BUS320-FInal Exam Review Questions 2

Table of Contents
Question 1: Cumulative Question (CH2-6)................................................................................................................1

Question 1: Cumulative Question (CH2-6): Solution ...............................................................................................3
Question 2: CH7...........................................................................................................................................................7
Question 2: CH7-Solution ...........................................................................................................................................8
Question 3: CH7......................................................................................................................................................... 11
Question 3: CH7: Solution ........................................................................................................................................ 12
Question 4: CH7......................................................................................................................................................... 14
Question 5: CH8......................................................................................................................................................... 16
Question 6: CH8......................................................................................................................................................... 19
Question 7: CH9......................................................................................................................................................... 25
Question 8: CH9......................................................................................................................................................... 27
Question 9: CH10....................................................................................................................................................... 30
Question 9: CH10: Solution ...................................................................................................................................... 31
Question 10: CH11..................................................................................................................................................... 34
Question 10: CH11: Solution .................................................................................................................................... 34
Question 11: CH11..................................................................................................................................................... 38
Question 11: CH11: Solution .................................................................................................................................... 39
Question 12: CH11..................................................................................................................................................... 42
Question 13: CH12..................................................................................................................................................... 44
Question 13: CH12-Solution ..................................................................................................................................... 45
Question 14: CH12..................................................................................................................................................... 46
Question 15: CH12..................................................................................................................................................... 49
BUS 320-Sample Exam Questions 2
Question 1: Cumulative Question (CH2-6)

Musical Notes Incorporated is a company involved in two different aspects of the music business. It has a chain of
three stores in southwestern Ontario that sell and repair musical instruments, and another single store that sells CDs,
DVDs, and other consumer entertainment products. All four stores are in leased space, and the main office is located
in the largest of the three stores selling musical instruments. The company has been in business for many years, and
you have just been hired as the new controller. The previous controller had been in the job since the company first
opened, and had been ill for a few years, and away from the office for the past six months. As a result, the books
need a thorough review in order to straighten out a few errors that have developed over the past fiscal year. The
fiscal year ends January 31, 2014, and you will need to correct the errors and draft financial statements using ASPE
in preparation for the annual visit of the auditors. The following information has been gathered for you to work with.
The trial balance at January 31, 2014, before any adjustments are made is as follows:
Account Description Debit Credit
Cash $ 53,265
Accounts receivable 251,000
Allowance for doubtful cccounts $ 7,200
Inventory—instruments 8,000,000
Inventory—CDs, DVDs, and other entertainment products 200,000
Prepaid insurance 5,000
Equipment—instrument division 500,000
Accumulated depreciation—equipment instrument division 350,000
Accounts payable 100,000
Notes payable 100,000
Income tax payable 23,000
Unearned revenue 60,000
Common shares (10,000 shares issued and outstanding) 100
Retained earnings 7,453,565
Sales revenue—instrument division 2,500,000
Account Description Debit Credit
Cost of goods sold—instrument division 1,200,000
Operating expenses—instrument division 150,000
Bad debt expense—instrument division 5,000
Insurance expense—instrument division 6,600
Sales revenue—CD division 250,000
Cost of goods sold—CD division 350,000
Operating expenses—CD division 100,000
Income tax expense 23,000
Your search through the company files has led you to the following information, which may require adjustments:
1- The CD division store is located in a shopping mall in an area of town where a number of factories have closed.
The mall is virtually empty. This area of the business has been struggling for a few years due to the availability
of downloadable music and movies off the Internet and recent changes to the local economy. This has resulted in
a decision to close this store. It is unlikely that a buyer can be found, and the store will be closed on March 31,
2014. The only asset of this division is the inventory, and all attempts will be made to sell this by the closing
date. It is expected that the company will recover the book value of the inventory as it is being carried at its
current fair value. There are no liabilities related to this division.
2- The company's income tax rate is normally 20%. When the income tax was paid for 2013, the payment was
debited to income tax expense.
3- The company paid a dividend of $25,000 to its shareholders in December 2013. This amount was incorrectly
recorded as an operating expense of the instrument division.
4- Accounts payable at year end, which had not been recorded, were a total of $20,000 of operating expenses for
the instrument division. Last year's accounts payable had been paid and were all related to operating expenses:
1
$65,000 for the instrument division and the remaining $35,000 for the CD division. When paid, operating
expense accounts had been debited.
5- During the year, one accounts receivable invoice in the amount of $5,000 for a violin had become uncollectible
and was written off to bad debt expense. The company follows a policy of recording 1% of its year-end accounts
receivable as an allowance for doubtful accounts. The CD division has cash sales, whereas the sales of the
instrument division are 100% on credit.
6- The equipment is being amortized using the straight-line method over 10 years, assuming no residual value.
Depreciation has not been recorded for the current year.
7- Insurance is paid each November 30, and covers a 12-month period. When the invoice was paid on November
30, 2013, it was debited to insurance expense. The 2012 invoice was for $6,000.
8- Inventory listings have been provided by the store staff that indicate the inventory has been properly accounted
for at year end.
9- The instrument repair department forgot to credit a customer who had paid a deposit of $500 on a repair to a
bassoon. The customer invoice for $750 is included in accounts receivable.
10- The note payable is due in two equal instalments of $50,000 each, plus interest, on January 30, 2015, and 2016.
The annual interest rate is 5%, and the note has been outstanding since August 1, 2013.
Instruction
Prepare the journal entries required to correct the accounts at year end. Post these journal entries to the trial balance
using a 10-column work sheet, and complete the other columns of the work sheet in good form. Prepare the January
31, 2014 statement of financial position and combined income statement and statement of retained earnings for
Musical Notes Incorporated for the year ended January 31, 2014.
2
Question 1: Cumulative Question (CH2-6): Solution

Journal Entries
1. No entry required – disclosure only
2. Income Tax Payable 23,000
Income Tax Expense 23,000
To reallocate income tax payment to offset balance in income tax payable account.
Income Tax Expense 199,219
Income Tax Payable 199,219
To record income tax expense based on net income of: 996,095 x 20% = $199,219.
On the financial statements, income tax expense will be allocated as follows:
Income tax expense on continuing operations
(1,161,095 x 20%= 232,219)
Income tax recovery from loss on discontinued operations ($165,000 x 20% = 33,000)
3. Dividends 25,000
Operating Expenses – Instrument Division 25,000
To correctly record dividend payment. (Note: A debit to Retained Earnings would also be correct)
4. Operating Expenses – Instrument Division 20,000
Accounts Payable 20,000
To record year end accounts payable
Accounts Payable 100,000
Operating Expenses – Instrument Division 65,000
Operating Expenses – CD Division 35,000
To reverse accounts payable from previous year
5. Allowance for Doubtful Accounts 5,000
Bad Debt Expense 5,000
To write off uncollectible account for violin.
6. Depreciation Expense – Equipment Instrument Division 50,000
Accumulated Depreciation – Equipment Instrument Division 50,000
To record depreciation for the year. [($500,000 - $0) / 10 years]
7. Prepaid Insurance 500
Insurance Expense 500
To record prepaid insurance at year end.
($6,600 x 10/12) = $5,500, balance in prepaid insurance currently $5,000.
8. No entry required
9. Unearned Revenue 500
Accounts Receivable 500
To correctly record customer deposit as payment against outstanding invoice.
Bad Debt Expense 305
Allowance for Doubtful Accounts 305
Accounts receivable balance is now: $251,000-$500 = $250,500. Allowance for doubtful accounts
should be 1% x $250,500 = $2,505. Current balance is ($7,200 – $5,000) $2,200, therefore
adjustment required is $2,505 - $2,200 = $305
10. Interest Expense 2,500

Interest Payable 2,500
To record interest expense = 5% x $100,000 x 6/12 =
$2,500.
3
Account Trial Balance Adjustments Adjusted Trial Income Statement Stmt. Of Fin.
Balance Position
DR CR DR CR DR CR DR CR DR CR
Cash 53,265 53,265 53,265
A/R - 251,000 9-500 250,500 250,500
Instruments
A4DA 7,200 5-5,000 5-305 2,505 2,505
Inventory – 8,000,000 8,000,000 8,000,000
Instruments
Inventory – 200,000 200,000 200,000
CD’s
Prepaid Ins. 5,000 7-500 5,500 5,500
Equip – ID 500,000 500,000 500,000
A/D – ID 350,000 6- 400,000 400,000
50,000
A/P 100,000 4- 4- 20,000 20,000
100,000 20,000
Notes 100,000 100,000 100,000
Payable
Interest 10- 2,500 2,500
payable 2,500
Income tax 23,000 2– 2- 199,219
payable 23,000 199,219 199,219
Unearned 60,000 9-500 59,500 59,500
Revenue
Common 100 100 100
Shares
Retained 7,453,565 7,453,565 7,453,565
Earnings
Dividends 3- 25,000 25,000
25,000
Sales – ID 2,500,000 2,500,000 2,500,000
COGS – ID 1,200,000 1,200,000 1,200,000
Operating 150,000 4- 3- 80,000 80,000
Expenses – 20,000 25,000
ID 4-
65,000
Bad Debt 5,000 5-305 5-5000 305 305
Expense –
ID
Insurance 6,600 7-500 6,100 6,100
Expense –
ID
Depreciation 6- 50,000 50,000
Expense - 50,000
ID
4
Cumulative Coverage Question (Continued)

