MBA 503 MIDTERM EXAM with ANSWERS
MIDTERM EXAM ANSWERS
1. Indicate on which financial statement you would expect to find each of the following. If an item can be found on more than one statement, list each statement.
2. For each of the following items that appear on the balance sheet, identify each as an asset (A), liability (L), or element of stockholders’ equity (SE). For any item that would not appear on the balance sheet, write the letter, N.
3. (4 points) Parker Pool Supply, Inc. reported the following items for the year ended December 31, 2008:
Prepare an income statement for the year.
4. (4 points) National Shops, Inc. reported the following amounts on its balance sheet on December 31, 2009:
1. Prepare a balance sheet for National Shops as of December 31, 2009.
2. National Shops wishes to purchase merchandise from your company on account. The amount of the purchases would probably be about $10,000 per month, and the terms would require National to make payment in full within 30 days. Would you recommend that your company grant credit to National under these terms? Explain the reasoning for your response.
5. (2 points) For each financial statement element listed, indicate whether a debit or a credit is used to increase the account’s balance.
1. Assets __________
2. Liabilities _____________
3. Contributed Capital ___________
4. Retained Earnings ___________
6. The Harris TV Store had the following transactions in August:
a. Sold $60,000 of goods to customers, receiving $56,000 in cash with the rest on account.
b. The cost of the inventory sold was $36,000.
c. The store purchased $16,000 of inventory and paid for $12,000 in cash and the rest on account.
d. They paid $16,000 in wages to employees who worked in August.
e. Received a $2,000 bill for utilities for August that will not be paid until September.
f. Received rent for the adjacent store front for the months of August and September in the amount of $4,000.
Based on the information above, Complete the following statements with dollar amounts:
7. Explain why a $5,000 revenue collected in advance for service would be recorded as a debit to cash and a credit to a liability account.
8. Why might managers be tempted to violate the revenue principle and the matching principle in financial reporting?
9. (2 points) During 2010, Burlington Company incurred operating expenses amounting to $600,000, of which $550,000 was paid in cash; the balance will be paid in January 2011. On the 2010 income statement of the company, what amount should be reported for operating expenses?
10. (2 points) On December 31, 2009, Avery Corporation paid $10,000 for next year’s insurance policy. This transaction should be recorded as follows by Avery: Select the correct answer–
11. (2 points) On November 1, 2009, Bug Busters collected $6,000 in advance for three months of service to be provided beginning on that date. It was credited in full to unearned rent revenue. Assuming the accounting year ends December 31, give the adjusting entry required on December 31, 2009 (assuming that no adjusting entries have been made during the year).
12. (2 points) Below are two related transactions for Golden Corporation. The annual accounting period ends December 31. For each date listed, give the required entry in journal format.
A. October 1, 2009–Golden Corporation borrowed $100,000 and signed a note providing for 8% interest. The principal and interest are due in one year (on September 30, 2010). What journal entry is needed?
B. December 31, 2009–end of the annual accounting period. (Prepare the necessary entry, If no entry is required, explain why).
13. (2 points) Bridge Company keeps a small inventory of supplies used for cleaning and maintenance purposes. On January 1, 2009, the inventory of supplies on hand was $2,000. During the year, supplies purchased were debited to the supplies inventory account in the amount of $6,500. On December 31, 2009, the inventory count of supplies in the storeroom was $1,750. Give the adjusting entry required at December 31, 2009.
14. (2 points)On November 1, 2009, Bruce Company leased some of its office space to Fairlane Company and immediately collected twelve months rent in advance of $600,000. Bruce debited cash and credited unearned rent revenue for $600,000. At December 31, 2009 (the end of the accounting period), give the adjusting entry Bruce should make in respect to the rent.
15. (2 points) On December 1, 2009, Fleet Company paid $30,000 rent for some office space which was debited in full to the prepaid rent expense account. The rent was for three months. Assuming Fleet’s accounting year ends December 31, give the adjusting entry required on December 31, 2009.
16. (4 points)Four transactions are given below that were completed during 2009 by Russell Company. The annual accounting period ends December 31. Each transaction requires an adjusting entry at December 31, 2009. You are to provide the adjusting entries required for Russell Company. No adjusting entries have been made during the year.
A. On December 31, 2009, Russell Company owed employees $3,750 for wages that were earned by them during December and were not recorded. Prepare the necessary entry.
B. During 2009, Russell Company purchased office supplies that cost $1,000 which were placed in the supplies room for use as needed. The purchase was recorded as follows:
At January 1, 2009, the inventory of unused office supplies was $300. At December 31, 2009, a physical count showed unused office supplies in the supply room amounting to $100. What entry is needed?
C. On December 1, 2009, Russell Company rented some office space to another party. Russell Company collected $900 rent for the period December 1, 2009, to March 1, 2010. The rent collected was recorded as follows:
Prepare the necessary entry:
D. On July 1, 2009, Russell Company borrowed $2,000 cash on a one-year, 8% interest-bearing, note payable. The interest is payable on the due date, May 31, 2010. The note was recorded as follows:
Prepare the necessary entry:
17. (4 points) Below, to the left, are listed several different account titles that you have studied. Under each column for each cell you are to enter one capital letter which indicates for each account its normal characteristics.
