You are on page 1of 16

1 | P a g e

Indian Institute of Management, Bangalore


Financial Accounting
Term 1, 2010
Midterm
Srinivasan Rangan

Name: Roll #:

Section:

Question Maximum Points Points Earned
(please do not fill )

1

20


2

14


3

14


4

17


5

21


6

14


7

10


Total


110



You have 1 hours to complete the test. The test is closed book-closed notes. Good
Luck!




2 | P a g e

Question I: Multiple Choice (2 10 = 20 points)

Please circle the letter choice that you consider correct.

1. On December 31, 1991, Vivaldi Company receives a cheque from a tenant and
recorded a journal entry for rent revenue on that date. The check is for a
lease beginning on January 1
st
1992. As of December 31
st
1991, this entry
resulted in

A. an overstatement of assets and an understatement of owners equity

B. an overstatement of assets and an overstatement of owners equity

C. an overstatement of assets and an understatement of liabilities

D. an overstatement of owners equity and an understatement of liabilities

2. Sunshine Company debited the insurance expense account instead of the
prepaid insurance account when making an advance payment for the entire
premium related to a 3 year policy. This error will:

A. overstate expenses

B. understate retained earnings

C. understate assets

D. all of the above

E. none of the above

3. A liability arises when a firm

A. signs a new labor union contract which includes a 6% pay raise for its
union employees

B. issues a purchase order for 100,000 units of inventory from a supplier
over the next two years

C. receives inventory previously ordered to be paid for later

D. both (b) and (c)

4. The stockholders' equity of a firm can be defined as
3 | P a g e


A. net current assets

B. a residual interest

C. total assets plus total liabilities

D. the owner's claim to the assets and liabilities

5. To record the purchase of equipment that is fully financed by the seller of the
equipment, you would

A. debit a liability and credit an asset

B. debit an asset and credit cash

C. debit an asset and credit a liability

D. debit an asset and credit shareholders' equity

6. Which equation is correct?

A. Assets = Liabilities + Contributed Capital + Dividends

B. Stockholders' Equity = Assets - Liabilities + Contributed Capital + Net
Income

C. Stockholders' Equity = Contributed Capital + Beginning Retained
Earnings + Net Income - Dividends

D. Retained Earnings = Net Income + Dividends

7. Ames Corp. purchased new equipment during the year but neglected to record
depreciation. What is the effect of this omission on each of the named
accounts?

A.
Accumulated
Depreciation
Retained
Earnings
Depreciation
Expense
Understated No effect Overstated



4 | P a g e

B.
Accumulated
Depreciation
Retained
Earnings
Depreciation
Expense
Overstated Understated Understated
C.
Accumulated
Depreciation
Retained
Earnings
Depreciation
Expense
Understated Overstated Understated

D.
Accumulated
Depreciation
Retained
Earnings
Depreciation
Expense
Overstated No effect Overstated

8. On July 1, Year 1, University Bagels bought an insurance policy costing
Rs.600 that would insure the retail building for two years against fire loss.
What asset account and what amount are recorded on the balance sheet at
December 31, Year 1?

A. Prepaid Insurance, Rs.450

B. Insurance Expense, Rs.300

C. Prepaid Insurance, Rs.300

D. Insurance Expense, Rs.150

9. On October 1, Year 1, Word-of-Mouth Catering accepted a Rs.10,000, 120 day
note from a customer. The note earns 10% interest per year. What is the
amount of interest receivable recorded at December 31, Year 1? (Assume no
other entries to record interest have been made.)

A. Rs.333

B. Rs.250

C. Rs.83

D. Rs.0, because interest is not due until January 31 of Year 2

5 | P a g e

10. Western Inc. uses a periodic inventory system. Beginning inventory is
Rs.20,000 and purchases for the year are Rs.80,000. A physical inventory
shows that Rs.15,000 of the inventory remains. How much is recorded as cost
of goods sold for the year?

A. Rs.75,000

B. Rs.80,000

C. Rs.85,000

D. Rs.95,000


Question II (7 2 = 14 points)

On the following page is the pre-adjusted trial balance of Jetco Fuel Services as of
December 31, 2008. They are in the business of buying and selling fuel.

