A.

Lightstone, March 2004

BAT4M - Practice Final Exam

Credit Cards and Debit Cards

Journalize the following sales for Laura's Hardware Store:

• January 19: Sold $30.00 of merchandise. PST is calculated at $2.40. GST is
calculated at $2.10. Payment received on a Diner’s Club (non-bank) credit card.
(This card charges the business a 4% fee for the total amount charged.)
• January 19: Sold $40.00 merchandise. PST is calculated at $3.20. GST is
calculated at $2.80. The customer paid using a bank issued VISA card. (The
business pays a 6% fee to VISA for the total amount charged on each VISA
sale.)
• January 19: Sold $50.00 of merchandise. PST is calculated at $4.00. GST is
calculated at $3.50. The customer paid using a debit card. (The business pays a
flat $0.20 fee to the bank any sale using a debit card.)
• January 29: Received payment from the Diner’s Club credit card company.

Date Particulars P.R. Debit Credit

Receivables, Page 1
A. Lightstone, March 2004

Bad Debts Expense

Mildred owns Mildred’s Motorcycle Repair in Etobicoke. Sadly, Mildred does not always receive
payment on her accounts, and must sooner or later write them off.

Record the transactions outlined below within the journal provided.

April 30: Mildred uses the allowance method to account for her Bad Debts Expense. In
particular, she uses the percent of sales (Income Statement focus) approach.
The total sales for the month of April are $12,000.00. Mildred estimates her Bad
Debts expense to be 5% of her total sales.

Make the necessary adjusting entry to record the allowance for this bad debts
expense.

May 3: Mildred provides C. Varone $200.00 of repairs on credit.

May 8: Mildred provides K. Smith $300.00 of repairs on credit.

May 18: Mildred tries to phone C. Varone to see about his late payment, but the phone
number is disconnected. Mildred writes off the entire account, totaling $200.00.

May 23: Mildred tries to phone K. Smith to see about her late payment, but she learns that
Ms. Smith has declared bankruptcy. Mildred writes off the entire account, totaling
$300.00.

May 29: Much to her surprise, Mildred receives a $200.00 payment on the C. Varone
account! It turns out that Mr. Varone had simply moved and needed some time to
catch up on his finances.

May 31: The total sales for the month of May are $8,000.00. Remember, Mildred
estimates her Bad Debts at 5% of her total sales.

Make the necessary adjusting entry to record the prediction of this bad debts
expense.

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Date Details P.R. Debit Credit

Receivables, Page 3
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Lump-Sum Asset Purchase

1. Journalize the following lump-sum purchase of capital assets on March 19th, 2004:

Purchased equipment (valued at $10,000.00), building (valued at $90,000.00), and land

(valued at $200,000.00) for $250,000.00. Paid cash.

Date Account Title and Explanation P.R. Debit Credit

Amortization Methods and Disposal of Assets

2. Mildred purchases computer equipment for $3,700.00 on March 9th, 2004. She estimates that
she will use it for three years, after which she hopes to sell it for $400.00. In the meantime she
will calculate amortization using the straight-line method.

Assuming that Mildred’s firm runs a one-year accounting period, which ends on December 31st:

i) Show the entry that will be made on December 31st, 2004 to adjust for the amortization expense
for the first year. (Use the nearest-whole month rule.)

ii) Show the entry that will be made on December 31st, 2005 to adjust for the amortization
expense for the second year.

Date Account Title and Explanation P.R. Debit Credit

Receivables, Page 4
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3. Mildred purchases binding equipment for $2,600.00 on May 13th, 2004. She is told that this
equipment can bind a total of 500,000 books, after which it can be returned to the seller for
recycling. The seller will pay $200.00 for these used binders. In the meantime Mildred will
calculate amortization using the units-of-production method.

Assuming that Mildred’s firm runs a one-year accounting period, which ends on December 31st:

i) Show the entry that will be made on December 31st, 2004 to adjust for the amortization expense
for the first year, if Mildred used her binding equipment to bind 30,000 books.

ii) Show the entry that will be made on December 31st, 2005 to adjust for the amortization
expense for the second year if Mildred used the equipment to bind 120,000 books.

Date Account Title and Explanation P.R. Debit Credit

4. Mildred purchases a building on September 25th, 2004 at a cost of $180,000.00. She is going
to use the CCRA rules for amortizing this building, so she will apply the capital cost allowance
percentage of 4% (this percentage applies to all Class #1 assets, which are defined as buildings
and other structures under the Income Tax Act). The CCRA also requires that Mildred apply the
half-year rule for the first year of ownership.

