Practice Midterm Test with Solutions

PRACTICE MIDTERM - (Covering Chapters 1 - 5) Problem - I — Multiple Choice (20 points) 1. A private organization which establishes broad accounting principles as well as specific accounting rules is the a. Securities and Exchange Commission. b. Internal Revenue Service. c. Financial Accounting Standards Board. d. Corporate Board of Directors. 2. Taco Hut pays the current month’s rent, $600. This transaction a. increases revenues by $600. b. increases assets by $600. c. decreases liabilities by $600. d. decreases stockholders’ equity by $600. 3. A corporation with total stockholders’ equity of $85,000 paid a $5,000 business debt. As a result of this transaction, total stockholders’ equity a. did not change. b. increased by $5,000. c. decreased by $5,000. d. increased to $90,000. 4. The right side of an account is always a. the debit side. b. the credit side. c. the balance of that account. d. carried forward to the next accounting period. 5. Posting is the process of a. preparing a chart of accounts. b. adding a column of figures. c. transferring journal entries to ledger accounts. d. recording entries in a journal. 6. Warton Company depreciates its equipment at the rate of $500 per month. The January 31 entry to record depreciation expense would include a. a debit to Equipment for $500. b. a credit to Retained Earnings for $500. c. a credit to Accumulated Depreciation for $500. d. a credit to Depreciation Expense for $500. 7. Logan Company debited Prepaid Insurance for $960 on July 1, 2005 for a one-year fire insurance policy. If the company prepares monthly financial statements, failure to make an adjusting entry on July 31 for the amount of insurance that has expired would cause a. assets to be overstated by $960 and expenses to be understated by $960. b. expenses to be overstated by $80 and assets to be understated by $80. c. assets to be overstated by $80 and expenses to be understated by $80. d. expenses to be overstated by $960 and assets to be understated by $960. 1 8. Which one of the following accounts is not closed at the end of an accounting period? a. Common Stock b. Dividends c. Service Revenue d. Insurance Expense 9. The second set of debit and credit columns on a work sheet is generally used for a. closing entries. b. the trial balance. c. the balance sheet figures. d. the adjustments. 10. Geronimo Company had net sales of $400,000, cost of goods sold of $225,000 and other operating expenses of $100,000. The company’s gross profit is a. $225,000 b. $175,000 c. $125,000 d. $75,000 Problem - II — Matching (10 points) Match the items below by entering the appropriate letter in the space. ____ 1. Partnership ____ 2. Liabilities ____ 3. Accrued expenses ____ 4. General ledger ____ 5. Matching principle ____ 6. Unearned revenues ____ 7. Income summary ____ 8. Intangible assets ____ 9. Gross profit A. A liability created when cash is received in advance of performing a service for a customer. B. The excess of net sales over cost of merchandise sold during the period C. Noncurrent resources that do not have a physical substance. D. An economic entity which is not a separate legal entity. E. The process of allocating the cost of an asset to expense over its useful life. F. The matching of efforts (expenses) with accomplishments (revenues). ____ 10. Depreciation G. Creditor’s claims on total assets. H. A temporary account used in closing revenue and expense accounts. I. Contains all assets, liabilities, stockholders’ equity accounts. and J. Expenses incurred but not yet paid in cash or recorded 2 Problem - III — Adjusting Entries (15 points) The following information for Nelsen Company is available on June 30, 2005, the end of a monthly accounting period. You are to prepare the necessary adjusting journal entries for Nelsen Company for the month of June for each situation given. Appropriate adjusting entries had been recorded in previous months. You may omit journal entry explanations. 1. Nelsen Company purchased a 2-year insurance policy on February 1, 2005 and debited Prepaid Insurance for $1,800. 2. On January 1, 2005, a tenant in an apartment building owned by Nelsen Company paid $5,700 which represents six months' rent in advance. The amount received was credited to the Unearned Rent account. 3. On June 1, 2005, the balance in the Office Supplies account was $200. During June, office supplies costing $480 were purchased. A physical count of office supplies at June 30 revealed that there was $240 still on hand. 4. On March 31, 2005, Nelsen Company purchased a delivery van for $42,000. It is estimated that the annual depreciation will be $6,000. 5. Nelsen Company has two employees who earn $80 and $120 per day, respectively. They are paid each Friday for a five-day work week that begins each Monday. Assume June 30 is a Wednesday in 2005. 3 Problem - IV — Closing Entries (10 points) The end of the period account balances after adjustments of Dryer Cleaners and Laundry are as follows: Account Balances (After Adjustments) Cash Cleaning Supplies Prepaid Rent Equipment Accumulated Depreciation—Equipment Accounts Payable Retained Earnings Common Stock Dividends Dry Cleaning Revenues Laundry Revenues Cleaning Supplies Expense Depreciation Expense Rent Expense Salaries Expense Utilities Expense $ 9,000 3,500 3,600 128,000 20,000 8,500 6,400 100,000 8,000 25,000 4,000 5,000 3,000 900 2,400 500 Instructions Prepare the end of the period closing entries for Dryer Cleaners and Laundry. You may omit journal entry explanations. 