Additional Information:

a. The fuel tanker was purchased on 1 July, 2008 by issuing a three year 10%
interest bearing note payable for Rs. 75,000. The tanker is expected to last 10
years and then be scrapped. Jetco uses the straight-line depreciation method.
b. After taking a physical inventory, it was discovered that fuel inventories was
overstated by Rs. 6,100.
c. Equipment on the Trial Balance was acquired on January 1, 2007 and has a
10 year life.
d. A search of unrecorded liabilities reveals unrecorded salary expenses of Rs.
4,800.
e. A 36-month insurance policy was acquired for Rs. 72,000 on August 31/2008,
and charged to Insurance Expense
f. One June 1, 2008, one years rent of Rs. 12,000 was paid and charged to rent
expense.
g. The balance in Customer Advances for fuel sales was earned in 2008.

Record any required adjustments as of December 31
st
2008 in the last two columns
of the table provided on the next page. Use the extra rows in the table to create new
account heads if necessary.





6 | P a g e

Pre-adjusted Trial Balance as of, December 31, 2008

Pre-Adjusted Adjustments
Debits Credits Debits Credits
Cash 39,800
Debtors 70,700
Fuel Inventory 42,600
Equipment 30,000
Fuel Tanker 75,000
Accumulated Depreciation 3,000
Accounts Payable 35,100
Accrued Expenses 12,500
Customer Advances 2,400
Notes Payable 75,000
Share Capital 75,000
Retained Earnings 15,300
Fuel Sales 840,000
Fuel Expense 641,200
Salary Expense 75,000
Insurance Expense 72,000
Rent Expense 12,000






























7 | P a g e

Question III (14 points)

Part A (7 points).

Cruise Industries purchased Rs.10,800 of merchandise on February 1, 2007, subject
to a trade discount of 10% and with credit terms 3/15, n/60. It returned Rs.2,500
(gross price before trade or cash discount) on February 4. The invoice was paid on
February 13.

Assume that Cruise uses the periodic method for recording merchandise
transactions, record the purchase, return, and payment. Round off to the nearest
Rupee.


# Account Title Debit Credit











































8 | P a g e

Part B (7 points).

On June 3, Arnold Company sold to Chester Company merchandise having a sales
price of Rs.3,000 with terms 2/10, n/60, f.o.b shipping point. An invoice totaling
Rs.90, terms n/30 was received by Arnold on June 8 from John Booth Transport
Service for the freight cost and Arnold paid it immediately. On June 12, the
company received a cheque for the balance due from Chester Company.

Prepare journal entries in the books of Arnold Company to record the above
transactions. Round off to the nearest rupee.

# Account Title Debit Credit














































9 | P a g e

Question IV (17 points)

Part A (6 points). The following information is available for Strong Company:

(Rs. In thousands) 2008 2009 2010
Credit sales Rs. 900 Rs. 1,100 Rs. 1,000
Cash sales Rs. 600 Rs. 800 Rs. 700
Total Rs. 1,500 Rs. 1,900 Rs. 1,700
Debtors (end of year) Rs. 170 Rs. 230 Rs. 220
Provision for doubtful accounts
(end of year)
Rs. 47 Rs. 30 Rs. 56
Accounts written off as
uncollectible (during the year)
Rs. 2 Rs. 50 Rs. 4

Assume that

a. the company uses the percentage of sales method to estimate bad debt
expense every year, and

b. bad debt expense remains a constant percentage of the credit sales.

Determine the ending balance in the Provision for doubtful accounts at the
beginning of 2008.

Hint: Use t-accounts.


















10 | P a g e

Part B (11 points). Avalon Corporation had a Rs.45,000 debit balance in Debtors
and a Rs.3,500 credit balance in provision for doubtful accounts on December 31,
2008.

1. The company prepared the following aging schedule to record the adjusting
entry for bad debts on December 31, 2008:

Age of Debtors Amount Expected Bad Debts

0-30 days old Rs. 30,000 5%
31-90 days old Rs. 10,000 11%
Over 90 days old Rs. 5,000 30%

2. On March 1, 2009, Avalon received information that that one of its
customers, Smith Corporation who owed Avalon Rs. 2,000 had finalized its
bankruptcy in a court. The court announced that all of Smiths creditors
would be paid 60% of the amounts owed to them by Smith.

3. On May 7, 2009, Avalon received a cheque from Smith for the amount
indicated by the court.

4. On May 31, 2009, Avalon received a pleasant surprise. Smith sent them a
cheque for the balance of the amount it owed.

Provide journal entries to record the preceding transactions in Avalons books in the
following table.


















