior period. What were Rice Export's cash payments to suppliers? a) $135,000 b) $85,000

Test Bank for Accounting Principles, Ninth Canadian Edition

c) $125,000 d) $95,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

127. Which of the following items does NOT appear in the cash flow statement under the direct method? a) cash payments to suppliers b) cash collections from customers c) depreciation expense d) cash from the sale of equipment Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

128. CAT Corp. has other operating expenses of $60,000. There has been a decrease in prepaid expenses of $4,000 during the year, and accrued liabilities are $6,000 larger than in the prior period. What were CAT's cash payments for operating expenses? a) $62,000 b) $58,000 c) $50,000 d) $70,000 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

129. Tabador Corporation shows income tax expense of $80,000. There has been a $2,000 increase in income tax payable during the year. What was Tabador's cash payment for income taxes? a) $80,000 b) $78,000 c) $75,000 d) $82,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

130. Which of the following would NOT appear in the operating activities section of a cash flow statement prepared under the direct method? a) cash receipts from customers b) cash paid for income taxes c) gain on sale of equipment d) cash paid to employees Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

131. Which of the following statements concerning the cash flow statement is true? a) The cash flow statement is usually more accurate when using the indirect method. b) A cash flow statement can be prepared using the direct or indirect method. c) The cash flow statement reports earnings per share. d) The cash flow statement is an optional financial statement for external reporting purposes. Answer: b Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

132. Boone Limited reports the following: End of Year Beginning of Year Inventory $25,000 $40,000 Accounts Payable 30,000 10,000 If cost of goods sold for the year is $150,000, the amount of cash paid to suppliers is a) $155,000. b) $145,000. c) $115,000. d) $185,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

133. Cash payments for operating expenses is increased by a(n) a) increase in prepaid expenses. b) decrease in prepaid expenses. c) increase in accrued expenses payable. d) increase in accounts payable. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

134. A $10,000 increase in accounts payable combined with a $4,000 decrease in inventory will cause the cash payments to suppliers to a) increase by $10,000. b) increase by $4,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) increase by $6,000. d) decrease by $14,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

135. A $12,000 increase in prepaid expenses combined with an $8,000 increase in accrued expenses payable will cause the cash payments for operating expenses to a) increase by $12,000. b) increase by $4,000. c) increase by $8,000. d) increase by $20,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

136. An increase in depreciation expense from $50,000 to $60,000 will cause cash payments for operating expenses to a) increase by $50,000. b) decrease by $10,000. c) increase by $10,000. d) remain unchanged. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

137. Generally, the most important category on the cash flow statement is cash flows from a) operating activities. b) investing activities. c) financing activities. d) significant noncash activities. Answer: a Bloomcode: Comprehension Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

138. Under IFRS, cash paid on interest and dividends is classified as a) financing activities. b) investing activities. c) operating activities. d) either operating or financing activities. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

139. In developing the cash flows from operating activities, standard setters prefer users to a) use the direct method. b) use the indirect method. c) present both the indirect and direct methods in their financial reports. d) prepare the operating activities section on the accrual basis. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

140. Jack Cleason Consulting reported income tax expense of $38,000 on the income statement. There has also been a decrease in the Income Tax Payable account in the amount of $4,000 when compared to the prior year. Cash payments for income taxes were therefore a) $38,000. b) $4,000. c) $34,000. d) $42,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

141. Ferrell Fine Meats reported sales revenue of $377,000 on the income statement. There has also been a decrease in the accounts receivable account in the amount of $12,000 when compared to the prior year. Cash receipts from customers were therefore a) $377,000. b) $389,000. c) $365,000. d) $12,000. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

142. Power Locker reported sales revenue of $1,750,000 and cost of goods sold of $992,000 on the income statement. The company also reported an increase in inventory of $15,000 when compared to the prior year, with no change in accounts payable. Under the direct method, Power Locker would report cash payments to suppliers in the amount of a) $1,007,000. b) $1,735,000. c) $758,000.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) $977,000. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

143. Ferrell Fine Meats reported sales revenue of $377,000 on the income statement. There has also been an increase in the accounts receivable account in the amount of $12,000 when compared to the prior year. Cash receipts from customers were therefore a) $377,000. b) $389,000. c) $365,000. d) $12,000. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

144. Power Locker reported sales revenue of $1,750,000 and cost of goods sold of $992,000 on the income statement. The company also reported a decrease in inventory of $15,000 when compared to the prior year, with no change in accounts payable. Under the direct method, Power Locker would report cash payments to suppliers in the amount of a) $1,765,000. b) $1,735,000. c) $773,000. d) $977,000. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

145. Alliance Plus Corp. had a decrease in inventory of $40,000. The cost of goods purchased was $90,000. There was a $5,000 increase in accounts payable from the prior period. What were Alliance Plus’ cash payments to suppliers? a) $135,000 b) $85,000 c) $125,000 d) $95,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

146. Minto Inc. had cash sales of $300,000 and credit sales of $500,000. The accounts receivable balance decreased $10,000 during the year. How much cash did Minto receive from its customers during the year? a) $790,000 b) $810,000 c) $490,000 d) $510,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

147. Morris Bond Limited had a cost of goods purchased of $500,000. The comparative balance sheet analysis revealed a $20,000 decrease in inventory and a $40,000 decrease in accounts payable. What were Morris Bond’s cash payments to suppliers? a) $560,000 b) $540,000 c) $520,000 d) $460,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Prepare the operating section of the cash flow statement using the direct method. Section Reference: Preparing the Statement of Cash Flows—Direct Method CPA: Financial Reporting AACSB: Analytic

148. The following information is available for Jupiter Company. 2024 Profit for the year $100,000 Cash provided (used) by operating activities 50,000 Cash provided (used) by investing activities (20,000) Cash provided (used) by financing activities (16,000) What is the free cash flow in 2023? a) $30,000 b) $(160,000) c) $40,000 d) $(120,000)

2023 $(10,000) (20,000) (140,000) 200,000

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

149. The following information is available for Jupiter Company: 2024 Profit for the year $100,000 Cash provided (used) by operating activities 50,000 Cash provided (used) by investing activities (20,000) Cash provided (used) by financing activities (16,000) What is the free cash flow in 2024? a) $30,000 b) $114,000 c) $14,000 d) $70,000 Answer: a

2023 $(10,000) (20,000) (140,000) 200,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

150. Free cash flow is a measure of a) company performance. b) profitability. c) solvency. d) liquidity. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

151. The sustainability of a company is linked to its ability to generate a) revenue. b) cash. c) profit. d) equity. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

152. Most entities consider ______ generated from operations as a key indicator of a company’s health. a) revenue b) profit c) assets

Test Bank for Accounting Principles, Ninth Canadian Edition

d) cash flows Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

153. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is a) cash flows from operating activities. b) cash flows from investing activities. c) cash flows from financing activities. d) usually different from year to year. Answer: a Bloomcode: Knowledge Difficulty: Medium Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

154. Free cash flow is equal to a) cash flow from operating activities. b) cash flow from financing activities. c) cash flow from investing activities. d) cash flow from operating activities less cash flow from investing activities. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

155. Summary financial information for Klinger Corporation for the year ended July 1, 2024, is listed

Test Bank for Accounting Principles, Ninth Canadian Edition

below: Profit for the year....................................................... Depreciation expense ................................................ Beginning inventory .................................................. Ending inventory ....................................................... Cost of goods sold ..................................................... Interest expense ........................................................ Income tax expense ................................................... Operating profit ......................................................... Cash provided by operating activities ...................... Dividends paid ........................................................... Cash used by investing activities .............................. Klinger’s free cash flow for 2024 is a) $128,000. b) $228,000. c) $178,000. d) $546,000.

$300,000 34,000 100,000 70,000 50,000 135,000 77,000 450,000 350,000 50,000 122,000

156. Which of the following reasons is NOT considered acceptable when examining the decrease in accounts receivable on the cash flow statement? a) More customers have failed to pay off their accounts compared to the prior year. b) The company hired an employee dedicated to monitoring accounts receivable. c) The company is collecting its accounting receivable faster. d) Sales revenue decreased. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

157. Vipont Motors has reported the following on its year-end cash flow statement: cash provided by

Test Bank for Accounting Principles, Ninth Canadian Edition

operating activities $210,000; cash used in investing activities $155,000; cash provided by financing activities $95,000. What amount would represent Vipont’s free cash flow? a) $210,000 b) $150,000 c) $55,000 d) $(40,000) Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Analyze the cash flow statement. Section Reference: Using the information in the Financial Statements CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 158. Indirect Method For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the cash flow statement, using the indirect method. The same letter may be used more than once. A. B. C. D. E. F. G.

Added to profit Deducted from profit Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity

____

1. Decrease in accounts payable during a period

____

2. Declaration and payment of a cash dividend

____

3. Loss on sale of land

____

4. Decrease in accounts receivable during a period

____

5. Retirement of bonds at maturity for cash

____

6. Proceeds from sale of equipment at carrying amount

____

7. Issue of common shares for cash

____

8. Purchase of a building for cash

____

9. Acquisition of land in exchange for common shares

____

10. Increase in merchandise inventory during a period

Test Bank for Accounting Principles, Ninth Canadian Edition

159. Direct Method For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the cash flow statement, using the direct method. The same letter may be used more than once. A. B. C. D. E. F. G. H. I. J.

Added in determining cash receipts from customers Deducted in determining cash receipts from customers Added in determining cash payments to suppliers Deducted in determining cash payments to suppliers Cash outflow—investing activity Cash inflow—investing activity Cash outflow—financing activity Cash inflow—financing activity Significant noncash investing and financing activity Is not shown

____

1. Decrease in accounts payable during a period

____

2. Declaration and payment of a cash dividend

____

3. Decrease in accounts receivable during a period

____

4. Depreciation expense

____

5. Conversion of bonds into common shares

____

6. Decrease in merchandise inventory during a period

____

7. Sale of equipment for cash at carrying amount

____

8. Issue of preferred shares for cash

____

9. Purchase of land for cash

____ 10. Loss on sale of land

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 158. Indirect Method 1.

10. B Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

159. Direct Method 1.

Test Bank for Accounting Principles, Ninth Canadian Edition

10. J Bloomcode: Knowledge Difficulty: Easy Learning Objective: Prepare a cash flow statement using the indirect method. Section Reference: Preparing the Statement of Cash Flows—Indirect Method CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

CHAPTER 18 FINANCIAL STATEMENT ANALYSIS CHAPTER STUDY OBJECTIVES 1. Identify the need for, and tools of, financial statement analysis. Users of financial statements make comparisons in order to evaluate a company’s past, current, and future performance and position. There are two commonly used bases of comparison: intracompany (within a company) and intercompany (between companies). The tools of financial analysis include horizontal, vertical, and ratio analysis.

2. Explain and apply horizontal analysis. Horizontal analysis is a technique for evaluating a series of data, such as line items in a company’s financial statements, by expressing them as percentage increases or decreases over two or more periods of time. The trend percent is calculated by dividing the amount for the specific period under analysis by a base-period amount multiplied by 100%. This percentage calculation normally covers multiple periods. The horizontal percentage change for a period is calculated by dividing the dollar amount of the change between the specific period under analysis and the prior period by the prior-period amount. This percentage calculation normally covers two periods only.

3. Explain and apply vertical analysis. Vertical analysis is a technique for evaluating data within one period by expressing each item in a financial statement as a percentage of a relevant total (base amount) in the same financial statement. The vertical percentage is calculated by dividing the financial statement amount under analysis by the base amount multiplied by 100% for that particular financial statement, which is usually total assets for the balance sheet and revenues or net sales for the income statement.

4. Identify and use ratios to analyze liquidity. Liquidity ratios include the current ratio, acid-test ratio, receivables turnover, collection period, inventory turnover, days sales in inventory, and operating cycle. The formula, purpose, and desired result for each liquidity ratio are presented in Illustration 18-21.

5. Identify and use ratios to analyze solvency. Solvency ratios include debt to total assets, interest coverage, and free cash flow. The formula, purpose, and desired result for each solvency ratio are presented in Illustration 18-27.

Test Bank for Accounting Principles, Ninth Canadian Edition

6. Identify and use ratios to analyze profitability. Profitability ratios include the gross profit margin, prof t margin, asset turnover, return on assets, return on equity, earnings per share, price-earnings, and payout ratios. The formula, purpose, and desired result for each profitability ratio are presented in Illustration 18-38.

7. Recognize the limitations of financial statement analysis. The usefulness of analytical tools can be limited by (1) the use of alternative accounting policies, (2) significant amounts of other comprehensive income, (3) the quality of the information provided, and (4) economic factors.

Test Bank for Accounting Principles, Ninth Canadian Edition

EXERCISES Exercise 1 Comparative information taken from London Antiques Corporation’s financial statements is shown below: 2025 2024 1. Notes receivable $ 80,000 $ -02. Accounts receivable 182,000 140,000 3. Retained earnings 49,000 (40,000) 4. Sales 930,000 750,000 5. Operating expenses 170,000 200,000 6. Income tax payable 95,000 70,000 Instructions Using horizontal analysis, show the percentage change from 2024 to 2025 with 2024 as the base year (round to the nearest whole percentage). Solution 1 (8–12 min.) 1. Base year is zero. Not possible to calculate. 2.

$42,000 ÷ $140,000 = 30% increase

Base year is negative. Not possible to calculate.

$180,000 ÷ $750,000 = 24% increase

$30,000 ÷ $200,000 = 15% decrease

$25,000 ÷ $70,000 = 36% increase

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 2 Cook Corporation had a profit of $3,500,000 in 2023. Using 2023 as the base year, profit decreased by 45% in 2024 and increased by 180% in 2025. Instructions Calculate the profit reported by Cook Corporation for 2024 and 2025 (round to the nearest whole

Test Bank for Accounting Principles, Ninth Canadian Edition

dollar). Solution 2 (6–9 min.) 2024: X ÷ $3,500,000 = 45% X = $3,500,000 ×.45 = $1,575,000 The decrease is $1,575,000; therefore, profit for 2024 is $1,925,000. 2025:

X ÷ $3,500,000 = 180% X = $3,500,000 × 1.8 = $6,300,000 The profit for 2025 is $9,800,000 ($3,500,000 + $6,300,000).

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 3 The following items were taken from the financial statements of Mike Inc. over a five-year period: Item 2025 2024 2023 2022 2021 Net Sales $980,000 $900,000 $650,000 $550,000 $500,000 Cost of Goods Sold 700,000 640,000 480,000 420,000 400,000 Gross Profit $280,000 $260,000 $170,000 $130,000 $100,000 Instructions Using horizontal analysis and 2021 as the base year, calculate the trend percentages for net sales, cost of goods sold, and gross profit. Explain whether the trends are favourable or unfavourable for each item (round to the nearest whole percentage). Solution 3 (10–15 min.) Item Net Sales Cost of Goods Sold Gross Profit

2025 196% 175% 280%

2024 180% 160% 260%

2023 130% 120% 170%

2022 110% 105% 130%

2021 100% 100% 100%

The trend in net sales is increasing and favourable. The cost of goods sold trend is increasing which could be unfavourable, but the sales are increasing each year at a faster pace than cost of goods sold. This is apparent by examining the gross profit percentages, which show a favourable, increasing trend. Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

Exercise 4 The total revenue figures for Dabous & Sons Construction Company are as follows: 2025 2024 2023 2022 Revenue $19,690 $10,350 $9,692 $9,984

2021 $9,496

Instructions a) Using horizontal analysis, calculate the percentage of change from the base year amount, assuming 2021 is the base year (round to the nearest whole percentage). b) Using horizontal analysis, calculate the percentage change for each year (round to two decimal places). Solution 4 Revenue

2025 $19,690

2024 $10,350

2023 $9,692

2022 $9,984

2021 $9,496

% of base year

207%

109%

102%

105%

100%

b) % change between years

90.24%

6.79%

-2.92%

5.14%

0.00%

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 5 Below is the partial balance sheet for Gabi Gold Limited: December 31, 2024 Accounts Receivable .......................... $110,000 Inventory ............................................ 80,000 Total Assets ........................................ 335,000

December 31, 2023 $140,000 95,000 376,000

Instructions Using the items from the comparative balance sheet of Gabi Gold Limited, illustrate horizontal and vertical analysis. Discuss the results of each type of analysis (round to the nearest whole percentage) Solution 5 (10–15 min.)

Test Bank for Accounting Principles, Ninth Canadian Edition

Horizontal Analysis December 31, 2024 79% 84% 89%

December 31, 2023 100% 100% 100%

December 31, 2024 Accounts Receivable .......................... 33% Inventory ............................................ 24% Total Assets ........................................ 100%

December 31, 2023 37% 25% 100%

Accounts Receivable .......................... Inventory ............................................ Total Assets ........................................ Vertical Analysis

Based on the horizontal analysis, the company’s total assets decreased 11% in 2024. Most of this decrease is attributable to the 21% decrease in accounts receivable. The vertical analysis indicates that accounts receivable as a percent of total assets has decreased from 37% to 33% and inventory has remained relatively consistent. Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 6 The comparative balance sheet of Alto Communications Corporation appears below: ALTO COMMUNICATIONS CORPORATION Comparative Balance Sheet December 31 2024

2023

Assets Current assets................................................................................................... Property, plant, and equipment ...................................................................... Total assets ...............................................................................................

$ 322 678 $1,000

$280 520 $800

Liabilities and Shareholders' Equity Current liabilities .............................................................................................. Non-current liabilities ...................................................................................... Common shares ............................................................................................... Retained earnings ............................................................................................ Total liabilities and shareholders' equity ................................................

$ 180 200 320 300 $1,000

$120 160 320 200 $800

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Using horizontal analysis, show the percentage change for each balance sheet item using 2023 as a base year (round to the nearest whole percentage). b) Using vertical analysis, prepare a common size comparative balance sheet (round to the nearest whole percentage). c) Comment on your analysis. Solution 6 (14–19 min.) a) ALTO COMMUNICATIONS CORPORATION Comparative Balance Sheet December 31 b) b) 2024 Percent 2023Percent

a) Percent

Assets Current assets................................................ Property, plant, and equipment ................... Total assets .............................................

$ 322 678 $1,000

32% 68% 100%

$280 520 $800

35% 65% 100%

15% 30% 25%

b) Liabilities and Shareholders' Equity Current liabilities ........................................... Non-current liabilities ................................... Common shares ............................................ Retained earnings ......................................... Total liabilities and shareholders' equity

$ 180 200 320 300 $1,000

18% 20% 32% 30% 100%

$120 160 320 200 $800

15% 20% 40% 25% 100%

50% 25% -050% 25%

c) The horizontal and vertical analysis indicate that the composition of the company’s assets has changed slightly during the year. Current assets have decreased during the year as a percent of total assets, while property, plant, and equipment have increased. The company’s current liabilities have increased from 15% of total assets to 18%, with an increase in the base year of 50%. Finally, the company’s retained earnings increased significantly over the year, as indicated by the 50% increase from the base year. Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 7 Below is the partial balance sheet for Chantal Channel Limited:

Test Bank for Accounting Principles, Ninth Canadian Edition

December 31, 2024 Accounts Receivable .......................... $ 960,000 Inventory ............................................ 920,000 Total Assets ........................................ 4,000,000

December 31, 2023 $ 600,000 750,000 3,000,000

Instructions Using the items from the comparative balance sheet of Chantal Channel Limited, illustrate horizontal and vertical analysis (round to the nearest whole percentage). Discuss the results of each type of analysis Solution 7 (10–15 min.) Horizontal Analysis December 31, 2024 160% 123% 133%

December 31, 2023 100% 100% 100%

December 31, 2024 Accounts Receivable .......................... 24% Inventory ............................................ 23% Total Assets ........................................ 100%

December 31, 2023 20% 25% 100%

Accounts Receivable .......................... Inventory ............................................ Total Assets ........................................ Vertical Analysis

Based on the horizontal analysis, the company’s total assets increased 33% in 2024. Most of this increase is attributable to the 60% increase in accounts receivable. The vertical analysis indicates that accounts receivable as a percent of total assets has increased from 20% to 24%, indicating that the accounts receivable has increased significantly during the year. Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 8 The income statements for the first three years of operations of Carol’s Music Ltd. are provided below: 2025 2024 2023 Revenue ......................................... $143,750 $115,000 $100,000 Cost of goods sold ......................... 68,350 53,820 46,000 Gross profit .................................... 75,400 61,180 54,000 Expenses Salaries................................... 19,000 15,080 13,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Depreciation expense ............ Other operating expenses ..... Total operating expenses ...... Profit from operations .................. Interest expense ............................ Income tax expense ...................... Profit for the year ..........................

22,000 27,360 68,360 7,040 (5,000) (600) $ 1,440

15,000 22,800 52,880 8,300 (3,000) (980) $ 4,320

4,000 20,000 37,000 17,000 (1,000) (2,000) $ 14,000

Instructions a) Is Carol’s gross profit improving over the three years or not? Use horizontal analysis, with 2023 as the base year, to support your answer (round to the nearest whole percentage). b) Provide one explanation for the decline in income from operations other than changes in gross profit. Support your answer using vertical analysis (round to the nearest whole percentage). c) Although profit is decreasing, Carol has not been concerned because her cash flows have increased from year to year. Using the information available in the income statements, explain why this is so. Solution 8 (20 min.) a) Revenue Cost of goods sold Gross profit

2025 144% 149% 140%

2024 115% 117% 113%

2023 100% 100% 100%

Although revenues have been increasing year over year (144% over the base year), the cost of goods sold has been increasing at a faster pace. As a result, the gross profit has not increased to the same extent as sales, increasing by 40% during the period in which sales increased by 44%. b) 2025 Revenue .................................... $143,750 100% Cost of goods sold .................... 68,350 48% Gross profit ............................... 75,400 52% Expenses Salaries.............................. 19,000 13% Depreciation expense ....... 22,000 15% Other operating expenses 27,36019% 22,800 Total operating expenses . 68,360 47% Profit from operations ............. $ 7,040 5%

2024 $115,000 53,820 61,180

100% 47% 53%

2023 $100,000 46,000 54,000

15,080 15,000 20% 52,880 $ 8,300

13% 13% 20,000 46% 7%

13,000 4,000 20% 37,000 $ 17,000

100% 46% 54% 13% 4% 37% 17%

Since neither salaries nor other operating expenses have been increasing as a percentage of sales, it is the increased depreciation expense that is the other explanation for the decrease in profit from operations (in combination with the decline in gross margin as explained in part a)). c) Because depreciation is a non-cash expense, the increased depreciation expense will not have the same negative effect on cash flow that it has on profit from operations.

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 9 The balance sheets of two competing companies in the same industry are provided below. The companies have approximately the same volume of sales and similar operating capacities. Balance Sheets Mega Co. Box Co. Assets Current assets $ 327,000 $ 300,000 Property, plant, and equipment 1,635,000 1,237,500 Accumulated depreciation (418,500) (637,500) Total assets $1,543,500 $ 900,000 Liabilities and Shareholders’ Equity Current liabilities $ 154,500 Non-current liabilities 916,500 Share capital 150,000 Retained earnings 322,500 Total liabilities and shareholders’ equity $1,543,500

$ 42,000 225,000 225,000 408,000 $900,000

Instructions a) Calculate the debt to total assets ratio for both companies (round to the nearest whole percent). Which company is more solvent? b) Based on the information provided, can horizontal analysis be used to determine which company is more profitable? Solution 9 (5 min.) a) Debt to total assets for Mega Co. = ($154,500 + $916,500) ÷ $1,543,500 = 69% Debt to total assets for Box Co. = ($42,000 + $225,000) ÷ $900,000 = 30% Box Co. is more solvent because its assets are financed more by equity than Mega Co. b)

Horizontal analysis is not useful in comparing two companies to each other; instead, it is used for comparisons of one company over time using many different ratio techniques.

Bloomcode: Analysis Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 10 The balance sheets of two competing companies in the same industry are provided below. The companies have approximately the same volume of sales and similar operating capacities. Balance Sheets Company X Company Y Assets Current assets $ 36,400 $ 38,000 Property, plant, and equipment 920,000 625,000 Accumulated depreciation (75,000) (125,000) Total assets $881,400 $538,000 Liabilities and Shareholders’ Equity Current liabilities Non-current liabilities Share capital Retained earnings Total liabilities and shareholders’ equity

$ 76,000 480,000 250,000 75,400 $881,400

$120,000 165,000 100,000 153,000 $538,000

Instructions a) Calculate the debt to total assets ratio for both companies (round to the nearest whole percentage). Which company is more solvent? b) Based on the information provided, can horizontal analysis be used to determine which company is more profitable? Solution 10 (5 min.) a) Debt to total assets for Company X = ($76,000 + $480,000) ÷ $881,400 = 63% Debt to total assets for Company Y = ($120,000 + $165,000) ÷ $538,000 = 53% Company Y is more solvent because its assets are financed more by equity than Company X’s. b)

Horizontal analysis is not useful in comparing two companies to each other; instead, it is used for comparisons of one company over time. Initially one might assume that Company Y has been more profitable because its retained earnings are higher, however, one would need to know profit to calculate a ratio such as return on equity to compare profitability. The lower retained earnings may be due to the payment of dividends, not due to lower profit.

