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STUDENT NUMBER_________________

McGill University
School of Continuing Studies

Introduction to Financial Accounting – MGCR 211


FALL 2012

MID-TERM EXAMINATION
SOLUTION
Lecturers: Ed Bierbrier Date: October 11, 2014
Jason Moschella Time: 9:00am – 11:30am

Instructions:

1. This is a closed book exam.


2. You are allowed dictionaries
3. Only non-text storing calculators are allowed
4. This exam consists of 7 questions.
5. Total number of pages including cover sheet: ??

Question Available Mark


Marks
Q1 24
Q2 10
Q3 10
Q4 10
Q5 16
Q6 14
Q7 16
Total 100
MGCR 211

Question 1 (24 marks - 36 minutes)

The following year-end data was taken from the accounts of Bright Side Ltd. at December 31, 2014:

Accounts Receivable $16,800


Interest Payable 350
Salary Expense 63,440
Retained Earnings, January 1, 2014 18,500
Income Tax Expense 1,164
Laundry Revenue 106,970
Depreciation Expense, Laundry Machines 6,000
Accounts Payable 4,900
Laundry Supplies 3,200
Utilities Expense 9,600
Prepaid Insurance 2,100
Laundry Machines 50,000
Insurance Expense 10,500
Salary Payable 1,904
Cash 5,100
Interest Expense 350
Accumulated Depreciation, Laundry Machines 21,000
Laundry Supplies Expense 13,200
Dividends declared and paid 4,500
Unearned Laundry Revenue 630
Income Taxes Payable 700
Common Shares 10,000
Note Payable, due 2018 21,000

Required:

Prepare in good form an Income Statement and Statement of Financial Position.

Bright Side Ltd.


Income Statement
For the Year Ended December 31, 2014

Laundry Revenue $106,970

Operating Expenses
Salary Expense $63,440
Insurance Expense 10,500
Utilities Expense 9,600
Depreciation Expense 6,000
Laundry Supplies Expense 13,200
Total Operating Expenses 102,740
Income from Operations 4,230
Interest Expense 350
Income before Income Taxes 3,880
Income Taxes 1,164
Net Income $2,716

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MGCR 211

Question 1 – Cont’d

Bright Side Ltd.


Statement of Financial Position
December 31, 2014

Assets
Current Assets:
Cash $5,100
Accounts Receivable 16,800
Laundry Supplies 3,200
Prepaid Insurance 2,100
Total Current Assets 27,200

Property, Plant and Equipment:


Machinery $50,000
Accumulated Depreciation 21,000 29,000
Total Assets $56,200

Liabilities and Shareholders’ Equity


Current Liabilities:
Accounts Payable $4,900
Salary Payable 1,904
Unearned Laundry Revenue 630
Interest Payable 350
Income Tax Payable 700
Total Current Liabilities 8,484

Long-term Liabilities
Notes Payable, due 2018 21,000
Total Liabilities 29,484

Shareholders’ Equity:
Common Shares $10,000
Retained Earnings 16,716
Total Shareholders’ Equity 26,716
Total Liabilities and Shareholders’ Equity $56,200

Retained Earnings 31/12/2014: $18,500 + 2,716 – 4,500 = $16,716

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MGCR 211

Question 2 (10 marks - 15 minutes)

Six Pack Ltd. successfully operates two high-end fitness centres in the same town. Members pay a
$150 non-refundable initiation fee, and then a one-year membership for unlimited access to the
facilities costs an additional $900. They have 3,200 active members. Memberships are required to be
paid in full, in three equal monthly instalments over the first 3 months of a membership year. Partial
refunds, of the annual fees, are only given if a member moves more than 50 kilometres away. In
addition to the facilities, there is a juice bar that sells fruit smoothies and healthy snacks. Members
can sign for their purchases at the juice bar and then they are billed at the end of the month.

Required:

Discuss when each type of revenue should be recognized by Six Pack Ltd.. Support your discussion
with reference to GAAP/IFRS revenue recognition criteria.

