Name: ______
Section: 001
University of Texas at Arlington
Mid-Term 1
Acct 5311- Fall 2010
Chandra Subramaniam
THIS EXAM IS 80 MINUTES LONG.
This exam consists of 3 questions. The first question uses the multiple choice format. Please use your Scantron sheet for this section. Answer the remaining two problems in the space provided in this exam. Please make sure that you have eleven (11) pages including this cover page. Page 10 and 11 are to be used to answer Problem 3.
There are 100 total possible points. Allocate an appropriate amount of time to each question.
The only materials you are permitted to use on this exam are (1) a calculator, (2) a pencil with eraser or pen.
Be sure to note the relevant dates referred to in each question.
Point Allocation
Problem 1 …………………………….52.5
Problem 2 …………………………….24.0
Problem 3 …………………………….24.0
Total Possible points 100.5
GOOD LUCK!
Problem 1 Multiple Choice (2.5 points each x 21=52.5 points)
Identify the letter of the choice that best completes the statement or answers the question.
1. A common set of accounting standards and procedures are called
a. financial accounting standards.
b. generally accepted accounting principles.
c. objectives of financial reporting.
d. statements of financial accounting concepts.
2. Companies that are listed on a stock exchange are required to submit their financial statements to the
a. AICPA.
b. APB
c. FASB.
d. SEC.
3. The purpose of Statements of Financial Accounting Concepts is to
a. establish GAAP.
b. modify or extend the existing FASB Standards Statement.
c. form a conceptual framework for solving existing and emerging problems.
d. determine the need for FASB involvement in an emerging issue.
4. Users of financial reports include all of the following except
a. creditors.
b. government agencies.
c. unions.
d. All of these are users.
5. The underlying theme of the conceptual framework is
a. decision usefulness.
b. understandability.
c. reliability.
d. comparability.
6. The two primary qualities that make accounting information useful for decision making are
a. comparability and consistency.
b. materiality and timeliness.
c. relevance and reliability.
d. reliability and comparability.
7. Accounting information is considered to be relevant when it
a. can be depended on to represent the economic conditions and events that it is intended to represent.
b. is capable of making a difference in a decision.
c. is understandable by reasonably informed users of accounting information.
d. is verifiable and neutral.
8. Information about different entities and about different periods of the same entity can be prepared and presented in a similar manner. Comparability and consistency are related to which of these objectives?
Comparability Consistency
a. Entities Entities
b. Entities Periods
c. Periods Entities
d. Periods Periods
9. Which of the following serves as the justification for the periodic recording of depreciation expense?
a. Association of efforts (expense) with accomplishments (revenue)
b. Systematic and rational allocation of cost over the periods benefited
c. Immediate recognition of an expense
d. Minimization of income tax liability
10. What accounting concept justifies the usage of accruals and deferrals?
a. Going concern assumption
b. Materiality constraint
c. Consistency characteristic
d. Monetary unit assumption
11. Which of the following statements about materiality is not correct?
a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
c. An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.
d. All of these are correct statements about materiality.
12. A prepaid expense can best be described as an amount
a. paid and currently matched with revenues.
b. paid and not currently matched with revenues.
c. not paid and currently matched with revenues.
d. not paid and not currently matched with revenues.
13. Maso Company recorded journal entries for the issuance of common stock for $40,000, the payment of $13,000 on accounts payable, and the payment of salaries expense of $21,000. What net effect do these entries have on owners’ equity?
a. Increase of $40,000.
b. Increase of $27,000.
c. Increase of $19,000.
d. Increase of $6,000.
14. Information in the income statement helps users to
a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.
d. all of these.
15. In order to be classified as an extraordinary item in the income statement, an event or transaction should be
a. unusual in nature, infrequent, and material in amount.
b. unusual in nature and infrequent, but it need not be material.
c. infrequent and material in amount, but it need not be unusual in nature.
d. unusual in nature and material, but it need not be infrequent.
16. Which of the following is a change in accounting principle?
a. A change in the estimated service life of machinery
b. A change from FIFO to LIFO
c. A change from C-corp to S-corp
d. None of the above is.
17. Craig Rusch Corporation reports the following information:
Net income $500,000
Dividends on common stock 140,000
Dividends payable 60,000
Weighted average common shares outstanding 100,000
Rusch should report earnings per share of
a. $3.00.
b. $3.60
c. $4.40.
d. $5.00.
18. The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
19. Which of the following is a contra account?
a. Premium on bonds payable
b. Unearned revenue
c. Patents
d. Accumulated depreciation
20. For Garret Wolfe Company, the following information is available:
Cost of goods sold $ 60,000
Dividend revenue 2,500
Income tax expense 6,000
Operating expenses 23,000
Sales 100,000
In Garret Wolfe’s multiple-step income statement, gross profit
a. should not be reported
b. should be reported at $13,500.
c. should be reported at $40,000.
d. should be reported at $42,500.
