MGCR 211 fall 2015 midterm
MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm October 16, 2015 Midterm Examination INTRODUCTION TO FINANCIAL ACCOUNTING MGCR211 - All sections October 16th, 2015 12:00PM - 2:00PM
SOLUTION Please pick your professor: Professor:
□ Jorien Pruijssers □
Seda Oz
□
Ralph Cecere
Day & Time of your class: Student Name:
McGill ID:
INSTRUCTIONS:
This is a CLOSED BOOK, CLOSED NOTES examination. SPACE IS PROVIDED on the examination to answer all 5 parts of the exam. CALCULATOR WITHOUT GRAPH FEATURES permitted ONLY. Translation dictionaries are allowed. This examination consists of 5 parts on a total of 13 pages, including the cover and extra sheet pages. All questions are to be answered on this examination paper. Answer the question in the space provided. Do not exceed the space allowed. Read each question carefully. Show your calculations and explain your reasoning. All companies are expected to be IFRS compliant unless stated otherwise and all amounts are material unless otherwise noted in the question. This examination is PRINTED ON BOTH SIDES of the paper. This examination paper MUST BE RETURNED. PART A
Multiple Choice Questions
PART B
Basic Accounting Equation
PART C
Adjusting Entries
PART D
Ratio Analysis
Part E
Revenue Recognition
Marks 20 Tiger, Inc.
17
Monkey, Inc.
15
Hawk, Co.
22
Starbucks Corp
8
Grade
18
TOTAL
100
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part A: Multiple Choices.
10 X 2 MARKS Select the best answer for each of the following unrelated items (unless otherwise noted). Answer each of these items directly on your examination paper by circling your choice. If more than one answer is given for an item than that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. 1. In which section of the annual report does management comment on the company and its operating results? a) report to the shareholders b) management's discussion and analysis c) corporate profile d) selected financial data 2. Which of the following is an internal user of annual report information? a) creditors b) board of directors c) regulators d) shareholders 3. Which of the following statements best describes a proprietorship? a) can be single or multiple owners b) taxed separately c) most expensive to establish d) owner is responsible for debt of the company 4. A company received a $6,500 deposit from a customer for goods to be delivered the following month. Under the accrual and cash basis of accounting respectively, the deposit would be recorded as a) b) c) d)
Accrual basis a liability a liability income income
Cash basis a liability income a liability income
5. An accrual refers to an event: a) where the expense or revenue is recorded after the cash settlement b) where the liability is recorded after the cash settlement c) where the expense or revenue is recorded before the cash settlement. d) where the asset is recorded after the cash settlement 6. At the end of 2014, Whiteberry Company has total assets and liabilities at $42,000 and $11,000, respectively. Whiteberry reported net income for 2015 in the amount of $12,000. How much is shareholders’ equity at the end of 2015? a) b) c) d)
$30,000 $22,000 $31,000 $43,000
7. If the debit amount of an entry to record the purchase of supplies on account was not posted: a) b) c) d)
liabilities would be understated liabilities would be overstated assets would be overstated assets would be understated
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm 8. On the financial statements, an item is deemed material if: a) b) c) d)
Its nature and magnitude are significant it overstates liabilities It represents the economic substance rather than the legal form of an event It affects shareholders’ wealth
Use the following data of Ankara, Co for questions 9 and 10: Cash Accounts receivable Accounts payable Note payable Inventory Dividends payable Equipment Short-term investments Net Income Accumulated Depreciation Common shares Beginning Retained earnings Prepaid rent expense Salaries payable
$15,200 $29,500 $34,500 $50,000 $17,000 $5,200 $220,000 $6,400 $35,000 $100,000 $40,000 $23,400 $1,600 $12,000
9. Total assets amounted to: a) b) c) d)
$189,700 $288,100 $289,700 $389,700
10. Total liabilities amounted to: a) b) c) d)
$101,700 $98,100 $196,500 $198,100
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part B: Basic Accounting Equation. In this part, there are two independent questions. Please use the allocated space for each question. 1. Tiger Inc. reports the following transactions for May 2015. Analyze the effect of each transaction on the accounting equation. For each transaction determine the account type (e.g. asset, liability, shareholder’s equity), account name (e.g. accounts receivable, cash) and the change (e.g. increase, decrease) in each account you state. Do not leave any box blank. A blank answer will receive zero marks. Tiger, Inc: a) On May 1, 2015, bought land with a value of $250,000 by issuing 100,000 shares. b)
On May 1, 2015, purchased a new 2-year insurance policy for $4,800. The new insurance policy starts on May 1, 2015 and ends on April 30, 2017.
