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Preston University

COURSE OUTLINE
FALL SEMESTER 2011
FINANCIAL ACCOUNTING

, PRESTON ,
UNIVER; JITY

MBA Program

Sr.
No,

Chapter Final Exam


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Chapter Headinq

Accounting: Information for Decision Making


Basic Financial Statements
The Accounting Cycle: Capturing Economic Events
The Accounting C. yc\e: Preparing an Annual Report
Accounting for Merchandising Activities
Financial Assets
Inventories and the Cost of Goods Sold
Plant Assets and Depreciation
Liabilities
Stockholders' Equity: Paid-in Capital
Income and Changes in Retained Earnings

Recommended Text Book:


Accounting: The Basis for Business Decisions; 11 Edition
by Meigs Williams Haka Bettner; McGraw Hill
DISTRIBUTION OF MARKS
External Eval.

Internal Sessional Evaluation


Assignments/
Project

Quizzes

Class Parti.
Attendance

Mid-Temi
Test

10

10

25

Final Examination Question Paper

Total
, Sessional
50

Terminal
Exam

Final
Evaluation

50

100

Required. 5 ProBtems out of B

~1

jjrfihur Underfill

PRESTON

TERMINAL

EXAMINATION

UNIVERSITY
Student Name:
Course Code:
Course Title:
Program:
Semester:

Islamabad - Kohat - Peshawar - Lahore


__Reg. No:_
FA 4340
Financial Accounting
MBA
Spring 2011

This is a three-hour examination and consists of problems only.


Yon may attempt not m o r e than live problems.
Q.l

The balance shcel items of The Original Malt Shop (arranged in alphabetical order) were as follows at the
close of business on September 30, 2001:
$55,000
Accounts payable
$8,500
Lund
54,090
Accounts receivable
1,250
Kay Martin, Capital
?
Ruitding
45,500
Notes Payable
3,440
Cash
7,400
Supplies
Furniture and
fixtures
20,000
The transactions occurring during the first week ofOclober were:
. Oct. 3 Martin invested an additional $30,000 cash in the business. The accounts payable were paid in full.
(No payment was made on the notes payable.)
Oct. 6 More furniture was purchased on account at a cost of $18,000, to be paid within 30 days. Supplies
were purchased for $1,000 cash from a restaurant supply centre that was going out of business.
These supplies would have cost $1,875 if purchased under normal circumstances.
Oct. 1-6 Revenues oT $5,500 were earned and paid in cash. Expenses required to earn the revenues of $4,000'
were incurred and paid in cash.
INSTRUCTIONS:
a. Prepare a balance slieet at September 30,2001. (You will need to compute the missing figure for notes
payable).
b. Prepare a balance sheet at October 6, 2001. Also prepare an income statement and a statement of cash
flows for the period October 1-6, 2001. In your statement of cash flows, treat the purchase of supplies
and the payment of accounts payable as operating activities.

,. Q.2

Environmental Solutions prepares financial statements and closes its accounts at the end of each calendar
year. The following adjusted trial balance was prepared at December 31, 2001.
ENVIRONMENTAL SOLUTIONS
Adjusted Trial Balance
December 31,2001
Cash
42,750
Notes Receivable
12,740
Accounts Receivable
65,090
Supplies
5,300
Land
196.000
Building....;.
126.000
$ 33,600
Accumulated Depreciation Building
Office Equipment
. 33,600
Accumulated Depreciation: Office Equipment.
13,440
Notes Payable
112,000
AccountsPayable
22,680
Frank L. Adams, Capital, December 31,2000..
230,300
. 70,000
Frank L. Adam, Drawing
487.200
Consulting Fees Earned
Advert isingiExpenscs
31.500
insurance Expense
38.720
Utilities Expense
15.040
Splaries Expense
245,280
Supplies Expense
9,640
Depreciation Expense: Building
,
4,200
Depreciation Expense: Office Equipment
3,360
:

$899,220

$ 899,220
Page 1 of4

INSTRUCTIONS;
a. Prepare in income statement and 0 statement of owner's equity lor Iht year ended December 31. 2001.
b. Prepare.i balance sheet (in report form) as of December 31, 2001.
c. What w(,s the estimated useful life used by Environmental Solutions in setting the depreciation rate tor
the built'ing? Approximalely how long has Environmental Solutions been using the building in its
operations'? Show computation.
d. Adam's'15 year old son Ansel is trying to understand what the net income of the business represents.
H e feels that net income less withdrawals by the owner should be available as cash. H i : compares
Environ nental Solutions 2001 net income, less withdrawals by owner, to the cash reported in the
balance sheet and asks what happened to the rest of the net income. Explain the concept of net income
to Anse Adams, including in your answer an explanation of where Die undistributed ntl income from
2001 (and prior years) "ended up".
!
E iplorer Scopes sells state of the art telescopes to individuals and organiUtions interested in studying the solar
5>stern. At December 31, last year, the company's inventory amounted to $120,000. During the Ural week of
January this'year, the company made only one purchase and one sale. These transactions were as follows:
Jan. 2 SohJ one telescope costing $37,200 to Central State University for cash, $62,000.
Jan. 5 Purchased merchandise on account from Lunar Optics, $80,000. Terms, net 30 days.

Q.3

INSTRUCT IONS:
a. Prepare journal entries to record these transactions assuming that Explorer Scopes uses the perpetual
inventory system. Use separate entries to record the sales revenue and the cost of goods sold for the sale on
January 2.
b. Compute the balance of the Inventory account on January 7.
c. Prepare journal entries to record the two transactions, assuming that Explorer Scopes uses the periodic
inventory system.
d. Compute the cost of goods sold for the first week or January assuming use ofu periodic inventory system.
Use your answer to part b as the ending inventory.
c. Which inventory system do you believe thai a company such as Explorer Scopes would probably use?
Explain your reasoning.
Q.4 a)

The cash transactions and cash balances of Norlhfleet Farm for July were as follows:
u. The ledger accounts for Cosh showed a balance at July 31 of $18,766-95.
b. The July bank statement showed a closing balance of $20,928.12.
c. The cash received on July31 amounted to $4,017.15. It was left at the bank in the night depository chute
after banking hours on July31 and therefore was not recorded by the bank on the July bank statement.
d. Also included with the July bank statement was a debit memorandum from the bank for $7.65
representing service charges for July.
e. A credit memorandum enclosed with the July bank statement indicated that a non-interest bearing note
receivable for $4,545 from Rene Manes, left with the bank for collection, had been collected and the
proceeds credited in Northfleet Farm.
L Comparison of the paid checks returned by Hie bank with the entries in the accounting records revealed
that check no 821 for $835.02 issued July 15 in payment for office equipment, had been erroneously
entered in North fleet's records as $853.02.
g. Examination of the paid checks also revealed that three checks, all issued in July, had not been paid by
the bank: no 811 for $861.12, no R14 for $640.80, no 823 for $301.05.
h. Included with the July bank statement was a $180 cheek drawn by Howard Williams, a customer of
Northflecl Farms This Check was marked "MS1 ". It had been included in ihe deposit of July 27 but had
been charged back against the Company's account on July 3 I.
T

INSTRUCTIONS:
a. Prepare a bank reconciliation Statement for Northfleel Farm at July 3 I.
b. Prepare journal entries to adjust the accounts at July 31. Assume that the accounts have not been closed.
c. State the amount oTcash that should be included in the balance sheet at 31 July.
b) On January 10, 2005, Islamabad Landscapping inc. sold 1,200 RaiuMaster-30 oscillating sprinkler heads to
CDA. Immediately prior to this sale, Islamabad Landscapping's perpetual inventory records for this
sprinkler head included the following cost layers:

