STUDENT NAME ______________________________________________

NORTHERN ALBERTA INSTITUTE OF TECHNOLOGY

EDMONTON ALBERTA

BTECH PROGRAM

FINANCIAL ACCOUNTING

BTE 343
MIDTERM#1

Date: February 2010

Value: 30%

Time Allowed: Three Hours

Instructor: Hayes

Possible
Earned
Question Description Marks Marks

1 Adjusting Entries 15 ______

2 Statements 20 ______
3 Closing Entries 10 ______
4 Journal Entries 10 ______
5 Multiple Choice 24 ______
6 Revenue Recognition Principles 21 ______

Total 100 ______

QUESTION 1 – ADJUSTING ENTRIES (15 Marks)

The unadjusted trial balance for Mark’s Magic Shows at December 31, 2009 is as
follows:

Mark’s Magic Shows

Unadjusted Trial Balance
December 31, 2009

Cash…………………….……………… $ 3,260
Accounts receivable …………………. 4,700
Supplies ……………………………….. 7,000
Prepaid insurance ………… …………… 1,440
Equipment …………………………….. 27,900
Accumulated amortization – Equipment $ 0
Accounts payable …………………….. 4,280
Wages payable ………………………… -
Unearned service revenue …………… 5,810
Mark Major, Capital ………………….. 11,975
Mark Major, Withdrawals ………………. 34,800
Service revenue ……………………….. 87,135
Wages expense ………………………… 28,800
Amortization expense-Equipment……. -
Supplies expense ……………………… -
Insurance expense …………………… -
Utilities expense ……………………….. 1,300 ________

TOTAL ………………………………….. $109,200 $109,200

Required:

Prepare the December 31, 2009 annual adjusting entries for each of the following
transactions. Use only the account names provided in the unadjusted trial balance.

Narratives or explanations are not required. Show all calculations.

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Question 1 Cont’d

a. At December 31, 2009 the business has earned $2,000 of the service
revenue that had been prepaid. (3 marks)

Date Account Debit Credit

Dec 31/09 Unearned Service Revenues 2,000
Service Rev Earned 2,000

b. On January 1, 2009 Mark’s Magic Shows had no supplies on hand. A count

of supplies on December 31, 2009 showed $4,000 of supplies on hand. (3
marks)

Date Account Debit Credit

Dec 31/09 Supplies Expense 3,000
Supplies 3,000

c. On June 1, 2009 Mark’s Magic Shows paid for twelve months of insurance
coverage. The policy has been in effect since June 1, 2009. (3 marks)

Date Account Debit Credit

Dec 31/09 Insurance Expense 840
Insurance 840
$1,440/12*7 months=$840

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Question 1 Cont’d

d. The equipment was purchased on November 1, 2009. The estimated value

of the equipment at the end of its 10-year life is $3,900. (3 marks)

Date Account Debit Credit

Dec 31/09 Amortization Expense-Eq 400
Acc Amortization Exp-Eq 400
$27,900-$3,900/10*2/12=$400

e. As of December 31, 2009, $400 of the service revenue has been earned at the
end of the year and is unrecorded.
(2 marks)

Date Account Debit Credit

Dec 31/09 Accts Receivable 400
Service Revenue Earned 400

f. At December 31, 2009, the business owes its employees 5 days wages at
$1,000 per day. (1 mark)

Date Account Debit Credit

Dec 31/09 Wages Expense 5,000
Wages Payable 5,000

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QUESTION 2 – FINANCIAL STATEMENTS (20 Marks)

Acosta Accounting Inc. is at the end of its financial year ending on September 30,
2009, the following items were listed on his adjusted trial balance. This was the
third year of operations. (Assume all accounts have normal balances.)

Debits Credits
Cash $100,000
Accounts receivable 7,000
Prepaid rent 15,000
Prepaid insurance 9,000
Office supplies 3,300
Land 700,000
Vehicle 8,000
Accumulated amortization, Vehicle $3,200
Office equipment 350,000
Accumulated amortization, Off. Eq. 42,000
Accounts payable 5,800
Salaries payable 14,500
Interest payable 2,500
Long-term note payable 52,000
Common Shares 810,000
Retained Earnings 200,000
Dividends 200,500
Service fees earned 370,800
Salaries expense 90,000
Insurance expense 5,200
Rent expense 5,000
Amortization expense, equipment 800
Amortization expense, building 7,000 _________
Totals $1,500,800 $1,500,800

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1. Prepare an Income Statement for the business in good form. (5 marks)

Acosta Accounting Inc.

Income Statement
For the year ending September 30, 2009

Revenues
Service Fees Earned $370,800

Operating Expenses
Salaries $90,000
Insurance Expense 5,200
Rent Expense 5,000
Amortization Expense-Equipment 800
Amortization Expense-Building 7,000
Total Operating Expenses 108,000
Net Income $262,800

-1 formatting
-1 other errors

2. Prepare a Statement of Retained Earnings for Acosta Accounting Inc. in

good form. (5 marks)

Acosta Accounting Inc.

