SAMPLE MIDTERM – BUS 251 Anne Macdonald
NOTE: This is a very long and tough accounting cycle question. So, if you
can handle this question you are in excellent shape.
Your midterm will also have two short theoretical questions where you will
be asked to explain an accounting idea in words. You might look at the
first section of questions at the end of each chapter – the questions titled
‘Assessing your recall’. They will give you an idea of what to expect. I
have included only one sample theory question on this exam.
The format of your midterm will be roughly as follows:
Technical questions (Accounting Cycle
And/or Preparation of F/S) 40 marks
2 Theory questions 20 “
20 Multiple Choice questions 40 “
Total 100 marks
SECTION 1, TECHNICAL QUESTIONS:
Q.A THE ACCOUNTING CYCLE (28 MARKS = 28 MINUTES)
Andy’s Yard Care Service Company Limited (AYC)
Andy Smith has been operating for 3 years. The company provides lawn-
mowing, tree trimming and weeding services to private residences in the lower
mainland. Andy incorporated the company on January 1 , 2006 and contributed
equipment with a fair market value of $50,000 to the business in exchange for
common shares valued at $10,000 and a $40,000 loan, payable to Andy.
The following is the trial balance for AYC at January 1 , 2009:
Cash $ 23,500
Accounts Receivable 18,000
Supplies Inventory (1) 1,000
Equipment (2) 50,000
Accounts Payable $ 6,000
Wages Payable 5,000
Loan Payable (3) 40,000
Accumulated Depreciation – equipment 30,000
Common Shares 10,000
Retained Earnings 1,500
$ 92,500 $ 92,500
(1) Consists of fertilizer and topsoil, used in lawn care.
(2)Contributed to the business January 1, 2006, estimated to have a 5 year
useful life, with no residual value.
1 (3) Shareholder loan payable bears interest at 10% annually. Interest on the
loan is paid on June 30 and December 31 each year. Andy does not
anticipate receiving any payments on principal until the business becomes
i) Prepare journal entries for the information provided below and on the next
page (which covers transactions for the first 3 months of 2009), or explain
why no entry is required. (Clearly label each account affected, but detailed
explanations for each entry are not required). CLEARLY STATE ANY
ASSUMPTIONS THAT YOU FEEL ARE NECESSARY.
ii) Prepare any adjusting entries required at March 31 , 2009. It is not
necessary to prepare an entry to close the accounts.
iii) Determine the March 31 , 2009 balance for cash, showing your work.
INFORMATION FOR THE FIRST 3 MONTHS OF 2009
1. Services Revenue: The company billed customers $47,250 for work done
between January 1 and March 31 . This included GST charged to
customers of $2,250.
2. At March 31 2009 there was $6,000 owing from customers that had not yet
been collected in cash.
3. Operating expenses (not including wages) incurred in the three months were
$11,500. All operating expenses are initially on credit.
4. AYC paid $14,000 to suppliers between January 1 and March 31 , 2009. st
5. Wages earned by employees between January 1 and March 31 , 2009 st
were $8,500. There were no amounts owing to employees at March 31 , st
6. Supplies inventory costing $1,500 was purchased for cash. A count in the
storeroom on March 31 , 2009 showed that there were supplies costing
$1,200 on hand.
7. Andy purchased three new ride-on mowers on January 1 , 2009, for
$6,000 each. He paid $10,000 in cash, and signed a note promising to pay
the balance in nine months (the end of his busy summer season). There will
2 be no interest paid on the note. The mowers are expected to have a 3 year
life, with no salvage value.
8. On March 31 , 2009, Andy signed a contract to purchase a fourth new
ride-on mower. This mower will be delivered to Andy in July, and will cost
9. Andy estimates that approximately $3,500 of the accounts receivable at
January 1 , 2009, which have still not been collected at March 31 , 2009, will
not be collectible.
10. Andy estimates that income taxes for AYC will be $12,000 for the 2009
year. These taxes will be paid in March in the year 2010. Due to high start-
up costs in the first three years of operation, AYC has not had to pay income
taxes before the 2009 fiscal year.
