Hult International Business School – Exam

(“Adjusting Entries, Closing & Financial Statements, Cash Flow Statement,

Sales and Credit Terms, Financial Margins & Ratios & Other Items”)
Course: MFIN Financial Reporting (London)
Lecturer: Alek Grzeszczak
Date: Fall 2022
Total: 100 points

Part 1 - ADJUSTING ENTRIES AND POSTING TO T-ACCOUNTS (9 points - 1 point

each)

If needed, prepare the required adjusting journal entry (for Brexa Decorators) for each
situation as of December 31, 2022 and post them to T- accounts provided. (See page 4
for the unadjusted account balances shown in T-accounts).

Example.
Dec. 31 Account Name Debit
Amount
2022 Account Name Credit
Amount

(a) Suppose Brexa’s had received a $1,800 shipment of supplies in September 2022.
When counting the supplies on December 31, 2022, Brexa’s found only $800 worth of
supplies on hand.

Debit and credit the accounts affected.

Dec. 31 Supplies expense $1000
2022 Supplies credited $1000

(b) Suppose Brexa’s had paid $12,000 for six months’ rent on November 1, 2022.

Debit and credit the accounts affected.

Dec. 31 Prepaid rent – Rent Expense $4000
2022 Prepaid rent $4000

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(c) Suppose Brexa’s had paid $6,000 for one year’s insurance on June 1, 2022.

Debit and credit the accounts affected.

Dec. 31 Insurance Expense $3500
2022 Prepaid Insurance $3500

(d) The company had acquired Property, Plant & Equipment costing $40,000 on January
1, 2022. Suppose that the depreciation on this Equipment was calculated to be $2,000 for
2022.

Debit and credit the accounts affected.

Dec. 31 Depreciation Expense $2000
2022 Accumulated depreciation $2000

(e) On December 1, 2022, the company had sold $500 in gift certificates for decorating
services to a customer. On December 31, 2022, the accountant received an envelope
containing $400 worth of redeemed gift certificates, not yet recorded in the company’s
books.

Debit and credit the accounts affected.

Dec. 31 Unearned Revenue $400
2022 Decorating Revenue $400

(f) On June 30, 2022, the company invested $20,000 in a certificate of deposit that will
yield (generate) 12% interest at the end of one year.

Debit and credit the accounts affected.

Dec. 31 Interested Expense -- Deposit $2400 --
1200
2022 Interest Receivable – Interest Revenue $2400 -
1200

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(g) The company borrowed money (a note payable) from the bank for $30,000 on January
1, 2022, due with all interest on June 30, 2023. The note payable requires 10% (annual)
interest.
Cash
Note payable

Debit and credit the accounts affected.

Dec. 31 Interest Expense $3000
2022 Interested Payable $3000

(h) The company calculated its income taxes as $26,110 for the year ended December
31, 2022.

Debit and credit the accounts affected.

Dec. 31 Income Tax Expense $26110
2022 Income Taxes payable $26110

(i) On December 15, 2022, the company declared a $750 dividend, payable January 15,
2023.

Debit and credit the accounts affected.

Dec. 31 Retained Earnings $750
2022 Dividend Payable $750

Part 2 - POSTING TO T-ACCOUNTS (9 points - 1 point each)

Un-adjusted starting balances are given. Post the adjusting entries above to the T-
accounts on the following page.

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 Assets Liabilities Stockholders’ Equity, continued
+ Cash – – Accounts Payable + – Retained Earnings +
Unadj. 43,450 250 Unadj. 750 Unadj.

+ Supplies – – Dividend Payable +

Unadj. 1,800 750 Unadj.
– Decorating Revenue +
120,000 Unadj.

