University of the South Pacific

School of Accounting and Finance

Semester 1, 2017

AF101 Introduction to Accounting Part I

Mid-Semester Test
ON-CAMPUS MODE

Instructions
This test has a total mark of 80 and carries a 20% weighting towards your overall
course grade.
There are 10 pages in this test paper, including this cover page.
You have 120 minutes to complete this paper and an additional 10 minutes reading
time.
Answer all questions.
You may use a hand-held, non-programmable calculator. This is not supplied.
SECTION A MULTIPLE CHOICE QUESTIONS 20 MARKS
[Answer in Multiple Choice Answer Sheet provided]

1. The major reason for the existence of generally accepted accounting principles is to:

a. force accountants to all act in the same way.

b. increase business profits.
c. improve the standard of accounting information for decision-making.
d. make accountants legally liable for errors.

2. An entity where it is reasonable to expect the existence of users who depend on general-
purpose financial reports for information for decision making is known as a:

a. company.
b. reporting entity.
c. public entity.
d. disclosing entity.

3. The Conceptual Framework states that an important implication of the qualitative

characteristic of comparability is that:

a. it will be used to assess the representational faithfulness of the financial reports.

b. users will be informed of the accounting policies used in the preparation of the
financial reports.
c. it will be used to predict outcomes of past, present or future events.
d. if there is a choice of accounting methods one method should be chosen and then
applied throughout the life of the entity.

4. What are the qualitative characteristics for financial reporting contained in the
Conceptual Framework?

a. Relevance, reliability, materiality, consistency, verifiability, understandability

b. Understandability, timeliness, relevance, readability, timeliness, reliability
c. Relevance, faithful representation, comparability, understandability, verifiability,
timeliness
d. Uniformity, relevance, reliability, consistency, faithful representation

5. Under the Conceptual Framework’s qualitative characteristics, information that is able

to influence economic decision making is described as:

a. verifiable.
b. relevant.
c. understandable.
d. material.

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6. Sam Matty is an accountant operating as a sole proprietor. In January he purchases for $540
some new furniture for his office. The purchase is made on credit. Which of the following
represents the effect of this transaction on the accounting equation?

a. Increase in the asset furniture $540; increase in the liability accounts payable $540.
b. Increase in the asset furniture $540; decrease in the asset accounts receivable $540.
c. Increase in the asset furniture $540; increase in equity $540.
d. Increase in the asset furniture $540; increase in the asset accounts receivable $540.

7. Sam Matty is an accountant operating as a sole proprietor. On 14 February he pays $600

wages in cash to his receptionist for work done during the first half of the month. Which of
the following represents the effect of this transaction on the accounting equation?

a. Decrease in cash at bank $600; decrease in liability accounts payable $600.

b. Decrease in cash at bank $600; increase in liability accounts payable $600.
c. Decrease in cash at bank $600; increase in equity $600.
d. Decrease in cash at bank $600; decrease in equity $600.

8. The accounting assumption that gives rise to the equity element in the accounting
equation is:

a. the accrual basis assumption.

b. the economic substance assumption.
c. the entity assumption.
d. the materiality assumption.

9. Which of these errors would be detected by a trial balance?

a. A cash sale was recorded in the sales account as $237 instead of $273 but was
correctly recorded in the bank account.
b. Office salaries were recorded as office expenses.
c. The sales assistant pocketed the cash from a cash sale and did not ring it up on the
register.
d. Purchase of inventory on credit was recorded as a debit to the plant and equipment
account and a credit to creditors.

10. A two year insurance policy paid for on l January can initially be recorded in an asset
account called:

a. prepaid insurance.
b. insurance payable.
c. unearned insurance.
d. debtors.

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11. Adjustments which are necessary because cash for expenses is paid in advance or cash
from income is pre-collected are called:

a. accruals.
b. deferrals/prepayments.
c. contras.
d. unrecorded adjustments.

12. On 1 July 2016 Victoria Ltd paid $600, representing a two-year insurance premium. The
$600 was initially recorded in the insurance expense account. The correct adjusting entry on
31 December 2016, the close of the annual accounting period, is which of the following?

a. Debit prepaid insurance $450; credit insurance expense $450

b. Debit prepaid insurance $150; credit insurance expense $150
c. Debit prepaid insurance $300; credit insurance expense $300
d. Debit insurance expense $150; credit prepaid insurance $150

13. If an adjustment for accrued income is omitted from the financial reports the effect is:

a. assets are understated; profit is understated.

b. assets are overstated; profit is understated.
c. assets are understated; profit is overstated.
d. assets are overstated; profit is overstated.

14. The prepaid insurance account of LJ Ltd shows a balance of $1800 representing a
payment on 1 July 2016 of a three-year insurance premium. Which of the following is the
correct adjusting entry on 31 December 2016, the close of the annual accounting period?

$ $
a. Insurance expense 600
Prepaid insurance 600

b. Insurance expense 300

Prepaid insurance 300

c. Prepaid insurance 300

Insurance expense 300

d. Prepaid insurance 1,500

Insurance expense 1,500

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15. What is the closing entry for drawings of $25 000?

a. Debit owner’s capital account $25 000; credit drawings $25 000
b. Debit profit or loss summary account $25 000; credit drawings $25 000
c. Debit bank $25 000; credit drawings $25 000
d. None of the above

16. End of year records from Olympic Boutique show:

$
Cash 20
GST outlays 35
Salaries payable 10
Rent expense 100
Interest expense 50
Prepaid rent 30
Salary expense 20
Rent collected in advance 20

During the closing process the total debit to the profit or loss summary account would be:

a. $90.
b. $110.
c. $80.
d. $170.

