Instructions:
1. This examination paper contains 18 pages including this title page. Please ensure that it is
complete.
2. You may not consult any other materials for any reason. Only non-programmable, noncommunicating calculators may be used. You may not listen to or use any communicating or
receiving hardware such as a cellular telephone, a Blackberry, or an iPod.
3. Page 18 of the examination contains a list of ratios. For your convenience, page 18 may be
detached from the examination paper. Do NOT show your work on page 18.
4. Answers for the multiple-choice questions must be recorded on the UW scantron card. All
other questions must be answered in the space provided on the examination paper. Answers
written outside of the provided space will not be graded. You must submit both this
examination paper and the UW scantron card.
5. If you have a question please ask one of the examination proctors. It is unacceptable for you
to communicate with another student for any reason.
6. Show details of all calculations.
7. The examination is 90 minutes
Marking Scheme:
Question
1
2
3
4
Total
Maximum Marks
13
38
24
15
90
Score
Question 1 (13 marks)
Maestro Music Inc. is a local music store that provides music lessons and sells a wide selection of
musical instruments. You have been hired as the accountant and have been asked to prepare journal
entries for the following September 2017 transactions. The company’s fiscal year end is September
30.
Required:
Provide the journal entries required for each of the following transactions in the chart provided on
page 3. The number of lines provided in the chart is not necessarily representative of the number
of lines required – use what you need. You do not need to include explanations for the journal
entries; however, note the letter of the transaction and the date of the entry.
A) On September 8, Maestro Music purchased music equipment for $10,000, paying $3,000
cash and the remainder on account.
B) On September 14, Maestro Music paid $5,800 on account for inventory received in August.
C) On September 15, Maestro Music sold and delivered a violin to a customer for $3,800 on
account.
D) On September 18, Maestro Music paid $1,500 for office supplies.
E) On September 21, Maestro Music collected cash on account in relation to the September
15 sale (i.e., transaction C).
F) On September 27, a customer ordered a grand piano with a selling price of $20,000. The
customer paid a deposit equal to 20% of the selling price.
Continue Question 1
Transaction Letter
and Date
Account Titles
Debits
Credits
Question 2 (38 marks)
Songhao Inc. is a small advertising company headquartered at Waterloo, Ontario with a fiscal year
end of December 31. Jenny, the accountant for Songhao Inc, is going on maternity leave. Songhao
Inc. hired you on a one-year contract to replace Jenny while she is on leave. You are asked to help
prepare the adjusting journal entries, the Adjusted Trial Balance, and the financial statements for
the year ended December 31, 2017. Before her departure, Jenny has provided you with the
Unadjusted Trial Balance and some additional information for Songhao Inc.
Required:
1. Using the additional information noted below for Songhao Inc., prepare the required yearend adjusting journal entries in the chart provided on page 5. You do not need to include
explanations for the adjusting journal entries; however, note the letter of the transaction
and the date of the entry.
2. Adjust the Unadjusted Trial Balance based on the adjusting journal entries you prepared
and complete the Adjusted Trial Balance on page 6.
3. Prepare the Statement of Earnings on page 7, the Statement of Retained Earnings on page
8, and the Statement of Financial Position on page 9. The ending Retained Earnings balance
for 2017 is $72,400.
4. Calculate the Current Ratio and the Debt Ratio as at December 31, 2017. Show your
calculations on page 10.
5. If the company decides to double its dividend payment for the year to $18,400 and nothing
else changes, what are the new Current Ratio and Debt Ratio? Show your calculations on
page 10.
Additional Information:
A) During the last two weeks of December, Songhao Inc. provided advertising services worth
$5,800 to a client. The company has not yet invoiced the client.
B) The unadjusted prepaid rent balance of $8,000 represents rent payment for the four-month
period from December 1, 2017 to March 31, 2018.
C) At the end of December, the company had $800 of office supplies on hand.
D) Songhao Inc. depreciates its computers using straight line depreciation. The annual
depreciation is $2,000.
E) Songhao Inc. pays employees on a semi-monthly basis – that is, on the 15th and the last day
of each month. Since December 31 is a Sunday and January 1 is a holiday, employees will
be paid on Tuesday, January 3, 2018. The monthly payroll is $6,400.
Continue Question 2
Transaction
Letter and Date
Account Titles
Debits
Credits
Continue Question 2
Songhao Inc.
