M30A: PRINCIPLES OF ACCOUNTING

PRACTICE EXAM
MIDTERM #2

CHAPTER 4
1. The Golden Petting Zoo operates a drive-through tourist attraction in Colorado. The
company adjusts its accounts at the end of each month. The selected accounts appearing
below reflect balances after adjusting entries were prepared on April 30. The adjusted trial
balance shows the following:
Prepaid Rent
Buildings
Accumulated DepreciationBuildings

$ 18,000
42,000
5,500

Unearned Ticket Revenue

600

Other data:
a) Three months' rent had been prepaid on April 1.
b) The buildings are being depreciated at $6,000 per year.
c) The unearned ticket revenue represents tickets sold for future zoo visits. The tickets
were sold at $4.00 each on April 1. During April, twenty of the tickets were used by
customers.

Instructions:
Prepare the adjusting entries that were made by the Golden Petting Zoo on April 30.
Solution
a) Rent Expense ..........................................................................

9,000

Prepaid Rent .................................................................

b) Depreciation Expense ..............................................................

Accumulated DepreciationBuildings ..........................

9,000

500
500

c) Unearned Ticket Revenue .......................................................

80

Ticket Revenue .............................................................

80

(20 X $4 = $80)

2. The following ledger accounts are used by the Heartland Race Track:

Accounts Receivable
Prepaid Advertising
Prepaid Rent
Unearned Sales Revenue
Sales Revenue
Advertising Expense
Rent Expense

Instructions:
For each of the following transactions below, prepare the journal entry (if one is required) to
record the initial transaction and then prepare the adjusting entry, if any, required on November
30, the end of the fiscal year.
(a)

On November 1, paid rent on the track facility for three months, $150,000.

(b)

On November 1, sold season tickets for admission to the racetrack. The racing season is
year-round with 25 racing days each month. Season ticket sales totaled $960,000.

(c)

On November 1, borrowed $250,000 from First National Bank by issuing a 6% note

payable due in three months.

(d)

On November 5, programs for 20 racing days in November, 25 racing days in December

and 15 racing days in January were printed for $3,000.

(e)

The accountant for the concessions company reported that gross receipts for November
were $140,000. Ten percent is due to Heartland and will be remitted by December 10.

Solution
(a) Journal Entry
Prepaid Rent ..........................................................................

150,000

Cash .............................................................................

150,000

Adjusting Entry
Rent Expense ........................................................................

50,000

Prepaid Rent .................................................................

50,000

($150,000 /3 = $50,000)

(b) Journal Entry

Cash ......................................................................................

960,000

Unearned Sales Revenue..............................................

960,000

Adjusting Entry
Unearned Sales Revenue ......................................................

80,000

Sales Revenue ..............................................................

80,000

($960,000 X 12 = $80,000)

(c) Journal Entry

Cash ......................................................................................

250,000

Note Payable ................................................................

250,000

Adjusting Entry
Interest Expense ....................................................................

1,250

Interest Payable ............................................................

1,250

([$250,000 X 6%] 12 = $1,250)

(d) Journal Entry

Prepaid Advertising ................................................................

3,000

Cash .............................................................................

3,000

Adjusting Entry
Advertising Expense ..............................................................

1,000

Prepaid Advertising .......................................................

1,000

($3,000X 20 X 60 = $1,000)

(e) Journal Entry

None

Adjusting Entry
Accounts Receivable .............................................................
Sales Revenue ..............................................................

14,000
14,000

3. Prepare the required end-of-period adjusting entries for each independent case listed
below.

Case 1
The Thoma Company began the year with a $3,000 balance in the Supplies account. During the
year, $8,500 of additional supplies were purchased. A physical count of supplies on hand at the
end of the year revealed that $8,300 worth of supplies had been used during the year. No
adjusting entry has been made until year end.

Case 2
The Leno Company has a calendar year-end accounting period. On July 1, the company
purchased office equipment for $30,000. It is estimated that the office equipment will depreciate
$200 each month. No adjusting entry has been made until year end.

