University of the South Pacific

School of Accounting and Finance

Semester 1, 2019

AF101 Introduction to Accounting Part I

Mid-Semester Test
ON-CAMPUS & ONLINE MODE

Instructions
This test has a total mark of 70 and carries a 25% weighting towards your overall
course grade.
There are 9 pages in this test paper, including this cover page.
You have 120 minutes to complete this paper and an additional 10 minutes reading
time.
Answer all questions.
You may use a hand-held, non-programmable calculator. This is not supplied.
SECTION A MULTIPLE CHOICE QUESTIONS 25 MARKS
[Answer in Multiple Choice Answer Sheet provided]
[Suggested time: 36 minutes]

1. Accounting is defined as the process of identifying, __________, recording and

communicating economic information to permit informed judgements and economic
decisions by users of the information.

a. verifying
b. interpreting
c. measuring
d. processing

2. Financial reports prepared for a variety of external users who are unable to obtain the
accounting information for their own specific needs are known as:

a. external user reports.

b. external purpose financial statements.
c. non-specific user reports.
d. general purpose financial statements.

3. Oakey & Associates had the following assets and liabilities. The total for equity equals:

$
Cash at bank 5 000
Mortgage 25 000
Creditors 9 000
Inventory 3 800
Debtors 12 200
Office equipment 8 600
Loan from Dalby Ltd 7 000
Motor vehicles 19 000

a. $ 7 600.
b. $ 1 200.
c. $39 600.
d. $25 600.

4. Jacob’s opening capital at 1 July 2017 was $75 000, his profit for the year was
$22 000 and his drawings were $8 000. What is the final balance of his capital at the end
of the year?

a. $89 000
b. $105 000
c. $53 000
d. $45 000

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5. Which assumption requires transactions to be recognised in the accounting reports when
they occur and not when the cash is received or paid?

a. faithful representation.
b. accounting period.
c. accrual basis.
d. accounting entity.

6. As identified by the IASB’s Conceptual Framework, which of the following groups are
the prime users of financial reports?

a. Financial analysts and advisors

b. Governments, regulatory bodies and parties performing an overseeing function
c. Existing and potential investors and creditors
d. The public and consumers of goods and services

7. Materiality is an aspect of the fundamental characteristic of relevance and:

a. means exercising due care and caution.

b. means attention to detail.
c. is linked to the qualitative characteristic of faithful representation.
d. provides a cut-off point in determining whether information is relevant.

8. Changing from straight line to reducing balance depreciation in one year, then back to
straight line in the next, and then back again to reducing balance, is a violation of which
qualitative characteristic?

a. comparability.
b. relevance.
c. reliability.
d. timeliness.

9. Select the account types for these items:

Rent received in advance
Mortgage
Prepaid expenses
Rates

a. Expense, liability, liability, equity

b. Asset, equity, asset, expense
c. Liability, liability, asset, expense
d. Expense, liability, asset, liability

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10. A sole proprietor who owns a news agency takes home stationery and exercise books for
his children to use at school. This would be considered to be:

a. an expense because an asset has been used for personal use.

b. a decrease in assets and a decrease in equity because by taking the stationery items
the owner has made a drawing from the business.
c. an increase in equity and a decrease in assets because the sole proprietor purchased
the inventory.
d. an increase in assets and an increase in equity.

11. The payroll officer recorded wages for the month as a debit to the Sales account rather
than as a debit to wages expense. This error will result in:

a. understated liabilities at the end of the period.

b. overstated expenses at the end of the period.
c. overstated profit for the period.
d. no effect on profit of the period.

12. On 1 October 2018 Tanya’s Pools paid $2400 for a 12 month insurance premium. The
$2400 was initially recorded in the insurance expense account. The adjusting entry required
to accurately represent the expired insurance at 31 December 2018, the close of the annual
accounting period, is:

a. DR Prepaid insurance $1800; CR Insurance expense $1800

b. DR Prepaid insurance $600; CR Insurance expense $600
c. DR Prepaid insurance $1200; CR Insurance expense $1200
d. DR Insurance expense $200; CR Prepaid insurance $200

13. If an adjustment for accrued rent is omitted from the financial reports the effect is:

a. liabilities are understated; profit is overstated.

b. liabilities are overstated; profit is understated.
c. assets are understated; profit is overstated.
d. assets are overstated; profit is understated.

