Chapter 1 & 2 - Fundamentals of Financial Accounting Theory & Conceptual

Framework
1. Which statement is NOT correct?
a) Financial accounting is the process of providing information to external parties.
b) Accounting is about the communication of financial information.
c) Accounting is the production of information about an enterprise and the transmission
of that information to those who need the information.
d) Financial accounting is the process of providing information to internal parties.

Managerial accounting involves reporting information to internal parties whereas

financial accounting involves reporting information to external parties.
2. Which is NOT a question that financial accounting theory can answer?
a) Why do companies provide financial information to external parties?
b) Why do all companies use the same accounting policies?
c) Why is certain disclosure mandatory in financial reporting?
d) What is the role of financial accounting and reporting?
3. Which statement best explains "information asymmetry"?
a) Information asymmetry means that there is uncertainty about the future.
b) Information asymmetry means that some people have more information than
others
c) Information asymmetry means that external parties need financial information.
d) Information asymmetry means information is material to a decision maker.
4. Which statement best explains "moral hazard"?
a) The term refers to a situation where one party has an information advantage over
another.
b) The term refers to the need external parties have for financial information.
c) The term refers to the fact that some people have more information than others.
d) The term refers to a situation where one party cannot observe the actions of
another party.
5. Which of the following statements is correct about financial information?
a) All users require the same kind of information.
b) Forward looking information is useful for evaluating management stewardship.
c) Trade-offs are necessary in accounting.
d) Historical cost information is useful for pricing the value of a company's shares.

Given multiple user groups and conflicting demands placed on accounting information,
trade-offs must be made.
6. Which of the following is NOT an example of management motivation to improve the
financial statements?
a) To make it likely that the firm will meet regulatory requirements
b) To provide stronger bargaining position in merger negotiations
c) To obtain higher compensation through profit-sharing agreements
d) To improve the firm's bargaining position relative to the employee union
 The firm would more likely show the employee union that the company is not performing
well. The bias would not be to improve the financial statements but to show worse
results than actually happened.
7. Which statement appropriately explains the meaning of "publicly accountable
enterprise"?
a) Firms without equity, debt or other securities traded in public markets.
b) Firms with equity, debt or other securities traded in public markets.
c) Firms with assets and liabilities that provide goods and services in public markets.
d) New firms entering the public markets to provide goods and services.
8. Which statement best explains the semi-strong form of the efficient securities market
hypothesis?
a) A market in which the prices of securities traded in that market at all times
properly reflect all information that is publicly known about those securities.
b) A market in which the prices of securities traded in that market reflect all information,
whether publicly or privately known.
c) A market in which the prices of debt securities traded in that market reflect all
information that is privately known about those securities.
d) A market in which the prices of equity securities traded in that market reflect all
information that is privately known about those securities.
9. Which of the following best describes the importance of qualitative characteristics as part
of the conceptual framework of financial reporting?
a) Relevance and representational faithfulness must always be present.
b) Representational faithfulness may be traded off.
c) Timeliness is a fundamental qualitative characteristic.
d) All of the above.
10. Schmidt Ltd. aims to improve the qualitative characteristics of its financial statements.
You are the owner and have been presented with the options shown below. Which of
these options would most likely improve the comparability of your company's financial
statements?
a) The restatement of its financial statements from Canadian GAAP to US GAAP
for its American investors.
b) The preparation of monthly financial statements.
c) The introduction of a policy that specifies how Schmidt's capital assets should be
amortized.
d) The use of foreign-trained accountants.
11. Enhancing qualitative characteristics are an essential part of the conceptual framework
of accounting. These include, among others, timeliness. Which of the items below would
be most indicative of timeliness?
a) The preparation of quarterly financial statements.
b) The preparation of annual financial statements.
c) The large volume of data to be included.
d) The choice of the best accounting principle.
a) The preparation of quarterly financial statements.
 12. In which of the following transactions would it NOT be appropriate for SGG to recognize
an asset in the financial statements?
a) SGG receives a firm commitment from another company to purchase goods
from SGG.
b) SGG pays $10,000 to a lawyer for services to be provided next year.
c) SGG provides services to another company, but will not be paid until after year end.
d) A customer of SGG makes a deposit of $1,500 for goods to be custom-made.

Not b, because if SGG prepays for services then the prepaid expense would be
recorded as an asset on the balance sheet. When the services have been used up then
the asset will be expensed.
13. Computer Inc. sells equipment with a 3-year warranty. Prior experience indicates that
costs for warranty repairs average 3% in the first year, 2% in the second year and 1% in
the third year. In 2020, Computer Inc. had sales of $800,000. It paid $20,000 for
materials and labour to make warranty-related repairs in 2020. What amount will be
recorded as warranty expense in 2020?
a) $16,000
b) $24,000
c) $28,000
d) $48,000

The warranty expense = 800,000 x (3%+2%+1%) = 48,000

14. The adoption of International Financial Reporting Standards is an example of:
a) The impact of technology on user's needs.
b) The impact of globalization on capital markets.
c) Ethical behaviour.
d) Creation of better standards by standard setting boards

Globalization means that users throughout the world need to be able to understand the
accounting standards in order to make investment or lending decisions.

Chapter 3 - Accrual Accounting Part 1

1. What is the accrual basis of accounting?
a) A basis of accounting that records economic events when they happen rather
than only when cash exchanges occur.
b) A method of accounting that does not require accruals for amounts due or outstanding
at year-end.
c) An entry that reflects accounting events and transactions after the related cash flow.
d) An entry that reflects events in a period different from their corresponding cash flow.
2. What is a "cash" cycle?
a) A cycle of transactions that converts cash inflows to cash outflows, or vice
versa.
 b) A cycle where there is receipt of funding from investors, those funds are used to
generate returns from investments and operations, and then the funds are returned to
investors.
c) A cycle where a property is purchased that has long-term future benefits for the
enterprise, which ultimately results in cash inflows, and then the property is disposed of.
d) A cycle that involves the purchase of items such as inventory; production, sales,
delivery of goods or provision of services; and receipts from customers.
3. A company gave a price quote for a possible service to a client in February, performed
the required service for the client in March, sent an invoice to the client in April, and
received payment in May. In which month, should the revenue be recognized?
a) February
b) March
c) April
d) May

The service was performed in March, at which time revenue can be recognized.
4. Adjusting entries are made to ensure that:
a) Expenses are recorded when they are incurred.
b) Revenues are recorded in the period in which they are earned.
c) Balance sheet and income statement accounts have correct balances at the end of an
accounting period.
d) All of the above
5. The unadjusted trial balance shows Supplies $1,350 and Supplies Expense $0. If $600
of supplies are on hand at the end of the period, the adjusting entry is:
a) Debit Supplies 600 Credit Supplies expense 600
b) Debit Supplies expense 600 Credit Supplies 600
c) Debit Supplies 750 Credit Supplies expenses 750
d) Debit Supplies Expense 750 Credit Supplies 750

The company’s supplies account showed $1,350 but the count revealed that only $600
was still on hand. This means that $750 worth of supplies were used during the period.
Therefore, the company will debit the supplies expense account for $750 and credit the
supplies for the $750 to account for the usage.
$1,350 - $600 = $750 were used
6. What is meant by "earnings quality"?
a) A measure of how closely expense accruals correspond to actual expenses without
management bias.
b) A measure to determine management bias by comparing actual reported profits with
"true" earnings.
c) A measure to determine management bias by comparing reported income to actual
cash flows.
d) A measure of how closely earnings correspond to earnings reported without
management bias.
7. In August, the University received $6 million from students for tuition in advance, relating
to the four-month fall semester covering the period September 1 to December 31. When
the cash was received, the Unearned Revenue account was credited for the full amount.
What adjusting journal entry should the university record on September 30 when
preparing financial statements for that month?
a) Debit Tuition Revenue 1,500,000 Credit Unearned Revenue 1,500,000
b) Debit Unearned Revenue 1,500,000 Credit Tuition Revenue 1,500,000
c) Debit Unearned Revenue 4,500,000 Credit Tuition Revenue 4,500,000
d) Debit Cash 1,500,000 Credit Tuition Revenue 1,500,000

Every month, the university earns the tuition that students have prepaid for. This means
that every month, the university will be able to recognize ¼ or $1,500,000 as revenue.
Therefore, the university will credit the tuition revenue account and debit the unearned
revenue account.
$6 million / 4 months = $1.5 million recognized every month
8. If, during an accounting period, an expense item has been incurred and consumed but
not yet paid for or recorded, then the end-of-period adjusting entry would involve:
a) a liability account and an asset account.
b) an asset or contra-asset and an expense account.
c) a liability account and an expense account.
d) a receivable account and a revenue account.

