Comm201 (08) Mid-term Exam

Instructor : Chima Mbagwu

Tuesday, February 12, 2002

1. Please print your name and student number on your answer sheet.
2. Please print your name and “shade in” your student number on the optical scan
sheet.
3. This is a 75-minute exam that includes one case problem and 25 multiple-choice
questions.
a. Case responses are to be written in the exam sheet provided.
b. Multiple-choice responses are to be recorded on the optical scan sheet.
4. The answer sheet and the optical scan sheet should be handed in at the end of this
exam.
5. Hand calculators may be used, but may not be shared.
6. The following are considered acts of academic dishonesty:
a. glancing at other students’ responses as this exam is being written.
b. recording any of the exam questions at any time during this exam.
c. conveying to other students, at any time, the contents of this exam.

Note: You may (or may not) find the following ratios helpful:
Return on assets = Net Income / Average Total Assets
Return on equity = Net Income / Average Total Shareholders’ Equity
Gross margin ratio = (Sales Revenue - Cost of Goods Sold) / Sales Revenue
Net profit margin ratio = Net Income / Revenues
Current ratio = Current Assets / Current Liabilities
Earnings (loss) per share = Net Income (Loss) / Average # of Outstanding Shares

GOOD LUCK!!
Part A: Case Problem (Write your answers on the answer sheet provided.)
(25 points available)

Douglas Limited (DL) was incorporated on January 10, 20X1. During the year, the
following transactions and events occurred:

January 19: $400,000 was invested in DL in exchange for common shares.

February 15: A building was rented for $2,000 per month. A deposit of $25,000 was
made and occupancy commenced March 1, 20X1.

February 22: Inventory of $250,000 was purchased for cash.

March 7: Equipment was purchased for $36,000 cash. The expected life of the
equipment is three years and the salvage value at the end of that
time will likely be zero.

May 29: A customer paid DL $100,000 cash for goods that are to be delivered each
month commencing in June 20X1. In each month, merchandise with a
retail or selling price of $10,000 is to be shipped.

Periodically, throughout the year, the following expenses were paid in cash:

Office $32,000
Wages 107,000
Interest 2,100
Selling 41,800

Also the following additional revenues were earned in cash during the year.
Sale of inventory $460,500
Interest revenue 10,200
470,700

In total, the cost of the inventory that was sold and shipped during the year 20X1
amounted to $210,000.

As of December 31, 20X1, the following expenses had been incurred and are to be paid
in 20X2:
Wages $3,500
Selling 1,650

In addition, $870 of interest revenue had been earned late in 20X1 but will not be
received in cash until 20X2.
Required:

Prepare a set of books of account for Douglas Limited and prepare a balance sheet as of
December 31, 20X1 and an income statement for the period from date of incorporation,
January 10, 20X1 to December 31, 20X1.

Hint: You are required to prepare journal entries, adjusting journal entries, T- accounts,
trial balance, income statement, statement of retained earnings and balance sheet.
Part B: Multiple-Choice (Indicate your answers on the computer readable sheets.)
(25 points available)

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

a) payment of interest expense

b) sale of an investment in other companies’ shares
c) purchase of property, plant, and equipment
d) issuance of common shares

2. Which of the following is not one of the three primary business activities?

a) financing.
b) advertising.
c) investing.
d) operating.

3. If a vehicle was purchased for $15,000 and has a residual value of $3,940, the annual
amortization expense will be $1,580 if the estimated useful life is:

a) 3.4 years.
b) 6 years.
c) 7 years.
d) 9.5 years.

4. Bonita Inc. recently purchased a building from Vista Corp. by issuing 10,000 of
Bonita’s shares. At the time of the exchange, the shares were selling for $9 a share
and the building had an appraised value of $91,000. The building is on Vista’s books
for $70,000. Bonita will record the building at:

a) $90,000.
b) $91,000.
c) $70,000.
d) $50,000.

5. Which of the following accounts does not normally have a credit balance?

a) Accumulated amortization
b) Prepaid insurance
c) Accounts payable
d) Common shares
6. Which of the following would be the adjusting entry to record accrued interest at the
end of an accounting period?

a) Debit interest expense, credit cash

b) Debit interest expense, credit interest payable
c) Debit interest payable, credit interest income
d) Debit interest payable, credit cash

Use the following information for questions 7-9:

Consider the following data reporting the balances for all of the balance sheet accounts:
Accounts payable 32,760 Long-term notes payable 50,000
Accounts receivable 20,000 10-year Mortgage payable 20,000
Accumulated amortization 100,000 Prepaid rent 1,600
Cash 9,200 Retained earnings 9,440
Common shares ????? Salaries payable 10,000
Equipment 220,000 Temporary investments 6,400
Inventory 17,000 Unearned revenue 1,200

7. Current assets amounted to:

a) $ 55,400.
b) $ 54,200.
c) $ 47,800.
d) $ 46,200.