Bloomcode: Analysis Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 11 Balance Sheets December 31, 2024 Amounts in 000s Food Wholesale Co.

Auto Leasing Co.

Assets Current assets ...................................................................................... Property, plant, and equipment ......................................................... Total assets ..................................................................................

$ 50,000 320,000 $370,000

$ 2,500 965,000 $967,500

Liabilities and Shareholders’ Equity Current liabilities ................................................................................. Non-current liabilities ......................................................................... Share capital ........................................................................................ Retained earnings................................................................................ Total liabilities and shareholders’ equity ...................................

$ 31,000 228,000 50,000 61,000 $370,000

$ 4,800 782,000 250,000 (69,300) $967,500

Other information: Profit for the year: .......................................................

$ 10,000

$ 20,000

Instructions a) Does horizontal analysis provide a useful tool to compare the above companies? Explain your answer using an example to demonstrate how it is useful or not useful. b) Suggest a ratio that could be used as an alternative to evaluate the profitability of the two companies and calculate the ratio (round to one decimal place). Compare the companies’ profitability based on your calculations. Solution 11 (10 min.) a) Horizontal analysis is not a useful tool in comparing the two companies. They are in different industries. For example, the food distribution company has property, plant, and equipment that is less than the auto leasing company’s by $645,000 or 67%. This is not a relative analysis, because the auto leasing company would have a large number of cars in their property, plant, and equipment. Horizontal analysis is a more useful tool in analyzing changes within a single company over time. [Note that other valid examples may be provided]. b)

A ratio that can be performed to compare the two companies’ profitability based on available information is ROE (return on equity). The two companies’ ROE are:

Test Bank for Accounting Principles, Ninth Canadian Edition

Food Wholesale Co.

Auto Leasing Co.

$ 50,000 61,000 $111,000

$250,000 (69,300) $180,700

$10,000 9.0%

$20,000 11.1%

Total equity (A) Share capital Retained earnings

Profit (B) ROE = (B)÷(A)

Based on this ratio it appears that the Auto Leasing Co. is more profitable. Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 12 The income statements for MGM Manufacturing Inc. are provided for two recent years: 2024 2023 Revenue ................................................................ $1,100,000 $1,050,000 Cost of goods sold ................................................ 340,000 300,000 Gross profit ........................................................... 760,000 750,000 Expenses Salaries.......................................................... 221,000 165,000 Depreciation expense ................................... 37,500 37,500 Other operating expenses ............................ 161,500 142,500 Total operating expenses ............................. 420,000 345,000 Profit from operations ......................................... 340,000 405,000 Interest expense ................................................... (15,000) (15,000) Income tax expense ............................................. (22,500) (27,000) Profit for the year ................................................. $ 302,500 $ 363,000 Instructions a) Using the above information, prepare a vertical analysis for MGM (round to one decimal place). b) Using the analysis completed in part a), identify the reason for MGM’s decreasing profit at the same time that revenue is increasing. Solution 12 (20 min.) a) 2024

2023

Test Bank for Accounting Principles, Ninth Canadian Edition

Revenue $1,100,000 Cost of goods sold 340,000 Gross profit 760,000 Expenses Salaries 221,000 Depreciation expense 37,500 Other operating expenses 161,500 Total operating expenses 420,000 Profit from operations 340,000 Interest expense (15,000) Income tax expense (22,500) Profit for the year $ 302,500 b)

100.0% 30.9% 69.1%

$1,050,000 300,000 750,000

100.0% 28.6% 71.4%

20.1% 3.4% 14.7% 38.2% 30.9% -1.4% -2.0% 27.5%

165,000 37,500 142,500 345,000 405,000 (15,000) (27,000) $ 363,000

15.7% 3.6% 13.6% 32.9% 38.6% -1.4% -2.6% 34.6%

The most significant area in which costs have increased in 2024 over 2023 is in salaries, which have gone from 15.7% of revenue to 20.1% of revenue, which is the main reason for the declining profit. Cost of goods sold is also higher.

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 13 The following are income statements of two companies that are both in the fast food industry. All amounts are in 000s and are for the year ended December 31, 2024. Company A Company B (public company) (private company) Revenue............................................................................ $100,000 $6,000 Cost of goods sold............................................................ 35,000 2,080 Gross profit....................................................................... 65,000 3,920 Expenses Salaries expense .............................................................. 15,000 905 Utilities expense............................................................... 1,950 140 Other operating expenses ............................................... 33,000 1,970 Total operating expenses .......................................... 49,950 3,015 Profit from operations ..................................................... 15,050 905 Interest expense............................................................... 2,100 475 Income tax expense ......................................................... 4,400 21 Profit for the year ............................................................. $ 8,550 $ 409 Instructions Using vertical analysis, determine which corporation is the more profitable and identify the most significant cause of the difference (round to one decimal place).

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 13 (20 min.) Revenue Cost of goods sold Gross profit Expenses Salaries expense Utilities expense Other operating expenses Total operating expenses Profit from operations Interest expense Income tax expense Profit for the year

Company A $100,000 100.0% 35,000 35.0% 65,000 65.0%

Company B $6,000 2,080 3,920

100.0% 34.7% 65.3%

15,000 1,950 33,000 49,950 15,050 2,100 4,400 $ 8,550

905 140 1,970 3,015 905 475 21 $ 409

15.1% 2.3% 32.8% 50.2% 15.1% 7.9% 0.4% 6.8%

15.0% 2.0% 33.0% 50.0% 15.1% 2.1% 4.4% 8.6%

Both companies have the same operating margin (15.1%) and approximately the same gross profit margin (65% and 65.3%). Therefore, the most significant cause of the difference in profitability is the higher interest expense (7.9%) that Company B, the private company, must carry over Company A’s 2.1% of revenue. With less access to capital, the private company must finance more of its assets with debt which explains the proportionately higher interest costs. The higher interest is partially offset by a lower overall tax burden on the part of the private company (0.4% versus 4.4% of revenue), but this in not enough to compensate for the higher interest. Bloomcode: Evaluation Difficulty: Hard Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

Exercise 14 The 2024 income statements for two different companies are provided below: Company M Company S Revenue $750,000 $750,000 Cost of goods sold 420,000 125,000 Gross profit 330,000 625,000 Expenses Salaries 75,000 425,000 Depreciation expense 100,000 15,000 Other operating expenses 44,000 87,000 Total operating expenses 219,000 527,000 Profit from operations 111,000 98,000 Interest expense (15,000) (2,000) Income tax expense (19,000) (19,000)

Test Bank for Accounting Principles, Ninth Canadian Edition

Profit for the year

$ 77,000

Instructions a) Are the two companies in the same or different industries? Use vertical analysis to support your answer (round to one decimal place). b) Can vertical analysis be used to compare the profitability of the two companies that are in different industries to each other? Support your answer with examples based on your calculations in part a). Solution 14 (20 min.) a) Revenue Cost of goods sold Gross profit Expenses Salaries Depreciation expense Other operating expenses Total operating expenses Profit from operations Interest expense Income tax expense Profit for the year

Company M Company S $750,000 100.0% $750,000 100.0% 420,000 56.0% 125,000 16.7% 330,000 44.0% 625,000 83.3% 75,000 100,000 44,000 219,000 111,000 (15,000) (19,000) $ 77,000

10.0% 13.3% 5.9% 29.2% 14.8% -2.0% -2.5% 10.3%

425,000 15,000 87,000 527,000 98,000 (2,000) (19,000) $ 77,000

56.7% 2.0% 11.6% 70.3% 13.1% -0.3% -2.5% 10.3%

It appears that the companies are in different industries, with company M being in an industry that focuses on the sale (or manufacture) of goods, as evidenced by its low operating costs and high cost of goods sold. Company S is in an industry that is labour intensive as can be seen by its very high labour costs, and it appears that the goods it sells are not the key success factor. Company M has a significant amount of depreciable assets such as equipment, as can be seen from the high depreciation expense, further suggesting it might be in manufacturing. Company S’s investment in long-lived assets is lower and therefore seems to play a lesser role in its business, reinforcing the idea it is in a service industry. The two companies are not competitors with each other. b)

Vertical analysis is not useful in comparing two companies in different industries. For example, the two companies have similar profit from operations (14.8% versus 13.1%) but since Company M has significant long-lived assets (see high depreciation expense) it also requires more borrowing (see higher interest costs). Vertical analysis is only useful in comparing two companies in the same industry or the same company from period to period.

Bloomcode: Analysis Difficulty: Medium Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 15 Chum Lee Merchandising Ltd. is required by its primary lender to maintain a current ratio of 2:1 in order to comply with its loan covenants. In the past, Chum Lee has had difficulty in achieving this target, but management is confident that in 2025 they will have met the bank’s requirement. Chum Lee’s accountant provides you with the following information taken from their most recent three years of financial statements. 2025 2024 2023 Current assets Cash $ 26,505 $ 28,500 $ 30,000 Accounts receivable 83,504 68,446 60,040 Inventory 189,266 146,718 125,400 $299,275 $243,664 $215,440 Current liabilities Accounts payable $ 91,000 $ 89,000 $ 86,000 Salaries payable 4,900 5,200 5,000 Current portion of long-term 24,000 36,000 36,000 debt $119,900 $130,200 $127,000 Other information: Credit sales in the year $782,775 $745,500 $710,000 Cost of goods sold 469,665 447,300 426,000 Instructions a) Calculate Chum Lee’s current ratio for each of the three years in order to demonstrate that management’s expectation has been met (round to one decimal place). b) Calculate Chum Lee’s accounts receivable turnover for 2025 and 2024 (round to one decimal place). c) Calculate Chum Lee’s inventory turnover for 2025 and 2024 (round to one decimal place) d) Using the outcome of b) and c), evaluate whether the achievement of the current ratio targets indicates an improved liquidity or not. Identify any other change that has contributed to meeting this goal and evaluate the impact. e) Calculate the acid-test ratio (round to one decimal place). Will this ratio always be lower than the current ratio? Solution 15 (20 min.) a) Current ratio 2025 = 2.5 2024 = 1.9 2023 = 1.7 b)

($299,275 ÷ $119,900) ($243,664 ÷ $130,200) ($215,440 ÷ $127,000)

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AR turnover 2025 = 10.3 2024 = 11.6

$782,775 ÷ ($83,504 + $68,446)÷2 $745,500 ÷ ($68,446 + $60,040)÷2

Inventory turnover 2025 = 2.8 2024 = 3.3

$469,665 ÷ ($189,266 + $146,718)÷2 $447,300 ÷ ($146,718 + $125,400)÷2

Both accounts receivable and inventory turnovers have declined, which suggests that receivables are being collected more slowly than in prior years, and that inventory is building up because it is selling more slowly. Therefore, although current assets have increased in relation to current liabilities, the reason may be because inventory and receivables are being poorly managed. The improved current ratio appears to be masking potential liquidity problems.

Acid-test 2025: ($26,505 + $83,504) ÷ $119,900 =.92 2024: ($28,500+ $68,446) ÷ $130,200 =.74 2023: ($30,000 + $60,040) ÷ $127,000 =.71 The acid-test ratio will always be lower than the current ratio.

Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 16 Susa Corporation had the following comparative current assets and current liabilities: Dec. 31, 2024 Dec. 31, 2023 Current assets Cash.................................................................................... $ 30,000 $ 30,000 Short-term investments .................................................... 40,000 10,000 Accounts receivable .......................................................... 55,000 95,000 Inventory............................................................................ 98,000 79,000 Prepaid expenses .............................................................. 35,000 20,000 Total current assets .................................................... $258,000 $234,000 Current liabilities Accounts payable .............................................................. Salaries payable ................................................................ Income tax payable ........................................................... Total current liabilities ...............................................

$120,000 40,000 20,000 $180,000

$110,000 30,000 15,000 $155,000

Test Bank for Accounting Principles, Ninth Canadian Edition

During 2024, credit sales and cost of goods sold were $260,000 and $192,000, respectively. Instructions Calculate the following liquidity measures for 2024 (round to one decimal place): a) Current ratio b) Acid-test ratio c) Receivables turnover d) Inventory turnover Solution 16 (10–15 min.) a) Current ratio = Current assets ÷ Current liabilities = $258,000 ÷ $180,000 = 1.4:1 b) Acid-test ratio = (Cash + Short-term investments + Receivables) ÷ Current liabilities = ($30,000 + $40,000 + $55,000) ÷ $180,000 = 0.7:1

c) Receivables turnover

d) Inventory turnover

Net credit sales ————————————— Average accounts receivable

$260,000 ———— = 3.5 times $75,000

Cost of goods sold = ————————— = Average inventory

$192,000 ———— = 2.2 times $88,500

Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 17 The following data are taken from the financial statements of Finicky Limited: 2024 2023 Monthly average accounts receivable $ 670,000 $ 680,000 Net sales on account 7,808,000 6,800,000 Terms for all sales are n/30 Instructions a) Calculate the receivables turnover and the collection period for both years (round to one decimal place).

Test Bank for Accounting Principles, Ninth Canadian Edition

What conclusion can an analyst draw about the management of the accounts receivable?

Solution 17 (8–12 min.) a)

Receivables turnover

Collection period

2024

2023

$7,808,000 ————— 670,000

$6,800,000 ————— 680,000

= 11.7 times

= 10 times

365 days ————— 11.7 times

365 days ———— 10 times

= 31.2 days

= 36.5 days

The receivables are turning over faster in 2024 than they did in 2023. There is still a problem since the normal credit period is 30 days, and the collection period for both years exceeds this target. Therefore, improvement in the management of the receivables would appear to be desirable, although the 2024 collection period is very close to the desired period.

Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 18 Selected information from the comparative financial statements of Patrick Parker Inc. for the year ended December 31, appears below: 2024 2023 Accounts receivable ................................................ $ 380,000 $ 320,000 Inventory ................................................................. 130,000 145,000 Total assets.............................................................. 1,800,000 1,650,000 Current liabilities ..................................................... 196,000 105,000 Non-current liabilities ............................................. 400,000 322,000 Net credit sales ........................................................ 1,900,000 1,250,000 Cost of goods sold ................................................... 700,000 619,000 Interest expense ...................................................... 75,000 30,000 Income tax expense ................................................ 60,000 44,000 Profit for the year .................................................... 210,000 97,000 Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer the following questions relating to the year ended December 31, 2024. Show calculations (round to one decimal place). a) The inventory turnover is ______. b) The interest coverage is ______. c) The debt to total assets is ______. d) The receivables turnover is ______. e) The return on assets is ______. Solution 18 (9–14 min.) a) The inventory turnover for 2024 is 5.1 times =

$700,000 ———————————— ($130,000 + $145,000) ÷ 2

b) The interest coverage in 2024 is 4.6 times =.

$210,000 + $60,000 + $75,000 —————————————— $75,000

c) The debt to total assets for 2024 is 33.1% =

$196,000 + $400,000 —————————— $1,800,000

$1,900,000 d) The receivables turnover for 2024 is 5.4 times = ———————————— ($380,000 + $320,000) ÷ 2

e) The return on assets for 2024 is 12.2% =

$210,000 —————————————— ($1,800,000 + $1,650,000) ÷ 2

Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 19 The financial statements of Diana Dining Inc. appear below: DIANA DINING INC. Comparative Balance Sheet

Test Bank for Accounting Principles, Ninth Canadian Edition

December 31 Assets .......................................................................................................... Cash ............................................................................................................ Investments at fair value through profit or loss ........................................ Accounts receivable ................................................................................... Inventory .................................................................................................... Property, plant, and equipment (net) ....................................................... Total assets ..........................................................................................

2024 $ 25,000 15,000 50,000 170,000 160,000 $420,000

2023 $ 40,000 60,000 30,000 120,000 200,000 $450,000

Liabilities and Shareholders' Equity Accounts payable ....................................................................................... Short-term notes payable .......................................................................... Bonds payable ............................................................................................ Common shares ......................................................................................... Retained earnings ...................................................................................... Total liabilities and shareholders' equity ...........................................

$ 20,000 40,000 100,000 170,000 90,000 $420,000

$ 30,000 40,000 160,000 145,000 75,000 $450,000

DIANA DINING INC. Income Statement Year Ended December 31, 2024 Net sales ..................................................................................................... Cost of goods sold ...................................................................................... Gross profit ................................................................................................. Expenses Interest expense ................................................................................. Operating expenses ............................................................................ Total expenses .............................................................................. Profit before income taxes ......................................................................... Income tax expense ................................................................................... Profit for the year .......................................................................................

$360,000 184,000 176,000 $24,000 50,000 74,000 102,000 30,000 $ 72,000

Additional information: 1. Cash dividends of $36,000 were declared and paid in 2024. There was also a stock dividend, to be ignored for this question. 2. Weighted average number of shares during 2024 was 60,000 shares. 3. Market value of common shares on December 31, 2024, was $18 per share. 4. Depreciation expense was $40,000 in 2024. Instructions Using the financial statements and additional information, calculate the following ratios for Diana Dining Inc. for 2024. Show all calculations (round to one decimal place). Calculations a) Current ratio ______ b) Return on equity ______

Test Bank for Accounting Principles, Ninth Canadian Edition

c) d) e) f) g) h) i) j)

Price-earnings ______ Debt to total assets ______ Receivables turnover ______ Interest coverage ______ Profit margin ______ Days sales in inventory ______ Payout ratio ______ Return on assets ______

Solution 19 (15–20 min.) a) Current ratio 4.3:1.

$260,000 $60,000

= 4.3

Return on equity 30.0%.

$72,000 ———————————–— = 0.3 ($260,000 + $220,000) ÷ 2

Price-earnings 15.0 times.

$72,000 EPS = ———––– = $1.2 60,000 $18 ———— = 15 times $1.20

Debt to total assets 38.1%

Receivables turnover 9.0 times.

360,000 ——————————–— = 9.0 ($50,000 + $30,000) ÷ 2

Interest coverage 5.3 times.

$72,000 + $30,000 + $24,000 —————————————— = 5.3 $24,000

Profit margin 20.0%.

$72,000 —————–— = 0.2 $360,000

Days sales in inventory 280.8 days.

Inventory turnover =

$20,000 + $40,000 +$100,000 = 38.1% $420,000

$184,000 ———————————— = 1.3 ($170,000 + $120,000) ÷ 2

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365 days ———–— = 280.8 1.3

Payout ratio 50.0%.

$36,000 ———––— = 0.5 $72,000

Return on assets 16.6%.

$72,000 ———————————–– = 0.166 ($420,000 + $450,000) ÷ 2

Exercise 20 Selected information from the comparative financial statements of Montero Corporation for the year ended December 31, appears below: 2024 2023 Accounts receivable ................................................ $35,000 $20,000 Inventory ................................................................. 50,000 42,000 Total assets.............................................................. 285,000 259,000 Current liabilities ..................................................... 44,000 52,000 Non-current liabilities ............................................. 150,000 100,000 Net credit sales ........................................................ 450,000 478,000 Cost of goods sold ................................................... 218,000 242,000 Interest expense ...................................................... 18,000 9,000 Income tax expense ................................................ 25,000 29,000 Profit for the year .................................................... 68,000 77,000 Instructions Answer the following questions relating to the year ended December 31, 2024. Show calculations (round to one decimal place). a) The inventory turnover is ______. b) The interest coverage is ______. c) The debt to total assets is ______.

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d) e)

The receivables turnover is ______. The return on assets is ______.

Solution 20 (9–14 min.) a) The inventory turnover for 2024 is 4.7 times =

$218,000 ———————————— ($50,000 + $42,000) ÷ 2

b) The interest coverage in 2024 is 6.2 times =.

$68,000 + $25,000 + $18,000 —————————————— $18,000

c) The debt to total assets for 2024 is 68.1% =

$44,000 + $150,000 —————————— $285,000

$450,000 d) The receivables turnover for 2024 is 16.4 times = ———————————— ($35,000 + $20,000) ÷ 2

e) The return on assets for 2024 is 25.0% =

$68,000 —————————————— ($285,000 + $259,000) ÷ 2

Exercise 21 The following ratios have been calculated for Peters Limited for 2024: Profit margin ............................................... 20% Interest coverage ........................................ 12 times Receivables turnover .................................. 5 times Current ratio ............................................... 2.5:1 Acid-test ratio ............................................. 1.4:1 Debt to total assets..................................... 24%

Test Bank for Accounting Principles, Ninth Canadian Edition

The 2024 financial statements for Peters Limited with missing information follow: PETERS LIMITED Comparative Balance Sheet December 31, 2024 Assets Cash ........................................................................................................ Short-term investments ......................................................................... Accounts receivable ............................................................................... Inventory ................................................................................................ Property, plant, and equipment (net) ................................................... Total assets ..................................................................................... Liabilities and Shareholders' Equity Accounts payable ................................................................................... Short-term notes payable ...................................................................... Bonds payable ........................................................................................ Common shares ..................................................................................... Retained earnings .................................................................................. Total liabilities and shareholders' equity ...................................... PETERS LIMITED Income Statement Year Ended December 31, 2024 Net sales ........................................................................................... Cost of goods sold ............................................................................ Gross profit ....................................................................................... Expenses: Depreciation expense ............................................................... Interest expense ....................................................................... Operating expenses .................................................................. Total expenses .................................................................. Profit before income taxes ............................................................... Income tax expense .................................................................. Profit for the year .............................................................................

2024 $25,000 15,000 ? (6) ? (8) 200,000 $ ? (9)

2023 $ 35,000 15,000 50,000 50,000 160,000 $310,000

$ 25,000 30,000 20,000 200,000 35,000 $310,000

? (7) 35,000 ? (10) 200,000 47,000 $ ? (11)

$200,000 100,000 100,000 $

? 5,000 25,000

(5)

? ? ? ?

(4) (2) (3) (1)

Instructions Use the above ratios and information from the Peters Limited financial statements to fill in the missing information on the financial statements. Follow the sequence indicated. Show calculations that support your answers. Solution 21 (35–45 min.) PETERS LIMITED Comparative Balance Sheet December 31, 2024 ——————————————————————————————————————————

Test Bank for Accounting Principles, Ninth Canadian Edition

Assets Cash ............................................................................................. Short-term investments .............................................................. Accounts receivable .................................................................... Inventory ..................................................................................... Property, plant, and equipment (net) ........................................ Total assets ..........................................................................

2024 $ 25,000 15,000 30,000 55,000 200,000 $325,000

Liabilities and Shareholders' Equity Accounts payable ........................................................................ Short-term notes payable ........................................................... Bonds payable ............................................................................. Common shares .......................................................................... Retained earnings ....................................................................... Total liabilities and shareholders' equity ...........................

$ 15,000 35,000 28,000 200,000 47,000 $325,000

(6) (8) (9)

(7) (10)

(11)

2023 $ 35,000 15,000 50,000 50,000 160,000 $310,000

$ 25,000 30,000 20,000 200,000 35,000 $310,000

Test Bank for Accounting Principles, Ninth Canadian Edition

PETERS LIMITED Income Statement Year Ended December 31, 2024 Net sales ...................................................................................... Cost of goods sold ....................................................................... Gross profit .................................................................................. Expenses Depreciation expense .......................................................... $15,000 Interest expense .................................................................. 5,000 Operating expenses ............................................................. 25,000 Total expenses ............................................................. Profit before income taxes .......................................................... Income tax expense .................................................................... Profit for the year ........................................................................ (1) Profit = $40,000 ($200,000 × 20%). (2) Profit before income taxes = $55,000. Let X = Profit before income taxes and interest expense. X ——— = 12 times 5,000 X = $60,000 $60,000 – $5,000 = $55,000 (3) Income tax expense = $15,000 ($55,000 – $40,000). (4) Total operating expenses = $45,000 ($100,000 – $55,000). (5) Depreciation expense = $15,000 (6) Accounts receivable = $30,000. Let X = Average receivables. $200,000 ———— = 5 times X 5X = $200,000.

[$45,000 – ($5,000 + $25,000)].