14. On 1 May 2019, Dress in Style received a $2000 advance payment from a customer for the
design and making of a formal gown. The gown is expected to be completed by the end of
August 2019. The correct accounting entry to initially record the $2000 is:

a. DR Bank $2000; CR Accounts payable $2000

b. DR Unearned income $2000; CR Bank $2000
c. DR Bank $2000; CR Unearned income $2000
d. DR Income earned $2000; CR Bank $2000

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15. On 1 May 2019, Dress in Style received a $2000 advance payment from a customer for the
design and making of a formal gown. The gown is expected to be completed by the end of
August 2019. By 30 June 2019, approximately half of the dress is complete. The correct
adjusting entry to be recorded at 30 June 2019 is:

a. DR Dress-making expenses $1000; CR Unearned income $1000

b. DR Unearned income $1000; CR Dress-making income $1000
c. DR Unearned income $1000; CR Bank $1000
d. DR Income earned $1000; CR Dress-making income $1000

16. What is the correct order for the steps in the closing process?
I Close the drawings account to the owner’s capital account
II Balance the owner’s capital account
III Transfer the profit or loss to the owner’s capital account
IV Close the income and expense accounts to the profit or loss summary account

a. III, IV, II, I

b. IV, III, I, II
c. IV, III, I, II
d. IV, III, II, I

17. Assume reversing entries are made by the entity. If wages of $2600 were accrued at the end
of the year and the first payment of wages the following year was $33 100 how would this
payment be recorded?

a. DR Salaries payable $2600; DR Salaries expense $30 500; CR Cash $33 100
b. DR Salaries expense $35 700; CR Salaries payable $2600; CR Cash $33 100
c. DR Salaries payable $2600; DR Salaries expense $33 100; CR Cash $35 700
d. DR Salaries expense $33 100; CR Cash $33 100

18. When preparing the bank reconciliation James found that the bank had incorrectly debited
the business’ bank account with $200. The proper procedure is to:

a. deduct $200 from the bank balance in the general ledger and notify the bank.
b. do nothing as the bank will adjust the error when they balance.
c. deduct $200 from the bank balance in the general ledger.
d. add $200 to the bank statement balance in the bank reconciliation and notify the
bank.

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19. The petty cash fund should be reimbursed at the time the financial statements are prepared
so that:

a. expenses are not understated and equity overstated.

b. petty cash asset is not overstated and expenses understated.
c. petty cash expenses are not overstated and bank understated.
d. expenses are not overstated and the petty cash asset understated.

20. Darling Inc makes all of its purchases on credit; 50% are paid in the month of purchase,
30% during the month following the purchase and 20% in the second month following the
purchase.
April May June
Purchases $16 000 $20 000 $15 000

The budgeted balance of creditors at the end of June is:

a. $11 500
b. $15 000
c. $16 700
d. $51 000

21. Sugar Industries makes all sales on credit with 60% of the payment received in the month of
sale, 20% in the month following the sale, 15% in the 2nd month following sale, and the
remaining 5% remains uncollected.
Budgeted sales are:
July $100 000
August $140 000
September $120 000
October $150 000

The budgeted receipts collected from debtors for September are:

a. $120 000
b. $135 000
c. $115 000
d. $100 000

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22. Which of the following is the correct closing entry for a profit of $78 400?

a. DR Owner’s capital account $78 400; CR Profit or loss summary account $78 400
b. DR Owner’s capital account $78 400; CR Bank $78 400
c. DR Profit or loss summary account $78 400; CR Owner’s capital account $78 400
d. No closing entry is required

23. A cash budget measures the:

a. working capital.
b. estimated financial position.
c. expected profitability.
d. estimated future cash position.

24. Just Cookware makes 75% of its sales on credit. Of those credit sales, 60% of the payment
is received in the month of sale, 30% in the month following sale and the remaining 10% in
the subsequent month. Budgeted sales are:

January $100 000

February $140 000
March $120 000

The budgeted balance of debtors at 31 March is:

a. $10 500
b. $46 500
c. $36 000
d. $37 500

25. ________________refers to the ability of a firm to pay its debts as they fall due.

a. the acid test.

b. cash management.
c. solvency.
d. being in surplus.

~Continue to Section B~

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SECTION B SHORT ANSWERS 10 MARKS

Read the following extract and answer the following questions.

“At the date of this declaration, in the opinion of the directors, there are
reasonable grounds to believe that the holding company and the group will be
able to pay its debts as and when they become due and payable.” (ATH Annual
Report 2018, page 33).

26. What ‘word’ best describes the aspect of the business 1 mark
highlighted in the extract above?

27. Identify 2 groups of users who would benefit most from 2 marks
the disclosure of this information.

28. Explain how it would affect the decision-making of each 2 marks

group.

29. Which accounting concept/assumption does the article best 1 mark

illustrate?
30. Explain how the concept above (Question 29) affects the 4 marks
valuation of Assets in Financial Statements.

