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Midterm I Spring semester 2018, questions and answers

Principles of Financial Accounting (New York University)

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Principles of Financial Accounting

Mid-Term Exam 1 (Practice Exam)
Professor Yiwei Dou

Name ____________________________

Section: 8:00 AM Class / 9:30 AM Class / 11:00 AM Class (Please circle)

General Instructions:
Please follow the Stern School’s Code of Conduct requirements. The penalty for cheating is
an automatic grade of F for the course and appearance before the Student Disciplinary
Committee.

1. You have 1 hour and 10 minutes to complete the exam.

2. This exam is closed book. You are permitted to use a calculator.
3. Please check that you have all the pages. Do not begin until instructed to do so.
4. If a question is ambiguous, write your assumptions on the exam along with your
answer. You will receive credit provided your assumptions are necessary and
reasonable.
5. Write your answers neatly in the space provided.
6. You must turn in your exam packet before you leave, even if you don’t want to
have it graded.
7. Exams written in pencil will not be considered for a re-grade. Use a pen if you
think you might submit your exam for a re-grade request.
8. Review the complete exam in order to allocate your time appropriately.
9. Good luck!

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Question I (7 Multiple choice questions; 21 points)

Write your answers to each multiple-choice question in the table below (Do not
circle the answers).

Question Answer

1 (3 points) B or D

2 (3 points) B

3 (3 points) C

4 (3 points) C

5 (3 points) D

6 (3 points) A

7 (3 points) A

1. The revenue principle requires four conditions to be met. Which of the following is
one of the four conditions?
A) Collection is reasonably assured.
B) Delivery of the goods or performance of services has occurred.
C) The customer has paid for the goods or services.
D) Both A and B are criteria.
E) Both B and C are criteria.

2. The accumulated amount of past earnings of a corporation that has not been distributed
to shareholders as dividends is
A) net income
B) retained earnings
C) total assets
D) contributed capital
E) none of the above is correct

3. On December 31, 2006, the effect of recording an adjustment for accrued wages (not
yet paid) of $2,000 would be
A) a decrease in stockholders’ equity and a decrease in an asset
B) a decrease in liabilities and an increase in stockholders’ equity
C) a decrease in stockholders’ equity and an increase in liabilities
D) an increase in stockholders’ equity and an increase in an asset
E) none of the above is correct

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4. All of the following are classified as non-current assets except

A) land and buildings.
B) patents.
C) contributed capital.
D) long-term investments in securities.
E) All of the above are non-current assets.

5. A landlord received $600 cash for December 2003's rent. However, the tenant's rent for
December is $1,000. Which of the following is true about the landlord’s financial
statements as of December 31, 2003?
A) $600 would be reported on the statement of cash flows.
B) $400 would appear on the balance sheet as rent receivable.
C) $1,000 would appear on the income statement as rent revenue earned.
D) All of the above are true.
E) Only A and B are true

6. Which of the following statements is true:

A) Adjusting entries do not involve a cash flow and therefore do not impact the cash
flow statement.
B) Accounts which start a new accounting period with zero balances are referred to
as temporary accounts and include both balance sheet and income statement
accounts.
C) Closing the expense and loss accounts at year-end requires that these accounts be
debited.
D) The unadjusted trial balance provides a listing of balance sheet accounts only

7. The adjusting (passive) entry to record accrued salaries has what effect on the basic
accounting equation?
A) Increases liabilities, decreases stockholders' equity
B) Increases liabilities, increases stockholders' equity
C) Decrease liabilities, decrease assets
D) Decrease assets, decreases stockholders' equity
E) Decrease assets, increases stockholders' equity

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Question II (15 points)

For this question, use Oceanic Air’s balance sheet, income statement, excerpts from the
statement of cash flows and the additional information items that appear below. The
required work for this question appears on the following page.

“N/A” stands for “not available” (you need to calculate it by yourself). “N/A” does
not equal 0.

Oceanic Air Inc Oceanic Air Inc

Balance Sheet Income Statement
At December 31, For the year
2004 2005 2004 2005
Assets Revenues 44,204 52,656
Cash (B) (C) Cost of sales (34,209) (35,843)
Prepaid Rent 258 369 Gross margin 9,995 16,813
Inventory 3,423 N/A Wage expenses 4,532 3,245
PPE, net 53,234 (E) Other expenses 1,521 8,318
Total Assets (A) N/A Net income 3,942 5,250

Liabilities
Accounts Payable 564 678
Notes Payable 12,000 12,000
Unearned Revenues 4,365 5,689 Oceanic Air Inc
Total Liabilities 16,929 18,367 Cash Flow Statement
For the year
Shareholders’ Equity 2004 2005
Contributed Capital 45,000 45,000 Cash From Operations 3,128 6,520
Retained Earnings 2,442 (D) Cash From Investing (2,000) (3,500)
Total Equity 47,442 N/A Cash From Financing (1,500) (2,000)

Total Liabilities and

equity N/A N/A

Additional information:

1. The only “financing activity” in the statement of cash flow in both years relates to
cash payments of dividends.
2. Cash from “investing activity” in 2005 relates to the purchase of additional equipment
in cash. No other equipment was purchased in 2005.
3. Depreciation expense in 2005 amounted to $1,058.

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Required:
Compute the missing numbers (A) – (E). Show your work for each part if you want
partial credit. Answers with no work will not be given full credit.