21. Panda Corporation paid cash of $18,000 on June 1, 2007 for one year’s rent in advance and recorded the transaction with a debit to Prepaid Rent. The December 31, 2007 adjusting entry is
a. debit Prepaid Rent and credit Rent Expense, $7,500.
b. debit Prepaid Rent and credit Rent Expense, $10,500.
c. debit Rent Expense and credit Prepaid Rent, $10,500.
d. debit Prepaid Rent and credit Cash, $7,500.
Problem 2 (24 points)
Part A and B are independent.
Part A
Andy Roddick is the new owner of Ace Computer Services. At the end of August 2007, his first month of ownership, Roddick is trying to prepare monthly financial statements. Below is some information related to unrecorded expenses that the business incurred during August. Prepare the adjusting journal entries in each case if necessary.
a) At August 31, Roddick owed his employees $1,900 in wages that will be paid on September 5.
b) On August 1, Roddick borrowed $30,000 from a local bank on a 15 year mortgage. The annual interest rate is 8%.
c) On August 1 Roddick took out a 1 year insurance policy for $1,200 and recorded it in the prepaid insurance account.
Part B.
Prepare the appropriate adjusting journal entries you would have prepared on 12/31/2008 for the information provided below.
a. Interest receivable at 1/1/10 was $1,000. During 2008 cash received from debtors for interest on outstanding notes receivable amounted to $5,000. The 2008 income statement showed interest revenue in the amount of $5,400.
b. Unearned rent at 1/1/08 was $5,300 and at 12/31/08 was $8,000. The records indicate cash receipts from rental sources during 2008 amounted to $40,000, all of which was credited to the Unearned Rent Account.
c. Accumulated depreciation—equipment at 1/1/08 was $230,000. At 12/31/08 the balance of the account was $270,000. During 2008, one piece of equipment was sold. The equipment had an original cost of $40,000 and was 3/4 depreciated when sold.
Problem 3 (24 points)
Presented below is information related to Thompson Corp. for the year 2005. Thompson had outstanding shares of 100,000 shares on January 1, 2005 and is subject to a 40% tax rate on operating income and all gains and losses. The board of Thompson formally decided to discontinue operating its Levitt division on May 31, 2005. The numbers below excludes the Levitt division.
Accounts payable………………………………………………. $ 45,000
Accounts receivable …………………………………………. 65,000
Accrued expenses payable ………………………………… 1,000
Accumulated depreciation ……………………………..……. 40,000
Administrative expenses…………………………………….. 48,000
Cash and Cash Equivalents ……………………………… 50,000
Cash paid to suppliers ………………………………….. 345,000
Common Stock ………………………………………. 100,000
Cost of goods sold ………………………………………. 780,000
Current maturity of long-term debt ………………………….. 5,000
Depreciation expense ………………………………………… 20,000
Dividends declared …………………………………………… 15,000
Common share dividends paid………………………………… 10,000
Fair market value of PP&E …………………………….……. 240,000
Gain on sale of automobile …………………………………. 4,000
Gross Sales ………………………………………………………. 1,200,000
Insurance collected due to death of CEO …………………… 50,000
Intangible assets …………………………………………… 50,000
Interest expense …………………………………………… 58,000
Interest revenue …………………………………………… 7,000
Inventory …………………………………………………… 100,000
Investment (Short term) ……………………………………… 100,000
Loss from debt retirement ……………………………………. 15,000
Long-term debt ………………………………………….. 250,000
Prepaid expenses ………………………………………….. 500
Proceeds from the issue of a short-term note payable ………. 150,000
Property, plant Equipment …………………………………. 200,000
Restructuring expenses …………………………………. 55,000
Retained Earnings at the beginning of the year ……… 155,500
Selling expenses …………………………………………… 165,000
Tax expense ……………………………………………………... 30,000
Taxes paid …………………………………………………….. 25,000
Unearned revenue ………………………………….. 2,000
The management of Thompson has entered into negotiations for a cash sale of Levitt for $450,000. The expected date of the sale and final disposal of the segment is July 1, 2006. The Levitt division is valued in Thompson’s books at $385,000. Thompson has a fiscal year ending December 31. The results of operations for the Levitt division for the 2005 fiscal year and the estimated results for 2006 are presented below.
Period Income (Loss)
January 1 – May 31 $ (120,000)
June 1 – December 31 $ (95,000)
January 1, 06 – July 1, 06 $ 25,000
a) Prepare the 2005 Multi-step Income Statement for Thompson Corporation in proper form. (12 points)
b) Without formally preparing the 2005 Balance Sheet for Thompson Corporation,
i) identify and list the assets given above
ii) identify and list the liabilities given above
iii) calculate the 2005 ending retained earnings for Thomson Corp (12 points)
a)
Consolidated Income Statement for Thomson Corporation
For the year ending December 31, 2005.
b) i) List of assets given in Problem 3
ii) List of liabilities given in Problem 3
iii) 2005 Ending retained earnings for Thomson Corporation.
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