ACCT 202 Financial Accounting II Spring 2011 Midterm Exam

(ACCT202)[2011](s)midterm~1406^_54999.pdf downloaded by kkwongbg from http://petergao.net/ustpastpaper/down.php?course=ACCT202&id=3 at 2020-10-15 12:22:32. Academic use within HKUST only.
DEPARTMENT OF ACCOUNTING
ACCT 202 Financial Accounting II

Spring 2011
Midterm Exam
Date: April 6, 2010 (Wednesday)

Time: 7pm – 9pm (2 Hours)
This exam paper contains TEN (10) pages (including this cover page).
Instructions:
1. This is a CLOSED book examination.
2. This exam contains 15 MC questions and 5 problems. ALL questions are

compulsory.
3. Answer all questions in the answer booklet provided.
4. Write your name, student number, and lecture section number (L1: Tue & Thu
16:30-17:50; L2: Tue & Thu 13:30-14:50) on the cover of the answer booklet.
5. START EACH QUESTION ON A NEW PAGE. Indicate the question no clearly.
6. SHOW YOUR WORKINGS. If you do not show your workings, you may not
receive full credit for a correct answer and you will not receive any partial
credit for an incorrect answer.
7. Materials, aids and instruments allowed during the examination: electronic

calculators ONLY.
8. Budget your time wisely. You have 120 minutes to get a maximum of 120
marks. On average, use 1 minute to get every 1 mark.
9. You may keep this exam paper. Answers to this exam will be released on
LMES tonight. Please report any problem in the answers immediately.
TURN OFF YOUR MOBILE PHONES!!!
ACCT 202 Spring 2011 Midterm Exam Page 1

SECTION A (15 Multiple-choice questions; 30 marks/minutes)
Instructions: Answer all MC questions on the FIRST PAGE of the Answer

Booklet. Answer each question on a NEW LINE. You are suggested to spend
about 2 minutes on each question.
1. In general, companies recognize revenue
A. at completion of production.
B. at the point of sale.
C. when cash is received.
D. after all costs are recognized.
2. Revenue is recognized by the consignor when the
A. goods are shipped to the consignee.

B. consignee receives the goods.
C. consignor receives an advance from the consignee.
D. consignor receives an account sales notification from the consignee.
3. The percentage-of-completion method must be used when certain conditions

exist. Which of the following is not one of those necessary conditions?
A. Estimates of progress toward completion, revenues, and costs can be

estimated reliably.
B. Total contract revenue can be measured reliably.
C. The buyer can be expected to satisfy some of the obligations under the
contract.
D. It is probable that the economic benefits associated with the contract will
flow to the company.
4. Which of the following are recognized each period under the cost-recovery
method?
A. Costs only.
B. Revenues only.
C. Both costs and revenues.
D. None of these.

5. The fair value option allows a company to
A. record income when the fair value of its investment increases.

B. value its debt investments at fair value in some years but not other years.
C. report most financial instruments at fair value by recording gains and
losses as a separate component of stockholders’ equity.
D. All of the above are true of the fair value option.
6. Santo Corporation declares and distributes a cash dividend that is a result of

current earnings. How will the receipt of those dividends affect the investment
account of the investor under each of the following accounting methods?
Fair Value Method Equity Method
A. No Effect Decrease
B. Increase Decrease
C. No Effect No Effect
D. Decrease No Effect
7. When the interest payment dates of a bond are May 1 and November 1, and a
bond issue is sold on June 1, the amount of cash received by the issuer will be
A. decreased by accrued interest from June 1 to November 1.

B. decreased by accrued interest from May 1 to June 1.
C. increased by accrued interest from June 1 to November 1.
D. increased by accrued interest from May 1 to June 1.
8. Which of the following statements is correct?
A. A company can exclude a short-term obligation from current liabilities if it

intends to refinance the obligation on a long-term basis.
B. A company can exclude a short-term obligation from current liabilities if it
has an unconditional right to defer settlement of the liability for at least 12
months.
C. A company can exclude a short-term obligation from current liabilities if it
is paid off after the statement of financial position date and subsequently
replaced by long-term debt before the statement of financial position is
issued.
D. None of these.

9. Which of the following is the proper way to report a contingent asset considered
probable?
A. As an asset.
B. As deferred revenue.
C. As a disclosure only.
D. No disclosure or accrual required.
Use the following information for questions 10–12.

