Session 9 — Course Recap (Worked Exercises)

Part of: Accounting Thirteen exam-style exercises spanning the whole course, each fully worked Key concepts: Accrual Accounting, Depreciation, SAFE, Stock Options, Equity Method, Business Combination, Goodwill, Revenue Recognition

How to use this note

The recap deck contains only the questions. Every solution below is worked from first principles and cross-referenced to the session where the concept is taught. Where the question leaves an input unstated, the assumption is flagged in a [!warning] callout — check it against the lecturer's intended figures. The deck's title slide reads "Session 11 — Recap"; this is the 9th note in the vault.

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Part A — Accrual Accounting

Theory: Session 2 - Accounting Fundamentals. The recurring trick across these three is that ==an expense or income is recorded when the economic event happens, not when cash moves==.

Exercise 1 — Computer Depreciation & Disposal

A student buys a computer (expected 4-yr life) on Dec 31 2024 for $2,000. In Jul 2025 it breaks and is sold on Yad2 for $150. Show entries & balances at 1/1/2025, 30/6/2025, 31/12/2025.

Depreciation: straight-line = $2,000 ÷ 4 yrs = $500/yr = $41.67/month.

The journal

Each row is one posting. By convention the credited account is indented, and in every entry total debits = total credits.

How to read the disposal entry

To remove an asset you reverse what's on the books: credit Equipment for its full cost ($2,000) and debit Accumulated Depreciation for the $250 built up against it. Debit Cash for the $150 actually received. Whatever is left to balance the entry is the Loss on Disposal ($1,600) — the cost you never recovered.

Disposal arithmetic

The balance sheet at year-end

A balance sheet is a snapshot at one date, so it's a single column. By 31 Dec 2025 the computer has been sold, so it has left the books entirely — the only thing left is the $150 of cash it fetched:

Assumption for a complete statement

The exercise gives a single asset with no company context, so to show a full Assets = Liabilities + Equity statement we assume the $2,000 computer was funded by $2,000 of owner's capital.

Balance Sheet as at 31 December 2025

	$
Assets
Cash	150
Equipment (sold — derecognised)	0
Total assets	150
Liabilities	0
Equity
Owner's capital	2,000
Retained earnings (accumulated loss)	(1,850)
Total equity	150
Assets = Liabilities + Equity	150 ✓

The $1,850 accumulated loss = $250 depreciation + $1,600 disposal loss — both are income-statement items, so they sit inside equity (retained earnings), never as their own balance-sheet lines.

The earlier dates (while the computer is still owned)

The question also asks for the position at 1 Jan and 30 Jun, before the sale. A non-current asset is shown at cost less accumulated depreciation (never a single net number), so a reader can see how worn-down it is:

While the computer is still owned

	1 Jan 2025	30 Jun 2025
Equipment, at cost	2,000	2,000
Less: accumulated depreciation	(0)	(250)
Equipment, net book value	2,000	1,750
Cash	0	0
Total assets	2,000	1,750
Owner's capital	2,000	2,000
Retained earnings	0	(250)
Total equity	2,000	1,750

At every date Assets = Equity (there are no liabilities). Once the computer is sold, both the cost and accumulated-depreciation lines vanish and only the $150 cash remains.

The lesson

An early disposal crystallises the unrecovered cost as a one-off loss. The $1,850 total hit ($250 depreciation + $1,600 loss) equals cost $2,000 − proceeds $150. Depreciation only ever spreads cost; disposal trues it up to reality.

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Exercise 2 — Accrued Utility Expense

Jan–Nov 2025 the company receives a $750 electricity bill by the 10th of the following month. For Dec 2025 it estimates $1,000 (cold winter). Entries & balances at 1/1/2025, 30/6/2025, 31/12/2025.

The bill arrives next month, but the electricity is consumed in the month itself → accrue the expense each month-end, then settle it when the bill is paid. December has no bill yet, so you accrue an estimate.

The journal — one representative cycle + year-end

The two-step accrual cycle

Step 1 (month-end): record the expense and a matching liability — you've used the power but haven't paid. Step 2 (next month): when the bill is paid, debit the liability away and credit Cash. The payment records no expense — that was already booked in step 1. Recording expense again on payment would double-count.

How it lands on the financial statements

*The December-2024 bill carried into 1 Jan, paid ~10 Jan; thereafter one month's bill always sits unpaid.

Estimates are still accruals

December's bill hasn't arrived, but the expense belongs to 2025 because the electricity was used in 2025. You accrue your best estimate ($1,000); when the real bill lands in January you adjust any small difference. Waiting for the invoice would wrongly push the cost into 2026.