c)
On May 1, 2015, bought a building for $100,000. Paid one-fourth in cash and the balance on a 10-year, 10% interest note payable.
d)
On May 5, 2015, purchased $9,000 of inventory on account.
e)
On May 1, 2015, received a utility bill for $750 covering month of April (no payment has been made).
f)
On May 15, 2015, paid $2,500 for the inventory previously purchased in transaction d.
g)
On May 12, 2015, declared a $1,000 dividend.
h)
On May 31, 2015, recognized that 1 month of the insurance coverage had expired (ref: transaction b).
NO MARKS WILL BE TAKEN OFF FOR NOT SPECIFYING AMOUNTS Item a)
Complete the Expanded Accounting Equation for each item in the space provided Land: +250,000 >>> Total Asset +250,000 Common Shares: +250,000 >>> Total Equity +250,000 2 MARKS
b) Cash -4,800 >>> Total Asset -4,800 Prepaid Expense: +4,800 >>> Total Asset: -4,800 2 MARKS c) Cash -25,000 >>> Total Asset: -25,000 Building +100,000 >>> Total Asset: + 100,000 Long-term Debt: +75,000 >>> Total Liability +75,000 3 MARKS d) Inventory +9,000 >>> Total Asset: +9,000 Accounts Payable: +9,000 : Total Liability: +9,000 2 MARKS e) Utility Payable: +750 >>> Total Liability: +750 Retained Earnings: -750 >>> Total Equity: +750 2 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm f) Cash: -2500 >>> Total Asset: -2,500 Accounts Payable: -2500 >>> Total Liability: -2,500 2 MARKS g)
Dividend Payable: +1000 >>> Total Liability: +1,000 Retained Earnings: -1000 >>> Total Equity: -1,000 2 MARKS
h)
Prepaid Expense: -200 >>> Total Asset: -200 Retained Earnings: -200 >>> Total Equity: -200 2 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm 2. Monkey Inc. made some errors during the posting process. Indicate the exact dollar impact each error would have on total assets, total liabilities, and shareholders' equity. Complete the chart below by using (OVER) to indicate overstated, (UNDER) to indicate understated, and (ZERO) to indicate no effect. Don’t forget to indicate exact dollar amount. Following is the list of errors made by Monkey Inc. Fill in every box of the table. Boxes left blank will be given 0 marks. a. A $200 credit to the Accounts Payable account was posted as $2,000. b. A $50 debit to Cash was never posted. c. A $550 credit to the Revenue account was credited to the Accounts Receivable account. d. A $45,000 debit to the Land account was debited to an expense account. e. A $200 payment on an account payable was credited to Accounts Receivable instead of Cash. Item a)
TOTAL ASSETS
TOTAL LIABILITIES Over 1,800 1 MARK
SHAREHOLDERS’ EQUITY 0 1 MARK
0 1 MARK
0 1 MARK
0 1 MARK
Under 550 1 MARK
0 1 MARK
Under 45,000 1 MARK
0 1 MARK
0 1 MARK
0 1 MARK b) Under 50 1 MARK c) Under 550 1 MARK d) Under 45,000 1 MARK e) 0 1 MARK
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part: C: Adjusting Entries Hawk Corporation is a furniture company and it prepares quarterly financial statements. The company’s fiscal year end is December 31st. Below is the unadjusted trial balance at its 2nd quarter end, June 30, 2014.
HAWK CORPORATION Unadjusted Trial Balance June 30, 2014 ——————————————————————————————————————-----------------------------------------------------Debit Credit Cash ............................................................................................................ Accounts receivable ................................................................................... Supplies .................................................................................................... Prepaid insurance ...................................................................................... Equipment .................................................................................................. Accumulated depreciation-equipment ..................................................... Accounts payable ....................................................................................... Unearned revenue ..................................................................................... Salary payable ............................................................................................ Interest Payable ......................................................................................... Bank Loan Payable .................................................................................... Common shares ......................................................................................... Retained earnings ...................................................................................... Furniture revenue ...................................................................................... Salary expense ........................................................................................... Supplies expense ....................................................................................... Insurance expense ..................................................................................... Depreciation expense-equipment ............................................................. Interest Expense ........................................................................................ Utilities expense .........................................................................................