$200,000 100,000 100,000 (5)

45,000 55,000 15,000 $ 40,000

(4) (2) (3) (1)

Test Bank for Accounting Principles, Ninth Canadian Edition

X = $40,000. Let Y = Accounts receivable at Dec. 31, 2024. $50,000 + Y —————— = $40,000 2 $50,000 + Y = $80,000 Y = $30,000 (7) Accounts payable = $15,000. Let X = Current liabilities. $25,000 + $15,000 + $30,000 ————————————— = 1.4 X 1.4X = $70,000 X = $50,000 $50,000 – $35,000 = $15,000 (8) Inventory = $55,000 Let X = Total current assets X ———— = 2.5 $50,000 X = $125,000 $125,000 – ($25,000 + $15,000 + $30,000) = $55,000 (9) Total assets = $325,000 (10) Bonds payable = $28,000 Let X = Total debt X ———— = 24%

($25,000 + $15,000 + $30,000 + $55,000 + $200,000)

Test Bank for Accounting Principles, Ninth Canadian Edition

$325,000 X = $78,000 $78,000 – ($15,000 + $35,000) = $28,000 (11) Total liabilities and shareholders' equity = $325,000; same as total assets—see (9) above. Bloomcode: Synthesis Difficulty: Hard Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 22 The following information is based on the financial statements of Oscar Distributing Ltd., which has a December 31 year end: Return on equity, 2023 ................................................................ 8.1% Return on equity, 2024 ................................................................ 8.4% Profit margin, 2023 ................................................................................. 10.1% Profit margin, 2024 ................................................................................. 10.3% Debt to assets ratio, 2023....................................................................... 3:5 Debt to assets ratio, 2024....................................................................... 1:2 Current ratio, 2023 ................................................................................. 1.8:1 Current ratio, 2024 ................................................................................. 2:1 Other events that recently occurred at Oscar’s: ▪ Five out of six members of the board of directors resigned. Four of these individuals have launched a lawsuit on behalf of shareholders in an attempt to terminate the employment of senior management. ▪ In February 2025, a major spill from Oscar’s heating fuel tanks damaged the fruit trees of a commercial orchard next door to Oscar’s warehouse. Instructions Using the information about Oscar Distributing Ltd., explain how use of ratio analysis alone may not lead to the optimum investment decision. Solution 22 (5 min.) In each area of profitability (return on equity and profit margin), solvency (debt to assets ratio) and

Test Bank for Accounting Principles, Ninth Canadian Edition

liquidity (current capital ratio) it appears that Oscar is a company that is doing better from year to year, and that it would be an attractive investment target. However, the two other events described indicate that Oscar is facing serious problems. The disagreement between board and management suggests that the company is not well managed. The fuel spill may result in losses from a lawsuit that could cause losses in the future. These facts should be taken into account by investors in deciding whether to invest in Oscar and how to value its shares. Bloomcode: Analysis Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 23 Selected information from the comparative financial statements of Princeton Inc. for the year ended December 31, appears below: ................................................................................. 2024 2023 Accounts receivable ................................................ $128,000 $174,000 Inventory ................................................................. 81,000 77,000 Total assets.............................................................. 590,000 512,000 Current liabilities ..................................................... 135,000 105,000 Non-current liabilities ............................................. 349,000 322,000 Net credit sales ........................................................ 620,000 595,000 Cost of goods sold ................................................... 344,000 319,000 Interest expense ...................................................... 22,000 27,000 Income tax expense ................................................ 21,000 14,000 Profit for the year .................................................... 94,000 62,000 Instructions Answer the following questions relating to the year ended December 31, 2024. Show calculations (round to one decimal place). a) The inventory turnover is ______. b) The interest coverage is ______. c) The debt to total assets is ______. d) The receivables turnover is ______. e) The return on assets is ______. Solution 23 (9–14 min.) a) The inventory turnover for 2024 is 4.4 times =

$344,000 ————————————

Test Bank for Accounting Principles, Ninth Canadian Edition

($77,000 + $81,000) ÷ 2

b) The interest coverage in 2024 is 6.2 times =.

$94,000 + $21,000 + $22,000 —————————————— $22,000

c) The debt to total assets for 2024 is 82.0% =

$135,000 + $349,000 —————————— $590,000

$620,000 d) The receivables turnover for 2024 is 4.1 times = ———————————— ($128,000 + $174,000) ÷ 2

e) The return on assets for 2024 is 17.1% =

$94,000 —————————————— ($590,000 + $512,000) ÷ 2

Exercise 24 Winnipeg Corporation has issued common shares only. The company produces and sells down-filled winter coats and has credit terms of net 30. Winnipeg has been successful and has a gross profit margin of 20%. The information shown below was taken from the company's financial statements: Beginning inventory ............................................................ $ 482,000 Purchases............................................................................. 4,146,000 Ending inventory ................................................................. ? Average accounts receivable .............................................. 700,000 Average shareholders' equity ............................................. 3,500,000 Sales (all on credit) .............................................................. 5,110,000 Profit for the year................................................................. 420,000 Instructions Calculate (round to one decimal place) and comment on the following: a) Receivables turnover and the collection period.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) c)

The inventory turnover and the days sales in inventory. Return on equity.

Solution 24 (13–18 min.) a) Receivables turnover

Credit sales = ————————————— Average accounts receivable = $5,110,000 ÷ $700,000 = 7.3 times 365 days = —————————— Receivables turnover

Collection period

= 365 ÷ 7.3 times = 50.0 days The company’s credit terms are net 30, which means the company expects most receivables to be collected in 30 days. The average collection period of 50 days is much longer than the 30 days expected, indicating that the company may have problems collecting its accounts receivable. b)

Inventory turnover = Cost of goods sold ÷ Average inventory First calculate ending inventory. Beginning Inventory $ 482,000 + Purchases 4,146,000 – Cost of Goods Sold (4,088,000)* Ending Inventory $ 540,000

*Since the gross profit margin is 20%, the cost of goods sold ratio is 80%. 80% × $5,110,000 (net sales) = $4,088,000. Ending Inventory = $540,000 (per above) Average Inventory = ($482,000 + $540,000) ÷ 2 = $511,000 Inventory Turnover = $4,088,000 ÷ $511,000 = 8 times Days Sales in Inventory = 365 days ÷ 8 times = 45.6 days The company is selling winter coats; therefore, an inventory turnover of 45.6 days seems reasonable for this type of business. c) Return on equity

Profit ————————————— Average shareholders' equity

= $420,000 ÷ $3,500,000 = 12.0% This ratio indicates that shareholders are earning a return of 12% on their investment. Bloomcode: Evaluation

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Hard Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 25 The following selected ratios are available for Rainbow Corporation for the three most recent years: 2025 2024 2023 Debt to total assets 48% 52% 60% Interest coverage 2.5 times 2.6 times 2.0 times Free cash flow $600,000 $590,000 $200,000 Instructions Using each of the three ratios above to support your answer, explain whether or not Rainbow’s solvency has improved over the past three years. Solution 25 (10 min.) Rainbow’s solvency has improved during the three years and is evidenced by all three ratios. A much smaller proportion of its assets are financed by debt than was the case just two years ago (48% currently versus 60% two years ago). With the smaller debt load, the company has less fixed costs (interest) and has a greater ability to tolerate changes in profit. Interest coverage has also improved from 2023 to 2025, although there was a small decrease from 2024 to 2025 which might be explained by lower profit, since its interest expense is probably lower in 2025 with its lower debt to assets ratio. However, it still has a greater ability in 2025 to generate profit to cover its interest commitment in the most recent year. Rainbow’s free cash flow has improved significantly over the three years, providing greater discretionary cash flow to use as needed by the particular circumstances of the year. This improved free cash flow can be used to pay down debt, further improving the total debt to asset ratio and improving solvency. Bloomcode: Analysis Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 26 The balance sheets and income statements for two competing companies in the same industry are

Test Bank for Accounting Principles, Ninth Canadian Edition

presented below: Company L

Company S

$ 50,000 640,000 10,000 $700,000

$ 20,000 190,000 200 $210,200

$ 30,000 300,000 200,000 170,000 $700,000

$ 12,000 170,000 200 28,000 $210,200

$161,000 56,350 104,650

$80,500 40,250 40,250

37,000 30,000 8,000 75,000 29,650 (14,000) (3,500) $ 12,150

15,300 10,000 2,980 28,280 11,970 (8,800) (500) $ 2,670

Assets Current assets............................................................... Property plant, and equipment ................................... Intangible assets ..........................................................

Liabilities and shareholders' equity Current liabilities .......................................................... Non-current liabilities .................................................. Common shares ........................................................... Retained earnings ........................................................

Revenue ........................................................................ Cost of goods sold ........................................................ Gross profit ................................................................... Expenses Salaries expense ................................................... Depreciation expense ........................................... Other operating expenses .................................... Total operating expenses ............................. Profit from operations ................................................. Interest expense ................................................... Income tax expense .............................................. Profit for the year .........................................................

Instructions a) Calculate both companies’ debt to total assets ratio (round to one decimal place). b) Calculate both companies’ interest coverage ratio (round to one decimal place). c) Comment on the two companies’ solvency in comparison to each other. d) One of the companies is a public company, and the other is a private company. Identify which of the two companies appears to be the public company and explain your conclusion. Describe how that affects the extent to which it is financed by debt in comparison to the other company. Solution 26 (20 min.) a) Company L ($30,000 + $300,000) ÷ $700,000 = 47.1% Company S ($12,000 + $170,000) ÷ $210,200 = 86.6% b)

Company L ($29,650 ÷ $14,000) = 2.1 times Company S ($11,970 ÷ $8,800) = 1.4 times

Both indicators of solvency are more favourable for Company L, so it is more solvent than Company S.

Test Bank for Accounting Principles, Ninth Canadian Edition

Based on the amount of share capital in relation to total equity, Company L is the public company. This makes it easier to attract equity investment than for Company S, the private company, which therefore has to rely more heavily on borrowing to finance its business.

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 27 The income statement for Woodford Corporation for the year ended December 31, 2024, appears below: Sales ................................................................. $610,000 Cost of goods sold ........................................... 380,000 Gross profit ...................................................... 230,000 Expenses .......................................................... 180,000* Profit for the year............................................. $ 50,000 *Includes $30,000 of interest expense and $16,000 of income tax expense. Additional information: 1. The weighted average number of common shares issued on December 31, 2024, were 50,000 shares. 2. The market price of Woodford's shares was $18 at the end of 2024. 3. Cash dividends of $10,000 were paid, $6,000 of which were paid to preferred shareholders. Instructions a) Calculate the following ratios for 2024 (round to one decimal place, except for earnings per share with two decimal places): i. earnings per share ii. price-earnings iii. interest coverage iv. total dividend payout b)

Comment on the above ratios, assuming the averages for the industry in which Woodford operates are as follows: (i) earnings per share $1.20 (ii) price-earnings 10 times (iii) interest coverage 2.2 times

Solution 27 (8–13 min.) a) i. Earnings per share

Test Bank for Accounting Principles, Ninth Canadian Edition

$50,000 – $6,000 ———————— = $0.88 50,000 ii.

Price-earnings $18.00 ——— = 20.5 times $0.88

iii.

Interest coverage $50,000 + $30,000 + $16,000 ————————————— $30,000

iv. b)

Total dividend payout

= 3.2 times

$10,000 ÷ $50,000 = 20.0%

The earnings per share of Woodford of $0.88 is below the industry average of $1.20. This may indicate that Woodford is earning less than the average firm in the industry or it may be attributable to Woodford’s capital structure (if the company has more shares issued than the average firm in the industry, EPS will be lower even if profit is the same). ii. Investors seem to have more confidence in Woodford, as the company’s price-earnings ratio is 20.5 compared to the industry average of 10. Investors seem willing to pay more for Woodford’s earnings. This could be because the high payout ratio of 20% may be higher than the industry average. iii. Woodford appears to be better able to meet its debt obligations as evidenced by its interest coverage ratio of 3.2 times compared to the industry average of 2.2 times.

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 28 The following information was taken from the financial statements of Larkin Corporation: 2024 2023 Gross profit ..................................................................................... $109,000 $ 89,500 Profit before income taxes ............................................................. 54,000 11,500 Profit for the year............................................................................ 132,000 116,000 Profit margin ................................................................................... 17% 24% Instructions

Test Bank for Accounting Principles, Ninth Canadian Edition

a) b) c)

Calculate the net sales for each year. Calculate the cost of goods sold in dollars and as a percentage of net sales for each year. Round percentage to the nearest whole percentage point. Calculate operating expenses in dollars and as a percentage (round to nearest whole percentage point) of net sales for each year. (Hint: Income taxes are not operating expenses).

Solution 28 (12–15 min.) a) To calculate net sales, divide the profit by the profit margin.

Net sales b)

2024 $132,000 ÷ 17% = $776,471

2023 $116,000 ÷ 24% = $483,333

Using the net sales information from a) and the gross profits given, it is possible to calculate the cost of goods sold. 2024 2023 Net sales $776,471 $483,333 Less: Gross profit 109,000 89,500 Cost of goods sold $667,471 $393,833 % of net sales

c) Gross profit Less: Profit before income taxes Operating expenses % of net sales

86%

81%

2024 $109,000 54,000 $ 55,000

2023 $89,500 11,500 $78,000

16%

Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 29 The following information for 2024 is provided for two public companies in the same industry: Flora Inc. Fauna Ltd. Earnings per share.............................................. $ 10.50 $ 3.25 Dividends paid per share ................................... 2.50 1.50 Market price per share ....................................... 120.00 28.00 Net sales (in 000s)............................................... 100,000 10,000 Gross profit ......................................................... 46,000 35,000 Profit for the year ............................................... 8,100 970

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Answer the following questions about the two companies. Use the information provided to calculate the ratios needed to support your answers (round to one decimal place). a) Based on the above information, which company is more profitable? b) About which company are investors more optimistic? c) In which company would investors prefer to buy shares for growth potential? In which company would they prefer to buy shares if their goal is dividend income? Solution 29 (10 min.) a) Fauna’s profit margin is 9.7% ($970 ÷ $10,000) as compared to Flora’s profit margin of 8.1% ($8,100 ÷ $100,000) indicating that Fauna is more profitable. b)

Flora’s price-earnings ratio is 11.4 times ($120 ÷ $10.50) and Fauna’s is 8.6 times ($28.00 ÷ $3.25), which shows that in spite of Fauna being more profitable, investors are more optimistic about Flora’s prospects.

Investors interested in growth would prefer Flora since it retains a greater percentage of its earnings for reinvestment in the company. Fauna’s investors would be those that prefer greater dividends. This is supported by the fact that Fauna’s dividend payout ratio ($1.50 ÷ $3.25 = 46.2%) is greater than Flora’s ($2.50 ÷ $10.50 = 23.8%).

Bloomcode: Evaluation Difficulty: Hard Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 30 Certain information from the financial records of Companies P and Q are presented below for the year ended December 31. The two companies are in the same industry. Company P Company Q Net sales revenue ............................................................ $145,000 $ 68,700 Profit for the year............................................................. $ 12,100 $ 7,200 Average shareholders' equity ......................................... $185,000 $110,000 Weighted average number of common shares .............. 1,500 25,000 December 31 common shares market value .................. $ 92.10 $ 8.25 Included in the shareholders’ equity of Company P is $80,000 of cumulative preferred shares with a 5% annual dividend entitlement ($4,000 per year). Instructions a) Calculate the following for each company (round to one decimal place):

Test Bank for Accounting Principles, Ninth Canadian Edition

(i) Profit margin (ii) Return on equity to common shareholders Calculate the following for each company (round to two decimal places): (i) Earnings per share (ii) Price-earnings ratio Based on the ratios calculated in part b), which company’s investors appear to be more optimistic about the future of the company? Explain your answer by reference to the ratios calculated.

Solution 30 (15 min.) a) (i) Profit margin: Company P ($12,100 ÷ $145,000) = 8.3% Company Q ($7,200 ÷ $68,700) = 10.5% (ii) Return on equity (common shareholders) Company P ($12,100 – $4,000) ÷ ($185,000 – $80,000) = 7.7% Company Q ($7,200 ÷ $110,000) = 6.5% b)

(i)

Earnings per share Company P ($12,100 – $4,000) ÷ 1,500 = $5.40 Company Q ($7,200 ÷ 25,000) = $0.29

(ii) Price-earnings ratio Company P ($92.10 ÷ $5.40) = 17.06 Company Q ($8.25 ÷ $0.29) = 28.45 c)

Based on the higher price-earnings ratio, investors appear to have a more optimistic view of Company Q’s future. This seems to be in contradiction to the lower return on equity, so there must be future-oriented information on which investors are evaluating the two companies.

Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 31 Selected data from O'Brien Ltd. are presented below: Total assets ..................................................................................... $1,600,000 Average assets ................................................................................ 1,750,000 Profit for the year............................................................................ 245,000 Net sales.......................................................................................... 1,400,000 Cost of goods sold .......................................................................... 745,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Average shareholders' equity ........................................................

1,000,000

Instructions Calculate the profitability ratios that can be derived from the above information (round to one decimal place). Solution 31 (9–13 min.) With the information provided, the profitability ratios that can be calculated are as follows: 1. Profit margin = Profit ÷ Net sales = $245,000 ÷ $1,400,000 = 17.5% 2.

Asset turnover

= =

Net sales ÷ Average assets $1,400,000 ÷ $1,750,000 = 0.8

Return on assets

= =

Profit ÷ Average assets $245,000 ÷ $1,750,000 = 14.0%

Return on equity

= =

Profit ÷ Average shareholders' equity $245,000 ÷ $1,000,000 = 24.5%

Gross profit margin =

(Net sales – Cost of goods sold) ÷ Net sales = ($1,400,000 – $745,000) ÷ $1,400,000 = 46.8%

Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Exercise 32 The balance sheet for Finley Corporation at the end of the current year indicates the following: Bonds payable, 6% .............................................................................. $3,000,000 $4 Preferred shares, $100 issue price ................................................. 1,050,000 Common shares, $8 issue price .......................................................... 2,000,000 Profit before income taxes was $720,000 and income tax expense for the current year amounted to $168,000. Cash dividends paid on common shares were $260,000, and the common shares were selling for $35 per share at the end of the year. There were no ownership changes during the year. Instructions Determine each of the following: a) number of times that bond interest was covered. b) earnings per share.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) d)

price-earnings ratio (round to one decimal place). payout ratio on common shares (round to one decimal place).

Solution 32 (9–14 min.) a) Profit before income taxes and interest expense Interest coverage ratio = —————————————————————— Interest expense $720,000 + $180,000 = ————————–—–– = 5 times $180,000 b)

Profit – Preferred dividends Earnings per share = ————————————————————— Weighted average number of common shares $552,000 – $42,000 = —————————–– = $2.04 per share 250,000 shares

c) Price-earnings ratio

Market price per share = —————————–— = Earnings per share

$35.00 ———— = 17.2 $2.04

Payout ratio on common shares = Dividends paid out ÷ Profit available to common shareholders= $260,000 ÷ [($720,000 - $168,000) – ($4 x [$1,050,000 ÷ $100])] = 51.0%

Bloomcode: Synthesis Difficulty: Hard Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

6. Identify and use ratios to analyze profitability. Profitability ratios include the gross profit margin, profit margin, asset turnover, return on assets, return on equity, earnings per share, price-earnings,

Test Bank for Accounting Principles, Ninth Canadian Edition

and payout ratios. The formula, purpose, and desired result for each profitability ratio are presented in Illustration 18-18.

Test Bank for Accounting Principles, Ninth Canadian Edition

TRUE-FALSE STATEMENTS 1. The objective to financial reporting is to provide capital providers useful information for decision making. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

2. A borrower’s liquidity is very important in evaluating the safety of a long-term loan. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

3. A long-term lender would look at the company’s solvency to determine a company’s ability to survive a long period of time. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

4. Investors will want to assess the probability of receiving a dividend and the growth potential of the share price of the company. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

5. When a company is compared on an intracompany basis, the company will compare its ratios with other companies in the same industry. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

6. Industry averages are used to compare companies within the same industry. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

7. Non-financial information may include a discussion of a company’s mission, goals, objectives, and its market position. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

8. Meaningful analysis of financial statements will include either horizontal or vertical analysis, but NOT both. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

9. Vertical analysis evaluates financial statement data over different periods of time. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

10. Horizontal analysis will measure the percentage change over two or more periods. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

11. An intercompany comparative analysis involves comparing an item or financial relationship of one company with the same item or relationship in one or more competing companies. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

12. If the base-year revenue is $8,606 and the increase between the past year and the current year is $516, then the revenue increased by 6%. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

13. In a horizontal analysis, if an item has a small value in the base year and a large value in the next year, the percentage change will NOT be meaningful. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

14. In a horizontal analysis, if there is a negative amount in the base year and a positive amount in the next year, then no percentage change can be calculated. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

15. If a company has sales of $110,000 in 2023 and $154,000 in 2024, the percentage increase in sales from 2023 to 2024 is 40%.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

16. Horizontal analysis evaluates financial statements by expressing each item in a financial statement as a percentage of the base amount. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

17. Horizontal analysis is also known as common size analysis. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

18. The vertical percentage formula divides the analysis amount by the base amount. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

19. In a vertical analysis of the balance sheet, all items are expressed as a percentage of total assets. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

20. In a vertical analysis of a merchandising company, all items on the income statement are expressed as a percentage of net sales. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

21. A vertical analysis can compare companies of differing sizes. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

22. A vertical analysis of a servicing company will have all items on the income statement expressed as a percentage of revenue. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply vertical analysis.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

23. The term “vertical analysis” means that we view financial statement data from up to down (or down to up) across more than one period. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

24. Ratio analysis expresses the relationship among selected items of financial statement data. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

25. The three categories used to measure a company are ratios that analyze a company’s liquidity, profitability, and permanency. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

26. Solvency ratios are used to measure a company’s short-term ability to pay its maturing obligations and to meet unexpected needs for cash.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

27. Profitability ratios measure a company’s ability to survive over a long period of time. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

28. The current ratio is total assets divided by total liabilities. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

29. If the current assets are $841,000 and the current liabilities are $541,000, the current ratio of the company is 1.55:1. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

30. A current ratio of 2:1 means that for every $1 of current assets, the company has $2 of current liabilities. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

31. If a company has an acid-test ratio significantly higher than the current ratio, it means that the company has a significant amount of inventory. Answer: False Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

32. The receivables turnover is used to assess the liquidity of the accounts receivable. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

33. A higher receivables turnover than last year means that the company is collecting their receivables slower this year than last year. Answer: False Bloomcode: Comprehension Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

34. The collection period for accounts receivable is calculated by dividing 365 days by the receivables turnover. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

35. The inventory turnover measures the average number of times that the inventory is sold during the period. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

36. Generally, the faster inventory is sold, the more cash there is tied up in inventory and the higher chance there is of inventory becoming obsolete. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

37. Debt to total assets is a ratio that measures a company’s solvency.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

38. The higher the percentage of total debt to total assets, the greater the risk that the company will be unable to meet its maturing obligations. Answer: True Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

39. From a lender’s point of view, a high ratio of debt to total assets is desirable. Answer: False Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

40. The interest coverage ratio gives an indication of a company’s ability to make its interest payments as they come due. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

41. Free cash flow is the amount of excess cash a company generates after paying to maintain its current physical plant. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

42. Free cash flow refers to the amount of excess cash a company generates after paying to maintain its current productive capacity. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

43. Profitability ratios measure a company’s operating success for a specific period of time. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

44. Gross profit margin is the profit of a company divided by its net sales. Answer: False Bloomcode: Knowledge

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

45. Asset turnover measures how efficiently a company uses its sales to generate assets. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

46. The return on assets ratio is calculated as profit divided by average total assets. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

47. Earnings per share is a measure of the profit earned on each preferred share. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

48. Earnings per share is only expressed in terms of the common shares, NOT the preferred shares. Answer: True

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

49. A company can NEVER have negative earnings per share. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

50. The payout ratio measures the percentage of profit distributed as cash dividends. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

51. Most companies with stable earnings have a low payout ratio. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

52. Investors who are interested in purchasing company shares for income potential will be interested

Test Bank for Accounting Principles, Ninth Canadian Edition

in a company with a high payout ratio. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

53. Investors who are interested in purchasing a company’s shares for growth potential will be interested in companies with a low payout ratio. Answer: True Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

54. A company’s financial information can best be analyzed by ignoring the external information that may affect the company. Answer: False Bloomcode: Comprehension Difficulty: Easy Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

55. A strong corporate governance process, including an active board of directors and audit committee, is essential to ensuring the quality of financial information. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Recognize the limitations of financial statement analysis.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 56. Which of the following is NOT commonly used as a tool of analysis? a) productive capacity analysis b) vertical analysis c) horizontal analysis d) ratio analysis Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

57. Which one of the following is NOT a characteristic generally evaluated in analyzing financial statements? a) liquidity b) profitability c) marketability d) solvency Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

58. In analyzing the financial statements of a company, a single item on the financial statements a) should be reported in bold-faced type. b) is more meaningful if compared to other financial information. c) is significant only if it is large. d) should be accompanied by a footnote. Answer: b Bloomcode: Comprehension Difficulty: Medium

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

59. Short-term creditors are usually most interested in evaluating a) solvency. b) liquidity. c) marketability. d) profitability. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

60. Long-term creditors are usually most interested in evaluating a) liquidity and solvency. b) solvency and marketability. c) liquidity and profitability. d) profitability and solvency. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

61. Shareholders are most interested in evaluating a) liquidity and solvency. b) profitability and solvency. c) liquidity and profitability. d) marketability and solvency. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

62. A shareholder is interested in the ability of a firm to a) pay consistent dividends. b) appreciate in share price. c) survive over a long period. d) All of the choices are correct. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

63. Comparisons of financial data made within a company are called a) intracompany comparisons. b) interior comparisons. c) intercompany comparisons. d) intramural comparisons. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

64. Intercompany comparisons are useful for understanding a company’s a) short-term goals. b) ability to repay debt. c) competitive position. d) changes in financial relationships.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