Sales 250,000 250,000 250,000
Revenue
–CD
COGS – 350,000 350,000 350,000
CD
Operating 100,000 4- 65,000 65,000
Expenses 35,000
– CD
Interest 10- 2,500 2,500
Expense 2,500
Income 23,000 2- 2-
Tax 199,219 23,000 199,219 199,219
Expense
Totals 10,843,865 10,843,865 426,024 426,024 10,987,389 10,987,389 1,953,124 2,750,000 9,034,265 8,237,389
Net 796,876 796,876
Income
Note: On the worksheet, numbers preceded by a hyphen indicate the items that they correspond to on the list of
information requiring adjustments.
Musical Notes Incorporated
Statement of Financial Position
As at January 31, 2014
Assets
Current Assets
Cash $ 53,265
Accounts receivable (net of AFDA of $2,505) 247,995
Inventory 8,000,000
Inventory held for sale – related to discontinued operation 200,000
Prepaid expenses 5,500
Total current assets 8,506,760
Property, plant, and equipment

Store equipment 500,000
Less: Accumulated depreciation (400,000)
Net property, plant and equipment 100,000
Total assets $ 8,606,760
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable $ 20,000
Interest payable 2,500
Income tax payable 199,219
Unearned revenue 59,500
Current portion of note payable 50,000
Total current liabilities 331,219
Notes payable, 5% interest, due 2016 50,000

Total liabilities 381,219
Shareholders’ equity
Common shares 100
Retained earnings 8,225,441
Total shareholders’ equity 8,225,541
Total liabilities and shareholders’ equity $ 8,606,760
5
BUS320: Final Exam Review Questions 2
Musical Notes Incorporated

Income Statement and Statement of Retained Earnings
For the year ended January 31, 2014
Sales revenue $ 2,500,000

Cost of goods sold 1,200,000
Gross profit 1,300,000
Expenses:
Operating expenses 80,000
Bad debt expense 305
Insurance expense 6,100
Depreciation expense 50,000
Interest expense 2,500
Total expenses 138,905
Income from continuing operations before income tax expense
1,161,095
Income tax expense 232,219
Income from continuing operations 928,876
Discontinued operations
Loss from operation of discontinued CD Division (net of income taxes of
$33,000) 132,000
Net income 796,876
Add: Retained earnings. February 1, 2013 7,453,565
Less: Dividend 25,000
Retained earnings, January 31, 2014 $ 8,225,441
6
Question 2: CH7
Duncan Stines is the controller for Dunn Mustard Products, a company that mills and prepares mustard seed for various
grocery stores. Duncan is reviewing the work of his staff in preparation for their fiscal year end of December 31, and
has noticed some unusual situations with respect to the receivables as described in the following situations.
Situation 1
Duncan discovered the following six receivables transactions and is uncertain how to present them on the balance sheet.
a. Advanced $10,000 to an employee.

b. Estimated $5,000 of income tax to be refunded.
c. Received a promissory note of $5,000 for services performed.
d. Sold merchandise on account to a customer for $6,000.
e. Sales tax (HST) of $2,500 is recoverable at the end of the quarter.
f. Extended a customer's account for six months by accepting a note in exchange for the amount owed on the
account.
Situation 2
There are two accounts receivable clerks at Dunn. One clerk believes that the accounts receivable should be recorded at
their net amount, as customers generally pay within the discount period, and thus most discounts are taken. The other
clerk believes that all receivable should be recorded at their gross value, since a customer is not entitled to the discount
until they actually pay the company the amount that is owed.
Duncan retrieved the customer files for one of their customers to determine the effects of recording receivables on either
the gross or net method. It showed that Dunn offers credit customers a 2% cash discount if the sales price is paid within
10 days. Any amounts not paid within 10 days are due in 30 days. These repayment terms are stated as 2/10, n/30. As a
sample transaction, on October 1, 2014, Dunn sold merchandise to Good Foods at a price of $20,000. The customer paid
$13,720 ($14,000 less the 2% cash discount) on October 9 and the remaining balance of $6,000 on November 4.
Situation 3
Dunn's largest customer, MegaStore, was expanding their operations and in need of financing to assist with the
renovations. Dunn agreed to loan $25,000 to MegaStore on January 2, 2014, in exchange for a three-year, zero-interest
bearing note. The current market rate for an equivalent note is 10% per annum.
Instructions
a) For each transaction presented in Situation 1, indicate whether the receivables should be reported as accounts
receivable, notes receivable, or other receivables on a balance sheet.
b) Prepare the appropriate journal entries to record the sale and cash collection, comparing the gross and net methods
for the sample transaction relating to Goods Foods on October 15, 2014.
c) For situation 2, assume that Dunn follows the gross method of recording receivables, and that Good Foods did not
make any payments on their account as they were short on cash. Dunn agreed, on November 1, 2014, to allow Good
Foods to substitute a six-month note for the account receivable of $20,000 that Good Foods was unable to pay. It
was agreed that the note would bear interest at a rate of 7% per annum. Prepare Dunn's entries to record the
substitution and payment of the note as scheduled.
d) Prepare a schedule of note discount amortization using the effective interest method, and prepare the journal entries
necessary to record the issue of the note and any adjusting journal entry required at December 31, 2014 (assume that
no other adjusting entries have been made throughout the year).
7
Question 2: CH7-Solution
a)
a. Other receivables
b. Other receivables
c. Notes receivable
d. Accounts receivable
e. Other receivables
f. Notes receivable
b)
Gross method:
October 1, 2014
Accounts Receivable 20,000
Sales revenue 20,000
October 9, 2014
Cash 13,720
Sales Discounts 280
November 4, 2014
Cash 6,000
Net method:
October 1, 2014
Sales revenue 19,600
8
October 9, 2014
Cash 13,720
November 4, 2014
Cash 6,000
Sales Discounts Forfeited 120
c)
November 1, 2014
Note Receivable 20,000
December 31, 2014
Interest Receivable 233
Interest Income 233
$20,000 × 7% × 2/12
May 1, 2014
Cash 20,700
Note Receivable 20,000
Interest Receivable 233
Interest Income [$20,000 × 7% × 4/12] 467
9
d)
Calculation of present value of note:
PV of note = PV of future cash flows
= FV of note × PVF (n=3, i=10%)
= $20,000 × 0.75132
= $15,026.40
January 2, 2014
Note Receivable 15,026.40
Cash 15,026.40
to record the issue of the note
Effective Interest Method 0% Note Discounted at 10%
Schedule of Note Discount Amortization

Effective Interest Method
0% Note Discounted at 10%
Interest Income
Cash Discount Carrying
(10% × carrying
Received Amortized Amount of Note
amount)
Jan. 2, 2014 $15,026.40
Jan. 2, 2015 $0 $1,502.64 $1,502.64 16,529.04
Jan. 2, 2016 0 1,652.90 1,652.90 18,181.94
Jan. 2, 2017 0 *1,818.06 1,818.06 20,000.00
$0 $4,973.60 $4,973.60
 small rounding adjustment