In order for revenue to be recognized performance must have been achieved, the amount
earned must be measurable and collection reasonably assured.

For the initiation fee all three criteria are met at the time of signing the contract and paying the
fee, so revenue can be recognized at that time.

For the membership fee although they are measurable when the contract is signed and
collection is estimable at that time, (and with certainty when it is fully paid at the end of three
months), the services have not been provided at that time. The service is provided over the
year and therefore revenue should be recognized evenly over the year. The amounts received
will initially be recorded as unearned revenue and then every month $75 would be recorded as
revenue. A small allowance should be set-up for expected refunds that might be claimed. The
amount could be based on previous years’ experience.

The revenues from the juice bar should be recognized at the time of sale, as they are
measurable and earned. Although collection will not take place until the end of the month,
collection appears to be reasonably assured and would not prevent the revenue from being
recognized at the time of sale. A small allowance for uncollectible amounts, if any, should be
accrued.

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MGCR 211

Question 3 (10 marks - 15 minutes)

The following information was available on December 31, 2014, the end of the year for Empire Ads
Ltd.:

a) On June 1, 2014 the company received $200,000 from a client to buy advertising spots for them
for the next 12 months. As at December 31, 75% of the amount had been spent on ads that had
run during 2014, the remainder will be spent in 2015.

b) The company moved to a new location on September 1, 2014 and paid 6-months rent of $12,000.
The company spent $20,000 on new furniture and equipment. The furniture and equipment is
expected to last 20 years with no salvage value.

c) The office supplies account at the beginning of the year had a balance of $700. Supplies worth
$5,000 were bought during the year and the balance at the end of the year was $1,800 which
included $1,000 of stationary with the old address on it and is therefore obsolete.

Required:

For each of the items above indicate what should appear on the income statement for the year ended
December 31, 2014 and on the balance sheet as of that date. Indicate where on the balance sheet
any amounts would be reported.

a) $200,000 x .75 = $150,000 would be on the income statement as Revenue. The balance,
$50,000, would be on the balance sheet as Unearned revenue, a current liability account.

b) The 2 months of rent, $4,000 that is for January and February would be in the Prepaid rent
account, a current asset. The $8,000 that represents the Rent expense for September to
December would be an operating expense on the income statement.

The $20,000 spent on furniture would be a capital asset; Furniture and equipment. There
would be 20,000/20 x 4/12 = $333 in the Accumulated amortization account (a contra asset
account) deducted against it. The Amortization expense of $333 is an operating expense on
the income statement.

c) The Office supplies expense, $4,900, an operating expense on the income statement would
consist of what they used: 700 + 5,000 – 1,800 = $3,900 plus the amount that is in the
ending balance but is no longer useful: $1,000. It should be expensed, as it no longer has
future value to the company. The Office supplies account on the balance sheet, a current
asset, would be $800 at year-end, the reported ending balance of $1,800 less the amount to
be expensed as worthless ($1,000).

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MGCR 211

Question 4 (10 marks - 15 minutes)

The accountant for Finger Piano Company needs your help with respect to the following transactions
which took place in February:

1. Received a $500 deposit from a customer who wanted her piano rebuilt.
2. Rented a part of the building to a bicycle repair shop; received $600 for rent in February.
3. Delivered 10 rebuilt pianos to customers who paid $20,000 in cash.
4. Received $8,000 from customers as payment on their account.
5. Received a Hydro bill for $340.
6. Purchased $800 in supplies to be paid next month.
7. Paid wages of $11,000 to employees for work that was done in January
8. Delivered a piano to a customer. The total repair bill was for $1,700. The customer will pay it
next month.
9. Paid $300 on account to suppliers.
10. Paid $600 for advertising ads that will be seen in the March issue of a magazine.

Required:

Journalize the above transactions.

