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York University AP/Adms 2500.03 PRACTICE EXAMINATION ANSWERS Introduction to Financial Accounting Midterm Examination #2 – Test Form A Time: 3.0 hours Instructions: 1. Submit: Only the pink mark sense sheet will be collected: you may keep this midterm examination paper. Mark your answers on it for later Questions: 50 reference. 2. Mark Sense Sheet: • Record your name and student number and answer all questions on the computer mark sense sheet provided with an HB (soft lead) pencil. Bring several pencils in case one breaks. The computer will not recognize ink or hard lead pencils • Test Form is 'A' and Code is your Section (in the left column) • Fill in the bubbles for your name and student number in pencil (your phone number is not required). Leave the last column of the student number BLANK If you change an answer, use a high quality eraser to completely remove the previous mark. If the computer senses two answers to a question, only the first scanned will be recognized. • • Only calculators without alphanumeric programmable memories are allowed. It is strongly suggested you bring a couple of cheap 4 function computers to the exam in case one fails. Be prepared to be challenged by invigilators if you bring a “fancy” calculator. • Compact foreign language/English dictionaries may be used. However, these will be examined by invigilators. If there are any loose pages or handwriting in the dictionary, it will be seized and you will be charged with academic dishonesty. In 2500, invigilators answer no questions of interpretation. They will pass along questions regarding possible errors/ typos/missing data to the head invigilator. If you believe a question contains an error and do not receive a response, make a detailed note on the front of your exam and submit it with your answer sheet. • 3. Exam Aids: 4. Exam Strategy

5. Exam room regulations: • the most common reason for poor exam performance in accounting. • Careful budgeting of time on an accounting exam is essential. Bring a watch and check your progress regularly. Poor time management is It is always a good idea to attempt the questions you deem easiest first. In an interrupted exam that is not restarted, your exam will be scored based on questions attempted. It is essential to transfer your answers to the grading sheet after each question in case the exam is interrupted by fire alarm. • • The last ten minutes of an exam should be devoted to double checking your transfers. What you submit is what is graded. If you have not transferred your answers to the mark sense sheet at the end of the exam, the invigilator will not wait. Your answer sheet will be seized and it will be graded based on whatever questions have choices filled in. • Remember there is no penalty for guessing on a multiple choice computer graded exam. Submit a choice for every question. Also note that in 2500, choice (E) None of the above does indeed represent a frequent correct choice to questions. • All personal belongings either on the floor or at the front of the exam room. All items on your desk will be examined by invigilators • Bring appropriate ID as proof of registration. You will be required to sign in and show appropriate documentation. Students without ID will be allowed to write the exam, but will be photographed and asked to submit registration and photo ID to the School of Administrative Studies the next day. must be accompanied by an invigilator. No one is to leave their seat in the last 15 minutes. and they will not accept your sheet once they have passed. Any violation of this protocol will result in a grade of zero recorded for the exam. • No student may leave the exam in the first hour. No student may start the exam after an hour. Students requiring restroom visits • The proctors will announce when there are 15 minutes remaining and any answers not transferred should be recorded at this time. • When time is called, the proctors will go down the rows collecting your answer sheets and this exam paper. They will not wait 6. Fire Alarms • A frequent occurrence in York exams. In the event of a fire alarm, you are to leave your exam and answer sheet face down on your desk and immediately proceed outside with coats and all personal belongings. Print your surname on the back of the exam so you know which seat to return to. An invigilator will lead the group outside to a place of safety. There is to be no talking during the evacuation or outside. Most rooms are cleared so that exams can recommence, within 30 minutes of the alarm. You will be told after this time whether to reenter the room and recommence the exam or to go home. 7. Academic Dishonesty • You are reminded that cheating is a serious offense which can result in expulsion from university 2

• Exams at York are held in regular classrooms, which may involve tiered seating. Consequently, neck exercises are not allowed during exams. First instance of wandering eyes has the student relocated to the front of the room. Second instance results in seizure of paper. Questions 1 to 5 are based on the following information about Guinevere Company Guinevere Company has the following data extracted from its Accounts Receivable records at June 30, 2011 Customer A B C D E F G Totals 31 -75 days $2,000 $2,000 - $1,000 - - $3,000 $8,000 Current $5,000 - $4,000 $2,000 $2,000 $6,000 $3,000 $22,000 Balance $8,000 $2,000 $4,000 $9,000 $3,000 $6,000 $7,000 $39,000 Over 75 days $1,000 - - $6,000 $1,000 - $1,000 $9,000 3 • Guinevere’s sales terms are 1/15 n/30 and it records sales at the gross amount of the invoice. • Guinevere’s year end is June 30 • The unadjusted balance in the Allowance for Doubtful Accounts at June 30 is $8,000 dr. • Guinevere makes average sales of $2,000,000 per year and averages write offs of uncollectible balances of $100,000 per year. • Sales for the year ended June 30, 2010 are $1,400,000 credit sales and $400,000 cash sales • Guinevere has a very conservative receivables management strategy. • No adjusting entries have been recorded at June 30 Use the remaining space on this page and the back of the page for your calculations

QUESTION 1 If Guinevere uses the Allowance Method (percentage of sales) to estimate bad debts, the adjusting entry at June 30 to record the provision for uncollectible accounts would involve a credit to the “Allowance for Uncollectible Accounts” of: A) $40,000 B) $70,000 *** C) $78,000 D) $90,000 E) Some other amount QUESTION 2 If Guinevere used the Allowance Method (aging) to estimate bad debts and by a detailed review of the above aged trial balance decided that an allowance of $30,000 was appropriate, then the adjusting entry on June 30 would involve a credit to the “Allowance for Uncollectible Accounts” of: A) $30,000 B) $90,000 C) $38,000 *** D) $8,000 E) Some other amount QUESTION 3 Assume that Guinevere does an aging analysis and adjusts its Allowance to a $20,000 credit balance on June 30 and on July 4 it reads in the Toronto Star that customer F has gone bankrupt. Guinevere should: A) Say some unprintable words but make no accounting entry B) Make an entry debiting bad debt expense for $6,000 C) Make an entry debiting bad debt expense for $10,000 D) Make an entry crediting bad debt expense for $6,000 E) None of the above are correct statements *** 4

