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QUESTION 1 Born to Play, Inc., is a popular source of musical instruments for professional and amateur musicians.

The company's accountants make necessary adjusting entries monthly, and they make all closing entries annually. Born to Play is growing rapidly and prides itself on having no long-term liabilities. The company's year-end is 31 December and has provided the following unadjusted trial balance at 31December 2010: $ Cash Accounts receivable Allowance for doubtful accounts Inventory Office supplies Prepaid insurance Building and fixtures Accumulated depreciation Land Accounts payable Unearned customer deposits Income tax payable Share Capital Retained earnings Revaluation reserve (for land) Revenue Cost of goods sold Bank service charges Bad debts expense Salary expense Office supplies expense Insurance expense Utilities expense Depreciation expense Income tax expense Dr $45,000 125,000 250,000 1,200 6,600 1,791,000 800,000 89,800 70,000 8,000 75,000 1,000,000 240,200 6,000 1,600,000 958,000 200 9,000 395,000 400 6,400 3,600 48,000 75,000 3,804,200 Cr

$5,000

3,804,200

Additional information: 1. The company's most recent bank statement reports a balance of $46,975. Included with the bank statement was a $2,500 cheque from Sing Ding Ting, a professional musician, charged back to Born to Play as NSF. The bank's monthly service charge was $25. Three cheques written by Born to Play to suppliers of merchandise inventory had not been cleared by the bank for payment as at the statement date. These cheques included: no. 507, $4,000; no. 511, $9,000; and no. 521, $8,000. Deposits made by Born to Play of $16,500 had reached the bank too late for inclusion in the current statement. The company prepares a bank reconciliation at the end of each month. 2. During December, $6,400 of accounts receivable were written off as uncollectible. A recent aging of the company's accounts receivable helped management to conclude that an allowance for doubtful accounts of $8,500 was needed at 31 December 2010.

-2ACC1002 __________________________________________________________________________ 3. The company uses a perpetual inventory system. A year-end physical count revealed that several guitars reported in the inventory records were missing. The cost of the missing units amounted to $1,350. This amount is not considered significant relative to the total cost of inventory on hand. 4. At 31 December, approximately $900 in office supplies remained on hand. 5. The company pays for its insurance policies 12 months in advance. Its most recent payment was made on 1 November 2010. The cost of this policy was slightly higher than the cost of coverage for the previous 12 months. 6. Depreciation expense related to the company's building and fixtures is $5,000 for the month ending 31 December 2010. 7. Although Born to Play carries an extensive inventory, it is not uncommon for musicians to order custom guitars made to their exact specifications. Manufacturers do not allow any sales returns of custom-made guitars. Thus, all customers must pay in advance for these special orders. The entire sales amount is collected at the time a custom order is placed, and it is credited to an account entitled "Unearned Customer Deposits." As at 31 December, $4,800 of these deposits remained unearned. Assume that the cost of goods sold and the reduction in inventory associated with all custom orders is recorded when the custom merchandise is delivered to customers. Thus, the adjusting entry requires only a decrease to unearned customer deposits and an increase to revenue. 8. Accrued income tax payable for the entire year ending 31 December 2010 total $81,000. No income tax payments are due until early 2011. 9. Land is revalued to $92,300 on 31 December 2010. Required: a) Prepare all necessary journal entries as at 31 December 2010. Ignore closing entries. Dates and descriptions are not required.

b) Prepare the income statement for the year ended 31 December 2010. c) Prepare the classified statement of financial position (balance sheet) as at 31 December 2010.

-3ACC1002 __________________________________________________________________________ QUESTION 2 Note from Dr Winston Kwok: Will be similar to those articles you encountered as Critical Thinking questions in your tutorials. This is on a well-known company which was in the news recently and also mentioned during my lecture.

QUESTION 3 Following are selected balance sheet accounts of Winston Corp. at 31 December 2009 and 2008. Also presented are selected income statement information for the year ended 31 December 2009, and additional information. Selected Balance Sheet Accounts 2009 2008 ______________________________________________________________________ Assets Accounts receivable Property, plant, and equipment Accumulated depreciation Liabilities and Shareholders' Equity Notes payable Dividends payable Share capital-ordinary, no-par value Retained earnings

$ 34,000 277,000 (178,000)

$ 24,000 247,000 (167,000)

49,000 8,000 31,000 104,000

46,000 5,000 22,000 91,000

Selected Income Statement Information for the Year Ended 31 December 2009 ______________________________________________________________________ Sales revenue Depreciation Gain on sale of equipment Income before taxes Net income $ 155,000 33,000 13,000 40,000 28,000

Additional information: a. Accounts receivable relate to sales of merchandise. b. During 2009, equipment costing $40,000 was sold for cash. c. During 2009, $20,000 of notes payable were issued in exchange for property, plant, and equipment. Continued on next page

-4ACC1002 __________________________________________________________________________ Required: Items 1 through 5 represent activities that will be reported in Winston's statement of cash flows for the year ended 31 December 2009. For each item, write down: The $ amount that should be reported in Winston's 2009 statement of cash flows. The category in which the amount should be reported in the statement of cash flows. Write O for Operating activity, I for Investing activity, and F for Financing activity. If you think the item can be classified in more than one category, write down all the possible categories. $ Amount Category ______________________________________________________________________ 1. Cash collections from customers (direct method). _______ ______ ______ ______ ______ ______

2. Payments for purchase of property, plant, and equipment. _______ 3. Proceeds from sale of equipment. 4. Cash dividends paid. 5. Repayment or retirement of notes payable. _______ _______ _______

Note from Dr Winston Kwok: The above does not imply that only the direct method will be examined. Your final exam question may be on the direct or indirect method, or both.