Mott Co. includes one coupon in each bag of dog food it sells. In return for eight
coupons, customers receive a leash. The leashes cost Mott $2.00 each. Mott
estimates that 40 percent of the coupons will be redeemed. Data for 2010 and 2011
are as follows:
2010 2011
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000
10. The premium expense for 2010 is
A. $25,000.
B. $30,000.
C. $35,000.
D. $50,000.
11. The estimated premium liability at December 31, 2010 is
A. $7,500.
B. $10,000.
C. $17,500.
D. $20,000.
12. The estimated premium liability at December 31, 2011 is
A. $11,250.
B. $21,250.
C. $22,500.
D. $42,500.

13. Tender Foot Inc. is involved in litigation regarding a faulty product sold in a prior
year. The company has consulted with its attorney and determined that it is
possible that they may lose the case. The attorneys estimated that there is a
40% chance of losing. If this is the case, their attorney estimated that the
amount of any payment would be $500,000. What is the required journal entry
as a result of this litigation?
A. Debit Litigation Expense for $500,000 and credit Litigation liability for
$500,000.
B. No journal entry is required.
C. Debit Litigation Expense for $200,000 and credit Litigation Liability for
$200,000.
D. Debit Litigation Expense for $300,000 and credit Litigation Liability for
$300,000.
14. The pre-emptive right enables a shareholder to
A. share proportionately in any new issues of shares of the same class.

B. receive cash dividends before other classes of stock without the pre-
emptive right.
C. sell ordinary shares back to the corporation at the option of the
shareholder.
D. receive the same amount of dividends on a percentage basis as the
preference shareholders.
15. Dunn Trading Co. issued 2,500 ordinary shares. The shares have a $2 par
value and sold for $12 per share. Dunn incurred $3,000 to sell the shares
related to underwriting costs and legal fees. Dunn Trading Co. will record the
$3,000 as
A. A debit to Financing Expense.

B. A debit to Share Capital—Ordinary.
C. A debit to Share Premium—Ordinary.
D. A debit to Retained Earnings.
CONTINUE ON NEXT PAGE …

SECTION B: Problem Questions (90 marks/minutes)
Instructions: Start each question on a NEW page. You are suggested to spend
about the recommended time on each question.
QUESTION 1 (20 marks/minutes) [Objective 1.3]
The following details pertain to your recent purchase of a TV from an electronics

shop:
December 25 You visited the store and saw a lot of TVs on display. All the
TVs on display were turned on and tuned to a local TV station
so that customers could see the picture quality of the TVs. You
decided to purchase one of the TVs on display. Although there
were new ones in the warehouse, you did not want a new one
because the one on display was selling at a substantial
discount. You paid the deposit by credit card.
December 31 The TV was removed from the store and sent back to the
warehouse. Prior to the removal, the shop still used the TV as a
display model.
January 2 The TV was delivered to you. You paid the balance by cash.
January 5 A technician came to your house to install the TV for you. The
installation involved connecting the TV to an electricity socket
and tuning for the TV channels.
REQUIRED:
What are the revenue recognition criteria in respect of this type of transaction?
Applying the facts to the criteria you identified, discuss when the shop should
recognize the revenue. If necessary, make any assumptions or state what additional
information you need.
(20 marks/minutes)

QUESTION 2 (15 marks/minutes) [Objectives 2.1, 2.12]
Explain how to determine the measurement basis (historical cost, amortized cost, or
fair value) of debt and equity investments. For investments that are accounted for at
fair value, indicate the accounting treatment of the “revaluation” gain or loss.
Do not discuss Equity Method securities.
(15 marks/minutes)

QUESTION 3 (22 marks/minutes) [Objectives 2.2-2.7]
On January 1, 2010, Company A purchased 10% bonds, having a maturity value of

$100,000. The bonds provide the bondholders with a 12% yield. They are dated
January 1, 2010, and mature January 1, 2013, with interest receivable annually on
January 1. Company A is a calendar-year corporation.
On December 31, 2010, the fair value of the bonds was $97,000.
On December 31, 2011, the fair value of the bonds was $98,000.
On June 30, 2012, Company A sold the bonds for $99,000, plus accrued interest.
REQUIRED:
Assume that the bonds are accounted for using fair value as the measurement basis,
prepare all relevant journal entries relating to the bonds. Indicate the date to each
journal entry. Show your workings clearly.
(22 marks/minutes)

QUESTION 4 (15 marks/minutes) [Objectives 2.10 & 2.12-2.13]
On January 1, 2010, Company B purchased two securities: Security 1 at the cost of

$100 and Security 2 at the cost of $100. Both are classified as trading securities.
On December 31, 2010, the fair value of Security 1 was $110 and the fair value of
Security 2 was $95.
On June 30, 2011, Security 1 was sold for $95.
On December 31, 2011, the fair value of Security 2 was $80.
Company B is a calendar-year corporation.
REQUIRED:
Following the accounting treatment as prescribed in the textbook and recommended

in the lecture notes, prepare all relevant journal entries relating to the securities.
Indicate the date to each journal entry. Show your workings clearly.
(15 marks/minutes)