$10,600 13,200 1,950 4,750 38,500 $8,850 2,500 6,700 650 100 4,000 15,000 10,100 37,200 11,850 450 750 550 100 2,400 $85,100
$85,100
An analysis of the account balances provided the following additional information: i.
A two-year insurance policy costing $6,000 was purchased on October 31, 2013.
ii. Salaries owed to employees on June 30, 2014, amount to $4,600 which has not yet been paid or recorded. iii. A physical count of supplies reveals $900 of supplies on hand on June 30, 2014. iv. Bank loan was incurred on February 1, 2014. Loan carries monthly fixed interest of $50. The interest and principal are due on February 1, 2016. v. Customers must pay a $750 deposit when they order hand-carved furniture. On June 5, 2014, a customer gave an order of 5 hand-carved furniture and made the deposit payment of $3,750. Hawk Co. promised to deliver all 5 items on June 30th. On June 30th, Hawk only delivered 2 items, the remaining to be delivered on August 1st, 2014. None of these transactions were recorded. vi. During the month of June, $2,000 of common shares were issued in exchange for cash. The accountant forgot to record this transaction. vii. Hawk Corporation is considering of purchasing $2,000 worth of product placement on TV. Using the above additional information, prepare the adjusting entries that should be made by Hawk Co. on June 30, 2014. Indicate if no adjusting journal entry is required by stating 'No Journal entry required'.
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
ANSWER: i.
June.
30
Insurance Expense 750 Prepaid Insurance
3 MARKS 750
ii.
June
30
Salary Expense 4,600 Salary Payable 4,600
3 MARKS
iii.
June
30
Supplies Expense Supplies
3 MARKS
iv. v.
June
30
1050
Interest Expense 150 Interest Payable
1050 3 MARKS 150
June
5
Cash
3750 Unearned Revenue 3750
3 MARKS
June
30
Unearned Revenue 1,500 Furniture Revenue 1,500
3 MARKS
vi.
June
30
Cash
3 MARKS
vii.
No adjusting entry is required
2,000 Common Shares 2,000
1 MARK
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part D: Ratio Analysis STARBUCKS CORP Condensed Consolidated Balance Sheets - USD ($) $ in Millions Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Deferred income taxes, net Total current assets Long-term investments Equity and cost investments Property, plant and equipment, net Deferred income taxes, net Other long-term assets Other intangible assets Goodwill TOTAL ASSETS Current liabilities: Accounts payable Accrued liabilities Insurance reserves Stored value card liability Current Portion of Long-Term Debt Total current liabilities Long-term debt Other long-term liabilities Total liabilities Shareholders' equity: Common stock ($0.001 par value) — authorized, 2,400.0 shares; issued and outstanding, 1,490.8 shares and 1,499.1 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income/(loss) Total shareholders' equity Noncontrolling interests Total equity TOTAL LIABILITIES AND EQUITY
Jun. 28, 2015
Sep. 28, 2014
$ 2,080.5 94.7 672.7 1,166 413.8 333 4,760.7 390.1 359.4 3,977.7 851.2 443.3 525.8 1,560.6 12,868.8
$ 1,708.4 135.4 631 1,090.9 285.6 317.4 4,168.7 318.4 514.9 3,519 903.3 198.9 273.5 856.2 10,752.9
603.2 1,656.9 214.7 1,024.6 549.8 4,049.2 2,347.4 613.9 7,010.5
533.7 1,514.4 196.1 794.5 0 3,038.7 2,048.3 392.2 5,479.2
1.5
0.7
41.1 5,945 (131.1) 5,856.5 1.8 5,858.3 $ 12,868.8
39.4 5,206.6 25.3 5,272 1.7 5,273.7 $ 10,752.9
Using the information provided in the above balance sheet, answer the following questions: 1. Compute the current ratio for both years presented and provide your comments regarding this ratio year over year. Round your answer to two decimal places. Current ratio = current assets / current liabilities Current ratio (2015) = 4,760.7 / 4,049.2 = 1.18 Current ratio (2014) = 4,168.7 / 3,038.7 = 1.37 The company's 2015 current ratio is lower when compared to the one in 2014. It indicates that the company's liquidity is weakening. The current ratio deals with the relationship between current assets and current liabilities. It is calculated by dividing current assets by current liabilities. The current ratio measures the ability to pay current liabilities with current assets. A high current ratio is preferable to a low current ratio. A high current ratio means a company has plenty of current assets to pay current liabilities. An increasing current ratio from one period to the next indicates an improvement in financial position. Calculation of ratio: 1 MARK Explanation: 2 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
2. Compute the company's debt to total assets ratio for both years presented and provide your comments regarding this ratio year over year. Debt to total assets = total liabilities / total assets Debt to total assets (2015) = 7,010.5 / 12,868.8 = 0.54 Debt to total assets (2014) = 5,479.2 / 10,752.9 = 0.51 The company's 2015 debt-to-total assets is higher when compared to the one in 2014. It appears that debt financing as opposed to equity financing has increased in 2015. The debt ratio deals with the relationship between total debt and total assets. It is calculated by dividing total liabilities by total assets. The debt ratio indicates the proportion of a company's assets that are financed with debt and measures the ability of a business to pay both current and longterm debts. A low debt ratio is preferable to a high debt ratio. A company with a small amount of liabilities has low required payments on debt. Such a company is unlikely to get into financial difficulties. Calculation of ratio: 1 MARK Explanation: 2 MARKS
