Income Statement Insurance Agency by ouz11532

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                          SCHOOL OF ACCOUNTING
Date:            Class:                Name                 Marks:

I. Matching (10 marks):

Listed below are technical terms in accounting.
a. Adequate disclosure                    f. Book value
b. Accounting cycle                       g. Solvency
c. Unincorporated business                h. Accounting period
d. Taking a physical inventory            i. FIFO method
e. Drawing account                        j. Retained earnings
  Each of the following statements may describe one of these technical terms. For
  each statement, indicate the term described.

1. Having the financial ability to pay debts as they become due.

2. The portion of the owner’s equity in a corporation that has accumulated as a result of
   profitable business operations.

3. The sequence of accounting procedures applied in recording, classifying, and
   summarizing accounting information.

4. The account used to record the withdrawals of cash or other assets by the owner.
  Closed at the end of the period by transferring its balance to the owner’s capital

5. The span of time covered by an income statement.

6. The generally accepted accounting principle of providing with financial statements
  any information that users need to properly interpret those statements.

7. The procedure of counting all merchandise on hand and determining its cost.

8. Any business that is not organized as a corporation. Includes both sole proprietorships
  and partnerships.

9. The cost of a plant asset minus the total recorded depreciation, as shown by the
  Accumulated Depreciation account. The remaining un-depreciated cost is also known
  as carrying value.

10.     A method of computing the cost of inventory and the cost of goods sold based on
  the assumption that the first merchandise acquired is the first merchandise sold, and
  that the ending inventory consists of the most recently acquired goods.
II. True or false (10 marks)

  1. Quick ratio is a more stringent measure of short-term solvency than the current ratio.

  2. The primary purpose for using an inventory flow assumption is to minimize income

  3. In general terms, financial assets appear in the balance sheet at estimated future sales

  4. Preparation of a daily listing of all checks received through the mail strengthens
  internal control over cash receipts.

  5. Hunter Corporation’s net income was $400,000 in 1995 and $160,000 in 1996. The
  percentage increase in net income Hunter must achieve in 1997 to offset the decline in
  profits in 1996 is 150%.

  6. Sole proprietors do not take an active role in the daily management of the business.

  7. Materiality requires that financial statements are accurate to the nearest dollar, but
  need not show cents.

  8. Closing entries is based upon the realization principle and the matching principle.

  9. Net income is computed in the income statement, appears in the statement of
  owner’s equity, and increases the amount of cash shown in the balance sheet.

  10. Posting is the process of transferring debit and credit changes in account balances
  from the ledger to the journal.

III. Translation
1. As the word intangible suggests, assets in this classification have no physical substance.
   Leading examples are goodwill, patents, and trademarks. Intangible assets are
   classified in the balance sheet as a subgroup of plant assets. However, not all assets
   that lack physical substance are regarded as intangible assets. In brief, intangible
   assets are assets which are used in the operation of the business but which have no
   physical substance and are noncurrent.

2. Judgement plays a major role in financial reporting. For those situations not
   specifically covered by an official pronouncement, accountants must exercise
   professional judgement in determining the treatment that is most consistent with
   generally accepted accounting principles. Judgement also is exercised in selecting
   appropriate accounting methods, in estimating the useful lives of depreciable assets,
   and in deciding what events are “ material” to a given business entity.
IV. Practice Exercises
1. During 1998, Crown Developers disposed of plant assets in the following transactions:
   Feb. 10 Office equipment costing $14,000 was given to a scrap dealer. No proceeds
            were received from the scrap dealer. At the date of disposal, accumulated
            depreciation on the office equipment amounted to $11,900.

  Apr. 1    Crown sold land and a building to Villa Associates for $630,000, receiving
            $200,000 in cash and a 5-year, 10% note receivable for $430,000. Crown’s
            accounting records showed the following amounts: Land, $120,000; Building,
            $350,000; Accumulated Depreciation: Building ( as of April 1 ), $115,000.

  Aug.15    Crown traded in an old truck for a new one. The old truck had cost $11,000,
            and accumulated depreciation amounted to $7,000. The list price of the new
            truck was $17,000; Crown received a $5,000 trade-in allowance for the old
            truck and paid the $12,000 balance in cash. ( Trucks are included in the
            Vehicles account.)

  Oct. 1    Crown traded in its old computer system as part of the purchase of a new
            system. The old computer had cost $150,000 and, as of October 1,
            Accumulated depreciation amounted to $110,000. The new computer had a
            list price of $90,000. Crown was granted a $10,000 trade-in allowance for
            the old computer system, paid $30,000 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: Prepare journal entries to record each of 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 accumulated depreciation figures stated in the problem.

V. Guardian Insurance Agency adjusts its accounts monthly, but closes them only at the
  End of the calendar year. Shown below are the adjusted balances of the revenue and
  expense accounts at September 30 of the current year, and at the ends of two earlier
                                                  Sept. 30 Aug. 31 June 30
  Commissions earned                             $144,000 $128,000 $ 90,000
  Advertising expense                               28,000      23,000      15,000
  Salaries expense                                 36,000       32,000     24,000
  Rent expense                                     22,500       20,000      15,000
  Depreciation expense                               2,700       2,400       1,800

  Prepare a “three-column income statement,” showing net income for three separate
  Time periods, all of which end on September 30. Use the format illustrated below.
  Show supporting computations for the amounts of revenue reported in the first two
                          GUARDIAN INSURANCE AGENCY
                                   Income Statement
                         For the Following Time Periods in 19__
                                                Month       Quarter       9 Months
                                                Ended       Ended         Ended
                                                Sept. 30    Sept. 30      Sept. 30


