University of Ottawa ADM 1340 Mid Term Exam Winter 2014 with perfect Answers & Solution

ADM 1340MID TERM EXAM Introductory Financial AccountingWinter 2014Question No. 1 (33 marks)Select the best answer for each of the following multiple-choice items and enter your answer on the Scantron Sheet provided. Failure to use the Scranton Sheet will result in zero marks for Question No. 1. Only one answer will be accepted for each question. There is no penalty for guessing. No account will be taken of any explanations provided.Items 1 to 11 are each worth one mark.1. In order for accounting information to be relevant, it musta. have very little cost.b. help predict future events or confirm prior expectations.c. be verifiable.d. be used by a lot of different organizations.2. Working capital is a measure of a. comparability.b. liquidity.c. profitability. d. solvency.3. A liquidity ratio measures thea. profit or operating success of a company over a period of time. b. ability of a company to survive over a long period of time.c. short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.d. percentage of total financing provided by creditors.4. A weakness of the current ratio is a. the difficulty of the calculation.b. that it doesn’t take into account the composition of the current assets.c. that it is rarely used by sophisticated analysts.d. that it can be expressed as a percentage, as a rate, or as a proportion.5. Which one of the following is a fundamental qualitative characteristic?a. Relevanceb. Timelinessc. Understandability d. Comparability6. Accounting information should be neutral in order to enhance a. faithful representationb. materiality.c. comparability.d. understandability.7. On a classified statement of financial position, current assets are often listed a. in alphabetical order.b. with the largest dollar amounts first.c. in the order in which they are expected to be converted into cash.d. in the order of acquisition.8. Long-lived assets without physical substance area. listed directly under current assets on the statement of financial position.b. not listed on the statement of financial position because they do not have physical substance. c. intangible assets.d. listed as a long-term investment on the statement of financial position.9. The classification and normal balance of the unearned revenue account is a. asset, debitb. liability, credit.c. revenues, credit.d. shareholders’ equity, credit. 10. In general, revenue recognition occurs a. when cash is receivedb. when it is earned.c. when expenses are incurred.d. in the period that income taxes are paid.11. Recording transactions that affect a company’s financial statements in the periods in whichthey occur rather than when cash is received or paid is called a. time period accountingb. the cash basis of accounting. c. monetary accounting.d. the accrual basis of accounting.Items 12 to 22 are each worth two marks.12. What is the total amount of working capital?Current assets $ 9,000 Net sales $ 20,000Current liabilities 4,000 Total liabilities 5,000Average assets 40,000 Shareholders’ equity 25,000Total assets 30,000 Market price of shares $2Profit 9,000 Weighted average number of common shares 18,000a. $2,000 b. $4,000 c. $5,000 d. $7,00013. What are the earning per share?Current assets $ 9,000 Net sales $ 20,000Current liabilities 4,000 Total liabilities 5,000Average assets 40,000 Shareholders’ equity 25,000Total assets 30,000 Market price of shares $2Profit 9,000 Weighted average number of common shares 18,000a. $0.36 b. $0.50 c. $0.80 d. $1.1114. What is the debt to total assets?Current assets $ 9,000 Net sales $ 20,000Current liabilities 4,000 Total liabilities 5,000Average assets 40,000 Shareholders’ equity 25,000Total assets 30,000 Market price of shares $2Profit 9,000 Weighted average number of common shares 18,000a. 12.5% b. 20.0% c. 75.0% d. 16.7% 15. The current assets of Key Corporation are $360,000. The current liabilities are $240,000. The current ratio expressed as a ratio isa. 150% b. 1.5:1 c. 0.7:1d. $360,000 ÷ $240,00016.Operating expenses $ 45,000Sales returns and allowances 25,000Sales discounts 16,000Sales 210,000Cost of goods sold 79,000Income tax expense 11,000The profit margin would be a. 16.2%.b. 20.1%. c. 26.6%. d. 41.0%.17. If a company has net sales of $500,000 and cost of goods sold of $350,000, the gross profit margin isa. 15%. b. 30%. c. 70%. d. 100%.18. Aye Corp sells $10,000 of goods on account in the current year and collects $7,500 of this. It incurs $6,000 in expenses on account during the current year and pays $4,000 of them. Aye would report what amount of profit under the cash and accrual bases of accounting, respectively? a. $4,000 on the cash basis and $3,500 on the accrual basisb. $3,500 on the cash basis and $4,000 on the accrual basisc. $6,000 on the cash basis and $3,500 on the accrual basis d. $1,500 on the cash basis and $6,000 on the accrual basis19. Benz Inc. shows the following account balances for last month:Purchases $28,000Sales Returns and Allowances 4,000Purchase Discounts 2,500Freight In 1,875Freight Out 2,500The cost of goods purchased for last month isa. $25,875 b. $27,375 c. $29,875 d. $30,500 20. Stylish Shoe Store reported beginning merchandise inventory of $15,000. During the period, purchases were $70,000; purchase returns, $2,000; and freight in $5,000. A physical count of inventory at the end of the period revealed that $10,000 was still on hand. The cost of goods available for sale wasa. $78,000 b. $82,000 c. $88,000 d. $92,00021. For last month, the following data were taken from the ledger of Shanghai Inc:Purchases $ 100,000Purchase Returns and Allowances 1,200Purchase Discounts 600Freight In 3,000Beginning Inventory 18,000Ending Inventory 19,200What was the cost of goods sold?a. $ 19,200 b. $100,000 c. $101,200 d. $119,20022. Westcom Corporation’s goods in transit at December 31 include (1) sales made FOB destination, (2) sales made FOB shipping point, (3) purchases made FOB destination, and (4) purchases made FOB shipping point. Which items should be included in Westcom’s inventory at December 31?a. (2) and (3) b. (1) and (4) c. (1) and (3) d. (2) and (4)**** END OF MULTIPLE CHOICE **** Question No. 2 (8 marks)FINEP Manufacturing produces and sells cars. The company adjusts its accounts annually. OnDecember 31, 2013 the FINEP’s unadjusted trial balance was as follows.FINEP manufacturing Unadjusted Trial Balance December 31, 2013CashAccounts receivableSuppliesPrepaid insuranceEquipmentAccumulated depreciation—equipmentAccounts payable Salaries payable Unearned revenueBank Loan (due May 2018) Common sharesRetained earningsRevenues Salary expense Rent Expense Interest expenseAdvertising expenseDebits20,00015,0006,0006,00030,00032,00010,0009,00012,000 140,000Credits15,0003,0002,0005,00020,00012,00040,00043,000140,000Additional information:1) The insurance, which has a one-year term, was signed and effective on August 1, 2013.The company paid $6,000 for the insurance.2) The company performs a count on December 31, 2013 and it reveals that the company has $200 worth of supplies on hand.3) The bank loan signed on December 1, 2013 has an interest rate of 9% per year. That interest is payable at the beginning of each month.4) The company uses straight line depreciation to depreciate its assets and the equipment has a useful life of 6 years and a residual value of zero.Required:Prepare the adjustment entries required at December 31, 2013 (show your calculations):Question No. 3 (8 marks)On September 1, Wilderness Inc had an inventory of 18 backpacks at a cost of $30 each. The company uses a perpetual inventory system. During September, the following transactions occurred.Sept. 4 Purchased 35 backpacks at $30 each from Back Packs Unlimited, terms 3/10, n/30.6 Received credit of $150 for the return of 5 backpacks purchased on Sept. 4 that were defective.9 Sold 20 backpacks for $50 each to University Supply, terms 2/10, n/30.14 Paid Back Packs Unlimited in full.18 Received payment from University Supply.InstructionsRecord the September transactions for Wilderness Inc.Question No. 4 (9 marks)Safety Helmets has the following inventory records for February 2014Date Description Units CostFeb 1 Beginning inventory 100 $85 Purchase 60 922 Purchase 150 924 Sales (300) 28 Purchase 90 10• The 300 units sold on February 24 generated sales revenue of $6,770• The company is considering the following three combinations to use for its inventory costing:1. FIFO –perpetual2. Average- perpetual3. Average- periodicRequired:a) Which one of the three combinations will enable the company to report the highest grossprofit for the month? Provide a brief logical explanation for your answer using no numerical calculations (1 point).b) Calculate the gross profit based on your answer in part (a) above (3 points).c) Which one of the three combinations will enable the company to report the lowest gross profit for the month? Calculate the amount of this gross profit (3 points).d) Will the amount of gross profit reported under the FIFO-Periodic combination (not listed in the three combinations being considered) equal the amount of the gross profit in part (b) above? Answer Yes or No with a brief logical explanation for your answer, using no numerical calculations (2 points).Question No. 5 (8 marks)Prince Inc. generated $2.5 million in credit sales during the current year. Based on past experience, it is estimated that 1.5% of all credit sales will prove to be uncollectible. The balance of the allowance for doubtful accounts at December 31 is $6,900 credit before the year end adjustment for uncollectible accounts. Accounts receivable at December 31 consists of the following:Account Classification Amount Current ………………………………………. $1,900,0001-30 days past due ………………………… 150,00031-60 days past due ………………………. 90,00061-90 days past due ………………………. 50,000Over 90 days past due …………………… 20,000Required:a. Calculate bad debts expense and record the related journal entry for the current year using the percentage of credit sales method. (2 points)b. Prince has decided to write off all the accounts that were over 90 days past due.Record the journal entry. (2 points)c. Show how Accounts Receivable will be presented on the December 31 balance sheet, with appropriate account balances, following the above adjustments. (2 points)d. One of the customers whose $3,000 account was written off paid in full. Record the journal entry. (2 points)

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