Account Titles
Cash
Accounts Receivable
Accrued Revenue
Unadjusted Trial Balance
December 31, 2017
Debit
Credit
$
35,600
14,000
Prepaid Rent
Supplies
Computers
Accumulated Depreciation - Computers
8,000
1,200
72,000
$
6,000
Accounts Payable
Salary Payable
Long Term Debt
17,600
Share Capital
Retained Earnings (Dec. 31, 2016)
Dividends
30,000
42,000
Advertising Revenue
Depreciation Expense
Rent Expense
Salary Expense
Supplies Expense
Utility Expense
Totals
3,000
9,200
50,800
8,800
$
600
149,400
$
149,400
Adjustments
Debit
Credit
Adjusted Trial Balance
December 31, 2017
Debit
Credit
Continue Question 2
Songhao Inc.
Statement of Earnings
(in Canadian Dollars)
Revenue
Expenses:
Total Expenses
Net income
Continue Question 2
Songhao Inc.
Statement of Retained Earnings
(in Canadian Dollars)
Retained Earnings, Dec. 31, 2016
Add:
Less:
Retained Earnings, Dec. 31, 2017
$72,400
Continue Question 2
Songhao Inc.
Statement of Financial Position
(in Canadian Dollars)
ASSETS
Current Assets
LIABILITIES
Current Liabilities
Total Current Liabilities
Total Current Assets
Total Liabilities
SHAREHOLDERS’ EQUITY
Total Shareholders’ Equity
Total Assets
Total Liabilities and
Shareholders’ Equity
Continue Question 2
Calculate the Current Ratio and the Debt Ratio as at December 31, 2017. Show your calculations.
If the company decides to double its dividend payment for the year from $9,200 to $18,400 and
nothing else changes, what are the new Current Ratio and Debt Ratio? Show your calculations.
Question 3 (24 marks)
Prepare the Statement of Cash Flows for Milan Inc. for the year ended December 31, 2016 using
the indirect method to report cash flows from operating activities. Complete the Statement of Cash
Flows in the space provided on page 14. The number of lines provided is not necessarily
representative of the number of lines that you require – please use what you need. The extra space
below can be used for any necessary calculations.
The Comparative Statement of Financial Position and the incomplete Income Statement for Milan
Inc. are shown on pages 12 and 13, respectively. Note, you need to first complete the Income
Statement before preparing the Statement of Cash Flows. In addition, you are given the following
information.
Additional Information:
A) An existing land with an original cost of $150,000 was sold during the year for $200,000
cash.
B) A new piece of land was acquired during the year in exchange for shares.
C) In addition to the shares that were issued in exchange for the land, additional shares were
issued for cash during the year.
D) There were no purchases or sales of building during the year.
E) Dividends were declared and paid in cash during the year.
F) A long-term debt principal payment of $10,000 was made during the year, and additional
funds were borrowed.
Extra Space for calculations:
Continue Question 3
Milan Inc.
Statement of Financial Position
As At December 31, 2016
(in Canadian dollars)
2016
ASSETS
Current assets
Cash
Accounts receivable
Inventory
Prepaid expenses
Total current assets
Land
Building
Accumulated Depreciation - Building
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Wages payable
Accrued liabilities
Taxes payable
Total current liabilities
$
$
$
Long-term debt
Total liabilities
Shareholders' equity
Share capital
Retained Earnings
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
$
105,900
163,000
750,000
50,000
1,068,900
2015
$
120,000
146,000
0
0
266,000
700,000
1,270,000
(194,000)
2,844,900 $
750,000
1,270,000
(145,500)
2,140,500
67,000
3,000
91,875
161,875
$
51,000
2,100
151,000
204,100
230,000
391,875
210,000
414,100
630,000
1,823,025
2,453,025
2,844,900
450,000
1,276,400
1,726,400
2,140,500
$
Continue Question 3:
Milan Inc.
Income Statement
For the Year Ended December 31, 2016
(in Canadian dollars)
Sales
Cost of sales
Gross profit
Operating expenses
Sales and marketing
General and administrative
Depreciation expense
Total operating expenses
Earnings from operations
Other income (expenses and losses)
Interest expense
Gain on sale of Land
Earnings before income taxes
Income tax recovery (expense)
Net earnings for the year
$
2,140,000
1,295,700
844,300
12,000
60,000
120,500
723,800
(6,300)
767,500
(191,875)
575,625
Continue Question 3:
Milan Inc.