1. Cash .................................................................................... 500


Deferred Revenue .................................................... 500

2. Cash .................................................................................... 600


Rent Revenue ........................................................... 600

3. Cash .................................................................................... 20,000


Revenue.................................................................... 20,000

4. Cash .................................................................................... 8,000


Accounts Receivable............................................... 8,000

5. Hydro (Utilities) Expense .................................................. 340


Accounts Payable .................................................... 340

6. Supplies.............................................................................. 800
Accounts Payable .................................................... 800

7. Wages Payable .................................................................. 11,000


Cash .......................................................................... 11,000

8. Accounts Receivable ........................................................ 1,700


Revenue.................................................................... 1,700

9. Accounts Payable .............................................................. 300


Cash .......................................................................... 300

10 Prepaid Advertising ........................................................... 600


Cash .......................................................................... 600

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MGCR 211

Question 5 (16 marks - 24 minutes)

Babar Ltd.’s fiscal year ends on December 31. It is December 31, 2014 and all of the 2014 entries
have been made except for the following adjusting entries:

1. On September 1, 2014 Babar collected six months’ rent of $7,200 on storage space. At the
time of collection, Babar credited the deferred rent revenue account for $7,200.
2. The company earned service revenue of $2,000 on a special job that completed on December
29, 2014. Collection will be made in January of 2015; no entry has been recorded.
3. On November 1, 2014, Babar paid a premium of $4,200 for a one-year property insurance
policy for coverage starting at that date. The prepaid insurance account was debited for the full
amount.
4. At December 31, 2014, wages earned by employees totaled $14,300. The employees will be
paid on the next payroll date of January 8, 2015.
5. Depreciation must be recognized on a service truck that cost $12,000 on July 1, 2014. The
estimated useful life is six years with no residual value.
6. Cash of $2,400 was collected on November 1, 2014 for services to be rendered evenly over
the next twelve months, beginning November 1, 2014. The deferred revenue account was
credited for the full $2,400.
7. On December 27, 2014, the com0pany received a tax bill of $450 from the city for property
taxes relating to 2014. The bill will be paid in January of 2015.
8. On October 1, 2014, the company borrowed $20,000 from a local bank and signed an 8% note
for that amount. The interest and principal are payable on September 30, 2015.

Required:

Prepare the adjusting entry required for each transaction at December 31, 2014.

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MGCR 211

Question 5 – Cont’d

1. Deferred rent revenue ....................................................... 4,800


Rent revenue ............................................................ 4,800
$7,200 ÷ 6 months = $1,200 per month for 4 months. This entry
reduces (debits) the liability for the amount earned and records revenue.


2. Trade receivables .............................................................. 2,000
Service revenue ....................................................... 2,000
This entry records an asset for the amount due from customers
and recognizes the revenue because it was earned in 2014.

3. Insurance expense ............................................................ 700


Prepaid insurance .................................................. 700
$4,200 ÷ 12 months = $350 per month for 2 months of coverage.
This entry reduces the asset (prepaid insurance) because part of it
has been used and only $3,500 represents future benefits (an asset)
to the company.

4. Wage expense.................................................................... 14,300


Wages payable ......................................................... 14,300
Wage expense is increased (debited) because this expense was
incurred in 2014. A liability (wages payable) is credited because
this amount is owed to the employees as at December 31, 2014.

5. Depreciation expense ...................................................... 1,000


Accumulated depreciation, service truck…………… 1,000
To record depreciation expense for the year:
($12,000 ÷ 6 years) x ½ year.

6. Deferred service revenue ................................................. 400


Service revenue........................................................ 400
To recognize revenue earned during the year ($2,400 x 2/12).

7. Property tax expense ....................................................... 450


Property tax payable ................................................. 450
To record expense incurred but not yet paid.

8. Interest expense ............................................................... 400


Interest payable ......................................................... 400
To accrue interest expense incurred but not yet paid,
$20,000 x 8% x 3/12 = $400.

