Haramaya University

College of Business and Economics

Department of Accounting

Mid exam for the course: Financial accounting I Max. Mark: 30%
Instructor: Amdemikael A. / Takele T. December, 2009
Time allowed: 2:30 hr

For office use only:

Instructions:
Make sure that the exam contains 10 multiple choice and three workout
questions.
Answer the multiple choice part on the answer sheet and the workout part
on the white paper attached.
Neat and clear answers are rewarded.
Any form of cheating or an attempt to cheat will nullify the result.

Note: Write your ID No and name on the space provided and writing in any
other place will disqualify your result.

For office use only:

Name: ____________________________________________________
ID: _____________________________
Answer Sheet

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Part I: Multiple choices. (1 pt each)

1. Brown Company's account balances at December 31, 2007 for Accounts

Receivable and the related Allowance for Doubtful Accounts are $460,000 debit
and $700 credit, respectively. From an aging of accounts receivable, it is
estimated that $12,500 of the December 31 receivables will be uncollectible. The
necessary adjusting entry would include a credit to the allowance account for
A. $12,500.
B. $13,200.
C. $11,800.
D. $700.

2. Chen Company's account balances at December 31, 2007 for Accounts

Receivable and the Allowance for Doubtful Accounts are $320,000 debit and
$600 credit. Sales during 2007 were $900,000. It is estimated that 1% of sales will
be uncollectible. The adjusting entry would include a credit to the allowance
account for
A. $9,600.
B. $9,000.
C. $8,400.
D. $3,200.
E. None.

3. Gregg Corp. reported revenue of $1,100,000 in its accrual basis income statement
for the year ended June 30, 2007. Additional information was as follows:
Accounts receivable June 30, 2006 $350,000
Accounts receivable June 30, 2007 530,000
Uncollectible accounts written off during the fiscal year 13,000
Under the cash basis, Gregg should report revenue of
A. $687,000.
B. $700,000.
C. $907,000.
D. $933,000.
E. None.

4. Allen Corp.'s liability account balances at June 30, 2007 included a 10% note
payable in the amount of $2,400,000. The note is dated October 1, 2005 and is
payable in three equal annual payments of $800,000 plus interest. The first
interest and principal payment was made on October 1, 2006. In Allen's June 30,
2007 balance sheet, what amount should be reported as accrued interest payable
for this note?
A. $180,000.
B. $120,000.
C. $60,000.
D. $40,000.
E. None.

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Use the following information for questions 5 through 7:
The income statement of Dolan Corporation for 2007 included the following items:
Interest revenue $65,500
Salaries expense $85,000
Insurance expense $7,600
The following balances have been excerpted from Dolan Corporation's balance sheets:
December 31, 2007 December 31, 2006
Accrued interest receivable $9,100 $7,500
Accrued salaries payable 8,900 4,200
Prepaid insurance 1,100 1,500

5. The cash received for interest during 2007 was

A. $56,400.
B. $63,900.
C. $65,500.
D. $67,100.
E. None.

6. The cash paid for salaries during 2007 was

A. $89,700.
B. $80,300.
C. $80,800.
D. $93,900.
E. None.

7. The cash paid for insurance premiums during 2007 was

A. $6,500.
B. $6,100.
C. $8,000.
D. $7,200.
E. None.

8. The following information is available concerning the accounts of Franz

Company:
Accounts payable, January 1, 2007 $18,000
Cash payments on account during 2007 58,000
Purchase discounts taken during 2007 on 2007 purchases 1,200
Accounts payable, December 31, 2007 10,000
Assuming the company records purchases at the gross amounts, the total
purchases for 2007 would be
A. $65,200.
B. $48,800.
C. $51,200.
D. $50,000.
E. None.

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 9. Jim Young, M.D., keeps his accounting records on the cash basis. During 2007,
Dr. Young collected $360,000 from his patients. At December 31, 2006, Dr.
Young had accounts receivable of $50,000. At December 31, 2007, Dr. Young
had accounts receivable of $70,000 and unearned revenue of $10,000. On the
accrual basis, how much was Dr. Young’s patient service revenue for 2007?
A. $310,000.
B. $370,000.
C. $380,000.
D. $390,000.
E. None.

10. The following information is available for Ace Company for 2007:
Disbursements for purchases $1,050,000
Increase in trade accounts payable 75,000
Decrease in merchandise inventory 30,000
Costs of goods sold for 2007 was
A. $1,155,000.
B. $1,095,000.
C. $1,005,000.
D. $945,000.
E. None.

