# Practice midterm 1 solution by cWw68Ksg

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```									                                        Accounting 381
Practice Midterm 1 Exam Solution

Name _____________________________________

Section ____________________________________

General Instructions:

1. Please observe the Portland State University Code of Conduct.

2. This exam packet should have 14 pages. Please confirm that you have all of the pages.

3. Review the complete exam in order to allocate your time appropriately. You will have one
hour and 50 minutes to complete the exam.

4. In fairness to all students, questions will not be answered during the exam, except to explain
words or phrases. If a question is ambiguous, write your assumptions on the exam along with
reasonable.

6. Monitor your time and good luck!

Question I                       26

Question II                       21

Question III                      18

Question IV                       15

Question V                        20

TOTAL                           100
Question I: Adjusting Journal Entries (26 points)

Give journal entries to record each of the following transactions as well as any adjusting entries
that will be necessary on December 31, 2006. Assume that all firms use a calendar-year
accounting period and close their books on December 31. Please note that you are required to
record all related journal entries and any necessary adjusting entries.

a. Vidon Vineyards acquires a van on September 1, 2006, for \$46,000 cash. Salvage value is estimated
to be \$4000 and the useful life is estimated to be 8 years.

Sept 1         PPE                            46,000
Cash                                     46,000

Dec. 31        Depreciation Expense           1,750
Accum. dep.                           1,750
(46,000 – 4000)/8 years = \$5250/year X 4/12 = 1750)

b. Tate Company purchased land on November 1, 2006 by giving a 3-month, 9% note with a
face value of \$20,000 to the seller.

Nov. 1 Land                                   20,000
NP                                          20,000
Dec 31     Interest expense                   300
Interest payable                        300
(20,000 * .09= 1800/year X 2/12)

c. Finch Bungy Company purchases a 3-year insurance policy on June 1, 2006, paying the 3-year
paid as Prepaid Insurance on June 1, 2006.

June. 1        Prepaid Insurance              18,000
Cash                             18,000

Dec. 31        Insurance Expense             3,500
Prepaid Insurance            3,500
(18,000 / 3 = 6000/yr X 7/12)

2
Question I, continued

d. A-Boy Hardware begins business on April 1, 2006. It acquires supplies costing \$9,000 on account.
Of this amount, it pays \$7,000 by year-end. A physical inventory indicates that office supplies
costing \$1,400 are on hand at December 31, 2006.

Apr 1         Supplies Inventory          9,000
AP                            9,000

Apr 1 –       AP                          7,000
Dec. 31              Cash                          7,000

Dec. 31       Supplies Expense            7,600
Supplies Inventory            7,600

e. On November 1, 2006, Bogus Basin Co. receives \$10,800 for services to be performed November 1,
2006 through April 30, 2007. Bogus Basin Co. decides to record the amount received as Service
Revenue on November 1, 2006.

Nov. 1 Cash                               10,800
Service Revenue                       10,800

Dec. 31       Service Revenue             7,200
Unearned Revenue                      7,200
(10,800/ 6 mo’s = 1800 * 2 months)

f.      Gibson Company paid \$3,600 on June 1, 2006 for a two-year insurance policy and
recorded the entire amount as Insurance Expense.

June 1 Insurance expense                           3600
Cash                                            3600

Dec 31 Prepaid Insurance                        2550
Insurance Expense                            2550
(3600/24 = 150 * 7 mo’s = 1050 expense (3600-1050) = 2550 prepaid)

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Question II: Income Statement (21 points)

a. Vincent Corporation had income from continuing operations of \$800,000 (after taxes) for the
year ended December 31, 2007. Preferred dividends declared and paid were \$20,000. Common
stock dividends declared and paid were \$50,000. In addition, the following information, which
has not been considered, is as follows.

1. In 2007, Vincent experienced an uninsured earthquake loss in the amount of \$200,000. This
is considered to be an extraordinary item.

2. A machine was sold for \$140,000 cash during the year at a time when its book value was
\$110,000. (Depreciation has been properly recorded.) The company often sells machinery of
this type.

3. Vincent decided to discontinue its stereo division in 2007. During the current year, the loss
on the disposal of this component of the business was \$150,000 less applicable taxes.

Instructions
Present in good form the income statement of Vincent Corporation for 2007 starting with
"income from continuing operations." Assume that Vincent's tax rate is 30%. Common shares
outstanding throughout the year were as follows:

1/1/07 – 3/31/07: 120,000 shares
4/1/07 – 5/31/07: 132,000 shares
6/1/07 – 12/31/07: 162,000 shares

Weighted average calculation: 3/12 * 120,000 + 2/12*132,000 + 7/12* 162,000 = 146,500
shares

4
Question II, continued
Solution
Vincent Corporation
Partial Income Statement
For the Year Ended December 31, 2007

Income from continuing operations                                               \$821,000*
Discontinued operations
Loss on disposal of a component of a business,
\$150,000, less applicable income taxes, \$45,000                             (105,000)
Income before extraordinary item                                                 716,000
Extraordinary loss, net of applicable income taxes of \$60,000                   (140,000)
Net income                                                                      \$576,000
Per share of common stock—
Income from cont. operations (821,000 – 20,000)/146,500            \$5.47
Discontinued operations, net of tax (105,000)/146,500               (.72)
Income before extraordinary item                                    4.75
Extraordinary loss, net of tax (140,000)/146,500                    (.96)
Net income (576,000 – 20,000)/146,500                              \$3.80

*Income from cont. operations (unadjusted)                  \$800,000
Gain on sale of machinery (after tax)                         21,000
Income from cont. operations (adjusted)                     \$821,000

