Principle of Accounting

2019 Fall

Midterm Exam

Name: Student ID:

Part I. Question 1 and 5 are True or False Questions. Please indicate either T or F before each
question. (10%)

Answers to True-False Statements

Item 1 2 3 4 5
Ans. F T T F F

1. Since a partner does not need to pay partnership taxes for its business activities, only one owner account
is needed for all partners in a partnership.

Each partner should have a corresponding owner account.

2. If a revenue account is credited, the revenue account is increased.

3. The expense recognition principle requires that expenses be matched with revenues of the same period.

4. Closing entries are unnecessary if the business plans to continue operating in the future and issue
financial statements each year.

Closing entries are necessary……

5. The specific identification method of inventory valuation is desirable when a company sells a large
number of low-unit cost items.

It is for large-ticket items (e.g., jewelry, furniture, automobiles, land)

Part II. Question 1 to 15 are multiple choice questions. Please choose the best answer for each
question. (30%)

Answers to Multiple Choice Questions

Item 1 2 3 4 5 6 7 8
Ans. B A A D A B D B
Item 9 10 11 12 13 14 15
Ans. D C B C B B B

1. GAAP stands for

 A. Generally Accepted Auditing Procedures.
B. Generally Accepted Accounting Principles.
C. Generally Accepted Auditing Principles.
D. Generally Accepted Accounting Procedures.

2. Harrod's Inc. purchased land for $50,000 in 2007. At December 31, 2017, an appraisal determined the
fair value of the land is $65,000. Under GAAP, in the 2017 financial statements, the land will be
reported at

A. $50,000 on the statement of financial position.

B. $65,000 on the statement of financial position.
C. $50,000 on the income statement.
D. $65,000 on the income statement.

Historical costs. Plz refer to the first para. at book P82.

3. A dividend is

A. a distribution of the company's earnings to its shareholders.

B. equal to liabilities minus equity.
C. equal to assets minus equity.
D. equal to revenues less expenses.

4. Which of the following correctly identifies normal balances of accounts?

A. Assets Debit
Liabilities Credit
Equity Credit
Revenues Debit
Expenses Credit
B. Assets Debit
Liabilities Credit
Equity Credit
Revenues Credit
Expenses Credit
C. Assets Credit
Liabilities Debit
Equity Debit
Revenues Credit
Expenses Debit
D. Assets Debit
Liabilities Credit
Equity Credit
Revenues Credit
Expenses Debit
5. Ron's Hot Rod Shop follows the revenue recognition principle. Ron services a car on July 31. The
customer picks up the vehicle on August 1 and mails the payment to Ron on August 5. Ron receives the
check in the mail on August 6. When should Ron show that the revenue was earned?

A. July 31
B. August 1
C. August 5
D. August 6

Accrual basis. Ron services a car on July 31.

6. Hal Smith opened Smith's Repairs on March 1 of the current year. During March, the following
transactions occurred and were recorded in the company's books:

1. Smith received shares for investing $25,000 cash and $100,000 of equipment in the business.
2. The company paid $2,000 cash to rent office space for the month.
3. The company received $16,000 cash for repair services provided during March.
4. The company paid $6,200 for salaries for the month.
5. The company provided $3,000 of services to customers on account.
6. The company paid cash of $500 for monthly utilities.
7. The company received $3,100 cash in advance of providing repair services to a customer.
8. The company paid dividend of $5,000.

Based on this information, the equity reported on the Statement of Changes in Equity at the end of
March would be:

A. $133,400.
B. $130,300.
C. $135,300.
D. $8,400.

(1) $25,000 + (1) $100,000 + (3) $16,000 + (5) $3,000 - (2) $2,000 - (4) $6,200 - (6) $500 - (8) $5,000 =
$130,300.

7. Adjusting entries are necessary

A. yearly.
B. quarterly.
C. monthly.
D. every time financial statements are prepared.

8. The following is selected information from Alpha-Beta-Gamma Corporation for the fiscal year ending
October 31, 2017.

Cash received from customers $600,000

Revenue earned 660,000
 Cash paid for expenses 340,000
Cash paid for computers on November 1, 2016 that will be used
for 3 years (annual depreciation is $32,000) 96,000
Expenses incurred, including interest, but excluding any depreciation 400,000
Proceeds from a bank loan, part of which was used to pay for
the computers 200,000
Based on the accrual basis of accounting, what is Alpha-Beta-Gamma Corporation’s net income for
the year ending October 31, 2017?

