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					                                AMERICAN UNIVERSITY IN BULGARIA
                                    BUS 251: Principles of Accounting
                                The First Really Bad Exam – Chapters 1- 4
                                            February 15, 2002

Score            First Name                            Last Name                     KEY             !

Phase I (3 points) -- An adjusting entry cannot include a debit to a(n): (Circle something.)
a.      asset and a credit to a revenue
b.      expense and a credit to an asset
c.      asset and a credit to a liability
d.      liability and a credit to a revenue
e.      All of the above are examples of adjusting entries.
All adjusting entries unbundle a cash flow into a chunk for the balance sheet and another for the income
statement – Only “c” fails to do that.

Phase II (3 points) -- Which of the following is an example of an accrual? (Circle something.)
a.     wages incurred but not yet paid
b.     purchase of supplies
c.     revenue collected in advance
d.     payment of advertising six months in advance
e.     all of the above
Only “a” is about a cash flow that has yet to happen – the definition of accrual.

Phase III (3 points) -- The adjusting entry to record expiration of a prepaid asset has what effect on the
basic accounting equation? (Circle something.)
a.      Increases liabilities, decreases stockholders' equity
b.      Increases liabilities, increases stockholders' equity
c.      Decreases assets, decreases stockholders' equity
d.      Decreases assets, increases stockholders' equity
e.      Decreases liabilities, decreases assets
“b” & “d” fail miserably as reasonable choices because they breach the A = L + E equation! Of the three
choices left, “a” fails to mention the word “assets” – part of the question! And “e” is out because every
adjusting entry affects the income statement and so, stockholders’ equity.

Phase IV (3 points) -- The adjusting entry to record interest expense has what effect on the basic accounting
equation? (Circle something.)
a.     Increase assets, increase liabilities
b.     Decrease assets, decrease liabilities
c.     Increase assets, decrease liabilities
d.     Increase liabilities, decrease stockholders' equity
e.     Decrease liabilities, increase stockholders' equity
“a,” “b” & “c” are out because they do not affect stockholders’ equity, which an expense would surely do.
Since an expense has a normal debit balance, the credit will fall to the liability – means it increases.

Phase V (3 points) -- Accumulated depreciation is classified as a(n): (Circle something.)
a.      liability account
b.      contra asset account
c.      asset account
d.      contra liability account
e.      equity account
This is close to memorization. “c” is a close second choice – took off only one point if “c” happened to be
marked instead of “b,” the best answer available.
Phase VI (3 points) -- Failure to record accrual of salaries expense account will: (Circle something.)
a.       overstate assets
b.       understate assets
c.       overstate liabilities
d.       understate liabilities
e.       understate net income
If an expense is not recorded, net income would be too high – that eliminates “e.” When expense is debited
in an adjusting entry, some balance sheet account is being credited; a credit reduces an asset and increases
a liability. Failing to reduce an asset would be “a” and failing to increase a liability would be “d,” those are
the only choices left. Crediting an asset and debiting an expense is the most common adjustment for a
deferral – like reducing Prepaid Rent. Question gives the hint about “accrual” but we already know people
first work and then get paid later, so “d” is surely the right choice.

Phase VII (3 points) -- Given the following two T accounts, what can be definitely said about this company's
transactions? (Circle something.)

                        Cash                                    Acc. Receivable
                (1) 12,000 | 800 (2)                           (3) 1,400 | 600 (5)
                (3)    900 | 300 (4)                                     |
                (5)    600 |                                             |

a.      Transaction one indicates the company sold merchandise for $12,000.
b.      Transaction two indicates the company bought merchandise for $800.
c.      Transaction three indicates the company sold merchandise for $900.
d.      Transaction four indicates the company paid $300 in salaries.
e.      Transaction five indicates the company received $600 from its customers.
All choices might work, but only “e’ is for sure.

Phase VIII (3 points) -- When a portion of prepaid rent expires, what will be the effect on the balance sheet
equation? (Circle something.)
a.      This transaction affects only the income statement, so there will be no effect on the balance sheet.
b.      Total assets and total liabilities will go down by the exact same dollar amount.
c.      Total assets and total stockholders' equity will go down by the exact same dollar amount.
d.      There will be no overall effect on total assets, because two different asset accounts will change by
        the exact dollar amount, with one increasing and the other decreasing.
e.      Without knowing the dollar amount of the transaction, the effect on the balance sheet equation
        cannot be determined.
Said it many times before: Adjusting entries unbundle a single cash flow into a chunk for the balance sheet
and another for the income statement. “a,” “b” & “d” fail to capture that rule. Not sure what to say about
“e” other than it’s wrong.

Phase IX (8 points) -- These data pertain to AV Corp. Total assets at January 1, 2003, were $300,000; at
December 31, 2003, total assets were $376,000. During 2003, sales were $1,097,000; cash dividends were
$3,000; and operating expenses (exclusive of cost of goods sold) were $500,000. Total liabilities at December
31, 2003, were $175,000; at January 1, 2003, total liabilities were $110,000. There was no additional paid-in
capital during 2003.

So, what was net income for 2003?                                                   $           14,000
Beg equity = 190,000 [300,000 – 110,000]; End equity = 201,000 [376,000 – 175,000].
190,000 + Net Income + Additional investment = Dividends + 201,000
Net Income = 201,000 +3,000 – 0 – 190,000 = 14.000.

