Exam Financial Accounting & External Accountability

Date: …
Time: 3 hours
Utrecht University School of Economics Venue: …

Name: Version:

Student number:

A
Instructions:
• This exam contains 12 pages and consists of 25 multiple choice questions accounting for 50 marks
and 3 open problems for 50 marks, adding up to a total of 100 marks.
• Marks for the multiple-choice questions are awarded after taking into account a guessing correction,
as follows:
Marks earned = (50/25)*(#Right Questions– (#Wrong Questions/3))
• Empty / missing answers count as wrong answers!
• The correct answers of the Multiple Choice questions must be checked on the corresponding tick box
on the Multiple Choice form sheet. Check clearly the version number of your test and the other
information, especially your student ID, requested on the Multiple Choice form sheet!
• Students are allowed to hand in the exam and leave the room 1 hour after the start of the exam.
• The use of unannotated dictionaries - not containing written notes or comments - is allowed.
• All numbers are displayed in the US-decimal system: (.) for decimals and (,) as a thousand separator.
• The effects of taxes can be ignored, unless explicitly mentioned otherwise.
• Graphical or programmable calculators, mobile phones, smart watches, etc. are strictly
FORBIDDEN. Only plain calculators are allowed.
Having any of these devices in proximity of your table during the exam will be considered as a
fraudulent act and can lead to a declaration of nullification of the test result and being barred from
the retake. Mobile phones must be switched off and kept in your bag beyond physical reach.

Good Luck!

2017 Utrecht University School of Economics

All rights reserved. No part of this examination may be reproduced or transmitted in any form by any electronic or mechanical means (including photocopying, recording or
information storage and retrieval) without the prior written permission of the Utrecht University School of Economics.
Multiple Choice Questions – Answer on Multiple Choice Form Sheet!
1. Winter Company earned revenues of €160,000 in cash and €210,000 on account during 2014. Of the
€210,000 on account, €80,000 was collected in cash in 2014 and the rest in 2015. The company incurred
expenses of €125,000 in 2014 and made payments of €90,000 towards the expenses in 2014. What is
net income in 2014 under accrual-basis accounting?
A) €85,000
B) €245,000
C) €280,000
D) €370,000

2. On December 1, 2015, Carrie's Day Care receives €3,000 in advance for an agreement to care for
Susan's children for the months of December, January, and February. Carrie's Day Care will make an
adjusting entry on December 31, 2015 to:
A) credit Revenue for €3,000.
B) debit Unearned Revenue for €1,000.
C) credit Revenue for €2,000.
D) credit Prepaid Revenue for €2,000.

3. When inventory is shipped from the seller to the buyer with shipping terms of FOB destination:
A) the seller has title to the goods while they are in transit.
B) the buyer will pay the transportation costs associated with the purchase.
C) title passes from the seller to the buyer when the goods leave the seller's shipping dock.
D) the goods will be included in the inventory of the buyer while in transit.

4. The selling price of a television is €1,000 and the cost to the retailer is €725. What is the retailer's
gross profit from the sale of the television?
A) €0
B) €275
C) €725
D) €1,000

5. On August 1, the Savage Company purchased €2,000 of inventory on account with credit terms of
2/10, net 30. Savage Company uses the perpetual inventory system. On August 15, the Savage Company
paid the amount due. What journal entry did they prepare on August 15?
A) debit Inventory for €2,000 and credit Accounts Payable for €2,000
B) debit Accounts Payable for €2,000, credit Purchase Discounts for €40 and credit Cash for €1,960
C) debit Accounts Payable for €2,000 and credit Cash for €2,000
D) debit Accounts Payable for €1,960 and credit Cash for €1,960

6. On May 1, the Santelle Company purchased €700 of inventory on account with credit terms of 2/10,
net 30. Santelle Company uses the perpetual inventory system. On May 2, the seller gave Santelle
Company a €100 allowance due to a product defect. What journal entry did Santelle Company prepare
on May 2?
A) debit Accounts Payable for €100 and credit Purchase Returns and Allowances for €100
B) debit Accounts Payable for €100 and credit Purchase Discounts for €100
C) debit Cash for €100 and credit Accounts Payable for €100
D) debit Accounts Payable for €100 and credit Inventory for €100

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7. The Allowance for Uncollectible Accounts is classified as:
A) a contra-asset account.
B) a contra-revenue account.
C) a contra-expense account.
D) an asset account.

