AFA100 Final Exam Practice Questions

AFA100: Final Exam Practice Questions

These questions are for learning and review purposes only. These are NOT the only concepts and topics you need to know for the final exam. Please do not expect to see these exact questions on the final exam.

I suggest you use these to practice as a final review after you have practiced the in-class/textbook practice questions.

Note that multiple choice questions may be theoretical or numerical. You can expect both types on your final exam.

Solutions are at the end of this file.

1. Which of the following assets is NOT considered a “tangible” asset?

A. Buildings

B. Furniture

C. Vehicles

D. Patents

E. None of the above

2. Which of the following assets is NOT considered an “intangible” asset?

A. Copyrights

B. Franchises

C. Customer lists

D. Trademarks

E. None of the above

3. On January 1, 2020 ABC Inc. purchased a truck for $80,000. At the purchase date, ABC planned to use the truck for 8 years and expected to be able to sell it for $12,000 after that time. The truck was depreciated using straight-line depreciation. On December 31, 2023 ABC sold the truck for $37,000. How much is the gain or loss on disposal?

A. $9,000 gain

B. $9,000 loss

C. $12,000 gain

D. $5,800 loss

E. There is no gain or loss on disposal.

4. ABC Inc. incurred the following costs when it acquired a machine to be used for production: Invoice price $8,000

Transportation $60

Installation and preparation $150

Insurance $360

What is the acquisition cost of the machine?

A. $8,210

B. $8,000

C. $8,570

D. $8,060

E. $8,150

5. ABC Inc. has 50,000 common shares issued and outstanding for a total of $2,000,000. No other contributed capital accounts exist for the company. For the first time in history, the company repurchased 10,000 shares for $35 per share. Which statement is correct?

A. The equity section will report a $50,000 credit balance in contributed surplus. B. The equity section will report 40,000 common shares issued.

C. The equity section will report $1,650,000 for common shares outstanding.

D. The equity section will report a $50,000 debit balance in contributed surplus. E. The company will record a $50,000 credit to retained earnings.

6. ABC Inc. issued 10,000 common shares to a law firm in exchange for legal services when a share was selling for $16/share. The fair value of legal services was $145,000. How would ABC record this transaction?

A. Dr. Legal fees $145,000 and Cr. Cash $145,000

B. Dr. Legal fees $160,000 and Cr. Common shares $160,000

C. Dr. Legal fees $145,000 and Cr. Common shares $145,000

D. Dr. Legal fees $160,000 and Cr. Cash $160,000

E. Dr. Legal fees $145,000, Dr. Retained earnings $15,000 and Cr. Common shares $160,000

7. ABC Inc. had 300,000 common shares outstanding on January 1. The company declared a 2% stock dividend on June 15 to all common shareholders of record as of June 20. The shares were issued on June 30. The market value of the shares was as follows:

June 15, $2.25;

June 20, $2.20;

June 31, $2.30.

Which of the following components would be part of the company’s entry on the date of declaration? A. Debit to dividends declared of $6,000

B. Debit to dividends declared of $13,500

C. Credit to common shares of $13,200

D. Credit to common shares of $13,800

E. Credit to retained earnings of $13,500

8. During a period when inventory unit costs are decreasing, which cost formula will result in the lowest net earnings?

A. Both FIFO and weighted-average cost.

B. FIFO.

C. Weighted-average cost.

D. Lower of cost and net realizable value.

E. None of the choices.

9. If a company sells a machine at a gain, which of the following is true on the statement of cash flows (indirect method):

A. The gain must be subtracted as an investing activity.

B. A gain must be subtracted as a financing activity.

C. The gain does not appear on the statement of cash flows.

D. The gain must be subtracted as an operating activity.

E. None of the above

10. Which of the following statements is true about the allowance method for uncollectible accounts? A. The carrying amount of accounts receivable is greater before an account is written off than after it is written off.

B. Bad Debts Expense is debited when a specific account is written off as uncollectible. C. The carrying amount of accounts receivable on the balance sheet is the same before and after an account is written off.