Q.B PREPARATION OF A B/S (12 MARKS = 12 MINUTES) st
Here is a trial balance for Jones Company at December 31 , 2009. Prepare a
good format balance sheet for the company. Show any calculations, and explain
any assumptions you feel are necessary.
Accounts payable $ 12,400
Accounts receivable 20,000
Allowance for doubtful accounts 800
Common shares 10,000
Cost of goods sold expense 62,000
Depreciation expense 5,000
Dividend declared 2,000
Accumulated depreciation - equipment 20,000
Interest expense 3,500
Income tax Payable 3,000
Mortgage Payable (payable in 5 equal
Instalments over the next 5 years) 50,000
Office expenses 7,000
Retained earnings 45,550
Salaries expense 24,000
Salaries payable 1,500
Revenues _______ 115,000
$ 258,250 $ 258,250
3 4 Section 2: THEORY (20 MARKS = 20 MINUTES)
Sample Question A (10 marks = 10 minutes)
Explain whether you agree or disagree with the following statement:
‘Retained earnings are like money in the bank: you can always use them to pay
your bills if you get into cash flow trouble’.
5 Section 3: MULTIPLE CHOICE (20 QUESTIONS = 40 MARKS = 40
Using the General Purpose Answer Sheet: for each question fill in the ONE
circle which is the BEST answer. You must use an HB pencil and fill in the
circle completely. Make sure that you also fill in your name and student
number on the General Purpose Answer Sheet.
1. If an organization uses accrual accounting, the financial statements will include:
a) Only actual cash receipts and cash expenditures
b) Only completed transactions
c) Completed and expected transactions that can be measured with reasonable
d) All of the above
2. Which of the following would require an adjustment to the cash balance in the
company’s accounting records if discovered through the bank reconciliation
a) Outstanding deposits
b) Outstanding cheques
c) Bank service charges
d) All of the above
3. Which one of the following would NOT be recorded as an asset by a business?
a) Land not currently being used, but held for future development
b) Accounts due from customers who have received products from the company
c) A five year employment contract with the President, who has improved the
company’s performance significantly
d) Cash owing to the business from employees
4. Working capital (current assets – current liabilities) is a measure of the company’s:
b) Ability to pay long-term debts
c) Resources available to produce inventory for the next year’s business
d) None of the above (are accurate definitions of working capital)
5. Which of the following transactions would result in a decrease in assets and a
decrease in shareholders’ equity?
a) Paying dividends payable
b) Purchasing land for cash
c) Paying the monthly electric bill
d) Receiving cash on account
6. Which of the following would NOT be included on the Cash Flow Statement?
a) The declaration of a dividend in the year
b) The purchase of capital assets for cash during the year
c) The repayment of long-term debt
d) The issuance of common shares
6 7. Transactions that can have an effect on the decisions of
shareholders are referred to by accountants as:
8. How much information to show on the financial statements and where to report it,
are issues of:
c) Transactional analysis
9. Which of the following BEST describes the main reason why shareholders’
demand for reliable financial information has increased over the years?
a) Tax laws have become more complex
b) Corporate shares have become more widely traded on public stock exchanges
c) Both of the above
d) None of the above
10. The income statement emerged as a standard financial statement based on a
demand for which of the following?
a) Performance measurement information
b) Cash flow information
c) Internal management information about the efficiency of operations
d) Information regarding changes in owners’ claims on assets
11. Making sales on account results in which one of the following impacts on the
a) Increases cash and increases accounts receivable
b) Increases sales and increases accounts receivable
c) Increases cash and increases sales
d) Increases accounts receivable and increases retained earnings
12. Which one of the following best describes the accounting principle of prudence?
a) Financial statements disclose the lowest reasonable amount for assets and the
highest reasonable amount for liabilities
b) Very little information is disclosed on the balance sheet, and any additional
information required is shown in the notes to the financial statements
c) Financial records are updated only when enough transactions have
accumulated to make it worth the time involved
d) Information is presented fa