December 31, 2014
Note Receivable 1,502.64
Interest Income [$15,026.40 × 10% × 12/12] 1,502.64
accrue interest income for first year of note
10
Question 3: CH7
Rhythm Central Incorporated is a franchise operation that runs 100 music stores in Canada, collecting fees from
franchisees across the country. You are the junior on the year-end audit for the company, and have been asked to
determine the correct amount to be shown for accounts receivable on the corporate balance sheet at December 31, 2014.
You have the following information available.
a. The company has the following amounts included in its year-end accounts receivable listing.
Name of Customer Balance, Dec. 31 Under 60 days 61-90 days 91-120 days Over 120 Days
Store #105 $153,000 $100,000 $53,000
Store #143 $47,500 $47,500
Store #157 $253,000 $253,000
Store #165 $250,000 $250,000
Store #193 $63,500 $63,500
TOTAL $767,000 $163,500 $53,000 $47,500 $503,000
b. Based on the company's historical records, it was expected that of the amounts under 60 days old, 2% might be
uncollectible; for amounts 61-90 days old, 5% might be uncollectible; and for amounts over 90 days, 10%
might be uncollectible.
c. The company had the following transactions in its account Allowance for Doubtful Accounts for the year.
Opening balance $50,000
Amounts written off during the year 8,500
Current balance $41,500
d. During the year, the company had factored accounts receivable in the amount of $250,000 due from Store
#165, in order to improve the cash flow and meet some debts as accounts came due. The agreement between
Rhythm Central Incorporated and the purchaser of this receivable indicated that Rhythm Central had no
ongoing interest in the receivables, and there was no repurchase agreement. Rhythm Central had agreed to pay
an upfront financing fee with respect to this agreement, and received cash in the amount of $240,000. When the
deposit was recorded, the following entry was made.
Cash 240,000
Loan from Factor 240,000
11
Instructions
A Determine the appropriate amounts to be shown on the balance sheet for Accounts Receivable and Allowance for
Doubtful Accounts. Prepare the necessary adjustments to correct any balance.
B What are the conditions that must be met for a transfer of receivables to be accounted for as a sale?
C How would Rhythm Central account for the Store #165 transaction if it were considered to be a secured borrowing
rather than a sale of receivables?
Question 3: CH7: Solution
Final balance in Accounts Receivable, and calculation of Allowance for Doubtful Accounts:
Name of Customer Balance, Dec. 31 Under 60 days 61-90 days 91-120 days Over 120 Days
Store #105 $153,000 $100,000 $53,000
Store #143 $47,500 $47,500
Store #157 $253,000 $253,000
Store #165 Removed from list due to having been factored
Store #193 $63,500 $63,500
TOTAL $517,000 $163,500 $53,000 $47,500 $253,000
% for Allowance 2% 5% 10% 10%
Allowance Calculation $35,970 $3,270 $2,650 $4,750 $25,300
Adjustment required to Allowance for Doubtful Accounts:
Balance prior to adjustment $ 41,500 CR
Balance required per above calculation 35,970 CR
Adjustment required $ 5,530 DR
Entry required:
12
Allowance for Doubtful Accounts 5,530
Bad Debt Expense (Recovery) 5,530
Entry required to correct Accounts Receivable balance:
Loss on Sale of Receivables.. $10,000
Loan from Factor $240,000
Accounts Receivable $250,000
Although the accounting standards governing the derecognition of financial assets were in a state of flux as this text
went to print, the current Canadian model states that for the transaction to be recorded as a sale, all of the following
conditions must be met:
1. The transferred asset has been isolated from the transferor (put beyond the reach of the transferor and its
creditors even in bankruptcy or receivership).
2. The transferee (the party that receives the assets) has obtained the right to pledge or to exchange either the
transferred assets or beneficial interests in the transferred assets.
3. The transferor does not maintain effective control over the transferred assets through an arrangement to
repurchase or redeem them before maturity or the ability to unilaterally cause the holder to return specific assets.
If the Store #165 transaction was considered to be a secured borrowing (rather than a sale), then Rhythm Central would
account for the Store #165 accounts receivable (the collateralized asset) in the same manner after the transaction as it
did before the transaction, and it would account for the liability (the amount of funds that were received and considered
to be a loan) according to the accounting policies for similar liabilities. Rhythm Central would thus recognize interest
expense on the borrowed amount, and may have to pay an additional finance charge, which is expensed.
13
Question 4: CH7
Goidte Ltd. is a profitable small business. It has not, however, given much consideration to internal control. For
example, in an attempt to keep clerical and office expenses to a minimum, the company has combined the jobs of
cashier and bookkeeper. As a result, Jack Truang handles all cash receipts, keeps the accounting records, and prepares
the monthly bank reconciliations.
The balance per bank statement on October 31, 2014 was $19,460. Outstanding cheques at that time were #782 for
$114, #783 for $160, #784 for $267, #789 for $171, #791 for $325, and #792 for $173. There were no deposits in
transit. Included with the bank statement was a $299 electronic collection on account from a customer, not yet recorded
by Goidte.
The company's general ledger showed the Cash account with a balance of $19,640. The balance included undeposited
cash on hand. Because of the lack of internal controls, Truang took all of the undeposited receipts, which were recorded
on the company's books, for his personal use (a misappropriation of company assets). He then prepared the following
bank reconciliation to hide his theft of cash:
GOIDTE LTD.
Bank Reconciliation
October 31, 2014
Cash balance per books $ 19,640
Less: Electronic funds transfer (EFT), collection from customer 299
Adjusted cash balance per books $ 19,341
Cash balance per bank statement $ 19,460
Less: Outstanding cheques
#782 $ 11
#783 16
#784 26
#789 17
#791 32
#792 17 119
Adjusted cash balance per bank $ 19,341
14
Instructions
A- Identify the errors in the above bank reconciliation.
B- Prepare a correct bank reconciliation.
C- Identify how much Truang stole for personal use. (Hint: The theft is the unidentified difference between the adjusted
balance per books before the theft and the adjusted balance per bank.)
D- Indicate the various ways that Truang tried to hide the theft and the dollar amount for each method
E- What steps could the company take to prevent a misappropriation of assets like this again in the future?
A
The electronic funds transfer (EFT) collection has been subtracted from the cash balance per books. It should be added.
Outstanding cheque #'s 782, 783, 784, 789, 791 and 792 have been listed on the bank reconciliation at incorrect
amounts. The undeposited cash has not been added to the bank balance (although the amount if not provided, it should
be presented in the reconciliation).
B
GOIDTE LTD.
Bank Reconciliation
31-Oct-14
Balance per bank statement $19,460

Less: Outstanding cheques
Cheque # 782 $114
# 783 160
# 784 267
# 789 171
# 791 325
# 792 173 1,210
Adjusted balance per bank $18,250
Cash balance per books $19,640

Add: EFT collection from customer 299
Adjusted balance per books (before theft) 19,939
Theft 1,689
Adjusted balance per books $18,250
C: According to the corrected bank reconciliation prepared in Part B, Truang stole $1,689.
D: The outstanding cheques listed were incorrect. The last digit was dropped for the outstanding cheques (e.g., cheque
#782 for $11 should have been listed as $114). Consequently, cheques totalling $1,210 were recorded as $119, thereby
concealing $1,091 of the theft. Furthermore, Truang subtracted rather than added the EFT collection from a customer to
the book balance for $299 so this misstated the balance by 2 × $299 = $598. These two errors ($1,091 + $598) sum to
the total $1,689 theft amount.
E: Some safeguards that could be implemented to assist in prevention of the misappropriation of cash include:
 The company could require independent checks of performance because the cashier handles the cash and prepares
the bank reconciliation. Independent review is necessary because employees can forget or intentionally fail to follow
internal controls, or they might become careless if there is no one to observe and evaluate their performance. These
reviews should take place internally and externally. Independent internal reviews are especially useful in comparing
accounting records with existing assets to ensure that nothing has been stolen (for instance, random petty cash
counts). It is useful to contrast independent internal reviews with independent external reviews. An important type of
external review is conducted by the external auditors. A review of the cash handling procedures, random cash
counts, and independent verification and accuracy review of the bank reconciliation would be beneficial.
 Segregation of duties is essential in a system of internal control because the responsibility for related activities
should be assigned to different individuals. When the same individual is responsible for related activities, the
potential for errors and irregularities is increased. In general, the following categories of activities should be
separated from one another: authorization of transactions and activities (which was covered above), recording of
transactions, and custody of assets. In thisinstance, the control activity of segregation of duties has been violated
because the cashier had access to cash and the accounting records and also prepared the bank reconciliation.
15
Question 5: CH8
Amanpreet Corporation has a July 31 fiscal year end and uses a perpetual inventory system. The records of Amanpreet
Corporation show the following data:
2014 2013 2012
Income Statement:
Sales $350,000 $330,000 $310,000
Cost of goods sold 245,000 235,000 225,000
Operating expenses 76,000 76,000 76,000
Statement of Financial Position:
Inventory 55,000 45,000 35,000
After its July 31, 2014, year end, Amanpreet discovered two errors:
1. At July 31, 2013, Amanpreet had $10,000 of goods held on consignment at another company that were not
included in the physical count.
2. In July 2013, Amanpreet recorded a $15,000 inventory purchase on account that should have been recorded in
August 2013.
Instructions
A. Prepare incorrect and corrected income statements for Amanpreet for the years ended July 31, 2012, 2013, and
2014.
B. What is the impact of these errors on the owner's equity at July 31, 2014?
C. Calculate the incorrect and correct inventory turnover ratios for 2013 and 2014.
D. Compare the trends in the incorrectly calculated annual profits with the trends in the correctly calculated annual
profits. Does it appear that management may have deliberately made these errors, or do they appear to be
honest errors? Explain.
E. If an error in ending inventory in one year will have the reverse effect in the following year, does this error
need to be corrected when it is discovered? Explain.
16

A
(INCORRECT)
Anampreet Corporation
Income Statement
Year Ended July 31
2014 2013 2012
Sales $350,000 $330,000 $310,000
Cost of goods sold 245,000 235,000 225,000
Gross profit 105,000 95,000 85,000
Net income $29,000 $19,000 $9,000
(CORRECT)
Anampreet Corporation
Income Statement
Year Ended July 31
2014 2013 2012
Sales $350,000 $330,000 $310,000
Cost of goods sold 240,000 ** 240,000 * 225,000
Gross profit 110,000 90,000 85,000
Net income $34,000 $14,000 $9,000
** $240,000 = $245,000 + $10,000 − $15,000

* $240,000 = $235,000 − $10,000 + $15,000
17
The impact of these errors on shareholder's equity at July 31, 2014 is zero because the total of the net income over the
three year period is the same with the incorrect statements as it is with the correct statements. However, using the
incorrect numbers it appears the company's net income is increasing at a steady rate over the three year period when in
fact increased slightly in 2013 and increased substantially in 2014.
Inventory turnover = Cost of goods sold ÷ Average inventory
Incorrect:
2013: $235,000 ÷ [($45,000 + $35,000) ÷ 2] = 5.88 times
2014: $245,000 ÷ [($55,000 + $45,000) ÷ 2] = 4.90 times
Correct:
2013: $240,000 ÷ [($40,000 + $35,000) ÷ 2] = 6.40 times
2014: $240,000 ÷ [($55,000 + $40,000) ÷ 2] = 5.05 times
The incorrect annual net income shows an increasing trend of profitability with net income increasing at a steady rate
from $9,000 in 2012 to $19,000 in 2013 and then to $29,000 in 2014.
The corrected net income also shows an increase in profitability but with a slow rate of increase from 2012 to 2013 and
a much sharper increase from 2013 to 2014. Net income increased from $9,000 to $14,000 in 2013 and subsequently
increased to $34,000 in 2014.
It is not possible to determine if the errors were deliberate or not. Certain factors can indicate a higher likelihood that the
errors are deliberate. For example, if management bonuses tied to trends in profitability, or income smoothing, then it
may be possible the errors were deliberate.
It is necessary to correct the error because users of the financial statements look at the results for individual years and
also look at any trends.
18
Question 6: CH8
SuperStore Limited is a huge retailer of consumer goods with stores in Western Canada. There have been some
problems with the perpetual inventory system during the year, and, as a result, the company has been very particular in
performing the year-end count of Goods for Resale at December 31, 2014. You are auditing the company's inventory
records and have the following information to work with.
1. The total of the inventory as counted is $50 million.