D. Allowance for Doubtful Accounts is closed each year to Income Summary.

E. None of the above.

11. On January 1, ABC Inc. had shareholders’ equity as shown below when their shares were trading at $20 per share.

Assume the company declared and issued a 100% stock dividend. The effect of this dividend would: A. leave total shareholders’ equity unchanged but increase the number of shares issued and outstanding to 200,000

B. increase common shares by $2,000,000 and increase shareholders’ equity by $2,000,000 C. increase common shares by $2,000,000 with no change in the number of shares issued and outstanding

D. reduce retained earnings by $2,000,000 with no change in the number of shares issued and outstanding

E. increase shareholders’ equity by $2,000,000

12. An aging of a company’s accounts receivable indicates that $6,500 is estimated to be uncollectible. If Allowance for Doubtful Accounts has an unadjusted $1,200 debit balance, the adjustment to record bad debts for the period will require a:

A. Debit to Bad Debts Expense for $6,500.

B. Debit to Bad Debts Expense for $5,300.

C. Debit to Allowance for Doubtful Accounts for $6,500.

D. Debit to Bad Debts Expense for $7,700.

E. Credit to Allowance for Doubtful Accounts for $5,300.

13. During 2023, ABC Inc. recorded bad debt expense of $15,000 and wrote off uncollectible accounts receivable amounting to $5,000. Assuming a credit balance in the allowance for doubtful accounts of $10,000 on January 1, 2023, the balance in the allowance account on December 31, 2023 would be which of the following?

A. $5,000

B. $15,000

C. $20,000

D. $25,000

E. None of the above

14. On July 1, 2022 ABC Inc. purchased a machine for $55,000. The estimated useful life from the date of purchase was 5 years and residual value was estimated at $5,000. This asset is depreciated using the double declining-balance method. The company has a fiscal year end of December 31. What is the depreciation expense for the machine in 2023?

A. $11,000

B. $22,000

C. $10,000

D. $18,000

E. $17,600

15. A $100,000 bond was retired at 98 when the carrying amount of the bond was $102,000. The entry to record the retirement would include:

A. A debit to Cash.

B. A debit to Premium on Bond Payable.

C. A credit to Premium on Bond Payable.

D. A debit to Gain on Redemption of Bonds.

E. A credit to Bond Interest Expense.

16. On January 1, ABC Inc. issued $800,000 of six year, 4% bonds that pay interest semi-annually on June 30 and December 31. The market rate at the time of issuance was 6%. What is the journal entry to record the 1st interest payment? Please use PV tables and round your final answer to the nearest dollar.

A. Dr. Bond Interest Expense 21,612

Cr. Cash 21,612

B. Dr. Cash 720,384

Cr. Bonds Payable 720,384

C. Dr. Bond Interest Expense 21,612

Cr. Cash 16,000

Cr. Discount on Bonds Payable 5,612

D. Dr. Bond Interest Expense 5,612

Dr. Premium on Bonds Payable 10,388

Cr. Cash 16,000

E. Dr. Bond Interest Expense 16,000

Cr. Cash 16,000

17. $16,000 The following information was available to the accountant of ABC Inc. when preparing the monthly bank reconciliation:

What was the cash balance per books of ABC Inc. prior to beginning the bank reconciliation? A. $2,238.

B. $2,270.

C. $2,336.

D. $2,354.

E. None of the above

18. During the end-of-period physical inventory count, ending inventory was overstated. What is the effect of this error if the company uses the periodic inventory system and the FIFO inventory costing method:

A. Cost of sales would be overstated and net earnings would be understated in the current period. B. Cost of sales would be understated and net earnings would be overstated in the current period. C. Both cost of sales and net earnings would be understated in the current period. D. Both cost of sales and net earnings would be overstated in the current period. E. Cost of sales and net earnings would not be affected by the error.

19. Which of the following statements about a 2 for 1 stock split is true?

A. Retained earnings remains unchanged after the split.

B. Number of shares issued and outstanding remains unchanged after the split. C. A stock split requires a journal entry.

D. Total shareholders’ equity will increase after the split.

E. Total contributed capital will increase after the split.

20. Investing activities include:

A. borrowing cash from creditors.

B. obtaining cash from investors by issuing common shares.

C. purchasing property, plant, and equipment or intangible assets for cash.

D. repaying cash previously borrowed.

E. issuing bonds in exchange for cash.

21. On March 1 ABC Inc. purchased inventory for $25,000, terms 2/10, n/30. On March 6 it returned $5,000 of the inventory because it was the wrong model. ABC Inc. paid the outstanding invoice on March 8. On March 15 ABC Inc. sold inventory for $22,000, terms n/30, and cost of inventory sold was $8,000. It received cash payment for the sale on March 23. What is the value in the Inventory account at period end for ABC Inc. if beginning inventory was zero?