1'agc 2 of 4

Purchase Date

Quantity

Unit Cost

Dec. 12, 2002

son

$9.25

Inn

WW

9.51)

9 2003

1700

Total Cost
S 7,475
H.550
SI 5,950

INSTRUCTIONS:
Nutc: We present this problem in the normal sequence oi'lhe accounting cycle - that is, journal entries
before ledger entries. However, you may find it helpful to work part b first.
a. Prepare a separate journal entry to record the cost of goods sold relating to the January 1.0 sale of 1,200
RainMaster-30 sprinkler heads, assuming that California Irrigation uses:
1. Specific idcDlificalion (400 of the units sold were purchased on December 12. and the remaining
800 were purchased on January 9).
2. Average cost.
3. D F O
4.
LIFO
b. Complete a subsidiary ledger record for Rainfvtas(cr-30 sprinkler heads using each of the four inventory
valuation methods listed above. Your inventory rccoids should show both purchases of this product, the
sale on January 1, and the balance on hand at December 12, January 9, and January 10.
c. Refer to the cost of goods sold figures computed in pari a. For financial reporting purposes can the
company use the valuation method that resulted in the lowest cost of goods sold if. for tax purposes, it
used the method that resulted in the highest cost oTgoods sold'.' Explain.
During the current year, Lund Developers disposed of plant assets in the following transactions:
Feb.10 Office equipment costing SI 5,000 was given to a scrap dealer. No proceeds were received from the
scrap dealer. At (he dale of disposal, accumulated depreciation on the office equipment amounted to
$ 12,900.
Apr. 1 Land Developers sold land and a building to Villa Associates for $ 730,000, receiving $ 400,000 in
ensh and a 5-ycar, 10% note receivable for $330,1100. Land Developers accounting records showed
the following amounts: Land $ 150,000, Building $ 300,000 Accumulated Depreciation Building
(as of April l ) $ 140,000.
Aug. 15 Land Developers traded in an old truck' for a new one. The old truck had cost $ 16,000 and
accumulated depreciation amounted to $ 11,000. The list price of the new truck was $22,000. Land
Developers received a $7,000 trade in allowance for the old truck and paid the $15,000 balance in
cash. (Trucks are included in the Vehicles account).
Oct .1 Land Developers traded in its old computer system as part of the purchase of anew system. The old
computer had cost $120,000 and as of October 1, accumulated depreciation amounted to $110,000.
The new computer had a list price of $ 70,000. Land Developers was granted a $10,000 trade in
allowance for the old computer system, paid $10,000 in cash, and issued a $ 50,000, 2 year, 9%
note payable to Action Computers for the balance. (Computers are included in the office equipment
account).
INSTRUCTIONS:
a.. Prepare;journal entries to record each of these transactions. Assume that depreciation expense on each
i asset already has been recorded up to the date of disposal. Thus you need not updaic the accumulated
depreciation figures staled in the problem.
b
Several, of the asset disposals made during the year involved the payment of boot. Explain what is meant
by the term "boot".
v

Sui Gos Co. obtained authorization to issue Rs.9l) million face value oT 10% 20 year bond", dated May I,
2001. Interest payments dates were November I and May I. Issuance of the bonds did not lake place until
August I , 2001, On this date all the bonds were issued at a price of 100 plus three month's accrued interest.
INSTRUCTIONS:
Prepare thenecessary entries in general; journal form on.
a. ' August. 1, 2001 to record the issuance of bonds.
b. November I, 2001 to record the first semiannual interest payment on the bond bsuc.
c. December 31, 2001, to accurate the bonds Interest through year-end,
d. May 1, 2002, to record the second semiannual interesl payment.
Page 3 of 4

Q.7

Early in 19 J9, Sinclair Press was organized with the authorization to issue 100, )00 shares o f $100 par value
preferred sock and 500,000 shares of $ I par value common stock. Ten thousand shares of the preferred
ilock were issued at par and 150.000 shares of common stock were sold for $V.< per share. The preferred
:tock pays a 9% cumulative dividend and is callable at SI 05. During the first fcur years of operations (1999
I hough 20(2 the corporation earned a total of $1,200,000 and paid dividends of 75 cents per share in each
;ttar on its outstanding common block.
NSTRUCTTONS:
i. Prepare the stockholders equity section of the balance sheet at Dec. 31, 2002. lnclud a supporting
schedule showing your computation of the amount retained reported.
"
'i. Are thsre any dividends in arrears on the company's preferred stock al December 31. 2002? Explain
your answer.
'
:

Q.8

Gulf Coasl Airlines operated both on airline and several motels located near airports. During Ihe year jusl
ended, all notel operations were discontinued and the following operating results were reported:
ponlinuinj; operations (airlines):
: Net sales
Costs and expenses (including Income taxes on continuing operations)....
Other data:
Operating Income from motels (net of Income taxes)
Gain on sale of motels (net of Income taNes)
Extraordinary loss (net oi'Income tax benefit)

" $51,120,000
43.320,000
864,000
4.956,000
3,360,000

The extraordinary loss resulted from the destruction of an airliner by terrorists.


Gulf Coast Airlines had 1,200,000 shares of capital stock outstanding tlnoiighoul the year.
INSTRUCTIONS:
a. Prepare a condensed income statement, including proper presentation ofthc discontinued motel
operations and the extraordinary loss. Include all appropriated earnings per share figures.
b. Assume that you expect the profitability of Gulf Coast's airlines operations to decline by 6% next year,
and the profitability of the motels to decline by 10%. What is your estimate of the company's net
earnings per share next year?

Page 4 of 4

TE

EXA.
Islamabad

Course Code:
Course TitKe:
Program:
Semester:

Lahore

Peshawar

Faisalabai

F A 4340
Financial Accounting
MBA
Sp

ring

This is a three-hour examination and consists of p r o b l e m s only.


Y o u may attempt not m o r e than five problems.
Q-.l

The balance sheet items of The Original Malt Shop (arranged in alphabetical order) were as follows at the close
of business on September 30, 2001:
$55,000
Accounts payable
$8,500
Land
5'J ,090
Accounts receivable
1,250
Kay Martin, Capital
'/
Building
-15,500
Notes Payable
3/1'10
Cash
9,400
Supplies
Furniture and
fixtures
20,000
The transactions occurring during the first week o f October were:
Oct. 3 Martin invested an additional 30,000 cash in the business. The accounts; a_v;mle were paid in full. (Mo
payment was made on (lie notes payable.)
Oct. 6 More furniture was purchased on account at a cost of $18,000, to be paid within 30 days. Supplies were
purchased for $1,000 cash from a restaurant supply center that was going out uf business. These
supplies would have cost $ 1,875 if purchased under normal circumstances.
Oct. 1-6 Revenues o f $5,500 were earned and paid in cash. Expenses required to earn the revenues of $4,000
were incurred and paid in cash.
INSTRUCTIONS:
a.
b.

Q.2

Prepare a balance sheet at September 30,2001. (You will need to compute the missing figure for notes
payable).
Prepare a balance sheet at October 6, 2001. Also prepare an income statement and a statement of cash flows,
for the period October 1-6, 2001. In your statement of cash flows, treat the purchase of supplies and the
payment o f accounts payable as operating activities.