65. Comparison with industry averages for diversified companies has a) less relevance than intracompany and intercompany comparisons. b) more relevance than intracompany and intercompany comparisons. c) the best results for investors. d) the same amount of relevance as intracompany and intercompany comparisons. Answer: a Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

66. An intracompany comparative analysis is the process of a) comparing an item or financial relationship within a company in the current year with one or more prior years. b) comparing an item or financial relationship within a company to the internally prepared master budget in order to highlight variances. c) comparing an item or financial relationship of one company with historical data compiled by one or more competing companies. d) comparing an item or financial relationship of one company with the same item or relationship in one or more competing companies. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

67. Ratio analysis a) compares data by expressing them as a dollar or percentage increase/decrease over two or more years. b) focuses on the relationships between items on the same financial statement. c) expresses the relationship between selected items of financial statement data within the same year. d) is the most widely used tool of financial analysis. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

68. Horizontal analysis a) compares data by expressing them as a dollar or percentage increase/decrease over two or more years. b) focuses on the relationships between items on the same financial statement. c) expresses the relationship between selected items of financial statement data within the same year. d) may be used for both intracompany and intercompany comparisons. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

69. Vertical analysis a) compares data by expressing them as a dollar or percentage increase/decrease over two or more years. b) focuses on the relationships between items on the same financial statement. c) expresses the relationship between selected items of financial statement data within the same year. d) is used only with intracompany comparisons. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

70. Intracompany basis a) compares an item within a company in the current year with one or more prior years. b) comparisons are not useful for discovering trends. c) compares an item of one company with the same item in one or more competing companies. d) comparisons are useful for understanding a company’s competitive position. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

71. Intercompany basis a) compares an item within a company in the current year with one or more prior years. b) comparisons are useful for identifying changes in financial relationships and discovering trends. c) compares an item of one company with the same item in one or more competing companies. d) comparisons are useful for discovering trends. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify the need for, and tools of, financial statement analysis. Section Reference: Basics of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

72. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021 Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 5,346 3,219 3,546 2,404 Using horizontal analysis, calculate the net sales horizontal percentage of base year for 2024, assuming that 2021 is the base year. a) 34.1% b) 151.7%

Test Bank for Accounting Principles, Ninth Canadian Edition

c) 134.1% d) 51.6% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic 73. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021 Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 5,346 3,219 3,546 2,404 Using horizontal analysis, calculate the cost of goods sold horizontal percentage of base year for 2023, assuming that 2021 is the base year. a) 56.0% b) 78.6% c) 44.0% d) 178.6% Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

74. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021 Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 5,346 3,219 3,546 2,404 Using horizontal analysis, calculate the net sales percentage change between 2023 and 2022. a) 50.4% b) 133.5% c) 33.5% d) 66.5%

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

75. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021 Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 5,346 3,219 3,546 2,404 Using horizontal analysis, calculate the gross profit percentage change between 2022 and 2021. a) 115.0% b) 13.1% c) 86.9% d) 47.5% Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

76. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021 Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 5,346 3,219 3,546 2,404 Profit from operations 756 963 194 443 Profit for the year $ 642 $ 819 $ 165 $ 377 Using horizontal analysis, calculate the profit for the year horizontal percentage of base year for 2023, assuming that 2021 is the base year. a) 154.0% b) 117.2% c) 54.0% d) 217.2% Answer: d

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

77. Horizontal analysis is used mainly in a) linear analysis. b) intercompany analysis. c) common size analysis. d) intracompany analysis. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

78. Horizontal analysis is also known as a) linear analysis. b) vertical analysis. c) trend analysis. d) common size analysis. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

79. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time a) that has been arranged from the highest number to the lowest number. b) that has been arranged from the lowest number to the highest number. c) to determine which items are in error.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) to determine the amount and/or percentage increase or decrease that has taken place. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

80. Horizontal analysis is a technique for evaluating financial statement data a) within a period of time. b) over a period of time. c) on a certain date. d) as it may appear in the future. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

81. Assume the following sales data for a company: 2025 .................... $1,000,000 2024 .................... 900,000 2023 .................... 750,000 2022 .................... 500,000 If 2022 is the base year, what is the percentage increase in sales from 2022 to 2024? a) 100% b) 180% c) 80% d) 55.5% Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

82. Horizontal analysis is appropriately performed a) only on the income statement. b) only on the balance sheet. c) only on the statement of retained earnings. d) on all three of these statements. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

83. Under which of the following scenarios may a percentage change be calculated? a) The trend of the balances is decreasing but all balances are positive. b) There is no balance in the base year. c) There is a negative balance in the base year and a negative balance in the subsequent year. d) There is a negative balance in the base year and a positive balance in the subsequent year. Answer: a Bloomcode: Comprehension Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

84. When horizontal analysis is used to measure the percentage change between any two periods of time, this is known as a) horizontal percentage of the base-period amount. b) horizontal analysis period amount. c) horizontal base period amount. d) horizontal percentage change for the period. Answer: d Bloomcode: Knowledge Difficulty: Easy

Test Bank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

85. Lovely Things Boutique reported revenue of $500,000 in 2024 and $446,500 in 2023. The horizontal percentage change from 2023 to 2024 is a) 9%. b) 10%. c) 11%. d) 12%. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

86. Software Inc. reported revenue of $500,000 in 2025, $446,500 in 2024, and $458,000 in 2023. The trend percentage for 2025 revenue using 2023 as the base period is a) 91.6%. b) 109.2%. c) 112.0%. d) 97.5%. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply horizontal analysis. Section Reference: Horizontal Analysis CPA: Financial Reporting AACSB: Analytic

87. Vertical analysis is a technique that expresses each item within a financial statement a) in dollars and cents. b) in terms of a percentage of the item in the previous year. c) in terms of a percent of a base amount. d) starting with the highest value down to the lowest value.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

88. Vertical analysis is also known as a) perpendicular analysis. b) common size analysis. c) trend analysis. d) straight-line analysis. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

89. In performing a vertical analysis, the base for prepaid expenses is a) total current assets. b) total assets. c) total liabilities . d) prepaid expenses. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

90. In performing a vertical analysis for a merchandising company, the base for sales on the income statement is a) net sales. b) total revenues.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) profit. d) cost of goods available for sale. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

91. In performing a vertical analysis for a merchandising company, the base for sales returns and allowances is a) sales. b) cost of goods sold. c) net sales. d) total revenues. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

92. In performing a vertical analysis for a service company, the base for salaries expense is a) total selling expenses. b) revenues. c) operating expenses. d) total expenses. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

93. In performing a vertical analysis, a 10% increase in net sales combined with an 8% increase in total expenses (in terms of net sales) will cause profit to a) increase by 10%. b) decrease by 10%. c) increase by 2%. d) decrease by 2%. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

94. Stella Ltd. has provided you with the following selected information from 2024 and 2023: 2024 2023 Sales $785,000 $740,000 Sales returns and allowances 55,200 52,000 Cost of goods sold 358,000 305,000 Operating expenses 285,000 255,000 Profit 86,800 128,000 Using a vertical trend analysis with net sales as a base, which of the following most accurately depicts the information stated above? a) Profit as a percentage of net sales decreased by 6.7 percentage points. b) Cost of goods sold as a percentage of net sales decreased by 5 percentage points. c) Profit as a percentage of net sales did not change significantly from 2023. d) Cost of goods sold as a percentage of net sales remained consistent from 2023. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic 95. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021 Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 2,850 2,146 1,615 1,404

Test Bank for Accounting Principles, Ninth Canadian Edition

Operating expenses 2,094 2,256 1,422 962 Profit from operations 756 963 194 443 Income tax expense 114 108 28 66 Profit for the year $ 642 $ 819 $ 165 $ 377 Using vertical analysis, calculate the cost of goods sold percentage of the base amount for 2023. a) 56.0% b) 78.6% c) 77.3% d) 178.6% Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic 96. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021 Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 2,850 2,146 1,615 1,404 Operating expenses 2,094 2,256 1,422 962 Profit from operations 756 963 194 443 Income tax expense 114 108 28 66 Profit for the year $ 642 $ 819 $ 165 $ 377 Using vertical analysis, calculate the operating expenses percentage of the base amount for 2024. a) 30.7% b) 73.5% c) 44.0% d) 16.1% Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

97. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021

Test Bank for Accounting Principles, Ninth Canadian Edition

Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 2,850 2,146 1,615 1,404 Operating expenses 2,094 2,256 1,422 962 Profit from operations 756 963 194 443 Income tax expense 114 108 28 66 Profit for the year $ 642 $ 819 $ 165 $ 377 Using vertical analysis, calculate the profit for the year percentage of the base amount for 2022. a) 85.1% b) 1.75% c) 100.0% d) 10.2% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

98. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021 Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 2,850 2,146 1,615 1,404 Operating expenses 2,094 2,256 1,422 962 Profit from operations 756 963 194 443 Income tax expense 114 108 28 66 Profit for the year $ 642 $ 819 $ 165 $ 377 Using vertical analysis, calculate the profit from operations percentage of the base amount for 2021. a) 56.0% b) 5.18% c) 44.1% d) 117.5% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

99. Selected, condensed information (in thousands) from Cote Ltd.’s income statements follows: 2024 2023 2022 2021 Net sales $12,969 $14,202 $9,441 $8,553 Cost of goods sold 7,623 10,983 5,895 6,149 Gross profit 2,850 2,146 1,615 1,404 Operating expenses 2,094 2,256 1,422 962 Profit from operations 756 963 194 443 Income tax expense 114 108 28 66 Profit for the year $ 642 $ 819 $ 165 $ 377 Using vertical analysis, calculate the gross profit percentage of the base amount for 2024. a) 22.5% b) 22.0% c) 37.4% d) 100.0% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain and apply vertical analysis. Section Reference: Vertical Analysis CPA: Financial Reporting AACSB: Analytic

100. The following liquidity ratios are available for Chad Industries: Current ratio ..................................................................................................... Acid-test ratio ................................................................................................... Receivables turnover........................................................................................ Inventory turnover ........................................................................................... How much is the collection period? a) 58 days b) 6.3 days c) 3.5 days d) 15.9% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

1.6:1 1.2:1 58 times 46 times

Test Bank for Accounting Principles, Ninth Canadian Edition

101. The following liquidity ratios are available for Chad Industries: Current ratio ..................................................................................................... Acid-test ratio ................................................................................................... Receivables turnover........................................................................................ Inventory turnover ........................................................................................... How much is the days sales in inventory? a) 46 days b) 3.5 days c) 12.6% d) 7.9 days

1.6:1 1.2:1 58 times 46 times

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic 102. The following liquidity ratios are available for Chad Industries: Current ratio ..................................................................................................... Acid-test ratio ................................................................................................... Receivables turnover........................................................................................ Inventory turnover ........................................................................................... How much is the operating cycle? a) 14.2 days b) 7.9 days c) 104 days d) 6.3 days

1.6:1 1.2:1 58 times 46 times

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

103. Winter Clothing Store had a balance in the Accounts Receivable account of $780,000 at the beginning of the year and a balance of $820,000 at the end of the year. Net credit sales during the year amounted to $5,840,000. The receivables turnover ratio was

Test Bank for Accounting Principles, Ninth Canadian Edition

a) 12.2. b) 7.3. c) 3.65. d) 1.0. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic 104. The Custom Kitchen Cabinets Store had net credit sales of $3,900,000 and cost of goods sold of $3,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The collection period of the receivables was a) 65 days. b) 56 days. c) 61 days. d) 79 days. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

105. A ratio calculated in the analysis of financial statements a) expresses a mathematical relationship between two numbers. b) shows the percentage increase from one year to another. c) restates all items on a financial statement in terms of dollars of the same purchasing power. d) is meaningful only if the numerator is greater than the denominator. Answer: a Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

106. A liquidity ratio measures the a) operating success of a company over a period of time. b) ability of a company to survive over a long period of time. c) short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. d) number of times interest is earned or “covered.” Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

107. The current ratio is a) calculated by dividing current liabilities by current assets. b) used to evaluate a company's liquidity and short-term debt-paying ability. c) used to evaluate a company's solvency and long-term debt-paying ability. d) calculated by subtracting current liabilities from current assets. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

108. Winter Clothing Store had a balance in the Accounts Receivable account of $780,000 at the beginning of the year and a balance of $820,000 at the end of the year. Net credit sales during the year amounted to $5,840,000. The collection period of the receivables was a) 30 days. b) 365 days. c) 100 days. d) 50 days. Answer: d Bloomcode: Application

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

109. The Custom Kitchen Cabinets Store had net credit sales of $3,900,000 and cost of goods sold of $3,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover ratio was a) 5.6 times. b) 6.5 times. c) 4.6 times. d) 6 times. Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

110. The Clock Store had net credit sales of $7,500,000 and cost of goods sold of $4,500,000 for the year. The average inventory for the year amounted to $1,500,000. The inventory turnover ratio for the year is a) 5 times. b) 7.5 times. c) 3 times. d) 1.67 times. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

111. Gummybear Ltd. had net credit sales of $7,500,000 and cost of goods sold of $4,500,000 for the year. The average inventory for the year amounted to $1,500,000. The days sales in inventory during the year was

Test Bank for Accounting Principles, Ninth Canadian Edition

a) 73 days. b) 49 days. c) 122 days. d) 219 days. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

112. Which one of the following would NOT be considered a liquidity ratio? a) current ratio b) inventory turnover ratio c) receivables turnover ratio d) return on assets ratio Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

113. A weakness of the current ratio is a) the difficulty of the calculation. b) that it doesn't take into account the composition of the current assets. c) that it is rarely used by sophisticated analysts. d) that it can be expressed as a percentage, as a rate, or as a proportion. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

114. A supplier to a company would be most interested in the a) asset turnover. b) profit margin. c) current ratio. d) earnings per share. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

115. Which one of the following ratios would NOT likely be used by a short-term creditor in evaluating whether to sell on credit to a company? a) acid-test ratio b) days sales in inventory c) asset turnover d) receivables turnover Answer: c Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

116. The ratios that are used to determine a company's short-term debt-paying ability are a) asset turnover, interest coverage, current ratio, and receivables turnover. b) interest coverage, inventory turnover, current ratio, and receivables turnover. c) interest coverage, current ratio, and inventory turnover. d) current ratio, receivables turnover, and inventory turnover. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios

Test Bank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

117. Now We See You Security Corporation had $250,000 of current assets and $90,000 of current liabilities before borrowing $60,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on Now We See You Security's current ratio? a) The ratio remained unchanged. b) The change in the current ratio cannot be determined. c) The ratio decreased. d) The ratio increased. Answer: c Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

118. If a company has a current ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio? Short-term Borrowing Collection of Receivables a) increase no effect b) increase increase c) decrease no effect d) decrease decrease Answer: c Bloomcode: Comprehension Difficulty: Hard Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

119. A company has a receivables turnover ratio of 10. The average gross receivables during the period are $400,000. What is the amount of net credit sales for the period? a) $40,000 b) $4,000,000 c) $480,000 d) Cannot be determined from the information given.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

120. If the average collection period is 50 days, what is the receivables turnover? a) 6.64 times b) 7.30 times c) 3.65 times d) None of the choices is correct. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

121. A general rule to use in assessing the collection period is that a) it should not exceed 30 days. b) it can be any length as long as the customer continues to buy merchandise. c) it should not greatly exceed the discount period. d) it should not greatly exceed the credit term period. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

122. An increase in the inventory turnover indicates a) the company is selling its inventory more frequently. b) the company’s cost of goods sold has decreased.

Test Bank for Accounting Principles, Ninth Canadian Edition

c) the company’s average inventory has increased. d) the company’s profitability has improved. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

123. A company has an average inventory on hand of $60,000 and the average days to sell inventory is 29.2 days. What is the cost of goods sold? a) $750,000 b) $1,752,000 c) $739,726 d) $876,000 Answer: a Bloomcode: Application Difficulty: Hard Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

124. A successful grocery store would probably have a) a low inventory turnover. b) a high inventory turnover. c) zero profit margin. d) low volume. Answer: b Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

125. An aircraft company would most likely have a) a high inventory turnover. b) low profit margin. c) high volume. d) a low inventory turnover. Answer: d Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

126. Net sales are $1,500,000, beginning total assets are $700,000, and the asset turnover is 3.0. What is the ending total asset balance? a) $500,000 b) $300,000 c) $700,000 d) $400,000 Answer: b Bloomcode: Application Difficulty: Hard Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

127. Selected financial ratios for Birdnest Incorporated are as follows: 2024 2023 2022 Current ratio 2.50:1 2.0:1 1.75:1 Accounts receivable turnover 7 times 12 times 18 times Inventory turnover 9 times 9.1 times 8.9 times Based upon an analysis of the above information, which of the following statements most accurately describes Birdnest’s financial results for 2024? a) The company is selling more inventory. b) The company is taking longer to collect its accounts receivable. c) The company’s current ratio deteriorated. d) The company’s liquidity improved. Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

128. Selected financial ratios for Front Room Decorating Ltd. are as follows: 2024 2023 2022 Current ratio 2.50:1 2.0:1 1.75:1 Accounts receivable turnover 7 times 12 times 18 times Inventory turnover 9 times 9.1 times 8.9 times Front Room’s current ratio increased in 2024. From an analysis of the above numbers, the most likely cause for the increase is a) the company’s cash has increased. b) the company’s inventory has increased. c) the company’s accounts receivable have increased. d) the company borrowed on its line of credit to repay some current liabilities. Answer: c Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

129. Selected financial ratios for Big Comfy Couch Incorporated are as follows: 2021 2020 2019 Current ratio 2.50:1 2.0:1 1.75:1 Accounts receivable turnover 7 times 12 times 18 times Inventory turnover 9 times 9.1 times 8.9 times When assessing the above ratios on an overall basis, most analysts would conclude that the company’s liquidity a) improved. b) declined. c) remained unchanged. d) cannot be determined from the information provided. Answer: b Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

130. Liquidity ratios measure a) a company’s cash flow. b) a company’s solvency. c) a company’s short-term ability to meet its maturing obligations. d) a company’s general financial performance. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

131. In general, the faster the receivables turnover, the better and more reliable the ______ is. a) collection period b) current ratio c) inventory ratio d) days sales in inventory Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

132. Inventory turnover measures the average number of times that the inventory is sold during the year. Its purpose is to measure the ______ of the inventory. a) liquidity b) validity c) solvency d) profitability

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

133. Sheldon Shoes Ltd. has provided you with the following selected information from 2023 and 2024: 2024 2023 Cash $15,500 $10,200 Accounts receivable 18,000 22,000 Short-term investments 30,000 60,000 Inventory 29,000 38,500 Total current assets 92,500 130,700 Total current liabilities 101,000 122,000 Which of the following best interprets Sheldon Shoes’ acid-test ratio analysis? a) Acid-test ratio has improved compared to prior year, increasing from 0.9 to 1.1. b) Acid-test ratio has weakened compared to prior year, decreasing from 0.8 to 0.6. c) Acid-test ratio has weakened compared to prior year, decreasing from 1.1 to 0.9. d) Acid-test ratio has improved compared to prior year, increasing from 0.6 to 0.8. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios CPA: Financial Reporting AACSB: Analytic

134. Stargate Limited reported the following on its income statement: Profit before income taxes ......... $560,000 Income tax expense .................... 140,000 Profit for the year........................ $420,000 An analysis of the income statement revealed that interest expense was $40,000. Stargate’s interest coverage ratio was a) 15 times. b) 14 times. c) 10.5 times. d) 11.5 times.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

135. The debt to total assets ratio measures a) the company's profitability. b) whether interest can be paid on debt in the current year. c) the proportion of interest paid relative to dividends paid. d) the percentage of the total assets financed by creditors. Answer: d Bloomcode: Knowledge Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

136. A company can increase its free cash flow by all of the following, except a) receiving increased dividend income. b) increasing spending on property, plant, and equipment. c) speeding up the collection of accounts receivable. d) decreasing payments to suppliers. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

137. An increase in the debt to total assets ratio indicates that the company is a) financing a greater portion of its assets with debt. b) likely to have significant growth in the future. c) having trouble meeting its debt payments.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) increasing the amount of equity invested in the business. Answer: a Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

138. Solvency ratios measure a) a company’s cash flow. b) a company’s liquidity. c) a company’s ability to survive over the long term. d) a company’s general financial performance. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

139. The higher the percentage of total debt to total assets, the greater the risk a) that the company will be able to pay dividends. b) that the company will purchase more assets. c) that the company will be able to obtain financing. d) that the company may be unable to meet its maturing obligations. Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

140. From a lender’s point of view, a) a low ratio of debt to total assets is desirable.

Test Bank for Accounting Principles, Ninth Canadian Edition

b) a high ratio of debt to total assets is desirable. c) a low ratio of debt to current assets is desirable. d) a high ratio of non-current liabilities to current liabilities is desirable. Answer: a Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

141. BBQ Incorporated has provided you with the following selected information from 2023 and 2024: 2023 2024 Interest expense $15,500 $10,700 Income tax expense 18,000 22,000 Profit for the year 68,000 60,000 Total assets 523,000 497,000 Total liabilities 285,000 234,000 Which of the following best interprets BBQ’s interest coverage ratio? a) Interest coverage ratio has improved compared to prior year, increasing from 6.5 to 8.7. b) Interest coverage ratio has improved compared to prior year, increasing from 4.4 to 5.6. c) Interest coverage ratio has weakened compared to prior year, decreasing from 3.8 to 2.7. d) Interest coverage ratio has weakened compared to prior year, decreasing from 5.2 to 4.8. Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

142. Selected information from the financial statements of Belair Corporation follows: 2024 2023 Total assets .............................................. $1,500,000 $1,615,000 Total liabilities ......................................... 822,900 906,000 Interest expense ...................................... 48,000 48,500 Income tax expense................................. 51,600 53,500 Profit for the year .................................... 205,600 208,000 What is the debt to total assets ratio for 2024? a) 61.5%

Test Bank for Accounting Principles, Ninth Canadian Edition

b) 54.9% c) 58.1% d) 1.82% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

143. Selected information from the financial statements of Belair Corporation follows: 2024 2023 Total assets .............................................. $1,500,000 $1,615,000 Total liabilities ......................................... 822,900 906,000 Interest expense ...................................... 48,000 48,500 Income tax expense................................. 51,600 53,500 Profit for the year .................................... 205,600 208,000 What is the debt to total assets ratio for 2023? a) 59.1% b) 62.4% c) 58.1% d) 56.1% Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic 144. Selected information from the financial statements of Belair Corporation follows: 2024 2023 Total assets .............................................. $1,500,000 $1,615,000 Total liabilities ......................................... 822,900 906,000 Interest expense ...................................... 48,000 48,500 Income tax expense................................. 51,600 53,500 Profit for the year .................................... 205,600 208,000 What is the interest coverage ratio for 2024? a) 4.3 times b) 23.3%

Test Bank for Accounting Principles, Ninth Canadian Edition

c) 6.4 times d) 3.2 times Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic 145. Selected information from the financial statements of Belair Corporation follows: 2024 2023 Total assets .............................................. $1,500,000 $1,615,000 Total liabilities ......................................... 822,900 906,000 Interest expense ...................................... 48,000 48,500 Income tax expense................................. 51,600 53,500 Profit for the year .................................... 205,600 208,000 What is the interest coverage ratio for 2023? a) 6.4 times b) 4.3 times c) 23.3% d) 3.2 times Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

146. Which of the following is TRUE? a) Solvency ratios measure a company’s ability to survive over the short run. b) Free cash flow is a solvency ratio. c) Long-term creditors are interested in a company’s short-term solvency. d) Debt to total assets is not a solvency ratio. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze solvency.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Solvency Ratios CPA: Financial Reporting AACSB: Analytic

147. Selected information from the financial statements of two competitor companies follows: Ardel Corporation Playa Limited Total assets, beginning of year................................ $426,000 $418,000 Total assets, end of year .......................................... 514,000 546,000 Total shareholders’ equity, beginning of year ........ 278,000 302,000 Total shareholders’ equity, end of year .................. 306,000 372,000 Net sales .................................................................. 686,000 793,000 Gross profit .............................................................. 187,500 263,000 Profit for the year .................................................... 72,300 115,000 What is the gross profit margin for Ardel Corporation and Playa Limited, respectively? a) 38.6% and 43.7% b) 27.3% and 33.2% c) 36.5% and 48.2% d) 2.59% and 2.29% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