A. $20,000

B. $19,600

C. $12,000

D. $11,600

E. $10,940

22. On January 1, 2022, two individuals invested $150,000 each to form ABC Inc. ABC had total revenues of $15,000 during 2022 and $40,000 during 2023. Total expenses for the same periods were $8,000 and $22,000, respectively. Cash dividends declared and paid out to shareholders totaled $6,000 in 2022 and $12,000 in 2023. What was the ending balance in ABC’s retained earnings account at the end of 2022 and 2023?

A. $1,000 and $6,000 respectively.

B. $1,000 and $7,000, respectively.

C. $7,000 and $19,000 respectively.

D. $301,000 and $306,000 respectively.

23. Using the accrual method of accounting, expenses are incurred:

A. only on rare occasions.

B. to produce assets.

C. to produce liabilities.

D. to generate revenues.

24. During 2023, ABC Inc. delivered products to customers for which customers promised to pay $3,820,000. The company collected $3,670,000 in cash from customers during the year. Indicate which of these amounts will appear on the statement of earnings and which on the statement of cash flows.

A. $3,670,000 appears on both the statement of earnings and the statement of cash flows. B. $3,670,000 appears on the statement of cash flows, and $3,820,000 appears on the statement of earnings.

C. $3,820,000 appears on both the statement of earnings and the statement of cash flows. D. $3,820,000 appears on the statement of cash flows, and $3,670,000 appears on the statement of earnings.

25. A company produces their financial statements to overstate sales and maximize net earnings because they wish to make their numbers look good in order to obtain a loan from the bank in the upcoming year. Which of the following characteristics is violated based on the information provided? A. Comparability

B. Timeliness

C. Conservatism

D. Understandability

E. Faithful representation

26. The main objective of financial reporting is to:

A. compare a company’s performance with its competitors.

B. meet the needs of all potential users.

C. provide information that is useful to individuals making investment and credit decisions. D. provide information that will be used by a company’s managers for product pricing decisions. E. None of the above is the main objective of financial reporting.

27. A company provided $840 of services to a customer on February 28, but was unable to send out the invoice until March 3. The customer paid the invoice on April 10. The company records adjusting entries monthly. Which of the following journal entries the company should record? A. On February 28 record a Dr. to Accounts Receivable and a Cr. to Service Revenue. B. On March 3 record a Dr. to Accounts Receivable and a Cr. to Service Revenue. C. On April 10, record a Dr. to Cash and a Cr. to Service Revenue.

D. On February 28 record a Dr. to Cash and a Cr. to Service Revenue.

E. On March 3 record a Dr. to Cash and a Cr. to Service Revenue.

28. ABC Inc. had the following account balances at December 31, 2023:

What is the amount of current assets to be reported on the statement of financial position? A. 191,000

B. 197,500

C. 198,500

D. 178,500

E. 193,500

29. ABC Inc. had net earnings of $160,000, depreciation expense of $4,000, a decrease in accounts receivable from the prior period of $9,000, an increase in inventory from the prior period of $13,500, a decrease in accounts payable from the prior period of $6,000, an increase in tax payable from the prior period of $13,000, and a loss on sale of furniture of $19,000. What is the net cash from operating activities?

A. $185,500

B. $207,900

C. $163,100

D. $142,500

E. $171,500

30. ABC Inc. had an opening retained earnings balance of $27,300 and a closing retained earnings balance of $19,300. Net earnings for the period was $14,000. The dollar value representing shares issued during the period was $2,000. Dividends payable at the end of the prior period was $800 and dividends payable at the end of the current period is 0. What is the amount of dividends paid in cash during the current period?

A. $22,000

B. $24,800

C. $21,200

D. $22,800

E. No dividends paid in cash

31. You have the following information about two companies from a single industry in 2023. The word high refers to the top third of the industry, average the middle third, and low the bottom third.

1) Which company is more profitable?

2) Which company has higher leverage?

3) Which company is more liquid?

4) Which company is more efficient in collecting its receivables?

5) The market expects Company ____ to have more growth opportunities.