8. Under the allowance method, when a company determines that they will not be able to collect from a
particular customer, they will:
A) debit Uncollectible-Account Expense and credit Accounts Receivable.
B) debit Accounts Receivable and credit Allowance for Uncollectible Accounts.
C) debit Allowance for Uncollectible Accounts and credit Uncollectible Account Expense.
D) debit Allowance for Uncollectible Accounts and credit Accounts Receivable.

9. A lump-sum purchase of multiple, long-term plant assets:

A) requires the company to record the assets bought as a single asset.
B) requires the company to divide the total cost among the various assets according to their
historical costs.
C) requires the company to divide the total cost among the various assets according to their
market values.
D) requires the company to divide the total cost among the various assets according to their book
values.

10. On January 2, 2015, Konrad Corporation acquired equipment for €300,000. The estimated life of the
equipment is 5 years or 40,000 hours. The estimated residual value is €20,000. If Konrad Corporation
uses the units of production method of depreciation, what will be the debit to Depreciation Expense for
the year ended December 31, 2016, assuming that during this period, the asset was used 9,000 hours?
A) €48,000
B) €56,000
C) €63,000
D) €67,500

11. On January 2, 2015, Kornis Corporation acquired equipment for €300,000. The estimated life of the
equipment is 5 years or 40,000 hours. The estimated residual value is €20,000. What is the balance in
Accumulated Depreciation on December 31, 2015, if Kornis Corporation uses the double-declining-
balance method of depreciation?
A) €56,000
B) €60,000
C) €112,000
D) €120,000

12. A company purchased a machine for €200,000 many years earlier. The accumulated depreciation on
the machine is €150,000. The machine is scrapped. Which journal entry is prepared to record the
disposal?
A) debit Loss on Disposal of Machine for €50,000, debit Accumulated Depreciation €50,000 and
credit Machine for €100,000
B) debit Accumulated Depreciation for €150,000 and credit Machine for €150,000
C) debit Accumulated Depreciation for €200,000, credit Machine for €150,000 and credit Gain on
Disposal of Machine for €50,000
D) debit Loss on Disposal of Machine for €50,000, debit Accumulated Depreciation for €150,000
and credit Machine for €200,000

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13. When an intangible asset is amortized:
A) stockholders' equity decreases.
B) net income decreases.
C) total assets decrease.
D) all of the above.

14. Marvin Company purchased Marathon Company on August 31, 2014. Marvin Company recorded
goodwill in the purchase of Marathon Company. How will Marvin Company account for Marathon
Company's goodwill in future accounting periods?
A) Marvin Company will amortize the goodwill over a 40-year life.
B) If the value of the goodwill increases in subsequent years, Marvin Company will increase the
Goodwill account.
C) If the goodwill is impaired in subsequent years, Marvin Company will decrease the Goodwill
account.
D) Marvin Company is not allowed to change the value of the Goodwill account.

15. How is the cash conversion cycle computed?

A) days' inventory outstanding + days' sales outstanding - days' payable outstanding
B) days' inventory outstanding - days' sales outstanding - days' payable outstanding
C) days' inventory outstanding - days' sales outstanding + days' payable outstanding
D) days' inventory outstanding + days' sales outstanding + days' payable outstanding

16. On June 15, Copps Stores (a German company), sold twenty-five computers, on account, to a
company located in Argentina for 3,000,000 pesos. On that date the peso was worth €0.079. On July 15,
when the peso was worth €0.070, payment was received. The journal entry on July 15 by Copps Stores
would include a:
A) credit to Cash €237,000.
B) credit to Accounts Receivable €210,000.
C) debit to Foreign-Currency Transaction Loss €27,000.
D) credit to Sales €210,000.