The end-of-the period adjusting entry would involve a credit to a liability and a debit to an
expense account when an expense item has been incurred and consumed but not yet
paid for.
9. Year-end net assets would be overstated and current expenses would be understated as
a result of failure to record which of the following adjusting entries?
a) Expiration of prepaid insurance
b) Depreciation of long-lived assets
c) Accrued wages payable
d) All of the above

Failure to record the expiration of prepaid insurance, depreciation of long-lived assets,

and accrued wages payable would result in net assets being overstated and current
expenses being understated.
10. Compared to the accrual basis of accounting, the cash basis of accounting overstates
income by the net increase during the accounting period of the:
a) Accounts Receivable- No, Accrued Expenses Payable - No
b) Accounts Receivable- No, Accrued Expenses Payable- Yes
c) Accounts Receivable- Yes, Accrued Expenses Payable- No
d) Accounts Receivable- Yes, Accrued Expenses Payable- Yes
11. Hegel Corp. reported revenue of $0.9 million in its accrual basis income statement for
the year ended June 30, 2020.
 Additional information was as follows:
Accounts receivable June 30, 2019 ... $230,000
Accounts receivable June 30, 2020 ... 490,000
Uncollectible accounts written off during the fiscal year ... 10,000
Under the cash basis, Hegel should report revenue of:

a) $640,000
b) $630,000
c) $650,000
d) $600,000

Revenue $900,000
Add: Opening Balance $230,000
Less: Accounts Receivable $490,000
Less: Uncollectible Accounts $10,000
Revenue on Cash Basis $630,000
12. Which of the following is not considered to be an accounting change?
a) Change in accounting estimate
b) Change in the composition of the board of directors
c) Change in accounting policy
d) Correction of a prior period error
13. Which of the following alternative accounting methods is (are) allowed by ASPE and
IFRS for reporting accounting changes?
a) Prospective and retrospective
b) Current and retrospective
c) Current and prospective
d) Retrospective only

ASPE and IFRS allows the prospective and retrospective method for reporting
accounting changes not just the retrospective method.
14. Accounting for a retrospective change requires:
a) reissuing all prior financial statements affected by the change.
b) adjusting the ending balance of retained earnings for the current year.
c) reporting the "catch-up" adjustment on the current income statement.
d) adjusting the opening balance of each affected component of equity for the
current year.
15. Stockton Ltd. changed its inventory system from FIFO to average cost. What type of
accounting change does this represent?
a) A change in accounting estimate for which the financial statements for the prior
periods included for comparative purposes do not need to be restated.
b) A change in accounting policy for which the financial statements for prior periods
included for comparative purposes do not need to be restated.
c) A change in accounting policy for which the financial statements for prior
periods included for comparative purposes should be restated.
 d) A change in accounting estimate for which the financial statements for prior periods
included for comparative purposes should be restated.
16. On January 1, 2020, Ravinder Ltd. changed its inventory valuation method to FIFO from
weighted-average cost for financial statement and income tax purposes, to make their
reporting as reliable and more relevant. The change resulted in a $600,000 increase in
the beginning inventory at January 1, 2020. Assume a 40% income tax rate. The
cumulative effect of this accounting change reported for the year ended December 31,
2020 is:

a) $0
b) $240,000
c) $360,000
d) $600,000

The cumulative effect would be impacted by taxes.

$600,000 x (1-0.40) = $360,000
17. On December 31, 2020, the bookkeeper at Akmad Corp. did not record special
insurance costs that had been incurred (but not yet paid), related to a building that
Akmad Corp. is constructing. What is the effect of the omission on the accrued liabilities
and retained earnings in the December 31, 2020 statement of financial position?
a) Accrued Liabilities: No effect. Retained Earnings: No effect
b) Accrued Liabilities: No effect. Retained Earnings: Overstated
c) Accrued Liabilities: Understated. Retained Earnings: No effect
d) Accrued Liabilities: Understated. Retained Earnings: Overstated

The accrued liabilities would be understated as the insurance costs have been incurred
but not yet paid and there is no impact to the retained earnings as the costs would be
capitalized to the work-in-progress related to the building.
18. On January 2, 2020, Beaver Corp. purchased machinery for $135,000. The entire cost
was incorrectly recorded as an expense. The machinery has a nine-year life and a
$9,000 residual value. Beaver uses straight-line depreciation for all its tangible assets.
The error was not discovered until May 1, 2022, and the appropriate corrections were
made. Ignore income tax considerations. Before the corrections were made, retained
earnings was understated by:
a) $135,000
b) $121,000
c) $107,000
d) $93,000

The machinery cost of $135,000 was expensed but 2 years of depreciation should have
been taken
Straight Line Depreciation = (Cost of an Asset - Residual Value) / Useful Life of an Asset
($135,000 -$9,000)/9 years x 2 years = $28,000
$135,000 - $28,000 = $107,000
 Therefore the understatement is $107,000.
19. An example of a correction of an error in previously issued financial statements is a
change:
a) from the cash basis of accounting to the accrual basis accounting.
b) from the FIFO method of inventory valuation to the average cost method.
c) in the service life of plant assets, based on changes in the economic environment.
d) in the tax assessment related to a prior period.
20. Which of the following is (are) the proper time period(s) to record the effects of a change
in accounting estimate?
a) Retrospectively only
b) Current period and prospectively
c) Current period and retrospectively
d) Current period only

The proper periods to record the effects of a change in accounting estimate is the
current period and prospectively. The same goes for a change in the accounting policy.
21. The service life of a building that has been depreciated for 30 years of an originally
estimated 50-year life (no residual value) has been revised to an estimated remaining
life of 10 years. Based on this information, the accountant should:
a) continue to depreciate the building over the original 50-year life.
b) depreciate the remaining book value over the remaining life of the asset.
c) adjust accumulated depreciation to its appropriate balance through net income, based
on a 40-year life, and then depreciate the adjusted book value as though the estimated
life had always been 40 years.
d) adjust accumulated depreciation to its appropriate balance through retained earnings,
based on a 40-year life, and then depreciate the adjusted book value as though the
estimated life had always been 40 years.
22. On January 1, 2014, Plover Ltd. purchased a machine for $330,000 and depreciated it
using the straight-line method with an estimated useful life of eight years with no residual
value. On January 1, 2017, Plover determined that the machine had a useful life of only
six years from the date of acquisition, but will have a residual value of $30,000. An
accounting change was made in 2017 to reflect these additional facts. At December 31,
2018, the accumulated depreciation for this machine should have a balance of
a) $182,500
b) $187,500
c) $241,250
d) $250,000

The depreciation taken in 2014 was: 330,000 / 8 years = $41,250

The depreciation taken in 2015 was: 330,000 / 8 years = $41,250
The depreciation taken in 2016 was: 330,000 / 8 years = $41,250
New estimate in 2017:
The depreciation taken in 2017 was:
(330,000 - (41,250 x 3) - 30,000) / (6 years - 3 years) = $58,750
 The depreciation taken in 2018 was:
(330,000 - (41,250 x 3) - 30,000) / (6 years - 3 years)] = $58,750
The total accumulated amortization is
(41,250 x 3 years) + ($58,750 x 2 years) = $241,250

Chapter 3 - Accrual Accounting Part 2

1. Which financial statement reports assets, liabilities, and shareholders' equity?
a) Balance Sheet/Statement of Financial Position
b) Income statement/Statement of Income
c) Statement of changes in equity/Retained earnings
d) Statement of cash flows
2. Financial statements must be prepared in the following order:
a) (1) Income statement, (2) statement of cash flows, (3) statement of changes in equity,
and (4) statement of financial position.
b) (1) Statement of changes in equity, (2) income statement, (3) statement of cash flows,
and (4) statement of financial position.
c) (1) Statement of financial position, (2) income statement, (3) statement of changes in
equity, and (4) statement of cash flows.
d) 1) Income statement, (2) statement of changes in equity, (3) statement of
financial position, and (4) statement of cash flows.
3. In a classified statement of financial position, the following selected current assets are
usually classified by North American companies in this order:
a) Accounts receivable, cash, prepaid insurance, and inventory.
b) Cash, inventory, accounts receivable, and prepaid insurance.
c) Prepaid insurance, merchandise inventory, accounts receivable, and cash.
d) Cash, accounts receivable, merchandise inventory, and prepaid insurance.
4. In a classified statement of financial position, assets are usually classified by North
American companies in this order:
a) Current assets; investments; property, plant, and equipment; and intangible
assets.
b) Current assets and current liabilities.
c) Current assets, investments, and share capital.
d) Intangible assets; property, plant, and equipment; investments; and current assets.
5. Net sales are $400,000; cost of goods sold is $310,000; selling expenses are $10,000;
administrative expenses are $50,000; other revenue and gains is $10,000; and income
tax expense is $8,000. What is the gross profit?
a) $12,000
b) $30,000
c) $32,000
d) $90,000

