Gross Profit/Margin Ratio 𝐺𝑅𝑂𝑆𝑆 𝑃𝑅𝑂𝐹𝐼𝑇

Indicates profitability of core business 𝑁𝐸𝑇 𝑂𝑃𝐸𝑅𝐴𝑇𝐼𝑁𝐺 𝑅𝐸𝑉𝐸𝑁𝑈𝐸 Higher

activities.

Profit Margin Ratio 𝑃𝑅𝑂𝐹𝐼𝑇

Indicates how much profit a company 𝑁𝐸𝑇 𝑂𝑃𝐸𝑅𝐴𝑇𝐼𝑁𝐺 𝑅𝐸𝑉𝐸𝑁𝑈𝐸 Higher
generates per dollar of revenue earned

Fixed Asset Turnover Ratio

Indicates the efficiency of a company's use of 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
its fixed assets to generate sales revenue. 𝑃𝑟𝑜𝑝𝑒𝑟𝑡𝑦, 𝑃𝑙𝑎𝑛𝑡, 𝐸𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 𝑎𝑛𝑑 𝑁𝑒𝑡 (𝑌𝑒𝑎𝑟 1) + (𝑌𝑒𝑎𝑟 2 Higher
2
Measures sales generates per dollar of fixed
assets

Return on Assets (ROA)

Indicates a company’s ability to generate 𝑃𝑟𝑜𝑓𝑖𝑡 + (𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 ×(1 − 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠(𝑌𝑒𝑎𝑟 1) + (𝑌𝑒𝑎𝑟 2) Higher
profit relative to total assets. Measures the 2

profit earned for each dollar of total assets

Return on Equity 𝑃𝑟𝑜𝑓𝑖𝑡

Measures how much profit generated per 𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 (𝑌𝑒𝑎𝑟 1) + (𝑌𝑒𝑎𝑟 2) Higher
2
dollar of shareholders equity

Financial Leverage
It indicates the amount of debt a company
uses to finance its operations relative to its
equity. A high Financial Leverage # indicates Return on (Equity) - (Assets) Lower(2)
that a company has a significant amount more
debt relative to equity; this can increase
potential returns but also chance of default.

DECIMALS

Current Ratio
Measures the Ability Company's ability to
pay off short term liabilities. Indicates Short
Term Liquidity, and ability to meet current 𝑇𝑜𝑡𝑎𝑙 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Higher
obligations. Having a high Current Ratio can 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
display an inefficient use of funds. For
startups in a growth phase this is expected to
be low.

Quick Ratio 𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒

Same use as Current Ratio, but with MOST 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 Higher
liquid assets. Ratio of 1.5 is considered good.

Receivables Ratio
Indicates how fast and efficiently a company 𝑁𝑒𝑡 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠
can collect payment from customers of items 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 (𝑌𝑒𝑎𝑡 1) + (𝑌𝑒𝑎𝑟 2) Higher
2
sold to them on credit. If it is very high this
would indicate they might be overly stringent.

Days in Receivables 365

Determines how many days on average it 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑅𝑎𝑡𝑖𝑜 Lower
takes for an account to be fully turned over

Inventory Turnover Ratio 𝐶𝑂𝐺𝑆

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠 (𝑌𝑒𝑎𝑟 1) + (𝑌𝑒𝑎𝑟 2) Higher
Measures the efficiency of which a company 2
 is able to manage its inventory.

Days’ Sales In Inventory 365

Indicates number of times a company sells 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜 Lower
and replaces its inventory over a year

Debt to Equity Ratio

Used to assess a company's financial 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Lower
leverage and its ability to meet its financial 𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
obligations

Times Interest Earned Ratio (TIE) 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
Indicates a company's ability to meet its 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 Higher
interest payments on debt obligations.

Table A

Table B
 BOND QUESTION #1

On January 1, 2014 Company A negotiated a 5-year bond with a maturity value of $600,000. The bond will pay

interest at a rate of 6.0% per annum payable June 30th and December 31st of each year. When the bond was

issued, the market rate (bond yield) was 8%.