Environmental Solutions prepares financial statements and closes its accounts at the end of each calendar year
The following adjusted trial balance was prepared at Decei :ibar 31,2001.
ENVIRONMENTAL SOLUTIONS
Adjusted Trial Balance
December 3 1,2001
Cash
: 42,750
Notes Receivable
12,740
Accounts Receivable
65,090
5,300
Supplies
196,000
Land
126.000
Building
Accumulated Depreciation Building
$ 33,600
Office Equipment
33,600
Accumulated Depreciation: Office Equipment.
13,440
Notes Payable
112,000
Accounts Payable
22,680
Frank L. Adams, Capital, December 31,2000..
230,300
Frank L. Adam, Drawing
70,000
Consulting Pees Earned
487,200
Advertising Expenses
31,500
Insurance Expense
38,720
Utilities Expense...'
15,0-10
Salaries Expense
245,280
Supplies Expense
9,640
Depreciation Expense: Building
4,200
3,360
Depreciation Expense: Office Equipment
$899,220

$ S99.220

FNSTf- UCTJON 3:
EI. Prepare an i iconic statement and a statement of owner's equity for the year ended December 31, 2001.
b. Pi spare a tw lance sheet (in report form) as of December 31,2001.
c. What was the estimated useful life used by Environmental Solutions in setting .lie depreciation rate for the
bi-ildbig? A pproxiinately how long has Environmental Solutions been using the building in its operations?
Show comp nation. '
d.

:^

i f t i ^ f i f i ^ 4 j t -

M:

'!'", "-"iiv?

-''v'.i'i

/""i.'^'

Adam's 15-'-ear old son Ansel. wTrjJWgto miderstand'what thsfetMicbrrie oftliBbusiiiessrtpreseiits. He" ;
feels that net income less withdrawals by the owner should be available as cash. He compares
Eivironmer tal Solutions 2001 net income, less withdrawal's by oivnei, to the oosh reported in the balance
si set and asks what happened to the rest of the net income. Explain the concept of net income to Ansel
Adams, including in your answer an explanation of where the undistributed net income from 2001 (and prior
years) "ended up".
;
1

Q.3

Explorer Scopes sells state of the art telescopes to individuals and organizations interested in studying the solar
system. At December 31, last year, the company's inventory amounted to $160,000. During the first week of
Jauuaiy this year, the company made only one purchase and one sale. These transactions were as follows:
Jan. 2, Sold one telescope costing $37,200 to Central State University for cash, $62,000.
Jan. 5; Purchased merchandise on account from Lunar Optics, $80,000. Terms, net 30 day;;.
t

INSTRUCTIONS:
a. Prepare journal entries to record these transactions assuming that Explorer Scopes uses the perpetual inventory
system. Use separate entries to record the sales revenue and the cost of goods sold for the sale on January 2.
b. Compute the balance of the Inventory account on January 7.
c. Prepare journal entries to record the two transactions, assuming that Explorer Scopes uses the periodic
inventory system.
d. Compute the cost of goods sold for the first week of January assuming use of a periodic inventory system. Use
your answer to part b as the ending inventory.
c. Which inventory system do you believe that a company such as Explorer Scopes would probably use? Explain
your reasoning.
Q-'l a)

The cash transactions and cash balances of Northfleet Farm for July were as follows:
a. The ledger accounts for Cash showed a balance at July 31 of $18,766.95.
b. The July bank statement showed a closing balance of 520,928.12.
c. The cash received on July31 amounted to $4,017.15. It was left at the bank in the night depository chute
after banking hours on July31 and therefore was not recorded by the bank on the July bank statement.
d. Also included with the July bank statement was a debit memorandum from the bank for $7.65 representing
service charges for July,
c. A credit memorandum enclosed with the July bank statement indicated that a non-interest bearing note
receivable for $4,545 from Rene Manes, left with the bank for collection, had been collected and the
proceeds credited in Northfleet Farm.
f.
Comparison o f the paid checks returned by the bank with the entries in the accounting records revealed that
check no 821 for $835.02 issued July 15 inpayment for office equipment, had been erroneously entered in
North flccl's records as $853.02.
g. Examination o f the paid checks also revealed that three checks, all issued in July, had. not been paid by the
bank: no 811 Tor $861 12, no 814 foi $640.80, no 823 for $301.05.
h. Included with the July bank statement was a $180 check drawn by Howard Williams, a customer of
Northfleet Farms This Check was marked "NSF". Jt had been included in the deposit of July 27 but had
been charged back against the Company's account on July 31.

INSTRUCTIONS:
a. Prepare a bank reconciliation Statement for Northfleet Farm at July 31.
b. Prepare journal entries lo adjust the accounts at July 31. Assume that the accounts have not been closed.
c. Stale the amount of cash that should be included in the balance sheet at 31 July.
b) On January 10, 2005, Islamabad Lands cap ping inc. sold 1,200 RainMaster-30 oscillating sprinkler heads to
C D A . Immediately prior to this sale, Islamabad Landscapping's perpetual inventory records for this sprinkler
head included the following cost layers:

Dec. 12. 2002


Jan

Unit Cost

Total Cost

XOQ

$9.25

S 7,400

900

9.50

Quantity

Pure ft tine Dale


9 2003

1700

S.550
SI 5.950

INSTRUCTIONS:
Note: W e present Uiis problem in the normal sequence of the accounting cycle - that is, journal entries before
ledger entries. However, you may find it helpful to work part b first.
a. Prepare a separate journal entry to record the cost of goods sold relating to the January 10 sale o f 1,200
RninMaster-30 sprinkler heads, assuming that California Irrigation uses:
1. Specific identification (400 of the units sold were purchased on December 12, and the remaining S00
were piu-chnsed on January 9).
i .
2. Average cost.
3. FIFO
4. U F O
b. Complete a subsidiary ledger record for RainMaster-30 sprinkler heads using each of the four inventory
valuation methods listed above. Your inventory records should show both purchases of this product, the
sale on January 1, and the balance on hand at December 12, January 9, and January 10.
c.

Refer to the cost o f goods sold figures computed in pail a. For financial reporting purposes can the
company use the valuation mediod that resulted in the lowest cost of goods sold if, for tax purposes, it used
the method that resulted in the highest cost of goods sold?' Explain.

During the current year. Land Developers disposed of plant assets in the following transactions;
Feb. 10 Office equipment costing S 15,000 was given to a scrap dealer. Mo proceeds were received from the
scrap dealer. A t die date of disposal, accumulated depreciation on Ilic office equipment amounted to
X 12,900.
Apr. I l.iiml Developers sold land and a building lo Villa Associates fin % 730,000, receivim , $ 400,000 in cash
and a 5-year, 10% note receivable for $3J0,O0O. Laud Duvelupers accoiunimi mcords showed idn
following amounts: Land $ 150,000, Building $ 300,000 Accumulated Depreciation Building (as of
April l ) $ 1-10,000.
Aug. 15 Land Developers traded in an old truck for a new one. The old truck had emit % 16,000 and accumulated
depreciation amounted to $ 11,000. The list price o f the new truck was $22,000. Land Developers
received a 7,000 trade in allowance for the old truck and paid the % 15,000 balance in cash (Trucks are
included in the Vehicles account).
1

Oct. I

Land Developers traded in its old computer system as part of the purchase of a new system. The old
computer had cost $120,000 and as o f October 1, accumulated depreciation amounted to S110,000. Tljc
new compifter had a list price of S 70,000. Land Developers was granted a $10,000 trade in allowance
for the old computer system, paid $ 10,000 in cash, and issued a S 50,000, 2 year, 9% note payable to
Action Computers for the balance. (Computers are included in the office equipment account).

INSTRUCTIONS:
'
|
"
a. Prepare journal f-ntries to record each o f these transactions. Assume that depreciation expense on each asset
already has be en; recorded |up to the date of disposal.'Thus you need not update the accumulated depreciation
figures stated in the problem.
b. Several o f the asiet disposals made during the year involved the payment of boot. Explain what is meant by
(he term "bcioi".
r .'
(

Sui i.ia:; Co. uttiiiiiiud anlhtiriziitioii (o i:.sue lis.6(1 million (lice v;tlth: of I{)'!;'
jv.tr I M H U I N , ikilell Mt'iy I. :?()!) I .
Interest payments dates were November 1 and May L Issuance of the bonds did not lake place- until August I,
2001. On this date all the bonds were issued at a price oflOO phii three momli's accrued interest.
INSTRUCTIONS: *
''
Prepare the necessary entries in general; journal form on.
a. August I, 200J to record the issuance o f bonds.
b. November 1,2001 to record the first semiannual interest payment on the bond issue.
c. December 31, 2001, to accurate the bonds interest through ycai-etid.
cl. May 1, 2002, to record the second semiannual interest payment,

*
>
>
>
4

>

'.