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Exercise 3 — Accrued Interest Income

On Jan 1 2024 the company deposits $100M of IPO proceeds in a 3% interest-bearing account; interest is paid annually. Entries & balances at 1/1/2025, 30/6/2025, 31/12/2025.

Assumption

"Monthly 3% interest" is ambiguous; this solution reads it as 3% per annum, accruing through the year and paid each 1 January for the preceding year. If the lecturer meant 3% per month, scale the figures up accordingly.

Annual interest = $100M × 3% = $3M/yr (= $250k/month accruing). Figures below in $000s.

The journal

The mirror image of an accrued expense

Accrued income is the flip of Exercise 2: you book the income as it's earned (debit the asset Interest Receivable) even though cash lands later. When cash finally arrives you debit Cash and credit the receivable away — no income is recorded on collection, because it was already recognised as it accrued.

How it lands on the balance sheet

*The 2024 receivable is collected in cash on 1 Jan, netting to zero, then re-accrues through 2025.

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Part B — Raising Debt & Capital

Theory: Session 3 - Raising Debt and Capital and Session 4 - Incorporation, Corporate Taxes & Employee Compensation.

Exercise 4 — Equity Raise, Bank Loan, 3 Years of Statements

• 1 Jan 2023: raise $5M at $20M pre-money (→ $25M post-money; investor owns 20%).
• 1 Jan 2024: $8M loan, repaid in 3 equal annual installments starting 1 Jan 2025, 12% interest paid each 1 Jan for the preceding year.
• Tax 25%. Operating income ($000s): 2023 = 1,200 · 2024 = 2,000 · 2025 = 950.
• Required: balance sheets, net income, and cash flows for 2023–2025.

Assumptions

Operating income is treated as cash; tax and interest are paid one year in arrears (so they sit as payables at year-end). All figures $000s.

The key journal entries

Operating income is shown as a single cash posting each year; the financing, interest and tax entries are the ones being tested.

Why interest falls in 2025

The loan is a reducing-balance repayment: the first $2,667 installment is paid on 1 Jan 2025, so interest for 2025 is charged on the remaining $5,333, not the original $8,000. Each year the interest charge shrinks as the principal is paid down.

Net income

¹ 2024 interest = $8,000 × 12% = 960 (full year on the loan). ² 2025: first installment of $8,000 ÷ 3 = 2,667 is repaid 1 Jan 2025, leaving 5,333 outstanding → interest = 5,333 × 12% = 640.

Balance sheets (year-end)

✓ Each year Assets = Liabilities + Equity.

Cash flows

Why 2025 cash falls despite a profit

2025 makes a $232.5k profit, yet cash drops $2.94M. The killers are the $2,667 principal repayment (a financing outflow that never touches the income statement) plus paying last year's $960 interest and $260 tax. ==Profit ≠ cash== — the gap is timing and balance-sheet movements, the core lesson of Session 5 - Financial Statements Analysis.

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Exercise 5 — Statement of Shareholders' Equity (SAFE + Priced Round)

• 1 Jan 2025: Founders contribute $100,000 → 100,000 common shares, $0.01 par.
• 1 Feb 2025: SAFE with Investor A for $500,000 (30% discount or $5M cap).
• Nov 2025: Investor B round of $3,000,000 for Preferred A at $8M pre-money.
• Required: Statement of Shareholders' Equity at 31 Dec 2025.

(This is the equity half of Assignment 1 — same numbers.)

SAFE conversion (triggered by Investor B's round): compare the two terms and give Investor A the lower price (more shares):

→ Investor A receives $500,000 ÷ $50 = 10,000 Preferred A shares.

Investor B price: the round is priced on the shares outstanding before the SAFE converts (the founders' 100,000) = $8,000,000 ÷ 100,000 = $80.00/share → $3,000,000 ÷ $80 = 37,500 Preferred A shares.

Why the price uses the pre-SAFE share count

The new round is priced on the shares outstanding before the SAFE converts (100,000), giving $80/share. The SAFE's 10,000 shares then convert alongside and dilute everyone, so Investor B's final stake works out to 25.42% — just below the $3M ÷ $11M ≈ 27% you might expect, because the converting SAFE dilutes the new investor too.

The journal

A SAFE is a liability, then equity

When the cash comes in (1 Feb) the SAFE is a liability — you owe future shares but the round hasn't happened. At conversion you debit the liability away and credit equity; total assets don't move, the obligation simply turns into stock.

