香港中文大學

The Chinese University of Hong Kong

Midterm Examination 1st Term 2016-2017
Course Code & Title
ACCT 2111 E and G
INTRODUCTORY FINANCIAL ACCOUNTING
Time allowed 時間: 2 hours 小時

Professor Jeff NG
Teaching Assistant Cliff LEE

Rules and Instructions:

1) This Midterm Exam is closed book and notes, which means that you are not to use any
materials when working on this exam.
2) No talking or communication of any kind during the exam.
3) No mobile phones, notebook computers, tablets, etc., not even in calculator mode.
4) A calculator may be used, but only for calculation. No notes are to be stored on
programmable calculators.
5) There are ten (10) pages including this cover page. Please check that you have a complete
exam.
6) Please read, sign and date the student declaration of academic honesty below.
7) Show all calculations for full credit.

I acknowledge that I am aware of University policies and regulations on honesty in academic

work, and of the disciplinary guidelines and procedures applicable to breaches of such
policies and regulations, as contained in the website. I understand that I am not to discuss the
contents of this exam with anyone, including students in other sections of this course, until
after all exams have been graded and returned.

___________________ __________________
Signature Date

Name (in English) Student ID

ACCT 2111_________ Intro Fin Accounting

Course code Course title

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SECTION A – MULTIPLE CHOICE (20 points, 1 point each)

Please select the most appropriate answer from each question below. Only one answer is
required from each question.

A1 – All of the following are true of Limited Companies in Hong Kong EXCEPT:

a) Limited Companies are legally distinct from its owners

b) Limited Company income is taxed
c) Dividends to Hong Kong shareholders are taxed
d) Limited Company shareholders elect the Board of Directors

A2 – Which of the following is a Liability?

a) Unearned Revenues
b) Prepaid Expenses
c) Accumulated Depreciation
d) Allowance for Uncollectible Accounts

A3 – Which of the following equations is accurate?

a) Assets + Shareholders’ Equity = Liabilities

b) Assets – Liabilities = Shareholders’ Equity
c) Assets = Liabilities – Shareholders’ Equity
d) Assets + Liabilities = Shareholders’ Equity

A4 – If assets decrease $10,000 during a given period, and liabilities decrease $25,000 during
the same period, shareholders’ equity must change by which amount?

a) Increase $15,000
b) Decrease $15,000
c) Decrease $35,000
d) Increase $35,000

A5 – A company issues share capital in exchange for $5,000 Inventory. What is the journal
entry related to this transaction?

a) DR Share Capital and CR Inventory

b) DR Inventory and CR Share Capital
c) DR Cost of Goods Sold and CR Cash
d) DR Share Capital and CR Cost of Goods Sold

A6 – The left side of a T-account is always which of the following?

a) The increase side

b) The decrease side
c) The debit side
d) The credit side

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A7 – Under accrual accounting, which of the following events results in expense recognition?

a) Perform services on account

b) Use supplies in the performance of services
c) Purchase inventories on account
d) Pay cash to settle accounts payables

A8 – Which of the following is true regarding the objective of the matching principle?

a) Match liabilities with assets

b) Match contra-assets with assets
c) Match equity with revenues
d) Match expenses with revenues

A9 – Receiving a payment from customers for future services is related to which type of
adjusting entry?

a) Accrued expense
b) Accrued revenue
c) Deferred expense
d) Deferred revenue

A10 – ABC Company had a beginning accounts receivable balance of $8,000, recorded sales
on account of $10,000, collected $6,000 on account, and had ending accounts receivable
balance of $11,000. What else is true for ABC Company?

a) ABC Company increased accounts payables by $1,000

b) ABC Company’s cash increased by $1,000
c) ABC Company wrote off $1,000 in accounts receivable during the month
d) ABC Company’s expenses exceed revenues by $1,000

A11 – Which of the following transactions results in an accrual when first recorded?

a) Purchase supplies on account

b) Perform services on account
c) Collect cash for unearned revenues
d) Pay cash for goods to be delivered next month

A12 – Which of the following transactions likely increases bad debt expense?

a) Collecting accounts receivable previously written off

b) Selling goods on account
c) Collecting cash from customers on account
d) Writing off doubtful accounts

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A13 – Using up supplies that were previously purchased on account results in which of the
following entries?

a) Debit Accounts Payable and Credit Supplies

b) Debit Supplies and Credit Accounts Payable
c) Debit Supplies Expense and Credit Supplies
d) Debit Supplies and Credit Supplies Expense

A14 – Which of the following adjustments are made to the BANK side of a bank
reconciliation?

