SAMPLE MIDTERM – BUS 251

SAMPLE MIDTERM – BUS 251
Your midterm will also have theoretical questions where you will be asked
to explain an accounting idea in words. You may want to review the
sample ones on exam guidance or ones on mini-midterms.
Section 1: THE ACCOUNTING CYCLE (40 MARKS = 40 MINUTES)
Andy’s Yard Care Service Company Limited (AYC)
Andy Smith has been operating for 3 years. The company provides lawnmowing, tree trimming and weeding services to private residences in the lower
mainland. Andy incorporated the company on January 1 st, 1996 and contributed
equipment with a fair market value of $50,000 to the business in exchange for
common shares valued at $10,000 and a $40,000 loan, payable to Andy.
The following is the trial balance for AYC at January 1st, 1999:
Debit
Cash
$ 23,500
Accounts Receivable
18,000
Supplies Inventory (1)
1,000
Equipment (2)
50,000
Accounts Payable
Wages Payable
Loan Payable (3)
Accumulated Amortization – equipment
Common Shares
Retained Earnings
$ 92,500
Credit
$ 6,000
5,000
40,000
30,000
10,000
1,500
$ 92,500
(1) Consists of fertilizer and topsoil, used in lawn care.
(2) Contributed to the business January 1, 1996, estimated to have a 5 year
useful life, with no residual value.
(3) Shareholder loan payable bears interest at 10% annually. Interest on the
loan is paid on June 30th and December 31st each year. Andy does not
anticipate receiving any payments on principal until the business becomes
better established.
REQUIRED: (28 marks for journal entries, 12 marks for balance sheet)
i) Prepare journal entries for the 1999 information provided on the next page, or
explain why no entry is required. (Clearly label each account affected, but
detailed explanations for each entry are not required). CLEARLY STATE
ANY ASSUMPTIONS THAT YOU FEEL ARE NECESSARY.
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ii) Prepare any adjusting entries required at March 31 st, 1999. It is not
necessary to prepare an entry to close the accounts.
iii) Prepare a balance sheet at March 31st, 1999, in good format.
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INFORMATION FOR THE FIRST 3 MONTHS OF 1999
1. Services Revenue: The company billed customers $48,150 for work done
between January 1st and March 31st. This included GST charged to
customers of $3,150. (We did not cover GST so you can ignore)
2. At March 31st 1999 there was $6,000 owing from customers that had not yet
been collected in cash.
3. Operating expenses (not including wages) incurred in the three months were
$11,500. All operating expenses are initially on credit.
4. AYC paid $14,000 to suppliers between January 1 st and March 31st, 1999.
5. Wages earned by employees between January 1 st and March 31st, 1999 were
$8,500. There were no amounts owing to employees at March 31 st, 1999.
6. Supplies inventory costing $1,500 was purchased for cash. A count in the
storeroom on March 31st, 1999 showed that there were supplies costing
$1,200 on hand.
7. Andy purchased three new ride-on mowers on January 1 st, 1999, for $6,000
each. He paid $10,000 in cash, and signed a note promising to pay the
balance in nine months (the end of his busy summer season). There will be
no interest paid on the note. The mowers are expected to have a 3 year life,
with no salvage value.
8. On March 31st, 1999, Andy signed a contract to purchase a fourth new ride-on
mower. This mower will be delivered to Andy in July, and will cost $8,000.
9. Andy estimates that approximately $3,500 of the accounts receivable at
January 1st, 1999, which have still not been collected at March 31 st, 1999, will
not be collectible.
10. Andy estimates that income taxes for AYC will be $12,000 for the 1999 year.
These taxes will be paid in March in the year 2000. Due to high start-up costs
in the first three years of operation, AYC has not had to pay income taxes
before the 1999 fiscal year.
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Section 2: MULTIPLE CHOICE (20 QUESTIONS = 40 MARKS = 40 MINUTES)
1.