2. The Kelowna store has included in its inventory list $250,000 worth of goods that were shipped to it on
December 31, 2014, f.o.b. Kelowna. The goods were still in transit at year end.
3. A shipment between the Vancouver and Victoria stores in the amount of $150,000 had been shipped f.o.b.
Vancouver and was included in the inventory count for both stores.
4. The stores sell some consignment items for artists in each local area. The value of these items has been
included in the inventory for the Canmore store as $200,000. The other stores did not count these items, but
you have been able to determine that the value of the items at the other stores is $650,000.
5. The stores sell books and music under an agreement with the wholesalers that unsold goods can be returned for
a full refund. The total value of these items at year end was $1 million. Historically, 20% of these items are
returned for credit.
6. In reviewing the payments made subsequent to year end, you have determined that many of the items included
in the inventory at the gross amount on the invoice were subject to discounts taken when payment was made.
The company uses the net method. The total of these discounts is $100,000.
As part of your audit testing, you have decided to check the costing of one large ticket item and one high volume item.
Cost figures have been produced by the computerized perpetual system. You have chosen to check the valuation of
snowmobiles, which are valued using the FIFO cost formula, and potato chips, which are valued using the average cost
formula. The following information is available.
(i) With respect to the snowmobiles:
Inventory November 30, 2014 6 units $63,000
Purchases in December 2014
December 15 3 units $30,000
December 20 25 units $275,000
Sales in December 2014 7 units $275,000
A FIFO cost formula is used
ii) With respect to potato chips:
Date Cases Purchased Cases Sold Balance
Dec. 1 Beginning Inventory 50,000 cases @ $2.60 = $130,000
Dec. 1-15 40,000
19
Dec. 16 75,000 @ $2.75
Dec. 17-24 65,000
Dec. 26 85,000 @ $2.95
Dec. 26-31 55,000
Finally, you decide that the best way to test the accuracy of the final balance is to try to estimate what the inventory
number should be by using both the Gross Profit and Retail Inventory methods
Here is the information you have collected.
Beginning Inventory, at cost $47,000,000
Purchases, at cost 443,000,000
Sales, at selling price 530,000,000
Gross profit % 20%
Beginning inventory, at retail 56,000,000
Purchases, at retail 532,000,000
Markups 5,000,000
Markup cancellations 1,500,000
Markdowns 3,000,000
Markdown cancellations 1,000,000
Instructions
A. Determine the correct balance for the ending inventory of Goods for Resale.
B. Determine the correct unit and total cost for snowmobiles and potato chips
C. Calculate the estimated inventory balance at cost using both the Gross Profit and Conventional Retail Inventory
methods. Explain why there may be differences between these figures and the actual count performed by the
company.
D. Using the revised inventory balance as calculated in Part A, assume that the net realizable value (NRV) of the
inventory is $48,300,000. Prepare the journal entry required, if any, to record the inventory at the lower of cost
and NRV under both the direct method and the indirect method.
20

A
Correct balance for ending inventory of Goods for Resale:
The total of the inventory as counted $50,000,000
Less:
Goods in transit December 31, shipped f.o.b. Kelowna 250,000
Shipment between the Vancouver and Victoria stores (has been counted twice) 150,000
Consignment goods included in inventory in error by Canmore store 200,000
Estimated returns of books and music items (20% × $1,000,000) 200,000
Discounts to be taken on goods included in accounts payable 100,000
Revised inventory balance $49,100,000
(ii) Cost of Snowmobiles
Units on hand at December 31, 2011 (6 + 3 + 25 − 7) 27
Using the FIFO cost flow assumption, these 27 snowmobiles consist of:
25 from the shipment on December 20 $ 275,000
2 from the shipment on December 15 20,000
Cost of snowmobiles using FIFO cost formula $ 295,000
2 units have a per unit cost of $10,000 and the other 25 have a per unit cost of $11,000.
(ii) Cost of Potato Chips:
Date Cases Purchased Cases Sold Balance
Dec. 1 Beginning Inventory 50,000 cases @ $2.60 = $130,000
Dec. 1-15 40,000 10,000 cases @ $2.60 = $26,000
Dec. 16 75,000 @ $2.75 85,000 cases @ $2.7324 = $232,250
21
Dec. 17-24 65,000 20,000 cases @ $2.7324 = $54,648
Dec. 26 85,000 @ $2.95 105,000 cases @ $2.9086 = $305,398
Dec. 26-31 55,000 50,000 cases @$2.9086 = $145,430
Calculation of moving-average cost per unit:
After Dec. 16 purchase = cost of units available / units available
= [$26,000 + (75,000 × $2.75)] / (10,000 + 75,000)
= $2.7324
After Dec. 26 purchase = [$54,648 + (85,000 × $2.95] / (20,000 + 85,000)
= $2.9086
Gross Profit Method
Beginning Inventory, at cost $ 47,000,000
Purchases, at cost 443,000,000
Goods available for sale, at cost 490,000,000
Sales (at selling price) 530,000,000
Less: Gross profit (20% x $530,000,000) 106,000,000
Sales at cost = Estimated COGS 424,000,000
Estimated ending inventory, at cost $ 66,000,000
Retail Inventory Method COST RETAIL
Beginning Inventory, at cost $ 47,000,000 $ 56,000,000
Purchases 443,000,000 532,000,000
Merchandise available for sale $490,000,000 $ 588,000,000
Add:
Markups 5,000,000
22
Less:
Markup cancellations 1,500,000
$490,000,000 $ 591,500,000
Cost to retail ratio = $490,000,000 = 82.84%

$591,500,000
Deduct:
Markdowns 3,000,000
Add:
Markdown cancellations 1,000,000
$ 589,500,000
Deduct: Sales 530,000,000
Ending Inventory at retail $ 59,500,000
Therefore, ending inventory at cost is = $ 59,500,000 × .8284 = $ 49,289,800
Summary and explanation of differences
Inventory per count, as adjusted $ 49,100,000
Inventory as estimated:
By gross profit method 50,000,000
By retail inventory method 49,289,800
The gross profit and retail inventory methods are techniques for estimating year-end inventory; therefore, there are
likely to be differences between the actual count and amounts determined by estimation. For example, if the gross profit
were slightly different this year than in past years, the inventory estimated using the gross profit method will vary from
the actual count. If we can assume that the count is accurate, then reasons for differences may include inventory
shrinkage by theft, breakage, and damage. In addition, in a large retail operation such as SuperStores, it is likely that the
gross profit will vary between items sold. The two estimation methods used do not distinguish between varying rates of
gross profit, and as a result, estimation errors will occur.
23
It is necessary to correct the error because users of the financial statements look at the results for individual years and
also look at any trends.
Direct method:
Cost of Goods Sold 800,000
Inventory ($49,100,000 − $48,300,000) 800,000
Indirect method:
Loss Due to Decline in NRV of Inventory 800,000
Allowance to Reduce Inventory to NRV 800,000
($49,100,000 − $48,300,000)
24
Question 7: CH9
On January 1, 2014, Rustermann Corporation, a publicly traded company, purchased 8% bonds, having a maturity value
of $400,000. The bonds provide the bondholders with a 6% yield. They are dated January 1, 2014, and mature January
1, 2019, with interest receivable December 31 of each year. Rustermann's business model is to hold these bonds to
collect contractual cash flows.
Instructions
A. Calculate the bond acquisition price.
B. Prepare the journal entry at the date of the bond purchase.
C. Prepare a bond amortization schedule.
D. Prepare the journal entry to record the interest received and the amortization for 2014.
E. Prepare the journal entry to record the interest received and the amortization for 2015.

A
Present value of the bond principal payments 298,904.00
[$400,000 × 0.74726 {PV(n=5,i=6%)}]
Present value of the annual bond interest payments 134,795.52
[($400,000 × 8%) × 4.21236 {PVA(n=5,i=6%)}]
Bond acquisition price $ 433,699.52
Jan 1, 2014 Bond Investment at Amortized Cost 433,699.52
Cash 433,699.52
Schedule of Interest Revenue and Bond Premium Amortization

8% Bonds Sold to Yield 6%
Cash Received Interest Revenue (carrying Premium Carrying Amount of

Date ($400,000 × 8%) amount × 6%) Amortized Bonds
1/1/2014 — — — $433,699.52
12/31/2014 $32,000 $26,021.97 $5,978.03 427,721.49
12/31/2015 32,000 25,663.29 6,336.71 421,384.78
12/31/2016 32,000 25,283.09 6,716.91 414,667.87
12/31/2017 32,000 24,880.07 7,119.93 407,547.94
12/31/2018 32,000 24,452.06 * 7,547.94 400,000.00
25
* Rounded by 82¢.
Dec 31, 2014 Cash 32,000.00
Bond Investment at Amortized Cost 5,978.03
Interest Revenue 26,021.97
Dec 31, 2015 Cash 32,000.00
Bond Investment at Amortized Cost 6,336.71
Interest Revenue 25,663.29
26
Question 8: CH9
Wedge Movers Incorporated has been growing quickly over the past several years due to its near perfect record in safely
and quickly moving families across the country. In order to finance its recent growth it became a publicly listed
company, and, as a result it must apply IFRS. The company has a December 31 year end. On January 1, 2014, Wedge
purchased 20% of a company in Halifax, Nova Scotia that manufactures packing crates, PCM Inc., for a price of
$300,000. Wedge considers this a significant influence investment, and has requested your help in accounting for it. At
the time of purchase, the carrying amount and fair values of the packing company assets and liabilities are as follows.
Carrying Amount Fair Value
Cash $ 50,000 $ 50,000
Accounts receivable 100,000 100,000
Land 200,000 250,000
Building (10-year life remaining; no residual value) 350,000 500,000
Liabilities (125,000) (125,000)
$575,000 $775,000
During the year, PCM reported income of $200,000, and paid a dividend to its common shareholders of $100,000. The
fair value of the investment in PCM shares at December 31, 2014 was $315,000.
Instructions
A. Prepare the journal entries for Wedge for 2014, assuming that Wedge cannot exercise significant influence over
PCM. The securities are accounted for using the fair value through net income (FV-NI) model.
B. Prepare the journal entries for Wedge for 2014, assuming that Wedge can exercise significant influence over
PCM.
C. At what amount is the investment in securities reported on the statement of financial position under each of
these methods at December 31, 2014? What is the total investment income reported in 2014 under each of
these methods?
D. Prepare the journal entries for Wedge for 2014, assuming that Wedge cannot exercise significant influence over
PCM and that the securities are eligible for the special election to be accounted for using the fair value through
other comprehensive income (FV-OCI) model.
E. Assume that Wedge is a private company and has decided instead to apply ASPE. Identify which, if any, of the
previous answers will change under this assumption. Can the company choose which standards to follow, or is
it restricted by the type of company it is? Explain briefly.
27