[Suggested Time: 17 minutes]

~Continue to Section C~

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SECTION C PROBLEM SOLVING QUESTIONS 35 MARKS

QUESTION 23 BANK RECONCILIATION & INTERNAL CONTROL 15 MARKS

You are provided with the last two months’ Bank Reconciliation Statements of Cairns Traders Ltd.

Bank Reconciliation Statement of Cairns Traders

as at 28h February, 2019
$
Debit Balance as per Bank Statement 22 250
Outstanding Cheques:
No. 123 (dated 25th November 2018) 125
No. 335 (dated 28th January 2019) 249
No. 438 (dated 15th February 2019) 605
No. 447 (dated 28th February 2019) 3 245
No. 448 (dated 25th May 2019) 2 384
Outstanding Deposits 26 789
Credit Error on Bank Statements 450
Balance as per Bank Account in the General Ledger ?

Bank Reconciliation Statement of Cairns Traders

as at 30th March, 2019
$
Debit Balance as per Bank Statement 18 756
Outstanding Cheques:
No. 335 (dated 28th January 2019) 249
No. 448 (dated 25th May 2019) 2 384
No. 473 (dated 22nd March 2019) 2 500
Outstanding Deposits 25 750
Balance as per Bank Account in the General Ledger ?

Required:
Refer to the Bank Reconciliation Statements above and answer the following questions below:

a) According to the February Bank Statement, does Cairns Traders have a favourable or
unfavorable bank balance? Give a reason for your answer.
(2 marks)
b) Calculate the missing Cash at Bank balance in the General Ledger of Cairns Traders on 28th
February. State whether this is a favorable or unfavorable balance.
(3 marks)
c) Calculate the missing Cash at Bank balance in the General Ledger of Cairns Traders on 30th
March. State whether this is a favorable or unfavorable balance.
(3 marks)

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d) Identify which cheques appear on both the February and March Bank Reconciliation
Statements and explain the possible reasons for this.
(2 marks)
e) As internal auditor of Cairns Traders, you have noticed that both the February and March
2019 Bank Reconciliations reflect very large outstanding deposits. Your investigation into
this matter shows that most of these amounts were in fact received by the cashier before the
date on the Bank Statement.
i. Briefly explain which internal control principles are violated.
(2 marks)
ii. Identify and briefly discuss two (2) internal control measures that could be
implemented within the accounting department to avoid any further such problems
reoccurring.
(3 marks)

[Suggested Time: 24 minutes]

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QUESTION 24 COMPLETE ACCOUNTING CYCLE 20 MARKS

Funny Drew Consultants adjusts and closes its accounts at the end of the financial year. On 31st
December 2018, the following trial balance was prepared from the General Ledger.

Funny Drew Consultants

Unadjusted Trial Balance
as at 31st December, 2018

Accounts Debit Credit

Cash 12 540
Prepaid Dues & Subscriptions 960
Supplies 1 600
Equipment 20 000
Accumulated Depreciation - Equipment 1 200
Loan 5 000
Unearned Consulting Fees 35 650
Hannah Drew, Capital 10 000
Hannah Drew, Retained Earnings 7 040
Hannah Drew, Drawings 27 000
Consulting Fees Revenue 90 860
Salaries Expenses 66 900
Telephone Expense 2 550
Rent Expense 14 300
Interest Expense 450
Insurance Expense 1 800
Miscellaneous Expense 1 650

$ 149,750.00 $149,750.00

The following additional information is available at the end of December:

1. On 1st December 2018, the firm signed a new rental agreement and paid three months’
rent in advance at a rate of $1 100 per month. This advance payment was debited to the
Rent Expense account.
2. Dues and subscriptions expired during the year amounted to $710.
3. A count of supplies on hand at 31st December was made, and revealed that cost of unused
supplies was $450.
4. Accrued interest on the loan payable is $600.
5. The company purchased a 12-month fire insurance policy on 31st May, 2018 for $1 800
and debited it to the Insurance Expense account.

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 6. Consulting services valued at $32 550 were rendered during the year for clients who
made payments in advance.
7. At 31st December, consulting services valued at $3 000 had been provided to clients but
no payments have been received from these clients as yet.
8. The salaries are paid fortnightly (10 working days) and the fortnight ends on Friday 7th
January, 2019 where total salaries to be paid to employees is $16,800.

Required:
a) Prepare the journal entries to record all the necessary balance day adjustments.
(Provide workings. Narrations are not required)
(15 marks)
b) From your adjusting entries, prepare appropriate reversing journal entries.
(5 marks)

[Suggested Time: 48 minutes]

~The End~

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