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STUDENT NUMBER

McGill University School of Continuing Studies

Introduction to Financial Accounting – MGCR 211 FALL 2012

MID-TERM EXAMINATION

SOLUTION

Lecturers: Ed Bierbrier Jason Moschella

Date: October 11, 2014 Time: 9:00am – 11:30am

Instructions:

1. This is a closed book exam.

2. You are allowed dictionaries

3. Only non-text storing calculators are allowed

4. This exam consists of 7 questions.

5. Total number of pages including cover sheet: ??

Question

Available

Mark

Marks

Q1

24

 

Q2

10

 

Q3

10

 

Q4

10

 

Q5

16

 

Q6

14

 

Q7

16

 

Total

100

 

MGCR 211

Question 1 (24 marks - 36 minutes)

The following year-end data was taken from the accounts of Bright Side Ltd. at December 31, 2014:

Accounts Receivable

$16,800

Interest Payable

350

Salary Expense

63,440

Retained Earnings, January 1, 2014

18,500

Income Tax Expense

1,164

Laundry Revenue

106,970

Depreciation Expense, Laundry Machines

6,000

Accounts Payable

4,900

Laundry Supplies

3,200

Utilities Expense

9,600

Prepaid Insurance

2,100

Laundry Machines

50,000

Insurance Expense

10,500

Salary Payable

1,904

Cash

5,100

Interest Expense

350

Accumulated Depreciation, Laundry Machines

21,000

Laundry Supplies Expense

13,200

Dividends declared and paid

4,500

Unearned Laundry Revenue

630

Income Taxes Payable

700

Common Shares

10,000

Note Payable, due 2018

21,000

Required:

Prepare in good form an Income Statement and Statement of Financial Position.

Bright Side Ltd. Income Statement For the Year Ended December 31, 2014

Laundry Revenue

$106,970

Operating Expenses Salary Expense

$63,440

Insurance Expense

10,500

Utilities Expense

9,600

Depreciation Expense

6,000

Laundry Supplies Expense

13,200

Total Operating Expenses

102,740

Income from Operations

4,230

Interest Expense

350

Income before Income Taxes

3,880

Income Taxes

1,164

Net Income

$2,716

MGCR 211

Question 1 – Cont’d

Bright Side Ltd. Statement of Financial Position December 31, 2014

Assets Current Assets:

Cash

$5,100

Accounts Receivable

16,800

Laundry Supplies

3,200

Prepaid Insurance

2,100

Total Current Assets

27,200

Property, Plant and Equipment:

Machinery

$50,000

Accumulated Depreciation

21,000

29,000

Total Assets

$56,200

Liabilities and Shareholders’ Equity Current Liabilities:

Accounts Payable

$4,900

Salary Payable

1,904

Unearned Laundry Revenue

630

Interest Payable

350

Income Tax Payable

700

Total Current Liabilities

8,484

Long-term Liabilities Notes Payable, due 2018

21,000

Total Liabilities

29,484

Shareholders’ Equity:

Common Shares

$10,000

Retained Earnings

16,716

Total Shareholders’ Equity

26,716

Total Liabilities and Shareholders’ Equity

$56,200

Retained Earnings 31/12/2014: $18,500 + 2,716 – 4,500 = $16,716

MGCR 211

Question 2 (10 marks - 15 minutes)

Six Pack Ltd. successfully operates two high-end fitness centres in the same town. Members pay a $150 non-refundable initiation fee, and then a one-year membership for unlimited access to the facilities costs an additional $900. They have 3,200 active members. Memberships are required to be paid in full, in three equal monthly instalments over the first 3 months of a membership year. Partial refunds, of the annual fees, are only given if a member moves more than 50 kilometres away. In addition to the facilities, there is a juice bar that sells fruit smoothies and healthy snacks. Members can sign for their purchases at the juice bar and then they are billed at the end of the month.

Required:

Discuss when each type of revenue should be recognized by Six Pack Ltd with reference to GAAP/IFRS revenue recognition criteria.

Support your discussion

In order for revenue to be recognized performance must have been achieved, the amount earned must be measurable and collection reasonably assured.

For the initiation fee all three criteria are met at the time of signing the contract and paying the fee, so revenue can be recognized at that time.

For the membership fee although they are measurable when the contract is signed and collection is estimable at that time, (and with certainty when it is fully paid at the end of three months), the services have not been provided at that time. The service is provided over the year and therefore revenue should be recognized evenly over the year. The amounts received will initially be recorded as unearned revenue and then every month $75 would be recorded as revenue. A small allowance should be set-up for expected refunds that might be claimed. The amount could be based on previous years’ experience.

The revenues from the juice bar should be recognized at the time of sale, as they are measurable and earned. Although collection will not take place until the end of the month, collection appears to be reasonably assured and would not prevent the revenue from being recognized at the time of sale. A small allowance for uncollectible amounts, if any, should be accrued.