3. For each of the actions listed below, determine what would happen to the current ratio. Assume nothing else on the balance sheet changes and that net working capital is positive. a. Accounts receivable are fully collected in cash
Current ratio does not change 1 MARK
b. Long-term debt are paid off with cash
Current ratio decreases 1 MARK
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part E: Revenue Recognition Following are three independent situations that occurred for each of the companies described below. All transactions and events occurred between January 1, 2014 and to the end of their accounting period December 31, 2014. None of the events have been recorded in the books of the respective companies. Situation 1: On December 31, 2014, AYSE Corporation sold a piece of equipment to one of its customers for $200,000 and collected $80,000 cash on that date. The remainder of $120,000 plus 10% interest is payable on December 31, 2015. AYSE Corporation will deliver the piece of equipment the first week of January 2015 because of a snowstorm which delayed delivery on December 31, 2014. Situation 2: On January 5, 2014, SeJo Corporation collected $450 cash for a three-year subscription to Kemosabe Magazine for a monthly magazine. SeJo Corporation published and delivered the first issue in March 2014 and every month following as scheduled. Situation 3: On January 1, 2014, the law firm of Vestale and Chester collected $30,000 from a client and agreed to provide legal services over a 3 year contract period (2014 thru 2016). The law firm has no reliable method of estimating the costs of providing the services nor the actual timing of the services. For each situation given above, answer the following questions: a. Describe the revenue recognition method that should be used and briefly explain the reasoning. Determine the amount of revenue to be recognized in 2014. SITUATION 1 Delivery of goods would be the critical event and should be used as the revenue recognition method adopted by the company. The company would have to establish when the risk and rewards of ownership over the goods would be transferred to the customer. A delivery point will need to be selected. As for the interest on the loan, this would simply be recorded as a function of time. No revenue would be recorded for 2014 as the delivery occurred after December 31, 2014 despite the weather related delay and interest revenue will only be earned in 2015. Revenue (2014) = 0 3 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm SITUATION 2 Delivery of goods would be the critical event and should be used as the revenue recognition method adopted by the company. The company would recognize revenue as each monthly magazine is delivered to the subscriber. Revenue of $125 would be recorded for 2014 as the delivery occurred for the March-December 2014 issues. Computed as $450 x 10/36. Revenue (2014) = 150 3 MARKS
SITUATION 3 Percentage of completion Provision of services would be the critical event and should be used as the revenue recognition method adopted by the company. However, the company would recognize revenue as each year is fulfilled under the contract. The company has no other basis of estimating the cost of rendering the services or timing, a reasonable method would be to use the period of the contract. Revenue of $10,000 would be recorded for 2014 as the one-third of the contract would be fulfilled. Computed as $30,000 x 1/3. Revenue (2014) = 10,000 3 MARKS
b. Prepare any entry(ies) that should be made in 2014 to correctly reflect the above facts. SITUATION 1 Dr Cash 80,000 Cr Unearned Revenue 80,000 3 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm SITUATION 2 Dr Cash 450 Cr Unearned Revenue 450 March to Dec Dr Unearned Revenue Cr Revenue
125 125
OR Combined entry: Debit Cash $425 Credit Unearned Revenue Credit Revenue 3 MARKS
$300 $125
SITUATION 3 Dr Cash 30,000 Cr Unearned Revenue
30,000
Dr Unearned revenue 10,000 Cr Revenue 10,000 Or Combined entry:
Debit Cash Credit Credit
$30,000 Unearned Revenue Revenue
$20,000 $10,000
3 MARKS
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SOLUTION Please pick your professor: Professor:
□ Jorien Pruijssers □
Seda Oz
□
Ralph Cecere
Day & Time of your class: Student Name:
McGill ID:
INSTRUCTIONS:
This is a CLOSED BOOK, CLOSED NOTES examination. SPACE IS PROVIDED on the examination to answer all 5 parts of the exam. CALCULATOR WITHOUT GRAPH FEATURES permitted ONLY. Translation dictionaries are allowed. This examination consists of 5 parts on a total of 13 pages, including the cover and extra sheet pages. All questions are to be answered on this examination paper. Answer the question in the space provided. Do not exceed the space allowed. Read each question carefully. Show your calculations and explain your reasoning. All companies are expected to be IFRS compliant unless stated otherwise and all amounts are material unless otherwise noted in the question. This examination is PRINTED ON BOTH SIDES of the paper. This examination paper MUST BE RETURNED. PART A
Multiple Choice Questions
PART B
Basic Accounting Equation
PART C
Adjusting Entries
PART D
Ratio Analysis
Part E
Revenue Recognition
Marks 20 Tiger, Inc.