Statement of Shareholders' Equity — 31 Dec 2025

Component	Shares	Amount
Common Stock (par $0.01 × 100,000)	100,000	$1,000
APIC — Common	—	$99,000
Preferred A — SAFE conversion (Investor A)	10,000	$500,000
Preferred A — Investor B	37,500	$3,000,000
Total contributed capital	147,500	$3,600,000

(Retained earnings/deficit from the year's trading would be added below; this exercise covers only the capital events.)

Resulting ownership (cap table)

Shareholder	Shares	Interest
Founders — common	100,000	67.80%
Investor A — Preferred A (via SAFE)	10,000	6.78%
Investor B — Preferred A	37,500	25.42%
Total	147,500	100%

Exam trap — the cap beats the discount here

Students instinctively apply the discount. Always compute both and take whichever gives the investor the lower conversion price. The $5M cap ($50/sh) beats the 30% discount ($56/sh), so the cap governs.

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Part C — Employees' Stock Options

Theory: Session 4 - Incorporation, Corporate Taxes & Employee Compensation (Black-Scholes, vesting).

Exercise 6 — Option Valuation & Sensitivities

31 May 2024: grant 10,000 options, 10-yr term, exercise price $10, vesting 4 yrs (1-yr cliff then 1/48 monthly). Risk-free 3.5%, volatility 60%, dividend yield 0%.

Sensitivities (how each input moves a call option's value)

One-line memory aid

A call gets more valuable with higher stock price, volatility, time, and rate; less valuable with higher strike and dividends. (Vesting just paces the expense.)

Grant-date value (Black-Scholes)

Assumptions

The market price at grant is unstated; assume at-the-money (S = K = $10). Expected term assumed 6.5 yrs (typical for a 10-yr option with a 4-yr vest). Both materially affect the number — confirm against the lecturer's figures.

→ Total grant-date fair value ≈ 10,000 × $6.05 = ≈ $60,500, expensed straight-line over the 4-year vesting period (≈ $60,500 ÷ 48 = $1,260/month). Nothing is recorded on the grant date itself — it is only the measurement date (see Session 4 - Incorporation, Corporate Taxes & Employee Compensation and the fuller worked treatment in Assignment 2).

The journal — recognising the expense

No entry at grant. Thereafter, each period:

The credit is equity, not a liability

The offset goes to APIC — Stock Options (equity), because the company will settle by delivering shares, not cash. Equity-settled awards never create a payable.

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Part D — Business Combinations

Theory: Session 7 - Business Combination. This is a step acquisition: Exercise 7 (25%, influence) → Exercise 8 (75%, control).

Exercise 7 — First Tranche: 25% Stake

1 Jan 2025: Harvest buys 500,000 shares of Beans LLC from an existing shareholder for $2M. Beans has 2,000,000 shares outstanding. Beans price: 31 Dec 2024 = $4; 31 Jan 2025 Beans declares a $2/share dividend. How is this reflected in Harvest's FS at 30 Jun 2025?

Ownership = 500,000 ÷ 2,000,000 = 25% → 20–50% band → ==Equity Method== (associate). Cost = $2M ($4.00/share, matching market).

The journal ($000s)

Investment carrying value at 30 Jun 2025

	Amount
Cost	$2.0M
Less dividend received	$(1.0M)
Plus share of Beans' H1 profit	not given
Carrying value	$1.0M (before any profit share)

Classification decision matters

At 25% this is the equity method, so the dividend reduces the investment. Had the stake been < 20% (a Financial Asset), the same dividend would instead be income in the P&L and the holding would be remeasured to fair value through profit or loss. Know which regime you're in before you book the dividend.

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Exercise 8 — Second Tranche: Crossing to Control (75%)

1 Jul 2025: Harvest buys 1,000,000 more shares from the founder for $5M; Beans price that day = $4.50. Now owns 1,500,000 ÷ 2,000,000 = 75% → control. Beans' 30 Jun 2025 balance sheet: Assets BV 2,000 / FV 5,000; Liabilities BV 1,000 / FV 1,000 ($000s). Reflect in Harvest's FS at 31 Dec 2025.

Obtaining control triggers the ==Acquisition Method== (IFRS 3). Three things happen at once:

1 — Remeasure the previously held 25% to fair value. Prior 500,000 shares × $4.50 = $2,250 ($000s). Carrying value was ~$1,000 (Ex. 7) → remeasurement gain to P&L ≈ $1,250.

2 — Compute goodwill (full-goodwill basis):

3 — Consolidate Beans 100% from 1 Jul 2025: all assets/liabilities at fair value, goodwill $5,500, NCI $2,250 in equity, and H2-2025 income split 75% Harvest / 25% NCI.