A. $388,000.
B. $228,000.
C. $124,000.
D. $260,000.

660,000 - 400,000 – 32,000 = 228,000

Questions 9-10 are based on the following information

The income statement for the month of June, 2017 of Taylor Enterprises contains the following
information:

Revenues $16,000
Expenses:
Salaries and Wages Expense $4,000
Rent Expense 3,000
Supplies Expense 600
Advertising Expense 400
Insurance Expense 200
Total expenses 8,200
Net income $7,800

9. The entry to close the revenue account includes a

A. debit to Income Summary for $7,800.

B. credit to Income Summary for $7,800.
C. debit to Income Summary for $16,000.
D. credit to Income Summary for $16,000.

10. At June 1, 2017, Taylor reported Retained Earnings of $70,000. The company paid no dividends during
June. At June 30, 2017, the company will report Retained Earnings of

A. $70,000.
B. $86,000.
C. $77,800.
D. $62,200.

70,000 + 7,800 = 77,800

11. The following information was available from the inventory records of Queen Company for July:

Units Unit Cost Total Cost

Balance at July 1 30,000 $ 2.25 $67,500
Purchases:
July 6 20,000 2.55 51,000
July 26 27,000 2.60 70,200
Sales:
July 7 (25,000)
July 31 (40,000)
Balance at July 31 12,000

What should be the inventory reported on Queen’s July 31 statement of financial position using the
average-cost inventory method (round per unit amounts to two decimal places)?

A. $27,000.
B. $29,400.
C. $29,610.
D. $31,500.

I. (67,500+51,000+70,200) / (30,000+20,000+27,000) = 2.45 II. 2.45 x 12,000 = 29,400

12. Tatsoi Company’s purchase and sales transactions for the month of May were as follows:

Assuming that Tatsoi keeps perpetual inventory records, the ending inventory on a FIFO basis is

A. $600,000.
B. $624,000.
C. $660,000.
D. $2,520,000.

purchase cost of goods sold balance

unit unit unit
date units cost total units cost total units cost total
5/1 2,000 300 600,000 - 2,000 300 600,000
5/2 - 1,200 600 720,000 800 300 240,000
5/7 6,000 320 1,920,000 - 800 300 240,000
- - 6,000 320 1,920,000

6,800 2,160,000
5/14 - 4,800 600 2,880,000 2,000 320 640,000
- -
- - 2,000 640,000
5/22 2,000 330 660,000 - 2,000 320 640,000
- - 2,000 330 660,000
- -
- - 4,000 1,300,000
5/28 - 2,000 650 1,300,000 2,000 330 660,000
- - -

- - 2,000 660,000
13. When purchase costs of inventory regularly decline, which method of inventory costing will yield the
highest gross profit and income?

A. FIFO.
B. LIFO.
C. Weighted average cost.
D. Specific identification.

Lower cost of goods sold under LIFO, higher gross profit

14. Hahn Company uses the percentage of sales method for recording bad debt expense. For the year, cash
sales are $300,000 and credit sales are $1,500,000. Management estimates that 1% is the sales percentage
to use. What adjusting entry will Hahn Company make to record the bad debt expense?

A. Bad Debt Expense ................................................................ 18,000

Allowance for Doubtful Accounts ................................. 18,000
B. Bad Debt Expense ................................................................ 15,000
Allowance for Doubtful Accounts ................................. 15,000
C. Bad Debt Expense ................................................................ 15,000
Accounts Receivable ...................................................... 15,000
D. Bad Debt Expense ................................................................ 18,000
Accounts Receivable ...................................................... 18,000

15. Gowns, Inc. uses the Aging method to estimate its bad debts. At December 31, 2017, Gowns estimates
total bad debts that will become uncollectible in the future as $11,140. The existing balance in the
Allowance for Doubtful Accounts is a debit balance of $2,640. The Accounts Receivable balance at
December 31, 2017 is $198,000. The amount of the bad debts adjusting entry at December 31, 2017 will
impact the statement of financial position by

A. Increasing expenses by $11,140.

B. Increasing the Allowance for Doubtful Accounts by $13,780.
C. Increasing the Allowance for Doubtful Accounts by $11,140.
D. Increasing the Allowance for Doubtful Accounts by $8,500.

11,140 + 2,640 = 13,780

Part III. Prepare Journal Entries (10%)

Flora Accounting Services completed these transactions in February:

a. Purchased inventory on account, $300.
b. Completed work for a client on credit, $500.
c. Paid cash for the inventory purchased in (a).
d. Completed work for a client and received $800 cash.
e. Received $500 cash for the work described in (b).
Prepare journal entries to record the above transactions.