+ Accounts Receivable – – Unearned Revenue +

Unadj. 4,000 500 Unadj.
– Investment Income +
2400 Unadj

+ Prepaid Rent – – Notes Payable + + Wage Expense –

Unadj. 12,000 30,000 Unadj. Unadj 32,00
. 0

– Interest Payable + + Utilities Expense –

+ Prepaid Insurance – 3000 Unadj. Unadj 1,000
Unadj. 6,000 .

+ Telephone Expense –
– Income Tax Payable + Unadj 500
+ Certificate of Deposit – 26110 Unadj. .
Unadj. 20,000
+ Supplies Expense –
Unadj 1000
Stockholders’ Equity
+ Interest Receivable – + Rent Expense –
Unadj. 0 – Common Stock + Unadj 4000
1,00 Unadj.
0 + Insurance Expense –
Unadj 3500
+ Property, Plant &
Equipment – + Depreciation Expense –
Unadj. 40,000 – Additional Paid-In Unadj 2000
Capital +
9,00 Unadj. + Interest Expense –
0 Unadj 2400
– Accumulated Depr. +
200 Unadj. + Income Tax Expense –
0 Unadj 26110

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Part 3 – ADJUSTED TRIAL BALANCE (5 points)

Prepare the adjusted trial balance as of December 31, 2022.

Brexa’s Decorators
Adjusted Trial Balance
December 31, 2022

Debit Credit
Cash 43,450
Supplies 1800
Accounts Receivable 4000
Prepaid Rent 12000
Prepaid Insurance 6000
Certificate of Deposit 20,000
Interest Receivable 0
Property, Plant & Equipment 40,000
Accumulated Depreciation 2,000
Accounts Payable 250
Dividend Payable 750
Unearned Revenue 500
Notes Payable 30,000
Interest Payable 3,000
Income Tax Payable 26110
Common Stock ($1 par value) 1,000
Additional Paid-in Capital 9,000
Retained Earnings 750
Decorating Revenue 120,000
Investment Income 6,400
Wage Expense 32,000
Utilities Expense 1,000
Telephone Expense 500
Supplies Expense 1,000
Rent Expense 4,000
Insurance Expense 3,500
Depreciation Expense 2,000
Interest Expense
Income Tax Expense 26110
Totals 199760 199760

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Part 4 – INCOME STATEMENT & BALANCE SHEET (6 + 6 points total)

Prepare a classified Income Statement for the full year 2022 and a classified Balance
Sheet as of December 31, 2022.

Brexa’s Decorators
Income Statement (6 points)
For the year ended December 31, 2022

Revenues:

Subtotal:

Expenses:

Subtotal:
Net Income:

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 Brexa’s Decorators
Balance Sheet (6 points)
December 31, 2022

Assets
Current Assets

Total Assets

Liabilities
Current Liabilities

Total Liabilities

Stockholders’ Equity

Total Liabilities & Shareholders’ Equity

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Part 5 – Short Questions (38 points) – add space if/as required.

1. What is a accrued expense (give example) and how is it recorded/classified? What

are the bookings (if any) afterwards ? (2 points)

An Accrued expense essentially is something that had happen but it has not been
paid for yet. Water bill is one example of accrued expense. It is recorded as a
journal entry which is then posted on the expense account. The Credited is posted
to an accrued expense liability account. Since it might be paid in the accounting
period, it might be passed on in the recording expenses incurred.

2. What is accrued revenue (give example) and how is it recorded/classified? What

are the bookings (if any) afterwards ? (2 points)

It is a revenue that is been earned by providing a product or services. However, no

payment has been received yet. It is recorded as receivables on the balance sheet.

3. What are permanent accounts ? How do they function ? Which are they ? (2
points)

Permanent accounted are essentially accounts that show cumulative balance and
they normally carry till the end of the accounting cycle. However, they gets carried
forward to the next accounting cycle as well. They function by recording the actual
value of company’s balance sheet until the company close forever or if they decide
to reorganize their operation.