Early in 199!', Sinclair Press was organizer! with the nuthorization to issue 100,000 shams of$100 par value
preferred sto;k and 500,000 shares o f $ ! par value common stock. Ten thousand shares'of the preferred stock
were issued r.tpar and 150,000 shares of common stdck were sold for $15 per share. Tins preferrad stock pay r. a
9% cumulative dividei d and is callable at S105. During the first four years of operation; (1999 (hough 2002 the
corporation named a t<tal o f $1,200,000 and paid dividends of 75 cents per share in eac i year on its outstanding
common slouk.
INSTftUCTlONS:
a. Prcparethe stock] loklers equity section o f the balance sheet nt Dec. 3 !. 2002. Include a supporting schedule
showing your compulation o f the amount retained repotted.
b. Are ihcve any div dends in arrears on the company's preferred stock at December 31,20027 Explain.
Gulf Coast Airlines operated both an airline and several motels located near airports. Djring the year just ended,
all motel operations H ere discontinued and the following operating results were reported:
'
1

Continuing operation;, (airlines):


Metsales:
Costs and. expensed (including Income taxes on continuing operations)....
Other data:
Operating Income -Vrom motels (net of Tncome taxes)
Gain on sale o f motels (net o f tncome taxes)
Extraordinary loss (net of Income tax benefit)

$51,120,000
43,320,000

864,000
4,956,000 i
3,360,000

Tlu: eKlnmniiiwvy loss rcsullcd from the destruction of an airliner by terrorists.


Gulf Coast Airlines hud 1,200,000 shines of capita! stock ou islanding ihrnughoul the year.
INSTRUCTIONS:
'
!,
a. Prepare a condensed income statement, including proper presentation o f the discontinued motel operations
and the extraordinary loss. Include all appropriated earnings per share figures.
b. Assume that you expect the profitability of Gulf Coast's airlines operations to decline by 6% next year, and
the profitability o f the motels to decline by 10%. What is your estimate of the company's net earnings per
share next year?

PRESTON
UNIVERSITY
Islamabad

Course Code:
Course Title:
Program:
Semester:

Lahore

Peshawar

FaisaJabnd

F A 4340
Financial Accountin;
MBA
Fall 2009

This is a three-hour examination a n d consists of p r o b l e m s only.


Y o u m a y attempt not m o r e than five p r o b l e m s .
Q.l

The balance sheet items o f The Original Malt Shop (arranged in alphabetical order) were as follows at the close
of business on September 30,2001:
Accounts payable
$8,500
Land
$55,000
Accounts receivable
1,250
Kay Martin, Capital
54,090
Building
45,500
Notes Payable
1
Cash
7,400
Supplies
3,440
Furniture and
fixtures
20,000
The transactions occurring during the first week o f October were:
Oct. 3 Martin invested an additional $30,000 cash in the business. The accounts payable were paid in full. ( N o
payment was made on the notes payable.)
Oct. 6 More furniture was purchased on account at a cost o f $18,000, to be paid within 30 days. Supplies were
purchased for $1,000 cash from a restaurant supply center that was going out of business. These
supplies would have cost $1,875 i f purchased under normal circumstances.
Oct. 1-6 Revenues of $5,500 were earned and paid in cash. Expenses required to earn the revenues o f $4,000
were incurred and paid in cash.

mSTRUCTlONS:
a.
b.

Q.2

Prepare a balance sheet at September 30,2001. (You will need to compute the missing figure for notes
payable).
Prepare a balance sheet at October 6, 2001. Also prepare an income statement and a statement o f cash flows
for the period October 1-6, 2001. In your statement of cash flows, treat the purchase o f supplies and the
payment o f accounts payable as operating activities.

Environmental Solutions prepares financial statements and closes its accounts at the end of each calendar year.
The following adjusted trial balance was prepared at December 31, 2001.
ENVIRONMENTAL SOLUTIONS
Adjusted Trial Balance
December31,2001
Cash
$ 42,750
Notes Receivable
12,740
Accounts Receivable.
65,090
Supplies
5,300
Land
196,000
Building
;
126,000
Accumulated Depreciation Building
$ 33,600
Office Equipment
33,600
Accumulated Depreciation: Office Equipment,
13,440
Notes Payable....'.
112,000
Accounts Payable".
22,680
FrankL. Adams, Capital, December 31,2000..
230,300
Frank L-. Adam, Drawing
70,000
Consulting Fees Earned
487,200
Advertising Expenses
31,500
Insurance Expense
18,720
Utilities Expense
15,040
Page I of4

Salaries Expens;.
Supplies Expen: e.
Depreciation E>pi nse: Building.
Depreciation E>pdnse: Office Equipment.

245,280
9,640 .
. ' 4,200
3,360
S

899,220

899,220

INSTRUCTIONS
a. Prepare an income statement and a statement o f owner's equity for the year ended December 31, 2001.
b. Prepare abalmce sheet (in report form) as of December 31,2001.
c. What was tne estimated useful life used by Environmental Solutions in setting the depreciation rate for the
building? Approximately how long has Environmental Solutions been using the builcfing in its operations?
Show comput ition.

d. Adam's 15'year old son Ansel is trying to understand what the net income o f the business represents. He
feels that net i ncome less withdrawals by the owner should be available as cash. He compares
Environmental Solutions 2001 net income,-less withdrawals by owner, to the cash reported in the balance
sheet and asks what happened to the rest o f the net income. Explain the concept o f net income to Ansel
Adams, includuig in your answer an explanation o f where the undistributed net income from 2001 (and prior
years) "ended up'
t

Q.3

Explorer Scopes s lis state of the art telescopes to individuals and organizations interested in studying the solar
system. A t December 31, last year, the company's inventory amounted to $120,000. During the first week o f
January this year, he company made only one purchase and one sale. These transactions were as follows:
Jan. 2
Sold one telescope costing $37,200 to Central State University for cash, $62,000.
Jan. 5
Purchased merchandise on account from Lunar Optics, $80,000. Terms, net 30 days.
INSTRUCTIONS:
a. Prepare journal entries to record these transactions assuming that Explorer Scopes uses the perpetual inventory
system. Use s jparate entries to record the sales revenue and the cost of goods sold for the sale on January 2.
b. Compute the mlance of the Inventory account on January 7.
c. Prepare journal entries to record the two transactions, assuming that Explorer Scopes uses the periodic
inventory system.
d. Compute the ;ost of goods sold for the first week o f January assuming use o f a periodic inventory system. Use
your answer t a part b as the ending inventory.
e. Which inventary system do you believe that a company such as Explorer Scopes would probably use?
Explain your -easoning.