Case 3
Yeats Realty is in the business of renting several apartment buildings and prepares monthly
financial statements. It has been determined that 2 tenants in $900 per month apartments and
one tenant in the $1,000 per month apartment had not paid their December rent as of
December 31st.

Solution

Case 1December 31
Supplies Expense ..............................................................

8,300

Supplies .................................................................

8,300

(To record supplies used during the year)

Case 2December 31
Depreciation Expense........................................................

1,200

Accumulated DepreciationEquipment.................

1,200

(To record depreciation expense for six months)

$200 X 6 months = $1,200 Depreciation

Case 3December 31
Accounts Receivable .........................................................
Rent Revenue ........................................................
(To accrue rent recognized but not yet received)
[(2 x $900) + $1,000)]

2,800
2,800

4. Sunkan Company prepares monthly financial statements. Below are listed some selected
accounts and their balances on the September 30 trial balance before any adjustments
have been made for the month of September.
SUNKAN COMPANY
Trial Balance (Selected Accounts)
September 30, 2014
____________________________________________________________________________

Debit
Supplies ...............................................................................................

$ 2,700

Prepaid Insurance ................................................................................

4,800

Equipment ............................................................................................

16,200

Credit

Accumulated DepreciationEquipment ...............................................

$ 1,000

Unearned Rent Revenue ......................................................................

1,200

(Note: Debit column does not equal credit column because this is a partial listing of selected
account balances.)

An analysis of the account balances by the company's accountant provided the following
additional information:
1. A physical count of office supplies revealed $1,000 on hand on September 30.
2. A two-year life insurance policy was purchased on June 1 for $4,800.
3. Office equipment depreciates $3,000 per year.
4. The amount of rent received in advance that remains unearned at September 30 is $300.
Instructions:
Using the information given, prepare the adjusting entries that should be made by Sunkan
Company on September 30.

Solution
1. Supplies Expense ...........................................................................

1,700

Supplies .................................................................................

1,700

(To record the amount of office supplies used $2,700 1,000)

2. Insurance Expense .........................................................................

200

Prepaid Insurance ..................................................................

200

(To record insurance expired $4,800 24)

3. Depreciation Expense ....................................................................

250

Accumulated DepreciationEquipment ................................

250

(To record monthly depreciation $3,000 12)

4. Unearned Rent Revenue ................................................................

Rent Revenue ........................................................................
(To record rent revenue recognized $1,200 $300)

900
900

5. Prepare year-end adjustments for the following transactions. Omit explanations.

1.

Accrued interest on notes receivable is $30.

2.

$1,000 of unearned service revenue has been recognized.

3.

Three years rent, totaling $45,000, was paid in advance at the beginning of the year.

4.

Services totaling $2,900 had been performed but not yet billed at the end of the year.

5.

Depreciation on equipment totaled $6,500 for the year.

6.

Supplies purchased totaled $850. By year end, only $250 of supplies remained.

7.

Salaries owed to employees at the end of the year total $960

Solution
1. Interest Receivable..........................................................................

30

Interest Revenue....................................................................

2. Unearned Service Revenue............................................................

30

1,000

Service Revenue ...................................................................

3.

Rent Expense ...............................................................................

1,000

15,000

Prepaid Rent .........................................................................

15,000

($45,000X 3 = $15,000)

4.

Accounts Receivable....................................................................

2,900

Service Revenue......................................................................

5.

Depreciation Expense .................................................................

2,900

6,500

Accumulated DepreciationEquipment ................................

6. Supplies Expense ...........................................................................

6,500

600

Supplies .................................................................................

600

($850 $250)

7. Salaries and Wages Expense .........................................................

Salaries and Wages Payable ...............................................

960
960

CHAPTER 5

6. Horner Corporation reported net sales of $150,000, cost of goods sold of $96,000,
operating expenses of $35,000, other expenses of $10,000, net income of $9,000.
Calculate the following values. 1. Profit margin. 2. Gross profit rate.

Solution

1. Profit margin =

2. Gross profit rate =

Net income
Net sales

Gross profit
Net sales

$ 9,000
$150,000

($150,000 - $96,000)
$150,000

=6%

= 36%

7. On September 1, Pennington Supply had an inventory of 20 backpacks at a cost of $25

each. The company uses a perpetual inventory system. During September, the following
transactions and events occurred.