Statement of Retained Earnings
For the year ending September 30, 2009

Retained Earnings, October 1, 2008 $200,000

Add: Net Income 262,800
Total $462,800
Less: Dividends 200,500
Retained Earnings, September 30, 2009 $262,300

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3. Prepare a Classified Balance Sheet in good form.
(10 marks)
Acosta Accounting Inc.
Balance Sheet
September 30, 2009
Assets
Current Assets
Cash $100,000
Accounts Receivable 7,000
Prepaid Insurance 9,000
Prepaid Rent 15,000
Office Supplies 3,300
Total Current Assets $134,300
Property, Plant and Equipment
Land $700,000
Vehicle $8,000
Accumulated Amortization 3,200 4,800
Office Equipment 350,000
Accumulated Amortization 42,000 308,000
Total Property, Plant and Equipment 1,012,800
Total Assets $1,147,100
Liabilities
Current Liabilities
Accounts Payable $5,800
Salaries payable 14,500
Interest Payable 2,500
Total Current Liabilities $22,500
Long Term Liabilities
Note Payable 52,000
Total Liabilities $74,500
Shareholders’ Equity
Common Shares $810,000
Retained Earnings 262,300
Total Shareholders’ Equity 1,072,300
Total Liabilities and Shareholders’ Equity $1,147,100

-2 formatting
-1 per other error

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QUESTION 3 –CLOSING ENTRIES (10 Marks)
[SAME PROBLEM AS PROVIDED EARLIER]
Prepare the closing entries for Acosta Accounting Inc. based on the information
provided in the adjusted trial balance.
Date Account Debit Credit
Sept 30 Service Fees Earned 370,800
Income Summary 370,800

Sept 30 Income Summary 108,000

Salaries Expense 90,000
Insurance Expense 5,200
Rent Expense 5,000
Amortization Exp-Eq 800
Amortization Exp-Bldg 7,000

Sept 30 Income Summary 262,800

Retained Earnings 262,800

Sept 30 Retained Earnings 200,500

Dividends Declared 200,500

QUESTION 4 – JOURNAL ENTRIES (10 Marks)

Prepare the following journal entries for January for G. Smith Enterprises in the general
journal provided. No explanations are required for the journal entries.

Jan 1 G. Smith the owner invested cash of $10,000 for shares in the company.
(2 marks)
Date Account Debit Credit
Jan 1 Cash 10,000
Common Shares 10,000

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Jan 3 G. Smith paid $3,000 for office equipment. (2 marks)
Date Account Debit Credit
Jan 3 Office Equipment 3,000
Cash 3,000

Jan 7 G. Smith borrowed $4,000 from the bank. (2 marks)

Date Account Debit Credit
Jan 7 Cash 4,000
Bank Loan 4,000

Jan 10 G. Smith completed work for a client for $5,000 on credit (2 marks)
Date Account Debit Credit
Jan 10 Accounts Receivable 5,000
Service Revenues 5,000

Jan 30 G. Smith paid an assistant in wages $4,000 for this month. (2 marks)
Date Account Debit Credit
Jan 30 Wages Expense 4,000
Cash 4,000
-1 PER ERROR

QUESTION 5 – MULTIPLE CHOICE (24 Marks)

Put your answer in the scorecard provided.

1. The constraints on the qualities of accounting information are:

a. Comparability and consistency
b. Understandability and neutrality
c. Cost/benefit and materiality
d. Verifiability and timeliness

2. Which of the following is a not characteristic of reliability?

a. Verifiability
b. Neutrality
c. Representational faithfulness
d. Consistency

3. Reliable information rests on the following fundamental characteristics:

a. Relevance and neutrality
b. Comparability and consistency
c. Cost/benefit and materiality
d. Verifiability and conservatism

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4. Disclosing the market value of a short-term investment is an example of which of
the following characteristics of accounting information?
a. Relevance
b. Timeliness
c. Neutrality
d. Consistency

5. The use of a specific accounting method by a company over time is an example of

which of the following characteristics of accounting information?
a. Understandability
b. Verifiability
c. Consistency
d. Neutrality

6. Determining the amount of a liability based on a written contract is an example of

which of the following characteristics of accounting information?
a. Comparability
b. Neutrality
c. Consistency
d. Verifiability

7. The fundamental types of activities that a firm typically engages in includes all of
the following except:
a. Operating
b. Borrowing
c. Investing
d. Financing

8. Which of the following is an example of a financing activity?

a. Paying dividends
b. Sale of investment in other companies' shares
c. Purchase of property, plant, and equipment
d. Payment of interest expense

9. Which of the following is not a typical financing activity?

a. Borrowing money
b. Paying dividends
c. Repurchasing shares
d. Paying interest expense

10. All of the following are investing activities except:

a. Earning interest income

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 b. Purchasing property, plant, and equipment
c. Purchasing other companies' shares
d. Selling property, plant, and equipment

