CONCORDIA UNIVERSITY

John Molson School of Business

Department of Accountancy (DRAFT No. 4)

It is important that you read this page before you begin

Course: Introduction to Financial Accounting

No.: ACCO 230.4

Sections: All

Examination: Midterm (3 hours)

Date: February 21, 2015 (10 AM to 1 PM)

Total Pages: Ten (10), including this page. Ensure your copy is complete.

Materials Allowed: Non-programmable / non-graphical calculators, and one ordinary

dictionary, i.e., not electronic. Pens, pencils, rulers and erasers.

INSTRUCTIONS
- Use the computer input sheet for the multiple-choice questions. Answer all other questions in
the exam copybook (booklet) only. You may answer the problems in any order you choose.

- Unless otherwise stated assume that all companies use the accrual basis of accounting and
have a December 31st year-end date. The use of abbreviations for account names is not
recommended, and may result in a nominal one-mark penalty per Question.

- Show details of all calculations, except for multiple-choice.

- Return the exam questionnaire, computer input sheet and copybook(s) at the end of the exam.

- The professor will not answer questions, unless you think there is an error in the exam. The
professor cannot interpret the questions for you. That would not be fair to others.

Student Name: _______________________________________

Student ID: ________________________

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 -1-

QUESTION 1 (21 marks; 38 minutes) Multiple Choice

For each of the following, choose the letter that corresponds to the best answer, and show your
answer on the computer input sheet only.

1. It was discovered that the bookkeeper for G Ltd. had recorded a $260 cash deposit from a
customer for service work to be performed in the future as follows: Dr. Service revenue
$620; Cr. Cash $620. As a result of this entry

A. Cash is understated by $880 and Unearned revenue is understated by $260.

B. Cash is understated by $520 and Unearned revenue is overstated by $520.
C. Cash is understated by $620 and Service revenue is understated by $880.
D. None of the above is true.

2. Consider the following elements of an income statement: sales revenue, $400,000; cost of
goods sold, $240,000; operating expenses, $60,000; other revenue, $10,000; and income tax
expense, $8,000. The gross profit percentage would then equal:

A. 60% B. 63.8% C. 40% D. 25.5%

3. At the end of 2014, the following data were taken from the accounts of N Inc:

Retained earnings, December 31, 2013 $100,000

Total revenue earned during 2014 $190,000
Total expenses incurred during 2014 $180,000
///////////////////////////////////////////////////////////////////////////////

N uses the income summary account during the closing process. The 2014 closing entries
would therefore include a
A. debit to retained earnings for $180,000.
B. credit to retained earnings for $190,000.
C. credit to retained earnings for $10,000.
D. credit to retained earnings for $100,000.

4. Indicate the respective effects of the declaration of a cash dividend (paid immediately)
on the following balance sheet sections:
Total Assets Total Liabilities Total Shareholders' Equity
A. No change Decrease Decrease
B. No change No change Decrease
C. Decrease No change Decrease

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 -2-

 D. Decrease Decrease Decrease

Use the following information to answer the next two multiple-choice questions.

Turnip Company reported $280,000 of current liabilities, $200,000 of current assets and
shareholders' equity of $1,000,000 before borrowing $60,000 on a six-month note.

5. What effect did the borrowing transaction have on Turnip 's debt-to-assets ratio?
A. No effect.
B. The ratio improved.
C. The ratio worsened.
D. Cannot be determined.

6. What effect did the borrowing transaction have on Turnip 's current ratio?
A. The ratio remained unchanged.
B. The ratio increased.
C. The ratio decreased.
D. Cannot be determined.

7. You are preparing the bank reconciliation for Company C. If a Company C cheque to a
supplier is correctly written and paid by the bank for $521, but is incorrectly recorded on
Company C's books for $251, the appropriate treatment on the bank reconciliation would be to
A. add $270 to the balance per bank.
B. add $270 to the balance per books.
C. deduct $270 from the balance per books.
D. deduct $270 from the balance per bank.

8. You are preparing the bank reconciliation for Company A. A cheque issued by Company A
for $157 to a supplier is incorrectly recorded as $175 by Company A. On Company A's bank
reconciliation, the $18 error should be
A. added to the balance per books.
B. deducted from the balance per books.
C. added to the balance per bank.
D. deducted from the balance per bank.

9. On a bank reconciliation "deposits-in-transit" are

A. Added to the balance per company's books.
B. Added to the balance per bank.
C. Deducted from the balance per bank.
D. Deducted from the balance per company's books.

