ACCT1115. Review Package - Midterm SOLUTION Fall 2013

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1 ACCT1115 Review Package - Midterm SOLUTION Fall 2013

2 Part I Multiple Choice 1) How should you record the purchase of an expensive automobile? a) Decrease cash, increase assets b) Decrease cash, increase expenses c) Decrease cash, decrease net worth d) Decrease cash, increase net worth 2) Which of the following businesses would be considered a service business? a) Paper manufacturer b) Retail store c) Law firm d) None of the available choices 3) Controls: a) are a system of rules that govern international businesses b) include procedures that are used to check and regulate business operations systematically c) are financial goals that a business works towards d) none of the choices 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? 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 5) Company ABC has not recognized $300 worth of prepaid insurance used at the end of its fiscal year. What happens to net income? a) Net income would not be affected. b) Net income would be understated by $300. c) It cannot be determined. d) Net Income would be overstated by $300.

3 6) A typical accounting adjustment could be: a) recognizing earned revenue b) recognizing depreciation c) recognizing prepaid expenses d) all of the choices 7) Entries are recorded in the journal: a) alphabetically b) chronologically (by date) c) in the order of account numbers used d) randomly 8) The document which records the activities and balances of each specific account is called a: a) journal b) general Ledger c) financial statement d) trial balance 9) The trial balance lists: a) all accounts in the general ledger and their balances b) only income statement accounts c) only balance sheet accounts d) a summary of owner's equity 10) Which of the following accounts will NOT show on the post-closing trial balance? a) Cash b) Rent Expense c) Accounts Payable d) Owner's Equity 11) A post-closing trial balance contains: a) assets and liabilities only b) all zero balances c) revenue and expenses only d) assets, liabilities and owner s equity 12) The Statement of Owner's Equity : a) is used to determine the sources and uses of cash 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 d) reflects increases due to losses and decreases due to profits

4 13) After closing revenues and expenses, but before closing the income summary account a profitable company would show a: 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 14) Cash is generated from day to day activities by: a) Capital exceeding expenses b) Gains on sale of stocks c) Receiving gifts d) Revenue exceeding expenses 15) What is a stakeholder? a) All of the available choices b) Somebody who has invested in a corporation c) Somebody who works in an organization d) A supplier or client of a company 16) Which of the following best defines GAAP? a) A stream of accounting b) A characteristic of accounting c) A professional accounting designation d) A set of standards and acceptable ways of reporting accounting activities 17) Which of the following is the most commonly discussed trade-off of characteristics? a) Reliability vs. Comparability b) Relevance vs. Understandability c) Comparability vs. Understandability d) Relevance vs. Reliability

5 Part II GAAP Principles Match each of the following GAAP principles to the appropriate description in the table below. A. Business entity principle B. Going concern principle C. Monetary unit principle D. Objectivity principle E. Cost principle F. Conservatism principle Corresponding Letter F D B C A E Description The accountant should exercise the option that results in a lower balance of assets, lower net income or a higher balance of debt. Accounting transactions should be recorded on the basis of verifiable evidence. Assumes that a business will continue to operate into the foreseeable future. Financial reports should be expressed in a single currency. Accounting for a business must be kept separate from the personal affairs of its owner or any other business. Accounting for purchases must be recorded at their cost on the date of purchase.

6 Part III Transactions - Revenue & Expense 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. 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 Received a maintenance invoice for work completed in May which will be paid May 25 next month $400 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

7 Part IV Adjusting Entries Below, is Reality Services' unadjusted trial balance at the end of December Adjusting entries have not yet been made. Use the trial balance and the information below to complete the journal entries. 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 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 A physical count showed that $300 of office supplies are still on hand The property, plant and equipment was purchased at the beginning of the year and is expected to last 5 years and no residual value Of the balance of unearned revenue, $720 has been earned The amount in prepaid insurance is for an annual policy that was paid and commences on September 1, 2012 Interest of $240 was owed on the bank loan, but was unpaid at December 31 st 5 Dec 31 Unrecorded reality services completed but not yet collected from customers at December 31 st amounted to $500.