148. Selected information from the financial statements of two competitor companies follows: Ardel Corporation Playa Limited Total assets, beginning of year................................ $426,000 $418,000 Total assets, end of year .......................................... 514,000 546,000 Total shareholders’ equity, beginning of year ........ 278,000 302,000 Total shareholders’ equity, end of year .................. 306,000 372,000 Net sales .................................................................. 686,000 793,000 Gross profit .............................................................. 187,500 263,000 Profit for the year .................................................... 72,300 115,000 What is the profit margin for Ardel Corporation and Playa Limited, respectively? a) 14.5% and 21.7% b) 10.5% and 14.5% c) 14.1% and 21.1% d) 9.5% and 6.9% Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic 149. Selected information from the financial statements of two competitor companies follows: Ardel Corporation Playa Limited Total assets, beginning of year................................ $426,000 $418,000 Total assets, end of year .......................................... 514,000 546,000 Total shareholders’ equity, beginning of year ........ 278,000 302,000 Total shareholders’ equity, end of year .................. 306,000 372,000 Net sales .................................................................. 686,000 793,000 Gross profit .............................................................. 187,500 263,000 Profit for the year .................................................... 72,300 115,000 What is the asset turnover for Ardel Corporation and Playa Limited, respectively? a) 1.6 times and 1.9 times b) 2.3 times and 1.8 times c) 1.3 times and 1.5 times d) 1.5 times and 1.6 times Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic 150. Selected information from the financial statements of two competitor companies follows: Ardel Corporation Playa Limited Total assets, beginning of year................................ $426,000 $418,000 Total assets, end of year .......................................... 514,000 546,000 Total shareholders’ equity, beginning of year ........ 278,000 302,000 Total shareholders’ equity, end of year .................. 306,000 372,000 Net sales .................................................................. 686,000 793,000 Gross profit .............................................................. 187,500 263,000 Profit for the year .................................................... 72,300 115,000 What is the return on assets for Ardel Corporation and Playa Limited, respectively? a) 15.4% and 23.9% b) 17.0% and 27.5% c) 14.1% and 21.1%

Test Bank for Accounting Principles, Ninth Canadian Edition

d) 24.8% and 34.1% Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic 151. Selected information from the financial statements of two competitor companies follows: Ardel Corporation Playa Limited Total assets, beginning of year................................ $426,000 $418,000 Total assets, end of year .......................................... 514,000 546,000 Total shareholders’ equity, beginning of year ........ 278,000 302,000 Total shareholders’ equity, end of year .................. 306,000 372,000 Net sales .................................................................. 686,000 793,000 Gross profit .............................................................. 187,500 263,000 Profit for the year .................................................... 72,300 115,000 What is the return on equity for Ardel Corporation and Playa Limited, respectively? a) 26.0% and 38.1% b) 24.8% and 34.1% c) 23.6% and 30.9% d) 17.0% and 27.5% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

152. The asset turnover ratio measures a) how often a company replaces its assets. b) how efficiently a company uses its assets to generate sales. c) the portion of the assets that have been financed by creditors. d) the overall rate of return on assets. Answer: b Bloomcode: Comprehension

Test Bank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

153. The profit margin is calculated by dividing a) sales by cost of goods sold. b) gross profit by net sales. c) profit by shareholders' equity. d) profit by net sales. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

154. Penny Corporation had profit of $250,000 and paid dividends to common shareholders of $50,000 in 2024. The weighted average number of shares issued in 2024 was 50,000 shares. Penny Corporation's common shares are selling for $40 per share on the Toronto Stock Exchange. Penny Corporation's price-earnings ratio is a) 2 times. b) 8 times. c) 10 times. d) 5 times. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

155. Shannon Corporation had profit of $250,000 and paid dividends to common shareholders of $50,000 in 2024. The weighted average number of shares issued in 2024 was 50,000 shares. Shannon Corporation's common shares are selling for $40 per share on the Toronto Stock Exchange. Shannon Corporation's payout ratio is

Test Bank for Accounting Principles, Ninth Canadian Edition

a) $5 per share. b) 25%. c) 20%. d) 12.5%. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

156. Investors would most likely favour a company with which of the following ratios if they wished to purchase shares for the purpose of capital appreciation (growth)? a) a low payout ratio b) a low price-earnings ratio c) a high payout ratio d) a high free cash flow Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

157. Earnings per share is calculated a) only for common shares. b) only for preferred shares. c) for common and preferred shares. d) only for bonds. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

158. Which of the following is NOT a profitability ratio? a) payout ratio b) profit margin c) interest coverage d) gross profit margin Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

159. The ratio that uses the weighted average number of common shares in the denominator is the a) price-earnings ratio. b) return on equity. c) earnings per share. d) payout ratio. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

160. An increase in the gross profit margin combined with a decrease in the profit margin indicate to investors that the company’s a) sales decreased during the period. b) cost of goods sold increased during the period as a percentage of sales. c) profit increased during the period as a percentage of sales. d) operating expenses increased during the period as a percentage of sales. Answer: d Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

161. An increase in a company’s gross profit margin indicates that the company a) has increased sales volume. b) has increased selling prices. c) has decreased its cost of goods sold. d) potentially any of the above could have occurred. Answer: d Bloomcode: Comprehension Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

162. The price-earnings ratio measures a) the ratio of the market price of each share to the earnings per share. b) the ratio of the market price of each share to the total profit for the year. c) the ratio of the sales price to the profit. d) cash flow per share. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

163. Because of the importance of this ratio, publicly traded companies are required to report it directly on the income statement. a) payout ratio b) EPS ratio c) asset turnover ratio d) profit margin ratio Answer: b

Test Bank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

164. A higher price-earnings ratio generally means that a) investors favour that company and have a high expectation of future profitability. b) investors do not expect future profitability. c) investors feel the shares are underpriced. d) investors will not see growth or expansion. Answer: a Bloomcode: Comprehension Difficulty: Easy Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

165. Gilbert’s Hydraulics Ltd. has provided you with the following selected information from 2023 and 2024: 2024 2023 Sales $785,000 $740,000 Sales returns and allowances 55,200 52,000 Cost of goods sold 358,000 305,000 Operating expenses 285,000 255,000 Profit for the year 86,800 128,000 Which of the following best interprets Gilbert’s profit margin? a) Profit margin has weakened compared to prior year, decreasing from 45.6% to 41.2%. b) Profit margin has weakened compared to prior year, decreasing from 18.6% to 11.9%. c) Profit margin has weakened compared to prior year, decreasing from 17.3% to 11.1%. d) Profit margin has weakened compared to prior year, decreasing from 55.7% to 50.9%. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

166. Ratios are used as tools in financial analysis a) instead of horizontal and vertical analyses. b) because they may provide information that is not apparent from inspection of the individual components of the ratio. c) because even single ratios by themselves are quite meaningful. d) because they are prescribed by GAAP. Answer: b Bloomcode: Comprehension Difficulty: Medium Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

167. A limitation in calculating ratios in financial statement analysis is that a) it requires comparisons. b) no one other than management would be interested in them. c) some financial statements contain many estimates. d) they seldom identify problem areas in a company. Answer: c Bloomcode: Comprehension Difficulty: Medium Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

168. The use of alternative accounting principles a) is not a problem in ratio analysis because the notes to the statements disclose the principles used. b) may be a problem in ratio analysis even if disclosed. c) is not a problem in ratio analysis since eventually all principles will lead to the same end. d) is only a problem in ratio analysis with respect to inventory. Answer: b Bloomcode: Comprehension Difficulty: Medium Learning Objective: Recognize the limitations of financial statement analysis.

Test Bank for Accounting Principles, Ninth Canadian Edition

Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

169. Although depreciation expense and the carrying amount of property, plant, and equipment may be different in one or more periods because of the choice of depreciation methods, in total, over the life of the assets, there is no difference. This is called a) difference in assumptions. b) permanent difference. c) timing difference. d) irrelevant differences. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

170. There are no standard ratio formulas incorporating a) comprehensive income. b) profit. c) net sales. d) total assets. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

171. The CEO and CFO of a publicly traded company must ensure and personally declare that the reported financial information is a) accurate. b) relevant. c) understandable. d) All of the choices are correct.

Test Bank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

172. Which of the following is NOT considered an economic measure that could have a significant impact on a company’s performance? a) changes in supply and demand b) unemployment c) rate of interest d) natural disasters Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

173. Nucles Inc. reported the following selected information (in millions) for the year ended October 31, 2024: Total revenue ........................................................... $25,310 Profit for the year .................................................... 6,475 Other comprehensive income (loss) ....................... (2,460) Total comprehensive income .................................. 4,015 How much is the profit margin using profit as the numerator? a) 29.6% b) 25.6% c) 15.9% d) 18.8% Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

174. Nucles Inc. reported the following selected information (in millions) for the year ended October 31, 2024: Total revenue ........................................................... $25,310 Profit for the year .................................................... 6,475 Other comprehensive income (loss) ....................... (2,460) Total comprehensive income .................................. 4,015 How much is the profit margin using total comprehensive income as the numerator? a) 29.6% b) 25.6% c) 15.9% d) 18.8% Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

175. Which of the following is TRUE? a) Most financial ratios include other comprehensive income. b) Private companies following ASPE do not report comprehensive income. c) Analysts will not adjust profitability ratios to incorporate the effect of total comprehensive income. d) There are standard ratio formulas incorporating comprehensive income. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

176. Which of the following is FALSE? a) Companies with full and transparent disclosure practices have high quality information. b) A strong corporate governance process is not essential to ensuring the quality of information. c) A company that has high quality information that is complete will not confuse users of the financial statements.

Test Bank for Accounting Principles, Ninth Canadian Edition

d) An active board of directors is essential to ensuring the quality of information. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

177. When companies use different accounting policies, which of the following is FALSE? a) Solvency and profitability ratios would not be affected. b) Intracompany comparability may be hindered. c) Analysts adjust financial statement data to improve comparability of ratios. d) Intercompany comparability may be hindered. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Recognize the limitations of financial statement analysis. Section Reference: Limitations of Financial Statement Analysis CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 178. Set A For each of the ratios or measures listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio. Code: L = P = S =

Liquidity ratio Profitability ratio Solvency ratio

____

Price-earnings

____

Asset turnover

____

Receivables turnover

____

Earnings per share

____

Payout ratio

____

Current ratio

____

Free cash flow

____

Debt to total assets

____

Interest coverage

____ 10.

Inventory turnover

Test Bank for Accounting Principles, Ninth Canadian Edition

179. Set B Match the ratios or measures with the appropriate ratio calculation by entering the appropriate letter in the space provided. A. B. C. D. E.

Current ratio Operating cycle Profit margin Asset turnover Price-earnings

____

Cost of goods sold 1. ————————— Average inventory

____

Profit 2. ————— Net sales

____

Cash dividends 3. ——————— Profit

____

Net sales 4. ——————— Average assets

____

Current assets 5. ———————— Current liabilities

____

365 days 6. —————————— Receivables turnover

____

Market price per share 7. ——————————— Earnings per share

F. G. H. I. J.

Interest coverage Inventory turnover Collection period Days sales in inventory Payout ratio

Test Bank for Accounting Principles, Ninth Canadian Edition

____

365 days 8. ———————— Inventory turnover

____

Profit before income taxes and interest expense 9. —————————————————————— Interest expense

____ 10. Days sales in inventory + Collection period

Test Bank for Accounting Principles, Ninth Canadian Edition

ANSWERS TO MATCHING QUESTIONS 178. Set A P__

1. Price-earnings

P__

2. Asset turnover

L__

3. Receivables turnover

P__

4. Earnings per share

P__

5. Payout ratio

L__

6. Current ratio

S__

7. Free cash flow

S__

8. Debt to total assets

S__

9. Interest coverage

L__

10. Inventory turnover

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Identify and use ratios to analyze liquidity. Section Reference: Liquidity Ratios Learning Objective: Identify and use ratios to analyze solvency. Section Reference: Solvency Ratios Learning Objective: Identify and use ratios to analyze profitability. Section Reference: Profitability Ratios CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

179. Set B 1.

10.

APPENDIX B: SALES TAXES EXERCISES Exercise 1 For the following provinces: New Brunswick, Newfoundland, Alberta, British Columbia, Yukon, identify which sales tax or taxes they charge. Solution 1 New Brunswick Newfoundland Alberta British Columbia Yukon

HST HST GST GST and PST GST

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Exercise 2 For the following provinces: Nunavut, Manitoba, Ontario, Prince Edward Island, Saskatchewan, identify which sales tax or taxes they charge. Solution 2 Nunavut Manitoba Ontario Prince Edward Island Saskatchewan

GST GST and PST HST HST GST and PST

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Exercise 3 Identify the three types of sales taxes and to whom the remittance must be made.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 3 There are three types of sales taxes: 1) Goods and services tax (GST) 2) Provincial sales tax (PST) 3) Harmonized sales tax (HST) GST and HST are remitted to the Receiver General for Canada, which is the collection agent for the federal government (and in the case of HST also the provincial government). PST is remitted to the Minister of Finance in the applicable province. Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Exercise 4 Here is a list of some typical goods and services: Office supplies Ready-to-eat pizza One dozen doughnuts Prescription drugs Uncooked pizza Municipal water Instructions For each item on the list, identify its GST/HST tax status as taxable, zero-rated, or exempt. Solution 4 Office supplies – taxable Ready-to-eat pizza – taxable One dozen doughnuts – zero-rated Prescription drugs – zero-rated Uncooked pizza – zero-rated Municipal water – exempt Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Test Bank for Accounting Principles, Ninth Canadian Edition

Exercise 5 Here is a list of some typical goods and services: Banking services Dental services Building materials Uncooked pizza Prescription drugs Instructions For each item on the list, identify its GST/HST tax status as taxable, zero-rated, or exempt. Solution 5 Banking services – exempt Dental services – exempt Building materials – taxable Uncooked pizza – zero-rated Prescription drugs – zero-rated Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Exercise 6 Maine Event is a new salon located in Winnipeg, Manitoba. The following information relates to transactions that took place in June. Maine Event uses a perpetual inventory system and uses the earnings approach for revenue recognition. June 3 In the salon, $500 worth of hair services were performed for cash. These services are subject to PST of 7% and GST. 4 A sale of $100 worth of products is made on account to James Zing. The cost of the product to Maine was $85. 10 James Zing returned $25 worth of product. This product had a cost of $15 and was returned to goods for resale. 30 James Zing paid his outstanding balance. Instructions Prepare the journal entries to record these transactions. . Solution 6 June 3 Cash ................................................................................................

560

Test Bank for Accounting Principles, Ninth Canadian Edition

Service Revenue ..................................................................... PST Payable ($500 x 7%) ........................................................ GST Payable ($500 x 5%) ........................................................ 4

500 35 25

Accounts Receivable ...................................................................... Sales ........................................................................................ PST Payable ($100 x 7%) ........................................................ GST Payable ($100 x 5%) ........................................................

112

Cost of Goods Sold ......................................................................... Merchandise Inventory ...........................................................

Sales Returns and Allowances ....................................................... PST Payable ($25 x 7%) .................................................................. GST Payable ($25 x 5%) .................................................................. Accounts Receivable...............................................................

25.00 1.75 1.25

Merchandise Inventory .................................................................. Cost of Goods Sold .................................................................

Cash ($112.00 – $28.00) .................................................................. Accounts Receivable...............................................................

100 7 5

28.00

Exercise 7 The following information relates to transactions that took place in April for Trip n Trail Inc. Trip n Trail is located in Trail, BC, uses a perpetual inventory system, and uses the earnings approach for revenue recognition. Apr. 2 In the shop, a total of $1,500 worth of backpack repair services were performed for cash. These services are subject to PST of 7% and GST. 6 Sales of $12,000 worth of camping-related merchandise were made on account to Trips R Us. The cost of the products to Trip was $8,500. 12 A return of $2,500 worth of products received from Trips R Us as they ordered an incorrect pack size. This product had a cost of $1,500 and was returned to goods available for sale. 30 Trips R Us settles their outstanding balance. Instructions Prepare the journal entries to record these transactions.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 7 Apr. 2 Cash ................................................................................................ Service Revenue ..................................................................... PST Payable ($1,500 x 7%) ..................................................... GST Payable ($1,500 x 5%) ..................................................... 6

1,680 1,500 105 75

Accounts Receivable ...................................................................... Sales ........................................................................................ PST Payable ($12,000 x 7%) ................................................... GST Payable ($12,000 x 5%) ...................................................

13,440

Cost of Goods Sold ......................................................................... Merchandise Inventory ...........................................................

8,500

Sales Returns and Allowances ....................................................... PST Payable ($2,500 x 7%) ............................................................. GST Payable ($2,500 x 5%) ............................................................. Accounts Receivable...............................................................

2,500 175 125

Merchandise Inventory .................................................................. Cost of Goods Sold .................................................................

1,500

Cash ($13,440 – $2,800) .................................................................. Accounts Receivable...............................................................

10,640

12,000 840 600

8,500

2,800

1,500

10,640

Exercise 8 Maine Event is a new salon located in Saint John, New Brunswick. The following information relates to transactions that took place in June. Maine Event uses a perpetual inventory system and uses the earnings approach for revenue recognition. June 3 In the salon, $500 worth of hair services were performed for cash. These services are subject to HST of 15%. 4 A sale of $100 worth of products is made on account to James Zing. The cost of the product to Maine was $85. 10 James Zing returned $25 worth of product. This product had a cost of $15 and was returned to goods available for sale. 30 James Zing paid his outstanding balance.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Prepare the journal entries to record these transactions. . Solution 8 June 3 Cash ................................................................................................ Service Revenue ..................................................................... HST Payable ($500 x 15%) ...................................................... 4

575 500 75

Accounts Receivable ...................................................................... Sales ........................................................................................ HST Payable ($100 x 15%) ......................................................

115

Cost of Goods Sold ......................................................................... Merchandise Inventory ...........................................................

Sales Returns and Allowances ....................................................... HST Payable ($25 x 15%)................................................................ Accounts Receivable...............................................................

25.00 3.75

Merchandise Inventory .................................................................. Cost of Goods Sold .................................................................

Cash ($115.00 – $28.75) .................................................................. Accounts Receivable...............................................................

86.25

100 15

28.75

86.25

Exercise 9 The following information relates to transactions that took place in April for Trip n Trail Inc. Trip n Trail is located in Fort Erie, Ontario, uses a perpetual inventory system, and uses the earnings approach for revenue recognition. April 2 In the shop a total of $1,500 worth of backpack repair services were performed for cash. These services are subject to HST of 13%. 6 Sales of $12,000 worth of camping-related merchandise were made on account to Trips R Us. The cost of the products to Trip was $8,500. 12 A return of $2,500 worth of products received from Trips R Us as they ordered an incorrect pack size. This product had a cost of $1,500 and was returned to goods available for sale. 30 Trips R Us settles their outstanding balance.

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions Prepare the journal entries to record these transactions. Solution 9 Apr. 2 Cash ................................................................................................ Service Revenue ..................................................................... HST Payable ($1500 x 13%) .................................................... 6

1,695 1,500 195

Accounts Receivable ...................................................................... Sales ........................................................................................ HST Payable ($12,000 x 13%) .................................................

13,560

Cost of Goods Sold ......................................................................... Merchandise Inventory ...........................................................

8,500

Sales Returns and Allowances ....................................................... HST Payable ($2,500 x 13%) ........................................................... Accounts Receivable...............................................................

2500 325

Merchandise Inventory .................................................................. Cost of Goods Sold .................................................................

1,500

Cash ($13,560 – $2,825) .................................................................. Accounts Receivable...............................................................

10,735

12,000 1,560

8,500

2,825

1,500

10,735

Exercise 10 Great Green Landscaping sells lawn maintenance equipment. They use a perpetual inventory system and their operations are located in Manitoba. The Manitoba PST rate is 7%. The following transactions took place in May: May 6 Purchased 350 trimmers for resale at $100 each before taxes from Trim It with terms 2/10, net 30, FOB shipping point. 16 Returned two of the trimmers as they were defective. 22 Picked up $250 worth of supplies to be used in the sales office and paid with cash. 31 Purchased two desks to be used in the sales office on account for $450, plus applicable taxes. Instructions Prepare the journal entries to record these transactions.

Test Bank for Accounting Principles, Ninth Canadian Edition

Solution 10 May 6 Merchandise Inventory (350 × $100) .............................................. GST Recoverable ($35,000 × 5%) ................................................... Accounts Payable ................................................................... 16

35,000 1,750 36,750

Accounts Payable ........................................................................... GST Recoverable ($200 x 5%) ................................................. Merchandise Inventory ...........................................................

210

Supplies ($250 + $17.50 PST) ......................................................... GST Recoverable ($250 x 5%)......................................................... Cash.........................................................................................

267.50 12.50

Furniture ($450 + $31.50 PST) ........................................................ GST Recoverable ($450 × 5%) ........................................................ Accounts Payable ...................................................................

481.50 22.50

10 200

280.00

504.00

Bloomcode: Application Difficulty: Medium Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

Exercise 11 Courts Plus sells tennis equipment. They have a perpetual inventory system and their store is located in Ontario with an HST rate of 13%. The following transactions took place in April: April 6 With terms 2/10, net 30, FOB shipping point Courts Plus purchased 350 racquets for resale at $120 each before taxes from Racquets Inc. 16 As part of their spring-cleaning efforts, the owner picked up $400 worth of cleaning supplies and paid using company cash. 22 Due to defects, Courts returned two racquets. 30 Purchased one new display unit on account for $500, plus applicable taxes. Instructions Prepare the journal entries to record these transactions. Solution 11 April 6 Merchandise Inventory (350 × $120) .............................................. HST Recoverable ($42,000 × 13%) ................................................. Accounts Payable ................................................................... 16

Supplies .......................................................................................... HST Recoverable ($400 x 13%) ......................................................

42,000 5,460 47,460 400 52

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash......................................................................................... 22

452

Accounts Payable ........................................................................... HST Recoverable ($240 x 13%)............................................... Merchandise Inventory ...........................................................

231.20

Furniture ......................................................................................... HST Recoverable ($500 × 13%) ...................................................... Accounts Payable ...................................................................

500 65

31.20 200.00

565

Exercise 12 Home Essence sells home accessories and other decorating supplies. They have a perpetual inventory system and their business is located in British Columbia. BC’s PST rate is 7%. The following transactions took place in May: May 6 A batch of 250 decorative vases were purchased for resale at $50 each before taxes from Sky View Decor Ltd. with terms 2/10, net 30, FOB shipping point. 16 Returned six of the vases as they were damaged in their packaging. 22 Picked up $100 worth of supplies for the office and paid with cash. 31 Purchased a display case for the store on account for $600, plus applicable taxes. Instructions Prepare the journal entries to record these transactions. Solution 12 May 6 Marchandise Inventory (250 × $50)................................................ GST Recoverable ($12,500 × 5%) ................................................... Accounts Payable ................................................................... 16

12,500 625 13,125

Accounts Payable ........................................................................... GST Recoverable ($300 x 5%) ................................................. Merchandise Inventory (6 x $50) ............................................

315

Supplies ($100 + $7 PST) ................................................................ GST Recoverable ($100 x 5%)......................................................... Cash.........................................................................................

107 5

Furniture ($600 + $42 PST) ............................................................. GST Recoverable ($600 × 5%) ........................................................

642 30

15 300

112

Test Bank for Accounting Principles, Ninth Canadian Edition

Accounts Payable ...................................................................

672

Exercise 13 Hockey Hus sells hockey equipment. They have a perpetual inventory system and their store is located in Ontario with an HST rate of 13%. The following transactions took place in October: Oct. 6 Hockey Hus purchased a skid of skates for $45,000 before taxes with terms 2/10, net 30, FOB shipping point from Zip Zag Inc. 16 Paid $1,000 for cleaning supplies for the store. 22 Due to defects in the blades, Hus returned five pairs of the skates for a credit of $2,000 before applicable taxes. 31 Ashwin purchased on account an additional check-out counter for the store for $3,500, plus applicable taxes. Instructions Prepare the journal entries to record these transactions. Solution 13 Oct. 6 Merchandise Inventory .................................................................. HST Recoverable ($45,000 × 13%) ................................................. Accounts Payable ................................................................... 16

45,000 5,850 50,850

Supplies .......................................................................................... HST Recoverable ($1,000 x 13%) ................................................... Cash.........................................................................................

1,000 130

Accounts Payable ........................................................................... HST Recoverable ($200 x 13%)............................................... Merchandise Inventory ...........................................................

2,260

Furniture ......................................................................................... HST Recoverable ($3,500 × 13%) ................................................... Accounts Payable ...................................................................

3,500 455

1130

260 2,000

Bloomcode: Application Difficulty: Medium Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting

3,955

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 14 Window Blinds is located in Ontario with an HST rate of 13%. At the end of the quarter, Window Blinds had the following balances in their HST accounts: HST Recoverable $12,000 HST Payable 20,000 Instructions Prepare the journal entry or entries related to their HST filing. Solution 14 HST Payable ..................................................................................................... HST Recoverable .................................................................................... Cash ........................................................................................................

20,000 12,000 8,000

Bloomcode: Application Difficulty: Medium Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Exercise 15 Online Gennie is located in Manitoba and at the end of the quarter Online Gennie had the following balances in their GST and PST accounts: GST Recoverable $48,000 GST Payable 80,000 PST Payable 30,000 Instructions a) Prepare the journal entry or entries related to their GST filing. b) Prepare the journal entry or entries related to their PST filing. c) For each of the above, indicate to whom payment if any should be made. Solution 15 a) GST Payable...................................................................................................... GST Recoverable .................................................................................... Cash ........................................................................................................ b) PST Payable ......................................................................................................