17. Lisa Laskowski Company reports the following information at the fiscal year end of December 31,
2015:

Common Stock, €0.10 par value per share €88 million

Paid-in Capital in Excess of Par—Common 700 million
Retained Earnings 800 million
Total Stockholders' Equity €1,588 million

What was the average selling price for the common stock sold?
A) €0.088 per share
B) €0.10 per share
C) €0.895 per share
D) €1.805 per share

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18. Wininger Corporation has 1,000 shares of 6%, €50 par value, cumulative preferred stock and 25,000
shares of €1 par value common stock outstanding on December 31, 2014 and December 31, 2015. The
board of directors declared and paid a €2,000 dividend in 2014. In 2015, €12,000 of dividends are
declared and paid. What are the dividends received by the common stockholders in 2015?
A) €3,000
B) €8,000
C) €9,000
D) €12,000

19. Economic value added (EVA) is computed as:

A) net income before taxes + long-term debt + interest expense.
B) net income before taxes + interest expense - capital charge.
C) net income before taxes - interest expense + capital charge.
D) net income before taxes - long-term debt + interest expense.

20. In 2015, Chen Corporation purchased treasury stock with a cost of €50,000. During the year, the
company declared and paid dividends of €10,000 and issued bonds payable for €1,000,000. Net Cash
Provided by Financing Activities for 2015 is:
A) €940,000.
B) €950,000.
C) €990,000.
D) €1,000,000.

21. Held-to-maturity investments in bonds are initially reported at ________ on the purchase date. On a
subsequent balance sheet date, the bonds are reported at ________.
A) cost; amortized cost.
B) amortized cost; fair value.
C) cost; fair value.
D) cost; lower of cost or market.

22. If 15% of the common stock of an investee company is purchased as a long-term investment, the
appropriate method of accounting for the investment is:
A) the equity method.
B) the consolidation method.
C) the available-for-sale method.
D) the lower of cost or market method.

23. Wolverine Corporation owns 29% of Buckeye Corporation. Net income for Buckeye for the year is
€250,000. The journal entry prepared by Wolverine Corporation is:
A) debit Equity-Method Investment for €72,500 and credit Cash for €72,500.
B) debit Equity-Method Investment for €72,500 and credit Equity-Method Investment Revenue for
€72,500.
C) debit Cash for €72,500 and credit Equity-Method Investment for €72,500.
D) debit Equity-Method Investment for €250,000 and credit Equity-Method Investment Revenue
for €250,000.

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24. On January 1, 2015, Barry Corporation paid €800,000 for 100,000 shares of Oak Company's common
stock, which represents 40% of Oak's outstanding common stock. For the year ending December 31,
2015, Oak reported net income of €200,000 and paid cash dividends of €60,000. Barry should report the
investment in Oak Company on its balance sheet at December 31, 2015 at:
A) €800,000.
B) €744,000.
C) €824,000.
D) €856,000.

25. Consider the following two statements:

1: Misstatements, including omissions, are considered to be material if they, individually or in the
aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis
of the financial statements.
2: The objective of a financial statement audit is to provide absolute assurance that the financial
statements are free from material misstatements.

Which statement(s) is/are true?

A) Statement 1 is true, statement 2 is false.
B) Statement 1 is false, statement 2 is true.
C) Both statements are false.
D) Both statements are true.

Final Test Financial Accounting and External Accountability 2016/2017 Page 6 of 12

Open questions

Problem 1 (16 marks)

Scheeler Company has the following comparative balance sheet data available:

12/31/2015 12/31/2014
Cash €30,000 €80,000
Accounts Receivable, net 160,000 100,000
Inventory 100,000 70,000
Prepaid Rent 20,000 10,000
Total Current Assets €310,000 €260,000
Equipment, at cost €400,000 €200,000
Accumulated Depreciation (60,000) (50,000)
Total Assets €650,000 €410,000

Accounts Payable €50,000 €40,000

Salaries Payable 40,000 40,000
Bonds Payable20 0 50,000
Common Stock, €10 par 300,000 100,000
Additional Paid-in Capital 50,000 0
Retained Earnings 210,000 180,000
Total Liabilities &
Stockholders' Equity €650,000 €410,000

Additional information:
1. The company reports net income of €100,000 and Depreciation Expense of €20,000 for the year
ending December 31, 2015.
2. Dividends declared and paid in 2015, €70,000.
3. Equipment with a cost of €20,000, with Accumulated Depreciation of €10,000 was sold for €3,000.
4. New equipment was purchased for cash.