NOTE: Present value tables can be found at the back of this exam (second last page)

1. Calculate the Proceeds received when the bond is issued.

a) To calculate the principal payment you must first multiply the maturity value by the Present Value. To
determine the present value you must find the matching column in TABLE A,
- where % = (Market Rate or Bond Yield%)/Annual Periods, and Periods = (Years * Annual Periods).
- In this case it will be 4%,10 Periods.
b) To calculate interest you must multiply the maturity value by the Present Value of Annuity (Table B),
the Interest Rate, and the 1/Yearly Periods.
- where % = (Market Rate or Bond Yield%)/Annual Periods, and Periods = (Years * Annual Periods).
- In this case it will be 4%,10 Periods.
c) To then calculate the proceeds from when the bond was received, add them together

Present Value = 0. 6756 × 600, 000 = $405,360

6
Interest = 600, 000 × 12
× 0. 06 × 8. 1109 = $145, 996

Total = $405,360 + $145,996 = 551,356

2. Prepare the Journal Entry to Record the issuance of the bond

Cash 551,356.20

Discount on Bond Payable (DOBP) 48,643.80

Bonds Payable 600,000

You start by recording the Initial Cash Value Payed for the Issuance of the Bond (calculated in part 1) as a debit, since
you are being PAID cash upfront for the bond. Credits must equal debits, so you create a contra liability to offer the
difference between the bond sold, and what is to-be paid. Lastly the credit Bonds Payable to represent the future value
which is owed.

Interest Expense (Issue Price * Market R8% * 6/12) 22,045

551,356 * 8% * 6/12

Discount on Bond Payable 4,045

Cash (Maturity * Coupon R8% * 6/12) 18,000

600,000 * 6% * 6/12

The interest expense is the semi-annual charge which represents the cost of borrowing associated with the bond (aka
promised the dividends to bond holders). Next you must update the discount on bond payable to represent the change
between the updated face value (which has decreased) of the bond and its issue price. Credit cash to reflect the
payment of interest directly from the given account.

Interest Exp ((Issue Price + Credited DOBP * Market R8% * 6/12) 22,216
(551,356 + 4,054) * 8% * 6/12

Discount on Bond Payable 4,216

Cash (Maturity * Coupon R8% * 6/12) 18,000

This journal entry represents the same effect as the preceding, however the Interest Expense will increase the calculated
sum compounding all preceding credits of discount on bond payable. The Cash amount should never change between
entries.

3. Using the effective interest rate mathond, prepare journal entires at June 30th and December 31st for 2014

The effective interest rate method is a way of amortising the bond discount or premium over the life of the bond based on the
effective interest rate. The method involves calculating the present value of the bond's cash flows at the time of issuance, and
then allocating the interest expense and discount or premium to each period based on the effective interest rate. Use the
table to record all changes to entires in the journal entires above.

Date Face Value Bond Premium Interest Interest Paid Bond Premium Carrying
Start Expense Ending Value Ending

Jan 1 600,000 48,643 551,356

Jan 1 - June 30 600,000 48,643.80 22,054 18,000 44,588.75 555411.25

July 1- Dec 31 600,000 44,588 22216 18,000 40,372.33 559627

 BOND QUESTION #2

Barley company issued bonds with the following provisions:

- Maturity Value: $100,000
- Interest: 10 Percent per annum payable semi-annually each September 30 and March 31
- Terms: Bonds dated April 1, 2016 and will mature 5 years from that date
- Fiscal Year ends on December 31th
- Bonds were issued at market rate of 6 percent
- Company uses effective interest method to amortise bind discounts or premiums

1. Is this a premium or a discount bond?

A bond is considered to be a premium when the price is higher than or par to face value; It is a discount for the
opposite. The face value of this bond is $100,000, to calculate the price:

Present Value = 0. 7441 × 100, 000 = $74,410

6
Interest = 100, 000 × 12
× 0. 1 × 8. 5302 = $42, 651

Total = $74,410 + $100,000 = $117,061

Since the sale price, $117,061, is higher than the face value of $100,000 the bond is being sold at a premium. By
issuing the bond at a premium can provide additional funds to a company which need them. However, doing so means
that the interest expense can be awfully high and hurt later profits.

