INTERMEDIATE FINANCIAL
ACCOUNTING II (ACC 352) MIDTERM
EXAM PRACTICE (Questions and
answers) A+ GRADED ATHABSCA
UNIVERSITY
, ACCT 352
Intermediate Financial Accounting II
Practice Midterm Examination with Solutions
Part 1: Theory
Note: The questions in Part 1 are examples only. Any of the learning objectives in the textbook that
deal with accounting theory may be examined in the actual examination, so it is important to
review and understand all the objectives. The Summary of Learning Objectives and the Key Terms
at the end of each chapter and appendix are a good place to start this type of review.
When you are answering written response questions worth several marks, think about what, why,
when, and how to answer the question fully.
1. Preferred shares often have preferences or restrictions attached. Name three features or
qualities of preferred shares and describe them.
Solution (any three of the five listed below):
Cumulative – any dividends in arrears for these shares must be made up before any profits
can be distributed to common shareholders.
Convertible – allows the company or holder to exchange the shares for common shares at a
predetermined ratio.
Callable/Redeemable – the company can redeem (call) at its option the outstanding
preferred shares at specified future dates and at stipulated prices.
Retractable – the holders can sell (put) their shares to the company after adequate notice
and the company must pay the holders.
Participating – sharing at the same rate as common shares in any profit distributions that
are higher than the prescribed rate of the preferred shares.
2. Discuss the differences in the accounting treatments for stock splits and stock dividends.
Solution:
Legally, a stock split is distinguished from a stock dividend because a stock split results in an
increase in the number of shares outstanding with no change in the share capital or retained
earnings accounts. Thus, no journal entry is required for a stock split. Typically, a stock
dividend will require a journal entry that results in an increase in the number of shares, an
increase to the share capital account, and a decrease to the retained earnings accounts.
Stock dividends and stock splits are often used to improve a share’s marketability. For
example, if the market value of a share is currently $150 per share, a 2:1 stock split will result
in each share’s market value being $75, making them more affordable to purchase by
investors.
,Part 2: Short Answer and Calculations
Complete each unrelated question.
1. On March 1, Hugo Ltd. signs a four-month, zero-interest-bearing note with Empire
Contracting and receives $103,000 cash. If the rate for notes of similar credit risk is 12%,
what is Hugo’s journal entry for the note on the due date?
Solution:
Jul 1 Note Payable 103,000
Interest expense 4,120
Cash 107,120
($103,000 X 12% X 4/12 = 4,120 interest + 103,000 principal = 107,120 due at
maturity)
All notes payable (or receivable) include an interest component, even if issued at “zero-
interest.” The interest component is the difference between the note’s issue amount ($103,000) and
the amount due at maturity (calculated as $107,120). Since this is a short-term note, net present value
calculations are not required. (Refer to Intermediate Accounting e-text, Vol. 1, pp. 391–392.)
2. Air Canada sells 300 tickets at $300.00 each for its upcoming flight to Vancouver. What is
the entry for the sale of the tickets?
Solution:
Cash 90,000
Unearned ticket revenue 90,000
3. Bell Inc. sells hand-held electronic game machines. They also sell 2-year warranty
contracts. During 2015, the company sold 8,000 warranty contracts at $72 each. The
company spent $142,000 servicing warranties during 2015, and it estimates that an
additional $300,000 will be spent in the future to service the warranties. Bell recognizes
revenue based on the proportion of costs incurred out of total estimated costs. Prepare Bell’s
journal entries for all the warranty related transactions.
Solution:
Cash 576,000
Unearned Warranty Revenue 576,000
(8,000 X $72)
Warranty Expense 142,000
Cash, Inventory, etc. 142,000
Unearned Warranty Revenue 185,050
Warranty Revenue 185,050
($576,000 X [$142,000/$442,000])
, 4. Kyle Koffee Co. offers a coffee mug to customers who send in three UPC labels from its
Kyle Koffee vacuum packs of coffee along with $2.00. The mug costs $1.75 each to
purchase and $1.10 each to mail to customers. During 2015, Kyle Koffee Co. sold 800,000
vacuum packs. The company expects 40% of the UPC labels to be sent in. During 2015,
156,000 UPC labels were redeemed. Prepare Kyle Koffee’s December 31, 2015 adjusting
entry.