17
Monkey, Inc.
15
Hawk, Co.
22
Starbucks Corp
8
Grade
18
TOTAL
100
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part A: Multiple Choices.
10 X 2 MARKS Select the best answer for each of the following unrelated items (unless otherwise noted). Answer each of these items directly on your examination paper by circling your choice. If more than one answer is given for an item than that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. 1. In which section of the annual report does management comment on the company and its operating results? a) report to the shareholders b) management's discussion and analysis c) corporate profile d) selected financial data 2. Which of the following is an internal user of annual report information? a) creditors b) board of directors c) regulators d) shareholders 3. Which of the following statements best describes a proprietorship? a) can be single or multiple owners b) taxed separately c) most expensive to establish d) owner is responsible for debt of the company 4. A company received a $6,500 deposit from a customer for goods to be delivered the following month. Under the accrual and cash basis of accounting respectively, the deposit would be recorded as a) b) c) d)
Accrual basis a liability a liability income income
Cash basis a liability income a liability income
5. An accrual refers to an event: a) where the expense or revenue is recorded after the cash settlement b) where the liability is recorded after the cash settlement c) where the expense or revenue is recorded before the cash settlement. d) where the asset is recorded after the cash settlement 6. At the end of 2014, Whiteberry Company has total assets and liabilities at $42,000 and $11,000, respectively. Whiteberry reported net income for 2015 in the amount of $12,000. How much is shareholders’ equity at the end of 2015? a) b) c) d)
$30,000 $22,000 $31,000 $43,000
7. If the debit amount of an entry to record the purchase of supplies on account was not posted: a) b) c) d)
liabilities would be understated liabilities would be overstated assets would be overstated assets would be understated
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm 8. On the financial statements, an item is deemed material if: a) b) c) d)
Its nature and magnitude are significant it overstates liabilities It represents the economic substance rather than the legal form of an event It affects shareholders’ wealth
Use the following data of Ankara, Co for questions 9 and 10: Cash Accounts receivable Accounts payable Note payable Inventory Dividends payable Equipment Short-term investments Net Income Accumulated Depreciation Common shares Beginning Retained earnings Prepaid rent expense Salaries payable
$15,200 $29,500 $34,500 $50,000 $17,000 $5,200 $220,000 $6,400 $35,000 $100,000 $40,000 $23,400 $1,600 $12,000
9. Total assets amounted to: a) b) c) d)
$189,700 $288,100 $289,700 $389,700
10. Total liabilities amounted to: a) b) c) d)
$101,700 $98,100 $196,500 $198,100
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part B: Basic Accounting Equation. In this part, there are two independent questions. Please use the allocated space for each question. 1. Tiger Inc. reports the following transactions for May 2015. Analyze the effect of each transaction on the accounting equation. For each transaction determine the account type (e.g. asset, liability, shareholder’s equity), account name (e.g. accounts receivable, cash) and the change (e.g. increase, decrease) in each account you state. Do not leave any box blank. A blank answer will receive zero marks. Tiger, Inc: a) On May 1, 2015, bought land with a value of $250,000 by issuing 100,000 shares. b)
On May 1, 2015, purchased a new 2-year insurance policy for $4,800. The new insurance policy starts on May 1, 2015 and ends on April 30, 2017.
c)
On May 1, 2015, bought a building for $100,000. Paid one-fourth in cash and the balance on a 10-year, 10% interest note payable.
d)
On May 5, 2015, purchased $9,000 of inventory on account.
e)
On May 1, 2015, received a utility bill for $750 covering month of April (no payment has been made).
f)
On May 15, 2015, paid $2,500 for the inventory previously purchased in transaction d.
g)
On May 12, 2015, declared a $1,000 dividend.
h)
On May 31, 2015, recognized that 1 month of the insurance coverage had expired (ref: transaction b).