A
No significant influence (FV-NI)
Investment in PCM 300,000
Cash 300,000
To record purchase of 20% of PCM.
Cash ($100,000 × 20%) 20,000
Investment Income (FV-NI) 20,000
To record receipt of dividend.
Investment in PCM ($315,000 – $300,000) 15,000
Investment Income (FV-NI) 15,000
To record the change in fair value of the PCM shares using the FV-NI model.
B
Significant Influence
Cash 300,000
Investment Income 37,000
To record investment income
Investment Income 37,000
Calculation of investment income:

Share of net income reported by PCM [$200,000 × 20%] $40,000
Less: Additional depreciation on difference between fair value
and PCM carrying amount of building
[(20% × ($500,000 − $350,000)) / 10 years = $3,000] 3,000
Investment income reported by Wedge $37,000
28
Cash ($100,000 × 20%) 20,000
C
Statement of Financial Position and Income Statement Amounts
No significant influence (FV-NI)
Statement of Financial Position – Investment in PCM Inc. $315,000
Income Statement – Investment Income (FV-NI) $35,000
Significant influence
Statement of Financial Position – Investment in PCM Inc. $317,000
Income Statement – Investment Income $37,000
D
No significant influence (FV-OCI)
Cash 300,000
Cash ($100,000 × 20%) 20,000
Dividend Income 20,000
Investment in PCM ($315,000 – $300,000) 15,000
Holding Gain on PCM Inc. shares (OCI) 15,000
To record the change in fair value of the PCM shares using the FV-OCI model.
E
If Wedge Movers Incorporated was a private entity following ASPE, then the PCM Inc. common shares would have to
be accounted for using fair value through net income (since ASPE does not have an FV-OCI option).
A public company must follow IFRS. However, a private company can choose to follow either IFRS or ASPE.
29
Question 9: CH10
Jared Millington has been busy during 2014 preparing for a large expansion of his sporting goods business. In an
attempt to be prepared for any further future expansions, Millington has decided to follow IFRS in the event that the
company may go public to raise more capital. Many acquisitions were made of property, plant, and equipment during
the year. Millington has approached you to help him determine how to account for these acquisitions. In preparation for
a meeting with Millington and his bookkeeper, you have reviewed the following information.
a. In January, Millington was able to purchase a warehouse building, along with land and some warehouse
equipment for $1.5 million. He has charged the entire cost of this purchase to an account called Warehouse.
You have been able to obtain information to indicate that the warehouse equipment had a fair value of
$250,000 and the land was appraised at $200,000 and the building at $800,000 just shortly before Millington
purchased them as a group.
b. Shortly after the warehouse was purchased, Millington purchased a piece of land in the downtown area for a
store. There was an old dilapidated building on the property, and Millington quickly tore that building down to
start construction of the new store. The cost of the land and building was $250,000. Millington estimated the
fair value of the building at $15,000. Demolition costs totalled $25,000. There is an account in his trial balance
called Downtown Land with a balance of $275,000.
c. Millington immediately began construction of a new store. His staff members were able to do much of the
work themselves, and contractors were hired for functions that staff was not able to complete. The direct
construction costs were $2 million and these costs are included in an account titled Downtown Store Building.
Costs directly attributable to the building activity, which are included in Millington's Administrative Overhead
account, totalled $750,000. When the construction was complete, Millington had the building appraised and
discovered that it was only worth $2.5 million.
d. On the last day of the fiscal year, Millington purchased a fleet of delivery vehicles on long-term credit. He was
proud that he had been able to finance these vehicles interest free. No payment was required on the non-
interest-bearing note in the amount of $250,000 for three years. Millington felt that this did not need to be
recorded at all as no payment was required; accordingly, no entries had been made to reflect this purchase.
Market interest rates were currently 5% per annum.
e. Millington had some computer equipment that required upgrading during the year. A friend of his was in the
computer business and was willing to make a trade. Millington traded a portion of the warehouse equipment
purchased at the beginning of the year for improved computer equipment. He figured the warehouse equipment
he gave up was about one-fifth of the total purchased in January. In exchange, he received computer equipment
with a fair value of $72,000. No depreciation had been recorded on the warehouse equipment to date.
f. During the year, Millington spent some money on the warehouse building and was wondering if these costs
should be recorded as assets or expenses. These payments have been charged to an account titled Warehouse
Repairs. The costs he was concerned about included:
o repairs to the roof to maintain it in its current condition, costing $100,000
o painting of the entire interior of the building at a cost of $25,000
o replacement of the heating and air conditioning systems at a cost of $150,000. Without this
expenditure, the building would have been very uncomfortable for staff to work in.
g. After an appraisal of all the properties as request by the bank, Millington noted that the fair value of the
warehouse building (purchased in part a) had increased in value by $100,000 over the current carrying amount.
This is the first time that Millington has obtained an appraisal on the real estate, and as such, has not recorded
any valuation changes in the past. In order to reflect this increase in value, Millington has increased the
carrying amount of the warehouse building and recorded a gain in an account titled Holding Gains on Real
Estate in order to increase the current year net income.
Instructions
A. In preparation for your upcoming meeting with Jared Millington and his bookkeeper, summarize the
appropriate accounting for each item. Where possible, prepare suggested correcting entries.
30

