accounting fundamentals exam answers.pdf
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Accounting Fundamentals
Midterm Exam
Accounting Fundamentals
Midterm Exam
Problem #1 (10 points) Chapter 1
A parcel of land that was originally purchased for $170,000 is offered for sale at
$300,000, is assessed for tax purposes at $190,000, is recognized by its purchasers as
easily being worth $280,000, and is sold for $274,000. At the time of the sale, assume
that the seller still owed $60,000 to the bank on the land that was purchased for $170,000.
Immediately after the sale, the seller paid off the loan to the bank. What is the effect of
the sale and the payoff of the loan on the accounting equation, i.e. what are the dollar
increases and/or decreases in assets, liabilities, and owners’ equity?
Answer:
Assets = liabilities + owner’s equity
Before sale of parcel of land: 170,000= 60,000 +110,000
After sale of parcel of land: 214,000= 0+214,000
Result from the sale:
Asset increase by 44,000
Liabilities decrease by 60,000
Owner’s equity increase by 104,000
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Problem #2 (5 points) Chapter 1
Match each of the following transactions and events to the accounting principle
applicable to recording and reporting them.
a. Business entity principle
b. Objectivity principle
c. Cost principle
d. Going concern principle
e. Monetary unit principle
f. Revenue recognition principle
__D___1. An insurance company receives insurance premiums for six
future month's worth of coverage.
___A__2. Mr Jones, a sole proprietor, pays for his daughter's preschool
out of business funds.
__B___3. To make the balance sheet look better, Mr Jones added several
thousand dollars to the Equipment account that he believed was
undervalued.
__C___4. A building is for sale at $480,000. An appraisal is given for
$450,000.
__E___5. Mayan Imports receives a shipment from Mexico. The invoice
is stated in pesos.
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Problem #3 (5 points) Chapter 1
Classify the following activities according to the appropriate section of the statement of
cash flows.
a. Operating activity
b. Investing activity
c. Financing activity
__C___1. Cash paid for dividends to stockholders.
__A___2. Cash received from customers.
__C___3. Cash received from owners contributions.
__B___4. Cash paid for a delivery van to be used in the business.
__B___5. Cash received from a one-time sale of used office equipment.
__A___6. Cash paid from utilities.
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Problem #4 (15 points) Chapter 3
a. Prepare an income statement for the adjusted trial balance of Hanson Storage.
b. Prepare a statement of owner's equity from the adjusted trial balance of Hanson
Storage. Ms. Hanson's capital account balance of $40,340 consists of a $30,340
beginning-year balance plus a $10,000 investment during the current year.
c. Prepare a balance sheet from the adjusted trial balance of Hanson Storage.
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Answers:
a. Prepare an income statement for the adjusted trial balance of Hanson Storage.
Hanson storage company
Income statement
For the year ended December 31 2012
Rent earned $57,500
Operating Expenses:
Wages expense $25,000
Utility expense $2,400
Property tax expense $1,900
Insurance expense $800
Office supplies expense $250
depreciation exp-Equipments $400
Depreciation exp-Building $5,570
Total operating expenses $36,320
Oprating income $21,180
Other Gains or Losses
Less: Interest expense $3,000
Net Income $18,180
b. Prepare a statement of owner's equity from the adjusted trial balance of Hanson Storage. Ms. Hanson's capital account balance of $40,340 consists of a $30,340 beginning-year balance plus a $10,000 investment during the current year.
Statement of Owner's equity
Mary Hanson's capital-Beginning balance $30,340
Add: investment during the year $10,000
Add: Net income $18,180
Total $58,520
Less: Withdrawal during the year $21,000
Total Owner's equity-Ending balance $37,520
c. Prepare a balance sheet from the adjusted trial balance of Hanson Storage.
Balance Sheet
As on 31st December 2012
Assets
Cash $3,050
Account Receivable $400
Prepaid Insurance $830
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Office supplies $80
Total current assets $4,360
Equipments $4,200
Accumulated depreciation $1,100 $3,100
Building $98,000
Accumulated depreciation $28,000 $70,000
Land $115,000
Total Fixed Assets $188,100
Total Assets $192,460
Liabilities
Interest payable $2,200
Wages payable $880
Property tax payable $1,400
Unearned rent $460
Total current liabilities $4,940
Long term Note Payable $150,000
Total Liabilities $154,940
Total Owner's Equity $37,520
Total Liabilities & Owner's Equity $192,460
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Problem #5 (10 points) Chapter 4
The following year-end adjusted trial balance is for Tom Jones Co. at the end of
December 31. The credit balance in Tom Jones, Capital at the beginning of the year,
January 1, was $320,000. The owner, Tom Jones, invested an additional $300,000 during
the current year. The land held for future expansion was also purchased during the
current year.
Required:
Prepare a classified year-end balance sheet. (Note: A $22,000 installment on the long-
term note payable is due within one year.)