Solution:
Dec 31/15 Premium Expense ............................................. 46,467
Estimated Liability for Premiums ........... 46,467
UPC labels expected to be sent in ........................................ 320,000
(40% X 800,000)
UPC labels already redeemed .............................................. 156,000
Estimated future redemptions ............................................. 164,000
Cost of estimated claims outstanding .................................. $ 46,467
(164,000 ÷ 3) X ($1.75 + $1.10 – $2.00)
ACCOUNTING II (ACC 352) MIDTERM
EXAM PRACTICE (Questions and
answers) A+ GRADED ATHABSCA
UNIVERSITY
, ACCT 352
Intermediate Financial Accounting II
Practice Midterm Examination with Solutions
Part 1: Theory
Note: The questions in Part 1 are examples only. Any of the learning objectives in the textbook that
deal with accounting theory may be examined in the actual examination, so it is important to
review and understand all the objectives. The Summary of Learning Objectives and the Key Terms
at the end of each chapter and appendix are a good place to start this type of review.
When you are answering written response questions worth several marks, think about what, why,
when, and how to answer the question fully.
1. Preferred shares often have preferences or restrictions attached. Name three features or
qualities of preferred shares and describe them.
Solution (any three of the five listed below):
Cumulative – any dividends in arrears for these shares must be made up before any profits
can be distributed to common shareholders.
Convertible – allows the company or holder to exchange the shares for common shares at a
predetermined ratio.
Callable/Redeemable – the company can redeem (call) at its option the outstanding
preferred shares at specified future dates and at stipulated prices.
Retractable – the holders can sell (put) their shares to the company after adequate notice
and the company must pay the holders.
Participating – sharing at the same rate as common shares in any profit distributions that
are higher than the prescribed rate of the preferred shares.
2. Discuss the differences in the accounting treatments for stock splits and stock dividends.
Solution:
Legally, a stock split is distinguished from a stock dividend because a stock split results in an
increase in the number of shares outstanding with no change in the share capital or retained
earnings accounts. Thus, no journal entry is required for a stock split. Typically, a stock
dividend will require a journal entry that results in an increase in the number of shares, an
increase to the share capital account, and a decrease to the retained earnings accounts.
Stock dividends and stock splits are often used to improve a share’s marketability. For
example, if the market value of a share is currently $150 per share, a 2:1 stock split will result
in each share’s market value being $75, making them more affordable to purchase by
investors.
,Part 2: Short Answer and Calculations
Complete each unrelated question.
1. On March 1, Hugo Ltd. signs a four-month, zero-interest-bearing note with Empire
Contracting and receives $103,000 cash. If the rate for notes of similar credit risk is 12%,
what is Hugo’s journal entry for the note on the due date?
Solution:
Jul 1 Note Payable 103,000
Interest expense 4,120
Cash 107,120
($103,000 X 12% X 4/12 = 4,120 interest + 103,000 principal = 107,120 due at
maturity)
All notes payable (or receivable) include an interest component, even if issued at “zero-
interest.” The interest component is the difference between the note’s issue amount ($103,000) and
the amount due at maturity (calculated as $107,120). Since this is a short-term note, net present value
calculations are not required. (Refer to Intermediate Accounting e-text, Vol. 1, pp. 391–392.)
2. Air Canada sells 300 tickets at $300.00 each for its upcoming flight to Vancouver. What is
the entry for the sale of the tickets?
Solution:
Cash 90,000
Unearned ticket revenue 90,000
3. Bell Inc. sells hand-held electronic game machines. They also sell 2-year warranty
contracts. During 2015, the company sold 8,000 warranty contracts at $72 each. The
company spent $142,000 servicing warranties during 2015, and it estimates that an
additional $300,000 will be spent in the future to service the warranties. Bell recognizes
revenue based on the proportion of costs incurred out of total estimated costs. Prepare Bell’s
journal entries for all the warranty related transactions.
Solution:
Cash 576,000
Unearned Warranty Revenue 576,000
(8,000 X $72)
Warranty Expense 142,000
Cash, Inventory, etc. 142,000
Unearned Warranty Revenue 185,050
Warranty Revenue 185,050
($576,000 X [$142,000/$442,000])
, 4. Kyle Koffee Co. offers a coffee mug to customers who send in three UPC labels from its
Kyle Koffee vacuum packs of coffee along with $2.00. The mug costs $1.75 each to
purchase and $1.10 each to mail to customers. During 2015, Kyle Koffee Co. sold 800,000
vacuum packs. The company expects 40% of the UPC labels to be sent in. During 2015,
156,000 UPC labels were redeemed. Prepare Kyle Koffee’s December 31, 2015 adjusting
entry.
Solution:
Dec 31/15 Premium Expense ............................................. 46,467
Estimated Liability for Premiums ........... 46,467
UPC labels expected to be sent in ........................................ 320,000
(40% X 800,000)
UPC labels already redeemed .............................................. 156,000
Estimated future redemptions ............................................. 164,000
Cost of estimated claims outstanding .................................. $ 46,467
(164,000 ÷ 3) X ($1.75 + $1.10 – $2.00)
