EXAM A
NAME
ID Number
Accounting 2010
Fall 2005
Dr. B. D. Merino
First Examination
October 4, 2005
I. Matching
( 22 points)
II Account Classification
(18 points)
III. Transaction Analysis
(34 points)
IV. Essays and Analysis
( 26 points)
Total
(100 points)
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EXAM A (Section 4)
I. Matching (20 Points)
Match the most appropriate term with each of the sentences below.
A. Asset
B. Consistency
C. Depreciation
D. Going Concern
E. Economic Entity
G. FASB
H. Financing
I. Full disclosure
J.. GAAP
K.. Going Concern
L. Intangible
M. Investing
N. Liabilities
O. Liquidity
P. Matching
Q. Materiality
R. Property, plant and equipment
S. Reliability
T. Relevance
U. Retained earnings
V. Revenue Recognition
W. SEC
X Solvency
Y. Working capital
1._________. The qualitative characteristic of information that indicates the information will make a
difference in a users’ decisions
2. _________. Ratios that provide a measure of a company’s ability to survive over time are called
_______ ratios
3 __________. Long lived assets with no physical substance (i.e., copyrights) are classified as
_________ assets
4 __________ . The initial of the agency authorized by Congress to set accounting standards
5. __________. The constraint that justifies Gidget company expensing light bulbs that cost $15
although the light bulbs have a 5 year life.
6. __________. Obligations and debts of a business that will require a future sacrifice
7.___________. The principle of accounting that requires recognition of expenses in the same period
as related revenue.
8.___________. The assumption that provides the :rationale for why plant assets are not reported at
liquidation value
9.___________.
The systematic process of allocating the cost of long lived tangible assets to
expenses as the resource is consumed (used) is called ___________.
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10.__________.
The qualitative characteristic of information that suggests it is verifiable and
trustworthy
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EXAM A
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
Legal fees earned
Bonds payable
Accumulated depreciation
Prepaid insurance
Interest expense
Cost of goods sold
Patents
Unearned rental income
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Normal Balance
EXAM A
III. Recording Transactions
(18 Points)
DJ’s Portrait Studio 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 effect, it is
not an accounting event, than put NO EFFECT under the Journal Entry.
Transaction 1: On April 2, DJ purchased scenic photographs for $13,000 on account; the photographs
were purchased to sell to customers.
JOURNAL ENTRY
T ACCOUNTS
Transaction 2: On April 3, DJ paid $1,200 to Office Cleaners Inc. for cleaning the studio he had
rented for his business.
JOURNAL ENTRY
T ACCOUNTS
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EXAM A
Transaction 3: On April 8, DJ paid $6,400 for a four year insurance policy; coverage would begin on
May 1, 2003 and end on April 30, 2007.
JOURNAL ENTRY
T ACCOUNTS
Transaction 4
On April 9, DJ hired a salesperson for $200 a week plus commission; the salesperson
agreed to begin working on April 15th.
JOURNAL ENTRY
T ACCOUNTS
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EXAM A
Transaction #5
A.
On April 16, DJ sold scenic photographs to a customer for $1,200 on account.
The photographs sold cost $80. Record the sale (Part A) and the cost of the
photograph (Part B).
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 A
IV. ADJUSTING ENTRIES Accruals and Deferrals (30 Points)
Make the appropriate adjusting entries to record the end of the year adjustments for Natalie’s
Emporium. 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.
Natalie’s Emporium is a calendar year company, all prepayments received during 2003 had been
recorded either as a asset or a liability when cash was paid or received during the year. No
adjustments had been made to any accounts prior to 12/31/03.
1. Natalie’s sold a $12,000 designer gown to a customer on account in November 2003, the gown
was shipped on December 30, 2003. No entry had been made for this transaction as of 12/31/03.
Prepare the appropriate adjusting entry on 12/31/03.
Journal Entry
OR
T Accounts
Type of Adjusting Entry
Deferral/Prepayment or Accrual
2. Natalie’s received a payment of $112,000 in July to provide choir robes to a choir group for its
December holiday recital. The payment was credited to a liability account in July. The robes were
delivered on 12/02/03 but no entry was made at that time. Prepare the adjusting entry on 12/31/03.
Journal Entry
OR
T Accounts
Type of Adjusting Entry
Deferral/Prepayment or Accrual
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EXAM A
3. On January 4, 2003, Natalie’s signed a 3 year advertising contract with a local television station.
Natalie’s paid the station $36,000 for commercials to be run weekly for the next three years. In
January, an asset account was debited for the payments. During 2003, the television station had
run 1/3 of the total commercials. Prepare the adjusting entry on 12/31/03.
Journal Entry
OR
T Accounts
Type of Adjusting Entry
Deferral/Prepayment or Accrual
4 Natalie’s had $1,200 in supplies on 1/1/03 and purchased $8,800 in supplies during 2003. On
12/31/03, an inventory showed $3,200 supplies were on hand. Prepare the adjusting entry needed
on 12/31/03.
Journal Entry
OR
T Accounts
Type of Adjusting Entry
Deferral/Prepayment or Accrual
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EXAM A
5. Natalie’s received a utility bill for $6,000 on December 29, 2003. No entry had been made as of
12/31/03. Prepare the appropriate adjusting entry at year end.
Journal Entry
OR
T Accounts
Type of Adjusting Entry
Deferral/Prepayment or Accrual
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EXAM A
Essays: (17 Points)
A. Ethics Case (11 Points)
Edward Rosse, a partner of LRB&M, a large audit firm, owned 10,000 shares of Bearing
Corporation’s stock in 1999. Edward convinced the controller of Bearing to hire LRB&M as it
external audit firm in 2001 and Edward became the partner in charge of the audit.
Bearing had purchased another defense company, Lockbolt, in December 2000. Bearing issued its
own stock to shareholders and the agreement required that Bearing stock stay above $26 for the
first six month of 2001 or Lockbolt’s shareholders could cancel the deal.
During the first half of 2001, Bearing suffered significant cost overruns because of inefficiencies in
the production process. If Bearings had reported the losses in the first quarter of 2001, Bearing’s
stock price would have plummeted and the deal with Lockbolt would had been revoked. Mr. Rosse
and the controller decided that the way to avert such an undesirable consequence was simply to
defer significant costs incurred to the third quarter so that the deal would be maintained. They
planned to disclose the large loss due to cost overruns in the third quarter when the deal with
Lockbolt could not be rescinded.
Mr. Rosse sold all of his Bearing stock in February 2002 so he would meet the rules related to audit
independence.
1. Discuss the concept of independence in relation to external audits and explain why regulators
might object to Mr. Rosse’s role as partner and question his ethical position.
Continued
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2. Who are the stakeholders (who has an interest) and how might the decision to defer costs to the
third quarter of 2001 affect them?
3. Can Mr. Rosse and the controller ethically defer costs to protect the merger deal? Explain how
you reach your conclusion.
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EXAM A
B: Measures Used to Analyze Liquidity, Solvency and Profitability: (6 points)
1. Explain what the term profitability means, list a ratio you would use to assess a company’s
profitability and explain how you would interpret that ratio.( 3 points)
2.
Explain how you would calculate working capital and what working capital is used to assess, i.e.,
liquidity, solvency or profitability. (3 points)
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