Q.4 a)

The
a.
b.
c.

cash transactions and cash balances of Northfleet Farm for July were as follows:
The ledger accounts for Cash showed a balance at July 31 of $18,766.95.
The July ban!: statement showed a closing balance of $20,928.12.
,
The cash rece ived on July3I amounted to $4,017.15. It was left at the bank in the night depository chute '
after banking hours on July31 and therefore was not recorded by the bank on the July bank statement.
Also includec. with the July bank statement was a debit memorandum from the bank for $7.65 representing
service charges for July.
A credit memorandum enclosed with the July bank statement indicated that a non-interest bearing note
receivable for $4,545 from Rene Manes, left with the bank for collection, had been collected and the
proceeds cret ited in Northfleet Farm.
Comparison i if the paid checks returned by the bank with the entries in the accounting records revealed that
check no 821 for $835.02 issued July 15 in payment for office equipment, had been erroneously entered in
North fleet's records as $853.02.
Examination af the paid checks also revealed that three checks, all issued in July, had not been paid by the
bank: no 811 for $861.12, no 814 for $640.80, no 823 for $301.05.
Included wit! the July bank statement was a $180 check drawn by Howard Williams, a customer of
Northfleet Farms This Check was marked "NSF". It had been included in the deposit o f July 27 but had
been charged back against the Company's account on July 31.
1

d.
e.

f.

g.
h.

Page 2 of 4

b)

INSTRUCTIONS;
a. Prepare a bank reconciliation Statement for Northfleet Farm at July 31.
b. Prepare journal entries to adjust the accounts at July 31. Assume that the accounts have not been closed.
c. State the amount o f cash that should be included in the balance sheet at 31 July.
On January 10,2005, Islamabad Landscapping roc. sold 1,200 RainMaster-30 oscillating sprinkler heads to C D A .
Immediately prior to this sale, Islamabad Landscapping's perpetual inventory records for this sprinkler head
included the following cost layers:
Purchase
Dec. 52, 2002
Jan. 9, 2003

Date

Quantity
800
900
1700

Unit Cost
$9.25
9.50

Total Cost
$ 7,400
8,550
$15,950

INSTRUCTIONS:
Note: W e present this problem in the normal sequence o f the accounting cycle - that is, journal entries before
ledger entries. However, you may find it helpful to work part b first.
a. Prepare a separate journal entry to record the cost o f goods sold relating to the January 10 sale of 1,200
RainMaster-30 sprinkler heads, assuming that Islamabad Landscapping issues:
1. Specific identification (400 of the units sold were purchased on December 12, and the remaining 800
were purchased on January 9).
2. Average cost.
3. FIFO
4. L I F O
b. Complete a subsidiary ledger record for RainMaster-30 sprinkler heads using each o f the four inventory
valuation methods listed above. Your inventory records should show both purchases of this product, the
sale on January 1, and the balance on hand at December 12, January 9, and January 10.
c.
Refer to the cost o f goods sold figures computed in part a. For financial reporting purposes can the
company use the valuation method that resulted in the lowest cost of goods sold if, for tax purposes, it
used the method that resulted in the highest Cost o f goods sold? Explain.
Q.5

During the current year, Land Developers disposed of plant assets in the following transactions:
Feb. 10

Office equipment costing $15,000 was given to a scrap dealer. N o proceeds were received from the
scrap dealer. A t the date o f disposal, accumulated depreciation on die office equipment amounted to
$ 12,900.
Apr. I Land Developers sold land and a building to Villa Associates for $ 730,000, receiving $ 400,000 in cash
and a 5-year, 10% note receivable for $330,000. Land Developers accounting records showed the
following amounts: Land $ 150,000, Building $ 300,000 Accumulated Depreciation Building (as o f
April 1) $ 140,000.
Aug. 15 Land Developers traded in an old truck for anew one. The old truck had cost $ 16,000 and accumulated
depreciation amounted to $ 11,000. The list price of the new truck was $22,000. Land Developers
received a $7,000 trade in allowance for the old truck and paid the $15,000 balance in cash (Trucks are
included in the Vehicles account).
'
Oct .1 Land Developers traded in its old computer system as part of the purchase o f a new system. The old
computer had cost $120,000 and as of October 1, accumulated depreciation amounted to $110,000. The
new computer had a list price of $ 70,000. Land Developers was granted a $ 10,000 trade in allowance
.for the old computer system, paid $10,000 in cash, and issued a $ 50,000, 2 year^ 9% note payable to
.. Action Computers for the balance. (Computers are included in the office equipment account).
:

DESTRUCTIONS:
a. Prepare journal entries to record each o f these transactions. Assume that depreciation expense on each asset
already has been recorded up to the date of disposal. Thus you need not update the accumuiweil depreciation
figures stated in the problem.
b. Several o f the asset disposals made during the year involved the payment of boot. Explain what is meant by
the term "boot".

Page 3 of4

During the fisca. year ended December 31, Xenon Corporation earned out the following transactions involving
notes payable. .
Aug. 6 Barroved $11,200 from T o m Hutchins, issuing to him a 45-day, 12% note payable.
Sept. IS Purchaoed office equipment from Harper Company. The invoice amount was $ 1 6,800 and Harper
Company agreed to accept as full payment a 12% three-month note for die invoice amount.
Sept.20 Paid the Hutchins note plus accrued interest,
N o v . i Borrowed $235,000 from Sun National Bank at an interest rate o f 12% per annum; signed a 90-day note,
payable.
Dec. 1 Purchased merchandise in the amount of $3,000 from Kramer Company. Gave irtsettlement a 90-day
. note boaring interest at 14%. ( A perpetual inventory system is in use). *
Dec. 16 The $16,800 note payable to Harper Company matured today. Paid the'interest accrued and issued a
new 30-day, 16% note to replace the maturing note.
INSTRUCTIONS:
a. Prepare journal entries (in general journal form) to record the above transactions. Use a 360-day year in
making the interest calculations.
b. Prepare the adjusting entry needed at December 31, prior to closing the accounts. Use one entry for all three
notes.
a.
Provide a possible explanation why the new 30-day note payable to Harper Company pays 16% interest
instead of the 12% rate charged on the September 16 note.
Early in 1999, Sinclair Press was organized with the authorization to issue 100,000 shares o f $100 par value
preferred stock and 500,000 shares of $1 par value common stock. Ten thousand shares o f the preferred stock
were issued at par and 150,000 shares of common stock were sold for $15 per share. The preferred stock pays a
9% cumulative dividend and is callable at $105. During the first four years of operations (1999 though 2002 the
corporation earned a total of $1,200,000 and paid dividends of 75 cents per share in each year on its outstanding
common stock.
INSTRUCTIONS:
a. Prepare the stockholders equity section of the balance sheet at Dec. 31, 2002. Include a supporting schedule
showing your computation o f the amount retained earnings reported.
b. Arc there any dividends in arrears on the company's preferred stock at December 31,2002? Explain.
Gulf Coast Airlines operated both an airline and several motels located near airports. During the year just ended,
all motel operations were discontinued and the following operating results were reported:
Continuing operations (airlines):
Netsalcs
Costs and expenses (including Income taxes on continuing operations)....
Other data:
Operating Income from motels (net o f Income taxes)
Gain on sale of motels (net o f Income taxes)
Extraordinary loss (net o f Income tax benefit)

$51,120,000
43,320,000
864,000
4,956,000
3,360,000

The extraordinary loss resulted from the destruction o f an airliner by terrorists.


Gulf Coast Airlines had 1,200,000 shares o f capital stock outstanding throughout the year.
INSTRUCTIONS:
a. Prepare a condensed income statement, including proper presentation o f the discontinued motel operations
and the extraordinary loss. Include all appropriated earnings per share figures.
b. Assume that you expect the profitability of Gulf Coast's airlines operations to decline hy 6% next year, and
the profitability o f the motels to decline by 10%. What is your estimate of the company's net earnings per
share next year?

Page 4 of4

PRESTON
UNIVERSITY
^fesass^*

Kohat

Islamabad

Course Code:
Course Title:
Program:
Semester:

Lahore

Peshawar

Faisalabad

F A 4340
Financial Accounting
MBA
Spring 2009

This is a three-hour examination and consists of problems only.