80,000 48,000 32,000

30,000

Test Bank for Accounting Principles, Ninth Canadian Edition

Cash ........................................................................................................

30,000

c) GST is payable to the Receiver General for Canada and the PST to the Minister of Finance for Manitoba. Bloomcode: Application Difficulty: Medium Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Exercise 16 Located in Saskatchewan, Watrous Resort at the end of the quarter had the following balances in their GST accounts: GST Recoverable $22,000 GST Payable 56,000 Instructions a) Prepare the journal entry or entries related to their GST filing. b) Indicate to whom payment if any should be made. Solution 16 a) GST Payable...................................................................................................... GST Recoverable .................................................................................... Cash ........................................................................................................

56,000 22,000 34,000

b) GST is payable to the Receiver General for Canada. Bloomcode: Application Difficulty: Medium Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Exercise 17 Located in Winnipeg, Manitoba, Polar Bears Gift Shop had the following balances in their GST and PST accounts at the end of the quarter: GST Recoverable $22,500 GST Payable 41,500 PST Payable 13,500

Test Bank for Accounting Principles, Ninth Canadian Edition

Instructions a) Prepare the journal entry or entries related to their GST filing. b) Prepare the journal entry or entries related to their PST filing. c) For each of the above, indicate to whom payment if any should be made. Solution 17 a) GST Payable...................................................................................................... GST Recoverable .................................................................................... Cash ........................................................................................................

41,500

b) PST Payable ...................................................................................................... Cash ........................................................................................................

13,500

22,500 19,000

13,500

Exercise 18 Located in PEI with an HST rate of 15%, Red Braids Hockey Hus had the following balances in their HST accounts at the end of the quarter: HST Recoverable $ 68,000 HST Payable 105,500 Instructions Prepare the journal entry or entries related to their HST filing. Solution 18 HST Payable ..................................................................................................... HST Recoverable .................................................................................... Cash ........................................................................................................ Bloomcode: Application Difficulty: Medium Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting

105,500 68,000 37,500

Test Bank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Exercise 19 Fine Equipment uses a perpetual inventory system and is located in Vancouver, British Columbia, where the PST rate is 7%. Fine Equipment uses the earnings approach for revenue recognition. The following transactions took place in March: Mar. 1 Paid rent of $1,250 plus PST and GST for March to the landlord. 5 Purchased $17,875 (plus applicable taxes) worth of camping goods on account from Keyboard Central. 9 A new laptop was purchased for the office to update their equipment. The price of the laptop was $1,500, plus taxes. 12 Returned $3,500 of camping goods to Keyboard Central. 18 Sold $5,300 of camping gear, plus applicable taxes, to Outdoor Adventures. The cost of the camping gear to Fine Equipment was $2,200. 30 Received an invoice of $120 plus PST and GST from TELUS for telephone services for March. 30 Issued a cheque to the Receiver General for Canada for the quarterly remittance of GST. The GST Payable was $6,800 and the GST Recoverable was $6,200 at the end of the quarter. Instructions Prepare the journal entries for the month of March. Solution 19 Mar. 1 Rent Expense ($1,250 + PST $87.50) .............................................. GST Recoverable ($1,250 x 5%)...................................................... Cash......................................................................................... 5

1,337.50 62.50 1,400.00

Merchandise Inventory .................................................................. GST Recoverable ($17,875 x 5%).................................................... Accounts Payable ...................................................................

17,875.00 893.75

Equipment ($1,500 + PST $105) ..................................................... GST Recoverable ($1,500 x 5%)...................................................... Cash.........................................................................................

1,605 75

Accounts Payable ........................................................................... GST Recoverable ($3,500 x 5%) .............................................. Merchandise Inventory ...........................................................

3,675

Accounts Receivable ...................................................................... Sales ........................................................................................ GST Payable ($5,300 x 5%) ..................................................... PST Payable ($5,300 x 7%) .....................................................

5,936

18,768.75

1,680

175 3,500

5,300 265 371

Test Bank for Accounting Principles, Ninth Canadian Edition

Cost of Goods Sold ......................................................................... Merchandise Inventory ...........................................................

2,200

Telephone Expense ($120 + PST $8.40) ......................................... GST Recoverable ($120 x 5%)......................................................... Accounts Payable ...................................................................

128.40 6.00

GST Payable.................................................................................... GST Recoverable..................................................................... Cash.........................................................................................

6,800

2,200

134.40

6,200 600

Bloomcode: Application Difficulty: Medium Learning Objective: Record sales taxes collected by businesses on good and services. Section Reference: Sales Taxes Collected on Receipts Learning Objective: Record sales taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Exercise 20 Ellie Smith is located in Gander, Newfoundland and provides bookkeeping services to local businesses. The HST rate in her area is 15%. The following transactions took place in January: Jan. 1 Purchased supplies of $1,500, plus applicable taxes for cash. 5 Purchased new office furniture. The cost was $5,500 and the store added in applicable taxes to her bill, which she paid in cash. 15 Invoiced Cod Cuts for bookkeeping services of $1,600, plus appropriate taxes. 19 Paid $350 to have the office copier repaired. 30 Collected the amount due from Cod Cuts. 31 Paid the quarterly remittance of HST to the Receiver General. The balance in the accounts consisted of HST Payable $12,350 and HST Recoverable of $1,885. Instructions Prepare the required journal entries. Solution 20 Jan. 1 Supplies .......................................................................................... HST Recoverable ($1,500 x 15%) ................................................... Cash......................................................................................... 5

Furniture .........................................................................................

1,500 225 1,725 5,500

Test Bank for Accounting Principles, Ninth Canadian Edition

HST Recoverable ($5,500 x 15%) ................................................... Cash.........................................................................................

825

Accounts Receivable ...................................................................... Service Revenue ..................................................................... HST Payable ($1,600 x 15%) ...................................................

1,840

Repairs Expense ............................................................................. HST Recoverable ($350 x 15%) ...................................................... Cash.........................................................................................

350.00 52.50

Cash ................................................................................................ Accounts Receivable...............................................................

1,840

HST Payable ................................................................................... HST Recoverable .................................................................... Cash.........................................................................................

12,350

6,325

1,600 240

402.50

1,840

Bloomcode: Application Difficulty: Medium Learning Objective: Record sales taxes collected by businesses on good and services. Section Reference: Sales Taxes Collected on Receipts Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

1,885 10,465

Testbank for Accounting Principles, Ninth Canadian Edition

APPENDIX B: SALES TAXES TRUE-FALSE STATEMENTS 1. GST is a provincial tax on most goods and services. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

2. GST is 5% on most transactions. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

3. GST is NOT charged on basic grocery items. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

4. HST is a combined or harmonized tax consisting of GST and provincial sales tax. Answer: True

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

5. HST does NOT have the same regulations as GST. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

6. Provincial sales taxes are remitted to the Receiver General for Canada. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

7. HST is remitted to the Receiver General for Canada. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

8. Provincial sales taxes are remitted to the Minister of Finance of the province.

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

9. The PST percentage does NOT vary from province to province. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

10. GST returns are submitted quarterly for most registrants. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

11. Zero-rated supplies include uncooked pizza. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

12. GST charged on a sale is recorded in the GST Payable account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes collected by businesses on good and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

13. When inventory is purchased for resale, its GST is recorded as GST payable. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

14. PST is NOT charged on goods for resale. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

15. Furniture purchased for the office would include an entry for GST recoverable. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting

Testbank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

16. When office supplies are purchased, the amount of HST paid would be recorded in the HST Recoverable account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

17. When purchasing furniture, the amount of taxes paid (PST/GST) is included in the amount recorded in the Furniture account. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

18. When remitting GST, it is appropriate to net the GST Payable and GST Recoverable accounts. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

19. If Company A has NOT received payment from a customer purchasing on account, the tax is NOT due to the government until that payment is received. Answer: False

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

20. At the end of the reporting period for GST, the amount of GST payable is added to any amount of GST recoverable. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 21. The goods and services tax is payable to the a) Minister of Finance. b) Canada Revenue Agency. c) Receiver General for Canada. d) Bank of Canada. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

22. Provinces that have harmonized sales tax include all of the following, EXCEPT a) Ontario. b) Nova Scotia. c) Manitoba. d) Newfoundland. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

23. If HK Coats located in Alberta ships adult jackets to a Manitoba customer, it must charge a) just Manitoba PST. b) just GST. c) both GST and Alberta PST. d) both GST and Manitoba PST. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax.

Testbank for Accounting Principles, Ninth Canadian Edition

Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

24. Which province(s) apply both PST and GST to the selling price of a taxable good or service? a) British Columbia b) Manitoba c) Saskatchewan d) All of the above provinces apply both PST and GST to the selling price of a taxable good or service. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

25. GST applies at a rate of ______ on most transactions. a) 7% b) 5% c) 8% d) 6% Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

26. Zero-rated supplies include all of the following, EXCEPT a) prescription drugs. b) six or more doughnuts. c) ready-to-eat pizza. d) uncooked pizza. Answer: c Bloomcode: Knowledge

Testbank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

27. Taxable supplies include a) uncooked pizza. b) two doughnuts. c) dental services. d) prescription drugs. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

28. PST is remitted to the a) Minister of Finance of the province. b) Canada Revenue Agency. c) Bank of Canada. d) Receiver General for Canada. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

29. HST is remitted to the a) Minister of Finance. b) Canada Revenue Agency. c) Bank of Canada. d) Receiver General for Canada. Answer: d

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

30. Goods exempt from PST include a) children’s clothing. b) residential rent. c) textbooks. d) All of the above are exempt from PST. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

31. Which territories only charge GST? a) Northwest Territories b) Nunavut c) Yukon d) All of the above only charge GST. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

32. HST is charged by which province? a) Ontario b) Alberta c) British Columbia d) Saskatchewan

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

33. Based on their sales tax rate(s), which of the following provinces and territories would apply taxes of $75 on a sales price of $500? a) British Columbia and Manitoba b) New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. c) Quebec d) Ontario Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

34. Based on their sales tax rate(s), which of the following provinces and territories would apply taxes of $25 on a sales price of $500? a) British Columbia, Manitoba, Quebec, and Saskatchewan b) Alberta, British Columbia, Manitoba, and Northwest Territories c) Nunavut, Quebec, Saskatchewan, and Yukon d) Alberta, Northwest Territories, Nunavut, and Yukon Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

35. Based on their sales tax rate(s), which of the following provinces and territories would apply taxes

Testbank for Accounting Principles, Ninth Canadian Edition

of $60 on a sales price of $500? a) British Columbia and Manitoba b) Alberta, British Columbia, Manitoba, and Northwest Territories c) Quebec d) Ontario Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

36. Continental Foods, located in Ontario, sold one pre-package of five doughnuts for a sales price of $4.00. How much would be recorded as revenue? a) $4.52 b) $4.00 c) $4.20 d) $4.28 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

37. Continental Foods, located in Ontario, sold one pre-package of five doughnuts for a sales price of $4.00. How much would be recorded as sales tax? a) $0 b) $0.28 c) $0.52 d) $0.20 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Explain the different types of sales tax. Section Reference: Types of Sales Taxes

Testbank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic 38. Assume that $500 of plumbing services were provided by a company in British Columbia for cash on August 18. These services are subject to both PST (7%) and GST (5%). Which of the following journal entries is correct to record the transaction? a) Cash .............................................................................................................. 500 PST Recoverable ........................................................................................... 35 GST Recoverable........................................................................................... 25 Service Revenue ..................................................................................... 560 b) Cash .............................................................................................................. 500 Service Revenue ..................................................................................... 446 PST Payable ............................................................................................ 31 GST Payable ............................................................................................ 22 c) Cash .............................................................................................................. 560 Service Revenue ..................................................................................... 500 PST Payable ............................................................................................ 35 GST Payable ............................................................................................ 25 d) Cash .............................................................................................................. 560 Service Revenue ..................................................................................... 560 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic 39. Assume that $500 of plumbing services were provided by a company in Newfoundland and Labrador on August 18 for cash. These services are subject to HST (15%). Which of the following journal entries is correct to record the transaction? a) Cash .............................................................................................................. 500 HST Recoverable .......................................................................................... 75 Service Revenue ..................................................................................... 575 b) Cash .............................................................................................................. 500 Service Revenue ..................................................................................... 435 HST Payable............................................................................................ 65 c) Cash .............................................................................................................. 575 Service Revenue ..................................................................................... 575 d) Cash .............................................................................................................. 575 Service Revenue ..................................................................................... 500 HST Payable............................................................................................ 75

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

40. Assume that $500 of plumbing services were provided by a company in Alberta on August 18 for cash. These services are subject to GST (5%). Which of the following journal entries is correct to record the transaction? a) Cash .............................................................................................................. 525 Service Revenue ..................................................................................... 500 GST Payable ............................................................................................ 25 b) Cash .............................................................................................................. 500 Service Revenue ..................................................................................... 475 GST Payable ............................................................................................ 25 c) Cash .............................................................................................................. 525 Service Revenue ..................................................................................... 525 d) Cash .............................................................................................................. 525 Service Revenue ..................................................................................... 500 GST Recoverable .................................................................................... 25 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

41. Assume that $500 of plumbing services were provided by a company in Saskatchewan on August 18 for cash. These services are subject to PST (6%) and GST (5%). Which of the following journal entries is correct to record the transaction? a) Cash .............................................................................................................. 500 PST Recoverable ........................................................................................... 30 GST Recoverable........................................................................................... 25 Service Revenue ..................................................................................... 555 b) Cash .............................................................................................................. 555 Service Revenue ..................................................................................... 500 PST Payable ............................................................................................ 30 GST Payable ............................................................................................ 25

Testbank for Accounting Principles, Ninth Canadian Edition

c) Cash .............................................................................................................. Service Revenue ..................................................................................... d) Cash .............................................................................................................. Service Revenue ..................................................................................... PST Payable ............................................................................................ GST Payable ............................................................................................

555 555 500 450 27 23

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

42. Wilson Flip Co. sells $2,100 of office furniture, on account, in the province of British Columbia, where PST is 7% and GST is 5%. Wilson Flip Co. uses a perpetual inventory system and the earnings approach for revenue recognition. The cost of the furniture is $950. Which of the following journal entries is correct to record the sale (ignore the cost of sale)? a) Accounts Receivable..................................................................................... 2,100 Sales ....................................................................................................... 2,100 b) Accounts Receivable .................................................................................... 2,352 Sales ....................................................................................................... 2,100 GST Payable ............................................................................................ 105 PST Payable ............................................................................................ 147 c) Accounts Receivable ..................................................................................... 2,100 GST Recoverable........................................................................................... 105 PST Recoverable ........................................................................................... 147 Sales ....................................................................................................... 2,352 d) Accounts Receivable .................................................................................... 2,352 Sales ....................................................................................................... 2,352 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

43. Sales taxes collected represent a(n) ______ for the company charging it. a) revenue source

Testbank for Accounting Principles, Ninth Canadian Edition

b) cash source c) asset d) liability Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

44. Lawn-care services of $350 were provided by Quickcare Inc., located in Manitoba, for cash. The entry to record this sale would include a credit to a) Accounts Receivable. b) GST Recoverable. c) Cash. d) GST Payable. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

45. Lawn-care services of $350 were provided by Quickcare Inc., located in New Brunswick, for cash. HST is 15%. The entry to record this sale would include a credit to a) Service Revenue. b) HST Payable. c) Cash. d) both Service Revenue and HST Payable. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

46. Sales taxes invoiced is a(n) a) long-lived asset. b) current asset. c) current liability. d) equity item. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

47. Hair-care services of $50 were provided by Maine Event, located in Manitoba, for cash. Manitoba has both PST 7% and GST 5%. The entry to record this sale would include a credit to a) Service Revenue for $50.00. b) Service Revenue for $56.00. c) GST Payable for $3.50. d) PST Payable for $2.50. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

48. Terry’s Trucks sells $250 worth of oil to a home-based mechanic. Both businesses are located in Manitoba where the PST is 7% and GST 5%. Terry’s uses a perpetual inventory system and the cost of the oil sold was $125 before tax. What would be the entry to cost of goods sold for the sale? a) $133.75 b) $140.00 c) $250.00 d) $125.00 Answer: d Bloomcode: Knowledge

Testbank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

49. When the goods from a sale with HST are returned, the HST account debited is a) HST Expense. b) HST Payable. c) HST Recoverable. d) No entry regarding HST is needed. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

50. Maine Event receives $100 worth of merchandise back from one of its customers. As part of its entry for the return of product, which GST-related account would be debited? a) GST Expense b) GST Payable c) GST Recoverable d) No entry regarding GST is needed. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sales taxes collected by businesses on goods and services. Section Reference: Sales Taxes Collected on Receipts CPA: Financial Reporting AACSB: Analytic

51. When merchandise is purchased, ______ is included in the inventory cost. a) GST b) PST c) HST d) no sales tax

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

52. GST paid on merchandise for resale is debited to a) GST Recoverable. b) GST Payable. c) Merchandise Inventory. d) Cash. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

53. A return of merchandise to the supplier was made for $100 plus taxes. The GST related to the return would appear as a a) $5 debit to GST Recoverable. b) $5 credit to GST Recoverable. c) $5 credit to GST Payable. d) $5 debit to GST Payable. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

54. A phone bill that totals $112 is received in Manitoba, a province that has both GST and PST. The amount that would appear as the expense would be a) $112.

Testbank for Accounting Principles, Ninth Canadian Edition

b) $100. c) $107. d) $105. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

55. Company 21 purchases $5,000 worth of new furniture (plus 5% GST and 7% PST). The amount debited to the Furniture account would be a) $5,600. b) $5,350. c) $5,000. d) $5,250. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

56. Bright Bulb Solutions purchases $5,000 worth of new furniture (plus HST of 13%). The amount related to the HST account would be a) a debit of $650 to HST Payable. b) a debit of $650 to HST Recoverable. c) zero as the amount would appear in the Furniture balance. d) a credit of $650 to HST Recoverable. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

57. Assume that $1,500 of equipment was purchased on account in the province of British Columbia. Which of the following journal entries is correct, given the PST (7%) and GST (5%) rates? a) Equipment .................................................................................................... 1,500 PST Recoverable ........................................................................................... 105 GST Recoverable........................................................................................... 75 Accounts Payable ................................................................................... 1,680 b) Equipment .................................................................................................... 1,605 GST Recoverable........................................................................................... 75 Accounts Payable ................................................................................... 1,680 c) Equipment .................................................................................................... 1,680 Accounts Payable ................................................................................... 1,680 d) Equipment ................................................................................................... 1,680 PST Payable ............................................................................................ 105 GST Payable ............................................................................................ 75 Accounts Payable ................................................................................... 1,500 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

58. Assume that $1,500 of merchandise was purchased on account for resale in the province of Ontario, where HST is 13%, and the company uses a perpetual inventory system. Which of the following journal entries is correct to record the purchase? a) Merchandise Inventory ................................................................................ 1,695 Accounts Payable ................................................................................... 1,695 b) Merchandise Inventory ................................................................................ 1,695 HST Payable............................................................................................ 195 Accounts Payable ................................................................................... 1,500 c) Merchandise Inventory................................................................................. 1,500 HST Recoverable .......................................................................................... 195 Accounts Payable ................................................................................... 1,695 d) Merchandise Inventory ............................................................................... 1,500 Accounts Payable ................................................................................... 1,500 Answer: c Bloomcode: Application Difficulty: Medium

Testbank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

59. Assume that $500 of office supplies was purchased for cash in the province of Manitoba where PST is 7% and GST is 5%. Assuming the company uses a perpetual inventory system, which of the following journal entries is correct? a) Supplies ........................................................................................................ 560 Cash ........................................................................................................ 560 b) Supplies ........................................................................................................ 560 GST Payable ............................................................................................ 25 Accounts Payable ................................................................................... 535 c) Supplies ........................................................................................................ 500 PST Recoverable ........................................................................................... 35 GST Recoverable........................................................................................... 25 Accounts Payable ................................................................................... 560 d) Supplies ........................................................................................................ 535 GST Recoverable........................................................................................... 25 Cash ........................................................................................................ 560 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

60. Assume that $500 of office supplies was purchased for cash in the province of Quebec where QST is 9.975% and GST is 5%. Assuming the company uses a perpetual inventory system, which of the following journal entries is correct? a) Supplies ........................................................................................................ 574.88 Cash ........................................................................................................ 574.88 b) Supplies ........................................................................................................ 574.88 QST Payable ........................................................................................... 49.88 GST Payable ............................................................................................ 25.00 Accounts Payable ................................................................................... 500.00 c) Supplies ........................................................................................................ 500.00 QST Recoverable .......................................................................................... 49.88 GST Recoverable........................................................................................... 25.00 Accounts Payable ................................................................................... 574.88 d) Supplies ........................................................................................................ 549.88

Testbank for Accounting Principles, Ninth Canadian Edition

GST Recoverable........................................................................................... Cash ........................................................................................................

25.00 574.88

Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

61. Assume that $1,500 of equipment was purchased on account in the province of Ontario. Which of the following journal entries is correct, given HST is 13%? a) Equipment .................................................................................................... 1,695 HST Payable............................................................................................ 195 Accounts Payable ................................................................................... 1,500 b) Equipment .................................................................................................... 1,327 HST Recoverable .......................................................................................... 173 Accounts Payable ................................................................................... 1,500 c) Equipment .................................................................................................... 1,695 Accounts Payable ................................................................................... 1,695 d) Equipment .................................................................................................... 1,500 HST Recoverable .......................................................................................... 195 Accounts Payable ................................................................................... 1,695 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Record sale taxes paid on the purchase of goods and services. Section Reference: Sales Taxes Paid on Payments CPA: Financial Reporting AACSB: Analytic

62. Bandolini Company operates a retail clothing store in Manitoba. Bandolini collects GST and PST from its customers upon each sale and pays GST on all purchases. In Manitoba, GST is 5% and PST is 7%. At the end of the quarter, June 30, 2024, Bandolini had total sales of $625,000 during the quarter and reported GST Recoverable of $18,750 and GST Payable of $31,250. Which of the following journal entries is correct to record the remittance to the federal government? a) GST Payable .................................................................................................. 12,500 Cash ........................................................................................................ 12,500 b) GST Payable .................................................................................................. 31,250 GST Recoverable .................................................................................... 18,750

Testbank for Accounting Principles, Ninth Canadian Edition

Cash ........................................................................................................ c) GST Recoverable ........................................................................................... Cash ........................................................................................................ d) GST Recoverable .......................................................................................... GST Payable ............................................................................................ Cash ........................................................................................................

12,500 12,500 12,500 31,250 18,750 12,500

Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

63. Bandolini Company operates a retail clothing store in Ontario. Bandolini collects HST from its customers upon each sale and pays HST on all purchases. In Ontario, HST is 13%. At the end of the quarter, June 30, 2024, Bandolini reported HST Recoverable of $31,250 and HST Payable of $18,750. Which of the following journal entries is correct to record the remittance to (receipt from) the federal government? a) HST Recoverable .......................................................................................... 12,500 Cash ........................................................................................................ 12,500 b) HST Payable.................................................................................................. 43,750 HST Recoverable .................................................................................... 31,250 Cash ........................................................................................................ 12,500 c) HST Payable .................................................................................................. 12,500 Cash ........................................................................................................ 12,500 d) Cash .............................................................................................................. 12,500 HST Payable .................................................................................................. 18,750 HST Recoverable .................................................................................... 31,250 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic 64. Bandolini Company operates a retail clothing store in Ontario. Bandolini collects HST from its customers upon each sale and pays HST on all purchases. In Ontario, HST is 13%. At the end of the quarter, June 30, 2024, Bandolini reported HST Recoverable of $31,250 and HST Payable of $18,750. How much of a refund, if any, will Bandolini receive from the federal government?

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a) $0 b) $12,500 c) $18,750 d) $31,250 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

65. Bandolini Company operates a retail clothing store in Manitoba. Bandolini collects GST and PST from its customers upon each sale and pays GST on all purchases. In Manitoba, GST is 5% and PST is 7%. At the end of the quarter, June 30, 2024, Bandolini had total sales of $625,000 during the quarter and reported GST Recoverable of $18,750 and GST Payable of $31,250. How much revenue would Bandolini report when filing their remittance to the federal government? a) $625,000 b) $637,500 c) $612,500 d) $675,000 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic 66. Bandolini Company operates a retail clothing store in Manitoba. Bandolini collects GST and PST from its customers upon each sale and pays GST on all purchases. In Manitoba, GST is 5% and PST is 7%. At the end of the quarter, June 30, 2024, Bandolini had total sales of $625,000 during the quarter and reported GST Recoverable of $18,750 and GST Payable of $31,250. How much is the input tax credit (ITC)? a) $18,750 b) $31,250 c) $12,500 d) $0 Answer: a

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

67. At the end of the quarter, Company 21 had a balance of $14,000 in their GST Recoverable account and $22,000 in GST Payable. The entry to record the quarterly remittance would be a) Dr. GST Payable $22,000, Cr. GST Recoverable $14,000, Cr. Cash $8,000. b) Dr. GST Recoverable $14,000, Dr. Cash $8,000, Cr. GST Payable $22,000. c) Dr. GST Payable $8,000, Cr. Cash $8,000. d) Dr. GST Recoverable $8,000, Cr. Cash $8,000. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

68. At the end of the quarter, Company 21 had a balance of $20,000 in their HST Recoverable account and $24,000 in HST Payable. The entry to record the quarterly remittance would be a) Dr. HST Recoverable $20,000, Dr. Cash $4,000, Cr. HST Payable $24,000. b) Dr. HST Payable $24,000 Cr. HST Recoverable $20,000, Cr. Cash $4,000. c) Dr. HST Payable $4,000, Cr. Cash $4,000. d) Dr. HST Recoverable $4,000, Cr. Cash $4,000. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

69. At the end of the quarter, Company 21 had invoiced total PST of $5,500. The entry to record the quarterly remittance would require the following entry plus a cheque made out to a) Dr. PST Payable, the Minister of Finance. b) Dr. PST Recoverable, the Minister of Finance.