10. You are preparing the bank reconciliation for D Ltd. Which of the following bank
reconciliation items would not require an adjusting entry on D's books?
A. Bank service charges.
B. Outstanding cheques.

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 -3-

 C. A customer’s NSF cheque.
D. Electronic payment on account by a customer.

11. You are preparing the bank reconciliation for V Ltd. Notification by the bank that a
customer's cheque was returned NSF requires that V Ltd. make the following adjusting entry:
A. Accounts Receivable
Cash
B. Cash
Accounts Receivable
C. Bank Charges Expense
Accounts Receivable
D. No adjusting entry is necessary.

12. The going concern assumption assumes that the business:

A. will be liquidated in the near future.
B. will be purchased by another business.
C. is in a growth industry.
D. will remain in operation for the foreseeable future.

13. Ending inventory on December 31, 2014 is overstated. As a result of this error
A. Cost of sales in 2014 is understated.
B. Operating expenses in 2014 are overstated.
C. Income tax expense for 2014 is understated.
D. More than one of the above statements is true.

14. Which of the following is a constraint in accounting?

A. Comparability
B. Cost of preparing information
C. Faithful representation
D. Timeliness

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 -4-

QUESTION 2 (16 marks; 29 minutes) Transaction analysis and adjusting journal entries

X Inc. reported the following balances for 2014. All amounts are incorrect because of the failure
to make certain adjusting journal entries. X's fiscal year end date is December 31.

Pre-tax Income Total Assets Total Liabilities Shareholders’ Equity

Reported incorrect balances $260,000 $470,000 $290,000 $180,000

Here is the information for the five (5) adjusting entries that were not made:
(1) X purchased equipment for $50,000 on July 1, 2014. The estimated useful life of the
equipment is ten (10) years. The acquisition was recorded properly, but no depreciation was
recorded. The company uses the straight-line method of depreciation.
(2) Service revenue amounting to $9,000 was earned on the last two days of December 2014
but was neither billed nor recorded. This is not related to item (4) below.
(3) On October 31, 2014 X paid $30,000 in advance for rent for the months of November 2014,
December 2014 and January 2015. The entire amount was debited to Prepaid Rent when it
was paid, and Cash was credited. No adjusting entry has been made.
(4) X collected $29,000 of cash deposits from customers during 2014. The entire amount was
credited to Unearned service revenue, and Cash was debited. At December 31, 2014 thirty-
percent (30%) of the work related to these deposits had actually been completed, but no
adjusting entry was made.

(5) On December 31. 2014 X's board of directors declared a cash dividend of $20,000 payable
in January. The dividend was not recorded.

Required

1. Prepare in proper form the adjusting journal entries for items (1) to (5) above. Show your
calculations. Omit narratives. (12 marks)

2. Assume that the income tax rate is 30% and that no entry has yet been made for income taxes.
Prepare the journal entry to record the accrual for income taxes. Hint: calculate the correct
amount for pre-tax income first. (4 marks)

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 -5-

QUESTION 3 (10 marks; 18 minutes) Preparation of routine journal entries
Y Ltd. owns and operates an indoor skating rink. The following information relates to selected
transactions that occurred in 2014.

a) The company purchased additional equipment during 2014 for $200,000. The company paid
$90,000 in cash and signed a two-year note payable for the balance.
b) Management consulting expenses for the year were $25,000, with $22,000 paid in cash and
the rest on account.
c) The company sold snacks to customers for $300,000 in cash. The cost of the food sold was
$220,000. The company uses a perpetual inventory system. Hint: four accounts are affected.
d) Guests may stay at accommodations owned by the company near the rink. In 2014 the
accommodations revenue was $550,000; $450,000 was paid by the guests in cash and the rest
was on account.
e) Issued additional common shares in exchange for cash of $500,000 and land valued at
$1,000,000.
f) Paid dividends of $40,000 that had been declared and recorded properly at the end of 2013.
g) Paid $56,000 for income taxes that had been accrued at the end of 2013.

Required

Prepare in proper form the journal entries to record the events described above. Omit narratives,
but show calculations where applicable.

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 -6-

QUESTION 4 (20 marks; 36 minutes) Preparation of financial statements

EPT Ltd. has operated for many years. You have been given the following accounts and balances
as at December 31, 2014. All balances are "normal", as the term is commonly defined. The
accounts are not arranged in any particular order or sequence. Only closing entries remain to be
done; all other entries, including adjusting entries, have already been made.