a.
This is a lump sum purchase. Therefore, you must calculate the amount of cost to be allocated to the land, building, and
warehouse equipment using the proportional method.
Allocation
Fair Value % of total of Total paid
Land $200,000 16% $240,000
Building $800,000 64% $960,000
Warehouse equipment $250,000 20% $300,000
TOTAL $1,250,000 $1,500,000
The total paid of $1.5 million has been erroneously charged to the account called Warehouse and must be allocated to
the proper accounts.
Land 240,000
Warehouse Building 960,000
Warehouse Equipment 300,000
Warehouse 1,500,000
Note: Asset componentization may be required if there are different useful lives and/or different patterns of delivering
economic benefits to the company for the major components on the building. For instance, the building structure, roof,
and electrical and heating services should be capitalized in separate accounts and depreciation should be calculated
according to their specific component characteristics. The degree of componentization is left up to professional
judgement. A primary consideration is the significance of the individual parts to the "whole" asset. On a cost-benefit
basis, an entity would only separate out components that make up a relatively significant portion of the of the asset's
total cost.
b.
This transaction has been accounted for appropriately. The building, and the building demolition costs, should be
charged to the Land account because the removal of old buildings is considered a land cost as the costs were necessary
to get the land ready for its intended purpose.
c.
Millington should first reallocate the administrative overhead costs to the account containing the balance of the building
costs. The following entry is required.
Downtown Store Building 750,000
Administrative Overhead 750,000
31
This leaves a balance in the Downtown Store Building account of $2,750,000. The amount of the cost of the building
that is in excess of its fair value after construction is complete should be treated as a loss on self-construction, and the
following entry is required.
Loss on Self-Construction 250,000
Downtown Store Building 250,000
d.
Millington must record the acquisition of these vehicles at cost. In this situation, cost is equal to the present value of the
future cash flows. The present value of the payment of $250,000 required in three years at the market rate of interest of
5% is $215,960 [$250,000 × .86384. See Table A-2 for the present value of a single sum PV = $250,000 × (PVF, 3,
5%)]. The following entry is required.
Vehicles 215,960
Note Payable 215,960
e.
This transaction represents a non-monetary exchange of assets. No cash was involved in the transaction. Non-monetary
transactions should be accounted for on the same basis as a monetary transaction: the cost of the asset acquired is equal
to the fair value of the asset given up unless the fair value of the asset received is more evident. In this case, we do not
know the fair value of the warehouse equipment that Millington gave up. We do know the fair value of the computer
equipment acquired. The cost of the warehouse equipment given up would be $60,000 [$300,000 × 20%]. The following
entry is required.
Computer Equipment 72,000
Warehouse Equipment 60,000
Gain on Disposal 12,000
Note: The warehouse equipment should have been depreciated for the portion of the year that it was in use. For
simplicity, and since the depreciation information is not available, that portion of the entry has been omitted.
f.
The roof repairs and the painting of the building are properly recorded as expenses since they do not provide
betterments to the building, but rather only restore the building to its original condition. The replacement of the heating
and air conditioning systems can probably be assumed to improve the quantity of work that will be done by warehouse
staff, as well as potentially reduce operating costs. This amount should be capitalized as part of the cost of the building.
Since the original carrying amount of the furnace and air conditioning systems is unknown, the substitution approach
cannot be used, so it is necessary to capitalize the cost incurred. This would be valid under ASPE. However, under
IFRS, a requirement is to estimate the cost of the old heating and air conditioning system and remove the cost along
with any accumulated depreciation that would have been charged on the old heating and air conditioning system, as well
as recognize a loss, if not fully depreciated. Under IFRS, another journal entry would be required to remove the
estimated cost of the old heating system and the related accumulated depreciation and record any loss on disposal. The
following entry is required based on the information provided.
Warehouse building 150,000
Warehouse repairs 150,000
g.
32
Under IFRS, IAS 16 permits the use of the revaluation model. Under this approach, property, plant, and equipment
assets whose fair values can be measured reliably are carried after acquisition at their fair value at the date of revaluation
less any subsequent depreciation and any subsequent impairment losses. A revaluation is not required at each reporting
date, but must be carried out often enough that the carrying amount reported is not materially different from the assets'
fair value. Between revaluation dates, depreciation is taken on the revalued amount.
Millington can thus choose to apply the revaluation model and increase the carrying amount of the warehouse building
by the increase in value of $100,000. However, the revaluation increases must be reported in the statement of
comprehensive income as other comprehensive income (OCI) items, not in net income. The following journal entry is
required to reclassify the revaluation surplus from net income to OCI.
Holding Gains on Real Estate 100,000
Revaluation Surplus (OCI) 100,000
Future reductions in fair value will first be removed form the Revaluation Surplus (OCI) account until it is depleted and
then the remaining decreases in fair value will be charged to net income as a Revaluation Loss. Over the life of the asset,
the effect of the treatment is that there is no net increase in net income from revaluing the asset (only net decreases are
charged to net income).
33
Question 10: CH11
Forever Furniture Incorporated is a chain of furniture stores that is looking for some help with determining the
appropriate accounting for certain transactions in its capital asset accounts. The company is expecting to go public in the
next few years, and following IFRS is very important to it. In addition, it wants to maximize accounting income if at all
possible. The company has asked you for help with these issues. Given that Forever Furniture is currently a private
company and have many competitors that are private companies, they have also asked you to determine the effects of
each of these transactions under ASPE.
Instructions
A. During the year, the company purchased a new building in northern Ontario. The cost of the building was $500,000.
The company expects to use the building for 10 years, although it has a physical life of 25 years with no residual
value at the end of this time. At the end of 10 years, it is expected that the building can be sold for $250,000. The
company would like to know what the most appropriate depreciation method is and how much depreciation would
be charged in the next three years under both the straight-line and double-declining-balance methods. The company
deducts half the normal depreciation in the year of acquisition and disposal of an asset.
B. Five years ago, the company set up a store in a building that it purchased in Nova Scotia. This year, it was
discovered that the building was deemed unsafe as it was full of asbestos, and the store had to be closed and the
building vacated. The land originally cost $500,000, the building had a cost of $1.5 million, and accumulated
depreciation to date is $500,000. The company has committed to cleaning up the building and will then sell the
property. A new location has been leased to accommodate the business operations until these issues are settled. The
costs of cleanup are expected to be $400,000, after which it is expected that the property will sell for $1 million. The
current fair value of the land and building is $250,000. The company has also determined that the discounted (value
in use) expected net future cash flows are $300,000. What process should be followed and what losses, if any, must
the company report? Forever Furniture has also inquired as to the accounting treatment if the fair value (and
recoverable amount) increase by the next reporting date and the property still has not yet been sold.

A
1. Straight-line
Asset Cost: $500,000
Salvage value $ 0
Physical life 25 years
Residual value $250,000
Useful life 10 years
Straight-line depreciation is:
cost − residual value = $500,000 − $250,000 = $25,000
useful life 10 years
34
Therefore, annual depreciation would be $25,000, with half of this amount reported in the first year of ownership.
Depreciation for each of the next three years would be:
Year 1 $12,500
Year 2 25,000
Year 3 25,000
2. Double-declining-balance
Rate to be used is [1/10 years × 2] = 20%
Cost of asset $500,000
Residual value $250,000
Calculation of Partial Period Depreciation
1st full year [20% × $500,000] $100,000
2nd full year [20% × $400,000] $80,000
3rd full year [20% × $320,000] $64,000
Of this, the actual amount to be deducted under the half-year rule is:
Year 1: [6/12 × $100,000] $50,000
Year 2: [(6/12 × $100,000) + (6/12 × $80,000)] $90,000
Year 3: [(6/12 × $80,000) + (6/12 × $64,000)] $72,000
A second part of the question was to respond to which method would be most appropriate for the company to use.
It is important to note that the underlying principle is that the resulting depreciation should reflect the pattern in which
the asset benefits are expected to be used up by the entity.
The straight-line method is used widely due to its simplicity. If creeping obsolescence is the main reason for the limited
useful life of this building, the depreciation charge determined under straight-line may be the most conceptually
appropriate. Using the straight-line method is acceptable under both IFRS and ASPE, and in this case, will assist the
company in its goal of higher net income for accounting purposes.
The declining-balance method is a decreasing charge method, which will provide for higher depreciation in early years
and lower charges in higher periods. This may not fit with the company's reporting objectives, although it is also
acceptable under both IFRS and ASPE. The main justification for this method is that higher depreciation should be
charged in earlier years when the asset offers the greatest benefit. Also, repair and maintenance costs may be higher in
later years and an accelerated method provides a fairly constant total expense (depreciation + repairs and maintenance).
35
In this case, it would also be necessary to look at the issue of consistency. We do not know how the company has
depreciated other buildings it owns. It might not make sense to use the straight-line method for this building if a
decreasing charge method has been used for previously purchased buildings. Otherwise, the straight-line method meets
the corporate reporting objectives and is the method that should be recommended.
The accounting treatment of the straight-line and double-declining balance methods are the same for both IFRS and
ASPE.
B
Under IFRS – Rational Entity Impairment Model
The conditions are present for an impairment of the value of this asset. The company is not able to recover the
investment cost in these assets in Nova Scotia.
1. The asset's recoverable amount is $300,000 [the higher of its value in use (i.e., value in use of $300,000) and its
fair value less costs to sell ($250,000)]. The recoverability test indicates that an impairment has occurred since
the carrying amount exceeds the recoverable amount.
2. The impairment loss is then calculated as follows: Carrying amount ($1,500,000) − recoverable amount
($300,000) = $1,200,000.
Accordingly, an impairment loss of $1,200,000 must be recorded this year. The asset should be moved from property,
plant, and equipment to a separate classification of long-term assets held for sale. It would no longer be depreciated.
The journal entry to record the impairment loss would be as follows:
Loss on Impairment 1,200,000
Accumulated Impairment Losses—Building 1,200,000
Under IAS 36, the reversal of a previous impairment loss amount is permitted for both assets in use and held for sale.
The specific asset cannot be increased in value to more than what its carrying amount would have been, net of
depreciation, if the original impairment loss had never been recognized.
Under ASPE – Cost Recovery Impairment Model
The conditions are present for an impairment of the value of this asset. The company is not able to recover the
investment cost in these assets in Nova Scotia.
The company should follow this procedure
1. 1. Determine if an actual impairment has taken place by comparing the undiscounted future net cash flows
expected from the use of the asset and its eventual disposition [$1,000,000 − $400,000 = $600,000] to the
asset's carrying amount [$500,000 + $1,500,000 − $500,000 = $1,500,000]. In this case, the recovery test
indicates that an impairment has occurred since the undiscounted future cash flows are less than the carrying
amount.
2. 2. Determine the amount of the impairment loss. In this case, the carrying amount is $1,500,000. The fair value
is $250,000. Accordingly, an impairment loss of $1,250,000 must be recorded this year. This would not be
36
considered an extraordinary item. The asset should be moved from property, plant, and equipment to a separate
classification of long-term assets held for sale. It would no longer be depreciated.
The journal entry to record the impairment loss would be as follows:
Loss on Impairment 1,250,000
Accumulated Impairment Losses—Building 1,250,000
ASPE allows the reversal of an impairment loss for assets held for sale. The amount of the reversal is limited to the
previous impairment write-down, such that the asset cannot have a carrying amount greater than its carrying amount
prior to the impairment. However, recovery of any impairment loss is not permitted for assets held for use or to be
disposed of other than by sale for entities using the cost recovery impairment model.
37
Question 11: CH11
Sugden Limited purchased land and a building on August 1, 2013, for $595,000. The company paid $200,000 in cash
and signed a 5% bank loan payable for the balance. The bank loan is due April 1, 2015. At that time, Sugden estimated
that the land was worth $340,000 and the building $255,000. The building was estimated to have a 40-year useful life
with a $15,000 residual value. The company has a December 31 year end and uses the straight-line depreciation method
for buildings. The following are related transactions and adjustments during the next three years:
2013
Dec. 31 Recorded the annual depreciation.
31 Paid the interest owing on the bank loan.
2014
May 21 Paid $2,000 for repairs to the roof.
Dec. 31 Recorded the annual depreciation.
31 Paid the interest owing on the bank loan.
31 The land and building were tested for impairment. The land had a
recoverable amount of $280,000 and the building $249,000.
2015
Mar. 31 Sold the land and building for $480,000 cash—$250,000 for the land
and $230,000 for the building.
Apr. 1 Paid the bank loan and interest owing.
Instructions
A. Record the above transactions and adjustments for each year.

