Straight Line Amortization Chart - DOC

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					                                        Name:

                                                               Term grade: _________________/ 35

                       MEMORIAL UNIVERSITY OF NEWFOUNDLAND
                                FACULTY OF BUSINESS
                                     BUSINESS 1101
                        TERM TEST # 2 - Value - 20% of your final grade
                                     October 19, 2005
                                             Version 2
                                                                                        Penalty if
                                                                                        exam is not
                 Question                       Marks          Suggested Time           passed in on
                  1                              25             19 minutes              time
                  2                              15             11 minutes
                  3                              20             15 minutes
                  4                              30             23 minutes
                  5                              10              7 minutes
                                                100             75 minutes


Instructions:


     1.        NO QUESTIONS WILL BE ANSWERED BY THE INVIGILATOR. Please include
               with your written answers any assumptions that you feel are necessary. Only logical
               assumptions will be considered.



2.        This entire exam must be returned to the University. Please be neat and logical.

3.        Budget your time. Please use a pen or dark pencil. DO NOT TEAR PAGES OUT OF
          THE EXAM.




                            Please turn off the ringer on your cell phone!
1.     25 marks: suggested time - 19 minutes
For each of the following, on this paper circle the most correct answer. Unclear answers will not
be marked. (one mark each)

1.   If a business pays rent in advance and debits a Prepaid Rent account, the company receiving
     the rent payment will credit
         a. cash.
         b. prepaid rent.
         c. unearned rent revenue.
         d. rent receivable.

2.        A decline in a company’s gross profit could be caused by all of the following except
          a. selling products with a lower mark-up.
          b. clearance of discontinued inventory.
          c. paying lower prices to its suppliers.
          d. increased competition resulting in a lower selling price.

3.        Gross profit margin is a measure of
          a. liquidity.
          b. profitability.
          c. solvency.
          d. comparability.

4.    Which of the following is not a current item on the balance sheet?
      a. Inventory
      b. Equipment
      c. Accounts payable
      d. Accrued wages payable

5. Which of the following accounts would not likely need to be adjusted at year end?
     a. Office Supplies
     b. Unearned Revenue
     c. Prepaid Advertising
     d. Land

On this paper, circle a T if the statement that follows is true. Circle F if the statement that
follows is false. Unclear answers will not be marked. (one mark each)

T     F       6. Prepaid expenses expire either with the passage of time or use.

T     F       7. If an error is detected in the trial balance stage, a closing entry is made to correct
                 the error.

T     F       8. Accounts receivable is normally a credit balance.
                                                   1
T   F     9. Interest revenue and interest expense are included in income from operations.

T   F   10. The balance sheet equation is represented as: Assets = Liabilities – Shareholders’
            Equity.

T   F    11. Debit and credit can be interpreted to mean ―bad‖ and ―good,‖ respectively

T   F    12. Closing entries result in the transfer of net earnings or net loss into the Retained
             Earnings account.

T   F    13. The Sales Returns and Allowances account and the Sales Discounts account are
             both classified as expense accounts.

T   F    14. Straight-line amortization = (cost + residual value) ÷ estimated useful life.

T   F    15. Under a perpetual inventory system, the cost of goods sold is determined each
             time a sale occurs.

T   F    16. Sales minus operating expenses equals gross profit or gross margin.

T   F   17. Freight costs incurred when buying inventory are added to the inventory account in
            a perpetual system.

T   F 18.     The terms 1/10, n/30 mean that a 1 percent discount is allowed on payments made
              within 10 days of the invoice date.

T   F   19. The matching principle requires that efforts (expenses) be related to
            accomplishments (revenues).

T   F    20. Unearned revenues result when cash has been received before revenue is earned.

T   F    21. Dividends are an expense of doing business.

T   F 22. Revenue should be recognized in the period in which the cash is received.

T   F   23. If prepaid costs are initially recorded as an asset, no adjusting entries will be
            required in the future.

T   F 24. The balances of the Amortization Expense and the Accumulated Amortization
          accounts should always be the same.