The journal ($000s)

First, remeasure the old stake; then post the acquisition (consolidation) entry.

Check: debits 5,000 + 5,500 = 10,500 = credits 1,000 + 5,000 + 2,250 + 2,250 = 10,500. ✓

What hits Harvest's 31 Dec 2025 consolidated statements

• Remeasurement gain ≈ $1,250 (in P&L) on the old 25% stake.
• Goodwill $5,500 recognised (impairment-tested, not amortised).
• NCI $2,250 in equity.
• Beans' assets (at the $3,000 stepped-up FV) and liabilities consolidated line-by-line; the asset step-up of $3,000 would be depreciated/amortised over H2 2025 — composition not given, so it's noted rather than quantified.

The signature move of a step acquisition

When you cross from influence to control you must revalue your old stake to fair value and run the gain/loss through P&L, as if you sold and rebought it. The acquisition-date fair value of that old interest then becomes part of the consideration used to compute goodwill.

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Part E — Revenue Recognition

Theory: Session 8 - Revenue Recognition (the five-step ASC 606 / IFRS 15 model). Each answer states whether, when, and how much.

Exercise 9 — Subscription With a History of Concessions

$10,000 subscription, but the company habitually lets clients slide or grants 50% discounts mid-year.

Answer

Yes, but not at $10,000. Your customary practice creates an implied price concession → the $10,000 is variable consideration (Step 3). The transaction price is the amount you expect to be entitled to, so estimate it (expected value / most-likely amount) and apply the constraint. If you typically end up at ~50%, recognise ≈ $5,000, over the subscription period as the service is delivered. Recognising the full $10,000 would over-state revenue and reverse later.

Exercise 10 — Verbal Promise of a Free Future Module

Standard 1-yr SaaS; nothing in writing about updates, but sales verbally promised a free Q3 reporting module.

Answer

A contract includes implied promises arising from statements that create a valid customer expectation. The verbal promise is therefore a second performance obligation (Step 2). Allocate the price across the subscription and the module by their standalone selling prices (Step 4); recognise the subscription ratably over the year, and defer the module's slice until control of it transfers in Q3.

Exercise 11 — Strategic Account With Habitual "Loyalty Credits"

$100,000 fixed enterprise contract, but management historically grants ~20% concessions mid-year to such accounts.

Answer

Same mechanism as Ex. 9: the habitual concession is variable consideration / implied price concession. Expected entitlement ≈ $80,000 ($100k − 20%). Recognise revenue at the constrained ~$80,000, over time as performance occurs; exclude the $20,000 you expect to concede.

Exercise 12 — Goods Plus a Deep-Discount Voucher

Sells raw materials for $100,000 plus a voucher for 40% off next quarter's purchases (deeper than normal).

Answer

Because 40% exceeds the customer's usual discount, the voucher confers a ==material right== → a separate performance obligation (Step 2). Allocate part of the $100,000 to the voucher by its SSP (estimated discount value × redemption probability) and defer that portion. Recognise the materials revenue (net of the voucher allocation) at the point of transfer; recognise the voucher's revenue when it is redeemed or expires.

Exercise 13 — Perpetual Licence Bundled With Mandatory Hosting

Perpetual on-prem licence downloaded to the client's servers, bundled with 12 months of mandatory cloud hosting + support.

Answer

Test whether the licence is distinct. An on-prem perpetual licence the customer downloads and can use is normally distinct → recognise the licence at a point in time (when control/the download transfers) and the hosting + support over the 12 months, allocating the price by SSP. However, if the software cannot function without the mandatory hosting (highly integrated), the two are a single combined performance obligation recognised over time across the 12 months. The pivotal judgment is functional dependence.

The thread running through Ex. 9–13

Three patterns recur: (1) implied price concessions make the stated price variable (9, 11); (2) implied or bundled promises create extra performance obligations to be allocated and deferred (10, 12, 13); (3) recognition always follows transfer of control, point-in-time vs over-time (13). Cash and the headline contract price rarely equal recognised revenue.

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Summary — What Each Exercise Tests

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Related Notes

• Accounting — subject hub
• Session 2 - Accounting Fundamentals — Ex. 1–3 (accruals, depreciation)
• Session 3 - Raising Debt and Capital — Ex. 4–5 (debt, SAFE, priced rounds)
• Session 4 - Incorporation, Corporate Taxes & Employee Compensation — Ex. 6 (options)
• Session 7 - Business Combination — Ex. 7–8 (equity method, consolidation)
• Session 8 - Revenue Recognition — Ex. 9–13 (five-step model)
• _Wiki-Link Registry — concept-link tracker