NO MARKS WILL BE TAKEN OFF FOR NOT SPECIFYING AMOUNTS Item a)
Complete the Expanded Accounting Equation for each item in the space provided Land: +250,000 >>> Total Asset +250,000 Common Shares: +250,000 >>> Total Equity +250,000 2 MARKS
b) Cash -4,800 >>> Total Asset -4,800 Prepaid Expense: +4,800 >>> Total Asset: -4,800 2 MARKS c) Cash -25,000 >>> Total Asset: -25,000 Building +100,000 >>> Total Asset: + 100,000 Long-term Debt: +75,000 >>> Total Liability +75,000 3 MARKS d) Inventory +9,000 >>> Total Asset: +9,000 Accounts Payable: +9,000 : Total Liability: +9,000 2 MARKS e) Utility Payable: +750 >>> Total Liability: +750 Retained Earnings: -750 >>> Total Equity: +750 2 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm f) Cash: -2500 >>> Total Asset: -2,500 Accounts Payable: -2500 >>> Total Liability: -2,500 2 MARKS g)
Dividend Payable: +1000 >>> Total Liability: +1,000 Retained Earnings: -1000 >>> Total Equity: -1,000 2 MARKS
h)
Prepaid Expense: -200 >>> Total Asset: -200 Retained Earnings: -200 >>> Total Equity: -200 2 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm 2. Monkey Inc. made some errors during the posting process. Indicate the exact dollar impact each error would have on total assets, total liabilities, and shareholders' equity. Complete the chart below by using (OVER) to indicate overstated, (UNDER) to indicate understated, and (ZERO) to indicate no effect. Don’t forget to indicate exact dollar amount. Following is the list of errors made by Monkey Inc. Fill in every box of the table. Boxes left blank will be given 0 marks. a. A $200 credit to the Accounts Payable account was posted as $2,000. b. A $50 debit to Cash was never posted. c. A $550 credit to the Revenue account was credited to the Accounts Receivable account. d. A $45,000 debit to the Land account was debited to an expense account. e. A $200 payment on an account payable was credited to Accounts Receivable instead of Cash. Item a)
TOTAL ASSETS
TOTAL LIABILITIES Over 1,800 1 MARK
SHAREHOLDERS’ EQUITY 0 1 MARK
0 1 MARK
0 1 MARK
0 1 MARK
Under 550 1 MARK
0 1 MARK
Under 45,000 1 MARK
0 1 MARK
0 1 MARK
0 1 MARK b) Under 50 1 MARK c) Under 550 1 MARK d) Under 45,000 1 MARK e) 0 1 MARK
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part: C: Adjusting Entries Hawk Corporation is a furniture company and it prepares quarterly financial statements. The company’s fiscal year end is December 31st. Below is the unadjusted trial balance at its 2nd quarter end, June 30, 2014.
HAWK CORPORATION Unadjusted Trial Balance June 30, 2014 ——————————————————————————————————————-----------------------------------------------------Debit Credit Cash ............................................................................................................ Accounts receivable ................................................................................... Supplies .................................................................................................... Prepaid insurance ...................................................................................... Equipment .................................................................................................. Accumulated depreciation-equipment ..................................................... Accounts payable ....................................................................................... Unearned revenue ..................................................................................... Salary payable ............................................................................................ Interest Payable ......................................................................................... Bank Loan Payable .................................................................................... Common shares ......................................................................................... Retained earnings ...................................................................................... Furniture revenue ...................................................................................... Salary expense ........................................................................................... Supplies expense ....................................................................................... Insurance expense ..................................................................................... Depreciation expense-equipment ............................................................. Interest Expense ........................................................................................ Utilities expense .........................................................................................
$10,600 13,200 1,950 4,750 38,500 $8,850 2,500 6,700 650 100 4,000 15,000 10,100 37,200 11,850 450 750 550 100 2,400 $85,100
$85,100
An analysis of the account balances provided the following additional information: i.