What was cost of goods sold for 2003?                                                  $       583,000
Rev = COGS + Op Exp + Net Income; 1,097,000 = COGS + 500,000 + 14,000;
COGS = 1,097,000 – 500,000 – 14,000 = 583,000
Phase X (8 points) – Here is a list of ten account balances:
                       Retained Income                 $       11,000
                       Salary Expense                           8,000
                       Equipment                               41,000
                       Accounts Payable                         4,000
                       Sales                                   47,000
                       Accumulated Depreciation                 3,000
                       Cash                                     9,000
                       Paid-in Capital                         14,000
                       Cost of Goods Sold                      26,000
                       Accounts Receivable                      5,000

With that list of account, the total debits in the trial balance would have to equal -- $   89,000
Items in red font are debits; they sum to 89,000.

Phase XI (15 points) – Here are some selected numbers:

                       Revenues                            $   170
                       Expenses                                100
                       Dividends Declared                       20
                       Retained Income - Ending                125
                       Paid-in Capital - Beginning              40
                       Paid-in Capital - Ending                 50
                       Total Assets - Ending                   250
                       Total Liabilities - Beginning            90

Use the numbers shown above to compute:

Additional investments by owners                                                       $     10
Beg PIC + Additional Investment = End PIC; 40 + 10 = 50

Net income                                                                             $     70
Revenue = Expense + Net Income; 170 – 100 = 70

Retained Income – Beginning                                                            $     75*
Beg RE + Net Inc = Div. + End ER; Beg RE + 70 = 20 + 125; Beg RE = 75

Total Assets – Beginning                                                               $    205*
A = L + E; A = 90 + 75 + 40 = 205

Total Liabilities – Ending                                                             $     75
A = L + E; 250 = L + 125 +50; l = 75

*No incremental penalty for correctly carrying forward an error made in previous computation.
Phase XII (15 points) – T Corp. had these journal entries for the transactions described. Prepare the
correcting entry needed for each transaction.
a.      A credit customer paid $400 to T Corp. for the customer's outstanding balance. The journal entry
        made by T Corp.:
               Cash                             400
                       Sales                            400

b.      Depreciation for the current year was supposed to be $1,200, however this journal entry was made
        by T Corp.:
               Depreciation Expense            2,100
                       Equipment                      2,100

c.      Inventory was acquired on account for $500. T Corp. made this journal entry:
               Inventory                       500
                      Accounts Receivable              500

d.      A repair was made on some equipment. The cost was supposed to be charged to Repair Expense.
        The journal entry made by T Corp. was:
               Equipment                       700
                       Accounts Payable              700

e.      A major competitor of the company filed for bankruptcy. It was believed that this would result in
        an increase in sales of $8,000 per year. T Corp. made this journal entry:
                Prepaid Revenue                  8,000
                        Retained Income                 8,000

                                                General Journal
                                  Account                                       Debit            Credit
a. Sales                                                                                400
      Accounts Receivable                                                                                 400
b. Equipment                                                                         2,100
      Depreciation Expense                                                                              900
      Accumulated Depreciation                                                                        1,200
[Max penalty for this entry is 3/24ths of the 15 points total.]
c. Accounts Receivable                                                                  500
      Accounts Payable                                                                                    500
d. Repairs Expense                                                                      700
      Equipment                                                                                           700
e. Retained Income                                                                   8,000
      Prepaid Revenue                                                                                 8,000
Phase XIII (15 points) -- Prepare any necessary adjusting or correcting entries called for by the following
situations. Assume that no entries have been made regarding the situation other than those specifically
described. Consider each situation separately.
a.      On June 1, $1,800 was paid in advance to the landlord for nine months' rent. The tenant debited
        Rent Expense. What adjustment is necessary as of December 31?
b.      Machinery is repaired and maintained by an outside maintenance company on an annual fee basis,
        payable in advance. The $3,600 fee was paid in advance on May 1 (for 12 months beginning May 1)
        and was charged to Prepaid Maintenance Services. What adjustment is necessary on December 31?
c.      On June 1, $6,000 of machinery was purchased. $600 cash was paid down and a 9-month, 12% note
        payable was signed for the balance. The June 1 transaction was properly recorded. Prepare the
        adjustment for the $378 interest as of December 31.

                                               General Journal
                                 Account                                        Debit            Credit
a. Prepaid Rent                                                                         400
      Rent Expense                                                                                        400
[1,800 / 9 * 2]
b. Maintenance Expense                                                               1,200
      Prepaid Maintenance Services                                                                    1,200
[3,600 / 12 * 4]
c. Interest Expense                                                                     378
      Interest Payable                                                                                    378
[5,400 * .12 * 7 / 12]
Note that interest rates are ALWAYS quoted in annual terms.

Phase XIV (15 points) -- Prepare the necessary journal entries for these transactions for M Co.
a. The company purchased equipment for $7,000, paying $2,000 in cash and the remainder in a note.
b. The company paid the current month's rent, which amounted to $500, and the current month's utilities,
   which amounted to $100.
c. M Co. sold 200 shares of common stock at $11 per share in cash.
d. Inventory costing $1,400 was sold on account for $2,700.
e. Depreciation on the equipment amounted to $700.

                                               General Journal
                                 Account                                        Debit            Credit
a. Equipment                                                                        7,000
      Cash                                                                                            2,000
      Note Payable                                                                                    5,000
b. Rent Expense                                                                         500
    Utilities Expense                                                                   100
       Cash                                                                                               600
Note that journal entries are posted, line by line, to the ledger. Debiting
all 600 to “Expenses” is wrong because there is no ledger account by that
name so the entry could never be posted.
c. Cash                                                                              2,200
       Common Stock                                                                                   2,200
d. Accounts Receivable                                                               2,700
       Sales                                                                                          2,700

   Cost of Goods Sold                                                                1,400
     Inventory                                                                                        1,400
e. Depreciation Expense                                                                 700
     Accumulated Depreciation - Equipment                                                                 700

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