4. What is the sequence of a full accounting cycle ? List all steps. (2 points)

There are a total of 8 accounting cycle. Identifying/recording, transaction in the journal,

posting in the ledger, generating unadjusted trial balance report, preparing worksheets,
preparing adjusting entries. Generating financial statement and finally closing the book.

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5. On August 1, 2022, Allen Company borrowed $600,000 on a one-year, 10% note
payable. The principal and all interest will be paid on July 31, 2023. As of
December 31, 2022, what are the (related) account balances (list the accounts and
amounts, Debits or Credits) after adjusting entries have been made? (2 points)

Prepare the journal entry for July 31, 2023. (2 points)

Debit and credit the accounts affected

31/07/202 Debit Credit
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Bank 600,000
Bank loan 600,000
Interest expense 60,000
Interest payable 60,000

6. Compton Industries (a wholesaler) bills customers subject to terms 4/10, n/60. Is it

in customers’ interest to take advantage of the sales discount in today’s economic
environment? (even if that would mean having to borrow money). Why or why not?
(2 points)

If the payment is made within 10 days of the sale then a discount of 4% will apply to the goods.
Even if the payment is not paid in 10 days, the customer can also pay the original prince within 60

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days. Due to the economies and the higher inflation rate, is better for the customer to take the deal
if the customer has the good cashflow and able to make the payment early. The customer can take
the advantage of the discount to gain more profit.

7. A company purchased a car that cost $20,000. It had an estimated useful life of five
years and a residual value of $2,000. The car was depreciated by the straight-line
method and was sold at the end of the third year of use for $10,000 cash.

Was there a gain or loss (and how large) on the sale ? (2 points);

There was a loss of $1200 after the sale.

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8. A company (X) is considering a purchase of another company (Y) whose Assets
and Liabilities (in no particular order) are as listed below (all in $ millions):

Inventory: $140; A/P: $50; Note Payable: $20; Cash: $120; Prepaid Expenses:
$10; A/R: $30; Long Term Debt: $100; Unearned Revenue: $20;

A: By showing the actual accounting bookings for this acquisition, calculate the
goodwill that would be created if Company (X) paid altogether $200 cash for
Company (Y) ($100 immediately and $100 in 6 months). (3 points)

140-50= 90 90-20=70 70+120=190 190+10=200 200+30=230 230-100=130

130+20= 150

The total amount of good will be 50 million in 6 month.

B: While preparing next year’s financial statements, it is determined that company

(X) overpaid for company (Y) and that half of the Goodwill created should not be
there. Show the accounting entry necessary to eliminate this portion of Goodwill
from company (X)’s Balance Sheet. (1 point)

The Goodwill portion should be noted as noncurrent asset

9. The balance sheet for Colt Corp. provided the following summarized pretax data:

Year 2020 Year 2021

Deferred tax liability $248,000 $376,000

Tax expense as reported on the 2021 Income Statement was $493,000.

Calculate the amount of income taxes payable for 2021 ? (3 points)

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10. What are the three ways of dealing with (accounting for) contingent liabilities ? (3
points)

Always avoid taking payment for a good or services on credit or client’s word. Try to ask
for payment upfront as it avoid bad situation later now. Always record contingent liabilities.
Always make a full payment.

11. Short Company purchased land today by agreeing to pay $50,000 each of the next
ten years beginning one-year from the purchase date. Short's incremental
borrowing/discount rate is 10%. (2 points)

At what value is the land reported at on the balance sheet:

12. Long Company purchased a new vehicle by paying $10,000 cash on the purchase
date and agreeing to pay $6,000 every three months during the next five years. The first
payment is due three months after the purchase date. Rae's incremental borrowing rate is
16% (annual). What is the value of the vehicle as reported on the balance sheet as of the
purchase date ? (2 points)

$54633

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13. Determine the effect of the following errors on the financial statements. Code your
answers as follows and do not leave any blank spaces.

O: If the error results in an overstatement of the financial statement component.

