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INTRODUCTORY FINANCIAL ACCOUNTING ACC100 MIDTERM
SOLULTION
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Multiple Choice (18 marks) M/C questions are not released to students. If you would like to review your M/C questions please make an appointment with your instructor.
Question 1: (5 marks) Using the information for GB Products Inc. from page 3 (repeated below for your convenience) prepare a multiple step income statement using appropriate format. Note that not all the information provided may be appropriate for use in the income statement. Below is a repeat of the information provided on page 3. The company's year end is December 31, 2011. Acc. Depr., Equipment Accounts payable Accounts receivable Cash Common shares Cost of goods sold Depreciation expense Dividends Equipment Income taxes expense Income taxes payable
4,20 0 12,0 00 14,0 00 30,0 00 17,0 00 51,0 00 2,10 0
Inventory Land Notes payable
22,00 0 60,00 0 20,00 0
Prepaid expense Retained earnings Salaries and wages expense Sales revenue Selling expenses
750 42,0 Supplies 00 18,0 Supplies expense 00 5,00 Unearned revenue 0
2,000 103,3 00 40,00 0 165,0 00 44,00 0 1,200 950 1,500
NOTE: marks will be deducted for inclusion of incorrect accounts or incorrect amounts. If an incorrect account is included, deduct 1/2 mark. If an incorrect amount is included, deduct 1/2 mark. If the order of the expenses is not correct, deduct 1/2 mark. NOTE: marks for Gross Profit, income before income tax and net income are awarded because they have included these subtotals, NOT because the $ value is correct. GB Products Inc. Income Statement Year ended December 31, 2011
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Sales Cost of goods sold Gross Profit 1/2
165,0 00 1/2 51,00 0 1/2 114,0 00
Expenses Selling expenses Salary and wages expense Depr. Expense Supplies expense
44,00 0 40,00 0 2,100 950
1/2 1/2 1/2 1/2 87,05 0
Total Expenses Income before income tax 1/2 Income tax expense 1/2 Net Income 1/2
26,95 0 18,00 0 8,950
Question 2: (22 marks) Nixxon Inc. completed the following transactions during April of 2011. Nixxon uses a perpetual inventory system. 1 mark if the indicator, account name and amount is correct. If the indicator is incorrect, deduct 1/2 mark. If the account name is incorrect, deduct 1/2 mark. If the amount is incorrect, deduct 1/2 mark. If everything is correct but it is in the incorrect category, no marks awarded. On April 2, 2011, purchase inventory on account from KS Corp. for $8,900, terms 2/10, n/30, FOB shipping point. 2 marks Assets
=
+Inventory 8,900
Liabilities
+
Shareholders' Equity
+ A/P 8,900
On April 3 the appropriate party paid $100 freight on the April 2 purchase. 2 marks Assets
=
Liabilities
+
Shareholders' Equity
+Inventory 100 -Cash 100
On April 6 returned $2,000 of the inventory purchased on April 2 as the items were defective. 2 marks Assets
=
-Inventory 2,000
Liabilities -A/P 2,000 Page 3 of 7
+
Shareholders' Equity
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On April 11, 2011, paid the outstanding balance to KS Corp. 3 marks Assets
=
- Cash $6,762 - Inventory $138
Liabilities
+
Shareholders' Equity
-A/P $6,900
On April 16 sold $11,600 of inventory on account to Thompson Ltd., terms 1/10, n/30, FOB destination. The cost of the inventory was $7,200. 4 marks Assets
=
Liabilities
+
+A/R 11,600 -Inventory 7,200
Shareholders' Equity +Sales 11,600 -Cost of goods sold 7,200
On April 17 the appropriate party paid $350 freight on the April 16 sale. 2 marks Assets
=
Liabilities
+
-Cash 350
Shareholders' Equity -Freight out expense 350
On April 20 Thompson Ltd. returned $1,000 of their order because it was the wrong colour. The inventory originally cost $620 and was returned to the shelf. 4 marks Assets
=
Liabilities
+
-A/R 1,000 +Inventory 620
Shareholders' Equity - sales returns and allowances 1,000 +cost of goods sold 620
On April 26, 2011 Thompson Ltd. paid their outstanding account balance. 3 marks Assets
=
Liabilities
+
-A/R 10,600 +cash 10,494
Shareholders' Equity -sales discounts 106
Question 3: (6 marks) A company purchased a $3,780, one-year insurance policy for cash on August 1. The policy came into effect on that date. The impact on the accounting equation is: 2 marks Assets
=
Liabilities
+
Shareholders' Equity
+Prepaid insurance 3,780 - Cash 3,780
Provide the adjusting entry on December 31 assuming that the company makes annual adjusting entries. 3 marks (1 for the calculation of the $1,575) Page 4 of 7