8 Journal 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 Service Revenue $500 Accrued for services provided.

9 Part V Business Bookkeeping - Full Accounting Cycle 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 company s Chart of Accounts is also included as shown below. The opening balances for the month of April are as follows: Gamma Services Assets Balance Sheet As at March 31, 2010 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 Owners' Equity 14,000 Total Assets $37,000 Total Liabilities & Owners' Equity $37,000 Transactions for the month of April: Apr 2 Provided services to a customer, who paid cash $5,000 Adjustments 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 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

10 The Chart of Accounts (GL No.) is shown below: ASSETS Account Description Account # Account Description REVENUE Account # Cash 101 Service Revenue 400 Accounts Receivable 105 Interest Revenue 410 Prepaid Insurance 110 EXPENSES Property, Plant & Equipment 120 Advertising Expense 505 Accumulated Depreciation 130 Insurance Expense 510 Maintenance Expense 515 LIABILITIES Professional Fees Expense 520 Accounts Payable 200 Rent Expense 525 Unearned Revenue 205 Salaries Expense 530 Bank Loan 210 Telephone Expense 535 Depreciation Expense 540 OWNER'S EQUITY Interest Expense 545 Capital Account 300 Owner's Drawing 310 Income Summary 315 Required: a) Journalize the transactions. 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. e) Post the closing entries to the General Ledger. f) Prepare the post-closing trial balance.

11 Journal Date Account Title & Explanation PR DR CR 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

12 Date Account Title & Explanation DR CR 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

13 Account: Cash GL No: 101 Opening Balance $22,000 DR Apr 2 J1 $5,000 $27,000 DR Apr 4 J1 $1,200 $25,800 DR Apr 7 J1 $200 $25,600 DR Apr 12 J1 $10,000 $35,600 DR Apr 13 J1 $9,500 $26,100 DR Apr 17 J1 $200 $25,900 DR Apr 20 J1 $4,000 $21,900 DR Apr 28 J1 $700 $21,200 DR Apr 30 J1 $150 $21,050 DR Account: Accounts Receivable GL No: 105 Opening Balance $9,000 DR Apr 10 J1 $4,000 $13,000 DR Account: Prepaid Insurance GL No: 110 Opening Balance $0 DR Apr 4 J1 $1,200 $1,200 DR Apr 30 To adjust prepaid insurance J1 $100 $1,100 DR Account: Property, Plant & Equipment GL No: 120 Opening Balance $8,000 DR Apr 13 J1 $9,500 $17,500 DR

14 Account: Accumulated Depreciation GL No: 130 Opening Balance $2,000 CR Apr 30 To record depreciation J1 $400 $2,400 CR Account: Accounts Payable GL No: 200 Opening Balance $10,500 CR Apr 7 J1 $200 $10,300 CR Account: Unearned Revenue GL No: 205 Opening Balance $4,500 CR Apr 30 To record earned revenue J1 $1,800 $2,700 CR Account: Bank Loan GL No: 210 Opening Balance $8,000 CR Apr 12 J1 $10,000 $18,000 CR Account: Capital Account GL No: 300 Opening Balance $14,000 CR Apr 30 Clear income summary J1 $5,950 $19,950 CR Apr 30 Clear income summary J1 $700 $19,250 CR

15 Account: Owner's Drawing GL No: 310 Apr 28 J1 $700 $700 DR Apr 30 Clear income summary J1 $700 $0 DR Account: Income Summary GL No: 315 Apr 30 Clear the revenue account J1 $10,800 $10,800 CR Apr 30 Clear the expense accounts J1 $4,850 $5,950 CR Apr 30 Clear income summary J1 $5,950 $0 CR Account: Service Revenue GL No: 400 Apr 2 J1 $5,000 $5,000 CR Apr 10 J1 $4,000 $9,000 CR Apr 30 To record earned revenue J1 $1,800 $10,800 CR Apr 30 Clear the revenue account J1 $10,800 $0 CR Account: Advertising Expense GL No: 505 Account: Insurance Expense GL No: 510 Apr 30 To adjust prepaid insurance J1 $100 $100 DR Apr 30 Clear the expense accounts J1 $100 $0 CR Account: Maintenance Expense GL No: 515