MGCR 211

Question 3 (10 marks - 15 minutes)

The following information was available on December 31, 2014, the end of the year for Empire Ads Ltd.:

a) On June 1, 2014 the company received $200,000 from a client to buy advertising spots for them for the next 12 months. As at December 31, 75% of the amount had been spent on ads that had run during 2014, the remainder will be spent in 2015.

b) The company moved to a new location on September 1, 2014 and paid 6-months rent of $12,000. The company spent $20,000 on new furniture and equipment. The furniture and equipment is expected to last 20 years with no salvage value.

c) The office supplies account at the beginning of the year had a balance of $700. Supplies worth $5,000 were bought during the year and the balance at the end of the year was $1,800 which included $1,000 of stationary with the old address on it and is therefore obsolete.

Required:

For each of the items above indicate what should appear on the income statement for the year ended December 31, 2014 and on the balance sheet as of that date. Indicate where on the balance sheet any amounts would be reported.

a) $200,000 x .75 = $150,000 would be on the income statement as Revenue. The balance, $50,000, would be on the balance sheet as Unearned revenue, a current liability account.

b) The 2 months of rent, $4,000 that is for January and February would be in the Prepaid rent account, a current asset. The $8,000 that represents the Rent expense for September to December would be an operating expense on the income statement.

The $20,000 spent on furniture would be a capital asset; Furniture and equipment. There would be 20,000/20 x 4/12 = $333 in the Accumulated amortization account (a contra asset account) deducted against it. The Amortization expense of $333 is an operating expense on the income statement.

c) The Office supplies expense, $4,900, an operating expense on the income statement would consist of what they used: 700 + 5,000 – 1,800 = $3,900 plus the amount that is in the ending balance but is no longer useful: $1,000. It should be expensed, as it no longer has future value to the company. The Office supplies account on the balance sheet, a current asset, would be $800 at year-end, the reported ending balance of $1,800 less the amount to be expensed as worthless ($1,000).

MGCR 211

Question 4 (10 marks - 15 minutes)

The accountant for Finger Piano Company needs your help with respect to the following transactions which took place in February:

1. Received a $500 deposit from a customer who wanted her piano rebuilt.

2. Rented a part of the building to a bicycle repair shop; received $600 for rent in February.

3. Delivered 10 rebuilt pianos to customers who paid $20,000 in cash.

4. Received $8,000 from customers as payment on their account.

5. Received a Hydro bill for $340.

6. Purchased $800 in supplies to be paid next month.

7. Paid wages of $11,000 to employees for work that was done in January

8. Delivered a piano to a customer. The total repair bill was for $1,700. The customer will pay it next month.

9. Paid $300 on account to suppliers.

10. Paid $600 for advertising ads that will be seen in the March issue of a magazine.

Required:

Journalize the above transactions.

1

.

Cash

500

 

Defe rred Revenue

500

2

.

Cash

600

 

Re nt Revenue

600

3

.

Cash

20,000

 

Revenue

20,000

4.

Cash

8,000

Accounts Receivable

8,000

5.

Hydro (Utilities) Expense Acc ounts Payable

340

340

6.

Supplies Acc ounts Payable

800

800

7 .

Wages Payabl e Cash

11,000

11,000

8.

Accounts Receivable Revenue

1,700

1,700

9.

Accounts Payable C ash

300

300

10

Prepaid Advertising C ash

600

600

MGCR 211

Question 5 (16 marks - 24 minutes)

Babar Ltd.’s fiscal year ends on December 31. It is December 31, 2014 and all of the 2014 entries have been made except for the following adjusting entries:

1. On September 1, 2014 Babar collected six months’ rent of $7,200 on storage space. At the time of collection, Babar credited the deferred rent revenue account for $7,200.

2. The company earned service revenue of $2,000 on a special job that completed on December 29, 2014. Collection will be made in January of 2015; no entry has been recorded.

3. On November 1, 2014, Babar paid a premium of $4,200 for a one-year property insurance policy for coverage starting at that date. The prepaid insurance account was debited for the full amount.

4. At December 31, 2014, wages earned by employees totaled $14,300. The employees will be paid on the next payroll date of January 8, 2015.

5. Depreciation must be recognized on a service truck that cost $12,000 on July 1, 2014. The estimated useful life is six years with no residual value.

6. Cash of $2,400 was collected on November 1, 2014 for services to be rendered evenly over the next twelve months, beginning November 1, 2014. The deferred revenue account was credited for the full $2,400.

7. On December 27, 2014, the com0pany received a tax bill of $450 from the city for property taxes relating to 2014. The bill will be paid in January of 2015.

8. On October 1, 2014, the company borrowed $20,000 from a local bank and signed an 8% note for that amount. The interest and principal are payable on September 30, 2015.

Required:

Prepare the adjusting entry required for each transaction at December 31, 2014.

MGCR 211

Question 5 – Cont’d

1.

Deferred rent revenue Re nt revenue

4,800

4,800

$7,200 ÷ 6 months = $1,200 per month for 4 months. This entry reduces (debits) the liability for the amount earned and records revenue.

2 .

Trade receivab les

2,000

Serv ice revenue This entry records an asset for the amount due from customers

2,000

and recognizes the revenue because it was earned in 2014.

3.