5
Question II, continued

6
Question III: Balance Sheet Effects of Errors or Omissions (18 points)

Using the notation O/S (overstated), U/S (understated), and NO (no effect), indicate the effect on
assets, liabilities, and shareholders’ equity as of December 31, 2006, of the following independent
errors or omissions. Ignore income tax implications. Record your answers on the schedule on the
next page. You do not have to indicate the dollar effect.

a. Depreciation expense during December 2006 was debited to Interest Expense.

b. Interest on a note payable for Year 2006 of \$2000 was not recorded.

c. A check for \$12,000 was received from a customer during December 2006 for merchandise
to be delivered during January 2007. No journal entries was made to record this check.

d. Interest accrued on Notes Receivable of \$600 as of December 31, 2006, was not recorded.

e. Interest accrued on Notes Payable of \$450 as of December, Year 2006, was recorded as
\$540.

f. An expenditure of \$1,200 made on December 2, Year 2006, for six months rent on an
automobile was debited to Rent Expense. No adjusting entry was made on December 31,
2006.

g. The company rented out excess office space for the two-year period beginning January 1,
2006. A rental check for this period of \$10,000 was received on December 26, 2005, and
correctly credited to Rental Fees Received in Advance. No further journal entries were
made relating to this rental during Year 2006.

h. A check for \$250 was paid to a supplier on December 31, 2006, in settlement of an
accounts payable. No journal entries have been made to record this check.

7
Question III, continued

ASSETS   LIABILITIES   SHAREHOLDERS’
EQUITY
a.
NO          NO             NO
b.
NO          U/S            O/S
c.
U/S         U/S            NO
d.
U/S         NO             U/S
e.
NO          O/S            U/S
f.
U/S         NO             U/S
g.
NO          O/S            U/S
h.
O/S         O/S            NO

8
Question IV: Balance Sheet (15 points)

1. Use the code letters listed below (a – l) to indicate, for each balance sheet item (1 – 11) listed
below the usual valuation reported on the balance sheet. Letters (a – l) may be used more
than once or not at all (11 points).
_____ 1. Trade accounts payable                _____ 7. Long-term bonds payable
_____ 2. Prepaid expenses                      _____ 8. Land (in use)
_____ 3. Merchandise inventory                 _____ 9. Land (future plant site)
_____ 4. Property, plant, and equipment        _____ 10. Patents

a.   Par value
b.   Current cost of replacement
c.   Amount payable when due, less unamortized discount or plus unamortized premium
d.   Amount payable when due
e.   Market value at balance sheet date
f.   Net realizable value
g.   Lower of cost or market
h.   Original cost less accumulated amortization
i.   Original cost less accumulated depletion
j.   Original cost less accumulated depreciation
k.   Historical cost
l.   Unexpired or unconsumed cost

Solution:
1.   d                       6.   h                        10.    h
2.   l                                                     11.    e
3.   g                       7.   c
4.   j                       8.   k
5.   f                       9.   k

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Question IV (cntd.):

2. The current assets section of the balance sheet should include
a.     machinery.
b.     patents.
c.     goodwill.
d.     inventory.

3. A generally accepted method of valuation is
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.
a.    1
b.    2
c.    3
d.    1 and 2

10
Question V: Short Answer and Multiple Choice (20 points)

1.   Katmandu Corporation has an extraordinary loss of \$400,000, an unusual gain of \$115,000, and a
tax rate of 40%. At what amount should Katmandu report each item in the income statement (2
points)?
Extraordinary loss           Unusual gain

(240,000)                   115,000

2.Should either of the following be reported as a prior period adjustment (2 points)? Circle correct
a. Change from unaccepted principle to accepted principle?              YES             NO
b. Change in estimated lives of depreciable assets?                     YES             NO

3. What is due process in the context of standard setting at the FASB?
a.      FASB operates in full view of the public.
b.      Public hearings are held on proposed accounting standards.
c.      Interested parties can make their views known.
d.      All of the above.

4. Which of the following organizations has been responsible for setting U.S. accounting standards?
a.     Accounting Principles Board.
b.     Committee on Accounting Procedure.
c.     Financial Accounting Standards Board.
d.     All of the above.

5. Which organization was responsible for issuing Accounting Research Bulletins?
a.     Accounting Principles Board.
b.     Committee on Accounting Procedure.
c.     The SEC.
d.     AICPA.

6. Which organization is responsible for issuing Emerging Issues Task Force Statements?
a.     FASB
b.     CAP
c.     APB
d.     SEC

7. One of the elements of financial statements is comprehensive income. As described in Statement of
Financial Accounting Concepts No. 6, "Elements of Financial Statements," comprehensive income is
equal to
a.       revenues minus expenses plus gains minus losses.
b.       revenues minus expenses plus gains minus losses plus investments by owners minus
distributions to owners.
c.       revenues minus expenses plus gains minus losses plus investments by owners minus
distributions to owners plus assets minus liabilities.
d.       none of these.

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Question V (cntd.)

8. Which basic assumption is illustrated when a firm reports financial results on an annual basis?
a.     Economic entity assumption.
b.     Going concern assumption.
c.     Periodicity assumption.
d.     Monetary unit assumption.

9. What are the basic components of the conceptual framework?

The basic components of the conceptual framework are:
a. Objective—present the goals and purposes of accounting.
b. Qualitative characteristics—the characteristics that make accounting information useful.
c. Elements—provide the definitions of the broad classifications of items found in financial
statements.
d. Operational guidelines (recognition and measurement concepts)—recommend concepts to guide
decisions concerning the display and disclosure of information about income, cash flows, and
financial position. The operational guidelines are composed of three parts:

(1) Basic assumptions.
(2) Accounting principles.
(3) Constraints.

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