a) Bank collection of dividend from investments

b) Check returned indicating that there was Non-Sufficient Funds (NSF)
c) Deposit in Transit
d) Book error

A15 – Bears Company issues a 3-month note on December 1 for $100,000 with a stated
interest rate of 12%. What is the amount of interest revenue recorded by Bears Company on
December 31, the end of the fiscal year?

a) $0
b) $1,000
c) $4,000
d) $12,000

A16 – Accounts receivables that a company cannot collect from customers are known by all
of the following names EXCEPT which?

a) Bad debts
b) Factoring
c) Uncollectible accounts
d) Doubtful accounts

A17 – Under the allowance method, writing off accounts receivable results in what income
statement impact(s)?

a) Increase bad debt expense

b) Reduce revenues
c) Both a) and b)
d) Neither a) nor b)

A18 – Which of the following activities increase the cost of Inventory (to the buyer)?

a) Purchase discount
b) Purchase allowance
c) Delivery cost borne by the buyer
d) Insurance paid by the seller

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A19 – In periods of increasing costs, which inventory costing method results in the highest
Cost of Goods Sold?

a) FIFO
b) LIFO
c) Average Cost
d) Specific Unit

A20 – If ending inventory is understated only during the current period, which of the
following will occur?

a) Current period cost of goods sold is understated

b) Current period net income is overstated
c) Next period cost of goods sold is understated
d) Next period net income is understated

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SECTION B – SHORT ANSWERS (33 marks)

This section requires you to write short answers or make simple calculations for each
question. Note that the questions are independent of each other. That is, B2 does not follow
from B1 and requires separate calculations.

B1 –BANK RECONCILIATION

Umbrellas Limited sells custom designed umbrellas in Hong Kong. It just received the
monthly bank statement for September 2016 from its bank. When completing the bank
reconciliation for the month of September 2016, Umbrellas Limited’s accountant discovered
the following items:

- The ending balance in Umbrellas Limited’s cash ledger is $538. The ending balance
in the bank statement is $894.
- A check received from English University in the amount of $208 was returned due to
insufficient funds (NSF).
- A check received from Occupy Limited in the amount of $540 was accidentally
recorded as $450.
- A customer made an electronic deposit for the purchase of 50 umbrellas into
Umbrellas Limited’s bank account in the amount of $1,328.
- The bank charged Umbrellas Limited $25 to issue them a new check book and $68 for
interest during the month of September 2016.

REQUIREMENTS:

a) Calculate the actual amount of cash Umbrellas Limited has at the end of September
2016.

Book Balance 538 + Bank Collection 1,328 + Book error 90 – NSF check 208 –
Service Charge 25 – Interest Deduction 68 = Actual Balance 1,655

b) Make the adjusting entries that Umbrellas Limited makes related to the above
information.

DR Cash $1,328
CR Unearned Revenue $1,328
DR Cash $90
CR Accounts Receivable $90
DR Accounts Receivable $208
CR Cash $208
DR Service Charge Expense $25
CR Cash $25
DR Interest Expense $68
CR Cash $68

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B2 – CLOSING ENTRIES

REQUIREMENT: Of the following accounts, circle the ones which are TEMPORARY
Accounts which need to be “closed” at the end of each period.

Unearned Revenues Cash Interest Revenue

Cost of Goods Sold Accounts Payable Share Capital

Supplies Retained Earnings Dividends Payable

Rent Expense Accumulated Depreciation Accounts Receivable

B3 – ALLOWANCE FOR DOUBTFUL ACCOUNTS

The beginning balance in Turtle and Fish Pet Shop’s (T&F) “Allowance for Doubtful
Accounts” account for the month of September 2016 was $82,409. T&F experienced the
following during September, 2016:
- Wrote off $12,097 in accounts receivables related to customers who filed for
bankruptcy.
- Collected $523,682 in Accounts Receivables.
- Recognized $1,093,542 in Sales Revenue, all on account
- The aging-of-receivables analysis indicates that T&F should have $69,240 in the
Allowance at the end of the month.
REQUIREMENT: Prepare T&F’s T-Accounts “Allowance for Doubtful Accounts” for the
month of September 2016.

Allowance for Doubtful Accounts

Beginning Balance $82,409

- Write Offs $12,097

- Bad Debt Expense $1,072 (Plug)

Ending Balance $69,240

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SECTION C – LONG QUESTION (37 marks)

Air Water Limited (氣水有限公司) is a retail company that sells beverages from all over the
world. It has a September 30 fiscal year end. All purchases are based on FOB destination
with payments terms for account purchases of 10/8, n/40. Air Water Limited uses the FIFO
inventory costing method. All prices are in HK dollars.