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c) Dr. PST Payable, the Receiver General for Canada. d) Dr. PST Recoverable, the Receiver General for Canada. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

70. If a company has a GST Recoverable amount of $5,600 and a GST Payable amount of $5,000 at the end of the quarter, what should they do? a) Delay filing their quarterly return until the next quarter when additional GST payable amounts are expected to offset the recoverable amount. b) File the quarterly return and request a refund of $600. c) Pay the amount of GST payable of $5,000. d) Pay the amount of GST payable of $5,000 and request a refund of $5,600. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting AACSB: Analytic

71. Bobs Bites has an HST Recoverable amount of $15,000 and an HST Payable amount of $10,000 at the end of the quarter. What should they do? a) Pay the amount of HST payable of $10,000 and request a refund of $15,000. b) File the quarterly return and request a refund of $5,000. c) Pay the amount of HST payable of $10,000. d) Delay filing their quarterly return until the next quarter when additional HST payable amounts are expected to offset the recoverable amount. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record the remittance of sales taxes. Section Reference: Remittance of Sales Taxes CPA: Financial Reporting

Testbank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTION 72. For each province below, indicate using an X which sales tax or taxes they charge: Province Manitoba Alberta Nova Scotia Nunavut Ontario Saskatchewan

PST

GST

HST

Province Manitoba Alberta Nova Scotia Nunavut Ontario Saskatchewan

PST X

GST X X

HST

Answer:

X X X X

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

73. For the items below, indicate with an X their correct GST/HST tax category: Item

Two doughnuts Uncooked pizza Dental services Seven doughnuts Prescription drugs Ready-to-eat pizza

Taxable Supplies

ZeroRated Supplies

Exempt Supplies

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Answer: Item

Taxable Supplies

Two doughnuts Uncooked pizza Dental services Seven doughnuts Prescription drugs Ready-to-eat pizza

ZeroRated Supplies

Exempt Supplies

X X X X X

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Explain the different types of sales taxes. Section Reference: Types of Sales Taxes CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

APPENDIX C – SUBSIDIARY LEDGERS AND SPECIAL JOURNALS EXERCISES Exercise 1 Candy Sweets has just started their operations this month. Here is a snapshot of some of their results: Credit Sales Date Name 11 MG Smarties 18 Sour Candy 22 Choco Treats 26 C&C Treats

Amount $3,750 8,475 5,637 2,700

Cash Collections Date Name 18 MG Smarties 25 Sour Candy 22 Choco Treats 30 C&C Treats

Amount $2,250 8,250 2,032 2,700

Instructions Calculate the balances that appear in the accounts receivable subsidiary ledger for each customer and the accounts receivable balance in the general ledger at the end of the month. Solution 1 Subsidiary Ledger Balances: Name Sales Collections MG Smarties $3,750 $2,250 Sour Candy 8,475 8,250 Choco Treats 5,637 2,032 C&C Treats 2,700 2,700 Total of subsidiary ledgers and GL balance

Balance $1,500 225 3,605 0 $5,330

Bloomcode: Application Difficulty: Medium Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

Exercise 2 JLH Boutique has just opened their first store and has had the following activity:

Testbank for Accounting Principles, Ninth Canadian Edition

Credit Sales Date Name 7 Petite Ltd. 19 Plus Inc. 20 Reg Inc. 28 Skyhigh Inc. Cash Collections Date Name 17 Petite Ltd. 26 Plus Inc. 26 Reg Inc. 30 Skyhigh Inc.

Amount $31,000 53,800 15,400 36,600

Amount $27,500 49,000 15,400 18,300

Instructions Calculate the balances that appear in the accounts receivable subsidiary ledger for each customer and the accounts receivable balance in the general ledger at the end of the month. Solution 2 Subsidiary Ledger Balances: Name Sales Collections Petite Ltd. $31,000 $27,500 Plus Inc. 53,800 49,000 Reg Inc. 15,400 15,400 Skyhigh Inc. 36,600 18,300 Total of subsidiary ledgers and GL balance

Balance $3,500 4,800 0 18,300 $26,600

Exercise 3 For each of the following accounts, identify in which ledger (general or subsidiary) the account is shown: Account Sales Rent Expense Accounts Payable–Jasper LLC. Service Revenue Bank Loan Payable

Testbank for Accounting Principles, Ninth Canadian Edition

Accounts Receivable–Zane Ltd. Merchandise Inventory Utilities Expense Solution 3 Account Sales Rent Expense Accounts Payable–Jasper LLC. Service Revenue Bank Loan Payable Accounts Receivable–Zane Inc. Merchandise Inventory Utilities Expense

Ledger General General Subsidiary General General Subsidiary General General

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

Exercise 4 For each of the following Candy Sweets accounts, identify in which ledger (general or subsidiary) the account is shown: Account Merchandise Inventory Insurance Expense Accounts Payable–Suits R Us Service Revenue Accounts Payable–Dunbar Limited Supplies Expense Sales Solution 4 Account Merchandise Inventory Insurance Expense Accounts Payable–Suits R Us Service Revenue Accounts Payable–Dunbar Limited Supplies Expense

Ledger General General Subsidiary General Subsidiary General

Testbank for Accounting Principles, Ninth Canadian Edition

General

Sales

Exercise 5 You are working part time as a bookkeeper for Pharma Inc. and have collected the following information: Subsidiary Ledger Customer Balances as at April 1 Customer Balance Jane Doe $3,900 Jameel Singh 3,300 Chunmei Lu 8,595 Mary Stefano 10,275 April Sales Journal Customer Chunmei Lu Jane Doe Jameel Singh Mary Stefano Marky Mark

Amount $2,250 3,450 750 1,245 645

Cost of Sales $1,170 2,850 563 1,043 443

April Cash Receipts Journal Account Amount Jane Doe $6,300 Marky Mark 645 Mary Stefano 10,800 Chunmei Lu 9,000 Instructions Determine the balance at the end of the month in both the control and subsidiary accounts. Solution 5 Subsidiary Ledger Balances:

Customer Jane Doe

Apr. 1 Balance $3,900

Apr. 30 Sales Payments Balance $3,450 $6,300 $1,050

Testbank for Accounting Principles, Ninth Canadian Edition

Jameel Singh Chunmei Lu Mary Stefano Marky Mark

3,300 8,595 10,275 0 $26,070

750 2,250 1,245 645 $8,340

0 9,000 10,800 645 $26,745

4,050 1,845 720 0 $7,665

The accounts receivable control account would show the following entries: Opening balance $26,070 + sales $8,340 – payments received $26,745 = ending balance of $7,665 Bloomcode: Application Difficulty: Medium Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

Exercise 6 On March 1, the balance in the accounts receivable control account is $225,000. The customers’ subsidiary ledger balances are as follows: Subsidiary Ledger Customer Balances at March 1 Customer Balance D. Sutherland $102,000 R. Chew 80,000 S. Siam 20,000 A. Feud 23,000 At the end of March, special journals contained the following information: Sales Journal – March Customer Amount S. Siam $26,000 D. Sutherland 7,300 R. Chew 1,500 A. Feud 3,360 M. Sanchez 12,000

Cost of Sales $17,160 4,818 990 2,218 7,920

Cash Receipts Journal – March Account Amount D. Sutherland $102,200 M. Sanchez 8,455 A. Feud 22,960 S. Siam 44,600

Testbank for Accounting Principles, Ninth Canadian Edition

Instructions Determine the balance at the end of the month in both the control and subsidiary accounts. Solution 6 Subsidiary Ledger Balances: Customer D. Sutherland R. Chew S. Siam A. Feud M. Sanchez

Balance $102,000 80,000 20,000 23,000 0 $225,000

Sales $7,300 1,500 26,000 3,360 12,000 $50,160

Payments Balance $102,200 $7,100 0 81,500 44,600 1,400 22,960 3,400 8,455 3,545 $178,215 $96,945

The accounts receivable control account would show the following entries: Opening balance $225,000 + sales $50,160 – payments received $178,215 = ending balance of $96,945 Bloomcode: Application Difficulty: Medium Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

Exercise 7 RGI Services had the following transactions in October: 1. Sale of their old head office building for cash. 2. Collection on account from one of their customers. 3. Revenue for the year closed to income summary. 4. Sale of t-shirt merchandise for cash. 5. Sale of jean merchandise on account. 6. Cheque issued to pay for window cleaning. 7. Depreciation on equipment. 8. Purchase of supplies on account. Instructions For each transaction, indicate which journal would normally be used: cash receipts, cash payments, sales, purchases, or general. Solution 7 1. Cash receipts

Testbank for Accounting Principles, Ninth Canadian Edition

Cash receipts

General

Cash receipts

Sales

Cash payments

General

Purchases

Bloomcode: Comprehension Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

Exercise 8 Spector Service Ltd. had the following transactions in April: Account Sale of merchandise for cash Sale of delivery van for cash Collection from customer Sale of merchandise on account Purchase of office supplies on account Depreciation on furniture Payment on supplier account Expenses closed to income summary Instructions For each transaction, indicate which journal would normally be used: cash receipts, cash payments, sales, purchases, or general. Solution 8 Account Sale of merchandise for cash Sale of delivery van for cash Collection from customer Sale of merchandise on account

Journal cash receipts cash receipts cash receipts sales

Testbank for Accounting Principles, Ninth Canadian Edition

Purchase of office supplies on account Depreciation on furniture Payment on supplier account Expenses closed to income summary

purchases general cash payments general

Exercise 9 Suits R Us had the following control balances on April 30 after all monthly postings were complete: Accounts Receivable $240,000 Dr. Accounts Payable $163,000 Cr. At the end of May, Suits R Us had the following special journal balances: Sales Journal: cost of goods sold $45,000, total sales $90,550 Purchases Journal: total purchases $26,000 In the May cash receipts journal, the accounts receivable section totalled $155,000. The accounts payable column in the cash payments journal totalled $105,000. Instructions Assuming that no entries that affected accounts receivable or payable were recorded in the general journal for May, determine the balance in the accounts receivable and payable control accounts after the monthly postings are complete. Solution 9 Accounts Receivable Control Account $240,000 + sales $90,550 – cash receipts $155,000 = $175,550 Accounts Payable Control Account $163,000 + purchases $26,000 – cash payments $105,000 = $84,000 Bloomcode: Application Difficulty: Medium Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

Exercise 10 You have been asked to calculate the control account balances for RGI Services’ accounts receivable and

Testbank for Accounting Principles, Ninth Canadian Edition

accounts payable at the end of October. There have not been any postings to the control accounts in October but the special journals are up to date. So far, you have collected the following information: Sales Journal: Cost of Goods Sold $100,000 Total Sales $225,000 Purchases Journal: Total Purchases $78,550 Cash Receipts Journal: accounts receivable $265,000 Cash Payments Journal: accounts payable $60,000 Sept. 30 Balances: Accounts Receivable Accounts Payable

$330,000 $95,000

Dr. Cr.

Solution 10 Accounts Receivable Control Account $330,000 + sales $225,000 – cash receipts $265,000 = $290,000 Accounts Payable Control Account $95,000 + purchases $78,550 – cash payments $60,000 = $113,550 Bloomcode: Application Difficulty: Medium Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

APPENDIX C: SUBSIDIARY LEDGERS AND SPECIAL JOURNALS TRUE-FALSE STATEMENTS 1. A general ledger is a group of accounts that share a common characteristic such as accounts receivable but have additional details. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

2. A subsidiary ledger maintains account details that the general ledger CANNOT capture. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

3. Common subsidiary ledgers include accounts payable, accounts receivable, and inventory. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

4. The accounts payable subsidiary ledger contains data for individual customers such as balances owed to the company.

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

5. Each general ledger control account must equal the total balance of the individual accounts in the related subsidiary ledger. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

6. Each general ledger control account does NOT have to equal the total balance of the individual accounts in the related subsidiary ledger. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

7. One advantage of a subsidiary ledger is that it shows all the transactions that affect one customer or creditor in a single account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers

Testbank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

8. A disadvantage of subsidiary ledgers is that they do NOT aid in locating errors in individual accounts. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

9. Posting to the individual accounts in the subsidiary ledger are made daily. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

10. Postings to the control account are made daily. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

11. For a company with a large number of similar transactions, it is beneficial to create a special journal for those transactions. Answer: True

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

12. The sales journal is used to record the sales of merchandise for cash. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

13. Cash sales of merchandise are entered into the cash receipts journal. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

14. The sales journal is used to record the sales of merchandise on account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

15. Daily postings are made from the sales journal to the individual accounts receivable in the subsidiary ledger.

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

16. Having a sales journal means that only the totals rather than each transaction are posted to the general ledger. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

17. A good control practice would be to have the qualified individual responsible for the sales journal to also be responsible for the cash receipts journal. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

18. All receipts of cash are recorded in the cash receipts journal. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting

Testbank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

19. The purchases journal may include purchases beyond inventory and supplies, such as other assets purchased on account. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

20. Purchase invoices are used as source documents for entries into the purchases journal. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

21. All payments of cash are included in the cash receipts journal. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

22. Those transactions that CANNOT be entered into a subsidiary ledger are recorded in the general ledger. Answer: True Bloomcode: Knowledge

Testbank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

23. In a perpetual inventory system, the Purchases account is used to record the purchases of inventory. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

24. Cost of goods sold is typically calculated at the end of the period under a periodic inventory system. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 25. A subsidiary ledger is used to a) track individual balances. b) maintain details that the general ledger cannot capture. c) balance its overall total to the control account. d) All of above are correct. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

26. Common subsidiary ledgers include a) accounts payable, accounts receivable, inventory, and a general one. b) inventory, payroll, long-lived assets, and a general one. c) inventory, accounts receivable, and payroll. d) general accounts, accounts payable, and long-lived assets. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

27. An accounts payable ledger keeps track of transactional data related to a) employee pay records. b) individual customers. c) individual creditors. d) property items. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers.

Testbank for Accounting Principles, Ninth Canadian Edition

Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

28. The accounts receivable subsidiary ledger keeps track of transactional data related to a) employee pay records. b) individual customers. c) individual creditors. d) property items. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

29. The advantages of subsidiary ledgers include all of the following, EXCEPT a) moving excessive details to the general ledger. b) showing transactions that affect one customer or creditor in a single account. c) helping locate errors in individual accounts. d) freeing the general ledger from excessive detail. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

30. The advantage(s) of subsidiary ledgers include a) freeing the general ledger from excessive detail. b) showing transactions that affect one customer or creditor in a single account. c) helping locate errors in individual accounts. d) All of the answers are correct. Answer: d Bloomcode: Knowledge

Testbank for Accounting Principles, Ninth Canadian Edition

Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

31. Which of the following is NOT a subsidiary ledger? a) payroll ledger b) general ledger c) inventory ledger d) long-lived asset ledger Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

32. Which of the following is NOT true about subsidiary ledgers? a) They are an expansion of the general ledger. b) They are a group of accounts that share a common characteristic. c) They are an addition to the general ledger and an expansion of the general ledger. d) They are a group of accounts that maintain summary details that the general ledger cannot capture. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

33. In each of the subsidiary ledgers, individual accounts are a) arranged in alphabetical, numerical, or alphanumerical order. b) only arranged in alphabetical order. c) only arranged in numerical order. d) only arranged in alphanumerical order. Answer: a

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

34. Which of the following is NOT true about various subsidiary ledgers? a) The inventory ledger collects transaction data for each inventory item purchased and sold. b) The accounts receivable subledger collects transaction data for individual creditors, such as invoice numbers and purchase dates. c) The long-lived asset ledger keeps track of each item of property, plant, and equipment. d) The payroll ledger details individual employee pay records. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

35. Which of the following is NOT true about subsidiary ledgers? a) They show transactions that affect one customer or one creditor in a single account. b) A trial balance of the general ledger does not contain vast numbers of individual customer account balances, which frees the general ledger from excessive details. c) Different employees post to the general ledger while one employee can post to the subsidiary ledgers. d) They help locate errors in individual accounts. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Describe the purposes and advantages of maintaining subsidiary ledgers. Section Reference: Subsidiary Ledgers CPA: Financial Reporting AACSB: Analytic

36. In which of the following special journals would a company record their purchase returns and allowances?

Testbank for Accounting Principles, Ninth Canadian Edition

a) Sales journal b) Cash receipts journal c) General journal d) Purchases journal Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

37. In which of the following special journals would a company record a correcting journal entry? a) Purchases journal b) Cash receipts journal c) Sales journal d) General journal Answer: d Bloomcode: Comprehension Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

38. Postings from the sales journal are made ______, while posting total sales to the general ledger are made ______. a) daily; monthly b) daily; daily c) monthly; daily d) monthly; monthly Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

39. A check mark is inserted in the reference posting column of the sales journal a) when the subsidiary ledger accounts are individually numbered. b) to indicate that the daily posting to the customer’s account has been made. c) for journalizing. d) to indicate an explanation for the entry to the sales journal. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

40. Which of the following is NOT true about the sales journal? a) The sequential pre-numbering of sales invoices helps to ensure that no sale is recorded more than once. b) Only individual entries, rather than totals, are posted to the general ledger. c) The sequential pre-numbering of sales invoices helps to ensure that all sales are recorded. d) The one-line–two-column entry for each sales transaction saves time. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

41. If a transaction CANNOT be recorded in a special journal, it is a) not a valid transaction. b) recorded in the general journal. c) already recorded elsewhere. d) not a financial transaction. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers.

Testbank for Accounting Principles, Ninth Canadian Edition

Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

42. The sales journal is used to record a) all sales made by the company. b) only cash sales. c) only credit sales. d) only cash and credit sales. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

43. Posting from the sales journal to individual accounts receivable subsidiary ledger accounts takes place a) daily. b) weekly. c) at the end of the month. d) quarterly. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

44. In order to have good internal control, the individual responsible for the sales journal should also be responsible for a) cash receipts. b) inventory. c) all general journal entries. d) None of these are correct. Answer: d

Testbank for Accounting Principles, Ninth Canadian Edition

45. The most common purchases on account include a) supplies. b) inventory. c) inventory and supplies. d) inventory, supplies, and staff wages. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

46. The cash payments journal shows a) all payments of cash. b) all payments and receipts of cash. c) all entries that affect cash. d) all purchases made on account. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

47. Entries in the cash payments journal are typically made using a) sales invoices. b) pre-numbered cheques. c) supplier invoices. d) All of the answers are correct.

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

48. When both control and subsidiary accounts are used a) both the control and subsidiary account must be identified in journalizing. b) for posting, it is a dual process, once to the subsidiary and once to the control account. c) Both answers are correct. d) None of these are correct. Answer: c Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

49. When using special journals for recording and posting transactions in a perpetual inventory or periodic inventory system, what is correct? a) They are exactly the same processes and accounts. b) They are essentially the same with two exceptions: 1) relating to account titles used and 2) the need under one for an additional column for COGS. c) The two are completely different. d) It is not possible to identify the type of inventory system being used from the special journal. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Record transactions in special journals and post to subsidiary and general ledgers. Section Reference: Special Journals CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 50. For each of the following accounts below, match it to the appropriate ledger where it would appear using: G – general ledger account or S – subsidiary ledger Account Sales Service Revenue Accounts Receivable–S. Singh Bank Loan Payable Utilities Expense Accounts Payable–Rodgers Merchandise Inventory

Ledger

Answer: Account Sales Service Revenue Accounts Receivable–S. Singh Bank Loan Payable Utilities Expense Accounts Payable–Rodgers Merchandise Inventory

Ledger G G S G G S G

51. Match the items below to the special journal in which each would be recorded. A. Sales B. Cash Receipts C. Purchases D. Cash Payments __

Annual premium on fire insurance of $6,525 is paid using cheque 121.

Testbank for Accounting Principles, Ninth Canadian Edition

Purchased $5,500 of supplies on account.

Sold $26,500 of merchandise to Bob Kang on account.

K.S. Override invests $10,000 in the business.

Cheque 2569 from Almonds Ltd. for $2,500 is received in full payment of invoice 156.

Inventory of $7,850 is purchased from Kick It Up Ink using cheque 125.

Answer: 1. D 2.

Testbank for Accounting Principles, Ninth Canadian Edition

APPENDIX PV: PRESENT VALUE CONCEPTS EXERCISES Exercise 1 LMNOP Services has just renovated their local warehouse. In order to do so they borrowed $40,000 at 3%, which is required to be repaid in two years. Instructions a) How much simple interest will LMNOP have to pay? Show your calculations. b) If the loan document indicated compound interest, what would the total interest be? Solution 1 a) $40,000 x.03 x 2 = $2,400 b)

Yr. 1 = $40,000 x.03 = Yr. 2 = $41,200 x.03 = Total =

$1,200 1,236 $2,436

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

Exercise 2 Suri has the following investments in her portfolio: Interest Interest Investment Rate Year(s) Type A $600 4% 2 Simple B $5,500 5% 2 Compound C $900 6% 1 Simple Instructions Calculate the total amount of interest Suri will receive on her portfolio. Solution 2 A B C

$600 x.04 x 2 = $ 48.00 Yr. 1 = $5,500 x.05 = 275.00 Yr. 2 = $5,775 x.05 = 288.75 $900 x.06 = 54.00 Total = $665.75

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

Exercise 3 Ashwin has just invested $10,000 in a compound interest three-year certificate with a rate of 6%. Instructions Calculate the total amount of interest Ashwin will receive. Solution 3

Yr. 1 Yr. 2 Yr. 3

A C Amount Rate $10,000 0.06 $10,600 0.06 $11,236 0.06 Total interest

AxC Interest $ 600.00 636.00 674.16 $1,910.16

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

Exercise 4 You have received the following investment schedule: Interest Total Investment Rate Year(s) Interest* A $1,500 6.5% 2 $201 B $8,500 7.0% 2 $1,190 C $2,500 5.0% 2 $250 *rounded to the nearest dollar Instructions For each investment, indicate with a C if the interest is compound or S if it is simple. Solution 4 Interest

Total

Interest

Testbank for Accounting Principles, Ninth Canadian Edition

A B C

Investment $1,500 $8,500 $2,500

Rate 6.5% 7.0% 5.0%

Year(s) 2 2 2

Interest* $201 $1,190 $250

Type C S S

*rounded to the nearest dollar Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

Exercise 5 Rhonda is planning to go to university in 5 years. After doing some research, she estimated tuition will run about $18,000 for the first year. Interest rates are currently at 3% and NOT expected to change over the next 5 years. Add link to PV tables Instructions How much money must Rhonda’s mother invest today to cover the tuition for the first year? Round to the nearest whole dollar. Solution 5 $18,000 x 0.86261 = $15,527 Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

Exercise 6 An investment opportunity advertises as follows: invest $33,842 and receive $50,000. In the fine print, the advertisement indicates an interest rate of 5%. Instructions Determine how many years the investor must wait to receive $50,000. Solution 6 $33,842/$50,000 = 0.67684 at 5% = 8 years

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

Exercise 7 Belinda has $4,445 in her savings account. Without adding any additional funds to this account, Belinda would like to have $5,000 in it at the end of 3 years. What interest rate would Belinda need in order to achieve her goal? Add link to PV tables Solution 7 = $4,445/$5,000 = 0.88900, which is 4.0% Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

Exercise 8 Fung-Yee dreams of owning her own home 10 years from now. At that time, she would like to have $30,000 saved up for a down payment. Interest rates are expected to remain at 4%. Add link to PV tables Instructions Calculate how much Fung-Yee would have to invest today to realize her dream. Round your answer to the nearest dollar. Solution 8 $30,000 x 0.67556 = $20,267 Bloomcode: Application Difficulty: Hard Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

Exercise 9 Stillwater Limited’s managing partner has just purchased an investment that pays an annual amount of $5,000 at the end of each year for the next 10 years. This investment has a guaranteed return of 4%. Add link to PV tables Instructions Calculate how much Stillwater paid for this investment. Solution 9 $5,000 X 8.11090 = $40,555 Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

Exercise 10 Suki Services has just leased a new printer that the chief accountant has determined is a capital lease. The terms are as follows: Term – 5 years Payments – $7,000 due at the end of each contract year Discount Rate – 4% Add link to PV tables Instructions What is the present value of the rental payments rounded to the nearest dollar? Solution 10 $7,000 x 4.45182 = $31,163 Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