11. Which of the following is a typical investing activity?

a. Sale of property, plant, and equipment
b. Payment of interest expense
c. Payment of dividends
d. Purchases of inventory

12. Operating activities include all of the following except:

a. Collections of accounts receivable
b. Payment of tax expense
c. Payment of dividends
d. Payment of interest expense

13. Which of the following is a typical operating activity?

a. Payment of dividends
b. Payment of accounts payable
c. Sale of property, plant, and equipment
d. Payment of long –term notes payable

14. In which section of the annual report are you likely to find prospective information
about a firm?
a. Financial section
b. Summary of industry segments
c. Selected financial data
d. Management Discussion and Analysis

15. What are the two primary outside sources of funds for a business entity?
a. Creditors and investors
b. Creditors and suppliers
c. Suppliers and shareholders
d. Investors and shareholders

16. Which of the following assets is never expensed on the income statement?
a. Land
b. Building
c. Inventory
d. Equipment

17. On July 1, 2008 Bonita, Inc. signed a 1-year $50,000 note payable from First
National Bank. The loan plus 6% interest is to be repaid on June 30, 2009.

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 Bonita’s year-end is December 31. In its 2008 financial statements Bonita will
record interest expense of:
a. $0
b. $1,500
c. $3,000
d. $50,000

18. Dividends are declared by a vote of a company's:

a. Management
b. Shareholders
c. Board of directors
d. Creditors

19. Which of the following will not appear on the income statement?
a. Amortization
b. Interest
c. Cost of goods sold
d. Dividends

20. If dividends are declared and paid in the same accounting period, what is the net
effect on the accounting equation?
a. A decrease in retained earnings and a increase in expenses.
b. A decrease in cash and an increase expenses.
c. A decrease in cash and an increase in retained earnings.
d. A decrease in cash and a decrease in retained earnings.

21. The purchase of land for a combination of cash and the issuance of shares would
require which of the following?
a. Increase in Land, Increase in Common shares, Increase in Cash
b. Increase in Cash, Decrease in Common shares, Decrease in Land
c. Increase in Land, Increase in Common shares
d. Increase in Land, Increase in Common shares, Decrease in Cash

22. The sale of merchandise to a customer partly for cash and partly on account would
require which of the following?
a. Increase in Accounts receivable, Increase in Cash, Increase in Sales revenue
b. Increase in Cash, Decrease in Accounts payable, Increase in Sales revenue
c. Increase in Cash, Increase in Sales revenue
d. Decrease in Accounts payable, Increase in Accounts receivable, Increase in
Sales revenue

23. Which of the following transactions would involve a debit to an asset account?
a. Recording amortization expense on capital assets.
b. Payment of an accounts payable
c. Payment of a dividend
d. Collection of an accounts receivable

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24. A list of all the accounts used by the company in its accounting records is referred
to as a:
a. Chart of accounts
b. Trial balance
c. General journal
d. Balance sheet

ANSWERS

1C 14D
2D 15A
3D 16A
4A 17B
5C 18C
6D 19D
7B 20D
8A 21D
9D 22A
10A 23D
11A 24A
12C
13B

QUESTION 6 – REVENUE RECOGNITION PRINCIPLES (21 Marks)

Bombardier has received a contract to build LRT trains for the City of Edmonton.
The contract price is for $10,000,000 which will be paid as follows:
 $500,000 at the signing of the contract on January 1 st , 2009
 $2,500,000 on December 31st, 2009
 $2,500,000 on December 31st, 2010
 $4,500,000 on December 31st, 2011
 All the LRT trains will be delivered on December 31 st, 2011.
The estimated and actual costs were:
 $2,000,000 in 2009
 $2,500,000 in 2010
 $1,500,000 in 2011
Bombardier feels very strongly that will be able to collect the revenues from the City of
Edmonton when they are due.
REQUIRED:
a. Calculate the revenue, expense, and profit for Edmonton Transportation should
report for each year using the following methods.

1. Percentage of completion method (12 marks)

1 Percentage of Completion method

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 (*$1,000) -4 per error maximum
Net 10
Year Revenues Earned Revenues Expenses income marks    
$
2009 $2,000/$6,000*$10,000= $3,333 2,000 1,333
$
2010 $2,500/$6,000*$10,000= $4,167 2,500 1,667
$
2011 $1,500/$6,000*$10,000= $2,500 1,500 1,000
$
$10,000 6,000 4,000
2
(*$1,000) -4 per error maximum
Net 10
Year Revenues Earned Revenues Expenses income marks    
2009
2010
$
2011 $10,000 $6,000 4,000

3 1 -The % of completion method better matches revenues against expenses. 2 marks each
-The firm has to be able to reliably estimate expenses over the project.
-The firm has to feel assured that the revenues will be collected over
the project life.

2. Completed contract method (5 marks)

b. Which method should Edmonton Transportation use and why?

Provide two Points. (4 marks)
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