Gross profit = Revenue - Cost of goods sold

Gross profit = Net sales - Cost of goods sold
Gross profit = $400,000 - $310,000
 Gross profit = $90,000

6. Which of the following appears on both a single-step and multiple-step income

statement?
a) Gross profit
b) Profit from operations
c) Merchandise inventory
d) Profit before income tax
7. Which of the following is NOT reported in a statement of changes in equity?
a) Legal capital of common shares
b) Fair value of common shares
c) Dividends
d) Accumulated other comprehensive income
8. Which of the following is not a generally practiced method of presenting the income
statement?
a) Including corrections of errors made in a prior period
b) The single-step income statement
c) The consolidated statement of income
d) Including gains and losses from discontinued operations of a segment of a business
in determining net income
9. Quorum Company reported the following information for 2020:
Sales revenue $520,000
Cost of goods sold 350,000
Operating expenses 55,000
Gain on the sale of capital assets 50,000
Cash dividends received on investment securities 2,000

For 2020, on a multiple-step income statement, Quorum would report other income of:
a) $167,000
b) $165,000
c) $52,000
d) $50,000

Gain on the sale of capital assets + Cash dividends received on investment securities =
Other income
$50,000 + $2,000 = $52,000

10. Which of the following items will not appear in the statement of retained earnings?
a) Net loss
b) Correction of an error
c) Change in accounting estimates
d) Stock dividends
11. The following information was extracted from the accounts of Colaw Corporation at
December 31, 2020:
 CR(DR)
(1) Total reported income since incorporation $1,500,000
(2) Total cash dividends paid (800,000)
(3) Cumulative effect of changes in accounting principle (120,000)
(4) Total stock dividends distributed (200,000)
(5) Correction of an error, recorded January 1, 2018 66,0000

What should be the balance of retained earnings at December 31, 2020?

a) $446,000
b) $500,000
c) $380,000
d) $566,000

Retained Earnings

1,500,000 (1)
800,000 (2)
120,000 (3)
200,000 (4)
66,000 (5)
$446,000

12. Which of the following should not be considered as a current asset in the statement of
financial position?
a) Instalment notes receivable due over eighteen months in accordance with normal
trade practice
b) Prepaid taxes which cover assessments of the following operating cycle of the
business
c) Equity or debt securities purchased with cash available for current operations
d) The cash surrender value of a life insurance policy carried by a corporation, the
beneficiary, on its president
13. Which item below is not typically a current liability?
a) Unearned revenue
b) Mortgage payable
c) The currently maturing portion of long-term debt
d) Trade accounts payable
14. Treasury stock should be reported as a(n):
a) current asset
b) investment
c) other asset
d) reduction in shareholder's equity
15. The financial statement which summarizes operating, investing, and financing activities
of an entity for a period of time is the:
a) retained earnings statement
b) income statement
c) statement of cash flows
 d) statement of financial position

Chapter 4 - Revenue Recognition Part 1

1. Which of the following best explains what recognition means in financial reporting?
a) Recognition is the process of reporting an item that is due within 12 months in the
current section of the balance sheet.
b) Recognition is the process of reporting an item in the notes to the financial
statements.
c) Recognition is the process of presenting an item in the financial statements.
d) Recognition refers to the choice between using fair value and historical cost in the
financial statements.
2. Which of the following are part of measuring revenue (IFRS)?
a) identifying the performance obligation and determining the transaction price
b) identifying the contract(s) and recognizing revenue when performance obligations are
satisfied
c) determining the transaction price and recognizing revenue when performance
obligations are satisfied
d) determining the transaction price and allocating the transaction price

Within the 5-steps of revenue recognition, measurement is based on step 3 determine

the transaction price and step 4 allocate the transaction price
3. Under a consignment sales arrangement:
a) the consignor receives the merchandise to sell.
b) the consignor retains legal title.
c) the consignee ships the merchandise to the consignor.
d) the consignee retains legal title.
4. In a consignment arrangement, revenue is recognized by the consignor when the:
a) goods are shipped to the consignee.
b) consignee receives the goods.
c) consignor receives an advance from the consignee.
d) consignor receives notification of a sale from the consignee.
5. On April 1, 2020, Green Co. consigned 50 handcrafted garden benches to Garden Co.
The per unit cost of the benches was $350 and total freight was $700 (the freight was
paid by Garden). On August 1, Green received a cheque in the amount of $14,100 from
Garden which included the following information:

Number of units sold: 20

Expenses deducted:
Freight: $700
Commission (20% of sales price): ?
Advertising: $450
Delivery: $290

Total sales were:

 a) $15,540
b) $19,425
c) $18,550
d) $19,060

Sales - (Sales x 20%) - $700 - $450 - $290 = $14,100

80% x Sales = $15,540
Sales = $15,540 / 0.80
Sales = $19,425

6. What is the reason behind delaying revenue recognition for installment sales beyond the
delivery date?
a) Because the legal title to the product has already passed
b) There is too much risk and uncertainty regarding amount of future benefits
c) The cash flows to be received are not 100% certain
d) Both B and C are correct
7. Which of the following is true about bill and hold arrangements?
a) The goods are ready for delivery and the seller holds onto them
b) The purchaser requests that the seller not deliver the goods
c) The seller can recognize revenue even while holding onto the goods
d) All of the above statements are true
8. Why is it important to identify when a sale contains multiple performance obligations?
a) This needs to be disclosed in the notes to the financial statements
b) Revenue needs to be allocated to the different components and these
components can have different timings for revenue recognition
c) In order for management to ensure all obligations are met by their deadlines
d) Revenue needs to be allocated to the different components and these components
will have the same timings for revenue recognition

Chapter 4 - Revenue Recognition Part 2

1. How should earned but unbilled revenues at the balance sheet date on a long-term
construction contract be disclosed if the percentage-of-completion method of revenue
recognition is used?
a) As construction in process in the current asset section of the statement of
financial position.
b) As construction in process in the noncurrent asset section of the statement of financial
position.
c) As a receivable in the noncurrent asset section of the statement of financial position.
d) In a note to the financial statements until the customer is formally billed for the portion
of work completed.

2. Bella Construction Company entered into a contract to build a new bus terminal for
$2,500,000.
 Construction commenced on June 1, 2020, with a planned completion date of December
31, 2022. A summary of the costs, billings, and collections is provided below:

2020 2021 2022

Costs incurred during $500,000 $700,000 $1,100,000

the year

Estimated costs to 1,500,000 1,200,000 0

complete at year end

Billings during the year 440,000 1,000,000 1,060,000

Cash collections during 400,000 900,000 1,200,000

the year

Bella uses the percentage of completion method.

What amount would appear as accounts receivable on Ying's December 31, 2021
balance sheet?
a) $140,000
b) $1,400,000
c) $100,000
d) $1,000,000

Accounts Receivable

$440,000 (2020)
$400,000 (2020)
$40,000 (2020)
$1,000,000 (2021)
$900,000 (2021)
$140,000 (2021)

3. Hello Construction Company entered into a contract to build a school for $1,800,000.
Construction commenced on May 1, 2020, with a planned completion date of December
31, 2022. A summary of the related accounting information is provided below:

2020 2021 2022

Costs incurred during $400,000 $500,000 $650,000

the year

Estimated costs to 1,200,000 600,000 0

complete at year end

Billings during the year 560,000 640,000 600,000

Cash collections during 500,000 310,000 990,000

 the year

How much gross profit would be recognized in fiscal 2020 if the company uses the
percentage of completion method?

a) $130,000
b) $100,000
c) $180,000
d) $50,000

2020 2021 2022 Total

Contract price A $1,800,000

Actual costs incurred C $400,000 $500,000 $650,000 $1,550,000

each year

Cumulative costs D 400,000 900,000 1,550,000

incurred to date

Estimated costs to E 1,200,000 600,000 0

complete at year end

Total estimated cost of F= 1,600,000 1,200,000 1,550,000

contract D+E

Cumulative % to G= 25% 75% 100%

complete to date D/F

Cumulative revenue to H= 450,000 1,350,000 1,800,000

date AxG

Revenue recognized in J= 0 450,000 1,350,000

prior years prior
H

Revenue recognized K= 450,000 900,000 450,000 1,800,000

for current year H-J

Cost of sales for L= $400,000 $500,000 $650,000 $1,550,000

current year C

Gross profit for M= 50,000 400,000 (200,000) 250,000

current year K-L

4. Spark Ltd. began work in 2018 on contract #731 which provided for a contract price of
$2,400,000. Other details follow:

2018 2019

Costs incurred during the year $400,000 $1,225,000

Estimated costs to complete as 1,200,000 0

 of December 31

Billings during the year 450,000 1,800,000

Collections during the year 300,000 1,950,000

Assume that Spark uses the completed-contract method of accounting. The portion of
the total gross profit to be recognized as income in 2018 is:
a) $0
b) -$400,000
c) $450,000
d) $300,000

Completed contract method is an accounting method that defers revenue and expense
recognition until the date when the contractor completes the project, instead of
periodically over the life of the contract under the percentage of completion method.

