Review Package - Midterm SOLUTION Fall Midterm ExReview Package - Midterm SOLUTION Fall 2013 . Part I Multiple Choice 1) ... E Accounting for purchases must be recorded at their cost on the date
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<ul><li><p>ACCT1115 </p><p>Review Package - Midterm </p><p>SOLUTION </p><p>Fall 2013 </p></li><li><p> Part I Multiple Choice </p><p> 1) How should you record the purchase of an expensive automobile? </p><p> a) Decrease cash, increase assets b) Decrease cash, increase expenses </p><p> c) Decrease cash, decrease net worth d) Decrease cash, increase net worth </p><p> 2) Which of the following businesses would be considered a service business? a) Paper manufacturer </p><p> b) Retail store c) Law firm </p><p> d) None of the available choices </p><p> 3) Controls: a) are a system of rules that govern international businesses </p><p> b) include procedures that are used to check and regulate business operations systematically c) are financial goals that a business works towards </p><p> d) none of the choices </p><p>4) A business commences with owner's equity of $60,000 and a cash balance of $15,000 on September 1st. On the last day of September, the business prepays a maintenance contract of $12,000 for a one year service contract that will commence in October. The services will be delivered in equal amounts each month. Assuming no other transactions, what will be the value of cash and owners equity at the end of December? </p><p> a) Cash $3,000. Equity $57,000 b) Cash $13,000. Equity $60,000 c) Cash $3,000. Equity $45,000 d) Cash $13,000. Equity $57,000 </p><p> 5) Company ABC has not recognized $300 worth of prepaid insurance used at the end of its fiscal year. What happens to net income? </p><p> a) Net income would not be affected. b) Net income would be understated by $300. c) It cannot be determined. </p><p> d) Net Income would be overstated by $300. </p></li><li><p>6) A typical accounting adjustment could be: </p><p> a) recognizing earned revenue b) recognizing depreciation c) recognizing prepaid expenses d) all of the choices </p><p> 7) Entries are recorded in the journal: a) alphabetically </p><p> b) chronologically (by date) c) in the order of account numbers used </p><p> d) randomly </p><p> 8) The document which records the activities and balances of each specific account is called a: a) journal </p><p> b) general Ledger c) financial statement d) trial balance </p><p> 9) The trial balance lists: a) all accounts in the general ledger and their balances </p><p> b) only income statement accounts c) only balance sheet accounts d) a summary of owner's equity </p><p> 10) Which of the following accounts will NOT show on the post-closing trial balance? a) Cash </p><p> b) Rent Expense c) Accounts Payable d) Owner's Equity </p><p> 11) A post-closing trial balance contains: a) assets and liabilities only b) all zero balances </p><p> c) revenue and expenses only d) assets, liabilities and owners equity </p><p> 12) The Statement of Owner's Equity : a) is used to determine the sources and uses of cash </p><p> b) is used to calculate ending Owners' equity so that it can be transferred to the income statement c) reports any changes in equity over the reporting period </p><p> d) reflects increases due to losses and decreases due to profits </p></li><li><p>13) After closing revenues and expenses, but before closing the income summary account a profitable company would show a: </p><p> a) zero balance in the income summary account b) debit balance in the income summary account c) credit balance in the income summary account d) debit balance in the owner's equity account </p><p> 14) Cash is generated from day to day activities by: a) Capital exceeding expenses </p><p> b) Gains on sale of stocks c) Receiving gifts </p><p> d) Revenue exceeding expenses </p><p> 15) What is a stakeholder? a) All of the available choices </p><p> b) Somebody who has invested in a corporation c) Somebody who works in an organization </p><p> d) A supplier or client of a company </p><p> 16) Which of the following best defines GAAP? a) A stream of accounting </p><p> b) A characteristic of accounting c) A professional accounting designation </p><p> d) A set of standards and acceptable ways of reporting accounting activities </p><p> 17) Which of the following is the most commonly discussed trade-off of characteristics? a) Reliability vs. Comparability </p><p> b) Relevance vs. Understandability c) Comparability vs. Understandability </p><p> d) Relevance vs. Reliability </p></li><li><p> Part II GAAP Principles </p><p> Match each of the following GAAP principles to the appropriate description in the table below. </p><p>A. Business entity principle </p><p>B. Going concern principle </p><p>C. Monetary unit principle </p><p>D. Objectivity principle </p><p>E. Cost principle </p><p>F. Conservatism principle </p><p> Corresponding Letter Description </p><p>F The accountant should exercise the option that results in a lower balance of assets, lower net income or a higher balance of debt. </p><p> D </p><p>Accounting transactions should be recorded on the basis of verifiable evidence. </p><p> B Assumes that a business will continue to operate into the </p><p>foreseeable future. </p><p> C Financial reports should be expressed in a single currency. </p><p>A Accounting for a business must be kept separate from the personal affairs of its owner or any other business. </p><p> E Accounting for purchases must be recorded at their cost on the date </p><p>of purchase. </p></li><li><p> Part III Transactions - Revenue & Expense </p><p> Complete the chart using the transactions below. Under the "Account Type" column, fill the cells with one of the following: Asset, Liability, Revenue or Expense. The first one has been done for you. </p><p> May 1 Paid cash for travel expenses incurred on this day $2,000 May 2 Paid cash for a one year insurance policy $1,800 May 12 Paid cash for telephone bill that was received and recorded last month $300 May 20 Received cash from a customer for service to be performed next month $800 </p><p>May 25 Received a maintenance invoice for work completed in May which will be paid next month $400 </p><p> Date Account Name Account Type Increase or Decrease Amount May 1 Travel Expense Expense Increase $2,000 Cash Asset Decrease $2,000 May 2 Prepaid Expense Asset Increase $1,800 Cash Asset Decrease $1,800 May 12 Accounts Payable Liability Decrease $300 Cash Asset Decrease $300 May 20 Cash Asset Increase $800 Unearned Revenue Liability Increase $800 May 25 Maintenance Expense Expense Increase $400 Accounts Payable Liability Increase $400 </p></li><li><p>Part IV Adjusting Entries </p><p>Below, is Reality Services' unadjusted trial balance at the end of December 2012. Adjusting entries have not yet been made. Use the trial balance and the information below to complete the journal entries. </p><p> DR CR Cash $2,000 Accounts Receivable 3,500 Prepaid Insurance 2,400 Office Supplies 750 Property, Plant & Equipment 8,000 Accumulated Depreciation $0 Accounts Payable 4,400 Unearned Revenue 1,200 Bank Loan 2,800 Capital Account 3,000 Owner's Drawings 1,000 Service Revenue 10,000 Depreciation Expense 0 Insurance Expense 0 Interest Expense 0 Maintenance Expense 800 Supplies Expense 0 Rent Expense 1,400 Salaries Expense 550 Telephone Expense 300 Travel Expense 700 Total $21,400 $21,400 </p><p> Dec 31 A physical count showed that $300 of office supplies are still on hand </p><p> Dec 31 </p><p>The property, plant and equipment was purchased at the beginning of the year and is expected to last 5 years and no residual value </p><p>5 </p><p> Dec 31 Of the balance of unearned revenue, $720 has been earned </p><p> Dec 31 </p><p>The amount in prepaid insurance is for an annual policy that was paid and commences on September 1, 2012 </p><p> Dec 31 Interest of $240 was owed on the bank loan, but was unpaid at December 31st</p><p> Dec 31 </p><p>Unrecorded reality services completed but not yet collected from customers at December 31</p><p>st amounted to $500. </p></li><li><p> Journal </p><p> Date Account Title and Explanation DR CR Dec 31 Supplies Expense $450 Office Supplies $450 Adjust office supplies Dec 31 Depreciation Expense $1,600 Accumulated Depreciation $1,600 Depreciate PPE Dec 31 Unearned Revenue $720 Service Revenue $720 Adjust for revenue earned Dec 31 Insurance Expense $800 Prepaid Insurance $800 Adjust for 4 months of insurance Dec 31 Interest Expense $240 Interest Payable $240 To accrue for interest on bank loan Dec 31 Accounts Receivable $500 </p><p> Service Revenue $500 Accrued for services provided. </p></li><li><p> Part V Business Bookkeeping - Full Accounting Cycle </p><p> Charles Ly is the owner of Gamma Services. He has hired you to update the transactions for his business. Charles has provided you with the opening balances and a list of transactions for the month of April. The companys Chart of Accounts is also included as shown below. </p><p> The opening balances for the month of April are as follows: Gamma Services </p><p> Balance