The University of Hong Kong

Faculty of Business and Economics

ACCT1101 Introduction to Financial Accounting

Mock Midterm Exam

Section A – Multiple Choice Questions (20 marks)
There are 15 multiple choice questions in this section. Question 1-10 carries 1 mark each and
Question 11-15 carries 2 marks each. Please select the best answer to each question and provide
your answers in capital letters (A, B, C, D) on the spaces provided on the Answer Booklet.
1. Hancock prepares monthly financial statements. Which of the following violates the
matching principle?
A) A portion of the salary payments made this month are not recognized as expense
because some of the work was done by employees last month.
B) The premium on a six-month insurance policy is charged immediately to expense.
C) Expenses for the period exceed revenue.
D) The cost of advertising done during the month is charged to expense even though no
payment is due for 60 days.

2. The best definition of an accounting system is:

A) Journals, ledgers, and worksheets.
B) Manual or computer-based records used in developing information about an entity for
use by managers and also persons outside the organization.
C) The personnel, procedures, technology, and records used by an entity to develop
accounting information and communicate this information to decision makers.
D) The concepts, principles, and standards specifying the information which should be
included in financial statements, and how that information should be presented.

3. Which of the following decision makers is least likely to be among the users of
management accounting reports developed by Sears, a department store?
A) The chief executive officer of Sears.
B) The manager of the Automotive Department in a Sears' store.
C) The manager of a mutual fund considering investing in Sears' common stock.
D) Internal auditors within the Sears organization.

4. If a company has a current ratio of 2, and purchases inventory on credit, what will this
do to its current ratio?
A) Increase the current ratio.
B) Decrease the current ratio.
C) Does not change the current ratio.
D) Cannot be determined.

5. Financial accounting:
A) Provides information primarily for external decision makers.
B) Provides information primarily for a company's employees.
C) Provides information primarily for the use of managers of the company.
D) Is primarily used to compute a company's tax obligation.
6. Which of the following would increase assets and increase liabilities?
A) Provide services to customers on account.
B) Purchase office supplies on account.
C) Pay dividends to stockholders.
D) Receive a utility bill for the current month. Plan to pay bill beginning of next month.

7. Consider the following events for Betterment Incorporated:

January 1 Betterment purchases gasoline for $200 on account.
January 7 Betterment advertises lawn mowing services for $100 per lawn.
January 9 Betterment signs up 8 customers who pay a total of $800 cash.
January 12 Betterment mows the lawns of the 8 customers and all gasoline
purchased on January 1 is used.
January 13 Betterment pays for the gasoline purchased on January 1.

Under accrual-basis accounting, what is the appropriate day to record the expenses related to
the gasoline?
A) January 1.
B) January 7.
C) January 12.
D) January 13.

8. When a company pays cash for equipment, what is the effect on the accounting equation for
that company?
A) Increase assets and increase liabilities.
B) Decrease assets and decrease liabilities.
C) No net change.
D) Increase assets and increase stockholders' equity.

9. The following information pertains to Sooner Company:

May 1 Customer ordered an installation service to be done by Sooner Company on
May 15.
May 2 Customer paid cash for the installation job to be done on May 15.
May 8 The Sooner Company purchased installation supplies on account for the job.
May 15 The installation job was started and completed.
May 20 Amount owed for supplies purchased on May 8 is paid.

Assuming that Sooner Company uses accrual-basis accounting, when would the company
record the expense related to the supplies?
A) May 2.
B) May 8.
C) May 15.
D) May 20.
10. Yummy Foods purchased a one-year hazard insurance policy on August 1 and recorded the
$4,200 premium to prepaid insurance. At its December 31 year-end, Yummy Foods would
record which of the following adjusting entries?
A) Debit Insurance Expense and credit Prepaid Insurance for $1,750.
B) Debit Prepaid Insurance and credit Insurance Expense for $1,750.
C) Debit Insurance Expense and credit Accounts Payable for $4,200.
D) Debit Insurance Expense and credit Prepaid Insurance for $2,450.

11. A company receives a utility bill each month for services received. The company's policy is
to pay the utility bill within 30 days of receipt. On December 31, 2021, the company
receives a utility bill of $4,200 for the month of December and plans to pay the bill by
January 30, 2022. What adjusting entry, if any, will the company record on December 31,
2021?
A) Debit Utilities Expense and credit Cash for $4,200.
B) Debit Utilities Expense and credit Utilities Payable for $4,200.
C) Debit Utilities Payable and credit Utilities Expense for $4,200.
D) No adjusting entry is necessary at the end of the year.