QUESTION 5 (18 marks/minutes) [Objectives 1.6]
During 2010, Company C started a construction job with a contract price of $1,000.
The job was completed in 2012. The following data pertain to the construction period.
2010 2011 2012

Costs incurred to date 240 600 900
Estimated costs to complete 560 600 0
Progress billings to date 300 700 1,000
Cash collected to date 200 550 800
REQUIRED:
(a) Compute the amount of gross profit (in terms of revenue minus expenses) to
be recognized in 2010, 2011 and 2012. Use the percentage-of-completion
method. Show your workings clearly.
(12 marks/minutes)
(b) Prepare journal entries for 2012.
(6 marks/minutes)
 END OF MIDTERM EXAM 

SUGGESTED SOLUTIONS
Section A
1. B
2. D
3. C
4. C
5. A
6. A
7. D
8. D
9. C
10. D
11. D
12. D
13. B
14. A
15. C

Section B
These solutions contain the main points only. Further elaboration in your
answer is generally required. In addition, your mark depends on whether your
answer is clear and concise.
QUESTION 1 (20 marks)
Revenue from the sale of goods should be recognized when all the following
conditions have been satisfied:
1. The enterprise has transferred to the buyer the significant risks and rewards of
ownership of the goods;
2. The enterprise retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold;
3. The amount of revenue can be measured reliably;
4. It is probable that the economic benefits associated with the transaction will flow
to the enterprise; and
5. The costs incurred or to be incurred in respect of the transaction can be
measured reliably.
Applying the facts to the conditions:
 When did significant risks and rewards of ownership transferred? Upon order
(Dec 25) or upon delivery (Jan 2)? Need to refer to contract to find out when the
risk of loss transferred to the buyer. Installation has no impact because it is a
simple installation.
 Did the seller retain continuing managerial involvement or effective control over
the goods sold? May be a problem because the shop still used the TV as a
display model prior to its removal. Therefore, this condition was fulfilled on Dec
31.
 The other conditions were not a problem.
 Therefore, revenue should be recognized on Dec 31 or Jan 2, depends on when
the risk of loss was transferred to the buyer.

For debt investments, they are reported at amortized cost if the company has (1) a
business model whose objective is to hold assets in order to collect contractual cash
flows (“business model test”) and (2) the contractual terms of the financial asset
provide specified dates to cash flows that are solely payments of principal and
interest on the principal amount outstanding (“contractual cash flow test”). Otherwise,
they are reported at fair value and any unrealized holding gain or loss is recorded in
the income statement.
For equity investments, they are generally recorded and reported at fair value. For
equity investment classified as trading, any unrealized holding gain or loss is
recorded in the income statement. For equity investment classified as non-trading,
any unrealized holding gain or loss is recorded in equity as other comprehensive
income (OCI).

Present value of the bonds as at January 1, 2010

= 10,000 / 1.12 + 10,000 / 1.122 + (10,000 + 100,000) / 1.123
= 95,196
Interest Interest Discount Bond Carrying

Date Receipt Revenue Amortization Value
Jan 1, 2010 – – – 95,196
Jan 1, 2011 10,000 11,424 1,424 96,620
Jan 1, 2012 10,000 11,594 1,594 98,214
Jun 30, 2012 5,000 5,893 893 99,107
Date Accounts Debit Credit

Jan 1, Debt Investment 95,196
2010 Cash 95,196
Dec 31, Interest Receivable 10,000

2010 Debt Investment 1,424
Interest Revenue 11,424
Dec 31, Securities F.V. Adjustment 380

2010 Unrealized Holding Gain 380
Jan 1, Cash 10,000

2011 Interest Receivable 10,000
Dec 31, Interest Receivable 10,000

2011 Debt Investment 1,594
Dec 31, Unrealized Holding Loss 594

2011 Securities F.V. Adjustment 594
Jan 1, Cash 10,000

2012 Interest Receivable 10,000
Jun 30, Cash 5,000

2012 Debt Investment 893
Jun 30, Cash 99,000

2012 Loss on Sale of Debt Investment 107
Debt Investment 99,107
Jun 30, Securities F.V. Adjustment 214



Jan 1, Equity Investments 200
2010 Cash 200
Dec 31, Securities F.V. Adjustment 5

Jun 30, Cash 95

2011 Realized Loss on Sale of Equity Inv 5
Equity Investment 100
Dec 31, Unrealized Holding Loss 25

2011 Securities F.V. Adjustment 25

Part (a)
Recognized in Recognized in
2010 To Date Prior Years Current Year
Revenue 300 300
Expenses 240 240
Gross profit 60 60
2011
Revenue 500 300 200
Expenses 700 240 460
Gross profit (200) 60 (260)
2012
Revenue 1000 500 500
Expenses 900 700 200
Gross profit 100 (200) 300
Part (b)