B. What factors may have been responsible for the impairment on December 31, 2014?
C. Assume instead that the company sold the land and building on March 31, 2015, for $650,000 cash—$390,000
for the land and $260,000 for the building. Record the journal entry (or entries) to record the sale.
D. Now assume that the land and building were not sold in 2015 and that by the end of December 31, 2015, the
fair values of each were $390,000 and $260,000, respectively. (1) Could the impairment loss recorded in 2014
be reversed under IFRS if the cost model were used? (2) Could it be reversed if the IAS 16 revaluation model
were used? (3) Could it be reversed if the IAS 40 fair value model were used? (4) Could it be reversed under
ASPE?
38

A
2013
Aug. 1 Land 340,000
Buildings 255,000
Cash 200,000
Bank Loan Payable 395,000
Dec. 31 Depreciation Expense 2,500
Accumulated Depreciation (Buildings) 2,500
($255,000 − $15,000) / 40 years × 5/12 = $2,500
Dec. 31 Interest Expense 8,229
Cash 8,229
($395,000 × 5% × 5/12 = $8,229)
2014
May 21 Repair and Maintenance Expense 2,000
Cash 2,000
Dec. 31 Depreciation Expense 6,000
Accumulated Depreciation—Buildings 6,000
($255,000 − $15,000) / 40 years = $6,000
Dec. 31 Interest Expense 19,750
Cash 19,750
($395,000 × 5% = $19,750)
Dec. 31 Impairment Loss 60,000
Land 60,000
($280,000 − $340,000 = − $60,000)
39
Building - no entry as recoverable amount of $249,000

is greater than the carrying amount = $246,500
($255,000 − $2,500 − $6,000).
2015
Mar. 31 Depreciation Expense 1,500
($255,000 − $15,000) / 40 years × 3/12 = $1,500
Mar. 31 Cash 480,000
Accumulated Depreciation—Buildings
($2,500 + $6,000 + $1,500) 10,000
Loss on Disposal (below) 45,000
Land 280,000
Buildings 255,000
Calculation of Loss on Disposal:

Total proceeds $480,000
Land $280,000
Buildings 255,000
Less: Accumulated depreciation 10,000
Total carrying amount 525,000
Loss on disposal ($45,000)
April 1 Interest Expense ($395,000 × 5% × 3/12) 4,938
Bank Loan Payable 395,000
Cash 399,938
The land may have been impaired due to contamination found on it or surrounding properties, or because plans to
develop an adjacent property that would have increased the value of Sugden's property may have been permanently
shelved.
40
Mar. 31 Cash 650,000
Land 280,000
Buildings 255,000
Gain on Disposal ($650,000 − $525,000) 125,000
1. IFRS – Cost model: Yes, the impairment loss can be reversed. The land was originally recorded at a cost of
$340,000, then written down to $280,000. If the fair value is $390,000, the impairment loss will be reversed
and the land written back up to $340,000.
2. IFRS – IAS 16 Revaluation model: Yes, the impairment loss can be reversed. In this case the land can be
written up all the way to $390,000 causing the reversal of the original revaluation loss of $60,000 ($340,000 –
$280,000) and creating a revaluation gain of $50,000 ($390,000 – $340,000). Unlike the original revaluation
loss and the reversal of the revaluation loss which are recorded in profit, the revaluation gain is recorded in
other comprehensive income.
3. IFRS – IAS 40 Fair value model: If the land was treated as an investment property and not used in the
operations of Sugden's business, but rather to earn rental income and for capital appreciation, then the fair
value model could be used and the land written up to $390,000. The full amount of this valuation gain would
be recorded in net income. Further, depreciation is not charged to operations when the fair value model is used
as the asset is not used for operational purposes, instead, the fair value changes are reflected in net income each
reporting period.
4. ASPE: the impairment loss cannot be reversed.
41
Question 12: CH11
Yangslo Mining Company has a December 31 fiscal year end. The following information relates to its Gandolph Aerial
mine:
1. Yangslo purchased the Gandolph Aerial mine on March 31, 2014, for $2.6 million cash. On the same day,
modernization of the mine was completed at a cash cost of $260,000. It is estimated that this mine will yield
560,000 tonnes of ore. The mine's estimated residual value is $200,000. Yangslo expects it will extract all the
ore, and then close and sell the mine site in four years
2. During 2014, Yangslo extracted and sold 120,000 tonnes of ore from the mine
3. At the beginning of 2015, Yangslo reassessed its estimate of the remaining ore in the mine. Yangslo estimates
that there is still 550,000 tonnes of ore in the mine at January 1, 2015. The estimated residual value remains at
$200,000
4. During 2015, Yangslo extracted and sold 100,000 tonnes of ore from the mine
Instructions
A. Prepare the 2014 and 2015 journal entries for the above, including any year-end adjustments.
B. Show how the Gandolph Aerial mine will be reported on Yangslo's December 31, 2015, income statement and
statement of financial position.
C. If the total estimated amount of units that will be produced (extracted) changes during the life of the natural
resource, is it still appropriate to use the units-of-production method? Explain.

A
2014
Mar. 31 Mine ($2,600,000 + $260,000 2,860,000
Cash 2,860,000
Dec. 31 Inventory 570,000
Accumulated Depreciation—Mine 570,000
($2,860,000 − $200,000) ÷ 560,000 tonnes
= $4.75/tonne × 120,000 tonnes = $570,000
Dec. 31 Cost of Goods Sold 570,000
Inventory 570,000
2015
Dec. 31 Inventory 380,000
42
Accumulated Depreciation—Mine 380,000
($2,860,000 − $570,000 − $200,000) ÷ 550,000 tonnes
= $3.80/tonne × 100,000 tonnes = $380,000
Dec. 31 Cost of Goods Sold 380,000
Inventory 380,000
YANGSLO MINING COMPANY
Income Statement (partial)
Year Ended December 31, 2015
Cost of goods sold $380,000
YANGSLO MINING COMPANY
Statement of Financial Position (partial)
December 31, 2015
Property, plant, and equipment
Mine $2,860,000
Less: Accumulated depreciation* 950,000 $1,910,000
* $570,000 + $380,000 = $950,000
Due to its nature, it is expected that the estimate of the total amount of ore to be extracted from a mine would need to be
adjusted as extraction occurs and better estimates can be made. Management should not be influenced by the need for
changes in estimates when choosing the units-of-production method for recording depreciation of the mine. It is the
depreciation method that best allocates the cost of the mine to the units of ore that are recorded in inventory.
43
Question 13: CH12
Good Foods Incorporated (GFI) is a worldwide diversified food manufacturing and distribution company that is listed
on a public stock exchange, and thus must follow IFRS. In the 2014 fiscal year, the company purchased the operations
of Sugar and Spice Limited (SSL). The assets purchased included land, building, equipment, accounts receivable, cash,
and goodwill. Carrying amounts and fair values of the assets acquired by GFI were as follows at the date of purchase.
Carrying Amount Fair Value
Cash $50,000 $50,000
Accounts receivable 150,000 150,000
Inventory 65,000 200,000
Property, plant, and equipment, net 500,000 1,000,000
Total assets $765,000 $1,400,000
SSL had no liabilities at the purchase date and GFI paid $2 million to acquire the assets.
GFI is also involved in a significant amount of research and development activity in order to develop recipes for new
food products. Currently, it is working on two projects. The first is the development of techniques for baking a
carbohydrate-free bread product. The company has determined through previous market research that the current
interest in low carbohydrate diets has resulted in a large market for products low in carbohydrates. The company has
also acquired the patent for a process that is a technically feasible way to produce the product. The second project is new
and untested. The company is attempting to determine if there is a market for vegetable-enhanced soft drinks. These
potential new beverages would provide the flavour of soft drinks with vitamin enhancement, which GFI feels may be
popular with consumers. Costs incurred during the year include:
Purchase of new ovens for the product development lab $500,000
Market research into vegetable-enhanced soft drinks $250,000
Salary costs for staff working on the bread product $100,000
Share of overhead related to product development lab $50,000
Depreciation of development lab assets $25,000
Amortization of bread-making process patent $50,000
Instructions
A. Prepare the entry required to record the purchase of the operations of SSL.
B. How should the research and development costs be handled?
C. Explain the options available to account for the intangible assets after acquisition under IFRS. Are these the
same options that would be available under ASPE?
44

A
The entry to record the purchase of the operations of SSL would be as follows.
Cash 50,000
Inventory 200,000
Property, plant, and equipment 1,000,000
Goodwill 600,000
Cash 2,000,000
B
The research and development costs should be handled as follows. The costs associated with the new soft drinks are
considered research. Research costs are expensed as costs of the period in which they are incurred. In this situation,
these would include:
Market research into vegetable-enhanced soft drinks $250,000
The remainder of the cost incurred is considered to be development costs that are eligible for deferral because the bread
product and its market are clearly defined and it is technically feasible. It is assumed that the resources exist to complete
the project. These costs include:
Purchase of new ovens for the product development lab $500,000
The ovens are a capital asset related to development. They would be capitalized and depreciation on these ovens would
be charged to the development lab and treated as a development cost. It is assumed that the depreciation of development
lab assets includes depreciation of these ovens. Therefore, the total development costs for the year are:
Salary costs for staff working on the bread product $100,000
Share of overhead related to product development lab 50,000
Depreciation of development lab assets 25,000
Total development costs $175,000
These development costs can be capitalized and deferred. Deferred development would be amortized over the usefulness
of the final process using an amortization method that best reflects the pattern of benefits received.
In addition, the following costs are also considered to be development costs for the year (and will be expensed during
the year wince you should not defer and amortize depreciation/amortization costs):
Amortization of bread-making process patent $50,000
C
Under IFRS, two models have been put forward for measuring intangible assets after initial recognition: a cost model
and a revaluation model. The cost model is the most widely used approach due to the fact that the revaluation model can
only be applied to intangible assets that have a fair value determined in an active market (for example, a variety of
agricultural quotas for which the government sets production limits, such as milk or eggs, and for some transferable taxi
licences in some jurisdictions).
Under ASPE, the cost model is the only method allowed.
45
Question 14: CH12
Karsch Enterprises, a public company, has a December 31 fiscal year end and uses straight-line amortization for its
finite-life intangible assets. The company has provided you with the following information related to its intangible
assets and goodwill during 2014 and 2015:
2014
Jan. 9 Purchased a patent with an estimated useful life of five years and a legal life of 20 years for $45,000 cash.
May Purchased another company and recorded goodwill of $450,000 as part of the purchase.
15
Dec. Recorded adjusting entries as required for amortization.