Insurance exp ense

700

Prepaid insurance $4,200 ÷ 12 months = $350 per month for 2 months of coverage. This entry reduces the asset (prepaid insurance) because part of it has been used and only $3,500 represents future benefits (an asset) to the company.

700

4.

Wage expense

14,300

Wages payable Wage expense is increased (debited) because this expense was incurred in 2014. A liability (wages payable) is credited because this amount is owed to the employees as at December 31, 2014.

14,300

5.

Depreciation expense Accumulated depreciation, service truck……………

($12,000 ÷ 6 years) x ½ year.

1,000

1,000

To record depreciation expense for the year:

6.

Deferred service revenue Service revenue To recognize revenue earned during the year ($2,400 x 2/12).

400

400

7.

Property tax expense Property tax payable To record expense incurred but not yet paid.

450

450

8.

Interest expense Interest payable To accrue interest expense incurred but not yet paid, $20,000 x 8% x 3/12 = $400.

400

400

MGCR 211

Question 6 (14 marks - 21 minutes)

The accountant for See No Evil, a sole proprietorship, prepared the following statement:

See No Evil Statement of Cash Receipts and Disbursements For the Year Ended December 31, 2014

Cash Receipts:

Received from customers (Including $20,000 for services provided in 2013)

$350,000

Bank borrowings

60,000

$410,000

Cash Disbursements:

Interest paid to the bank

4,000

Purchase of computer

8,000

Rent paid

26,000

Equipment purchased

44,000

Salaries paid (which includes $4,000 for December 2013)

45,000

Insurance premiums paid (covers the period January 1, 2014 – December 31, 2015)

10,000

Parts & supplies purchased

36,000

173,000

Net cash receipts

$237,000

After reviewing the accounting records, you determine that the amounts were correct, and you discover these additional facts:

1. The business does most of its work for cash, but at the end of the year customers owed $16,000 for services that were provided in 2014 on account (i.e., had yet to be paid).

2. The $26,000 of rent paid includes $2,000 for the December 2013 rent that was paid only in

2014.

3. The equipment was purchased at the beginning of 2014 and has an estimated life of 4 years, with an estimated residual value of $4,000.

4. The computer, which was purchased at the beginning of the year, is expected to have a 2 year life with no residual value.

5. In addition to the salaries paid during the year, $1,200 is owed to employees for work that was performed in the last few days of 2014.

6. In addition to the $36,000 of parts and supplies that were purchased and paid for during the year, creditors have billed the business $2,000 for parts and supplies that were purchased and delivered but not paid for.

7. An inventory count at the end of 2014 shows that $1,300 of unused parts and supplies are still on hand. The company had $1,900 of parts and supplies on hand at December 31, 2013.

Required:

Prepare, in good form, an accrual-basis Statement of Earnings for the year ended December 31,

2014. In order to earn the maximum number of marks you are asked to show all your work.

MGCR 211

Question 6 – Cont’d

See No Evil Statement of Earnings (accrual basis) For the Year-Ended December 31, 2014

Service Revenues (350,000 - 20,000 + 16,000) Operating expenses:

$346,000

Parts & Supplies

$38,600

Salaries Expense (45,000 – 4,000 + 1,200) 42,200

 

Rent Expense (26,000 – 2,000)

24,000

Insurance Expense (10,000/2)

5,000

Depreciation Expense - Equipment

10,000

Depreciation Expense - Computer

4,000

Total Expenses

123,800

Earnings from operating sources

222,200

Financing expense: Interest

(4,000)

Net Earnings

$218,200

Parts & Supplies: $1,900 + 36,000 + 2,000 – 1,300 = 38,600

Depreciation expense – equip: (44,000 – 4,000)/4 = 10,000

Depreciation expense – computer: 8,000/2 = 4,000

MGCR 211

Question 7 (16 marks - 24 minutes)

The following errors were made in the accounting records of Jezibel Ltd. in 2014 and were not discovered until 2015:

1. The journal entry to record a receipt of $3,170 for Consulting Revenue was incorrectly recorded as $7,310

2. A payment of $2,800 for dividends paid was incorrectly debited to Salary Expense account.

3. Salary expense for 2014 of $1,650 was not recorded. It was recorded as salary expense in 2015 when it was paid.

4. A $1,850 credit to the Unearned Revenue account was posted to Accounts Receivable.

Required:

For each of the independent errors listed above, identify the net effect on assets, liabilities, shareholders’ equity and net income for 2014 and 2015. Show understatements by “U”, overstatements by “O” and no effect by “NE”, and identify their amounts.

 

Assets

   

Liabilities

 

Shareholders’

 

Net Income

   

Equity

 
 

2014

2015

 

2014

2015

2014

2015

 

2014

2015

1.

O 4,140

O

4,140

 

NE

NE

O

4,140

O 4,140

O

4,140

NE

2.

NE

 

NE

 

NE

NE

 

NE

NE

U

2,800

NE

3.

NE

 

NE

U

1,650

NE

O

1,650

U 1650

O

1,650

U 1,650

4.

U 1,850

U

1,850

U

1,850

U 1,850

 

NE

NE

 

NE

NE