32. Jackson Limited purchased land and a building on July 1, 2022, for $1,155,000. The company paid $345,000 in cash and signed a three-year note payable for the remaining balance. At that time, it estimated that the land was worth $450,000 and the building $705,000. The building was estimated to have a 25-year useful life with a $105,000 residual value. The company has a December 31 year end and uses the double diminishing-balance depreciation method for buildings. The following events occurred during 2022 to 2024:

2022

July 1 Recorded the purchase of land and building.

December 31 Recorded the annual depreciation.

2023

February 17 Paid $950 cash to have the furnace cleaned and serviced.

December 31 Recorded the annual depreciation.

31 The land and building were tested for impairment after depreciation was recorded for 2023. The land had a recoverable amount of $360,000 and the building had a recoverable amount of $720,000.

2024

January 31 Sold the building for $630,000 cash.

Record journal entries for the above transactions and adjustments.

33. Use the following information to prepare the statement of cash flows for 2023 using the indirect method.

XYZ Inc.

Statement of Financial Position

As at December 31, 2023

Dec. 31, 2023 Dec. 31, 2022

Assets

Cash $29,000 $15,000 Accounts receivable 28,000 19,000 Prepaid expenses 9,000 12,000 Merchandise inventory 40,000 29,000 Long-term investments 35,000 53,000 Equipment 75,000 48,000 Accumulated depreciation – Equipment (26,000) (22,000) Total Assets $190,000 $154,000 Liabilities and Shareholders’ Equity

Liabilities

Accounts payable $21,000 $9,000 Dividends payable 3,000 2,000 Long-term bank loan payable 37,000 45,000 Shareholders’ Equity

Common shares 40,000 23,000 Retained earnings 89,000 75,000 Total Liabilities and Shareholders’ Equity $190,000 $154,000

XYZ Inc.

Statement of Earnings

For the Year Ended December 31, 2023

Sales $206,780 Cost of Sales (85,460) Gross Profit $121,320 Operating Expenses

Salaries Expense (69,090) Depreciation Expense (4,000) Loss on sale of long-term investments (5,000) Earnings from Operations 43,230

Non-Operating Revenues or Expenses

Interest Expense (4,730) Earnings before Income Tax 38,500 Income Tax Expense (11,500) Net Earnings $27,000

Additional Information:

• A cash dividend was declared and paid during the year.

• Long-term investments with a carrying amount of $53,000 were sold for $48,000 cash. • Equipment was purchased with cash.

Solutions

1. D

2. E. They are all intangible assets.

3. B

Accumulated depreciation = (80,000 – 12,000)/8 x 4 = 34,000

Carrying amount = 80,000 – 34,000 = 46,000

Gain/Loss = 37,000 – 46,000 = -9,000 => Loss.

4. A. Insurance is not included in the acquisition cost.

5. A

6. C

7. B

300,000 x 2% = 6,000 shares

Date of declaration: $2.25/share x 6,000 shares = $13,500 debit to dividends declared 8. B

9. D

10. C

11. A

Number of shares issued and outstanding after the 100% stock dividend = 100,000 x 2 = 200,000 shares Value of common shares after the dividend: $20/share x 200,000 = $4,000,000 (increase by $2,000,000) Therefore, retained earnings would decrease by $2,000,000.

Total shareholders’ equity remains unchanged.

12. D

13. C

AFDA

10,000 Jan. 1

5,000 write off

15,000 bad debt expense

20,000 Dec. 31

14. E

Depreciation for 2022 (July 1 to December 31) = (55,000 - 0) x 2/5 x 6/12 = 11,000 Depreciation for 2023 = (55,000 - $11,000) x 2/5 = 17,600

15. B

Call amount = 100,000 x 98% = 98,000

Carrying amount – Call amount = 4,000 gain on redemption of bonds

Carrying amount – Par value = 2,000 unamortized premium

Dr. Bonds Payable 100,000

Dr. Premium on Bonds Payable 2,000

Cr. Gain on Redemption of Bonds 4,000

Cr. Cash 98,000

16. C

Issue price = 800,000 x 0.7014 + 16,000 x 9.9540 = 720,384

Bond interest expense = 720,384 x 6% x 1/2 = 21,612

Cash interest payment = 800,000 x 4% x 1/2 = 16,000

Amortization of discount = 21,612 – 16,000 = 5,612

17. C

Correct cash balance = 3,450 – 972 + 351 = 2,829

Cash balance per books prior to bank reconciliation – 58 – 33 + 575 + (532 – 523) = 2,829 => Cash balance per books prior to bank reconciliation = 2,336