A two-year insurance policy costing $6,000 was purchased on October 31, 2013.
ii. Salaries owed to employees on June 30, 2014, amount to $4,600 which has not yet been paid or recorded. iii. A physical count of supplies reveals $900 of supplies on hand on June 30, 2014. iv. Bank loan was incurred on February 1, 2014. Loan carries monthly fixed interest of $50. The interest and principal are due on February 1, 2016. v. Customers must pay a $750 deposit when they order hand-carved furniture. On June 5, 2014, a customer gave an order of 5 hand-carved furniture and made the deposit payment of $3,750. Hawk Co. promised to deliver all 5 items on June 30th. On June 30th, Hawk only delivered 2 items, the remaining to be delivered on August 1st, 2014. None of these transactions were recorded. vi. During the month of June, $2,000 of common shares were issued in exchange for cash. The accountant forgot to record this transaction. vii. Hawk Corporation is considering of purchasing $2,000 worth of product placement on TV. Using the above additional information, prepare the adjusting entries that should be made by Hawk Co. on June 30, 2014. Indicate if no adjusting journal entry is required by stating 'No Journal entry required'.
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
ANSWER: i.
June.
30
Insurance Expense 750 Prepaid Insurance
3 MARKS 750
ii.
June
30
Salary Expense 4,600 Salary Payable 4,600
3 MARKS
iii.
June
30
Supplies Expense Supplies
3 MARKS
iv. v.
June
30
1050
Interest Expense 150 Interest Payable
1050 3 MARKS 150
June
5
Cash
3750 Unearned Revenue 3750
3 MARKS
June
30
Unearned Revenue 1,500 Furniture Revenue 1,500
3 MARKS
vi.
June
30
Cash
3 MARKS
vii.
No adjusting entry is required
2,000 Common Shares 2,000
1 MARK
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part D: Ratio Analysis STARBUCKS CORP Condensed Consolidated Balance Sheets - USD ($) $ in Millions Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Inventories Prepaid expenses and other current assets Deferred income taxes, net Total current assets Long-term investments Equity and cost investments Property, plant and equipment, net Deferred income taxes, net Other long-term assets Other intangible assets Goodwill TOTAL ASSETS Current liabilities: Accounts payable Accrued liabilities Insurance reserves Stored value card liability Current Portion of Long-Term Debt Total current liabilities Long-term debt Other long-term liabilities Total liabilities Shareholders' equity: Common stock ($0.001 par value) — authorized, 2,400.0 shares; issued and outstanding, 1,490.8 shares and 1,499.1 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income/(loss) Total shareholders' equity Noncontrolling interests Total equity TOTAL LIABILITIES AND EQUITY
Jun. 28, 2015
Sep. 28, 2014
$ 2,080.5 94.7 672.7 1,166 413.8 333 4,760.7 390.1 359.4 3,977.7 851.2 443.3 525.8 1,560.6 12,868.8
$ 1,708.4 135.4 631 1,090.9 285.6 317.4 4,168.7 318.4 514.9 3,519 903.3 198.9 273.5 856.2 10,752.9
603.2 1,656.9 214.7 1,024.6 549.8 4,049.2 2,347.4 613.9 7,010.5
533.7 1,514.4 196.1 794.5 0 3,038.7 2,048.3 392.2 5,479.2
1.5
0.7
41.1 5,945 (131.1) 5,856.5 1.8 5,858.3 $ 12,868.8
39.4 5,206.6 25.3 5,272 1.7 5,273.7 $ 10,752.9
Using the information provided in the above balance sheet, answer the following questions: 1. Compute the current ratio for both years presented and provide your comments regarding this ratio year over year. Round your answer to two decimal places. Current ratio = current assets / current liabilities Current ratio (2015) = 4,760.7 / 4,049.2 = 1.18 Current ratio (2014) = 4,168.7 / 3,038.7 = 1.37 The company's 2015 current ratio is lower when compared to the one in 2014. It indicates that the company's liquidity is weakening. The current ratio deals with the relationship between current assets and current liabilities. It is calculated by dividing current assets by current liabilities. The current ratio measures the ability to pay current liabilities with current assets. A high current ratio is preferable to a low current ratio. A high current ratio means a company has plenty of current assets to pay current liabilities. An increasing current ratio from one period to the next indicates an improvement in financial position. Calculation of ratio: 1 MARK Explanation: 2 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