QUESTION 4 Assume the same information as in Question 3 (Customer F going bankrupt July 4). Assume also that on August 25 Guinevere receives a cheque in the mail from F Company for $6,000 with the following note attached. “The company has reorganized and is trying to restore its credit rating with all its former suppliers. Please accept this cheque with our apologies”. Guinevere should: A) Make a debit to Cash and credit Miscellaneous Income B) Make a debit to Cash and credit Uncollectible Accounts Expense C) Make a debit to Cash and a credit to Accounts Receivable (after first reversing the write-off entry) *** D) Make a debit to Cash and a credit to “Advances from Customers” E) Some other entry QUESTION 5 Assume that Guinevere had always been allowed under Canadian GAAP to use the Direct Write-Off Method because it had never experienced any bad debt losses in its history as a company. There isn’t even an Allowance” account in its General Ledger Chart of Accounts. Under this assumption, the adjusting entry June 30 to record the provision for uncollectible accounts would involve: A) A debit to “Uncollectible Accounts Expense” B) A debit to “ Allowance for Uncollectible Accounts” C) No entry to be made *** D) A credit to “Uncollectible Accounts Expense” E) A credit to Accounts Receivable End of Guinevere questions QUESTION 6 Deuce Company counts its inventory of tires prior to preparing monthly financial statements on June 30. It uses the periodic inventory system. The warehouse actually contained 6884 tires, but the count team reported back to the accountant that there were 6284 tires and this number was used to adjust the accounting records. As a result of this, net income reported for the month ended June 30 would be: A) Overstated B) Understated *** C) Correctly stated 5

D) There is insufficient information provided to make an assessment QUESTION 7 Sweet Company has the following information in its accounting records: Sales year to date Average mark-up on cost Cost of Goods Sold year to date would then be: A) $3,750,000 B) $4,000,000 C) $4,25,0000 D) $4,166,667 *** E) Some other amount $5,000,000 20% QUESTION 8 Hot Pepper Company had the following information in its accounting records at year end: Inventory Cost It estimates the net realizable value of this inventory is $3,500,000. As a result of this information Culpepper would: A) Make no journal entry B) Make a journal entry debiting a gain on market appreciation for $500,000 C) Make a journal entry debiting the allowance for inventory valuation for $500,000 D) Make a journal entry debiting a loss on inventory decline for $500,000 *** E) Make a journal entry crediting the allowance for inventory valuation for $500,000 $4,000,000 QUESTION 9 Gringo Company has just been formed and is deciding on its accounting policies for the first time. It wants an inventory costing flow assumption that results in the lowest reported profits. Prices have been falling for the past two years and there is no end in sight to this trend. Dingo would select the: A) LIFO method B) FIFO method *** C) Average Cost Method 6

D) Gross Profit method E) Retail method QUESTION 10 Juan Valdez buys a Mexican Government Savings Bond for $30,000 Canadian Funds. The market rate of interest in Mexico is 10% and interest is compounded semi-annually. At the end of four years, Juan’s investment will be worth (rounded to the nearest dollar): A) $36,278 B) $39,110 C) $41,890 D) $54,224 E) None of the above *** QUESTION 11 Li Na wants to have $40,000 saved up when she starts college in 6 years. Money is worth 8% and all investment opportunities she is looking at are compounded quarterly. How much should she deposit now? A) $20,222 B) $23,454 C) $27,990 D) $30,004 E) Some other amount *** QUESTION 12 Donald Frump invests an inheritance of $50,000 into an investment account that pays simple interest at 6% per annum and leaves it there for 48 months. The investment company sends him a cheque after 48 months. He immediately takes this cheque and buys an annuity from an insurance company that sends him an annual cheque for 10 years. The annuity is based on an effective interest rate of 6%, money compounded annually. How much will the annual cheque be (rounded to the nearest dollar)? A) $6,676 B) $8,424 *** C) $9,562 D) $10,888 7

E) $11,339 F) Cannot be determined from the data provided QUESTION 13 Needy Company wants to raise money from the issue of bonds and the Board of Directors authorizes the issue of $9,000,000 of bonds in $1,000 denominations with interest paid semi-annually to run for a term of 12 years until maturity. At the time of issue the stated rate of interest on the bonds is 6% and the market rate of interest is 4%. The proceeds from the bond issue will be: A) $9,000,000 B) $9,885,340 C) $10,702,241 *** D) $11,110,230 E) Some other amount QUESTION 14 Quinine Company has a 12/31 year end and buys a bottling machine to use in its manufacturing plant on September 12, 2009. The cost of the machine is $300,000. Taxes, duty and freight on the machine totaled $30,000. Expected salvage value is for the scrap value of the metal and is thought to be $10,000. The company uses the units of production method and the machine is expected to last 5,000 machine hours. Actual usage in 2009 was 600 hours and in 2010 1,400 hours Depreciation expense recorded in 2010 would be: (A) $89,600 *** (B) $92,400 (C) $140,800 (D) $145,200 (E) Some other amount QUESTION 15 Attack Company buys a factory for $9,000,000 on Jan 1 2004 with an estimated life of 30 years and no salvage value and depreciates the building using the straight line method. On January 1, 2006 it adds a $1,000,000 addition to the building. On January 1, 2007 it 8

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