REQUIREMENT 1: Journalize the following transactions (no explanations necessary):

REQUIREMENT 2: Create an Income Statement and Balance Sheet for Air Water Limited
for the Fiscal Period ending September 30, 2016 in the space given.

June 25, 2016: The Company was incorporated in Hong Kong. It issued $500,000 of share
capital for cash.

DR Cash $500,000
CR Share Capital $500,000

July 1, 2016: Sign one-year rental contract for retail space in Time Square. The company
pays $120,000 cash for twelve (12) months’ rent and another $10,000 for security deposit.

DR Prepaid Rent $120,000

DR Rent Deposit $10,000
CR Cash $130,000

July 8, 2016: Purchase 5,000 bottles of Caco Cola at $5 per bottle and 3,000 bottles of Pipse
Cola at $4 per bottle, on account. The bottles were delivered the same day.

DR Caco Cola Inventory $25,000

DR Pipse Cola Inventory $12,000
CR Accounts Payable $37,000

July 14, 2016: Pay for the account from July 8, in full.

DR Accounts Payable $37,000

CR Cash $33,300
CR Caco Cola Inventory $2,500
CR Pipse Cola Inventory $1,200

August 1, 2016: Purchase $1,000 of supplies on account.

DR Supplies $1,000
CR Accounts Payable $1,000

August 20, 2016: Pay for the account from August 1, 2016, in full.

DR Accounts Payable $1,000

CR Cash $1,000

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September 18: Purchase $6,000 of insurance coverage for the business to commence on
September 1 and end on February 28, 2017, paying cash

DR Prepaid Insurance $6,000

CR Cash $6,000

September 25, 2016: Sell 500 bottles of Caco Cola at $9 per bottle and 2,000 bottles of Pipse
Cola at $6 per bottle, cash.

DR Cash $16,500
CR Sales Revenues $16,500
DR Cost of Goods Sold $9,450 (500 * $4.5 + 2000 * $3.6)
CR Caco Cola Inventory $2,250
CR Pipse Cola Inventory $7,200

September 26, 2016: Purchase 1,000 bottles of Caco Cola at $5.50 per bottle and 1,000
bottles of Pipse Cola at $5 per bottle, paying cash.

DR Caco Cola Inventory $5,500

DR Pipse Cola Inventory $5,000
CR Cash $10,500

September 29,2016: Sell 1,500 bottles of Caco Cola at $10 per bottle and 1,500 bottles of
Pipse Cola at $7 per bottle on account. Air Water Limited incurs $200 freight charge for this
sale, paid in cash.

DR Accounts Receivable $25,500

CR Sales Revenue $25,500
DR Cost of Goods Sold $12,850 (1,500 * $4.5 + 1,000 * $3.6 + 500 * $5)
CR Caco Cola Inventory $6,750
CR Pipse Cola Inventory $6,100
DR Freight Expense $200
CR Cash $200

September 30, 2016: A physical count reveals that there are $800 supplies, $19,250 of Caco
Cola, and $2,000 of Pipse Cola on hand. Record all adjusting entries Air Water Limited needs
to record for the current fiscal year.

DR Supplies Expense $200

CR Supplies $200
DR Cost of Goods Sold $250
DR Caco Cola Inventory $250
CR Pipse Cola Inventory $500
DR Rent Expense $30,000
CR Prepaid Rent $30,000
DR Insurance Expense $1,000
CR Prepaid Insurance $1,000

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Use the following space to complete the Income Statement and Balance Sheet that Air Water
Limited reports on September 30, 2016.

Air Water Limited

Income Statement
Fiscal Year Ending November 30, 2016
(June 25 – September 30, 2016)

Sales Revenues $42,000

- Cost of Goods Sold ($22,550)
Gross Income $19,450
- Rent Expense ($30,000)
- Supplies Expense ($200)
- Insurance Expense ($1,000)
- Shipping Expense ($200)
($32,400)
Net Income (Loss) ($11,950)

Air Water Limited

Balance Sheet
As of September 30, 2016
ASSETS
Cash $335,500
Accounts Receivable $25,500
Supplies $800
Prepaid Insurance $5,000
Prepaid Rent $90,000
Rental Deposit $10,000
Inventory (Caco Cola 19,250 + Pipse Cola 2,000) $21,250
=Total Assets $488,050
LIABILITIES + SHAREHOLDERS EQUITY
Share Capital $500,000
Retained Earnings (Accumulated Loss) ($11,950)
=Total Liabilities and Shareholders’ Equity $488,050

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