8. Current liabilities amounted to:

a) $42,760.
b) $31,960.
c) $45,400.
d) $43,960.

9. Assuming the above list includes all of the balance sheet accounts, what would be the
balance in common shares?

a) $40,000.
b) $50,800.
c) $174,200.
d) None of the above.
10. The most common point at which revenues are recognized is the time of:

a) collection.
b) production.
c) contract signing.
d) delivery.

Use the following information for questions 11 and 12:

Dulzura Construction Co. agreed to build a bridge for National City. The contract
specifies that construction will take three years and Dulzura will receive $5,000,000. The
company expects annual costs to be $1,500,000; $1,875,000; and $375,000.

11. Assume Dulzura uses the percentage of completion method. Profit for year one will
be:
a) $3,500,000.
b) $ 500,000.
c) $2,000,000.
d) $ 0.

12. Assume Dulzura uses the completed contract method. Expenses recognized in year
two would be:

a) $ 0
b) $1,875,000
c) $ 937,500
d) $ 625,000

13. The instalment method of revenue recognition is appropriate when:

a) A sale is made on a contract basis.

b) Less than 10% of the sales proceeds is received in the year of the sale.
c) Collection of the receivable is not reasonably assured.
d) None of the above.

14. As of October 15, 2001, it appears that Jorge’s Computer Shop will report earnings
per share (EPS) of $8.25 for the year ended October 31, 2001. Which of the following
events would cause the 2001 EPS to decrease, assuming the event occurs on October
31, 2001 before the close of business?

a) The company pays a supplier for inventory bought on account.

b) The company declares, but does not pay, a cash dividend.
c) The company purchases 1,000 common shares of another company.
d) None of the above causes the EPS to decrease.
15. If during 1999, total assets increased by $720,000, current liabilities increased by
$15,000, and shareholders’ equity increased by $320,000, what would be the change
in long-term liabilities?

a) increase by $ 285,000
b) increase by $ 258,000
c) increase by $ 385,000
d) decrease by $ 385,000

16. Which financial statement reports assets, liabilities, and shareholders’ equity?

a) Balance statement.
b) Statement of retained earnings.
c) Income statement.
d) Balance sheet.

17. The segment of a company’s annual report that describes the company’s accounting
methods/policies is the:

a) Management discussion and analysis.

b) Notes to the financial statements.
c) Auditor’s report.
d) Company profile.

18. Which of the following accounts would be classified as a current liability?

a) Dividends declared.
b) Customer deposits received.
c) Sales revenue.
d) None of the above.

19. The balance in retained earnings is not affected by:

a) Net income.
b) Dividends declared, but not paid.
c) Dividends declared and paid.
d) None of the above (i.e., all affect the balance in retained earnings).

20. Which of the following ratios compares the net income during an accounting period
with the related revenues?

a) Matching ratio.
b) Profit margin ratio.
c) Gross margin ratio.
d) Return on assets ratio.
21. Which accounts normally have debit balances?

a) Assets, expenses, and revenues.

b) Assets, expenses, and retained earnings.
c) Assets, liabilities, and dividends declared.
d) Assets, dividends declared, and expenses.

22. A balance sheet will not balance if:

a) A correct journal entry is recorded twice in appropriate T-Accounts.

b) The purchase of supplies on account is debited to Supplies and credited to
Cash.
c) A $450 payment to a supplier on account is debited to Accounts Payable for
$45 and credited to Cash for $45.
d) A $100 cash dividend is debited to Dividends Declared for $1,000 and
credited to Cash for $100.

23. The accounting records show a debit balance of $1,350 in an asset account called
Supplies on Hand and a balance of $0 in Supplies Expense. If $600 of supplies are on
hand at the end of the accounting period, the necessary adjusting journal entry is:

a) Dr. Supplies on hand 600

Cr. Supplies expense 600

b) Dr. Supplies on hand 750

Cr. Supplies expense 750

c) Dr. Supplies expense 600

Cr. Supplies on hand 600

d) Dr. Supplies expense 750

Cr. Supplies on hand 750

24. Which account will have a zero balance after closing entries have been recorded?

a) Service Revenue.
b) Retained Earnings.
c) Prepaid Insurance.
d) Accumulated Amortization.
25. Performing services for a customer, which are charged on account, will have the
following effects on the basic accounting equation:

a) Increase assets and decrease equity.

b) Increase assets and increase equity.
c) Increase assets and increase liabilities.
d) Increase liabilities and decrease equity.