Sept.

4 Purchased 50 backpacks at $25 each from Sievert, terms 2/10, n/30.

6 Received credit of $100 for the return of 4 backpacks purchased on September 4

that were defective
9 Sold 25 backpacks for $40 each to Lilly Books, terms 2/10, n/30.

13 Sold 15 backpacks for $40 each to Stoner Office Supply, terms n/30.

14 Paid Sievert in full, less discount.

Instructions
Prepare the journal entries for the September transactions for Pennington Supply.

Solution

Sept.

Inventory ..........................................................................

1,250

Accounts Payable ...................................................

Accounts Payable ............................................................

1,250

100

Inventory .................................................................

Accounts Receivable .......................................................

Sales Revenue.........................................................

100

1,000
1,000

Cost of Goods Sold ..........................................................

625

Inventory .................................................................

13

Accounts Receivable .......................................................

625

600

Sales Revenue.........................................................

Cost of Goods Sold ..........................................................

600

375

Inventory .................................................................

14

Accounts Payable ($1,250 - $100) ...................................

375

1,150

Cash ($1,150 x .98)..................................................

1,127

Inventory ($1,150 x .02) ............................................

23

8. Petersen Book Store entered into the transactions listed below. In the journal provided,
prepare Petersens necessary entries, assuming use of the perpetual inventory system.

July

Purchased $1,600 of merchandise on credit, terms n/30.

Returned $100 of the items purchased on July 6.

Paid freight charges of $90 on the items purchased July 6.

19

Sold merchandise on credit for $4,400, terms 1/10, n/30. The merchandise had
an inventory cost of $2,700.

22

Of the merchandise sold on July 19, $300 of it was returned. The items had cost
the store $150.

28

Received payment in full from the customer of July 19.

31

Paid for the merchandise purchased on July 6.

Solution

July

Inventory

1,600

Accounts Payable

Accounts Payable
Inventory

1,600

100
100

Inventory

90

Cash

19

Accounts Receivable .

90

4,400

Sales Revenue

Cost of Goods Sold.

4,400

2,700

Inventory

22

Sales Returns and Allowances..

2,700

300

Accounts Receivable.

Inventory

300

150

Cost of Goods Sold

28

150

Cash ($4,100 x .99)

4,059

Sales Discounts

41

Accounts Receivable

31

Accounts Payable ($1,600 - $100)

Cash

4,100

1,500
1,500

CHAPTER 6
9. Johnson Company reports the following for the month of June.

Date

Explanation

Units

Unit Cost

Total Cost

June 1

Inventory

225

$5

$1,125

12

Purchase

525

3,150

23

Purchase

750

5,250

30

Inventory

280

(a) Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO, (2)
LIFO, and (3) average cost.
Solution
(a)

(1) FIFO

Beginning inventory (225 $5) ...........................................

$1,125

Purchases
June 12 (525 $6) ........................................................

$3,150

June 23 (750 $7) ........................................................

5,250

8,400

Cost of goods available for sale ..........................................

9,525

Less: Ending inventory (280 $7) ......................................

1,960

Cost of goods sold ..............................................................

$7,565

(2) LIFO

Cost of goods available for sale ..........................................

$9,525

Less: Ending inventory (225 $5) + (55 $6).....................

1,455

Cost of goods sold ..............................................................

$8,070

(3) AVERAGE COST

Cost of Goods

Total Units

Available for Sale Available for Sale

$9,525

Weighted Average
=

1,500

Unit Cost
$6.35

Ending inventory (280 $6.35) $1,778

Cost of goods sold (1,220 $6.35) $7,747
or $9,525 $1,778 = $7,747

10. Hansen Company uses the periodic inventory method and had the following inventory
information available:
Units

Unit Cost

Total Cost

1/1

Beginning Inventory

100

$3

$ 300

1/20

Purchase

500

$4

2,000

7/25

Purchase

100

$5

500

10/20

Purchase

300

$6

1,800

1,000

$4,600

A physical count of inventory on December 31 revealed that there were 380 units on hand.

Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at
December 31 is $__________.
2. Assume that the company uses the average cost method. The value of the ending inventory
on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on
December 31 is $__________.
4. Determine the difference in the amount of income that the company would have reported if it
had used the FIFO method instead of the LIFO method. Would income have been greater or
less?
Solution
1. FIFO: Ending inventory $2,200
300 units @$6

$1,800

80 units @$5

400

380 units

$2,200

2. Average Cost: Ending inventory $1,748

$4,600 1,000 = $4.60 per unit 380 units = $1,748

3. LIFO: Ending Inventory $1,420

100 units @$3

$ 300

280 units @$4

1,120

380 units

$1,420

4. FIFO: Cost of goods sold $2,400

100 units @$3

$ 300

500 units @$4

2,000

20 units @$5

100

620 units

$2,400

LIFO: Cost of goods sold $3,180

300 units @$6

$1,800

100 units @$5

500

220 units @$4

880

620 units

$3,180

Income would have been $780; ($3,180 vs. $2,400) greater if the company used FIFO instead
of LIFO.

11. Faster Company uses the periodic inventory method and had the following inventory
information available:
Units

Unit Cost

Total Cost

1/1

Beginning Inventory

15

$8.00

$ 120

1/20

Purchase

60

$8.80

528

7/25

Purchase

30

$8.40

252

10/20

Purchase

45

$9.60

432

150

$1,332

A physical count of inventory on December 31 revealed that there were 55 units on hand.

Instructions
Answer the following independent questions and show computations supporting your answers.
1. Assume that the company uses the FIFO method. The value of the ending inventory at
December 31 is $__________.
2. Assume that the company uses the Average Cost method. The value of the ending inventory
on December 31 is $__________.
3. Assume that the company uses the LIFO method. The value of the ending inventory on
December 31 is $__________.
4. Assume that the company uses the FIFO method. The value of the cost of goods sold at
December 31 is $__________.

Solution
1. FIFO: Ending inventory $516
45 units @$9.60 =

432

10 units @$8.40 =

84

55 units

$516

2. Average Cost: Ending inventory $488

$1,332 150 = $8.88 per unit 55 units = $488

3. LIFO: Ending Inventory $472

15 units @$8.00 =

$ 120

40 units @$8.80 =

352

55 units

$472

4. FIFO: Cost of goods sold $816

15 units @$8.00 =

$ 120

60 units @$8.80 =

528

20 units @$8.40 =

168

95 units

$ 816

12. This information is available for Groneman, Inc. for 2013 and 2014.

(in millions)

2013

2014

$ 2,290

$ 2,522

2,522

2,618

Cost of goods sold

24,351

23,099

Sales

43,251

43,232

Beginning inventory
Ending inventory

Instructions
Calculate the inventory turnover, days in inventory, and gross profit rate for Groneman., Inc. for
2013 and 2014.
Solution

2013
Inventory
turnover

2014

$24,351

$23,099

($2,290 + $2,522) 2

($2,522 + $2,618) 2

$24,351 = 10.1 times

$23,099 = 9.0 times

$2,406

$2,570

365 = 36.1 days

365 = 40.6 days

10.1

9.0

$43,251$24,351 = .44

$43,232$23,099 = .47

Ratio

Days in
inventory

Gross
profit rate

$43,251

$43,232

13. Dalton Company was undergoing an end of year audit of its financial records. The
auditors were in the process of reviewing Daltons inventory for year end, December 31,
2014. They completed an end of year inventory. The value of the ending inventory prior
to any adjustments was $185,000, but before finishing up they had a few questions.
Discussion with Daltons accountant revealed the following:
(a)

Dalton sold goods costing $60,000 to Summey Company FOB shipping point on
December 28. The goods are not expected to reach Summey until January 12. The goods
were not included in the physical inventory because they were not in the warehouse.

(b)

The physical count of the inventory did not include goods costing $95,000 that were
shipped to Dalton FOB destination on December 27 and were still in transit at year-end.