You may attempt not more than five problems.
Q.l

Shown below in random order is a list of bulance sheet items for Blue Lagoon Farms at September 30,
2001:
Land
Barns and Sheds
Notes Payable
Accounts receivable
Citrus trees
Accounts payable
Property Taxes Payable

$ 550,000
78,300
530,000
22,365
76,650
77,095
29,135

Fences and Gates


irrigation System
Cash
Livestock
Hollis Roberts, Capital
Wages Payable

$ 33,570
20,125
28,710
120,780
?
1,820

INSTRUCTIONS:
i.
Prepare a balance sheet by using these items and computing the amount for Hollis Roberts, Capital. Use
a sequence of assets that after "Barns and Sheds" you may list the remaining assets in any order. Include
a proper heading for your balance sheet.
ii. Assume that on September 30, immediately after this balance sheet was prepared, a tornado completely'
destroyed one of the barns. This barn hasa cost of $23,300, and was not insured against this type of
disaster. Explain what changes would be required in your September 30 balance sheet to reflect the loss
of this barn.
Q.2

Island Hopper is an airline providing passenger and freight service among some Pacific islands, The
accounts are adjusted and closed each month. At June 30 the trail balance shown below was prepared from
the ledger.
ISLAND HOPPER
Trial Balance
June 30,2001
Cash
$ 23,600
Accounts receivable
7,200
Prepaid rent
9,600
Unexpired insurance
21,000
Aircraft
:
1,200,000
Accumulated depreciation: Aircraft
$ 380,000
Notes payable
600,000
Unearned passenger revenue
,
60,000
MaryEarhart, capital
_
230;850
Mary Earhart, drawing
7,000
Freight revenue. ..
'
130,950
Fuelexpense
',
53,800
Salaried expense/
66,700
Maintenance expense
'.
12,900
$1.401.800 . $1,401.800
OTHER D A T A : '
a. The aircraftiis being depreciated by the straight-line method overa period of 10 years (120 months).
b.
The amount shown as unearned passenger revenue represents tickets sold to customers in advance of
fljghts. During June, $38,650 of this amount was earned by the airline. (Credit Passenger Revenue).
c.
Salaries earned by employees but not yet paid amount to $3,300 at June 30.
d. Accrued interest on notes payable amounts to $5,000 at June 30 and has not yet been recorded. Interest
is paid monthly, within 10 days of the end of the month. The $600,000 note payable matures on
December 3.1,2003.
,

'

Page I of<t

f
e.

f.
g.

One of th< Island Hopper's regular customers is Pacific Trading Company. The airline keeps track of
the weigh, of shipments carried for the trading company during the month and sends a bill shortly after
.month cm I. "No entry has yet been made to record $4600 earned in June carrying freight for Pacific
Trading Company.
Three months rent ($14,400) had been prepaid on May 1.
. On April 1. a 12 month insurance policy had been purchased for $25,200.

INSTRUCTIONS: Prepare a worksheet for the month ended June 30,2001,


Q.3

SoIEV Telescopes sells state of the art telescopes to individuals and organizations interested in studying the
sola-system. At December 31, last year, the company's inventory amounted to $I40 000. During the first
weeK of January this year, the company made only one purchase and one sale. These-transactions were as
follwws;
Ian. 2
Sold one telescope costing $37,200 to Central State University for cash, $52,000.
Jan/5 Purchased merchandise on account from Lunar Optics, $80,000. Terms, net 30 days. :

INSTRUCTIONS:
a. Prepare journal entries to record these transactions assuming that Solar Telescopes uses the perpetual
inventory system. Use separate entries to record the sales revenue and the cost of goods sold for the sale
' on January 2.
b. Compute the balance of the Inventory account on January 7.
c. Prepare journal entiles to record the two transactions, assuming that Solar Telescopes uses the periodic
inventory system.
d. Compute the cost of goods sold for the fust week of January assuming use of a periodic inventory system.
Use
your answer to pari b as the ending inventory.
e. Which inventoiy system do you believe that a company such as Solar Telescopes would probably use?
Explain your reasoning.
Q.4 a)

Maps & Globes, Inc., is a manufacturer that makes all sales on 30-day credit terms. Annual sales are
approximately $25 million. At the end of 2000, accounts receivable were presented in the company's
balance sheet as follows:
Accounts Receivable from Customers
$2,350,000
Less: Allowance for Doubtful Accounts
70,000
During 2001, $740,000 in accounts receivable were written off as uncollectible. Of these accounts written
off, receivables totaling $24,000 were unexpectedly collected. At the end of 2001, an aging of accounts
receivable indicated a need for an $80,000 allowance to cover possible failure to collect the accounts
currently outstanding.
Maps & Globes makes adjusting entries in its accounting records only ot year-end, Monthly and quarterly
financial statements are prepared from work sheet, without any adjusting or closing entries actually being
entered in the aecounting records. (In short, you may assume the companv adjusts its accounts only at yearend).

INSTRUCTIONS:
a. Prepare the following in the form of general journal entries:
i.
One entry to summarize all accounts written off against the allowance for doubtful accounts
during 2001.
ii. Entries to record the $24,000 in accounts receivable that were unexpectedly collected.
iii. The adjusting entry required at December 31,2001, to increase the allowance for doubtful
accounts to $80,000.
b. Notice that the allowance for doubtful accounts was only $70,000 at the end of 2000, but uncollectible
accounts during 2001 totaled $716,000 ($740,000 less the $24,000 reinstated). Do these relationships
appear reasonable, or W B S the allowance for doubtful accounts greatly understated at the end of 2000?
Explain.
b) Audio Shop uses a periodic inventoiy system. One of the most popular items carried in stock by Audio Shop
is an eight-inch speaker unit. The inventory quantities, purchases, and sales of this unit for the most recent
year are as follows:

Peee 2 of4

Inventory, Jan, 1
First purchase (May 12)
Second purchase (July 9)
Third purchase (Oct.4)
Fourth purchase (Dec.18)
Goods available for sale
Units sold during the year
Inventory, Dec. 31

Number
of Units
2,700
3,540
2,400
1,860
3.000
13,500
10.4Q0
3,100

Cost
Per Unit
$30.00
30.60
31.05
32.10
32.55

Total Cost
$81,000
108,324
74,520
59,707
97,650
$421,200

INSTRUCTIONS:
i. Using periodic costing procedures, compute the cost of the December 31 inventory and the cost of goods
sold for the eight-inch speaker units during the year under each of the following cost flow assumptions:
a. First-in, first-out
b. Last-in, first-out c. Average cost
ii. Which of the three inventory pricing methods provides the most realistic balance sheet valuation of
inventory in light of the current replacement cost of the speaker units? Does this same method also produce
the most realistic measure of income in light of the cost being incurred by Audio Shop to replace the
speakers when they are sold? Explain.
0,5

On March 29, 1998 Global Manufacturing purchased new equipment with a cost of $100,000, and an
estimated useful life of 5 years, and an estimated residual value of $10,000. For income tax purposes, this
equipment is classified as "5-year property".
INSTRUCTIONS:
Compute the annual depreciation expense for each year until this equipment becomes fully depreciated
under each of the depreciation methods listed below. (Because you will record depreciation for only a
fraction o f a year in 1998, depreciation will extend through 2003). Show supporting computations.
a. Straight-line, with depreciation for fractional years rounded to the nearest whole month.
b. 200%-declining-balance, with the half-year convention. (Limit depreciation in 2003 to an amount
that reduces the undepreciated cost to the estimated residual value.)