11 | P a g e

# Account Title Debit Credit


























































12 | P a g e

Question V (11 + 10 = 21 points)

A. On 1
st
November, Mr. Seller accepted a 60-day 9% per annum bill of exchange
for Rs. 5,000 drawn by Mr. Slow-pay for previously recorded credit sales.

Thirty days later Mr. Seller discounted the bill at 15% per annum with a bank.

At maturity, the bill was dishonored and bank charged the seller Rs. 50 as
noting charges. Mr. Seller paid the bank the amount owed.

Thirty days after the date of dishonor, Mr. Seller recovered the amount owed by
Mr. Slow-pay together with interest at the rate of 9% per annum for the
additional 30 days, and the noting charge.

Record Journal Entries to record the above transactions. Show your calculations.
Round off to the nearest Rupee.




























13 | P a g e

B. On 1
st
December, Mr. Seller accepted a 90 day 8% per annum bill of exchange for
Rs. 10,000 drawn by Mr. Latepay for a credit sale made on that day.

At maturity, the bill was dishonored and the seller Rs. 50 paid noting charges to
a Notary Public to record the dishonor of the bill. He called Mr. Late-pay to let
him know that the latter owed the amount of the bill, interest, and the noting
charges.

Thirty days after the date of dishonor, Mr. Seller recovered the amount owed by
Mr. Late-pay together with interest at the rate of 9% per annum and the noting
fee.

Record Journal Entries to record the above transactions. Show your calculations.
Round off to the nearest Rupee.






























14 | P a g e

Question VI (14 points)

Part A (6 points).

Indicate by circling either include or not include which of these items would be
included in the cost of inventory in a companys December 31 Balance Sheet.

1. Goods purchased f.o.b shipping point that are in transit at December 31

Include Do not Include

2. Goods purchased f.o.b destination that are in transit on December 31
st


Include Do not Include

3. Goods sold f.ob shipping point that are in transit on December 31
st


Include Do not Include

4. Freight charges on good purchased

Include Do not Include

5. Goods held on consignment from another company

Include Do not Include

6. Good sold f.o.b destination that are in transit on December 31

Include Do not Include


Part B (8 points)

The net income in the books of Linda Patrick Company was determined without the
knowledge of the errors indicated. Ignore taxes.

Net Profit Error in Ending
Year Per Books Inventory

2002 Rs.50,000 Overstated Rs. 3,000
2003 52,000 Overstated Rs. 9,000
2004 54,000 Understated Rs. 11,000
2005 56,000 No error
15 | P a g e

Under the heading show your calculations and final answer for the correct net profit
for each of the 4 years 2002-2005 after taking into account the inventory errors.


Net Profit Adjustments Correct Net Profit
Year Per Books

2002 Rs.50,000

2003 52,000

2004 54,000

2005 56,000


Question VII (10 points)

Kohls operates family-oriented department stores that sell moderately priced
apparel, etc. Data from their financial statements for the year ended 1/31/2000,
1/31/2001, and 1/31/2002 are provided below. Assume all sales are credit sales. Use
this information to compute the following:

a. Gross profit for 1/31/2002

b. Profit before Interest and Tax for 1/31/2002

c. Average debt collection period for 1/31/2001

d. Average debt collection period for 1/31/2002

e. Give one explanation for change in debt collection period between 1/31/2001
and 1/31/2002

Fiscal Year End
(MM/DD/YYYY)
1/31/2000 1/31/2001 1/31/2002
Sales (Net) 4,557,112 6,151,996 7,488,654
Cost of Goods Sold 3,014,073 4,056,139 4,923,527
Operating Expenses 1,006,241 1,317,556 1,557,987
Depreciation & Amortization 88,523 126,986 157,165
Interest Expense 29,470 49,332 57,351
Non-Operating Income 2,307 3,131 7,240
Income Tax Expense 162,970 232,966 304,188
Receivables, net 505,010 681,256 835,946
16 | P a g e


a. Gross Profit, 12/31/2002






b. Profit before Interest and tax, 12/31/2002






c. Average debt collection period 1/31/2001








d. Average debt collection period 1/31/2002








e. Why did debt collection period change between 1/31/2001 and 1/31/2002