2. Compute the company's debt to total assets ratio for both years presented and provide your comments regarding this ratio year over year. Debt to total assets = total liabilities / total assets Debt to total assets (2015) = 7,010.5 / 12,868.8 = 0.54 Debt to total assets (2014) = 5,479.2 / 10,752.9 = 0.51 The company's 2015 debt-to-total assets is higher when compared to the one in 2014. It appears that debt financing as opposed to equity financing has increased in 2015. The debt ratio deals with the relationship between total debt and total assets. It is calculated by dividing total liabilities by total assets. The debt ratio indicates the proportion of a company's assets that are financed with debt and measures the ability of a business to pay both current and longterm debts. A low debt ratio is preferable to a high debt ratio. A company with a small amount of liabilities has low required payments on debt. Such a company is unlikely to get into financial difficulties. Calculation of ratio: 1 MARK Explanation: 2 MARKS
3. For each of the actions listed below, determine what would happen to the current ratio. Assume nothing else on the balance sheet changes and that net working capital is positive. a. Accounts receivable are fully collected in cash
Current ratio does not change 1 MARK
b. Long-term debt are paid off with cash
Current ratio decreases 1 MARK
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm
Part E: Revenue Recognition Following are three independent situations that occurred for each of the companies described below. All transactions and events occurred between January 1, 2014 and to the end of their accounting period December 31, 2014. None of the events have been recorded in the books of the respective companies. Situation 1: On December 31, 2014, AYSE Corporation sold a piece of equipment to one of its customers for $200,000 and collected $80,000 cash on that date. The remainder of $120,000 plus 10% interest is payable on December 31, 2015. AYSE Corporation will deliver the piece of equipment the first week of January 2015 because of a snowstorm which delayed delivery on December 31, 2014. Situation 2: On January 5, 2014, SeJo Corporation collected $450 cash for a three-year subscription to Kemosabe Magazine for a monthly magazine. SeJo Corporation published and delivered the first issue in March 2014 and every month following as scheduled. Situation 3: On January 1, 2014, the law firm of Vestale and Chester collected $30,000 from a client and agreed to provide legal services over a 3 year contract period (2014 thru 2016). The law firm has no reliable method of estimating the costs of providing the services nor the actual timing of the services. For each situation given above, answer the following questions: a. Describe the revenue recognition method that should be used and briefly explain the reasoning. Determine the amount of revenue to be recognized in 2014. SITUATION 1 Delivery of goods would be the critical event and should be used as the revenue recognition method adopted by the company. The company would have to establish when the risk and rewards of ownership over the goods would be transferred to the customer. A delivery point will need to be selected. As for the interest on the loan, this would simply be recorded as a function of time. No revenue would be recorded for 2014 as the delivery occurred after December 31, 2014 despite the weather related delay and interest revenue will only be earned in 2015. Revenue (2014) = 0 3 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm SITUATION 2 Delivery of goods would be the critical event and should be used as the revenue recognition method adopted by the company. The company would recognize revenue as each monthly magazine is delivered to the subscriber. Revenue of $125 would be recorded for 2014 as the delivery occurred for the March-December 2014 issues. Computed as $450 x 10/36. Revenue (2014) = 150 3 MARKS
SITUATION 3 Percentage of completion Provision of services would be the critical event and should be used as the revenue recognition method adopted by the company. However, the company would recognize revenue as each year is fulfilled under the contract. The company has no other basis of estimating the cost of rendering the services or timing, a reasonable method would be to use the period of the contract. Revenue of $10,000 would be recorded for 2014 as the one-third of the contract would be fulfilled. Computed as $30,000 x 1/3. Revenue (2014) = 10,000 3 MARKS
b. Prepare any entry(ies) that should be made in 2014 to correctly reflect the above facts. SITUATION 1 Dr Cash 80,000 Cr Unearned Revenue 80,000 3 MARKS
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MGCR 211 - All Sections, Midterm Exam, October 16, 2015 12pm-2pm SITUATION 2 Dr Cash 450 Cr Unearned Revenue 450 March to Dec Dr Unearned Revenue Cr Revenue
125 125
OR Combined entry: Debit Cash $425 Credit Unearned Revenue Credit Revenue 3 MARKS
$300 $125
SITUATION 3 Dr Cash 30,000 Cr Unearned Revenue
30,000
Dr Unearned revenue 10,000 Cr Revenue 10,000 Or Combined entry:
Debit Cash Credit Credit
$30,000 Unearned Revenue Revenue
$20,000 $10,000
3 MARKS
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