SAMPLE ACCOUNTING 414 CONSOLIDATED FINAL EXAMINATION SOLUTION
Note: these solutions are provided for information purposes only. There could be
some solutions that have changed slightly since this final exam was used, so
please ensure you review your current course material for changes to how items
are accounted for.
Financial reporting is getting complicated because there are many different methods applied
to similar items. For example, some investments are reported at fair value while others are
reported at amortized costs. Sometimes, the fair value adjustment is reported in net income
and other times it is reported in OCI. Sometimes the rules for private enterprises are the
same as the rules for public companies but sometimes they are different.
Although there are many differences, there are valid reasons for the differences. The
accounting method is different because the situation in which it is being applied is different.
The accounting method usually fits the situation and it better reflects the economic reality.
Therefore, users are better served because the information faithfully represents the financial
position and results of operations for the reporting entity.
Management does have some discretion in choosing accounting policies but the choice
should be based on which policy best reflects management’s intention or best reflects the
economic situation. A policy should not be chosen to simply get a desired result for net
income. Question 2
The maximum revenue to be recorded is the percentage of work completed for the 80
customers who have signed contracts less the estimated sales to be cancelled at final
inspection. In other words, revenue should be recognized on a percentage of completion
basis only for lots that have been sold and after estimating the number of sales that will be
cancelled on final inspection.
The reason for this conclusion is as follows:
1. The first condition for revenue recognition is that a customer has agreed to a sale.
Revenue cannot be recognized if a customer does not exist or has not been identified i.e.
revenue cannot be recognized for doing work for yourself. Since 80 customers have
signed contracts with the company, this condition has been met for these 80 contracts.
2. The amount of the sale is measurable at $50,000, the sales price for a lot. However, the
customers can cancel the contract at the very end of the process when they inspect the
property. This is like a sales return that in effect cancels the entire sale. If there is a high
risk that the sale could be cancelled, then the revenue should not be recognized until the
customer inspects and approves the property. But, if the company can reliably estimate
the number of sales cancellations, the company can recognize revenue for the 80
contracts but must set up an allowance for sales cancellations to offset the gross revenue.
3. Revenue can only be recognized if the company has performed the work required by the
contract. Since this is a long term contract, the percentage of completion method should
be used to recognize revenue for the portion to the work completed in a particular year.
The company would use the costs to date as a percentage of total estimated costs for the
contract to determine percentage completion. If they can reliably measure the percentage
complete on this basis, then this condition has been met. If they cannot reliably measure
the costs to complete the contract, they would delay revenue recognition until the costs
4. Another condition for revenue recognition is collectability. Crosby has only received a
deposit of $2,000 on signing. The other $48,000 is due over 5 years. If Crosby has done
credit checks and is confident that the customer will pay, then this condition is met. If
there is some doubt about the customer’s ability to pay, then an allowance for doubtful
accounts should be established or no revenue should be recognized until the cash is
received from the customer.
The cost of developing the site the cost of the one-week at the resort should be expensed in
the same period as the revenue i.e. match the expense to the revenue. If the percentage of
completion basis is used for recognizing the revenue, the costs of developing the site would
be expensed as incurred because these are the costs incurred to earn that revenue.
The cost of the one-week at the resort is a cost of earning the revenue. It also should be
expensed in the same period as the revenue i.e. matches the expense to the revenue. If the
percentage of completion basis is used for recognizing the revenue, the same percentage
should be used in determining the portion of the cost of the resort to be expensed. For
example, if one-third of the work on a lot has been completed at the end of the year, one-
third of the cost of the free resort should be accrued as a promotion expense and promotion
liability at the end of the year. Question 3
a. Eldon Corporation
At October 31, 2011
Balance per books $ 2,091.10
Note collected by bank $ 175.00
Interest on note 5.50 180.50
NSF Cheque $ 81.00
Bank service charge 2.20
Default note payment to bank
[1,000 + (1,000 x 16% x 3/12)] 1,040.00 1,123.20
Balance per books $1,148.40
Balance per bank $ 659.40
Deposits in Transit (400 + 40,600 – 40,000) 1,000.00
O/S Cheques ($350 + 39,161 – 39,000) (511.00)
Adjusted balance per bank $1,148.40
b. Accounts Receivable 81.00
Note Receivable 1,040.00
Misc. Expense 2.20
Note receivable A 175.00
Interest Revenue 5.50
Cash 942.70 Question 4 – Part A
a) Bad Debts Expense............................................3,540...........
Allowance for Doubtful Accounts .........................3,540..
Total allowance needed 4,300
Present allowance (760)
Bad debts expense$ 3,540
b) Bad Debts Expense .......................3,699
Allowance for Doubtful Accounts .........................3,699..
Sales returns and allowances (14,000)
Net sales 411,000
Bad debts expense$ 3,699
May 11 Purchases (0.98 × $8,000) ...............................7,840.
Accounts Payable ........................7,840...
15 Accounts Payable (0.98 × $2,000) ......................1,960
Purchase Returns and Allowances .............. 1,960
30 Purchase Discounts Lost [0.02 x (8,000 – 2,000)] . 117.60