5. Noodle Construction Company entered into a contract to build an office building for
$1,800,000.
Construction commenced on July 1, 2020, with a planned completion date of December
31, 2022. A summary of the related accounting information is provided below:

2020 2021 2022

Costs incurred during $400,000 $500,000 $650,000

the year

Estimated costs to 1,200,000 600,000 0

complete at year end

Billings during the year 360,000 440,000 1,000,000

Cash collections during 300,000 410,000 1,090,000

the year

How much gross profit would be recognized in 2022 if Noodle uses the completed
contract method?
a) $120,000
b) $220,000
c) $0
d) $250,000

2020 2021 2022 Total

Contract price A $1,800,000

Actual costs incurred C $400,000 $500,000 $650,000 $1,550,000

each year
 Cumulative costs D 400,000 900,000 1,550,000
incurred to date

Estimated costs to E 1,200,000 600,000 0

complete at year end

Total estimated cost of F= 1,600,000 1,200,000 1,550,000

contract D+E

Cumulative % to G= 25% 75% 100%

complete to date D/F

Cumulative revenue to H= 450,000 1,350,000 1,800,000

date AxG

Revenue recognized in J= 0 450,000 1,350,000

prior years prior
H

Revenue recognized K= 450,000 900,000 450,000 1,800,000

for current year H-J

Cost of sales for L= $400,000 $500,000 $650,000 $1,550,000

current year C

Gross profit for M= 50,000 400,000 (200,000) 250,000

current year K-L

6. This question relates to the risks of revenue misstatements and the appropriateness of
revenue recognition policies.

Which statement is correct about the "winner's curse"?

a) Misstatements from the winner's curse are unintentional under-estimates or over-
estimates.
b) Misstatements from the winner's curse result from the unavailability of correct
information.
c) The winner's curse means a contract is usually awarded to the highest bidder.
d) The winner's curse means that a contract will tend to be awarded to the contractor
who underestimates costs the most.

Chapter 5 - Cash and Receivables

1. Bank overdrafts, if material, should
a) be reported as a current liability.
b) be netted against cash and a net cash amount reported.
c) be reported as a deduction from cash.
d) be reported as a deduction from the current assets section.
2. Which of the following is considered cash?
a) Certificates of deposit (CDs)
b) Money market chequing accounts
c) Money market savings certificates
d) Postdated cheques
 Cash is a financial asset and a financial instrument. It consists of coin, currency, bank
deposits, and negotiable instruments such as money orders, cheques, and bank drafts.

3. Davis Corporation had cheques outstanding totalling $5,400 on its June bank
reconciliation. In July, Davis Corporation issued cheques totalling $38,900. The July
bank statement shows that $26,300 in cheques cleared the bank in July.

What is the amount of outstanding cheques on Davis's July bank reconciliation?

a) $5,400
b) $7,200
c) $12,600
d) $18,000

Outstanding balance in July = Outstanding balance in June + Cheques issued - Cleared

cheques
= $5,400 + $38,900 - $26,300 = $18,000

4. Which of the following items on a bank reconciliation would require an adjusting entry on
the company's books?

a) An error by the bank

b) Outstanding cheques
c) A bank service charge
d) A deposit in transit

A bank service charge is reflected on the bank statement, but is not reflected in the
company’s books. Therefore, the company will need to make an entry for the service
charge.

5. Which of the following would NOT be an example of segregation of duties?

a) Sales employees have restricted ability to delete or modify accounts receivables.
b) Employees make sales to customers and record the credit sales in the accounts
receivables.
c) Customer refunds are recorded on a written credit note.
d) Employees depositing funds to the bank do not prepare the bank reconciliation.
6. Macaroon Corp. has sold goods at terms 1/10, n/30. If the discount is not taken, the
amount payable is $8,524. Assuming Macaroon uses the net method, the entry to record
the sale is:
a) debits of $8,438.76 and $85.24 to Accounts Receivable and "Forfeited Sales
Discounts" respectively, and a credit to Sales for the total.
b) a debit and credit of $8,524 to Accounts Receivable and Sales respectively.
c) a debit and credit of $7,671.60 to both Accounts Receivable and Sales respectively.
d) a debit and credit of $8,438.76 to Accounts Receivable and Sales respectively.
 Net method records receivables net of cash discounts and records any discounts
forfeited as income

Discount = 1% if paid in 10 days

Sales revenue = $8524 x (100%-0.01%) = $8,438.76

Accounts receivable $8,438.76

Sales revenue $8,438.76

7. Macaroon Corp. has sold goods at terms 1/10, n/30. If the discount is not taken, the
amount payable is $8,524. Assuming Macaroon uses the gross method, the entry to
record the sale is:
a) a debit and credit of $7,671.60 to Accounts Receivable and Sales respectively.
b) a debit and credit of $8,438.76 to Accounts Receivable and Sales respectively.
c) a debit and credit of $8,524 to Accounts Receivable and Sales respectively.
d) debits of $8,438.76 and $85.24 to Accounts Receivable and "Forfeited Sales
Discounts" respectively, and a credit to Sales for the total.

Gross method records the gross/face value of receivables and records any discounts
taken as a reduction in revenue
The discount is not recorded at the time of the sale under the gross method.

Accounts receivable $8,524

Sales revenue $8,524

8. During the year, Bergh Company made an entry to write off a $4,000 uncollectible
account. Before this entry was made, the balance in accounts receivable was $60,000
and the balance in the allowance account was $4,500. The net realizable value of
accounts receivable after the write-off entry was:
a) $60,000
b) $59,500
c) $51,500
d) $55,500

The net realizable value would be $60,000 - $4,500. The write-off would eliminate the
AR and the allowance.
Accounts Receivable

$60,000 (BB)
$4,500
$55,500

9. If a note receivable was issued at an amount that is less than its face value, then:
 a) the note was issued at a premium.
b) the note was issued at a discount.
c) the note's stated rate was the same as the prevailing market rate of interest.
d) it must be a zero-interest-bearing note.
10. When the stated rate and market rate of a note receivable are the same:
a) the note's face value would be different.
b) the note’s face value would be indeterminable.
c) it must be a zero-interest-bearing note.
d) the note's face value and fair value would be the same.

Chapter 7 - Financial Assets Part 1

1. What is a financial asset?
a) An asset that has a fixed or determinable cash flow.
b) Assets such as land and buildings that generate future cash flows.
c) An asset arising from contractual agreements on future cash flows.
d) An asset that does not generate future cash flows.

A financial asset is defined as being “any asset that is cash, an equity instrument of
another entity, or a contractual right to receive cash or another financial asset from
another party, or a contractual right to exchange financial assets or liabilities with
another party under conditions that are potentially favourable to the entity.
2. Fossil Company purchased 200 of the 1,000 outstanding shares of Ericksen Company's
common shares for $60,000 on January 2, 2018. During 2018, Ericksen Company
declared dividends of $10,000 and reported earnings for the year of $40,000.

If Fossil Company uses the equity model of accounting for its investment in Ericksen
Company, its Investment in Ericksen Company account on December 31, 2018 should
be:
a) $58,000
b) $66,000
c) $68,000
d) $60,000

The investment would be recorded as:

Investment = Purchase price + (Earnings x Fraction of shares) - (Dividends x Fraction of
shares)
Investment = 60,000 + ($40,000 x 0.2) - ($10,000 x 0.2) = $66,000.
3. The accounting for investments in another entity's equity instruments depends mainly
on:
a) the level of influence the investor is able to exert.
b) the level of influence the investor actually exerts.
c) the quality of earnings of the investee.
d) whether the investee pays dividends.
4. An investor who owns 15% of an entity's voting shares can:
a) always be assumed to have little or no influence over the investee.
b) potentially have influence over the investee if the shares are widely held.
c) be assumed to account for the investment under the cost model.
d) Both (a) and (c)

Normally an investor with less than 20% share ownership would have little influence,
however, with 15% ownership and widely distributed shares the investor would have
influence.
5. Fossil Company purchased 200 of the 1,000 outstanding shares of Ericksen Company's
common shares for $60,000 on January 2, 2020. During 2020, Ericksen Company
declared dividends of $10,000 and reported earnings for the year of $40,000.

If Fossil Company uses the cost model of accounting for its investment in Ericksen
Company, its investment in Ericksen Company account on December 31, 2020 should
be:
a) $58,000
b) $66,000
c) $68,000
d) $60,000

The investment would be recorded at its cost of $60,000.