Sheet </p><p> As at March 31, 2010 </p><p> Assets Liabilities Cash $22,000 Accounts Payable $10,500 Accounts Receivable 9,000 Unearned Revenue 4,500 Prepaid Insurance 0 Bank Loan 8,000 Property, Plant & Equipment 8,000 Accumulated Depreciation (2,000) Total Liabilities 23,000 </p><p> Owners' Equity </p><p>14,000 </p><p> Total Assets </p><p>$37,000 Total Liabilities & Owners' Equity $37,000 </p><p> Transactions for the month of April: Apr 2 Provided services to a customer, who paid cash $5,000 </p><p> Apr 4 Prepaid insurance for one year $1,200 Apr 7 Paid cash to reduce the balance of accounts payable $200 Apr 10 Provided services to a customer, who will pay later $4,000 Apr 12 Obtained a loan from the bank $10,000 Apr 13 Purchased equipment with cash $9,500 Apr 17 Paid the telephone bill $200 Apr 20 Paid salaries to employees $4,000 Apr 28 The owner withdrew cash for personal use $700 Apr 30 Paid interest on the bank loan $150 Adjustments Apr 30 Recognized prepaid insurance for this month $100 Apr 30 Recorded deprecation on equipment $400 Apr 30 Recognized unearned that has now become earned $1,800 </p></li><li><p> The Chart of Accounts (GL No.) is shown below: </p><p>Account Description Account </p><p># </p><p>Account Description Account </p><p># ASSETS </p><p> REVENUE </p><p> Cash 101 </p><p>Service Revenue 400 Accounts Receivable 105 </p><p> Interest Revenue 410 </p><p> Prepaid Insurance 110 </p><p>EXPENSES Property, Plant & Equipment 120 </p><p> Advertising Expense 505 </p><p> Accumulated Depreciation 130 </p><p>Insurance Expense 510 </p><p> Maintenance Expense 515 </p><p> LIABILITIES </p><p>Professional Fees Expense 520 Accounts Payable 200 </p><p> Rent Expense 525 </p><p> Unearned Revenue 205 </p><p>Salaries Expense 530 Bank Loan 210 </p><p> Telephone Expense 535 </p><p>Depreciation Expense 540 OWNER'S EQUITY </p><p> Interest Expense 545 </p><p> Capital Account 300 Owner's Drawing 310 Income Summary 315 </p><p> Required: a) Journalize the transactions. </p><p> b) Post the transactions to the General Ledger. c) Prepare the adjusted trial balance. d) Prepare the closing journal entries. Assume the company uses the income summary method. </p><p> e) Post the closing entries to the General Ledger. f) Prepare the post-closing trial balance. </p></li><li><p>Journal Date Account Title & Explanation PR DR CR </p><p> Apr 2 Cash 101 $5,000 Service Revenue 400 $5,000 Sold product to customer for cash Apr 4 Prepaid Insurance 110 $1,200 Cash 101 $1,200 To record the prepayment of insurance Apr 7 Accounts Payable 200 $200 Cash 101 $200 To record payment to reduce accounts payable Apr 10 Accounts Receivable 105 $4,000 Service Revenue 400 $4,000 Sold product to a customer on account Apr 12 Cash 101 $10,000 Bank Loan 210 $10,000 To record the loan from the bank Apr 13 Property, Plant & Equipment 120 $9,500 Cash 101 $9,500 To record purchase of equipment Apr 17 Telephone Expense 535 $200 Cash 101 $200 To record payment for telephone Apr 20 Salaries Expense 530 $4,000 Cash 101 $4,000 To record payment for salaries Apr 28 Owner's Drawing 310 $700 Cash 101 $700 To record owner's drawings Apr 30 Interest Expense 545 $150 Cash 101 $150 To record payment of loan interest </p></li><li><p>Date Account Title & Explanation DR CR </p><p> Adjustments: Apr 30 Insurance Expense 510 $100 Prepaid Insurance 110 $100 To adjust prepaid insurance Apr 30 Depreciation Expense 540 $400 Accumulated Depreciation 130 $400 To record depreciation Apr 30 Unearned Revenue 205 $1,800 Service Revenue 400 $1,800 To record earned revenue </p></li><li><p> Account: Cash GL No: 101 Date: 2010 Description PR DR CR Balance (DR or CR) Opening Balance $22,000 DR Apr 2 J1 $5,000 $27,000 DR </p><p> Apr 4 J1 $1,200 $25,800 DR </p><p> Apr 7 J1 $200 $25,600 DR </p><p> Apr 12 J1 $10,000 $35,600 DR </p><p> Apr 13 J1 $9,500 $26,100 DR </p><p> Apr 17 J1 $200 $25,900 DR </p><p> Apr 20 J1 $4,000 $21,900 DR </p><p> Apr 28 J1 $700 $21,200 DR </p><p> Apr 30 J1 $150 $21,050 DR </p><p> Account: Accounts Receivable GL No: 105 Date: 2010 Description PR DR CR Balance (DR or CR) Opening Balance $9,000 DR Apr 10 J1 $4,000 $13,000 DR </p><p> Account: Prepaid Insurance GL No: 110 Date: 2010 Description PR DR CR Balance (DR or CR) Opening Balance $0 DR Apr 4 J1 $1,200 $1,200 DR </p><p> Apr 30 To adjust prepaid insurance J1 $100 $1,100 DR </p><p> Account: Property, Plant & Equipment GL No: 120 Date: 2010 Description PR DR CR Balance (DR or CR) Opening Balance $8,000...</p></li></ul>
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