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Student ID:_____________
University of Guelph
College of Management & Economics
ACCT *2220 Introductory Financial Accounting
Term Test #1
February 5th, 2014
Version 1
Time:
Marks:
110 minutes
51
Instructions:
1. Record your name and student number on this exam
2. Write the all answers on this exam paper
3. Calculators are the only aid allowed.
4. The exam is 110 minutes in length. Budget your time wisely.
5. You are reminded that cheating is a serious offence, which can result
in expulsion from the university.
4.
Which
of
the
following
statements
is
true
with
respect
to
materiality:
a. It
helps
users
make
predictions
about
future
events
b. It
results
when
users
can
identify
and
understand
similarities
and
differences
amount
items
c. Applies
when
the
omission
or
misstatement
influences
the
decision
making
of
users
d. Ensures
that
the
value
of
the
information
provided
in
financial
reporting
is
greater
an
the
cost
of
providing
it
5. Expenses:
a. Are
normally
considered
assets
b. Are
normally
considered
liabilities
c. Are
initially
recorded
as
debits
d. Are
initially
recorded
as
credits
Question
1
(20
Marks)
Pinkman
Corporation
began
operations
on
January
2nd,
2013
and
adjusts
its
accounts
annually.
The
following
is
a
list
of
selected
transactions:
Required:
a)
For
each
of
the
above
situations
prepare
the
journal
entry
for
the
original
transaction
and
any
adjusting
entry
that
might
be
required
on
December
31st,
2013.
Write
your
answer
in
the
space
provided
below
each
transaction
and
omit
explanations
1. Supplies
were
purchased
on
January
15th
for
$5000
on
account.
The
supplies
on
had
at
the
end
of
the
year
amounted
to
$1000.
January
15
Supplies
$5000
Accounts
Payable
$5000
December
31st
Supplies
Expense
$4000
Supplies
$4000
2. Pinkman
purchased
a
truck
on
January
2nd,
2013
for
$40,000.
The
truck
was
estimated
to
have
a
useful
life
of
four
years.
January
2nd
Truck
(Equipment)
$40,000
Cash
$40,000
December
31st
Deprecation
Expense
-
$10,000
Accumulated
Depreciation
$10,000
3. Pinkman
paid
for
12
months
of
rent
on
January
2nd,
2013.
The
total
amount
of
the
rent
was
$18,000.
January
1st
Prepaid
Rent
$18,000
Cash
$18,000
December
31st
Rent
Expense
$18,000
Prepare
Rent
$18,000
November
10th
December
31st,
Cash
$4500
Unearned
Revenue
$4500
$32,900
10,900
30,200
1,850
Common
Shares
Cost
of
Goods
Sold
Dividends
Intangibles
Goodwill
46,300
244,200
400
12,450
3,950
12,500
37,050
Required:
a)
Prepare
trial
balance
(in
good
form).
Account
Debit
Cash
1,850
Inventory
39,500
Prepaid
Insurance
7,600
Other
Current
Assets
67,750
Land
26,250
Equipment
10,900
Building
30,200
Intangibles
12,450
Goodwill
3,950
Accounts
Payable
Mortgage
payable
Other
Short
Term
Liabilities
Mortgage
payable
(long
term)
Note
payable
Common
Shares
Retained
Earnings
Dividends
400
Sales
244,200
Cost
of
Goods
Sold
Interest
Expense
2,150
Operating
Expenses
74,250
Tax
Expenses
12,500
Total
533,950
Interest
Expense
Land
Mortgage
Payable
Mortgage
Payable
(Due
in
One
Year)
Merchandise
Inventory
Notes
Payable
(Due
2015)
Operating
Expenses
Other
Current
Assets
Other
Short
Term
Liabilities
Prepaid
Expenses
Sales
Credit
32,900
6,300
12,200
10,050
19,150
46,300
37,050
370,000
533,950
$2,150
26,250
10,050
6,300
39,500
19,150
74,250
67,750
12,200
7,600
370,000
b) Calculate working capital (Note: show your work for any calculations made)
Current
Assets-Current
Liabilities
116,700
51,400
=
$65,300
c) Calculate
the
current
ratio
(Note:
show
your
work
for
any
calculations
made)
Current
Assets/Current
Liabilities
116,700/51,400
=
2.27
d) Calculate
debt
to
total
asset
ratio
(Note:
show
your
work
for
any
calculations
made)
Total
Debt/Total
Assets
80,600/200,450
=
40%
Question
3
(4
Marks)
The
following
is
a
summary
of
ratios
for
three
companies.
Assume
you
are
a
banker,
which
company
are
you
most
likely
to
lend
the
money
too?
Support
your
answer
by
specifically
discussing
liquidity,
solvency
and
profitability.
Company
A
Company
B
Company
C
Working
Capital
181
180
190
Current
Ratio
0.9:1
1.1:1
0.9:1
Debt
to
total
Assets
30%
45%
34%
Earnings
Per
Share
$1.51
$0.80
$1.50
Company
A
Good
Liquidity
(Strong
Current
ratio
or
strong
working
capital)
- The
Best
Solvency
(
Lowest
Debt
to
total
Asset
ratio)
-
The
Best
profitability
(Highest
Earnings
Per
share
)