Q.6

On September 1,2001, Kansas Steak House signed a 30-year, $540,000 mortgage note payable to Dodge
City Savings and Loan in conjunction with the purchase of a restaurant. This mortgage note calls for interest
at the rate of 12% per year (Wa per month) and monthly payments of $5,555. The note is fully amortizing
ever a period of 360 months (30 years).
Dodge City Savings sent Kansas Steak Hose an amortization table showing the allocation of the monthly
payments between interest and principal over the life of the loan. A small part of this amortization table is
illustrated below, (for convenience, amounts have been rounded to the nearest dollar.

lateral
Period
Issue
Date
' 1
. 2
t

Amortization Table
(12%, 30-Year Mortgage Note Payable for $540,000.
Payable in 360 Monthly Installments of $5,555
Payment
Monthly
Interest
Reduction in
Date
Payment
Expense
Unpaid
Balance
September

1
2001
$5,555
$5,400
$ 155
Oct. 1
5,555
5,398
157
Nov. 1

Unpaid
Balance
$ 540,000
539,845
539,688

INSTRUCTIONS;
;
a. Explain whether the amounts of interest expense and the reductions in the unpaid balance are likely to
change in any predictable pattern from month to month.
;
b. Prepare journal entries to record the first two monthly payments on this mortgage.
c. Complete this amortization table for two more monthly inslailments-those due on December 1,2001,
and January-1, 2002 (round amount to the nearest dollar.)
d. Will any amounts relating to this 30-year mortgage be classified as current liabilities in the December
31,2001, balance sheet of Kansas Steak House? Explain, but you need not compute any additional
dollar amoujits.
Page 3 of4

Q.7

Dutmg the fist al year ended December 31, Dunleer Corporation carried out the following transactions
involving note; payable.
Aui.. 6 Born wed $11,200 from Tom Hutchins, issuing to him a 45-day, 12% note payable.
SepLtfi Pure! ased office equipment from Harper Company. The invoice amount wss $16,800 and Harper
Com iany agreed to accept as full payment a 12% three-month note for the invoice amount.
Sept.20 Paid.the Hutchins note plus accrued interest.
NoV. 1 Borrowed $235,000 from Sun National Bank at an interest rate of 12% per annum; signed a 90-day
note -layable.
Dec. 1 purchased merchandise in the amount of $3,000 from Kramer Company. Cave in settlement a 90day rote bearing interest at 14%. ( A perpetual inventory system is in use).
Dec. 16 The M6.SO0 note payable to Harper Company matured today. Paid the interest accrued and issued a
new 10-day, 12% note to replace the maturing note.
;

INSTRUCTIONS:
a. Prepare journal entries {in general journal form) to record the above transactions. Use a 360-day year in
' making the interest calculations.
b. 'Prepare the adjusting entry needed at December 31, prior to closing the accounts. Use one entry for all
three
notes, note in which interest is included in the face amount of the note.
c.
Provide a possible explanation why the new 30-day note payable to Harper Company pays 16% Interest
instead of the 12% rate charged on the September 16 note.
Q.8

At the beginning of 2001, OverN'ighl Letter showed the following amounts in the stockholders' equity section
of its balance sheet.
Stockholders' equity:
Capital stock, $1 par value, 500,000 shares authorized
382,000 issued
Additional paid-in capital: Capital stock
Total paid-in capital
Retained earnings
Total stockholders' equity

$ 382,000
4,202,000
$4,584,000 .
2,704,600
$7,288,600

The U'ansactions relating to stockholders' equity during the year are as follows:
Jan. 3 Declared a dividend of $1 per share to stockholders of record on January 31, payable on February 15.
Febl5 Paid the cash dividend declared on January 3.
Apr. 12 The corporation purchased 6,000 shares of its own capital stock at a price of $40 per share.
May 9 Reissued 4,000 shares of the treasury stock at a price of $44 per share.
June 1 Declared a 5% stock dividend to stockholders of record at June 15, to be distributed on June 30.
The market price of the stock at June 1 was $42 per share. {The 2,000 shares remaining in the treasury
do not participate in the stock dividend.)
June 30 Distributed the stock dividend declared on June 1.
Aug. 4 Reissued 600 of the 2,000 remaining shares of treasury stock at a price of $37 per share.
Dec.31 The Income Summary account, showing net income for the year of $1,928,000, was closed into the
Retained Earnings account.
Dec.31 The $382,000 balance in the Dividends account was closed into the Retained Earnings account.
INSTRUCTIONS:
i. Prepare in general journal form the entries to record the above transactions.
ii. Prepare the stockholders' equity section of the balance sheet at December 31m 2001. Include a supporting
schedule showing your computation of retained earnings at that date.
iii. Compute the maximum cash dividend per share that legally could be declared at December 31, 2001,
without impairing the paid-in capital of OverNight Letter.(Hint: The availability of retained earrings for
dividends is restricted by the cost of treasury stock owned.).

Page 4 of 4

PRESTON

TERMINAL
EXAMINATION

UNIVERSITY
Student Name:
Course Code:
Course Title:
Program:
Semester:

Islamabad) - Kohat ~ Peshawar - Lahore


Ree. No:
FA 4340
Financial Accounting
MBA
Fall 2010

This is a three-hour examination and consists of problems only.


You may attempt not more than five problems.
Q.i

Q.2

The balance sheet items of The Original Malt Shop (arranged in alphabetical order) were as follows at the
close of business on September 30, 2005:
$55,000
Accounts payable
$8,500
Land
54.090
Accounts receivable
1,250
Kay Martin, Capital
Building
45,500
Notes Payable
3,440
Cash
9,400
Supplies
Furniture and fixtures
20,000
The transactions occurring during the first week of October were:
Oct. 3 Martin invested an additional $350,000 cash in the business. The accounts payable were paid in
full. (No payment was made on the notes payable.)
Oct. 6 More furniture was purchased on account at a cost of $18,000, lo be paid within 30 days. Supplies
were purchased for $1,500 cash from a restaurant supply center that was going out of business.
These supplies would have cost $),875 if purchased tinder normal circumstances.
Oct. 1-6 Revenues of $6,500 were earned and paid in cash. Expenses required to earn the revenues of $4,500
were incurred and paid in cash.
INSTRUCTIONS:
a. Prepare a balance sheet at September 30, 2005. (You will need to compute the missing figure for notes
payable).
b. Prepare a balance sheet at October 6, 2005. Also prepare an income statement and a statement of cash
flows for the period October 1-6, 2001. In your statement of cash flows, treat the purchase of supplies
and the payment of accounts payable as operating activities.
Environmental Solutions prepares financial statements and closes its accounts at
year. The following adjusted trial balance was prepared at December 3 I 20Q1.
E N V I R O N M E N T A L SOLUTIONS
Adjusted Trial.Balance
December 31,2001
Cash
Notes Receivable
Accounts Receivable
Supplies
Land
Building
Accumulated Depreciation Building
Office Equipment
Accumulated Depreciation: Office Equipment.
Notes Payable
Accounts Payable
Frank L. Adams, Capital, December 31,2000..
Frank
Adam, Drawing
Consulting Fees Earned
Advertising Expenses
Insurance Expense
Utiiitie's Expense.
Salaries Expense!
Supplies Expense
Depreciation Expense: Building
Depreciation Expense: Office Equipment
,

the end of each calendar

42,750
12,740
65,090
5,300
196,000
126.000
$ 33,600
33,680
13,440
112,000
22,680
230,300
70,0p0
487,200
31,500
38,720
15,040
245,2*80
9,640
4,200
3,360
$899,220