T   F   25.    When an invoice is paid within the discount period, the amount of the discount
              decreases Merchandise Inventory.
2.      15 marks : suggested time – 11 minutes

     By completing the chart below, state the effect on each of net income, total assets and total
     liabilities if the following adjustments are accidentally not recorded or recorded incorrectly.
     (Ignore income taxes.) You must clearly indicate whether the account would be over or
     under stated and include the dollar amount. The first one is completed as an example. If
     there is no impact on the account, indicate this with N/A. Blank cells/blocks will be
     marked wrong.
        a.         Utilities expense incurred but not yet paid, $350.
        b.         Amortization on equipment, $400.
        c.         Ending inventory was overstated by $450.
        d.         Insurance expired during the current period, $250.
        e.         Unearned revenue that was earned during the period, $450.
        f.         Service revenue earned, but not yet collected, $900.


                      Net Income              Total Assets            Total Liabilities
              a.            over 350                   N/A                     under 350
              b.


              c.


              d.


              e.


              f.




You are not required to explain your entries. However, the explanation for example a is that
both utilities expense and utilities payable are understated.
3.      20 marks: suggested time – 15 minutes

On September 1, Plains Supply had an inventory of 18 backpacks at a cost of $20 each. The
company uses a perpetual inventory system. During September, the following transactions and
events occurred. All purchases and sales are on credit.

Sept.    4   Purchased 35 backpacks at $20 each from Ginzer, terms 2/10, n/30.

         6   Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that
             were defective.

         9   Sold 30 backpacks for $30 each to Makell Books, terms 2/10, n/30.

        13   Paid Ginzer amount owing.

Instructions:
Journalize the September transactions for Plains Supply. Please answer this in the answer
booklet, not on this paper. The marker will not see anything written on this paper. You do
not need to include explanations with your journal entries, but it is to your advantage to show
supporting calculations.
4.       30 marks: suggested time – 23 minutes

The unadjusted trial balance of Ethan Hennessey Inc. appears below.
                                                   ETHAN HENNESSEY INC.
                                                      Undjusted Trial Balance
                                                          September 30, 2005
———————————————————————————————————————
                                                                                                                Debit   Credit
Cash ......................................................................................................... $ 6,400
Accounts Receivable ...............................................................................              2,200
Office Supplies ........................................................................................         1,800
Prepaid insurance .....................................................................................          1,500
Office Equipment ....................................................................................           13,500
Accumulated Amortization—Office Equipment ....................................                                         $ 2,100
Accounts Payable ....................................................................................                    5,900
Unearned Service Revenue .....................................................................                           5,000
Common Shares .......................................................................................                    8,900
Retained Earnings ...................................................................................                    4,400
Dividends ................................................................................................       2,500
Service Revenue ......................................................................................                   3,500
Rent Expense ..........................................................................................          1,900
                                                                                                               $29,800 $29,800

Additional data:
   a. A count of Office Supplies showed there was $550 on hand at September 30th.

     b. Amortization per month is $350.

     c. The balance in the Prepaid Insurance account is for a six month policy bought on July 1,
        2005.

     d. $1,500 of the amount collected in advance from customers had been earned by September
        30th.

     e. Salaries of $400 are owing to the employees.

Instructions:
Prepare the adjusting journal entries for the quarter July 1, 2005 to September 30, 2005. Please
answer this in the answer booklet, not on this paper. The marker will not see anything
written on this paper. You do not need to include explanations with your journal entries, but it
is to your advantage to show supporting calculations.
5.     10 marks: suggested time – 7 minutes

Presented below is the Adjusted Trial Balance for Emma Hickey Corporation on December 31, 2005.
                                  EMMA HICKEY CORPORATION
                                             Trial Balance
                                          December 31, 2005
————————————————————————————————

                                              Dr.            Cr.
Cash                                     $ 2,000
Accounts Receivable                        3,900
Prepaid Rent                               1,500
Supplies                                     800
Automobile Equipment                      18,000
Accumulated Amortization—
   Automobile Equipment                                  $ 1,500
Accounts Payable                                           3,000
Income Tax Payable                                         2,000
Notes Payable                                             10,000
Interest Payable                                             120
Salaries Payable                                             600
Unearned Service Revenue                                   4,360
Common Shares                                              7,200
Dividends                                   3,200
Service Revenue                                            9,200
Salaries Expense                           2,660
Utilities Expense                          2,100
Rent Expense                               1,100
Supplies Expense                             400
Amortization Expense                         200
Interest Expense                             120
Income Tax Expense                         2,000
   Totals                                $37,980         $37,980