Using the indirect method, prepare the statement of cash flows for the year ending December 31, 2015.

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Problem 2: Refer to exhibits 1 and 2 (20 marks)
On February 28, 2016, GTI Corp. issues 10%, 10-year bonds payable with a face value of €800,000. The
bonds pay interest on February 28 and August 31. GTI Corp. amortizes bonds by the effective interest
method. The market interest rate is 12% when GTI Corp. issues its bonds.

a) Will the bonds be priced at par, at a premium, or at a discount? Explain. (2 marks)

b) Compute the price at which the bond is issued. Refer to exhibit 1 and exhibit 2! (4 marks)
c) Journalize the following bonds payable transactions.
1. Issuance of bonds on February 28, 2016. (3 marks)
2. Payment of interest and amortization of the bonds on August 31, 2016. (3 marks)
3. Accrual of interest and amortization of the bonds on December 31, 2016. (3 marks)
4. Payment of interest and amortization of the bonds on February 28, 2017. (3 marks)
d) Record interest payable and bonds payable as they would appear on the GTI Corp. balance sheet
at December 31, 2016. (2 marks)

Final Test Financial Accounting and External Accountability 2016/2017 Page 8 of 12

Problem 3 (14 marks):
The November 30, 2017, records of HQ CAR PARTS, Corp. include the following accounts:

Accounts receivable: 20,000

Allowance for doubtful accounts: (1,200)

At the year-end (December, 31), the company ages its receivables and adjusts the balance in allowance
for Doubtful Accounts to correspond to the aging schedule. During the last month of 2017, the company
completed the following selected transactions:

Dec. 12: Purchased inventory from suppliers, on account for €8,000. (2 marks)
Dec. 18: Sold a transmission to Wheeler Dealers, on account for €2,300. The transmission was recorded
in inventory at cost for €1,200. (4 marks)
Dec. 19: Collected €5,400 from Misfit Garage on account. (2 marks)
Dec. 25: Wrote off as uncollectible the remaining €400 account receivable from Street Outlaws. This was
the only write-off in December. (2 marks)
Dec. 31: Adjusted the Allowance for Doubtful Accounts and recorded doubtful-account expense at year-
end, based on the aging of receivables, which follows: (4 marks)

Age of Accounts
Not yet 1-30 31-60 Over 60 Total
Customer
due days days days Balance
Gas Monkey Garage € 2,000 4,200 € 6,200
Misfit Garage 2,500 3,200 1,200 € 6,900
Wheeler Dealers 2,300 1,500 3,500 4,500 € 9,800
Totals 6,800 4,700 8,900 4,500 24,900
Est. percent uncollectible 1.00% 5.00% 12.00% 20.00%

Record the transactions in the journal. Explanations are not required.

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Exhibit 1 - Present value of 1 Euro

Final Test Financial Accounting and External Accountability 2016/2017 Page 10 of 12

Exhibit 2 - Present value of annuity of 1 Euro

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Formula Sheet

• Current ratio = Current assets / Current liabilities

• Acid test ratio = [Cash + Short-term investments + Net current receivables] / Current liabilities

• Inventory turnover = Cost of goods sold / Average inventory

• Accounts Receivable turnover = Sales revenue / Average accounts receivable

• Accounts Payable turnover = Cost of goods sold /Average net accounts payable

• Debt Ratio = Total liabilities / Total assets

• Times-interest earned ratio = Operating Income / Interest expense

• Return on Sales = Net income / Net sales

• Return on Total Assets (ROA) = Net income / Average total assets

• Return on ordinary shareholders’ Equity (ROE) = [Net income – Preference dividends] / [Average
shareholders’ equity – Preference equity]

• Earnings per Share = [Net income – Preference dividends] / weighted average of ordinary shares
outstanding.

• Price/Earnings ratio = Market price per ordinary share / Earnings per ordinary share

• Dividend yield = Dividend per ordinary (preference) share / Market price per ordinary
(preference) share

• Book value per ordinary share = [Total shareholders’ equity – Preference equity] / number of
ordinary shares outstanding.

Final Test Financial Accounting and External Accountability 2016/2017 Page 12 of 12