U: If the error results in an understatement of the financial statement component.
N: If the error does not affect the financial statement component.

Error 1: A company failed to record accrued wage expense at year-end. (3 points)

Revenue _N____
Expenses __U___
Net income _O____
Assets __N___
Liabilities ___U__
Stockholders' equity _N____

Error 2: A company failed to accrue revenue earned at year-end. (3 points)

Revenue __U___
Expenses _N____
Net income __U___
Assets __U___
Liabilities __N___
Stockholders' equity __U___

14. Explain what impact on financial statement (I/S and B/S) would have a sudden
decision to switch from “expensing” a lease to “capitalizing” it. (2 points)

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In the balance sheet, It will increase the total assets because capitalizing account
on the balance sheets an asset. Hence, it will also reflect the increase on the
income statement as depreciation.

Part 6 – CASHFLOW STATEMENT (10 points total)

GW Inc. is developing its annual financial statements at December 31, 2022. The
statements are complete except for the statement of cash flows. The completed
comparative balance sheets and income statement are summarized as follows:

2021 2022
Balance sheet at December 31
Cash $ 65,000 $ 64,000
Accounts receivable 20,000 15,000
Inventory 20,000 22,000
Property and equipment 150,000 210,000
Less: Accumulated depreciation (45,000) (60,000)
$ 210,000 $ 251,000
Accounts payable $ 19,000 $ 8,000
Taxes payable 1,000 2,000
Note payable, long-term 75,000 86,000
Common stock and additional paid-in capital 70,000 75,000
Retained earnings 45,000 80,000
$ 210,000 $ 251,000
Income statement for 2022
Sales $ 190,000
Cost of goods sold 90,000
Other expenses 60,000
Net income $ 40,000

Also, during 2022, the Company:

a. Bought equipment for cash, $60,000.

b. Borrowed an additional $11,000 and signed an additional long-term note payable.
c. Issued new shares of stock for $5,000 cash.
d. Dividends of $5,000 were declared and paid in cash.

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 e. Other expenses included depreciation, $15,000; wages, $20,000; and taxes,
$25,000.
f. Accounts payable includes only inventory purchases made on credit.

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 A. Prepare (show the “waterfall”) the 2022 statement of cash flows for GW Inc. using the
indirect method. (7 point)

B. What is the amount of Cashflow from Operations for the year ? (1 point)

C. What is the amount of Free Cash Flow for the year ? (1 point)

D. What is the net change in cash for the year ? (1 point)

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Part 7 - CALCULATING RATIOS (1.5 point each, 9 points total)

MNF Corporation gathered the following data at the end of the accounting period,
December 31, 2021:

Net income $60,000

Net sales revenue $1,200,000
Interest expense $25,000
Total average liabilities $200,000
Total average stockholders' equity (50,000 shares outstanding) $300,000
Total dividends declared and paid during 2021 $22,500
Market price per share of stock at year end $9.00
Average income tax rate 40%

Calculate each of the following ratios:

A. Net profit margin: 5%

B. Return on equity: 20%

C. Earnings per share: $1.2

D. Dividend yield ratio:

E. Price/earnings ratio: 7.5

F. Return on assets: 6000

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Part 8 - SALES JOURNAL ENTRIES (8 points total)

On July 13, 2022, Bad-deal.com sold merchandise for $6,000, terms 1/10 n/45. Prepare the
journal entry. This merchandise originally cost $4,800. (2 points)

Debit and credit the accounts affected

July 13 Debit Credit

On July 18, 2022 the customer returned (in original packaging) $1,500 (or ¼) of the
merchandise that was purchased back on July 13. Prepare the journal entry. (2 points)

Debit and credit the accounts affected

July 18 Debit Credit

The customer paid for the merchandise on July 28, 2022. Prepare the journal entry (2 points)

Debit and credit the accounts affected

July 28 Debit Credit

Compute Net Sales ? (2 point)

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