$ 899,220
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INSTRU 7T10NS:
a. Prepare an inccme statement and a statement of owner's equity for the year ended Dtcember31, 2001.
b. Prepare a balance sheet {in report form) as of December 31,2001.
c. V/ha; was the estimated useful life used by Environmental Solutions in setting the depreciation i ate for
the building? t .pproximately how long has Environmental Solutions been using the building in its
operations? Shjw computation.
d. Adam's 15 yea old son Ansel is trying to understand what the net income of the business represents.
He feels thai net income less withdrawals by the owner should be available as cash, l-le compares
Environmental Solutions 2001 net income, less withdrawals by owner, to the cash reported in the
balance sheet a id asks what happened lo the resi of the net income. Explain the concept of net income
to Ansel Adpmi, including in your answer an explanation of where the undistributed net income from
200t (and prioi years) "ended up".
'
Explorer "Scopes sells state of the art telescopes lo individuals and organizations interested in studying the solar
system. At December 31, last year, the company's inventory amounted to SI 80,000. During the first week of
January this year, tlte company made only one purchase and one sale. These transactions were as follows:
Jan. 2 Sold one telescope costing $37,200 to Central State University for cash, $60,000.
Jan. 5 Purchased merchandise on account from Lunar Optics, $80,000. Terms, net 30 days.
INSTRUCTIONS'.
a. Prepare journal entries io record these transactions assuming that Explorer Scopes uses the perpetual
inventory system. Use separate entries lo record the sales revenue and the cost of goods sold for the sale on
January 2.
b. Compute the balance of the Inventory account on January 7.
c. Prepare journal entries to record the two transactions, assuming that Explorer Scopes uses the periodic
inventory system.
d. Compute the cost of goods sold for the first week of January assuming use of a periodic inventory system.
Use your answer to part b as the ending inventory.
e. Which inventory system do you believe that a company such as Explorer Scopes would probably use?
Explain your reasoning.
a]

The cash transactions and cash balances of Northfleet Farm for July were as follows:
a. The ledger accounts for Cash showed a balance at July 31 of $18,766.95.
h. The July bank statement showed a closing balance of $20,928.12.
c. The cash received on July31 amounted lo $4,017.15. Il was left at the bank in the night depository chute
after banking hours o July31 and therefore was not recorded by the bank on the July bank suilemeni.
d. Also included with the July bank statement was a debit memorandum from the bank for $7.65
representing service charges for July,
e. A credit memorandum enclosed with the July bank Statement indicated that a non-interest bearing note
receivable for $4,545 from Rene Manes, left with the bank for collection, had been collected and the
proceeds credited in Northfleet Farm.
f. Comparison of the paid checks returned bj the bank with the entries in the accounting records revealed
thai check no 821 for $835.02 issued July 15 in payment for office equipment, had been erroneously
entered in North fleet's records as $853.02.
g. Examination of the paid checks also revealed thai three checks, all issued in July, had noi been paid by
the bank: no 811 for $861.12, no 814 for $640.80. no 823 for $301.05.
h. Included with the July bank statement was a $180 eheck drawn by Howard Williams, a customer of
Northfleet farms This Check was marked "NSF". It had been included in the deposit of-luly 27 but had
been charged back agninst the Company's account on Julv 31.

INSTRUCTIONS:
a. Prepare a bank reconciliation Statement for Northfleet Farm at Inly 31.
b. Prepare journal entries lo adjust the accounts at July 31. Assume that the accounts have not been closed.
c. State the amount of cash that should be included in the balance sheet at 31 July.
b) On January 10, 2005, Islamabad Landscapping inc. sold 1,200 RainMaster-30 oscillating sprinkler heads lo
CDA. Immediately prior to this sale, Islamabad Landscapping'.* perpetual inventor; records for this
sprinkler head included the following cost layers;

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Unit Cost

Total Cost

Dec. 12, 2002

800

$9.25

$ 7.400

Jan

900

9.50

8.550

Quantity

Purchase Date
9 2003

Total on hand.

..

1700

$ J 5.950

INSTRUCTIONS:
Note: We present this problem in the norma) sequence of the accounting cycle - that is. journal entries
before ledger entries. However, you may find it helpful to work part b first,
a
Prepare a separate journal entry to record the cost of goods sold relating to the January 10 sale of 1,200
RainMaster-30 sprinkler heads, assuming that California Irrigation uses:
1. Specific identification (400 of the units sold were purchased on December 12. and the remaining
800 were purchased on January 9).
2. Average cost.
3. FIFO
4. LIFO
b. Complete a subsidiary ledger record for RainMaster-30 sprinkler heads using each of the four inventory
valuation methods listed above. Your inventory records should show both purchases of this product, the
sale on January I, and the balance en hand at December 12, January 9. and January 10.
c. Refer to the cost of goods sold figures computed in pan a. For financial reporting purposes can the
company use the valuation method that resulted in the lowest cost of goods sold if, for tax purposes, it
used the method that resulted in the highest cost of goods sold? Explain.
Q.5

On October 26, 1998. Atlantic Iron Works acquired new machinery at a cost of $60,000. The machinery has
an estimated useful life of 5 years, with a residual value of $ 20.000. For income lav purposes: this
machinery qualifies as 3-year property.
INSTRUCTIONS:
Compute the annual depreciation expense for each year using each of iwo depreciation method listed below.
Because you will record depreciation for only a fraction of a year in 1998, the straight-line depreciation
schedule will extend to the year 2003.
a. Straight-line using the half-year convention.
b. MACRS, the method Atlantic uses in its income tax returns.

Q.6

Sui Oas Co. obtained authoi izalion to issue Rs.EO million face value of 10% 20 year bonds, dated May 1.
2001. Interest payments dales were November I and May 1. Issuance of the bonds did not lake place until
August 1, 2001. On this date all the bonds were issued at a price of 100 plus three month's accrued interest.
INSTRUCTIONS:
Prepare the necessary entries in general; journal form on.
a. August 1,200] to record the issuance of bonds.
b. November 1, 2001 to record Ihe first semiannual interest payment on the bond issue;
c. December 31. 2001, to accurate the bonds interest through year-end.
d. May 1,2002. to record the second semiannual interest payment.
t

Q.7

'

Early in 1999, Sinclair Press was organized with the authorization to issue 100,000 shares of $100 par value
preferred stock and 500,000 shares of $1 par value common slock. Ten thousand shares of the preferred
stock ware issued at par and 170.000 shares of common slock were sold for $15 per share. The preferred
stock pays a 8% cumulative dividend and is callable at S?05. During the first four years of operations (1999
though 2002 the corporation earned a total of $1,025,000 and paid dividends of 75 cent-, per share in each
year on its outstanding common slock,
i
INSTRUCTIONS:'
a. Prepare the stockholders equity section Dftrie balance sheet ai Dec: 31, 2002. Include a supporting
schedule showing your computation of the amount retained reported.
b. Are there any dividends in arrears on the company's pre (erred stock at December 31, 2002? Explain
your answer. *
c. Assume that interest rales increase steadily from 1999 through 2002. Would you e\pect the market price
of the comparty's prefer! ed stock to be higher or lower than us call price ofSJ 05 at December 21, 2U02?
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At the beginning of the year, Exotic Adventures, Inc. has total stockholders' equity of $:>40000 and 40000
outstani ing shares' of a single class of capital stock. During the year, the corporation completes the following
transactions affect" ng its stockholders' equity accounts:
Jan. 10 A 5% sto;k dividend is declared and distributed. (Market price, $20 per share.j
Mar.15 The corporation acquires 2000 shares of its own capital stock at a cost of $21.00 per shari.
May 30 All 2000 shares of the treasury stock are reissued at a price of $31.50 per share.
July 3 1 ' The capital stock is split 2-for-l.
Dec.15 The board of directors declares a cash dividend of $1.10 per share, payable on January 15.
Dec.31 Net income of $260,400 (equal to $3.10 per share) is reported for the year ended December 31.
INSTRUCTIONS.
Compute the amount of total stockholders' equity the number of shares of capital stock outstanding, and the
book value per share following each successive transaction. Organize your solution-as a three-column
schedule with these separate column headings: (1) Total Stockholders' Equity. (2) Number of Shafes
Outstanding, and ^3) Book Value per Share.

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