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MGCR 211

Question 6 (14 marks - 21 minutes)

The accountant for See No Evil, a sole proprietorship, prepared the following statement:

See No Evil
Statement of Cash Receipts and Disbursements
For the Year Ended December 31, 2014

Cash Receipts:
Received from customers
(Including $20,000 for services provided
in 2013) $350,000
Bank borrowings 60,000 $410,000

Cash Disbursements:
Interest paid to the bank 4,000
Purchase of computer 8,000
Rent paid 26,000
Equipment purchased 44,000
Salaries paid (which includes $4,000 for
December 2013) 45,000
Insurance premiums paid (covers the period
January 1, 2014 – December 31, 2015) 10,000
Parts & supplies purchased 36,000 173,000
Net cash receipts $237,000

After reviewing the accounting records, you determine that the amounts were correct, and you
discover these additional facts:

1. The business does most of its work for cash, but at the end of the year customers owed
$16,000 for services that were provided in 2014 on account (i.e., had yet to be paid).

2. The $26,000 of rent paid includes $2,000 for the December 2013 rent that was paid only in
2014.

3. The equipment was purchased at the beginning of 2014 and has an estimated life of 4 years,
with an estimated residual value of $4,000.

4. The computer, which was purchased at the beginning of the year, is expected to have a 2 year
life with no residual value.

5. In addition to the salaries paid during the year, $1,200 is owed to employees for work that was
performed in the last few days of 2014.

6. In addition to the $36,000 of parts and supplies that were purchased and paid for during the
year, creditors have billed the business $2,000 for parts and supplies that were purchased and
delivered but not paid for.

7. An inventory count at the end of 2014 shows that $1,300 of unused parts and supplies are still
on hand. The company had $1,900 of parts and supplies on hand at December 31, 2013.

Required:

Prepare, in good form, an accrual-basis Statement of Earnings for the year ended December 31,
2014. In order to earn the maximum number of marks you are asked to show all your work.

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MGCR 211

Question 6 – Cont’d

See No Evil
Statement of Earnings (accrual basis)
For the Year-Ended December 31, 2014

Service Revenues (350,000 - 20,000 + 16,000) $346,000


Operating expenses:
Parts & Supplies $38,600
Salaries Expense (45,000 – 4,000 + 1,200) 42,200
Rent Expense (26,000 – 2,000) 24,000
Insurance Expense (10,000/2) 5,000
Depreciation Expense - Equipment 10,000
Depreciation Expense - Computer 4,000
Total Expenses 123,800
Earnings from operating sources 222,200
Financing expense: Interest (4,000)
Net Earnings $218,200

Parts & Supplies: $1,900 + 36,000 + 2,000 – 1,300 = 38,600

Depreciation expense – equip: (44,000 – 4,000)/4 = 10,000

Depreciation expense – computer: 8,000/2 = 4,000

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MGCR 211

Question 7 (16 marks - 24 minutes)

The following errors were made in the accounting records of Jezibel Ltd. in 2014 and were not
discovered until 2015:

1. The journal entry to record a receipt of $3,170 for Consulting Revenue was incorrectly
recorded as $7,310
2. A payment of $2,800 for dividends paid was incorrectly debited to Salary Expense account.
3. Salary expense for 2014 of $1,650 was not recorded. It was recorded as salary expense in
2015 when it was paid.
4. A $1,850 credit to the Unearned Revenue account was posted to Accounts Receivable.

Required:

For each of the independent errors listed above, identify the net effect on assets, liabilities,
shareholders’ equity and net income for 2014 and 2015. Show understatements by “U”,
overstatements by “O” and no effect by “NE”, and identify their amounts.

Assets Liabilities Shareholders’ Net Income


Equity
2014 2015 2014 2015 2014 2015 2014 2015

1. O 4,140 O 4,140 NE NE O 4,140 O 4,140 O 4,140 NE


2. NE NE NE NE NE NE U 2,800 NE
3. NE NE U 1,650 NE O 1,650 U 1650 O 1,650 U 1,650
4. U 1,850 U 1,850 U 1,850 U 1,850 NE NE NE NE

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