Statement of Cash Flows
For the Year Ended December 31, 2016
(in Canadian dollars)
Operating Activities:
Net cash flow from (used for) operating activities
Investing Activities:
Net cash flow from (used for) investing activities
Financing Activities:
Net cash flow from (used for) financing activities
Net decrease in cash flow
Non-cash Investing and Financing Activities
Question 4 (15 marks)
Choose the correct response from the answers provided. There is no mark penalty for incorrect
responses. Mark the correct responses by completing the University of Waterloo answer scantron card,
using a black lead HB pencil only. Write your name and student number on the answer card and mark
your student number in the appropriate ovals. You do not need to complete the section number
and card number. Answers recorded on the following pages will not be marked.
1. The primary responsibility for the fair presentation of the financial statements in conformity
with generally accepted accounting principles lies with:
A. the company’s auditors.
B. the company’s accounting department.
C. the shareholders.
D. the company’s management.
2. If assets increase $120,000 during a given period and liabilities decrease $25,000 during the
same period, shareholders' equity must:
A. Increase $95,000
B. Decrease $145,000
C. Increase $145,000
D. Decrease $95,000
3. The stable monetary unit assumption is the basis for ignoring:
A. the possibility that the value of inventory might drop below it historical cost.
B. the effect of inflation on the value of the reporting currency.
C. the difference between the appraised value and the actual cost when recording an asset at
its historical cost.
D. fluctuations in the value of Canadian dollar relative to foreign currencies.
4. The operating cycle of a business is best defined as which of the following?
A. One-year period.
B. The period of time for which we prepare our financial statements.
C. The length of time it takes for a company to purchase and pay for goods and services
from suppliers, sell those goods and services to customers and collect cash from the
customers.
D. The length of time over which plant and equipment assets are expected to be used by the
company in generating revenues.
5. On January 1, 2016, Bankburn Corporation had the following balances in its shareholders’
equity accounts: common shares - $200,000 (50,000 shares) and retained earnings - $46,000.
During 2016, the company issued 12,000 shares at $4 per share, reported net income of $38,000
and declared dividends of $8,000. What is the total shareholders’ equity balance as at
December 31, 2016?
A. $340,000
B. $292,000
C. $324,000
D. $276,000
6. Under the revenue recognition principle, a business should record revenue when the business:
A. Receives an order from a customer for goods or services.
B. Prepares the invoice (bill) for goods or services.
C. Delivers goods or services to a customer.
D. Receives payment from a customer for goods or services.
7. An accrual refers to an event:
A. Where the expense or revenue is recorded after the cash settlement.
B. Where the liability is recorded after the cash settlement.
C. Where the expense or revenue is recorded before the cash settlement.
D. Where the asset is recorded after the cash settlement.
8. Assume the beginning balance in the Retained Earnings account is zero. If a debit balance
exists in Retained Earnings after closing out revenues and expenses at the end of the current
period, it indicates:
A. The company had net income for the current period.
B. An increase in cash for the current period.
C. The company incurred a net loss for the current period.
D. A decrease in cash for the current period.
9. When considering making a loan to a company, a bank will look for:
A. A high debt ratio and a low current ratio.
B. A high debt ratio and a high current ratio.
C. A low debt ratio and a low current ratio.
D. A low debt ratio and a high current ratio.
10. Accounts which are closed at the end of an accounting period include:
A. Revenues, expenses, and dividends
B. Assets, revenues, and dividends
C. Revenues, dividends, and liabilities
D. Assets, revenues, and expenses
11. At December 31, 2016, the following data were taken from the adjusted trial balance of Storm
Inc.:
Share Capital
Retained Earnings
Total Revenue
Total Expenses
Dividends
$100,000
$123,000
$84,000
$61,000
$15,000
The 2016 closing entries would include which of the following?
A. $23,000 net credit to retained earnings.
B. $23,000 net debit to retained earnings.
C. $8,000 net credit to retained earnings.
D. $8,000 net debit to retained earnings.
12. Financing activities involve:
A. Acquiring investments.
B. Paying dividends in cash.
C. Acquiring long-lived assets.
D. Lending money.
13. In the indirect method, a loss on sale of equipment is reported as:
A. A decrease to net earnings.
B. An increase to net earnings.
C. An increase to revenues.
D. An increase to cash provided by investing activities.
14. Which of the following is a cash flow from operating activities?
A. Purchase of equipment by issuing shares
B. Sale of a piece of land no longer used in operations.
C. Sale of long-term investments in common shares.
D. Payment of account payable.
15. The claims held by the shareholders of a corporation are represented as:
A. Retained Earnings
B. Share Capital
C. Share Capital minus Retained Earnings
D. Share Capital plus Retained Earnings
This page can be removed so that you can reference it as you work. Do not write on this
page as it will not be marked.
Ratios