Name: Student ID: Section A: Multiple-Choice Questions (2 marks each; Total 30 marks) Choose the one best answer. 1. The accounting process involves all of the following except ( d ) a. identifying economic transactions that are relevant to the business. b. communicating financial information to users by preparing financial reports. c. recording economic events that change the financial position of the business. d. reporting the predicted future performance of the business to users. 2. The common characteristic possessed by all assets is ( b ) a. long life. b. future economic benefit. c. tangible nature. d. great monetary value. 3. Retained earnings at the end of the period is equal to ( b ) a. retained earnings at the beginning of the period plus net income minus liabilities. b. retained earnings at the beginning of the period plus net income minus dividends. c. net income. d. assets plus liabilities. 4. The double-entry system requires that each transaction must be recorded ( a ) a. in at least two different accounts. b. in two sets of books. c. in a journal and in a ledger. d. first as a revenue and then as an expense 5. A journal provides ( c ) a. the balances for each account. b. information about a transaction in several different places. c. a chronological record of transactions. d. a list of all accounts used in the business. 6. Which of the following is false? ( a ) a. IAS 1 requires to follow the format of Assets Liabilities = Equity for the presentation of the balance sheet. b. IAS 1 basically requires the presentation of assets and liabilities into separate classification on the balance sheet as current and non-current. c. Under IAS 1, companies can use either the function of expense method or the function of nature method for the presentation of the income statement. d. Under IAS 1, companies have a choice of presenting all items of income and expense recognised in a period either in a single statement of comprehensive income or in two statements comprising a separate income statement and a statement displaying other comprehensive income. 7. A company must make adjusting entries ( d ) a. To ensure that the revenue recognition and expense recognition principles are followed. b. Each time it prepares an income statement and a statement of financial position. c. To account for accruals or deferrals. d. All of the above (a, b and c) are correct regarding adjusting entries. 1
8. Which of the following reflect the balances of prepayment accounts prior to adjustment? ( c ) a. Asset accounts are understated and expense accounts are understated. b. Asset accounts are overstated and expense accounts are overstated. c. Asset accounts are overstated and expense accounts are understated. d. Asset accounts are understated and expense accounts are overstated. 9. Which of the following permanent account is changed during the closing process? ( b ) a. Share Capital-ordinary. b. Retained Earnings. c. Unearned Revenue. d. None of the above. 10. Freight costs paid by a seller on merchandise sold to customers will cause an increase ( a ) a. in operating expenses for the seller. b. in the selling expense of the buyer. c. to the cost of goods sold of the seller. d. to a contra-revenue account of the seller. 11. Cost of goods sold is determined only at the end of the accounting period in ( b ) a. a perpetual inventory system. b. a periodic inventory system. c. both a perpetual and a periodic inventory system. d. neither a perpetual nor a periodic inventory system. 12. Which of the following expressions is incorrect? ( c ) a. Gross Profit Operating Expenses = Operating Profit b. Sales Cost of Goods Sold All Other Expenses = Net Income c. Net income + Cost of Goods Sold = Gross Profit d. Gross Profit + Cost of Goods Sold = Sales 13. A post-closing trial balance will show ( a ) a. only permanent account balances. b. only temporary account balances. c. zero balances for all accounts. d. the amount of net income (or loss) for the period. 14. What is the approach of choosing an accounting method, when alternatives exist, that will least likely overstate assets and net income? ( c ) a. Timeliness b. Materiality c. Prudence d. Consistency 15. To be relevant, accounting information must: ( d ) a. improve the company s internal control. b. be presented on the balance sheet. c. be recorded at historical cost. d. be capable of making a difference in a decision. 2