Inventory 300
Accounts Payable 300

Accounts Receivable 500

Services Revenue 500

Accounts Payable 300

Cash 300

Cash 800
Services Revenue 800

Cash 500
Accounts Receviable 500
Part IV. Inventory (10%)

Using the information given below for a company that uses a perpetual inventory system, calculate the (1)
ending inventory, (2) cost of goods sold, using LIFO. (Please show the calculation procedure)

Units Cost per unit

Beginning inventory 100 $10
Jan. 5 purchased 40 12
Jan. 10 sold 60 -
Jan. 15 purchased 70 13
Jan. 25 sold 50 -

purchase cost of goods sold balance

unit unit unit
date units cost total units cost total units cost total
1/1 100 $10 $1,000
1/5 100 $10 $1,000
40 $12 $480 40 $12 $480
140 $1,480
1/10 40 $12 $480 80 $10 $800
20 $10 $200
60 $680
1/15 80 $10 $800
70 $13 $910 70 $13 $910
150 $1,710
1/25 50 $13 $650 80 $10 $800
20 $13 $260
100 $1,060

ending inventory = 80x10 + 20x13 = $1,060

COGS = 40x12 + 20x10 + 50x13 = $1,330
Part V. The Allowance Method of Accounting for Bad Debts (10%)

On September 30, Emerson Co. has $540,250 of accounts receivable. Emerson uses the allowance method
of accounting for bad debts and has an existing credit balance in the allowance for doubtful accounts of
$13,750.

a. Sold $325,000 of merchandise (that cost $178,500) to customers on credit.

b. Received $425,100 cash in payment of accounts receivable.
c. Wrote off $16,700 of uncollectible accounts receivable.
d. $5,000 of written-off receivable was repaid by a customer
e. In adjusting the accounts on October 31, its fiscal year-end, the company estimated that 3.0% of
accounts receivable will be uncollectible.
(1) Prepare journal entries to record the following selected October transactions. The company uses the
perpetual inventory system.

a. Accounts Receivable 325,000

Revenue 325,000
Cost of Goods Sold 178,500
Inventory 178,500
b. Cash 425,100
Accounts Receivable 425,100
c. Allowance for Doubtful Accounts 16,700
Accounts Receivable 16,700
d. Accounts Receivable 5,000
Allowance for Doubtful Accounts 5,000
Cash 5,000
Accounts Receivable 5,000
e Bad Debt Expense 10,654
Allowance for Doubtful Accounts 10,654

(2) Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its October 31
Balance Sheet.

Accounts Receivable 423,450

Less: Allowance for Doubtful Accounts 12,704
410,747

T-account for reference

Accounts Receivable Allowance for Doubtful Accounts

540,250 13,750
325,000 16,700
425,100 5,000
16,700 10,654
5,000
5,000
870,250 446,800 16,700 29,404
423,450 12,704
Part VI. Prepare Financial Statements (30%)

Using the information presented below, prepare an (1) Income Statement, (2) the Statement of Shareholders
‘Equity and (3)the Balance Sheet for ABC Company. There was no issuance of shares during the current
year.

The Trial Balance of ABC Company at the end of December 31, 2018 as follows:
Debit Credit
Cash $3,050
Accounts receivable 400
Prepaid insurance 830
Office supplies 80
Office equipment 4,200
Accumulated Depreciation-Office equipment $1,100
Building 98,000
Accumulated Depreciation-Buildings 28,000
Land 115,000
Wages payable 880
Property taxes payable 1,400
Interest payable 2,200
Unearned rent 460
Long-term notes payable 150,000
Share capital 30,340
Retained earnings 10,000
Dividends 21,000
Rent earned 57,500
Wages expense 25,000
Utilities expense 1,900
Property taxes expense 2,400
Insurance expense 800
Office supplies expense 250
Depreciation expense-Office equipment 400
Depreciation expense-Building 5,570
Interest expense 3,000
Total $281,880 $281,880
 ABC Company
Income Statement
For the Year Ended December 31, 2018
Revenue
Rent earned $57,500
Expenses:
Wages expense $25,000
Utilities expense 1,900
Property taxes expense 2,400
Insurance expense 800
Office supplies expense 250
Depreciation
expense-Office 400
equipment
Depreciation expense-Buildings 5,570
Interest expense 3,000
Total expenses 39,320
Net income $18,180

ABC Company
Statement of Shareholders' Equity
For Year Ended December 31, 2018
Retained Total
Share capital
earnings equity
Balance at January 1 $30,340 $10,000 $40,340
Plus: Issuance of shares
Net income 18,180 18,180
Less: Dividends 21,000 21,000
Balance at December 31 $30,340 $7,180 $37,520
 ABC Company
Balance Sheet
December 31, 2018
Assets
Cash $3,050
Accounts receivable 400
Prepaid insurance 830
Office supplies 80
Land 115,000
Office equipment $4,200
Less: Accumulated
Depreciation-Office 1,100 3,100
equipment
Buildings 98,000
Less: Accumulated
28,000 70,000
Depreciation-Buildings
Total assets $192,460

Liabilities and equity

Wages payable $880
Property taxes payable 1,400
Interest payable 2,200
Unearned rent 460
Long-term notes payable 150,000
Total liabilities $154,940

Share capital 30,340

Retained earnings 7,180
Total equity $37,520
Total liabilities and
$192,460
equity