31
Dec. Tested assets for impairment and determined the patent and the goodwill's recoverable amounts were
31 $40,000 and $400,000, respectively.
2015
Jan. 2 Incurred legal fees of $30,000 to successfully defend the patent.
Mar. Incurred research costs of $175,000.

31
Apr. 1 Purchased a copyright for $66,000 cash. The company expects the copyright will benefit the company for 10
years.
July 1 Purchased a trademark with an indefinite expected life for $275,000 cash.
Dec. Recorded adjusting entries as required for amortization

31
Dec. Tested assets for impairment and determined the copyright and the trademark's recoverable amounts were in
31 excess of their cost.
The patent and the goodwill's recoverable amounts were $45,000 and $425,000, respectively.
Instructions
A. Record the transactions and adjusting entries as required.

B. Show the statement of financial position presentation of the intangible assets and goodwill at December 31,
2015.
46
2014
Jan. 9 Patents 45,000
Cash 45,000
May 15 Goodwill 450,000
Cash 450,000
Dec. 15 Amortization Expense 9,000
Accumulated Amortization—Patents ($45,000 ÷ 5) 9,000
Dec. 15 Impairment Loss 50,000
Goodwill ($450,000 − $400,000) 50,000
2014
Jan. 2 Patents 30,000
Cash 30,000
Mar. 31 Research Expense 175,000
Cash 175,000
Apr. 1 Copyrights 66,000
Cash 66,000
July 1 Trademark 275,000
Cash 275,000
Accumulated Amortization—Patents
[($45,000 − $9,000 + $30,000) ÷ 4] 16,500
Accumulated Amortization—Copyrights
47
[($66,000 ÷ 10) × 9/12 4,950
Dec. 31 Loss on Impairment* 4,500
Accumulated Impairment Losses—Patents 4,500
* Impairment test—Patents
Cost $45,000
Addition 30,000
Amortization 2014 (9,000)
Amortization 2015 (16,500)
Carrying amount Dec. 31, 2015 49,500
Recoverable amount 45,000
Impairment loss $ 4,500
** Impairment test—Goodwill:
Carrying amount of Goodwill 400,000
Recoverable amount 425,000
Note: No recovery of goodwill impairment is recorded under IFRS, regardless of the previous impairment losses
recorded on goodwill.
Karsch Enterprises
as at December 31, 2015
Intangible assets
Patents $75,000
Less: Accumulated amortization 30,000 $45,000
Copyrights 66,000
Less: Accumulated amortization 4,950 61,050
Trademark 275,000
Total intangible assets $381,050
Goodwill $400,000
48
Question 15: CH12
The intangible assets reported by Wingu Company at December 31, 2013, follow:
Patent #1 $ 80,000
Less: Accumulated amortization 16,000 $64,000
Copyright #1 48,000
Less: Accumulated amortization 28,800 19,200
Goodwill 220,000
Total $303,200
Patent #1 was acquired in January 2012 and has an estimated useful life of 10 years. Copyright #1 was acquired in
January 2008 and also has an estimated useful life of 10 years. The following cash transactions may have affected
intangible assets and goodwill during the year 2014:
Jan. 2 Paid $23,200 of legal costs to successfully defend Patent #1 against infringement by another company.
June Developed a new product, incurring $180,000 in research costs and $60,000 in development costs, which
30 were paid in cash. Patent #2 was granted for the product on July 1. Its estimated useful life is equal to its legal
life of 20 years.
Sept. 1 Paid $12,000 to an Olympic athlete to appear in commercials advertising the company's products.
The commercials will air in September.
Oct. 1 Acquired a second copyright for $18,000 cash. Copyright #2 has an estimated useful life of six years.
Dec. Determined the recoverable amount of the goodwill to be $240,000. The company had originally paid
31 $250,000 for the goodwill in 2011. In 2012, the company had recorded a $30,000 impairment loss on the
goodwill. There is no indication that the patents and copyrights were impaired
Instructions
A. Record the above transactions.

B. Prepare any adjusting journal entries required at December 31, 2014, the company's year end.
C. Show how the intangible assets and goodwill will be reported on the statement of financial position
at December 31, 2014.
D. Since intangible assets do not have physical substance, why are they considered to be assets?
49
Jan. 2 Patent #1 23,200

Cash 23,200
June 30 Research Expense 180,000
Cash 180,000
Sep 30 Patent #2 60,000
Cash 60,000
Sep 1 Advertising Expense 12,000
Cash 12,000
Oct. 1 Copyright #2 18,000
Cash 18,000
Dec. 31 No entry: Reversals of impairments of goodwill may not be recorded.
Accumulated Amortization—Patent #1* 10,900
Accumulated Amortization—Patent #2** 1,500
* [($80,000 × 1/10) + ($23,200 × 1/8)]

At Jan. 1, 2014 Patent # 1 has been amortized 2 years
($16,000 ÷ $80,000 = 2/10) — remaining period to
amortize is 8 years.
** [$60,000 × 1/20 × 6/12 = $1,500]
Accumulated Amortization—Copyright #1 4,800
Accumulated Amortization—Copyright #2 750
[($48,000 × 1/10) + ($18,000 × 1/6 × 3/12)]
50
WINGU COMPANY
as at December 31, 2014
Intangible assets
Patents (1) $163,200
Less: Accumulated amortization (2) 28,400 $134,800
Copyrights (3) 66,000
Less: Accumulated amortization (4) 34,350 31,650
Total intangible assets $166,450
Goodwill $220,000
1. Cost: Patent #1 ($80,000 + $23,200) + Patent #2 ($60,000) = $163,200

2. Accumulated Amortization: Patent #1 ($16,000 + $8,000 + $2,900) + Patent #2 ($1,500) = $28,400
3. Cost: Copyright #1 ($48,000) + Copyright #2 ($18,000) = $66,000
4. Accumulated Amortization: Copyright #1 ($28,800 + $4,800) + Copyright #2 ($750) = $34,350
Although intangible assets do not have physical substance, they have characteristics common to other assets in that they
contribute to the revenue producing ability of a business that owns them. They are owned and controlled by the business
and therefore fit the definition of assets.
51

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Table of Contents

Question 1: Cumulative Question (CH2-6)................................................................................................................1

Question 1: Cumulative Question (CH2-6)

Question 1: Cumulative Question (CH2-6): Solution

10. Interest Expense 2,500

Cumulative Coverage Question (Continued)

Property, plant, and equipment

Notes payable, 5% interest, due 2016 50,000

Musical Notes Incorporated

Sales revenue $ 2,500,000

a. Advanced $10,000 to an employee.

Accounts Receivable 20,000

Sales revenue 20,000

Sales Discounts 280

Accounts Receivable 14,000

Accounts receivable 6,000

Accounts Receivable 19,600

Sales revenue 19,600

Accounts Receivable 13,720

Accounts receivable 5,880

Sales Discounts Forfeited 120

Note Receivable 20,000

Accounts Receivable 20,000

December 31, 2014

Interest Receivable 233

Interest Income 233

Note Receivable 20,000

Interest Receivable 233

Interest Income [$20,000 × 7% × 4/12] 467

PV of note = PV of future cash flows

= FV of note × PVF (n=3, i=10%)

Note Receivable 15,026.40

to record the issue of the note

Effective Interest Method 0% Note Discounted at 10%

Schedule of Note Discount Amortization

Jan. 2, 2014 $15,026.40

Jan. 2, 2015 $0 $1,502.64 $1,502.64 16,529.04

Jan. 2, 2016 0 1,652.90 1,652.90 18,181.94

Jan. 2, 2017 0 *1,818.06 1,818.06 20,000.00

 small rounding adjustment

Store #105 $153,000 $100,000 $53,000

Store #143 $47,500 $47,500

Store #157 $253,000 $253,000

Store #165 $250,000 $250,000

Store #193 $63,500 $63,500

TOTAL $767,000 $163,500 $53,000 $47,500 $503,000

Opening balance $50,000

Amounts written off during the year 8,500

Current balance $41,500

Loan from Factor 240,000

Question 3: CH7: Solution

Store #105 $153,000 $100,000 $53,000

Store #143 $47,500 $47,500

Store #157 $253,000 $253,000

Store #165 Removed from list due to having been factored

Store #193 $63,500 $63,500

TOTAL $517,000 $163,500 $53,000 $47,500 $253,000

% for Allowance 2% 5% 10% 10%

Allowance Calculation $35,970 $3,270 $2,650 $4,750 $25,300

Adjustment required to Allowance for Doubtful Accounts:

Balance prior to adjustment $ 41,500 CR

Balance required per above calculation 35,970 CR

Adjustment required $ 5,530 DR

Allowance for Doubtful Accounts 5,530