Use the following information for MCQ #12 and 13:

Waldorf Co. had the following transactions during the month of October 2019:
i) Cash received from bank loans was $60,000.
ii) Dividends of $18,500 were paid to stockholders in cash.
iii) Revenues earned and received in cash amounted to $100,500.
iv) Expenses incurred and paid were $78,000.

12. What amount of net income will be reported on an income statement for the month of
October 2019?
A) $ 18,500.
B) $ 22,500.
C) $ 78,000.
D) $100,500.

13. At the beginning of October, the balance of stockholders’ equity in Waldorf was
$480,000. Given the transactions in October 2019, what will be the stockholders’ equity
balance at the end of the month?
A) $480,000.
B) $484,000.
C) $502,500.
D) $580,500.
Use the following information for MCQ #14 and 15:
The bookkeeper for Wood Mfg. made the following journal entry on January 30, 2020:

D. Cr.
Land 201,500
Buildings 84,500
Cash 65,000
Notes Payable 221,000

14. This transaction involves:

A) The sale of land and building for $286,000.
B) Payment of $221,000 on a note payable.
C) The receipt of $65,000 cash.
D) An increase in liabilities of $221,000.

15. Before the journal entry above, Wood had assets, liabilities, and owners' equity of
$450,000, $100,000, and $350,000, respectively. What are total assets immediately after
the above transaction occurs?
A) $221,000.
B) $671,000.
C) $735,500.
D) $450,000.
Section B – Problem Solving Questions
Question 1

Jason runs a consulting services company, and engages in business activities with Marcus
Roberts Inc., a service provider. For the month of December 2019, the following transactions
occurred:

Marcus Roberts Inc. hires Jason for his consulting services at the end of the
Dec 1
month of December and pays Jason $1000 in advance for the same.
Dec 6 Marcus Roberts Inc. provides maintenance service to Jason on account, $500.
Jason borrows $800 from Marcus Roberts Inc. by signing a note to repay
Dec 9
later.
Marcus Roberts Inc. purchases IT equipment from ICT Corporation, paying
Dec 12
cash of $800.
Dec 16 Jason pays $500 to Marcus Roberts Inc. for maintenance provided on Dec 6.

Dec 21 Jason pays the utility bill for the month of Dec, $100.
Marcus Roberts Inc. receives consulting services from Jason for the amount
Dec 29
paid on Dec 1.
Dec 31 Jason pays $800 to Marcus Roberts Inc. for money borrowed on Dec 9.

Required:

For each of the above activities, prepare journal entries for Jason. Please note that it might not be
necessary for Jason to record all the transactions.
Question 2
Consider the following transactions.
Accrual-Basis Cash-Basis
Transaction Revenue Expense Revenue Expense
1. Pay dividends to stockholders,
$200.
2. Pay for supplies previously
purchased on account, $400.
3. Pay for insurance one year in
advance, $3,600.
4. Receive cash from customers
for services performed in the
current period, $1,800.
5. Provide services to customers
on account, $2,100.

Required:

For each transaction, determine the amount of revenue or expense, if any, which should be
recorded under accrual-basis accounting and under cash-basis accounting.
Question 3
Pokfield, Inc. had the following separate situations occur during 2019.
a. On June 1, 2019, Pokfield, Inc. paid the annual lease amount on its warehouse space. The
annual lease is $13,200 and was recorded by debiting Prepaid Rent and crediting Cash. No
adjusting entries have been prepared since June 1, 2019.
b. The Unearned Revenue account has an unadjusted balance of $8,000 consisting of gift cards
sold to customers. Redeemed gift cards that have not yet been recorded total $2,400.
c. The company has not yet received a bill for utilities nor paid for the month of December.
The expense is estimated to be $1,680.
d. On December 1, 2019, Pokfield, Inc., received $3,000 cash from a customer related to a
special order. The special order was delivered to the customer on December 29 but no entry
has been made to record the delivery.
e. On December 31, 2019, employee wages of $4,600 have been incurred but not paid or
recorded.
f. On December 31, 2019, $880 of interest has been incurred, but not yet paid or recorded.

Required:

The company’s accountant is preparing the annual financial statements on December 31, 2019
and has asked you to prepare the adjusting entries for each situation.