Online Midterm Exam
QUESTION I: Multiple Choice — (15 marks)
Answer the multiple-choice questions in the answer booklet, NOT on this document. Assume all companies have a December 31st yearend and follow IFRS, unless otherwise indicated.
Ava ltd. is a gym and began its operation on January 1, 2017. The following information is provided for years 2017 and 2018:
Collected $500,000 cash in 2017 from members for membership fees. 80% of these membership fees were used in 2017, the reminders were used in 2018
Collected $700,000 cash in 2018 from members for membership fees. 70% of these membership fees were used in 2018, the reminders will be used in 2019
Unearned revenue at the end of 2017 was
$400,000
$100,000
$490,000
$210,000
Revenue recognized in 2017 was
$400,000
$100,000
$490,000
$210,000
Unearned revenue at the end of 2018 was
$100,000
$310,000
$210,000
$490,000
Revenue recognized in 2018 was
$400,000
$700,000
$490,000
$590,000
Monty Ltd. reported net income of $575,000 for the year ended December 31, 2020. During the year, the company also declared and paid dividends of $25,000 on the company’s preferred shares and $125,000 on the company’s common shares. At the beginning of the year, Monty Ltd. had 125,000 common shares outstanding. On April 1st the company issued 50,000 new common shares. The weighted average number of common shares outstanding equals
162,500
150,000
137,500
175,000
The basic earnings per share (EPS) of Monty Ltd. (see #8 above) is closest to
$3.38
$4.40
$3.29
$3.14
Failure to make an adjustment at the end of the financial year to record depreciation expense would cause which of the following:
An understatement of assets, net income, and stockholders ‘equity
An overstatement of assets, net income, and stockholders’ equity
An overstatement of assets and an understatement of net income
No effect on assets, liabilities, net income and stockholders’ equity
Which of the following accounts is closed at the end of a fiscal period?
Supplies expense
Prepaid Insurance
Supplies
Accumulated Depreciation
Using accrual basis accounting, revenues are recorded and reported only
When they are earned, whether or not cash is received
When they are earned and received at the same time
If they are received before they are earned
If they are received after they are earned
What is the normal balance of sales returns and allowances, accumulated depreciation, and unearned revenue respectively?
Debit, debit, debit
Debit, credit, credit
Credit, debit, debit
Credit, credit, credit
QUESTION II: Journal Entries, Adjusting Entries and Financial Statements — (35 marks)
ACE Incorporated is a retailer that has been operating for a number of years. Its fiscal year ends every October 31.
Transactions that occurred during October 2018 follow along with additional information necessary for the preparation of the ACE’s financial statements at year-end. The transactions are not listed in order.
Wages owing but not paid by October 31 amounted to $19,200.
The rental revenue is the amount received for 11 months. The October rent has not yet been received.
On October 4, ACE purchased, on account, $50,000 worth of inventory from supplier Alpha Inc.
On October 8 ACE sold Gamat Corp. $270,000 of goods on account with terms of 2/10, n/30. Cost of goods sold equals $67,500.
Insurance expired during the year was $10,600.
On October 12, ACE received a full payment from Gamat Corp. for the sale transaction on October 8 (from transaction (d) above).
On October 13, ACE paid Alpha Inc. the amount due for the purchase on October 4, 2018 (from transaction (c) above).
ACE’s accountant included in the sales revenue account $19,800 that were paid in advance by a customer for products to be delivered in February 2019.
ACE’s October 2018 electricity bill was $10,000 and it has not been recorded.
Record the interest relative to the note signed on January 2, 2017.
The unadjusted trial balance for ACE Incorporated is presented below for the fiscal year-end October 31, 2018.
ACE INCORPORATED
Unadjusted Trial Balance
October 31, 2018
Account name Debit Credit
$ $
Cash 295,000
Accounts Receivable 16,000
Prepaid insurance 24,000
Inventory 240,000
Land 1,200,000
Equipment 600,000
Accumulated depreciation equipment 258,000
Buildings 1,800,000
Accumulated depreciation buildings 372,000
Note payable (see note 1 below) 1,000,000
Contributed capital (100,000 shares issued and outstanding) 1,460,000
Retained earnings 304,000
Sales revenue 1,366,000
Rental revenue 88,000
Cost of sales 336,000
Wages expense 180,000
Interest expense 7,000
Utilities expense 112,000
Depreciation expense – equipment 18,000
Depreciation expense – building 20,000
Totals $4,848,000 $4,848,000
Note 1: ACE signed this note on January 2, 2017, which is payable on December 31, 2021. ACE pays 4.2 percent interest on this note each December 31.
Required:
Prepare all the necessary journal entries to record the transactions that occurred as described above. If an event does not require a journal entry, explain the reason. skip a line between journal entries and omit narratives. (15 marks)
Prepare a multiple step statement of income for the year ended October 31, 2018. (20 marks)
QUESTION III: Financial Statements and closing entries — (35 marks)
The following adjusted trial balance data is for Bobbles Tomorrow Ltd. (BT) as at December 31, 2020.
Bobbles Tomorrow Ltd. (BT)
Adjusted Trial Balance
At December 31, 2019
Account name Debit Credit
Accounts receivable $7,700
Administrative expenses 7,500
Cash 3,000
Cost of goods sold 43,000
Dividends declared 3,500
Equipment 28,000
Income tax expense 2,170
Interest expense 2,500
Inventory 29,000
Prepaid expenses 300
Selling expenses 9,530
Short-term investments 6,500
Accounts payable $6,500
Accumulated depreciation, equipment 6,500
Common shares (15,000 common shares) 15,000
Dividends payable 700
Income tax payable 1,300
Notes payable (current portion) 8,500
Notes payable (non-current portion) 25,000
Retained earnings 11,400
Sales revenue 66,000
Unearned revenue 1,800
Totals $142,700 $142,700
Required:
a. Prepare a multiple step statement of income for 2020, and a classified statement of financial position.
b. Prepare the necessary closing entries at the end of the period.
QUESTION IV: Template approach — (15 marks)
Bellamy Inc. began operations in April of the current year with the following transactions occurring during the month:
Apr 1 Sold 15,000 common shares for $13 per share.
2 Paid $6,300 for three months’ rent in advance.
5 Purchased $25,000 of equipment paying 25% down and agreeing to pay the balance in two years.
6 Purchased inventories for $19,000 on credit.
10 Sold on account $16,000 of inventory for $23,000.
15 Paid wages of $1,200.
20 Collected $8,000 from customers on account.
25 Paid suppliers $3,000 on account.
31 Paid wages of $1,100.
31 Recognized one month’s rent expense.
31 Recognized one month’s equipment depreciation expense. The estimated salvage value is $4,000 and the estimated useful life is 5 years.
Required:
Show the effect of each of the following transactions on the basic accounting equation, by preparing a template like the one below, include totals.