6. The fair value through profit or loss model requires that:
a) investments are measured at fair value
b) transactions costs are expensed as incurred
c) transaction costs are generally capitalized
d) (a) and (b)

When using the fair value through profit or loss model the investments are measured at
fair value and transaction costs will be expensed as incurred.
7. Other comprehensive income does NOT include:
a) holding losses resulting from the application of the fair value through other
comprehensive income model
b) net income
c) holding gains resulting from the application of the fair value through other
comprehensive income model
d) (b) and (c)

OCI does not include net income.

8. Which of the following statements regarding financial assets is TRUE?
a) Accounts receivable are a financial asset; inventories are a financial asset
b) Accounts receivable are not a financial asset; inventories are a financial asset
c) Accounts receivable are a financial asset; inventories are not a financial asset
d) Accounts receivable are not a financial asset; inventories are not a financial asset
 Accounts receivable are financial assets because they represent contractural
arrangements for future cash flows between customers and the company. Inventories
are not financial assets even though they are expected to generate future cash flows
because there are no specific contracts that define the payer of those cash flows.

Chapter 7 - Financial Assets Part 2

1. Which statement is correct about debt instruments?
a) A contract whose value changes according to a specified variable.
b) A contract that gives the holder the residual interest in an entity.
c) A contract that gives the holder joint interest in an entity.
d) A contract that is not an equity instrument or a derivative.

Debt instruments represent a creditor relationship with an enterprise and include debt
instruments such as investments in government securities, municipal securities,
corporate bonds, convertible debt, and commercial paper.
2. Russin, Inc. owns bonds that are accounted for under the fair value through profit or loss
model. The bonds have a carrying value of $124,365 on December 31, 2020. The fair
value at that date is $123,000. The entry to record the year-end adjustment is
a) Dr. Loss on Investments 1,365 Cr. Investments 1,365.
b) no adjustment required
c) Dr. Unrealized Holding Loss on (OCI) 1,365 Cr. Investments 1,365.
d) Dr. Investments 1,365 Cr. Unrealized Holding Gain on Available-for-Sale Investments
(OCI) 1,365.

Unrealized gain (loss) = Fair value - Carrying value

Unrealized gain (loss) = $123,000 - $124,365 = $(1,365)

Using the fair value through profit or loss model the carrying value must be updated to
the fair value of $123,000. The adjustment will go through income, which will result in a
loss in this case.
3. On November 1, 2018, Roper Company purchased 600 of the $1,000 face value, 9%
bonds of Poon, Limited, for $632,000, which includes accrued interest of $9,000. The
bonds, which mature on January 1, 2023, pay interest semi-annually on March 1 and
September 1. Assuming that Roper uses the straight-line method of amortization and
that the bonds are accounted for under the amortized cost method, the net carrying
value of the bonds should be shown on Roper 's December 31, 2018, statement of
financial position (balance sheet) at:
a) $632,000
b) $600,000
c) $623,000
d) $622,080

Face value = 600 x $1000 = $600,000

 $632,000 > $600,000
The accrued interest needs to be removed from the purchase price
632,000 - $9,000 = $623,000
Then the premium needs to be reduced for 2 months out of the 50 months
2023 - 2019 = 4 years x 12 months + 2 months = 50 months
$623,000 - ($23,000 x 2 / 50) = $622,080.
4. An amortization schedule is necessary to apply the amortized cost method. Why is it
also necessary to prepare an amortization schedule for debt investments classified as
FVOCI?
a) We need to establish the source of change in value
b) We need to distinguish 2 sources of change in value: the predictable change
caused by the amortization of premium/discount, and the unpredictable changes
due to changes in market interest rates, credit risk, etc.
c) We need to distinguish 2 sources of change in value: the unpredictable change
caused by the amortization of premium/discount, and the predictable changes due to
changes in market interest rates, credit risk, etc.
d) It is actually unnecessary to prepare an amortization schedule for debt investments
classified as FVOCI.
5. Which of the following is correct regarding the application of present value techniques to
account for investments in debt instruments?
a) There are 5 essential parameters; any 4 can be used to compute the 5th
b) A bond amortization schedule is useful for calculating the amount of interest through
the duration of the investment
c) A bond amortization schedule is useful for calculating the amortized cost through the
duration of the investment
d) All of the above statements are true
6. In considering non-strategic investments in debt and the differences between IFRS and
ASPE, which of the following is true?
a) Under IFRS investments in debt may be classified as FVPL, FVOCI or amortized cost
using the straight-line method
b) Under IFRS investments in debt may be classified as FVPL or amortized cost using
the effective interest method
c) Under ASPE investments in debt have to be accounted for using amortized cost
d) Under ASPE when the amortized cost method is used, straight line or effective
interest amortization may be used whereas under IFRS, the effective interest
method is the only allowable method.

ASPE allows effective interest and straight line methods whereas IFRS mandates the
effective interest method be used.

Chapter 8 - Property, Plant and Equipment

1. Under ASPE, the cost for environmental clean-up costs at the end of an asset’s useful
life are:
a) expensed as incurred
 b) recognized only if they represent a legal obligation
c) are capitalized once they become apparent
d) none of the answers is correct.

Asset retirement obligations are those costs associated with the eventual retirement of
long-lived assets. Under IFRS, costs of both legal and constructive obligations are
recognized, whereas ASPE recognizes only costs associated with legal obligations.
2. On April 1, Dotty Corporation purchased for $765,000 a piece of land on which was
located a warehouse and office building. The following data were collected concerning
the property:

What are the appropriate amounts that Dotty should record for the land, warehouse, and
office building, respectively?
a) Land, $250,000; warehouse, $150,000; office building, $300,000.
b) Land, $300,000; warehouse, $200,000; office building, $400,000.
c) Land, $273,214; warehouse, $163,929; office building, $327,857.
d) Land, $255,000; warehouse, $170,000; office building, $340,000.

In some instances a company may purchase a group of plant assets at a single lump
sum price (basket purchase). The best way to allocate the purchase price of the assets
to the individual items is based on the relative fair values of the assets acquired.

The land would be valued based on: $300,000/$900,000 x 765,000 = $255,000

The warehouse would be valued based on: $200,000/$900,000 x 765,000 = $170,000
The office building would be valued based on: $400,000/$900,000 x 765,000 = $340,000

3. Belluga Company purchased a large area of land with the intention to transform it into a
banana plantation. Before the new seedlings can be planted, the site, which is prone to
flooding, must be drained. The cost of the draining should be:
a) capitalized as part of the cost of the land.
b) expensed only after the first crop of bananas has been harvested.
c) expensed immediately
d) reported as a loss from discontinued operations.

Land acquired for operational use is classified as property, plant, and equipment. Land
costs include (a) purchase price; (b) closing costs; (c) cost of grading, filling, draining
and clearing; (d) assumption of any liens, mortgages, or encumbrances on the property;
and (e) any additional land improvements that have an indefinite life.
4. On February 1, 2020, Berry Corporation purchased a parcel of land as a factory site for
$300,000. An old building on the property was demolished, and construction began on a
new building which was completed on November 1, 2020. Costs incurred during this
period are listed below:

Salvaged materials resulting from demolition were sold for $10,000. Berry should record
the cost of the land and new building, respectively as:
a) $330,000 and $1,015,000.
b) $315,000 and $1,030,000.
c) $315,000 and $1,025,000.
d) $320,000 and $1,025,000.

Land = Land cost + Demolition + Legal fee - Salvaged materials

= $300,000 + $25,000 + $5,000 - $10,000 = $320,000.

Building = Architect’s fees + Construction costs

= $35,000 + $990,000 = $1,025,000.
5. A major overhaul made to a machine increased its fair market value and its production
capacity by 25% without extending the machine's useful life. The cost of the
improvement should be:
a) expensed
b) debited to accumulated depreciation
c) capitalized to the machine account
d) allocated between accumulated depreciation and the machine account

Major repairs (such as an overhaul), that benefit several periods, should be handled as
an improvement or replacement. If an improvement or replacement increases the future
service potential of the asset, it should be capitalized.
6. On September 10, 2020, Hannah Co. incurred the following costs for one of its printing
presses:

Neither the attachment nor the renovation increased the estimated useful life of the
press. However, the renovation resulted in significantly increased productivity. What
amount of the costs should be capitalized?
a) $0
b) $108,000
 c) $130,000
d) $144,000

If an improvement or replacement increases the future service potential of the asset, it

should be capitalized. All of the costs would be capitalized: $84,000 + $10,000 +
$36,000 + $14,000 = $144,000.
7. A principal objection to the straight-line method of depreciation is that it:
a) provides for the declining productivity of an aging asset.
b) ignores variations in the rate of asset use.
c) tends to result in a constant rate of return on a diminishing investment base.
d) gives smaller periodic write-offs than decreasing charge methods.

