EXAM
B (Section 5)
I. Matching (20 Points)
Match the most appropriate term with each of the sentences below.
A.
C.
E.
G.
I.
K.
M.
O.
Q.
S.
U.
W.
Accumulated depreciation
B. Liabilities
Asset
D. Liquidity
Contra
F. Matching
Dividends
H. Materiality
Economic Entity
J. Profitability
FASB
L. Reliability
Financing
N. Relevance
Full disclosure
P. Retained earnings
GAAP
R. Revenue Recognition
Going Concern
T. SEC
Intangible
V. Time Period
Income Statement
X. Working Capital
1.__________ The qualitative characteristic of information that suggests it is verifiable and
trustworthy.
2.__________ Ratios that provide a measure of a company’s ability to meet its short term
obligations are called _______ ratios.
3__________ The initials of the private sector standard setting body that currents sets
accounting standards..
4.__________ Resources owned or controlled by the business that are expected to have a future
benefit for the business..
5__________ The assumption that “indicates that personal and business record keeping should be
separately maintained.”
.
6.__________ The assumption that provides the rationale for why plant assets are not reported at
liquidation value
7__________ Distributions of profits to stockholders
8__________ The qualitative characteristic of information that indicates the information will make a
difference in users’ decisions.
9__________The constraint that justifies Gidget company expensing light bulbs that cost $15
although the light bulbs have a 5 year life.
10__________The financial statement that provides a periodic measure of managerial efficiency.
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EXAM
B (Section 5)
II. Account Classification (16 Points)
Classify each of the accounts below as a(n) Asset, Contra Asset, Expense, Liability, Revenue, or
Stockholders’ Equity Account and the normal balance (debit or credit) of each account.
Classification
Supplies used
Accumulated depreciation
Retained earnings
Inventory
Income tax expense
Unearned advertising fees
Prepaid rent
Mortgage payable
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Normal Balance
EXAM
B (Section 5)
III. Recording Transactions
(18 Points)
Joey’s Video Studio & Gallery began operation in April 2003. The following transactions occurred during
the first two weeks of April. Prepare either a journal entry or T accounts for each transaction. If you use
T accounts, write the account title above each T Account. If a transaction has no accounting effect,
write NO EFFECT in the space below JOURNAL ENTRY.
Transaction 1:
On April 2, Joey sold $60,000 worth of its 6%, 10 year bonds to investors.
JOURNAL ENTRY
Transaction 2:
T ACCOUNTS
On April 3, Joey paid $24,000 for video equipment to be used in the business
JOURNAL ENTRY
T ACCOUNTS
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EXAM B
(Section 5)
Transaction 3: On April 4, Joey hired a secretary for $400 a week; the secretary agreed to
begin working on April 15th .
JOURNAL ENTRY
T ACCOUNTS
Transaction #4
On April 5, Joey received $2,500 from a customer who hired the studio to take
wedding pictures on May 22nd
JOURNAL ENTRY
T ACCOUNTS
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EXAM B
(Section 5)
Transaction #5
A.
On April 11, Joey sold scenic photographs to a customer for $400 on account.
The photographs cost $120.
Record the sale of the photograph
JOURNAL ENTRY
T ACCOUNTS
B. Record the cost of the photographs sold
JOURNAL ENTRY
T ACCOUNTS
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EXAM
B (Section 5)
IV. ADJUSTING ENTRIES Accruals and Deferrals (30 Points)
Make the appropriate adjusting entries to record the end of the year adjustments for Lands End Realty
Corporation. Make either journal entries or use T accounts to record adjustments. If you use T
accounts, you must write the account title above each T account to receive credit.
You also should indicate what type of adjustment was made, i.e., an accrual or a deferral in the space
provided
Lands End Realty is a calendar year company, all prepayments during 2003 had been recorded either as a
asset or a liability when cash was paid or received. No adjustments had been made to any accounts prior
to 12/31/03.
Adjustment 1: Lands End owed $12,000 to its employees for work done in December 2003. Record the
12/31/03 adjustment
Journal Entry
OR
T Accounts
Type of Adjustment
Deferral or Accrual
Adjustment 2: Land End Realty paid Round Rock insurance $7,200 for a 3 year insurance policy on
January 1, 2003. The payment has been recorded as an asset. Record the 12/31/03 adjustment.
Journal Entry
OR
T Accounts
Type of Adjustment
Deferral or Accrual
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EXAM B (Section 5)
Adjustment 3: On January 2, 2003, Lands End Realty received $48,000 for rental of office space for
three years (2003-2005) from Jacob & Jackson Law firm. Land End’s bookkeeper credited the $48,000
to a liability account on January 2nd. Record the 12/31/03 adjustment.
Journal Entry
OR
T Accounts
Type of Adjustment
Deferral or Accrual
Adjustment 4: Lands End had earned commissions of $16,000 for sales made during the last week of
December 2003. Customers had not been billed nor had the commissions recorded. Prepare the
12/31/03 adjusting entry.
Journal Entry
OR
T Accounts
Type of Adjustment
Deferral or Accrual
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EXAM B (Section 5)
Adjustment 5: . Lands End Reality purchased $6,500 in supplies during 2003. On 12/31/03, and
inventory showed $2,800 supplies were on hand. Record the 12/31/03 adjustment.
Journal Entry
OR
T Accounts
Type of Adjustment
Deferral or Accrual
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EXAM
B (Section 5)
Essays: (16 Points)
A. Ethics Case (12 Points)
William Librand, a partner of LRB&M, a large audit firm, bought 100,000 shares of Torrupt
Corporation’s stock in December 2000. Mr. Librand convinced the controller of Torrupt to hire LRB&M
as it external audit firm in 2001 and William became the partner in charge of the audit.
In May 2001, the Federal Drug Administration ordered Torrupt to remove its two most profitable
products due to serious side effects. Torrupt’s revenues declined significantly and its expenses increased as
the company incurred significant research costs to develop products to replace those removed from the
market. The research program proved to be successful and by December the company had marketable
substitutes for the recalled produced and expected demand to be very high for the new products in 2002. .
At year end, the controller and Mr. Librand concluded that the 2001 costs were “excessively high” and
revenues were “excessively low” due to the product recall. They believed that the Torrupt’s stock price
would decrease dramatically if a large loss was reported in 2001 and that investors would be misled.
Therefore, they agreed to defer a substantial portion of the 2001 expenses and to accrue revenues, based
on the projected sales of the new products in the first quarter of 2003. While this was not in accordance
with accepted accounting practice, Librand and the controller justified the deferrals and accruals as a way
to protect stockholders from the unreasonable decline in the stock market price of the company’s stock,
which they felt was not justified by the company’s long run prospects.
1. Discuss the concept of independence in relation to external audits and explain why regulators might
object to Mr. Librand being in charge of the Torrupt audit. Was Mr. Librand behaving in an ethical (1)
professional and (2) personal manner? Explain how you reach your conclusions. Write neatly.
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EXAM B (Section 5)
2. Who are the stakeholders (who has an interest) and what are the ethical considerations in the decision
to defer expenses and accelerate revenues in 2001?.
3. Can Mr. Librand and the controller defer expenses and accrue revenues and still be ethical? Explain how
you reach your conclusion.
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EXAM
B (Section 5)
Measures Used to Analyze Liquidity, Solvency and Profitability: (4 points)
Explain what the term solvency means, list a ratio you would use to assess a company’s solvency and
explain how you would interpret that ratio.
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