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Answer: Classified Balance Sheet
Tom Janes Co.
as of Dec 31
Assets
Cash $90,000
Accounts Receivable 18,000
Prepaid Insurance 6000
Investment in Stocks 150,000
Office Supplies 2,000
Current Assets $266,000
Office Equipment 18,000
less Accumulated depreciation Equipment -4,000
Net Office Equipment 14,000
Building 350,000
less Accumulated depreciation Building -170,000
Net Building 180,000
Intangible Assets - Licensing Agreement 50,000
Land held for future expansion 300,000
Land 250,000
Other Non-current Assets 16,400
Non-Current Assets $810,400
Total Assets $1,076,400
Liabilities and Shareholders Equity
Liabilities
Accounts Payable $17,800
Salaries Payable 8,500
Interest Payable 7,900
Note installment Payable 22,000
Current Liabilities $56,200
Long-term note payable 202,000
Total Liabilities $258,200
Equity
Tom Janes, Capital $620,000
Tom Janes, Withdrawals -60,000
Tom Janes, Equity 560,000
Total Equity 818,200
Total Liabilities And Equity $1,076,400
$0
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Problem #6 (15 points) Chapter 5
Prepare journal entries to record the following merchandising transactions of Dean
Company, which applies the perpetual inventory system. Dean Company offers all of its
credit customers credit terms of 2/10, n/30.
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Answer:
May 1 merchandise inventory 7800
Account payable—swift co 7800
May 2 merchandise inventory 10,600
Account payable—arrow co 10,600
May 3 account receivable—bee co 5600
Sales 5600
COGS 3000
Merchandise inventory 3000
May 4 merchandise inventory 300
Cash 300
May 5 accounts payable—swift co 800
Merchandise inventory 800
May 6 account payable—arrow co 10,600
Merchandise inventory (10,600*.02) 212
Cash (10,600-212) 10,388
May 8 account receivable—nat co 3300
Sales 3300
COGS 1500
Merchandise inventory 1500
May 11 accounts payable—swift co 7000
Merchandise inventory (7000*.01) 70
Cash (7000-70) 6930
May 13 Cash(5600*.98) 5488
Sales discount(5600*.02) 112
Account receiveable—bee co 5600
May 14 sales return/allowances 300
Account receivable—nat co 300
May 17 Cash(3300-300)*.98) 2940
Sales discount(3000*.02) 60
Account receivable(3300-300) 3000
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Problem #7 (10 points) Chapter 6 Target Store uses the periodic inventory system and had the following transactions during
the month of May:
Prepare the required journal entries that Target Store must make to record these
transactions.
Answer:
05/03
accounts receivable $600 sales $600 cost of goods sold $350 inventory $350 to record sale 2% 10/net30 and cost of sale
05/04
Cash $425 sales $425 cost of goods sold $225 merchandise inventory 225 to record sale 2/10 net30 and cost of sale
05/06
accounts receivable $1300 sales $1,300.00 cost of goods sold $750 merchandise inventory $750 to record sale 2/10 net30 and cost of sale
05/08
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sales returns $100.00 cash $100.00 merchandise inventory $55 cost of goods sold $55.00 to record return of merchandise
05/15
Cash $1274 Discounts $28 accounts receivable $1,300.00 to record payment 2/10
05/31
Cash $ 600 accounts receivable $600.00 to record payment net30
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Problem #8 (10 points) Chapter 6
A company made the following merchandise purchases and sales during the month of
May:
There was no beginning inventory. If the company uses the weighted average inventory
valuation method and the perpetual inventory system, what would be the cost of its
ending inventory?
Answer:
Units, Rate, Amount May 1st purchase of 380 at $15--------------- 380X15= 5,700
May 5th purchase of 270 at $17--------------- 270X 17= 4,590
Revised Average Rate-----------------------------400,16=10,290
May 10th sold 400 at $50------------------------ 400X15.83= 6,332
Stock After Selling --------------------------------250X15.83 =3,958
May 20th purchased 300 at $22-------------- 300X 22 =6,600
New Average Rate------------------------------------…550X19.196=10,558
Sold 400 and Remaining is 150 Units-------- 150X19.196 =2,879
Problem #9 (10 points) Chapter 6
Evaluate each inventory error separately and determine whether it overstates or
understates cost of goods sold and net income.
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Answer:
Inventory Error Cost of Goods Sold Net Income
Understates beginning inventory Understated Overstated
Understates ending inventory Overstated Understated
Overstates beginning inventory Overstated Understated
Overstates ending inventory Understated Overstated
Problem #10 (10 points) Chapter 6
A company's warehouse was destroyed by a tornado on October 15. The following
information was the only information that was salvaged:
The company's average gross profit ratio is 40%. What is the estimated cost of the lost
inventory?
Answer:
= $28,000 + $17,000 - ([1 - 0.40][$55,000 - $700])
= $45,000 - $0.60($54,300)
= $45,000 - $32,580
= $12,420