Section B: Short Answer Questions (Total 40 marks) 1. What are two fundamental qualitative characteristics according to the IASB s Conceptual Framework for Financial Reporting 2010? (2 marks) Relevance and Faithful Representation 2. One of the methods for the presentation of the income statement categorises all operating costs into cost of sales, distribution and selling costs, administrative expenses, and other operating expenses. What is the method called? (2 marks) The function of expense method OR Cost of sales method 3. IFRS standard is referred to as ( ) because it is more loosely framed and allows for professional judgement. On the other hand, US GAAP is referred to as ( ) because it provides a rule for every situation. (2 marks) Principles-based, rules-based 4-7. On July 1, Mr. Young established a retail shop, SixTwelve. Prepare the journal entries for the following transactions. (10 marks) On July 1, Mr. Old, a friend of Mr. Young invested 20,000 cash in the business in exchange for ordinary shares. July 1 Dr. Cash 20,000 Cr. Share capital - ordinary 20,000 On July 1, Mr. Young paid 100 cash for July rent for the shop. July 1 Dr. Rent expense 100 Cr. Cash 100 On July 2, Mr. Young purchased merchandising inventory from JK Wholesaler Inc. for 500 on account. SixTwelve uses a perpetual inventory system. July 2 Dr. Merchandising inventory 500 Cr. Accounts payable 500 On July 3, Mr. Young sold merchandise for cash 200. The merchandise sold had a cost of 130. July 3 Dr. Cash 200 Cr. Sales 200 Dr. Cost of goods sold 130 Cr. Merchandise inventory 130 3
8-9. Prepare the journal entries for the following transactions. (10 marks) On May 1, Hyehwa Supermarket purchased merchandise for $1,000 cash and $3,000 on credit (terms 1/10, n/30) from SungKyun Company, and Hyehwa also paid freight costs $100 to Hyundai Delivery Co. Hyehwa Supermarket uses a periodic inventory system. May 1 Dr. Purchases 4,000 Freight-in 100 Cr. Cash 1,100 Accounts payable 3,000 On May 9, Hyehwa Supermarket paid SungKyun Company in full for May 1 transaction. May 9 Dr. Accounts payable 3,000 Cr. Purchase discounts 30 Cash 2,970 10. 5M Co. has the following account balances at the end of fiscal year 2010. Compute net sales, cost of goods sold and gross profit. ($) Beginning inventory 400 Purchases 1,700 Ending inventory 600 Purchase returns and allowances 200 Sales 3,000 Purchase discounts 50 Sales returns and allowances 250 Freight-in 60 Sales discounts 100 Freight-out 40 Net sales = 3,000 250 100 = 2,650 Net purchases = 1,700 200 50 = 1,450 Cost of goods sold = 400 + 1,450 + 60 600 = 1,310 Gross profit = 2,650 1,310 = 1,340 (6 marks) 11. SKK Co. received $50,000 from customers in 2011. Of the amount received, $15,000 was from sales revenue earned on account in 2010. In addition, SKK Co. earned $40,000 of sales revenue in 2011, which will not be collected until 2012. SKK Co. paid $30,000 for expenses in 2011. Of the amount paid, $10,000 was for expenses incurred on account in 2010. In addition, SKK Co. incurred $25,000 of expenses in 2011, which will not be paid until 2012. Compute 2011 cash-basis net income and accrual-basis net income. (8 marks) Dr. Cash 50,000 Cr. Accounts receivable 15,000 Sales revenue 35,000 Dr. Accounts receivable 40,000 Cr. Sales revenue 40,000 Dr. Expenses 20,000 Accounts payable 10,000 Cr. Cash 30,000 Dr. Expenses 25,000 Cr. Accounts payable 25,000 Cash-basis net income = 50,000 30,000 = 20,000 Accrual-basis net income = (35,000 + 40,000) (20,000 + 25,000) = 30,000 4