Assuming that Mildred’s firm runs a one-year accounting period, which ends on December 31st:

i) Show the entry that will be made on December 31st, 2004 to adjust for the amortization expense
for the first year.

ii) Show the entry that will be made on December 31st, 2005 to adjust for the amortization
expense for the second year.

Date Account Title and Explanation P.R. Debit Credit

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5. At the beginning of 2006, Mildred realizes that the computer equipment she purchased for
$3,700.00 on March 9th, 2004 is now completely obsolete because of new technology in the
computer field. She maintains her original estimate that she will use it for a total of three years,
but she now realizes that she will not be able to sell it for any money at all.

Calculate the revised annual amortization for this computer equipment.

i) Show the entry that will be made on December 31st, 2006 to adjust for the amortization expense
associated with this computer.

ii) Show the entries that will be made on March 9, 2007, when the computer equipment is thrown
in the garbage. (Don’t forget to first bring the accumulated amortization account up to date!)

Date Account Title and Explanation P.R. Debit Credit

6. On August 25th, 2005, Mildred sells her company van for $6,000.00. The van was originally
purchased for $15,000.00. The van has been amortized using the straight-line method at
$2,000.00 per year, and its accumulated amortization account had a balance of $8,000.00 as at
December 31st, 2004.

i) Show the entry that will be made on August 25th, 2005 to bring the accumulated amortization
account up to date.

ii) Show the entry that will be made on August 25th, 2005 to record the sale of the van.

Date Account Title and Explanation P.R. Debit Credit

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Intangible Assets

8. On April 27th, 2004 Mildred spends $4,000.00 cash to repaint a store that she is currently leasing. She has six
years left on her lease, and the paint is expected to last for the duration.

i) Show the entry that will be made on April 27th, 2004 when the painting is completed and paid for with cash.

ii) Show the entry that will be made on May 31st, 2004 to record one month’s of amortization expense on the
leasehold improvement.

Date Account Title and Explanation P.R. Debit Credit

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Partnerships

July 1, 2004: S. Kwon and E. Seo invest in a partnership. S. Kwon invests $6,000.00 cash, and equipment
worth $8,000.00. He also has a $5,000.00 bank loan payable associated with business. E. Seo invests
$10,000.00 cash.

July 15, 2004: S. Kwon and E. Seo each withdraw $500.00 for personal use.

July 31, 2004: The partnership generates a $10,000.00 net income in this first month. Each partner receives a
10% (per year) interest allowance on their initial investment, plus a salary allowance of $2000.00. Any remaining
income or loss is split equally. Note: When calculating the interest allowance, remember that this is just a
one-month accounting period.

Post
Date Account Title Debit Credit
Ref.

Receivables, Page 8
A. Lightstone, March 2004

Corporations

October 1, 2003: Acme Corp. receives its charter to issue unlimited common and preferred shares. It
immediately issues 10,000 shares of common stock at $20.00 a share.

February 10, 2004: Acme Corp. agrees to issue 2000 shares of preferred stock in exchange for land currently
valued at $100,000.00. These shares have a dividend preference of $5.00 a year.

September 30, 2004: Acme Corp. has generated a Net Income of $140,000.00 for its first fiscal year. The board
of directors declares $50,000.00 of this Net Income as dividends to be paid to shareholders. Preferred
shareholders are paid first, and the remaining dividends are divided equally amongst the common shares.
(Acme Corp. chooses to debit Retained Earnings directly at the date of declaration.)

October 31, 2004: Acme Corp. pays the dividends that were declared on September 30th.

Post
Date Account Title Debit Credit
Ref.

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January 1, 2004: Acme Corp. receives its charter to issue unlimited common and preferred shares. It
immediately issues 12,000 shares of common stock at $20.00 a share, and 5000 shares of preferred stock at
$30.00 a share with a dividend preference of $3.00 a share.

September 10, 2004: Acme Corp retires 2,000 common shares at $21.00 a share.

October 31, 2004: Acme Corp. declares a 5% share dividend on its 10,000 common shares. Acme Corp.'s
common shares are currently trading at $22.00. (Acme Corp. chooses to debit Retained Earnings directly at the
date of declaration.)

November 30, 2004: Acme Corp. distributes the share dividends that were declared on October 31st.

December 15, 2004: Acme Corp. declares a $3.00 cash dividend on its 5,000 preferred shares. (Acme Corp.
chooses to debit Retained Earnings directly at the date of declaration.)

December 31, 2004: Acme Corp. distributes the cash dividends that were declared on December 15th.

Post
Date Account Title Debit Credit
Ref.

Receivables, Page 10
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Receivables, Page 11