4 Problem - V — Journal Entries (18 points) Prepare the necessary general journal entries for the month of May for Stringer Company for each situation given below. Stringer uses a perpetual inventory system. Oct. 5 Paid operating expenses as follows: $4,000 Salaries Expense, $2,000 Rent Expense, $500 Utilities Expense. Oct. 8 Purchased merchandise for $25,000 on account. Credit terms: 2/10, n/30. Oct. 12 Borrowed $25,000 from Sun Bank signing an 8%, 6-month note. Oct. 15 Returned defective merchandise with a cost of $3,500 and paid balance due for merchandise purchased on October 8. The company takes all discounts to which it is entitled. Oct. 20 Sold merchandise for $20,000 to Adder Company on account. The cost of the merchandise sold was $12,000. Credit terms: 2/10, n/30. Oct. 22 Purchased a 2-year insurance policy for $4,400 cash. Oct. 25 Issued Credit Memo No. 3811 to Adder Company for $2,000 for merchandise returned by Adder from the sale on October 20. The cost of the merchandise returned was $1,025. Oct. 29 Purchased office equipment for $15,000 paying $4,000 in cash and signing a 3-month, 11% note for the remainder. 5 Problem - VI — Multiple-Step Income Statement (15 points) Below is a partial listing of the adjusted account balances of Murray Department Store at year end on December 31, 2005. Accounts Receivable Cost of Goods Sold Selling Expenses (includes depreciation) Interest Expense Accumulated Depreciation—Building Sales Discounts Merchandise Inventory Administrative Expenses (includes depreciation) Sales Accounts Payable Interest Revenue $ 19,000 255,000 35,000 1,000 10,000 22,000 45,000 15,000 330,000 14,000 800 Instructions Using whatever data you believe appropriate, prepare a multiple-step income statement for Murray Department Store for the year ended December 31, 2005. 6 Problem - VII — Correcting Entries (12 points) The following errors were made in journalizing and posting transactions in March in the Seal Company. 1. A $1,700 payment for a cash purchase of a 2-year insurance policy was debited to Prepaid Insurance and credited to Accounts Payable. 2. A collection of $4,500 on account from a customer was recorded as a debit to Cash $4,500 and a credit to Sales Revenue $4,500. 3. A bill for $1,550 for new office equipment was debited to Office Supplies $1,550 and credited to Accounts Payable $550. 4. The receipt of $800 from a customer for future service was recorded as a debit to Accounts Receivable $800 and a credit to Service Revenue $800. Instructions Prepare the correcting entries at May 31 assuming the incorrect entry is not reversed. (Omit explanations.) 7 Solutions — Practice Midterm Problem - I — Solution 1. 2. 3. c d a 4. 5. 6. b c c 7. 8. 9. c a d 10. b Problem - II — Solution 1. 2. 3. 4. 5. D G J I F 6. 7. 8. 9. 10. A H C B E Problem - III — Solution 1. 2. 3. 4. 5. Insurance Expense .............................................................................................. Prepaid Insurance ..................................................................................... 75 Unearned Rent ..................................................................................................... Rent Revenue ............................................................................................ 950 Office Supplies Expense ..................................................................................... Office Supplies .......................................................................................... 440 Depreciation Expense – Delivery Van ................................................................. Accumulated Depreciation—Delivery Van .............................................. 500 Salaries Expense ................................................................................................. Salaries Payable ........................................................................................ 600 75 950 440 500 600 Problem - IV — Solution Dry Cleaning Revenues .............................................................................................. Laundry Revenues ...................................................................................................... Income Summary ............................................................................................. 25,000 4,000 Income Summary ........................................................................................................ Cleaning Supplies Expense ............................................................................. Depreciation Expense ...................................................................................... Rent Expense .................................................................................................... Salaries Expense .............................................................................................. Utilities Expense ............................................................................................... 11,800 Income Summary ........................................................................................................ Retained Earnings............................................................................................. 