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BUSI3013 –Financial Accounting

Spring 2021

FINAL EXAMINATION SOLUTIONS

Question 1 (Revenue Recognition | 30 Points)

Required:

a. Points:5

An entity is a principal if the entity controls a promised good or service before the entity transfers the good or service to a customer. An entity is an agent if the entity’s performance obligation is to arrange for the provision of goods or services by another party. Principal: gross revenue. Agent: net revenue.

b. Points:5

Facebook recognizes cash from customers as revenue (an increase in cash and retained earnings) when the goods or services are delivered. For services, revenue is recognized with completion of the service. Cash received for either goods or services, before they are delivered or completed, are recorded as “deferred sales,” a liability on the balance sheet.

c. Points: 10

Dr: Cash    3,957

Cr. Deferred Revenue 3,957

Dr. Deferred Revenue 989.25

Cr. Revenue   989.25

d. Points: 10

Dr. Cash 20,000

Cr. Revenue 18700/(18700+3000)*20000=17,235

Cr. Deferred Revenue 2,765

Solution to Question 2 (Cash Flow Statement)

Operating: 14 Points; Investing: 8 Points; Financing: 8 Points 

Solution to Problem Set 3 (20 points: 5*4 points)

a. Record the income tax expense (using a journal entry or the accounting equation) for GM in 2017.

dr. Tax expense 11,533

cr. Cash/Taxes payable 653

cr. Deferred Tax Asset/Liability 10,880

b. Calculate GM’s effective tax rates for 2016 and 2017.

2016: ETR = 2,739/12,008 = 23%

2017: ETR = 11,533/11,863 = 97%

c. How did GM’s net deferred tax position (= DTA – DTL) change in 2017?

The net deferred tax position decreased (credit to deferred taxes).

d. At a rate of 35% the related difference in taxable income is = 8,074/0.35 = 23,068. The new value of the deferred tax asset is therefore 23,068*0.21= 4,844.4.

e. Lower tax rates (in the future), all else equal, increase after tax net income (because they reduce the tax expense).

In 2017 when the tax rate cut was announced, the cut led to a decrease of GM’s net income due to the revaluation of the deferred tax positions. The tax cut will lead to a revaluation of the DTLs and DTAs at the new tax rate and both of them will decrease. The immediate impact of the tax cut on the 2017 tax expense for GM depends on whether it has more DTAs than DTLs or vice versa. In reality, the tax cut led to an increase in the 2017 tax expense as GM’s DTAs exceeded the DTLs. Thus, the reduction in the DTAs was greater than the decrease in DTLs. Since the net effect is assets going down, retained earnings goes down as well, via an increase in the income tax expense.

Solution to Problem Set 4

Required:

a. What percent of Gross Accounts Receivable does the Allowance for Doubtful Accounts represent as of October 31, 2019?  Did that percentage increase or decrease in 2019 relative to 2018?  (6 pts)

9,046/(524,766 + 38,175) = 1.61% for 2019, and 5,613/(495,763+64,067) = 1.00% for 2018. The percentage has increased by 0.61%.

b. Provide the accounting entry to record bad debt expense and write-offs in 2019. You can record the transaction using the accounting equation or a journal entry. (8 pts)

Dr. Bad debt expense 11,669

Cr. Allowance for doubtful accounts 11,669

Dr. Allowance for uncollectible accounts     8,236

Cr. Accounts receivable 8,236

c. Calculate the bad debt expense for 2018 and the write-offs in 2017. (6 pts)

Bad debt expense in 2018: 3,368 (= 5,613 (EB) + 2,920 (Write-off) – 5,165 (BB))

Write-offs in 2017: 185 (= 3,201 (BB) + 2,149 (BDE) – 5,165 (EB))