Balance:
Cost of goods sold $ 620,000
Cash 120,000
Property, plant and equipment, at cost 1,149,100
Retained earnings 186,800
Insurance expense 6,800
Rent expense 8,000
Note receivable, due 2017 60,600
Sales revenue 1,897,500
Share capital (20,000 shares) 87,000
Advertising expense 36,000
Accumulated depreciation 173,000
Depreciation expense 40,000
Trade payables 150,000
Prepaid insurance (expires in 2015) 10,000
Merchandise inventory 149,400
Trade receivables 168,600
Deferred/unearned revenue 16,000
Interest income 3,500
Interest receivable 4,900
Salaries expense 200,000
Note payable, due 2015 84,000
Income tax expense 200,000
Income tax payable 180,000
Interest expense 5,000
Dividend income 600

Required

1. Prepare a multi-step income statement in proper form. How much was "EPS" for 2014? Briefly
explain what this means. (12 marks)

2. Prepare in proper form the Assets section only of the classified statement of financial position
(balance sheet) as at December 31, 2014. Do not prepare a complete statement of financial
position. (8 marks)
ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 -7-
QUESTION 5 (15 marks; 27 minutes) Financial ratios and selected computations

Selected condensed (summary) financial statements of A Inc. and B Inc., two major Canadian
companies operating in the same industry, are presented below.

Summary Statement of Financial Position -- "Balance Sheet" -- (in millions of dollars)

A B
Fiscal 2014 Fiscal 2014
Assets
Current Assets
Cash and Cash Equivalents 779 25
Trade Receivables, net 1,896 973
Inventory 441 283
Other Current Assets 438 109
Total Current Assets 3,554 1,390
Total Non-Current Assets 35,973 18,209
Total Assets 39,527 19,599
Liabilities
Current Liabilities 5,953 3,949
Long Term Debt 10,649 5,313
Other Long-term Liabilities 5,608 2,158
Total Liabilities 22,210 11,420
Shareholders' Equity
Share Capital 15,520 5,428
Retained Earnings 1,797 2,751
Total Shareholders’ Equity 17,317 8,179
Total Liabilities and
39,527 19,599
Shareholders’ Equity

Summary Income Statement

(in millions of dollars) A B
Fiscal 2014 Fiscal 2014

Sales Revenue 19,685 10,779

Cost of Sales (4,981) (6,062)

Operating Expenses - various (9,384) (1,841)
Interest Expense (2,174) (1,510)
Income Tax Expense (554) (328)

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 -8-

Profit 2,592 1,038

Please make the following simplifying assumptions:

1) All sales and purchases are made on credit.

2) Trade receivables were $50 million higher for each company at the beginning of 2014
compared to the end of 2014.

3) Company A reported that 300 million common shares were outstanding throughout
2014. A's market price per common share was $86 at the end of 2014.

4) Company B reported that 60 million common shares were outstanding throughout

2014. B's market price per common share was also $86 at the end of 2014.

Required

a. Calculate the following three profitability ratios for each company for 2014, using the
formulae in our textbook: (1) Gross profit margin (2) Profit margin (3) Price-earnings.

Based on your calculations above and any other relevant information provided, which company is
a better investment? Explain briefly. (12 marks)

b. Calculate the amount of cash collected from customers by Company A in 2014.

Hint: use T-accounts. (3 marks)

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 -9-

QUESTION 6 (18 marks; 32 minutes) Accounting for merchandise inventory

PART A (10 marks; 18 minutes)

Q Ltd. shows the following information for one of its products:

Units Unit Cost

Beginning inventory, January 1, 2015 420 $30

Transactions during January:

Purchase, January 7 500 $32
Sale @ $40, January 13 (700)
Purchase, January 19 500 $36
Sale @$38, January 31 (100)

Required

1. If the periodic / FIFO system is used, how much is the cost of goods sold for the month of
January?

2. If the periodic / Weighted Average system is used, how much is the cost of ending inventory
on January 31?

3. If the perpetual / Moving Average system is used, how much is the debit to Cost of goods sold
on January 13? A journal entry is not required.

PART B (8 marks; 14 minutes)

June 4 Buyer Corporation purchased $5,000 worth of merchandise, terms 2/10, n/30 from
Vendor Corporation on credit. The cost of the merchandise to Vendor was $3,600.
10 Buyer returned $800 worth of goods to Vendor for full credit. The goods had a cost
of $575 to Vendor and were placed back into inventory.
12 Buyer paid the amount owing.

Required

Prepare in proper form the journal entries for Buyer Corporation to record the events described
above. Buyer Corporation uses a periodic inventory system. Omit narratives, but show
calculations.

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 - 10 -

 THE END

ACCO 230.4 -- Midterm Exam, Feb. 21, 2015 - 11 -