DO NOT DETACH PAGES DURING EXAM Assets
=
Liabilities
+
-Prepaid Insurance 1575
Shareholders' Equity -insurance expense 1575
3,780 / 12 month * 5 months = 1,575 (1 mark) What type of adjusting entry did you make? (prepaid expense, unearned revenue, accrued expense, accrued revenue) _______Prepaid Expense________ 1 mark
Question 4: (5 marks) A company received a $1,600 advanced cash payment from a customer on November 1 for services to be provided in the future. The impact on the accounting equation is:2 marks Assets
=
+cash $1,600
Liabilities
+
Shareholders' Equity
+ unearned revenue $1,600
As at December 31 half of the services had been provided. Provide the adjusting entry at December 31 assuming the company makes annual adjusting entries. 2 marks Assets
=
Liabilities
+
-unearned revenue $800
Shareholders' Equity + revenue $800
If the adjusting entry had not been made on December 31 would net income be understated (too low) or overstated (too high)? Net income would be _________understated____.1 mark
Question 5: (6 marks) A company has five (5) employees who each earn $200 a day. Salaries are normally paid on Fridays for work completed Monday through Friday of the same week. Salaries were last paid on Friday, December 27. Employees worked Monday, December 30, and Tuesday, December 31. Provide the entry that the company would make on December 31, the company's year end.2 marks Assets
=
Liabilities
+
+wages payable $2,000
Shareholders' Equity - wages expense $2,000
5 employees * $200 * 2 days = 2,000 Provide the entry that would be made on Friday, January 3, 2012, assuming that employees are paid for all statutory holidays. 3 marks Assets
=
- cash $5,000
Liabilities
+
- wages payable $2,000
Shareholders' Equity - wages expense $3,000
5 employees * $200 * 5 days = 5,000 Which of the above noted entries is the adjusting entry? (Circle the correct answer.)1 mark a. The entry made on December 31, 2011. b. The entry made on January 3, 2012.
Question 6: (5 marks) Page 5 of 7
DO NOT DETACH PAGES DURING EXAM A company earns $250 of interest on its investments for the month of December, 2011, which the bank will deposit in their account on January 2. Provide the adjusting entry that the company would make on December 31, the company's year end. 2 marks Assets
=
Liabilities
+
+ interest rec. 250
Shareholders' Equity + interest revenue 250
Provide the entry that would be made on January 2 when the bank deposits the interest into the company's bank account. 2 marks Assets
=
Liabilities
+
Shareholders' Equity
+cash $250 - interest rec. 250
What type of adjusting entry did you make? (prepaid expense, unearned revenue, accrued expense, accrued revenue) _______Accrued revenue (asset)________ 1 mark
Question 7 (9 marks) a. List the criteria should an accountant must use to determine when revenue should be recognized. (3 marks) The performance is achieved (1 mark) The amount is reasonably measurable (1 mark) The collection of cash is reasonable assured (1 mark) A manufacturing company receives a $10,000 order on March 11. The company completes the order on April 7 and ship it to the customer on April 10, FOB destination. The customer receives the order on April 15 and pays in full on May 12. Note that the company always performs credit checks on their customers before accepting an order. The president has asked you to recognize revenue on March 11, when the order is received. b. Can the company recognize revenue on March 11? Explain why or why not, referring to the criteria you provided in Part (a). 2 marks for indicating No but ONLY if support provided.
• • • •
No they can not recognize revenue on March 11 No performance as the goods have not been delivered. Even though revenue is measurable, $10,000, there is no performance. there is high assurance of collection due to the credit check but there is still no performance.
c. On what date should the company recognize revenue? Be sure to support your answer by referring to the criteria you provided in Part (a). (4 marks, 1 for each point. No marks awarded for giving date with no support.)
•
• • •
The company should recognize revenue on April 15, when the customer receives the goods. Performance has been achieved. Revenue is measurable ($10,000) Collection is reasonably assured because they completed a credit check. Page 6 of 7
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