16 Account: Professional Fees Expense GL No: 520 Account: Rent Expense GL No: 525 Account: Salaries Expense GL No: 530 Apr 20 J1 $4,000 $4,000 DR Apr 30 Clear the expense accounts J1 $4,000 $0 DR Account: Telephone Expense GL No: 535 Apr 17 J1 $200 $200 DR Apr 30 Clear the expense accounts J1 $200 $0 DR Account: Depreciation Expense GL No: 540 Apr 30 To record depreciation J1 $400 $400 DR Apr 30 Clear the expense accounts J1 $400 $0 DR Account: Interest Expense GL No: 545 Apr 30 J1 $150 $150 DR Apr 30 Clear the expense accounts J1 $150 $0 DR

17 Gamma Services Adjusted Trial Balance April 30, 2010 Account Titles DR CR DR CR DR CR Cash $21,050 $21,050 Accounts Receivable 13,000 $13,000 Prepaid Insurance 1,100 $1,100 Property, Plant & Equipment 17,500 $17,500 Accumulated Depreciation $2,400 $2,400 Accounts Payable 10,300 $10,300 Unearned Revenue 2,700 $2,700 Bank Loan 18,000 $18,000 Capital Account 14,000 $14,000 Owner's Drawing 700 $700 Service Revenue 10,800 $10,800 Advertising Expense 0 $0 Insurance Expense 100 $100 Maintenance Expense 0 $0 Professional Fees Expense 0 $0 Rent Expense 0 $0 Salaries Expense 4,000 $4,000 Telephone Expense 200 $200 Depreciation Expense 400 $400 Interest Expense 150 $150 Totals $58,200 $58,200 $4,850 $10,800 $52,650 $48,100 Net Profit (Loss) $5,950 $5,950 Total $58,200 $58,200 $10,800 $10,800 $52,650 $54,050

18 Gamma Services Income Statement For the Month Ending April 30, 2010 Revenue $10,800 Less Expenses Advertising Expense $0 Insurance Expense 100 Salaries Expense 4,000 Telephone Expense 200 Depreciation Expense 400 Interest Expense 150 Total Expenses 4,850 Net Income $5,950 Gamma Services Statement of Owner's Equity For the Month Ending April 30, 2010 Opening Capital Account $14,000 Add: Net Income $5,950 Less: Owner's Drawings (700) Ending Capital Account $19,250

19 Gamma Services Balance Sheet April 30, 2010 Assets Cash $21,050 Accounts Receivable 13,000 Prepaid Insurance 1,100 Property, Plant & Equipment $17,500 Accumulated Depreciation (2,400) 15,100 Total Assets $50,250 Liabilities Accounts Payable $10,300 Unearned Revenue 2,700 Bank Loan 18,000 Total Liabilities $31,000 Owner's Equity Capital Account 19,250 Liabilities + Owner's Equity $50,250

20 Closing Entries: Date Account Title & Explanation DR CR Apr 30 Service Revenue $10,800 Income Summary $10,800 Clear the revenue account Apr 30 Income Summary $4,850 Insurance Expense $100 Salaries Expense $4,000 Telephone Expense $200 Depreciation Expense $400 Interest Expense $150 Clear the expense accounts Apr 30 Income Summary $5,950 Capital Account $5,950 Clear income summary Apr 30 Capital Account $700 Owner's Drawing $700 To close owner's drawings

21 Gamma Services Post-Closing Trial Balance April 30, 2010 Account DR CR Cash $21,050 Accounts Receivable 13,000 Prepaid Insurance 1,100 Property, Plant & Equipment 17,500 Accumulated Depreciation $2,400 Accounts Payable 10,300 Unearned Revenue 2,700 Bank Loan 18,000 Capital Account 19,250 Total $52,650 $52,650

22 Part VI Worksheet Vius Company unadjusted trial balance is shown below, at the end of December Adjusting entries have not yet been made. DR CR Cash $6,000 Accounts Receivable 3,000 Prepaid Insurance 2,400 Office Supplies 1,000 Property, Plant & Equipment 10,000 Accumulated Depreciation $0 Accounts Payable 5,000 Unearned Revenue 1,400 Bank Loan 3,500 Capital Account 9,250 Owner's Drawings 800 Service Revenue 9,000 Depreciation Expense 0 Insurance Expense 0 Interest Expense 0 Maintenance Expense 700 Supplies Expense 0 Rent Expense 2,100 Salaries Expense 900 Telephone Expense 500 Travel Expense 750 Total $28,150 $28,150 Dec 31 Dec 31 Dec 31 Dec 31 A physical count showed that $400 of supplies are still on hand The property, plant and equipment was purchased at the beginning of the year and is expected to last 4 years and no residual value Of the balance of unearned revenue, $840 has been earned The amount in prepaid insurance is for an annual policy that was paid on October 1, Required: Complete the worksheet by using the trial balance and the information given.