18. On July 1, 2009, Bass Company paid a two-year insurance premium. On that date the following journal entry was made:
The annual accounting period ends on December 31.
A. How much of the premium should be reported as expense on the 2009 income statement? __________
B. What is the amount of prepaid insurance which should be reported on the balance sheet at December 31, 2009? __________
C. Give the adjusting entry that should be made on December 31, 2009.
19. The following income statement was reported for Bauer Inc. for the first year of operations ending December 31, 2009 reported (in thousands of dollars):
A. Calculate net profit margin _____________
B. Calculate earnings per share if there are 200,000 shares of common stock outstanding _____________
20. Explain how adjusting entries provide for potential manipulation by managers. In addition, discuss how compensation arrangements may result in incentives for such manipulation to occur.
21. PhotoFly has reported the following information on their income statements for the years 2008 through 2012:
A. Compute the gross profit percentage for each year.
2012 2011 2010 2009 2008
_____ _____ _____ ______ _______
B. Has the gross profit ratio for PhotoFly improved over time or worsened?
Explain your answer.
22. (4 points) On December 31, 2009, Colonial Corporation had the following account balances related to credit sales and receivables prior to recording adjusting entries:
Present the necessary year-end adjusting entry related to uncollectible accounts for each of the following independent assumptions:
A. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivables outstanding at year-end will be uncollectible.
B. It is estimated that 1% of credit sales for the year will prove to be uncollectible.
C. Assume the same information presented in (1. above except that prior to adjustment, the Allowance for Doubtful Accounts had a debit balance of $200 rather than a credit balance of $200.
23. (4 points) American Company uses the allowance method to account for uncollectible accounts. On January 1, The Allowance for Doubtful Accounts had a credit balance of $3,000. The balance in the Accounts Receivable account on that date was $75,000. On January 2, prior to any credit sales, a $500 account from National Company was deemed to be uncollectible and written off.
A. Compute the net realizable (A/R – Allowance for Doubtful account) value of American’s receivables on January 1. _________________
B. Present the journal entry American would record on January 2 related to the write-off of National’s account.
C. Compute the net realizable value of American’s receivables on January 2, immediately following the write-off of National’s account. _________
24. Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:
Calculate the accounts receivable turnover for 2011 and 2010:
2010 ______________ 2011 ____________
25. Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:
Calculate the days’ sales in receivables for 2011 and 2010:
26. A recent annual report for Pap’s Pop contained the following data:
A. Calculate the accounts receivable turnover ratio and average days’ sales in receivables for 2011.
A/R turnover _______________
Avg Days sales _______________
B. Explain the meaning of each number.
27. Why is the reconciliation of a company’s cash account to the bank statement so important for effective internal control for cash?
28. (4 points) A comparison of the balance in Cottonwood Company’s cash account (per its books) as of April 30, 2009, and the bank statement dated April 30, 2009, revealed the following information:
Prepare a bank reconciliation using the format below. Complete the form below, then determine the correct cash balance.
Note: If one or more of the items given above should not appear on the reconciliation statement, do not include the item(s). Item code = item description
29. (5 points) Burke Company has just received its June 30 bank statement from Urban Bank. The bank statement and the cash account, summarized below, are to be reconciled for the month of June.
A. Prepare a bank reconciliation.
B. Give the journal entries that should be made in the accounts of Burke Company as a result of the above bank reconciliation.
30. What are “cash equivalents”? Specifically where would they appear on the financial statements?
31. You are the new manager of West Coast Company. The company distributes goods throughout the Rocky Mountain area. Customers are billed after the shipments are sent. Most customers pay within two weeks. You notice that one employee is responsible for opening all incoming payments, recording them in the accounting records, and depositing all receipts in the bank daily. When asked why this one person performed all of these duties, you were told that it was more efficient for one person to handle cash and to keep track of things. If any cash was missing, responsibility could be easily determined. Do you agree with this arrangement? If you were to make changes, what would you do, and why?
32. For each of the accounts listed below, indicate whether the typical or normal balance is a debit or credit.
A. Inventory ____________
B. Notes payable ____________
C. Retained earnings ____________
D. Equipment ____________
E. Prepaid insurance ____________
F. Accounts receivable ____________
G. Land ____________
H. Contributed capital ____________
I. Accounts payable ____________
J. Unearned revenue ____________
33. Give a brief summary of what SOX is why it is important (essay)
Bonus 1 (+6 points max) Al, Bill and Chad organized the ABC Corporation on January 1, 2009. Each of these owners invested $100,000 cash and received shares of stock. Below are selected transactions that were completed during January.
(A.) Give the entry on ABC’s books for each transaction:
1. Sold stock to the owners.
2. Borrowed $80,000 on one-year note payable.
3. Purchased land by signing a $70,000 note payable.
4. Paid $10,000 of accounts payable.
5. Purchased two service vehicles, $24,000 each; paid cash.
6. Purchased $2,000 of supplies on credit.
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