(c)

Dalton received goods costing $25,000 on January 2. The goods were shipped FOB
shipping point on December 26 by Strong Company. The goods were not included in the
physical count.

(d)

Dalton sold goods costing $40,000 to Hampton Company FOB destination on December
30. The goods were received by Hampton Company on January 8. Because the goods had
been shipped, they were excluded from the physical inventory count.

(e)

Dalton received goods costing $42,000 on January 2 that were shipped FOB destination
on December 29. The shipment was a rush order that was suppose to arrive December 31.
This purchase was included in the ending inventory of $192,000.

(f)

Dalton Company, as the consignee, had goods on consignment that cost $3,000. Because
these goods were on hand as of December 31, they were included in the physical
inventory count.

Instructions
Analyze the above information and calculate a corrected amount for the ending inventory.
Explain the basis for your treatment of each item.

Solution

Start with

$185,000

Item (a)

(Because the goods were shipped FOB shipping point title

passed to Button upon shipping. Properly excluded.)

Item (b)

(Goods should be excluded. Title does not pass to Dalton until

goods are received).

Item (c)

+25,000

(Goods belong to Dalton. Title passed when supplier delivered

the goods to the transportation company.)

Item (d)

+40,000

(Because the goods were shipped FOB destination point

Dalton has title to these goods.)

Item (e)

42,000

(Goods were shipped FOB destination. Dalton does not take

title until they receive them no matter when expected.)

Item (f)

3,000

(These goods are owned by the consignor, not the consignee,

and should not be included in Dalton's inventory.)

Corrected inventory $205,000

14. The Cain Company has just completed a physical inventory count at year end,
December 31, 2014. Only the items on the shelves, in storage, and in the receiving area
were counted and costed on the FIFO basis. The inventory amounted to $80,000. During
the audit, the independent CPA discovered the following additional information:
(a)

There were goods in transit on December 31, 2014, from a supplier with terms FOB
destination, costing $10,000. Because the goods had not arrived, they were excluded from
the physical inventory count.

(b)

On December 27, 2014, a regular customer purchased goods for cash amounting to
$1,000 and had them shipped to a bonded warehouse for temporary storage on December
28, 2014. The goods were shipped via common carrier with terms FOB shipping point. The
customer picked the goods up from the warehouse on January 4, 2015. Cain Company had
paid $500 for the goods and, because they were in storage, Cain included them in the physical
inventory count.

(c)

Cain Company, on the date of the inventory, received notice from a supplier that goods
ordered earlier, at a cost of $4,000, had been delivered to the transportation company on
December 28, 2014; the terms were FOB shipping point. Because the shipment had not
arrived on December 31, 2014, it was excluded from the physical inventory.

(d)

On December 31, 2014, there were goods in transit to customers, with terms FOB shipping
point, amounting to $800 (expected delivery on January 8, 2015). Because the goods had
been shipped, they were excluded from the physical inventory count.

(e)

On December 31, 2014, Cain Company shipped $2,500 worth of goods to a customer,
FOB destination. The goods arrived on January 5, 2014. Because the goods were not on
hand, they were not included in the physical inventory count.

(f)

Cain Company, as the consignee, had goods on consignment that cost $3,000. Because
these goods were on hand as of December 31, 2014, they were included in the physical
inventory count.

Instructions
Analyze the above information and calculate a corrected amount for the ending inventory.
Explain the basis for your treatment of each item.

Solution
Start with
Item (a)

$80,000

Item (b)

500

Item (c)

+ 4,000

Item (d)

(Because the goods were shipped FOB destination title will

pass to Cain upon arrival. Properly excluded.)
(Goods should be excluded. The customer accepted title when
the goods left Cain FOB shipping point.)
(Goods belong to Cain. Title passed when supplier delivered
the goods to the transportation company.)
(Because the goods were shipped FOB shipping point Cain no
longer has title to these goods. Properly excluded.)

Item (e)

+ 2,500

(Goods were shipped FOB destination. Cain retains title until

the customer receives them.)

Item (f)

3,000

(These goods are owned by the consignor, not the consignee,

and should not be included in Cain's inventory.)

Corrected inventory

$83,000