17,200 Retained Earnings........................................................................................................ Dividends ........................................................................................................... 8,000 29,000 5,000 3,000 900 2,400 500 17,200 8,000 Problem - V — Solution Oct. Oct. 5 8 Oct. 12 Oct. 15 Salaries Expense .................................................................................... Rent Expense .......................................................................................... Utilities Expense ..................................................................................... Cash ............................................................................................. 4,000 2,000 500 Merchandise Inventory .......................................................................... Accounts Payable ....................................................................... 25,000 6,500 25,000 Cash .......................................................................................................25,000 Notes Payable ............................................................................. 25,000 Accounts Payable .................................................................................. Merchandise Inventory ............................................................... Cash ............................................................................................. 3,930 21,070 25,000 8 Oct. 20 Oct. 22 Oct. 25 Oct. 29 Accounts Receivable ............................................................................. Sales ............................................................................................ 20,000 Cost of Goods Sold ............................................................................... Merchandise Inventory ............................................................... 12,000 Prepaid Insurance .................................................................................. Cash ............................................................................................. 4,400 Sales Returns and Allowances ............................................................. Accounts Receivable .................................................................. 2,000 Merchandise Inventory .......................................................................... Cost of Goods Sold .................................................................... 1,025 Office Equipment ................................................................................... Cash ............................................................................................. Notes Payable ............................................................................. 15,000 20,000 12,000 4,400 2,000 1,025 4,000 11,000 Problem - VI — Solution MURRAY DEPARTMENT STORE Income Statement For Year Ended December 31, 2005 Sales revenues Sales ....................................................................................................... Less: Sales discounts ........................................................................... Net sales .......................................................................................................... Cost of goods sold ........................................................................................... Gross profit ....................................................................................................... Operating expenses Selling expenses ................................................................................... Administrative expenses ...................................................................... Total operating expenses .............................................................. Income from operations .................................................................................. Other revenues and gains Interest revenue ..................................................................................... Other expenses and losses Interest expense .................................................................................... Net Income......................................................................................................... $330,000 22,000 $308,000 255,000 53,000 35,000 15,000 50,000 3,000 800 1,000 $ (200) 2,800 Problem - VII — Solution 1. 2. 3. 4. May 31 31 31 31 Accounts Payable............................................................................ Cash ....................................................................................... 1,700 Sales Revenue ................................................................................. Accounts Receivable ........................................................... 4,500 Office Equipment ............................................................................ Office Supplies ..................................................................... Accounts Payable ................................................................ 1,550 Cash ................................................................................................800 Service Revenue ............................................................................. Unearned Revenue .............................................................. Accounts Receivable ........................................................... 1,700 4,500 1,550 1,000 800 800 800 Note: No explanations either before or after entries. 9