Instructions:
Prepare the closing journal entries for December 31, 2005. Please answer this in the answer
booklet, not on this paper. The marker will not see anything written on this paper. You do
not need to include explanations with your journal entries.
                    Solution to 1101 test #2, version 2 F2005

1    C
2    C   Paying lower prices will decrease COGS and increase gross
         profit.
3    B
4    B
5    D


6    T
7    F   An adjusting, not closing, entry is made.
8    F   Debit balance
9    F   Included AFTER income from operations
10   F   Assets = Liabilities PLUS (not minus) Shareholders’ Equity
11   F   No, they are just arbitrary terms.
12   T
13   F   No. They are contra revenue accounts.
14   F   Cost Minus (not plus) residual value
15   T
16   F   Sales minus cost of goods sold (not operating expenses)
         equals gross margin.
17   T
18   T
19   T
20   T
21   F   Dividends are not an expense on the Income Statement.
22   F   Revenue is recognized when the work is performed. Cash
         may be received before or after that point in time.
23   F   The assets must be decreased as the prepaid asset expires / is
         used up.
24   F   No. Accumulated Amortization will build up or accumulate
         over time.
25   T
IMPACT OF ERRORS
a.        Utilities expense incurred but not yet paid, $350.
Answer was given on the exam; no marks awarded here.

b.        Amortization on equipment, $400.
Amortization expense and accumulated amortization are understated. Understating the
expense will overstate income. Understating the accumulated amortization means you
are not subtracting as much in calculating book value of assets, so total assets are
overstated.

b.     Ending inventory was overstated by $450.
Net income will be overstated because the error in inventory will cause Cost of Goods
Sold expense to be understated. Understating an expense overstates income.

d.     Insurance expired during the current period, $250.
Should have increased insurance expense and decreased the asset, prepaid insurance.
Understating an expense overstates income.

e.     Unearned revenue that was earned during the period, $450.
The liability should have been reduced and revenue should have been increased.
Understating revenue understates income.

f.    Service revenue earned, but not yet collected, $900.
Accounts receivable and revenue are understated.


             Net Income               Total Assets             Total Liabilities
     a.             over 350                    N/A                  under 350
                    no marks                 no marks                 no marks
     b.            Over $400                 Over $400                   N/A
     c.            Over $450                 Over $450                   N/A
     d.            Over $250                 Over $250                   N/A
     e.           Under $450                    N/A                  Over $450
     f.           Under $900                Under $900                   N/A
Entries for the perpetual inventory system

Sept.    4   Inventory (or Merchandise Inventory) ........................................                   700
                   Accounts Payable ..............................................................                 700
             35 X $20

         6   Accounts Payable ........................................................................       100
                  Inventory ...........................................................................            100
             5 X $20

         9   Accounts Receivable ...................................................................         900
                  Sales ..................................................................................         900
             30 X $30

             Cost of Goods Sold .....................................................................        600
                   Inventory ...........................................................................           600
             30 X $20

        13   Accounts Payable ($700 – $100) ................................................                 600
                  Cash ($600  .98) ..............................................................                 588
                  Merchandise Inventory ($600  .02) .................................                              12
a. Supplies Expense (or Office                              1,250
   Supplies Expense)
                                 Office Supplies                    1,250
   1,800 - 550

b. Amortization expense                                     1,050
                                 Accumulated Amortization           1,050
   $350 / month X 3 months

c. Insurance expense                                         750
                                 Prepaid insurance                   750
   $1,500 / 6 months = $250
   $250 X 3 months = $750

d. Unearned revenue                                         1,500
                                 Service revenue (or                1,500
                                 Revenue)

e. Salaries expense                                          400
                                 Salaries payable                    400
Dec. 31   Service revenue                            9,200
                              Retained Earnings              9,200

Dec. 31   Retained Earnings                          8,580
                              Salaries expense               2,660
                              Utilities expense              2,100
                              Rent expense                   1,100
                              Supplies expense                 400
                              Amortization expense             200
                              Interest expense                 120
                              Income tax expense             2,000

Dec. 31   Retained Earnings                          3,200
                              Dividends                      3,200

				
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