2. Prepare the journal entry to record the issuance of the bonds, and the next 3 subsequent dates.

April 1
Cash 117,061

Premium on Bond Payable (POBP) 17,061

Bonds Payable 100,000

The premium on Bond Payable represents the difference between Sale Price and face value. With each ongoing
payment the company will have to slowly pay off the additional amount.

Sept 30
 Interest Expense ((Issue Price * Market R8% * 6/12) 3,511
(117,061* 6% * 6/12)

Discount on Bond Payable 1,488

Cash (Maturity * Coupon R8% * 6/12) 5,000

(100,000 * 10% * 6/12)

The discount on bond payable represents the difference between Interest expense and the cash

Dec 31
Interest Exp ((Issue Price - Credited DOBP) * Market R8% * 3/12) 1733
(117,061 - 1,488)* 6% * 3/12)

Discount on Bond Payable 766

Cash (Maturity * Coupon R8% * 3/12) 2,500

Since they record end of year journal entries you must adjust for the year end, which is only 3 months.
Mar 31
Interest Expense 1733

Discount on Bond Payable 766

Cash (Maturity * Coupon R8% * 6/12) 2,500

Since the previous was split between the current payment, the math was already done and you can simply rewrite it.

Now at the end of the term asked you should calculate the Current Value of the Bond:

April 1: 177,061
Sept 30 Prem Amort: (1488)
Sept 30 Current Value: 115572

Dec 31 Prem Amort: (766)

Dec 31 Current Value: 114806

March 31 Prem Amort (766)

March 31 Current Value: 114040
Cash Flow #1
Cash Flows From Operating Activities

Net Earnings: 28,000

(Stated in Additional Information (1))

+ Depreciation Expense 8,000

(Stated in Additional Information (1))

- Gain on sale of equipment (2,000)

(Stated in Additional Information (1))

+ Decrease in Accounts Receivables 16,000

(Accounts Receivables (2017) - (2016))

+ Decrease in Inventory 9,000

(Inventory (2017) - (2016))
 - Decrease in Trade Payables (17,000)
(Trade Payables (2017) - (2016))

Net Cash Flow from Operating Activities 42,000

Cash Flows From Investing Activities

+ Sale of Equipment 12,000

(Stated as Profit in Additional Information (3)

- Purchase of Equipment (38,000)

(Stated as Profit in Additional Information (4) + Equipment, net (2017) - (2016)

- Purchase of Land (30,000)

(Land (2017) - (2016))

Net Cash Flow from Investing Activities (56,000)

Financing Activities

+ Issuance if Long Term Debt for Cash 15,000

(Long term notes payables (2017 - (2016)) - Equipment Purchased (4)

- Payment of Cash dividends (9,000)

(Retained Earnings (Year 1) + Profit (Year 2) (4) - Retained Earnings (Year 2))

Net Cash Flow From Investing Activities 6,000

Net Cash Flow From Financing Activities

Net Increase in Cash and Short Term Investments (8,000)

(Operating + Financing + Investing)

Cash and cash equivalents at beginning of period 18,000

(2016 Cash Balance)

Cash and Short-Term Investments, end of year 10,000

(2017 Cash Balance)

Cash Flow #2
Cash Flows From Operating Activities

Net Earnings: 10,000

(Stated as Net Income)

+ Depreciation Expense 8,000

(Stated As Depreciation)
 - Gain on sale of equipment (4,000)
(Stated as Sale of Equipment) - (Cost of Equipment(2) - Accumulated Depreciation on Equipment(2))

+ Decrease in Accounts Receivables 5,000

(Accounts Receivables (2017) - (2016))

+ Decrease in Inventory 13,000

(Inventory (2017) - (2016))

+ Increase in Trade Payables 6,000

(Trade Payables (2020) - (2019))

Net Cash Flow from Operating Activities 38,000

Cash Flows From Investing Activities

+ Sale of Equipment 15,000

(Stated as Profit in Additional Information (2) + Stated as Sale of Equipment)

- Purchase of Equipment (40,000)

(Stated as Profit in Additional Information (2) + Equipment, net (2020) - (2019)

Net Cash Flow from Investing Activities (25,000)