Section C: Preparation of Income Statement and Balance Sheet (Total 30 marks) s trial balance as at 31 March 2011 is as follows: Trial Balance March 31, 2011 Debit Credit Cash 11,400 Accounts receivable 5,500 Supplies 1,000 Prepaid insurance 3,000 Merchandise inventory 9,500 Property, plant and equipment 22,000 Accumulated depreciation 4,000 Accounts payable 3,200 Unearned revenue 5,400 Mortgage payable 8,000 Share capital - ordinary 10,000 Retained earnings 4,500 Sales revenue 38,000 Cost of goods sold 17,700 Salaries expense 3,000 73,100 73,100 Additionally, you are informed as follows: (a) A count shows 600m of supplies on hand at March 31. (b) Depreciation on PPE for the period was 800m. (c) The mortgage interest is 10% per year (The mortgage was taken out on January 1, 2011). (d) The insurance expired during the period was 900m. (e) Inventories costing $700m were sold and billed for $1,500m, but An-Guk has not yet received cash from customers. (f) Salaries of $1,200m incurred during March have not been paid yet. (g) As of March 31, 600m of the previously recorded unearned revenue has been earned. Prepare an income statement for the year ended 31 March 2011 and a balance sheet as at 31 March 2011 in forms that comply with IAS 1. 5
(a) A count shows 600m of supplies on hand at March 31. Mar 31 Dr. Supplies expense (1,000 600) 400 Cr. Supplies 400 (b) Depreciation on PPE for the period was 800m. Mar 31 Dr. Depreciation expense 800 Cr. Accumulated depreciation 800 (c) The mortgage interest is 10% per year (The mortgage was taken out on January 1 2011). Mar 31 Dr. Interest expense 200 Cr. Interest payable 200 (d) The insurance expired during the period was 900m. Mar 31 Dr. Insurance expense 900 Cr. Prepaid insurance 900 (e) Inventories costing $700m were sold and billed for $1,500m, but An-Guk has not yet received cash from customers Mar 31 Dr. Accounts receivable 1,500 Cr. Sales revenue 1,500 Dr. Cost of goods sold 700 Cr. Merchandising inventory 700 (f) Salaries of $1,200m incurred during March have not been paid yet. Mar 31 Dr. Salaries expense 1,200 Cr. Salaries payable 1,200 (g) As of March 31, 600m of the previously recorded unearned revenue has been earned. Mar 31 Dr. Unearned revenue 600 Cr. Sales revenue 600 Adjusted Trial Balance March 31, 2011 Debit Credit Cash 11,400 Accounts receivable 5,500 + 1,500 = 7,000 Supplies 1,000 400 = 600 Prepaid insurance 3,000 900 = 2,100 Merchandise inventory 9,500 700 = 8,800 Property, plant and equipment 22,000 Accumulated depreciation 4,000 + 800 = 4,800 Accounts payable 3,200 Unearned revenue 5,400 600 = 4,800 Mortgage payable 8,000 Share capital - ordinary 10,000 Retained earnings 4,500 Sales revenue 38,000 + 1,500 + 600 = 40,100 Cost of goods sold 17,700 + 700 = 18,400 Salaries expense 3,000 + 1,200 = 4,200 Supplies expense 400 Depreciation expense 800 Interest expense 200 Interest payable 200 Insurance expense 900 Salaries payable 1,200 76,800 76,800 6
Income Statement For the year ended March 31, 2011 Sales Revenue 40,100 Cost of goods Sold 18,400 Gross Profit 21,700 Other expenses Salaries expense 4,200 Supplies expense 400 Depreciation expense 800 Interest expense 200 Insurance expense 900 6,500 Net Income 15,200 Balance Sheet (Statement of Financial Position) March 31, 2011 Current assets Cash 11,400 Accounts receivable 7,000 Supplies 600 Prepaid insurance 2,100 Merchandise inventory 8,800 29,900 Non-current assets Property, plant and equipment 22,000 Less Accumulated depreciation 4,800 17,200 Total assets 47,100 Current liabilities Accounts payable 3,200 Unearned revenue 4,800 Interest payable 200 Salaries payable 1,200 9,400 Non-current liabilities Mortgage payable 8,000 Total liabilities 17,400 Equity Share capital - Ordinary 10,000 Retained Earnings 19,700 29,700 Total liabilities and equity 47,100 Note: Retained earnings (19,700) = Opening retained earnings (4,500) + Net Income (15,200) Dividends (0) 7