18. B

19. A

20. C

21. D

0 + (25,000 – 5,000) x 0.98 – 8,000 = 11,600

22. B

2022: 0 + 15,000 – 8,000 – 6,000 = 1,000

2023: 1,000 + 40,000 – 22,000 – 12,000 = 7,000

23. D

24. B

25. E

26. C

27. A

28. C

29. A

160,000 + 4,000 + 9000 – 13,500 – 6,000 + 13,000 + 19,000 = 185,500

30. D

Retained earnings, opening + Net earnings – Dividends declared = Retained earnings, closing Dividends declared and payable for the current period = 27,300 + 14,000 – 19,300 = 22,000 Dividends payable, current period end = 800 (prior period) + 22,000 (current period) – Dividends paid = 0

=> Dividends paid = 22,800

31. 1) A

2) A

3) B

4) A

5) B

32.

July 1, 2022

Dr. Land 450,000

Dr. Buildings 705,000

Cr. Cash 345,000

Cr. Long-term notes payable 810,000

December 31, 2022

Dr. Depreciation expense 28,200

Cr. Accumulated depreciation – Buildings 28,200

Depreciation expense for 2022: 705,000 x 2/25 x 6/12 = 28,200

February 17, 2023

Dr. Repair and maintenance expense 950

Cr. Cash 950

December 31, 2023

Depreciation:

Dr. Depreciation expense 54,144

Cr. Accumulated depreciation – Buildings 54,144

Depreciation expense for 2023: (705,000 – 28,200) x 2/25 = 54,144

Impairment loss:

Dr. Loss due to impairment of assets 90,000

Cr. Land 90,000

There is no impairment on the building as its carrying amount of 622,656 (705,000 – 28,200 – 54,144) is below the recoverable amount of 720,000.

The land is impaired because the recoverable amount of 360,000 is less than cost of 450,000. Impairment loss = 450,000 – 360,000 = 90,000

January 31, 2024

Update depreciation:

Dr. Depreciation expense 4,151

Cr. Accumulated depreciation – Buildings 4,151

Depreciation expense for January 2024: (705,000 – 28,200 – 54,144) x 2/25 x 1/12 = 4,151

Disposal:

Dr. Cash 630,000

Dr. Accumulated depreciation – Buildings 86,495 (28,200 + $54,144 + $4,151) Cr. Buildings 705,000

Cr. Gain on disposal 11,495

Gain on disposal = Sales price – Carrying amount = 630,000 – (705,000 – 86,495) = 11,495

33.

XYZ Inc.

Statement of Cash Flows

For the Year Ended December 31, 2023

Operating activities:

Net earnings $27,000 Depreciation expense 4,000 Loss on sale of long-term investments 5,000 Increase in accounts receivable (9,000) Decrease in prepaid expense 3,000 Increase in inventory (11,000) Increase in accounts payable 12,000 Net cash provided by operating activities 31,000 Investing activities:

Sale of long-term investments $48,000 Purchase of long-term investments (see (1) below) (35,000) Purchase of equipment (see (2) below) (27,000) Net cash used in investing activities (14,000) Financing activities:

Issue of common shares $17,000 Repayment of long-term bank loan payable (8,000) Payment of cash dividends (see (3) below) (12,000) Net cash used in financing activities (3,000)

Net increase in cash $14,000 Cash, beginning of period 15,000 Cash, end of period $29,000

(1) Purchase of long-term investments

Long-term investments, beginning balance 53,000

– Sale of long-term investments (53,000)

+ Purchase of long-term investments 35,000 Investing: Cash outflow Long-term investments, ending balance 35,000

(2) Purchase of equipment

Equipment, beginning balance 48,000

+ Purchase of equipment 27,000 Investing: Cash outflow Equipment, ending balance 75,000

(3) Payment of cash dividends

Retained earnings, beginning balance 75,000

+ Net earnings 27,000

– Dividends declared (13,000)

Retained earnings, ending balance 89,000

Dividends payable, beginning balance 2,000

+ Dividends declared and payable 13,000

– Payment of cash dividends (12,000) Financing: Cash outflow Dividends payable, ending balance 3,000