A. Total Assets (12/31/2004) (3 points)

Total Assets = Total Liabilities + Shareholders’ Equity = 16,929+47,442 = 64,371

B. Cash (12/31/2004) (3 points)

Cash = Total Assets – Prepaid Rent – Inventory – PPE, net = 64,371 – 258 – 3,423 –
53,234 = 7,456

C. Cash (12/31/2005) (3 points)

Cash = Last Year Cash +Cash From Operation + Cash From Investing + Cash
From Financing = 7,456 + 6,520 – 3,500 – 2,000 = 8,476

D. Retained Earnings (12/31/2005) (3 points)

Retained Earnings = Last Year Retained Earnings + Net Income – Dividends = 2,442
+ 5,250 – 2,000 = 5,692

E. PPE, net (12/31/2005) (3 points)

PPE, net = Last Year PPE, net + Equipment Purchase – Depreciation = 53,234 +
3,500 – 1,058 = 55,676

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Question III (28 points)

Sternie Cupcakes & Cookies (SCC) started on January 1, 2013. A summary of the
transactions during January 2013 follows

Required:

1. For each event, provide the required journal entries to record the event. Also, provide
any related and required adjusting (or passive) entries as of January 31, 2013. (24
points)
2. Answer one question about the balance sheet as of January 31, 2013 and one question
about the net income. (4 points)

a. On January 1, 2013, SCC took out a one-year loan of $10,000 from a bank; interest of
$100 will be due at the end of each month. According to SCC’s policy, interest will be
paid on the 5th day of next month.

Cash 10,000
Short-term Notes Payable 10,000

Passive entries on January 31, 2013:

Interest Expense 100
Interest Payable 100

b. On January1, 2013, SCC received $10,000 in exchange for common stock

Cash 10,000
Common Stock 10,000

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c. On January 1, 2013, SCC rented a retail space and prepaid $9,000 for 6 months’ worth
of rent.

Prepaid Rent 9,000

Cash 9,000

Passive entries on January 31, 2013:

Rent Expense 1,500
Prepaid Rent 1,500

d. On January 1, 2013, SCC purchased $4,800 in bakery equipment using cash; SCC
expects to use this machine for 2 years and expects to depreciate it evenly over that
period using a residual value of zero.

Equipment 4,800
Cash 4,800

Passive entries on January 31, 2013:

Depreciation Expense 200
Accumulated Depreciation 200

e. On January 13, 2013, SCC purchased $3,000 in bakery suppliers (flour, suger, milk,
butter, etc.) on account.

Inventory 3,000
Accounts Payable 3,000

f. On January 16, 2013, SCC sold $2,000 in cupcakes to retail customers; cost of supplies
used up is $1,000.

Cash 2,000
Revenue 2,000
Cost of Goods Sold 1,000
Inventory 1,000

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g. On January 19, 2013, SCC sold $5,000 in cookies to one corporate customer who pays
on account; cost of suppliers used up is $1,500

Accounts Receivable 5,000

Revenue 5,000
Cost of Goods Sold 1,500
Inventory 1,500

h. What is the balance of cash as of January 31, 2013?

10,000 + 10,000 – 9,000 – 4,800 + 2,000=8,200

i. What is the net income for January 2013?

2,000 + 5,000 – 1,000 – 1,500 – 100 – 1,500 – 200 = 2,700

Question IV (36 points)

For each of the following independent cases of errors or omissions, indicate the effects
(direction and amount) on assets, liabilities and shareholders’ equity as of December 31,
2011 and the effects on revenue, expense and net income in December 2011.
Record your answers in the table on the next page, using the following notation: O/S
(overstated), U/S (understated) and NO (no effect). One example is provided.

Example. On December 1, 2011, a firm paid $12,000 for rental of a building for two
months (December 2011 AND January 2012). The firm debited rent expense and credited
cash on December 1, 2011 and made no further entries with respect to this rental.

a. On December 15, 2011, a firm received $1,200 from a customer as a deposit on

merchandise the firm expects to deliver to the customer during January 2012. The
firm debited Cash and credited Sales Revenue on December 15 and made no further
entries with respect to the deposit during December 2011.

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b. On December 1, 2011, a firm acquired a used truck costing $4,800. The truck was
expected to have a two-year life and a zero residual value. The firm recorded the
transaction by debiting Repair Expense and crediting Cash for $4,800 and made no
further entries during December 2011.

c. A firm incurs interest expense of $1,500 for the month of December 2011 on a 45-day
loan obtained on December 1, 2011. The firm properly recorded the loan on its books
on December 1 but made no entry to record interest on December 31. The loan is
payable with the interest on January 15, 2012.

d. A firm purchased merchandise on account costing $11,600 on December 23, 2011. It

debited Inventory and Credited Accounts Payable. The firm paid for this purchase on
December 28, 2011. It debited Cost of Goods Sold and Credited Cash. The
merchandise has not been sold as of December 31, 2011.

Important: Write your answers clearly. No credit will be given to ambiguous O’s and
U’s.

Shareholders’ Revenue Expense Net Income

Assets Liabilities equity
Example: U/S U/S O/S U/S
NO
6,000 6,000 NO 6,000 6,000

a. NO U/S O/S O/S NO O/S

1,200 1,200 1,200 1,200

b. U/S NO U/S NO O/S U/S

4,600 4,600 4,600 4,600

c. NO U/S O/S NO U/S O/S

1,500 1,500 1,500 1,500

d. NO O/S U/S NO O/S U/S

11,600 11,600 11,600 11,600

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Points Available Points Received

Question I 21

Question II 15

Question III 28

Question IV 36

TOTAL 100

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