Part II. Workout (20 pts)

1. ABC Co. uses the accrual basis of accounting. ABC owns machinery that it rents
to XYZ Company. Rent revenue under the accrual basis of accounting for year 3
was $114,460. ABC Co. uses magazines, televisions & radios in order to advertise
its products. Some of the advertising is paid in advance and some is paid on
receipt of invoices. Cash paid for advertising in year three amounted $ 71,650.
The amounts of accruals & deferrals on two successive balance sheet dates were
as follows:

December 31, year 3 December 31, year 2

Rent receivable -------------------------------- $ 6,900 -------------------------------$ 5,600
Advertising payable --------------------------- $ 4,430 ------------------------------ $ 9,340
Unearned rent ---------------------------------- $ 3,640 ------------------------------ $ 6,400
Prepaid advertising ---------------------------- $ 7,900 ------------------------------ $ 6,860

Required:
A. Compute the amount of advertising expense that should appear in ABC Co.
income statement for year 3 under the accrual basis of accounting. ( 3 pts )
B. Compute the amount of cash received by ABC Co. from rent during year 3.
( 3pts)

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 2. The following information was taken from comparative balance sheets of
Dire dawa food complex prepared on the accrual basis of Accounting for the year
ended December 31, 2002.
Dec 31, 2002 Dec 31, 2001
Accounts receivable ------------------------ $ 80,000 $ 65,000
Inventories --------------------------------- $ 54,000 $ 77,000
Prepaid Insurance -------------------------- $ 15,000 $ 10,000
Prepaid rent --------------------------- ----- $ 14,000 $ 58,000
Accounts payable --------------------------- $ 33,000 $ 20,000
(Merchandise suppliers)
Accrued liabilities -------------------------- $ 3,000 $ 1,200
Accumulated Depreciation ---------------- $ 60,000 $ 34,000
(There was no disposal of plant assets during year 2002)

Additional information:
A summary of cash receipts and payments for year 2002 are as follows:
Cash collected from customers: ------------------ 674,200.
Cash paid to merchandize supplies: ------------- 314,500.
Cash paid to operating expenses ----------------- 83,400.
Income tax rate: ------------------------------------ 40%.

Required: prepare income statements schedule by using:-

A. The cash basis of accounting. ( 3 pts )
B. The accrual basis of accounting. ( 5 pts )

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3. Data relating to the balances of various accounts affected by adjusting or closing
entries appear below. (The entries which caused the changes in the balances are
not given.) You are asked to supply the missing journal entries which would
logically account for the changes in the account balances. ( 1 pts each )

A. Interest receivable at 1/1/07 was $1,000. During 2007 cash received

from debtors for interest on outstanding notes receivable amounted to
$5,000. The 2007 income statement showed interest revenue in the
amount of $5,400. You are to provide the missing adjusting entry that
must have been made, assuming reversing entries are not made.

B. Unearned rent at 1/1/07 was $5,300 and at 12/31/07 was $8,000. The
records indicate cash receipts from rental sources during 2007
amounted to $40,000, all of which was credited to the Unearned Rent
Account. You are to prepare the missing adjusting entry.

C. Accumulated depreciation—equipment at 1/1/07 was $230,000. At

12/31/07 the balance of the account was $270,000. During 2007, one
piece of equipment was sold. The equipment had an original cost of
$40,000 and was 3/4 depreciated when sold. You are to prepare the
missing adjusting entry.

D. Allowance for doubtful accounts on 1/1/07 was $50,000. The balance

in the allowance account on 12/31/07 after making the annual
adjusting entry was $65,000 and during 2007 bad debts written off
amounted to $30,000. You are to provide the missing adjusting entry.

E. Prepaid rent at 1/1/07 was $9,000. During 2007 rent payments of

$120,000 were made and charged to "rent expense." The 2007 income
statement shows as a general expense the item "rent expense" in the
amount of $125,000. You are to prepare the missing adjusting entry
that must have been made, assuming reversing entries are not made.

F. Retained earnings at 1/1/07 were $150,000 and at 12/31/07 it was

$210,000. During 2007, cash dividends of $50,000 were paid and a
stock dividend of $40,000 was issued. Both dividends were properly
charged to retained earnings. You are to provide the missing closing
entry.