2012 Construction in Process (C.I.P.) 300
Cash (or A/P, etc.) 300
C.I.P. (gross profit) 300

Construction Expenses 200
Revenue from L.T. Contracts 500
Accounts Receivable 300

Billings on C.I.P. 300
Cash 250
Accounts Receivable 250
Billings on C.I.P. 1,000

C.I.P. 1,000

ACCT 202 Financial Accounting II Spring 2011 Midterm Exam

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(ACCT202)[2011](s)midterm~1406^_54999.pdf downloaded by kkwongbg from http://petergao.net/ustpastpaper/down.php?course=ACCT202&id=3 at 2020-10-15 12:22:32. Academic use within HKUST only.

ACCT 202 Financial Accounting II

Date: April 6, 2010 (Wednesday)

1. This is a CLOSED book examination.

2. This exam contains 15 MC questions and 5 problems. ALL questions are

3. Answer all questions in the answer booklet provided.

5. START EACH QUESTION ON A NEW PAGE. Indicate the question no clearly.

7. Materials, aids and instruments allowed during the examination: electronic

TURN OFF YOUR MOBILE PHONES!!!

ACCT 202 Spring 2011 Midterm Exam Page 1

SECTION A (15 Multiple-choice questions; 30 marks/minutes)

Instructions: Answer all MC questions on the FIRST PAGE of the Answer

1. In general, companies recognize revenue

2. Revenue is recognized by the consignor when the

A. goods are shipped to the consignee.

3. The percentage-of-completion method must be used when certain conditions

A. Estimates of progress toward completion, revenues, and costs can be

ACCT 202 Spring 2011 Midterm Exam Page 2

5. The fair value option allows a company to

A. record income when the fair value of its investment increases.

6. Santo Corporation declares and distributes a cash dividend that is a result of

Fair Value Method Equity Method

A. decreased by accrued interest from June 1 to November 1.

8. Which of the following statements is correct?

A. A company can exclude a short-term obligation from current liabilities if it

ACCT 202 Spring 2011 Midterm Exam Page 3

Use the following information for questions 10–12.

10. The premium expense for 2010 is

11. The estimated premium liability at December 31, 2010 is

12. The estimated premium liability at December 31, 2011 is

ACCT 202 Spring 2011 Midterm Exam Page 4

14. The pre-emptive right enables a shareholder to

A. share proportionately in any new issues of shares of the same class.

A. A debit to Financing Expense.

CONTINUE ON NEXT PAGE …

ACCT 202 Spring 2011 Midterm Exam Page 5

SECTION B: Problem Questions (90 marks/minutes)

QUESTION 1 (20 marks/minutes) [Objective 1.3]

The following details pertain to your recent purchase of a TV from an electronics

CONTINUE ON NEXT PAGE …

ACCT 202 Spring 2011 Midterm Exam Page 6

QUESTION 2 (15 marks/minutes) [Objectives 2.1, 2.12]

Do not discuss Equity Method securities.

CONTINUE ON NEXT PAGE …

ACCT 202 Spring 2011 Midterm Exam Page 7

QUESTION 3 (22 marks/minutes) [Objectives 2.2-2.7]

On January 1, 2010, Company A purchased 10% bonds, having a maturity value of

CONTINUE ON NEXT PAGE …

ACCT 202 Spring 2011 Midterm Exam Page 8

QUESTION 4 (15 marks/minutes) [Objectives 2.10 & 2.12-2.13]

On January 1, 2010, Company B purchased two securities: Security 1 at the cost of

On June 30, 2011, Security 1 was sold for $95.

On December 31, 2011, the fair value of Security 2 was $80.

Company B is a calendar-year corporation.

Following the accounting treatment as prescribed in the textbook and recommended

CONTINUE ON NEXT PAGE …

ACCT 202 Spring 2011 Midterm Exam Page 9

QUESTION 5 (18 marks/minutes) [Objectives 1.6]

2010 2011 2012

(b) Prepare journal entries for 2012.

 END OF MIDTERM EXAM 

ACCT 202 Spring 2011 Midterm Exam Page 10

ACCT 202 Spring 2011 Midterm Exam Page 11