Use of the straight-line method results in a uniform charge to depreciation expense

during each year of an asset's useful life and is considered a function of the passage of
time. This method is based upon the assumption that the decline in an asset's benefits is
the same each year. Although the straight-line method is easy to use, it rests on the
tenuous assumption that the asset's economic usefulness is constant from year to year.
8. Holiday Co. purchased machinery that was installed and ready for use on January 3,
2020, at a total cost of $115,000. Residual value was estimated at $15,000. The
machinery will be amortized over five years using the double declining-balance method.
For the year 2021, Holiday Co. should record depreciation expense on this machinery of:
a) $24,000
b) $27,600
c) $40,000
d) $46,000

Depreciation rate = 1 / Useful life = 1 x 2 / 5 = 2 / 5 = 0.40

2020:
Depreciation expense = (Cost of asset - Residual value) x Depreciation rate
= 115,000 x 0.40 = 46,000
Carrying amount = Carrying amount - Depreciation expense
= 115,000 - 46,000 = 69,000
2021:
Depreciation expense = Carrying value x Depreciation rate
= 69,000 x 0.40 = 27,600

The depreciation is calculated as: [$115,000 - ($115,000 × 0.4)] × 0.4 = $27,600.

Period Depreciation rate Depreciation Expense End of year carrying amount

$115,000.00
2020 40.00% 46,000 69,000
2021 40.00% 27,600 41,000

You should not consider the residual value when calculating double declining-balance.
9. Hopper Company acquired machinery on January 1, 2015 which it depreciated under
the straight-line method with an estimated life of fifteen years and no residual value. On
January 1, 2020, Hopper estimated that the remaining life of this machinery was six
years with no residual value. How should this change be accounted for by Hopper?
a) As a prior period adjustment
b) As the cumulative effect of a change in accounting principle in 2020
c) By setting future annual depreciation equal to one-sixth of the book value on
January 1, 2020
d) By continuing to depreciate the machinery over the original fifteen year life

The estimates involved in the depreciation process are sometimes subject to revision as
a result of unanticipated occurrences. These estimates must be reviewed regularly and
at least at each fiscal year end under IFRS. Such revisions are classified as changes in
accounting estimates and should be handled in the current and prospective periods
rather than changing previously reported results.
10. Changes in the depreciation rate are accounted for:
a) as a catch up adjustment to prior periods
b) as an adjustment to the current period only
c) as an adjustment to current and future periods
d) none of the answers

The estimates involved in the depreciation process are sometimes subject to revision as
a result of unanticipated occurrences. These estimates must be reviewed regularly and
at least at each fiscal year end under IFRS. Such revisions are classified as changes in
accounting estimates and should be handled in the current and prospective periods
rather than changing previously reported results.
11. Portland Corporation purchased a machine on July 1, 2015, for $250,000. The machine
was estimated to have a useful life of 10 years with an estimated residual value of
$14,000. During 2018, it became apparent that the machine would become
uneconomical after December 31, 2022, and that the machine would have no scrap
value. Accumulated depreciation on this machine as of December 31, 2017, was
$59,000.

What should be the depreciation expense in 2018 assuming the use of straight-line
depreciation?

a) $35,400
b) $38,200
c) $41,000
d) $47,750

The estimates involved in the depreciation process are sometimes subject to revision as
a result of unanticipated occurrences. These estimates must be reviewed regularly and
at least at each fiscal year end under IFRS. Such revisions are classified as changes in
 accounting estimates and should be handled in the current and prospective periods
rather than changing previously reported results.

The annual depreciation would need to be revised based on the unamortized balance
and the remaining useful life. ($250,000 – $59,000) / 5 years = $38,200.

12. Moritz Company purchased a new machine on May 1, 2009 for $132,000. At the time of
acquisition, the machine was estimated to have a useful life of ten years and an
estimated residual value of $6,000. The company has recorded monthly depreciation
using the straight-line method.

On March 1, 2018, the machine was sold for $18,000.

What should be the loss recognized from the sale of the machine?
a) $0
b) $2,700
c) $6,000
d) $8,700

First you need to calculate the monthly depreciation.

($132,000 - $6,000) / (10 years x 12 months) = $1,050 per month
Next you can calculate the loss:
$18,000 - [$132,000 - ($1,050 × 106 mo.)] = -2,700
13. On January 1, 2010, Buccaro Corporation purchased for $76,000, equipment having a
useful life of ten years and an estimated residual value of $4,000. The company has
recorded monthly depreciation of the equipment on the straight-line method. On
December 31, 2018, the equipment was sold for $14,000.

As a result of this sale, Buccaro Corporation should recognize a gain of:

a) $0
b) $2,800
c) $6,800
d) $14,000

First you need to calculate the monthly depreciation:

($76,000 - $4,000) / (10 years x 12 months) = $600/month.
Next you need to calculate the gain:
$14,000 - [$76,000 - ($600 x 108)] = $2,800.
14. When an enterprise is the recipient of a donated asset such as land, the account
credited may be a:
a) paid-in-capital account
b) revenue account
c) deferred revenue account
d) all of the answers are correct.
 A donated asset would be recorded as revenue for a not-for-profit organization. Paid-in-
capital and deferred revenue accounts would not be appropriate.
15. On December 1, 2018, Lear Company acquired a new delivery truck in exchange for an
old delivery truck that it had acquired in 2015. The old truck was purchased for $20,000
and had a book value of $7,600. On the date of the exchange, the old truck had a
market value of $8,000. In addition, Lear paid $26,000 cash for the new truck, which had
a list price of $36,000.

At what amount should Lear record the new truck for financial accounting purposes?

a) $26,000
b) $34,000
c) $33,600
d) $36,000

● No commercial substance

Book value method:

New Truck 33,600
Accumulated depreciation 12,400
Cash 26,000
Old Truck 20,000

New Truck = Cash paid + Book value of Old Truck

= $26,000 + $7,600 = $33,600

The cost of the truck is the book value of the truck exchanged of $7,600 plus the cash
paid of $26,000 for a total of $33,600.

Chapter 9 - Intangible Assets, Goodwill, Mineral Resources, and Government

Grants
1. If a trademark is developed by the enterprise itself, the costs should be:
a) capitalized if future benefits are reasonably assured.
b) capitalized.
c) expensed.
d) expensed if future benefits are reasonably assured.

If the future benefits are reasonably assured then you would capitalize the cost of the
trademark.
2. When determining whether an internally developed intangible asset should be
recognized (capitalized), the process of generating the intangible is usually broken down
into the following parts:
a) The research and financing element
 b) The acquisition and disposal stages
c) The exploitation and disposal stages
d) The research and development phase

Due to the uncertainty of whether an asset should be recognized, two phases are
considered. These phases are the research phase and the development phase.
3. The cost of purchasing patent rights for a product that might otherwise have seriously
competed with one of the purchaser's patented products should be:
a) expensed in the current period.
b) amortized over the legal life of the purchased patent.
c) added to the factory overhead and allocated to production of the purchaser's product.
d) amortized over the remaining estimated life of the original patent covering the
product whose market would have been impaired by competition from the newly
patented product.

A patent that is acquired would be capitalized as opposed to expensed.

The cost of an intangible asset less residual value should be amortized over the period
the asset is expected to generate future economic benefits.
4. Jeremiah Inc. is being targeted for acquisition by Argo Corporation. As an analyst for
Argo, you are asked to determine the goodwill that, pending various assumptions, may
be inherent in this potential transaction. The available information relating to Jeremiah
includes the following:

Current net assets: $5.1 million.

Expected return on net asset for industry: 10%

Reported net income for the previous six consecutive years:

The earnings for 2020 included a $200,000 gain from the sale of a discontinued part of
its business. Estimated goodwill by capitalizing average excess earnings at 14% is:

a) $1,791,667
b) $760,833
c) $2,029,762
 d) $1,654,331

First you need to determine the total earnings.

Total earnings = Total income for 2018-2023
Total earnings = $710,000 + $680,000 + $980,000 + $745,000 + $815,000 + $835,000 =
$4,765,000

Next you need to determine the excess of the average earnings over the current net
assets times the rate of return.
Average excess earnings = [(Total earnings - Gain on sale of discontinued operations) /
6 years] - (Net current assets x Return on net assets)
[($4,765,000 - $200,000) / 6 years] - ($5,100,000 x 0.10) = $250,833

Finally you need to capitalize the average excess earnings.

Estimated goodwill = Average excess earnings / Capitalized rate
= $250,833 / 0.14 = $1,791,667
5. Depletion expense:
a) is usually part of cost of goods sold.
b) includes tangible equipment costs in the depletion base.
c) excludes tangible equipment costs in the depletion base.
d) excludes restoration costs from the depletion base.