17. Highland Ltd makes all of its purchases on credit; 50% are paid in the month of purchase;
30% during the month following the purchase and 20% in the second month following the
purchase. Given the following data, determine the cash paid to creditors during month three.
Month 1 2 3
Credit Purchases $80 000 $50 000 $70 000

a. $85 000
b. $50 000
c. $66 000
d. $70 000

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 18. Wong Cookware makes all sales on credit with 60% of the payment being received in the
month of sale, 30% in the month following sale and the remaining 10% in the subsequent
month.

Budgeted sales are as follows:

January $100 000
February $140 000
March $120 000

The budgeted balance of debtors at 31 March is:

a. $48 000.
b. $62 000.
c. $74 000.
d. $120 000.

19. The entry at the end of the month to reimburse the petty cash for the amount spent is
which of the following?

a. Debit petty cash asset; credit bank

b. Debit bank; credit petty cash asset
c. Debit petty cash asset; credit petty cash expenses
d. Debit petty cash expenses; credit bank

20. Assuming the account is not in overdraft, when reconciling the ledger with the bank
statement a deposit in transit should be:

a. subtracted from the general ledger bank balance.

b. added to the general ledger bank balance.
c. subtracted from the bank statement balance in the reconciliation.
d. added to the bank statement balance in the reconciliation.

~Continue to Section B~

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SECTION B PROBLEM SOLVING QUESTIONS 60 MARKS

QUESTION 21 BANK RECONCILIATION & INTERNAL CONTROL 25 MARKS

The owner of Mountainview Furniture Ltd has just completed a bank reconciliation and found
that the bank’s records do not agree with the cash records of his business. His immediate reaction
is that internal control has broken down and cash handlers are pilfering cash. He asks you, as an
accountant, to check his records and confirm his suspicions or show him where he has gone
wrong. As requested, he supplies the reconciliation statement at the end of the last month, his
cash records, and the most recent bank statement.

Last month’s reconciliation statement is presented below.

Bank Reconciliation Statement

as at 31st January 2017
Balance as per bank statement 31 January, 2017 $3 402.75
Add: Outstanding deposits 219.90
3 622.65
Less: Unpresented cheques 991.00
Balance per Cash at Bank account at 31 January 2017 $ 2 631.65

The following information regarding cash journals for the month of February was provided – the
total of the cash receipts journal was $62 669.05 and the total of the cash payments journal was
$60 989.55.

Bank statement received for the month ended 28th February, it was noted that cheques presented
and paid amounted to $57 952.05, and total deposits amounted to $62 870.90. There were also
additional debits on the statement for a dishonoured cheque for $100, and account fees for $10.

A cross-check of the records revealed that all reconciling items at 31st January, 2017 appeared in
the bank statement for February, unpresented cheques at 28th February totalled $6 742.15, and that
the 28th February deposit of $1 840.70 had not been credited by the bank.

Your check of the cash journals revealed that addition errors had been made by the clerks
responsible. Receipts should have totalled $63 769.05 and payments should have totalled $60
980.55.

Required:
a) Briefly explain to the owner of Mountainview Furniture Ltd the ‘3 important principles of
an internal control system for cash’.
[6 marks]

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b) Recalculate the general ledger Cash at Bank account balance as it should be at 28 th
February, 2017.
[6 marks]

c) Recalculate the Balance as per Bank Statement at 28th February, 2017.

[5 marks]

d) Prepare the Bank Reconciliation Statement as at 28th February, 2017.

[4 marks]

e) Advise the owner of Mountainview Furniture Ltd whether or not pilfering cash is taking
place, assuming that the records maintained by the bank are accurate. Also, provide ONE
recommendation for the improvement in internal control system [take into account your
answer from (a)].
[4 marks]

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QUESTION 22 COMPLETE ACCOUNTING CYCLE 35 MARKS

The ledger of Metro Financial Consultant, contains the following account balances on 30 June 2017.
IGNORE GST.

Account Debit Credit

Cash at Bank $ 5 200
Prepaid Rent 3 200
Accounts Receivable 10 180
Office Supplies 1 140
Land 60 000
Building 152 000
Accumulated Depreciation – Building $ 67 200
Office Equipment 23 400
Accumulated Depreciation – Office Equipment 6 420
Accounts Payable 7 960
Unearned Consulting Fees 1 560
Mortgage Payable 88 600
Capital 73 490
Drawings 52 780
Consulting Fees Revenue 156 860
Insurance Expense 1 660
Salaries Expense 87 940
Electricity Expense 2 090
Interest Expense 760
Telecommunications Expense 1 740
$402 090 $402 090

The following balance day adjustment information is also available at the end of the period:

1. A physical count of office supplies reveals that supplies totalling $420 are on hand at 30 June.

2. The balance in the Unearned Consulting Fees account includes $1200 earned for services rendered
in the last week of June.

3. A 12-month insurance policy was purchased on 1 April, 2017 for $780.

4. Interest due on mortgage payable $220 at 30th June.

5. The June telecommunications costs for $320 is unrecorded and unpaid.

6. Salaries of $980 were owing to employees at 30th June.

7. At the end of June, consulting services provided to clients but not yet received or recorded amount
to $5500.

8. Prepaid Rent represents rent paid on 1 April, 2017 to cover 4 months’ rent.

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Required:
a) Prepare adjusting journal entries for items 1 to 8 above.
[13.5 marks]

b) Post adjusting entries to the provided 10-column worksheet template.

[15.5 marks]
c) Journalise the necessary closing entries.
[6 marks]

~The End~

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