Financing Activities

+ Issuance if Long Term Debt for Cash (9,000)

(Long term notes payables (2020 - (2019))

- Payment of Cash dividends (15,000)

Retained Earnings(2019) + Net Income(2020) - Retained Earnings (2020)

Net Cash Flow From Investing Activities (6,000)

Net Cash Flow From Financing Activities

Net Increase in Cash and Short Term Investments 7,000

(Operating + Financing + Investing)

Cash and cash equivalents at beginning of period 20,000

(2016 Cash Balance)

Cash and Short-Term Investments, end of year 27,000

(2017 Cash Balance)

** Note, you do not need to include the cost of purchasing equipment for Cash Flows, since it was purchased with
shares which is a cost with cash.
Comprehensive Question:

July 1st Horses 30,000

Common Shares 30,000

Cash 30,000

Common Shares 30,000

To make it easier to track, you should record both transactions under the same date header, but split their respective
debit and credit transactions to be in-line with each other. If you are getting a specific supply/equipment you should
record it as such, as is the cash with Horses.

July 1st Prepaid Expense 14,400

Cash 14,400

BESI is renting a farm, and paid upfront. To account for this you would debit Prepaid Expense of the account, and pay
the amount with cash.
 July 1st Supplies (Hay) 6,000

Cash 6,000

Aug 1 Cash 18,000

Unearned Revenue 18,000

Even though the lessons are happing over the span of a year you would debit cash for the full amount, and unearned
revenue for the same amount. With each subsequent month you would debit unearned revenue the same equal amount
(1/12 of unearned revenue), and credit real revenue the same amount. This is done to ensure accounting principles are
met, and to track revenue as earned.

October 1st Equipment 16,000

Note payable - Short Term 16,000

Record Depreciation at end of year

Dec 3 Accounts Receivable 5,000

Sales Revenue 5,000

Record as Sales Revenue since you are selling a service

Dec 31 Supplies Expense 3,000

Supplies (Hay) 3,000

Record the expense of using the supplies, and then credit the supplies to indicate the loss in the account.

ADJ 1 Depreciation Expense 3,000

Accumulated Depreciation - Horses 3,000

For Paid Shares (July 1)

Calculation is: Depreciation = ((Initial Cost - Residual Value)/Useful Life) * Years Used,

Depreciation = ((30,000 - 0)/5) * 6/12 = 2417

ADJ 2 Rent Expense 7,200

 Prepaid Expense 7,200

For rent paid on farm (July 1)

Calculation is Rent Expense = (Prepaid Expense) * Months Elapsed/12 Months

Rent Expense = ((14,400) * 5/12) = 6,000

ADJ 3 Unearned Revenue 7,500

Sales Revenue 7,500

For riding lessons (Aug 1)

Calculation is Sales Revenue = Unearned Revenue * Months Elapsed/12 Months

Sales Revenue = 18,000 * 5/12

ADJ 4a Depreciation Expense 750

Accumulated Depreciation: Equip 750

For paid Equipment (Oct 1)

Calculation is Depreciation = ((Initial Cost - Residual Value)/Useful Life) * Years Used,

Depreciation = ((16,000 - 1,000)/5) * 3/12 = 750

ADJ 4b Interest Expense 400

Interest Payable 400

For note on equipment (Oct 1)

Calculation is 16,000 * 3/12 * 0.1 = 400

ADJ 5 Bad Debt Expense 250

Allowance for Doubtful Accounts 250

For payment for wedding (Accounts Receivable)

5,000 * 0.05 = 250

Allocation Question

Asset Fair Value % of total fair Total Cost Allocated Cost

value

Land $ 1,600,000 35% $ 4,000,000 $ 1,400,000

Building $ 2,500,000 54% $ 4,000,000 $ 2,160,000

Equipment $ 500,000 11% $ 4,000,000 $

440,000

TOTAL $ 4,600,000 $ 4,000,000

Land $ 1,400,000

Building $ 2,160,000

Equipment $ 440,000

Cash $ 1,500,000

Notes Payable $ 2,500,000

Note Payable $ 2,500,000

Interest Expense $ 187,500

Cash $ 2,687,500