The depreciation, or depletion expense, is a product cost, becoming a direct cost of the
inventory of mineral or petroleum products produced during the period.
6. In 2020, CopperCo Corporation purchased a mine for $200 million ($30 million were
applicable to the land). An independent evaluation estimated the mine's reserves at 7.5
million tons. In 2020, CopperCo extracted 0.9 million tons. The company's depletion
expense for 2020 is:
a) $24 Mill.
b) $0.2 Mill
c) $18 Mill.
d) $20.4 Mill.

The depletion expense is calculated as follows: [($200 - $30) / 7.5] x 0.9 = $20.4
Depletion expense = Extracted units x Price per unit
= 0.9 x [($200 - $30) / 7.5] = $20.4 million
7. In 2020, Waverly Corp. set up a new manufacturing facility in Nova Scotia. To
encourage Waverly to set up its factory, the province provided equipment with a fair
value of $250,000 and an estimated useful life of 15 years using straight-line
depreciation. What journal entry would be required to record the equipment contribution
in fiscal 2020, using the gross method?
a) A credit to donation revenue of $250,000.
b) A credit to other comprehensive income – donated assets of $250,000.
c) A credit to deferred income of $250,000.
 d) A credit to property, plant and equipment for $250,000.

Using the gross method, the contribution would be credited to deferred income.

Chapter 10 - Applications of Fair Value to Non current Assets

1. The revaluation model of accounting for PP&E assets:
a) may be applied to all classes of PP&E including investment property.
b) uses a revaluation surplus account to hold net increases in the asset's fair value.
c) should not be applied to investment property.
d) (b) and c) are correct.

Investment property is the only tangible capital asset that may be accounted for under
the fair value model. The revaluation model is not used for investment property.
Changes in fair value are recorded to the revaluation surplus, an equity account.
2. Meissner Inc. owns assets to which it applies the revaluation model. The following
additional information is available:

Accumulated Depreciation at December 31, 2018 (prior to any fair value adjustments)
was $24,000.
Between 2017 and December 31, 2018, the property's fair value had increased by
$49,000.
The December 31, 2018 balance in the revaluation surplus account (prior to any fair
value adjustments) was $1,000.

The adjusted 2018 year-end balance in Meissner's accumulated depreciation account

will be:
a) $24,000
b) $0
c) $23,000
d) $25,000

The effect on the revaluation of the associated asset can either be accomplished by
adjusting the account proportionately (between the carrying amount of the asset and the
accumulated depreciation) (proportionate method) or by eliminating the accumulated
depreciation account (asset adjustment method). In this case the accumulated
depreciation balance was eliminated.
3. ASPE requires that assets must be assessed for indications of impairment:
a) at the end of each reporting period.
b) at the end of every quarter.
c) when events and circumstances indicate the asset's carrying amount may not
be recoverable.
d) whenever the method of depreciation has changed.
 Under ASPE assets are assessed for indicators of impairment when events and
circumstances indicate that an asset’s carrying amount may not be recoverable.
4. Which of the following is most likely an indicator for possible asset impairment?
a) Evidence of obsolescence
b) A significant decrease of the asset's market value
c) External and internal factors
d) All of the above

Evidence of obsolescence, a significant decrease of the asset’s market value, and

external and internal factors are all likely an indicator for possible asset impairment.
5. Magenta Company, a public corporation owns equipment for which the following year-
end information is available:
Carrying amount: $59,000
Recoverable amount: $52,000
Which of the following best describes the proper accounting treatment for Magenta's
equipment?

a) It is not impaired and a loss should not be recognized.

b) It is impaired, a loss must be recognized, but may be reversed in future periods.
c) It is impaired and a loss must be recognized, which cannot be reversed in future
periods.
d) (b) or (c) depending on company policy selection.

The carrying amount of $59,000 is higher than the recoverable amount of $52,000 which
shows that there is an impairment. A loss must be recognized but it is possible in the
future to reverse this loss.
6. Which of the following is the impairment test for indefinite-life intangibles under ASPE?
a) Fair value test
b) Recoverability test and then fair value test
c) Fair value test then recoverability test
d) Recoverability test

Under ASPE, indefinite-life intangibles are tested for impairment whenever events and
circumstances indicate the carrying value may not be recoverable, in which case the fair
value test is applied. This impairment test differs from the one used for limited-life
intangibles in that there is no recoverability test.
7. In January, 2013, Targa Corporation purchased a patent for a new consumer product for
$900,000. At the time of purchase, the patent was valid for fifteen years. Due to the
competitive nature of the product, however, the patent was estimated to have a useful
life of only ten years. During 2018 the product was permanently removed from the
market under governmental order because of a potential health hazard present in the
product. What amount should Targa recognize as an impairment during 2018, assuming
amortization is recorded at the end of each year?
a) $600,000
 b) $450,000
c) $90,000
d) $60,000

The 5 years of amortization has been taken. The remaining amount of ($900,000 / 10
years) x 5 years = $450,000 will need to be written off.
8. Which of the following statements best describes when goodwill should be tested for
impairment under IFRS?
a) Goodwill should be tested for impairment when events or changes in circumstance
indicate that impairment may have occurred.
b) Goodwill should be tested annually for impairment regardless of the circumstances.
c) Goodwill should be tested for impairment annually and whenever events or
changes in circumstance indicate that impairment may have occurred.
d) Goodwill should only be tested for impairment when the company follows a policy to
amortize its goodwill.

An enterprise performs an impairment test for an asset:

annually if it is goodwill or an intangible asset with an indefinite life; or
when there are indications that the asset may be impaired.

IFRS requires that an assessment of the estimated value of goodwill be done on an

annual basis or on an interim basis if circumstances indicate the CGU may be impaired.
9. Goodwill was purchased when a business was acquired. When an impairment to the
goodwill is determined, the credit is usually made to:
a) the Goodwill account
b) an accumulated amortization account
c) a deferred credit account
d) a shareholder's equity account

Goodwill would be reduced directly for an impairment loss.

10. A company owns assets that qualify as investment property and applies the fair value
model for all such property. Assuming the assets are expected to be used for 10 years
and have a year-1 book value of $100,000, depreciation expense for that year is:
a) $0
b) $10,000
c) $15,000
d) $9,000

Investment property is the only tangible capital asset that may be accounted for under
the fair value model. Changes in its value are reported in net income in the period of the
change, and no deprecation is recognized over the life of the asset.
11. Depreciation should be discontinued when:
a) an asset has been de-recognized
b) an asset is classified as held for sale
 c) an asset has been taken out of service
d) (b) and (c)

Depreciation is discontinued when an asset is classified as held for sale or when an

asset has been taken out of service.
12. Long-lived assets that are held for sale:
a) are not depreciated
b) are reported separately
c) must be re-measured at each balance sheet date
d) All of the above

When a long-lived asset is to be disposed of by sale, it is first classified as held for sale
and then re-measured to its net realizable value, which is the lower of its carrying
amount and fair value less cost to sell. Assets held for sale are reported separately.
Assets classified as held for sale are not depreciated during the period in which they are
held.
13. Consider an asset that is classified as held for sale for which the following information is
available:

Accumulated Depreciation (at March 1, 2018): $24,300

Asset: $50,000

If the asset was sold on April 1, 2019 for $27,600, there would be:

a) a loss of $1,900
b) a gain of $1,900
c) a loss from discontinued operations
d) an extraordinary loss

The asset is sold for $27,600

Carrying value = Cost of asset - Accumulated depreciation
= $50,000 - $24,300 = $25,700

Gain = $27,600 - $25,600 = $1,900

Chapter 6 - Inventories
1. Which of the following does NOT correctly describe a perpetual inventory accounting
system?
a) In a perpetual system cost of goods sold are calculated every time a sale is made.
b) In a perpetual system, assuming shrinkage of zero, inventory and cost of goods sold
do not have to be updated at the end of the period.
c) The use of this system eliminates the requirement for an annual physical
inventory count.
 d) In a perpetual system, assuming a FIFO cost flow, the cost of goods sold would equal
those from a periodic system.

You still need to perform a physical inventory count as goods could be stolen, which
would not be updated within the accounting system.
2. Which of the following does NOT correctly describe a periodic inventory accounting
system?
a) In a periodic system cost of goods sold is calculated every time a sale is made.
b) In a periodic system, cost of goods sold is a residual amount.
c) In a periodic system assuming a FIFO cost flow, the cost of goods sold would equal
those from a perpetual system.
d) In a periodic system, inventory and cost of goods sold must be updated at the end of
the period.