Exercise 11 A new lease contract has just been signed for a digital engraving machine. It has been determined that this lease is a capital lease containing the following terms: Term – 5 years Payments – $5,000 due at the end of each contract year

Testbank for Accounting Principles, Ninth Canadian Edition

Discount Rate – 6% Add link to PV tables Instructions Calculate the amount used to capitalize the engraving machine. Round your answer to the nearest dollar. Solution 11 5,000 x 4.21236 = $21,062 Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

Exercise 12 Rainbow Bridge Pet Care Centre is looking at issuing $200,000 of 5-year bonds in order to finance their small animal wing. The bonds have an interest rate of 5% with semi-annual interest payments. The day they go to issue the bonds, the market rate is at 4%. Instructions Determine how much Rainbow Bridge will bring in from the sale of these bonds. Solution 12 PV principal 2% 10 periods Interest payments PV of interest payments PV of interest payments Total proceeds of bond sale

$200,000 10 periods

$200,000 0.025 2%

0.82035 $5,000 8.98259

$164,070

44,913 $208,983

Bloomcode: Application Difficulty: Medium Learning Objective: Calculating the present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

Exercise 13 Wyatt Industries is about to issue $150,000 bonds with a 10-year term. The interest on these bonds is 3% with annual interest payments. The market rate is currently at 4%. Add link to PV tables

Testbank for Accounting Principles, Ninth Canadian Edition

Instructions Calculate how much Wyatt will receive from the sale of these bonds. Round to the nearest dollar. Solution 13 PV principal = $150,000 x.67556 = PV of interest: ($150,000 x.03 = $4,500) x 8.11090 = Total Proceeds =

$101,334 36,499 $137,833

Bloomcode: Knowledge Difficulty: Medium Learning Objective: Calculating the present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

Exercise 14 Key West Surfboards is issuing $260,000 worth of their bonds today. The bonds have a 5-year term and an interest rate of 4% equal to that of the market. Instructions Calculate the sales price of these bonds. Solution 14 As the market and bond rate are the same the bonds will sell at face value for $260,000. This is calculated as follows: PV principal = $260,000 x 0.82193 = $213,702 + PV interest: ($260,000 x .04 = $10,400) x 4.45182 = 46,299 Total $260,001 Bloomcode: Application Difficulty: Medium Learning Objective: Calculating the present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

Exercise 15 The market interest rate is 5%. Your company has just announced the following: Series A bonds $500,000 6% semi-annual interest 5-year bonds

Testbank for Accounting Principles, Ninth Canadian Edition

Instructions How much can they expect to collect from the Series A bond sales? Solution 15 PV principal = $500,000 x 0.78120 = (2.5%, 10 periods) + PV interest: ($500,000 x.03 = $15,000) x 8.75206 = Total

$390,600

131,281 $521,881

Bloomcode: Application Difficulty: Medium Learning Objective: Calculating the present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

Exercise 16 Brewer Services gives Minor Consulting a $550,000 five-year note indicating an interest rate of 3% to cover the consulting services they arranged. As part of this agreement, Strategic Services will make annual blended payments at the end of the year. Add link to PV tables Instructions Calculate the annual payment amount that Minor Consulting can expect to receive. Solution 16 $550,000/4.57971 = $120,094.94 Bloomcode: Application Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate, or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

Exercise 17 Joe is interested in Marissa’s 1974 yellow Corvette. He offers to purchase it from her for $25,000. This would include $5,000 up front and then moving forward, equal blended payments over the next 6 years at 7%. The payments would be made at the end of each year. Add link to PV tables

Testbank for Accounting Principles, Ninth Canadian Edition

Instructions How much will the payment be from Joe at the end of each year? Solution 17 ($25,000 – $5,000)/4.76654 = $4,195.92 Bloomcode: Analysis Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate, or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

Exercise 18 You recently purchased a new sectional sofa from Steve’s Fine Furniture. The price of the deal was $4,500 with the option of an extra $500 off the list price or no payment for two years. What is the effective interest rate of this deal? Solution 18 PV value of the sofa = $4,500 – $500 = $4,000 PV factor = $4,000/$ 4,500 = 0.88889 = 6% Bloomcode: Analysis Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate, or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

Exercise 19 You are looking at purchasing a new car. The contract on the offer includes an interest rate of 5% and purchase price of $30,000. You can see that the annual blended payments are $5,184.60 but you are unable to read the term as there’s a mark on the contract. Instructions Determine how many years will it take you to pay off this car loan. Solution 19 $30,000/$5,184.60 = 5.78637 which matches 7 years Bloomcode: Analysis Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the

Testbank for Accounting Principles, Ninth Canadian Edition

interest rate, or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

Exercise 20 Ting Towables has a programmable plastic moulding machine. This machine is expected to last another 4 years. The most recent estimates for its future cash flows have been calculated at: Estimated Cash Year Flows 1 $ 5,000 2 5,500 3 4,000 4 3,500 Add link to PV tables Instructions Calculate the moulding machine’s value in use using a discount rate of 4%. Round to two decimal places Solution 20 Year 1 2 3 4

Estimated Cash Flows $ 5,000 5,500 4,000 3,500 Value in Use

PV Factor 0.96154 0.92456 0.88900 0.85480

PV Amount $ 4,807.70 5,085.08 3,556.00 2,991.80 $16,440.58

Bloomcode: Application Difficulty: Medium Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

APPENDIX PV: PRESENT VALUE CONCEPTS TRUE-FALSE STATEMENTS 1. Interest is the payment for the use of money. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

2. The rate of interest is generally stated using a quarterly rate. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

3. Compounding calculates interest NOT only on the principal but also on the interest earned to date. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

4. Simple interest is used in most business transactions. Answer: False

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

5. Present value refers to the value of an investment at the end of a three-year period for a three-year investment. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

6. Present value is the value today of a given investment to be received in the future. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

7. The market price of a bond is determined using a present value calculation. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

8. A series of payments of equal dollar amounts to be paid periodically are referred to as an annuity. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

9. A series of receipts in varying amounts, to be received periodically, are referred to as an annuity. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

10. The present value of an annuity is the value in the future at a specified date of a series of future payments using a compound interest rate. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

11. The present value of an annuity is the value today of a series of future payments discounted using a compound interest rate. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities)

Testbank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

12. For an annuity due, it is assumed that the first payment starts at the end of the period. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

13. For an ordinary annuity, the payments are at the end of each period. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

14. When calculating the present value of an annuity, you need to know the discount rate, the number of payments, and the amount of the periodic payment. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

15. In order to calculate the present value of an annuity, it can be done using the table entitled present value of $1. Answer: False

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

16. The calculation of the market price of a bond involves three variables: payment amount, market interest rate, and the length of time until the amounts are paid. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculating the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

17. Bond payments are made up of two components: the principal amount and a series of interest payments. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculating the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

18. When the market rate is equal to the contractual rate, the bond will be sold at its face value. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculating the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

19. When the contractual rate and market rates of interest are equal, a bond will be sold above its face value. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculating the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

20. If the market rate of interest is greater than the contractual rate, the bond will sell at a discount. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculating the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

21. If the bond’s contractual rate is 8% and the market rate is 9%, the bond will sell at a discount. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculating the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

22. If the bond’s contractual rate is 10% and the market rate is 8%, the bond will sell above its face value. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculating the market price or present value of a bond. Section Reference: Applying Present Value Concepts

Testbank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

23. As a note payable will be paid using periodic payments, including both principal and interest, the future value of the note is zero. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate, or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

24. The present value of a note payable is the amount borrowed. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate, or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

25. The application of present value concepts includes determining the value in use of an asset. Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

26. The value in use calculation for an asset involves the estimate of future cash flows and calculating the present value of these cash flows.

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: True Bloomcode: Knowledge Difficulty: Easy Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

27. An asset is considered impaired if its carrying amount is less than its recoverable amount. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

28. Value in use of an asset involves a single step calculating the asset’s future cash flows. Answer: False Bloomcode: Knowledge Difficulty: Easy Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

MULTIPLE CHOICE QUESTIONS 29. The amount of interest involved in a transaction is based upon a) the principal. b) interest rate. c) time period. d) all of these. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

30. Simple interest is calculated by a) principal x compound interest rate x time. b) principal x interest rate x time. c) payment due x interest x number of payments in a year. d) payment due x compound interest x number of payments in a year. Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

31. Assuming a simple rate of interest, how much interest in total would you pay if you borrowed $5,000 for three years at 8%? a) $400 b) $800 c) $1,200 d) More information is need to complete the calculation. Answer: c Bloomcode: Application Difficulty: Medium

Testbank for Accounting Principles, Ninth Canadian Edition

Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

32. You decided to borrow $2,000 for two years at 5%. How much interest would you pay in the first year? a) $200 b) $100 c) $50 d) $75 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

33. You have two options 1) invest $1,000 at 5% simple interest for two years or 2) invest $900 for two years at 5% compounded annually. What is the total amount of interest to be received under each scenario? a) 1) – $100; 2) – $90 b) 1) – $102.50; 2) – $92.25 c) 1) – $102.50; 2) – $90 d) 1) – $100; 2) – $92.25 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

34. You have two options 1) invest $10,000 at 5% simple interest for two years or 2) invest $9,000 for two years at 5% compounded annually. What is the total amount of interest to be received under each scenario? a) 1) – $1,000, 2) – $900 b) 1) – $1,025, 2) – $922.50

Testbank for Accounting Principles, Ninth Canadian Edition

c) 1) – $1,025, 2) – $900 d) 1) – $1,000, 2) – $922.50 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

35. Mango Company has borrowed $15,000 to complete some renovations to its office. The loan agreement indicates that the loan must be repaid in three years, with interest at 4%. How much simple interest will Mango Company have to pay? a) $600 b) $1,800 c) $1,200 d) $1,873 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

36. Mango Company has borrowed $15,000 to complete some renovations to its office. The loan agreement indicates that the loan must be repaid in three years, with interest of 4%. How much compound interest will Mango Company have to pay in total by the end of year 2? a) $600 b) $1,200 c) $1,800 d) $1,224 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting

Testbank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

37. Mango Company has borrowed $15,000 to complete some renovations to its office. The loan agreement indicates that the loan must be repaid in three years, with interest of 4%. How much compound interest will Mango Company have to pay? a) $1,873 b) $600 c) $1,200 d) $1,800 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

38. Compound interest is calculated a) only on the principal. b) by principal x interest rate x time. c) payment due x interest x number of payments in a year. d) on principal and on any interest earned that has not been paid or withdrawn. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

39. Assuming compound interest, how much interest in total would you pay if you borrowed $5,000 for three years at 4%? a) $600 b) $200 c) $624 d) More information is needed to complete the calculation. Answer: c

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest CPA: Financial Reporting AACSB: Analytic

40. Suppose you have a winning lottery ticket and the lottery commission gives you the option of taking $25,000 three years from now, or taking the present value of $25,000 now. If a 4% discount rate is used, what is the present value of your winnings of $25,000 three years from now using the present value formula (round to two decimal places)? a) $28,121.60 b) $26,000.00 c) $22,224.91 d) $24,038.46 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

41. Suppose you have a winning lottery ticket and the lottery commission gives you the option of taking $25,000 three years from now, or taking the present value of $25,000 now. If a 4% discount rate is used, what is the present value of your winnings of $25,000 three years from now using a financial calculator (round to two decimal places)? a) $26,000.00 b) $28,121.60 c) $24,038.46 d) $22,224.91 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

42. Determine the amount you must deposit now in your savings account, paying 1.5% interest, in order to accumulate $5,000 to purchase a home theatre system five years from now. a) $4,641.30 b) $4,761.90 c) $4,926.10 d) $5,386.42 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

43. What is the present value of a $$25,000, 5-year bond with a contractual rate of 5% and a market rate of 6% with quarterly interest payments? a) $23,946.91 b) $23,926.96 c) $25,000.00 d) $23,933.72 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

44. Calculate the market price of a $10,000, 5-year bond when the market is at 4% and the contractual rate is 6%. Bond interest is paid quarterly. a) $10,000.00 b) $10,902.28 c) $10,890.36 d) $10,900.59 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount.

Testbank for Accounting Principles, Ninth Canadian Edition

Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

45. Given an interest rate of 4%, what amount would you have to invest today to end up with $1,000 one year from now? a) $250 b) $961.54 c) $925.93 d) Additional information is required to complete the calculation. Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

46. If you want to have $2,000 in your pocket at the end of one year, what amount would you have to invest today given an interest rate of 5%? a) $1,951.22 b) $1,818.18 c) $1,904.76 d) Additional information is required to complete the calculation. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

47. You have a target of having $5,000 at the end of 5 years. If the interest rate is 3%, how much would you need to invest today? a) $4,313.04 b) $4,854.36 c) $4,442.45 d) Additional information is required to complete the calculation.

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

48. You are planning a trip to Europe three years from now and would like to have $6,000 at that time. Given an interest rate of 5%, how much would you need to invest today? a) $5,731.10 b) $5,714.28 c) $5,183.03 d) Additional information is needed. Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount CPA: Financial Reporting AACSB: Analytic

49. In calculating the present value of an annuity, it is required to know the a) discount rate. b) number of payments. c) amount of each payment. d) All of the choices are correct. Answer: d Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

50. An annuity is a) a series of equal dollar amounts to be received or paid periodically. b) a series of dollar amounts to be paid each month.

Testbank for Accounting Principles, Ninth Canadian Edition

c) a series of dollar amounts to be received each month. d) a one-time payment or receipt. Answer: a Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

51. You have won the local lottery and will receive $1,000 cash each year for three years. If the discounted rate is 5%, what is the present value of this award? a) $2,590.92 b) $2,723.25 c) $4,579.71 d) $3,150.00 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

52. You are scheduled to receive a bonus of $1,000 cash each year for three years. Assuming a discount rate of 3%, what is the present value of this bonus? a) $3,090.00 b) $2,912.62 c) $2,828.61 d) $2,745.42 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

53. Assume that you will receive $5,000 cash each year for four years. Considering a discount rate of 2%, what is the present value of this annuity? a) $19,038.64 b) $9,430.45 c) $20,400.00 d) $16,236.40 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

54. What is the present value of $2,000 of cash received each year for 5 years at a 6% discount rate? a) $11,144.65 b) $8,424.73 c) $7,472.60 d) $10,600.00 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

55. Bilangio Company has just signed a capital lease contract for equipment that requires rental payments of $5,000 each, to be paid at the end of each of the next three years. The appropriate discount rate is 4%. What is the present value of the rental payments to capitalize the leased equipment? a) $15,000.00 b) $5,624.32 c) $13,875.46 d) $15,600.00 Answer: c Bloomcode: Application

Testbank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

56. You have just inherited some money and are expected to receive $10,000 cash each year for three years. Assuming a discount rate of 2%, what is the present value of your inheritance? a) $30,000.00 b) $31,216.08 c) $30,600.00 d) $28,838.83 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

57. You have just inherited some money and are expected to receive $5,000 cash every six months for three years. Assuming a discount rate of 2%, what is the present value of your inheritance? a) $28,977.38 b) $14,419.42 c) $28,007.15 d) $14,704.93 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

58. An annuity due means a) payments are due immediately. b) payments are due at the beginning of the period. c) payments are due at the end of the period. d) no payment is due.

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: b Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

59. What is the present value of $1,000 received each year for 5 years at a 3% discount rate? a) $5,796.37 b) $5,000.00 c) $5,150.00 d) $4,579.71 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) CPA: Financial Reporting AACSB: Analytic

60. A $100,000, 5-year bond with an interest rate of 5% is for sale when the market interest is at 5%. This bond will sell at a) a discount. b) a premium. c) neither a discount or a premium. d) More information is needed. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

61. A $500,000, 4-year bond with an interest rate of 6% is for sale when the market interest is at 5%. This bond will sell at

Testbank for Accounting Principles, Ninth Canadian Edition

a) a discount. b) a premium. c) neither a discount or a premium. d) more information is needed. Answer: b Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

62. On January 1, 2024, M & M Inc. issues $1,000,000 of 10-year, 4% bonds to yield a market interest rate of 4%. Interest is paid semi-annually on January 1 and July 1. What is the issue price of the bonds? a) $1,000,000 b) $728,193 c) $1,327,029 d) $760,437 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

63. On January 1, 2024, Sylol Inc. issues $1,000,000 of 10-year, 5% bonds to yield a market interest rate of 4%. Interest is paid semi-annually on January 1 and July 1. What is the issue price of the bonds? a) $1,135,903 b) $796,145 c) $737,643 d) $1,081,757 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting

Testbank for Accounting Principles, Ninth Canadian Edition

AACSB: Analytic

64. On January 1, 2024, Ferocious Inc. issues $800,000 of 10-year, 4% bonds to yield a market interest rate of 5%. Interest is paid semi-annually on January 1 and July 1. What is the issue price of the bonds? a) $865,406 b) $764,992 c) $737,643 d) $835,930 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

65. Blue Bayou Enterprises issued $1 million of 5-year, 3% bonds that pay interest semi-annually. The market rate of interest for the bonds at the issue date is 4%. What cash proceeds did Blue Bayou receive from the issue of the bonds? a) $1,046,111 b) $955,087 c) $1,089,826 d) $888,704 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

66. Blue Bayou Enterprises issued $1 million of 5-year, 4% bonds that pay interest semi-annually. The market rate of interest for the bonds at the issue date is 3%. What cash proceeds did Blue Bayou receive from the issue of the bonds? a) $1,089,826 b) $955,087 c) $888,704 d) $1,046,111

Testbank for Accounting Principles, Ninth Canadian Edition

Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

67. Your company is getting ready to market their $1,000 bonds which have an interest rate of 4.5% and a five-year term. Current markets estimate interest rates at 5%. What will your bonds likely sell for? a) $1,000 b) > $1,000 c) < $1,000 d) You will be unable to sell them at this rate. Answer: c Bloomcode: Comprehension Difficulty: Easy Learning Objective: Calculate the present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

68. What is the present value of a $25,000 bond, 5-year with a contractual rate of 5% and a market rate of 6% with semi-annual interest payments? a) $23,946.91 b) $23,933.72 c) $25,000.00 d) $24,375.00 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

69. Calculate the market price of a $10,000, 5-year bond when the market is at 4% and the contractual rate is 6%. Bond interest is paid semi-annually. a) $10,000.00 b) $9,146.94 c) $10,898.26 d) $10,900.59 Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

70. We are considering a note payable of $10,000 with an interest rate of 5% for five years. Determine the blended annual payment amount. a) $2,152.47 b) $2,309.75 c) $2,000.00 d) $2,100.00 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

71. You are about to purchase your first car for $35,000. You pay $2,500 cash and finance the remaining amount at an annual interest rate of 5% over a period of 48 months. How much is your monthly payment, assuming you make equal blended principal and interest payments each month? a) $1,936.14 b) $748.45 c) $1,797.85 d) $806.03 Answer: b Bloomcode: Application

Testbank for Accounting Principles, Ninth Canadian Edition

Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

72. You are a student who has borrowed $1,500 per year and upon graduation you have a total debt of $7,500. You have a fixed rate loan with an interest rate of 5%. Assuming you can pay $105 month, how long will it take you to pay off the loan? a) 63 months b) 31 months c) 5 years d) 85 months Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

73. We are considering a note payable of $25,000 with an interest rate of 4% for five years. Determine the blended annual payment amount. a) $5,615.68 b) $4,615.68 c) $7,050.30 d) $5,000.00 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

74. We are considering a note payable of $10,000 with an interest rate of 5% and blended annual

Testbank for Accounting Principles, Ninth Canadian Edition

payment amounts of $2,309.75. Determine the length of time until the amounts are paid (time to maturity date). a) 5 years b) 4 years c) 5.5 years d) 4.5 years Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

75. We are considering a note payable of $25,000 with an interest rate of 4% and blended annual payments of $5,615.68. Determine the length of time until the amounts are paid (time to maturity date). a) 4 years b) 4.5 years c) 5 years d) 5.5 years Answer: c Bloomcode: Application Difficulty: Medium Learning Objective: Applying present value concepts to notes payable to calculate the periodic payments, the interest rate or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable CPA: Financial Reporting AACSB: Analytic

76. Flava Inc. has a piece of equipment on their production line that they think will last another 5 years and is expected to generate $3,500 of annual cash flows. Using a discount rate of 4%, what is the value in use of this equipment? a) $3,500 b) $15,581 c) $17,500 d) $14,384 Answer: b

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Application Difficulty: Medium Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use Using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

77. You are attempting to estimate the value in use of your company’s equipment, which you estimate will be used in operations for another five years. You estimate that the equipment will generate annual cash flows of $10,000, at the end of each year, for the remainder of its productive life, and that 3% is the appropriate discount rate. What is the value in use of this equipment? a) $11,593 b) $50,000 c) $51,500 d) $45,797 Answer: d Bloomcode: Application Difficulty: Medium Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use Using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

78. DLH Company owns a specialized piece of equipment used in its manufacturing process. DLH needs to determine the asset’s value in use to test for impairment. DLH’s management estimates that the equipment will last for another five years and that it will generate the following future cash flows at the end of each year: Year 1 Year 2 Year 3 Year 4 Year 5 $5,000 $6,000 $8,000 $10,000 $7,000 Assuming a discount rate of 5%, how much is the value in use? a) $30,826 b) $30,306 c) $36,000 d) $31,172 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use Using Future Cash Flows

Testbank for Accounting Principles, Ninth Canadian Edition

CPA: Financial Reporting AACSB: Analytic

79. Assume Guild Inc. has a piece of equipment that is expected to generate $10,000 of annual cash flows. The company believes that the equipment will last another 10 years. Using a discount rate of 4%, what is the value in use of the equipment? a) $14,802 b) $81,109 c) $104,000 d) $100,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use Using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

80. Assume Rice Paper Inc. has equipment that is expected to generate $5,000 of annual cash flows. The company believes that the equipment will last another 6 years. Using a discount rate of 5%, what is the value in use of the equipment? a) $31,500 b) $25,378 c) $30,000 d) $3,731 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use Using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

81. KPop estimates their embossing machine will last another three years and will generate the following cash flows: Year 1 2 3 $5,000 $6,000 $6,500 Using a rate of 6% what is the equipment’s value in use? a) $15,514

Testbank for Accounting Principles, Ninth Canadian Edition

b) $16,458 c) $16,700 d) $33,111 Answer: a Bloomcode: Application Difficulty: Medium Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use Using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

82. T-Mall has a piece of equipment on their production line that they think will last another 6 years and is expected to generate $6,500 of annual cash flows. Using a discount rate of 5%, what is the value in use of this equipment? a) $31,962 b) $32,992 c) $29,102 d) $39,000 Answer: b Bloomcode: Application Difficulty: Medium Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use Using Future Cash Flows CPA: Financial Reporting AACSB: Analytic

Testbank for Accounting Principles, Ninth Canadian Edition

MATCHING QUESTIONS 83. Match the items below by entering the appropriate code letter in the space provided: A. B. C. D. E.

Compound interest Discount rate Annuity Simple interest Annuity due

F. G. H.

Ordinary annuity Discount Present value

A series of equal payments or receipts

Calculated by taking the principal x interest rate x time

Also referred to as the effective rate

One where the first payment starts at the beginning of the period

Calculated based upon interest not only on the principal but also on interest earned

One where the first payment is at the end of each period

If the bond’s contractual rate is less than the market, it will be sold at a ___

8. The discounting of future cash flows is often referred to as the process of determining the ______ Answer: 1. C 2.

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate simple and compound interest. Section Reference: Simple and Compound Interest Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount Learning Objective: Calculate the present value of an annuity. Section Reference: Present Value of a Series of Future Cash Flows (Annuities) Learning Objective: Calculating the market price or present value of a bond. Section Reference: Applying Present Value Concepts CPA: Financial Reporting AACSB: Analytic

84. Match the items below by entering the appropriate code letter in the space provided: A. B. C. D. E.

Discount Premium Blended Present value Zero

The future value of an instalment note payable

Amount borrowed

Interest calculated on the principal only

Determining an asset’s value in use requires the application of ______

______ interest is used most in business transactions

If the bond’s contractual rate is greater than the market, it will be sold at a ______

If the bond’s contractual rate is less than the market, it will be sold at a ______

A payment made up of both principal and interest

Answer: 1. E 2.

F. G. H.

Principal Compound Simple

Testbank for Accounting Principles, Ninth Canadian Edition

Bloomcode: Knowledge Difficulty: Easy Learning Objective: Calculate the present value of a single amount. Section Reference: Present Value of a Single Amount Learning Objective: Calculate the market price or present value of a bond. Section Reference: Applying Present Value Concepts Learning Objective: Apply present value concepts to notes payable to calculate the periodic payments, the interest rate, or the number of periods. Section Reference: Using Present Value Concepts with Notes Payable Learning Objective: Estimate the value of an asset using future cash flows. Section Reference: Assets: Estimating Value in Use Using Future Cash Flows CPA: Financial Reporting AACSB: Analytic