Not covered
2.
Which of the following would require an adjustment to the cash balance in the
company’s accounting records if discovered through the bank reconciliation
process:
a) Outstanding deposits
b) Outstanding cheques
c) Bank service charges
d) All of the above
3.
Which one of the following would NOT be recorded as an asset by a business?
a) Land not currently being used, but held for future development
b) Accounts due from customers who have received products from the company
c) A five year employment contract with the President, who has improved the
company’s performance significantly
d) Cash owing to the business from employees
4.
Working capital is a measure of the company’s:
a) Cash
b) Ability to pay long-term debts
c) Resources available to produce inventory for the next year’s business
d) None of the above (are accurate definitions of working capital)
5.
Which of the following transactions would result in a decrease in assets and a
decrease in shareholders’ equity?
a) Paying dividends payable
b) Purchasing land for cash
c) Paying the monthly electric bill
d) Receiving cash on account
6.
Which of the following would NOT be included on the Cash Flow Statement?
a) The declaration of a dividend in the year
b) The purchase of capital assets for cash during the year
c) The repayment of long-term debt
d) The issuance of common shares
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7.
Transactions that can have an effect on the decisions of shareholders are referred
to by accountants as:
a) Material
b) Completed
c) Unqualified
d) Reliable
8.
How much information to show on the financial statements and where to report it,
are issues of:
a) Recording
b) Adjusting
c) Transactional analysis
d) Disclosure
9.
Not covered
10.
The income statement emerged as a standard financial statement based on a
demand for which of the following?
a) Performance measurement information
b) Cash flow information
c) Internal management information about the efficiency of operations
d) Information regarding changes in owners’ claims on assets
11.
Making sales on account results in which one of the following impacts on the
balance sheet?
a) Increases cash and increases accounts receivable
b) Increases sales and increases accounts receivable
c) Increases cash and increases sales
d) Increases accounts receivable and increases retained earnings
12.
Not covered
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13.
Creations Limited started business on January 1st, 1999. On January 5th, 1999 a
cheque for $3,000 was written, payable to the company’s landlord, and recorded
as Prepaid Rent. The payment was to cover rent on business premises from
January 1st to March 31st, 1999. Assuming no other journal entries were made,
what adjusting entry would be required on March 31st?
a) DR Prepaid Rent
3,000
CR Cash
3,000
b) DR Rent Expense
1,000
CR Prepaid Rent
1,000
c) DR Rent Expense
3,000
CR Cash
3,000
d) DR Rent Expense
3,000
CR Prepaid Rent
3,000
14.
Not covered
15.
Which one of the following is not an expense of the business in the current period?
a) A deposit for equipment you will receive next year
b) An estimate of the costs of warranties provided to current period customers
c) Amounts owing to employees (but not yet paid) for work performed this period
d) None of the above (all are expenses)
16.
Not covered
17.
Which of the following characteristics best describes why we use the accounts, bad
debts expense and the allowance for doubtful accounts in the financial statements?
a) Matching
b) Materiality
c) Relevance
d) None of the above
18.
An item of inventory, which cost $10 when purchased last year, is sold today to a
customer, on account, for $25. Which of the following statements is true?
a) ‘Gain on sale’ in the current year’s income statement will be $15
b) Shareholders’ equity increases this year by $15
c) The increase in cash this year is $15
d) All of the above
19.
Which of the following journal entries should be used to write off an accounts
receivable deemed uncollectible where the company has created an allowance for
doubtful accounts?
a) Debit bad debts expense, credit allowance for doubtful accounts
b) Debit allowance for doubtful accounts, credit accounts receivable
c) Debit bad debts expense, credit accounts receivable
d) Debit allowance for doubtful accounts, credit bad debts expense
20.