In a periodic system, the cost of goods sold is not updated every time a sale is made.
3. A physical inventory count is normally taken:
a) when a periodic inventory system is used
b) when a perpetual inventory system is used
c) at the end of the company's fiscal year
d) All of the above

A physical inventory count should be taken in any company that holds inventory,
regardless of whether it is using a periodic or perpetual system. In addition, the count
should be done every quarter end or at the very least, at the end of the fiscal year.
4. A $750 purchase of merchandise inventory is made on June 12, terms 2/10, n/30. On
June 16, merchandise costing $50 is returned. What amount will be paid if payment is
made in full on June 21? On July 11?
a) $630 and $700
b) $686 and $700
c) $700 and $750
d) $735 and $750

June 21 = $750 - $50 x (1 - 0.02) = $686

July 11 = $750 - $50 = $700

June 21 is within the 10-day discount period and therefore the company will receive the
2% discount of ((750-50) x 2%) = $14. July 11 does not fall within the discount period
and therefore the full amount is due on that date. The correct response is 686 and 700
due to the $50 returned merchandise.
5. Enrage Inc. purchased merchandise for $310 on May 12, terms 1/10, n/30, FOB
shipping point. On May 12, freight costs of $25 were also paid by the company. On May
15, Enrage returned merchandise costing $10. On May 21, the company paid the
amount owing. What is the ending balance in the Merchandise Inventory account related
to these transactions, if Enrage uses a perpetual inventory system?
 a) $300
b) $321.75
c) $322
d) $325

F.O.B. origination/shipping point - buyer takes possession as soon as the goods

leave the supplier’s location

May 21 = $310 - $10 x (1 - 0.01) = $297 + $25 = $322

On May 21, the company purchased inventory worth $310 less the $10 = $300 on which
it could take a 1% discount for paying within the 10-day discount period. Subtracting $3
from the $300 leaves $297 for the purchase plus $25 for the freight for which the
purchase party was responsible.
6. Which of the following items should be included in a company's inventory on the
statement of financial position?
a) Goods in transit which were purchased f.o.b. destination.
b) Goods received from another company for sale on consignment.
c) Goods sold to a customer, which are being held for the customer to call for at his or
her convenience.
d) None of the above is correct.

None of these items would actually be included in inventory.

7. Which of the following should usually be considered when calculating the cost of ending
inventory?
a) inventory that is subject to special sales agreements
b) the ownership for inventory in transit at the balance sheet date
c) discounts and vendor rebates
d) All of the above

You would need to consider all of these when calculating the cost of ending inventory.
8. Chu Company uses FIFO to cost its inventory. The following information is available for
Chu's inventory of product #101:

Beginning inventory: 120 units @ $3.14 per unit

March 1: Purchase of 250 units @ $3.50 per unit
April 10: Sale of 100 units @ $5.10 per unit

Assuming Chu uses a periodic inventory system, the entry to account for the March 1
purchase is:
a) Debit: "Inventory" and Credit: "Accounts Payable" $875
b) Debit: "Purchases" and Credit: "Accounts Payable" $875
c) Debit: "Accounts Payable" and Credit: "Purchases" $875
d) Debit: "Accounts Payable" and Credit: "Inventory" $875
 Purchase = $250 units x $3.50 = $875
Periodic inventory system uses purchases account

9. Chu Company uses FIFO to cost its inventory. The following information is available for
Chu's inventory of product #101:

Beginning inventory: 120 units @ $3.14 per unit

March 1: Purchase of 250 units @ $3.50 per unit
April 10: Sale of 100 units @ $5.10 per unit
Assuming Chu uses a perpetual inventory system, which entry would have been made
to account for the April 10 sale?
a) Debit: "Cost of goods sold" and Credit: "Inventory" $350
b) Debit: "Cost of goods sold" and Credit: "Purchases" $350
c) Debit: "Cost of goods sold" and Credit: "Purchases" $314
d) Debit: "Cost of goods sold" and Credit: "Inventory" $314

Sale = 100 units x $5.10 = $510

Perpetual inventory system uses inventory

10. The specific identification method should only be used if the inventory consists of:
a) Homogeneous, non-distinguishable goods.
b) Non-interchangeable, distinguishable goods.
c) High-priced, low-volume goods.
d) Low-priced, high-volume goods.

The specific identification method is used for unique goods that are easily
distinguishable.

Specific identification - a method of assigning costs to inventories and cost of sales

based on actual costs of each item
Should be used only for items that are distinguishable from each other using information
such as serial numbers
Usually applied to high value items
11. The gross margin percentage is calculated by:
a) dividing cost of goods sold by net sales.
b) dividing gross margin on sales by cost of goods sold.
c) dividing gross margin on sales by net sales.
d) dividing gross margin on sales by goods available for sale.

Gross margin percentage = Gross profit / Net sales

12. On April 15 of the current year, a fire destroyed the entire uninsured inventory of a retail
store. The following data is available:
 Sales, January 1 through April 15: $485,000
Inventory, January 1: $80,000
Purchases, January 1 through April 15: $391,000
Mark-up on cost: 20%
The amount of the inventory loss is estimated to be:
a) $66,833
b) $75,000
c) $111,500
d) $90,000

Retail price per dollar of cost:

Retail price per dollar of cost = (($1 x Markup) + $1) x (1 - Markdown)
= ($1 x 20%) + $1 = $1.20

Cost as % of retail price:

Cost as % of retail price = ($1 / Retail price per dollar of cost) x 100
= ($1 / $1.20) x 100 = 83.33%

Cost of goods sold:

Cost of goods sold = Cost as % of retail price x Retail value of inventory
= 83.33% x $485,000 = $404,167

Ending inventory:
Ending inventory = Inventory + Purchases - Cost of goods sold
= $80,000 + $391,000 - $404,167 = $66,833

You would calculate the inventory loss as: $80,000 + $391,000 - ($485,000 / 1.20) =
$66,833
13. Which of the following does NOT correctly describe the concept of net realizable value
(NRV)?
a) Estimates of NRV are based on the best evidence available at and shortly after the
statement of financial position date.
b) NRV generally does not change over time.
c) NRV generally changes over time.
d) A new estimate of NRV is required at each statement of financial position date

The NRV will change over time as the selling price of inventory would likely change as
the input prices change.
14. Avonlea Corp. had inventory at a cost of $5,000 and a net realizable value of $4,750 at
the end of Year 1. At the end of Year 2, it had inventory at a cost of $6,000 and a net
realizable value of $6,500. The amounts that should be reported for inventory at the end
of Year 1 and Year 2, respectively, are:
a) $5,000 and $6,000
b) $5,000 and $6,500
 c) $4,750 and $6,000
d) $4,750 and $6,500

Inventory should be recorded at the lower of cost and NRV. Therefore, if the NRV is
lower, the inventory value will go down accordingly. However, if the NRV price is higher,
the inventory will stay at cost. In Year 1, the NRV is lower than inventory cost so the
NRV will be the corrected amount of $4,750. In Year 2, the NRV is higher, so the
inventory cost will be the recorded amount of $6,000.
15. Eskins Co. received merchandise on consignment. As of January 31, Eskins included
the goods in inventory, but did not record the transaction. The effect of this on its
financial statements for January 31 would be:
a) net income, current assets, and retained earnings were overstated
b) net income was correct and current assets were understated.
c) net income and current assets were overstated and current liabilities were
understated.
d) net income, current assets, and retained earnings were understated.

The inventory does not belong to Eskins therefore including the consigned goods in
inventory overstates the current assets (inventory). Net income is overstated as a lower
amount of ending inventory was deducted. This higher net income will overstate retained
earnings.
16. In 2020, Garrison Corporation reported net income of $70,000. A recount of the
company's inventories revealed that 2020 ending inventory was overstated by $10,000.
What is Garrison's corrected net income?
a) $80,000
b) $70,000
c) $60,000
d) $75,000

The corrected net income would be $60,000. A lower amount of ending inventory would
be deducted resulting in a reduction of net income of $60,000.
17. Lavigne Ltd.'s ending inventory is understated by $4,000. The effects of this error on the
current year's cost of goods sold and profit before income taxes, respectively, are:
a) an understatement and an overstatement.
b) an overstatement and an understatement.
c) an overstatement and an overstatement.
d) an understatement and an understatement.

The inventory is understated and therefore, the cost of goods sold are overstated to
compensate for the inventory value being lower. This is causing the net income before
taxes to be overstated since the cost of goods sold are higher than they should be.
18. Hall Corporation overstated its inventory by $15,000 at December 31, 2018. It did not
correct the error in 2018 or 2019. As a result, Hall's shareholders' equity was:
a) overstated at December 31, 2018, and understated at December 31, 2019.
b) overstated at December 31, 2018, and properly stated at December 31, 2019.
c) understated at December 31, 2018, and understated at December 31, 2019.
d) overstated at December 31, 2018, and overstated at December 31, 2019.
In 2018, the inventory value is reported as higher than the actual value. In 2018, the cost
of goods sold were lower and therefore, the net income was higher. That caused the
shareholders’ equity to be overstated in 2018. In 2019, the error was not corrected, so
the shareholders’ equity was properly recorded for the 2019 fiscal year.