  Net income

VI. Daytona recycling Center reports the following information concerning cash
balances. And cash transactions for the month of September:
  1. Cash balance per bank statement as of September 30 was $ 20,893.25.
  2. Two debit memoranda accompanied the bank statement: one for $ 10 was for
     service charges for the month, the other for $ 64.60 was attached to an NSF check
     from A. Smith.
  3. Included with the bank statement was $ 69 credit memorandum for interest earned
     on the bank account in September.
  4. The paid checks returned with the September bank statement disclosed an error in
     Daytona’s cash records. Check no. 851 for $ 77.44 for telephone expense had
     erroneously been listed in the cash payments journal as $ 44.77.
  5. A collection charge for $ 26.00 ( not applicable to Daytona ) was erroneously
     deducted from the account by the bank. Notice that this was the bank’s error.
  6. Cash receipts of September 30 amounting to $585.25 were mailed to the bank too
     late to be included in the September bank statement.
  7. Checks outstanding as of September 30 were as follows: no. 860 for $151.93,
     no.867 for $ 82.46, and no.869 for $123.61.
  8. The Cash account showed the following entries during September.
   Sept 1 Balance                   18,341.82 Sept 30 Month’s payments 11,598.63
           30 Month’s receipts 1 4,441.58

a. Prepare a bank reconciliation at September 30.
b. Prepare the necessary adjusting entries in general journal form.
                     SCHOOL OF ACCOUNTING

Marks Summary
 I      II    III         IV       V       VI               Total Marks

                               Answers sheet
Date:               Class:                      Name       No: ---------
I. (10 Marks)
1       2     3       4        5       6        7      8   9         10

II. (10 Marks)
1       2      3      4        5       6        7      8   9         10

III. (30 Marks)


IV. Practice Exercises
Feb. 10

Apr. 1

Aug. 15

Oct. 1

V. Income Statement (10 marks)

                            Income Statement
                  For the Following Time Periods in 19__
                                        Month        Quarter    9 Months
                                        Ended        Ended      Ended
                                        Sept. 30     Sept. 30   Sept. 30

     Net income

                                Daytona Recycling Center
                                    Bank Reconciliation
                                      September, 30
Balance per bank statement, Sept.30

Deduct: Outstanding checks

Adjusted cash balance

Balance per depositor’s records, Sept. 30


Adjusted cash balance

b. Adjusting entries:
                              Answers for exam (3)

Date:                Class:                   Name       Marks: ---------
I. (10 Marks)
   1     2       3       4        5      6      7    8      9       10
   g     J       b       e        h      a      d    c      f        i

II. (10 Marks)
   1      2      3       4        5      6      7    8     9        10
   T      F      F       T        T      F      F    F     F        F

III. (30 Marks)

IV. Practice Exercises (20 Marks)
Feb. 10      Dr. Loss on Disposal of Plant Assets     2,100
                 Accumulated Depreciation             11,900
                 Cr. Office Equipment                         14,000
Apr. 1       Dr. Cash                              200,000
                 Notes Receivable                  430,000
                Accumulated Depreciation            115,000
                  Cr. Land                                    120,000
                      Building                                350,000
                      Gain on Disposal of Plant Assets         275,000
Aug. 15       Dr. Vehicles ( new truck )               17,000
                  Accumulated Depreciation              7,000
                     Cr. Vehicles ( old truck )                    11,000
                         Gain on Disposal of Plant Assets           1,000
                         Cash                                      12,000
Oct. 1       Dr. Office Equipment ( new )            90,000
                 Accumulated Depreciation             110,000
                 Loss on Disposal of Plant Assets      30,000
                        Cr. Office Equipment (old )                       150,000
                            Cash                                           30,000
                            Notes Payable                                  50,000

V. Income Statement (12 marks)

                         GUARDIAN INSURANCE AGENCY
                                  Income Statement
                        For the Following Time Periods in 19__
                                               Month       Quarter     9 Months
                                               Ended       Ended       Ended
                                               Sept. 30    Sept. 30    Sept. 30
       Commissions earned                     $ 16,000      $ 54,000    $144,000
       Advertising expense                      5,000        13,000       28,000
       Salaries expense                         4,000         12,000      36,000
       Rent expense                             2,500          7,500      22,500
       Depreciation expense                       300            900        2,700
     Net income                               $ 4,200       $ 20,600     $ 54,800

VI. (18 Marks)
                                  Daytona Recycling Center
                                     Bank Reconciliation
                                        September, 30
Balance per bank statement, Sept.30                                    $ 20,893.25
Add: Deposit of Sept. 30 not recorded by the bank         $ 585.25
     Error on a collection charge by the bank                26.00          611.25
                                                                       $ 21,504.50
Deduct: Outstanding checks
       No. 860                                           $ 151.93
       No. 867                                              82.46
       No. 869                                             123.61           358.00
Adjusted cash balance                                                  $ 21,146.50

Balance per depositor’s records, Sept. 30                               $ 21,184.77
Add: Interest earned during September                                         69.00
                                                                       $ 21,253.77
Deduct: NSF check of A. Smith                             $ 64.60
       Service charge                                       10.00
       Error on check no. 851                                32.67          107.27
Adjusted cash balance                                                  $ 21,146.50
b. Adjusting entries:

Dr. Cash                              69.00
   Cr. Interest revenue                        69.00

Dr. Bank service charges              10.00
   Accounts receivable ( A. Smith )   64.60
   Telephone expense                  32.67
  Cr. Cash                                    107.27

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