Excelsior Company had sales to customers during the year of $40,000. The
company records a gross profit percentage of 60% [gross profit % = (sales revenue
– COGS expense)/sales revenue]. The company’s cost of goods sold expense in
the year was:
a) Cannot tell from the information provided
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b) $24,000
c) $16,000
d) None of the above
SOLUTION
Section 2 - MCQ
1. C
2. C
3. C
4. D
5. C
6. A
7. A
8. D
9. B
10. A
11. D
12. A
13. D
14. D *
15. A
16. C
17. A
18. B
19. B
20. C
* Assumes the $250 cost of the inventory thrown away is not included in “Cost of goods
sold expense “ on the I/S, it would be included in a ‘loss’ account.
Section 1 – THE ACCOUNTING CYCLE
DR
CR
CR
A/R (A↑)
Sales Revenue (SE ↑)
GST Payable (L ↑)
DR
48,150
45,000
3,150
Cash (A ↑)
CR
A/R (A ↓)
[Jan.1/99 $18,000 + 48,150 – Mar.31/99 $6,000]
60,150
DR
Operating expenses (SE ↓)
A/P (L ↑)
11,500
CR
A/P (L ↓)
Cash (A ↓)
14,000
CR
DR
DR
DR
60,150
Wages expense (SE ↓)
Wages payable (L ↓)
CR
Cash (A ↓)
DR
CR
Supplies inventory (A ↑)
Cash (or A/P)
DR
11,500
14,000
8,500
5,000
13,500
1,500
1,500
Operating expenses (SE ↓)
CR
Supplies inventory (A ↓)
[Jan.1/99 $1,000 + $1,500 – Mar.31/99 $1,200]
1,300
DR
18,000
CR
CR
Equipment – mowers (A ↑)
Cash (A ↓)
Note payable (L ↑)
1,300
10,000
8,000
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Transaction 8. No entry required as no exchange has yet taken place (signed contract
only – no exchange of cash or delivery of equipment).
DR
CR
Bad debts expense (SE ↓)
3,500
Allowance for doubtful accounts (XA ↑)
3,500
DR
Income tax expense (SE ↓)
3,000
CR
Income tax payable (L ↑)
3,000
[Accrual of income tax. Based on estimate $12,000 x 3/12, assumes income earned
evenly over the year.]
Adjusting entries
DR
Amortization expense (SE ↓)
2,500
CR
Accumulated amortization – equipment
2,500
[$10,000 per year x 3/12] (XA ↑)
DR
Amortization expense (SE ↓)
1,500
CR
Accumulated amortization – mower (XA ↑)
1,500
[$18,000/3 years = $6000 per year x 3/12]
DR
Interest expense (SE ↑)
CR
Interest payable (L ↑)
[$40,000 x 10% x 3/12]
1,000
1,000
AYC
Balance Sheet
March 31, 1999
ASSETS:
Current assets:
Cash
A/R
$ 6,000
Less: Allowance for doubtful accounts 3,500
Supplies inventory
Total current assets
Non-current assets :
Equipment
$68,000
Less : Accumulated amortization
34,000
TOTAL ASSETS
LIABILITIES & SHAREHOLDERS’ EQUITY:
LIABILITIES
Current liabilities:
A/P
GST Payable
Interest Payable
Note Payable
Income tax Payable
Total current liabilities
Non-current liabilities :
Loan Payable
$44,650
2,500
1,200
$48,350
34,000
$82,350
$ 3,500
3,150
1,000
8,000
3,000
$ 18,650
40,000
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TOTAL LIABILITIES
$ 58,650
SHAREHOLDERS’ EQUITY:
Common shares
$ 10,000
Retained earnings ($1,500+12,200*net income)
13,700
TOTAL SHAREHOLDERS’ EQUITY
$ 23,700
TOTAL LIABILITIES & SHAREHOLDERS’ EQUITY
$ 82,350
* Net income = $45 – ($11.5 + 8.5 +1.3 +3.5 +3 +2.5 + 1.5 + 1) = $12.2
(in thousands)
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