23 Vius Company Worksheet December 31, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Account Titles DR CR DR CR DR CR Cash $6,000 $6,000 Accounts Receivable 3,000 3,000 Prepaid Insurance 2, ,800 Office Supplies 1, Property, Plant & Equipment 10,000 10,000 Accumulated Depreciation $0 2,500 $2,500 Accounts Payable 5,000 5,000 Unearned Revenue 1, Bank Loan 3,500 3,500 Capital Account 9,250 9,250 Owner's Drawings Service Revenue 9, ,840 Depreciation Expense 0 2,500 2,500 Insurance Expense Interest Expense 0 0 Maintenance Expense Supplies Expense Rent Expense 2,100 2,100 Salaries Expense Telephone Expense Travel Expense Total $28,150 $28,150 $4,540 $4,540 $30,650 $30,650

24 Part VII Closing Entries Below is the year-end trial balance for Serava Marketing : Serava Marketing Trial Balance For the period ending December 31, 2012 Account # Account Title DR CR 101 Cash 20, Accounts Receivable 10, Prepaid Insurance 6, Accounts Payable 3, Unearned Revenue 3, Capital Account 30, Owner's Drawing 1, Service Revenue 6, Insurance Expense 2, Rent Expense 1, Depreciation Expense 1,100 Totals 42,500 42,500 Prepare the journal entries to close the appropriate accounts using the income summary. Date Description DR CR Dec 31 Service Revenue $6,000 Income Summary $6,000 To close the revenue accounts Dec 31 Income Summary $4,700 Insurance Expense $2,400 Rent Expense $1,200 Depreciation Expense $1,100 To close the expense accounts Dec 31 Income Summary $1,300 Capital Account $1,300 To close the income summary account Dec 31 Capital Account $1,800 Owner's Drawing $1,800 To close the owner's drawing account

25 Part VIII Financial Statements Shown below is Voxa Marketing financial accounting information for the year ended July 31, Assume no additional owner's inv occurred during the year. Voxa Marketing List of Accounts July 31, 2012 Account Titles Balance Accounts Payable $5,000 Accounts Receivable 4,000 Bank Loan 3,500 Capital Account 2,370 Cash 2,800 Depreciation Expense 400 Insurance Expense 300 Maintenance Expense 200 Owner's Drawings 800 Prepaid Insurance 2,400 Property, Plant & Equipment 6,000 Rent Expense 1,000 Service Revenue 7,600 Telephone Expense 500 Travel Expense 850 Unearned Revenue 780 Required: Using this information, prepare the Income Statement, Statement of Owners' Equity and then the Balance Sheet as at July 31, 2012.

26 Voxa Marketing Income Statement For the Year Ended July 31, 2012 Revenue Service Revenue $7,600 Expenses Insurance Expense 300 Maintenance Expense 200 Rent Expense 1,000 Telephone Expense 500 Travel Expense 850 Depreciation Expense 400 Total Expenses 3,250 Net Income (Loss) $4,350 Voxa Marketing Statement of Owner's Equity For the Year Ended July 31, 2012 Capital Account at August 1, 2011 $2,370 Add Additional Investments $0 Add Net Income (Loss) 4,350 Subtotal 6,720 Subtract Owner's Drawings 800 Capital Account at July 31, 2012 $5,920

27 Voxa Marketing Balance Sheet As at July 31, 2012 Assets Cash $2,800 Accounts Receivable 4,000 Prepaid Insurance 2,400 Property, Plant & Equipment $6,400 Less: Accumulated Depreciation (400) 6,000 Total Assets $15,200 Liabilities Accounts Payable $5,000 Unearned Revenue 780 Bank Loan 3,500 Total Liabilities $9,280 Owner's Equity Capital Account 5,920 Total Liabilities & Owner's Equity $15,200

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