Midterm Test: Principles of Accounting

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Question 1

(a) What Grace suggested doesn’t seem to be ethical. First of all the transfer of her personal property to the Company will simply overstate the Company’s asset. Secondly, when the expenses were hidden off, profit will certainly overstate. In such a way, The Company does not record the book correctly. Such window dressing deed is equivalent to tell lies to the account users such as the bank and in turn dishonest to the shareholders. So eventually what they are doing is totally at the expense of the Company’s integrity. (5 marks) The GAAP being violated are

• Economic Entity Concept – no separation of personal business event to that of the firm’s. The property is a personal asset of Grace Luo, it should not be recorded in the company’s book. (3 marks) • Accrual Concept (or Matching principles) – which states that expenses once incurred must be recorded in the book disregard if payment been made or not. All expenses incurred last year must be recorded as to match the revenue concurrently earned during the year. (3 marks)

• Full disclosure principle which requires that events that make a difference to financial statement users must be disclosed. The hiding of expenses will overstate profit and the adding in of apparent property only make the accounts look fantastic, but it doesn’t tell the truth. (3 marks)

(b) The primary external users of financial accounting information are investors and creditors, (2marks), although external users also include labor unions, governmental agencies, suppliers, customers, trade associations, and the general public.(3 marks) Investors (owners) would like to know the performance (through the generation of profit) and the financial position of the firm as to decide their investing status. Creditors (lenders or sellers on credit) would like to ensure if the firm has the ability to repay the amount owed to them. (6 marks)

Question 2

Req. 1

| Journal | | |DATE |ACCOUNTS AND EXPLANATIONS |. |DEBIT |CREDIT | |2011 |Adjusting Entries | | | | |June 30 |(a) |Service Revenue |1 |6,500 | | | | |Unearned Service Revenue |1 | |6,500 | | | | | | | | | |(b) |Prepaid Insurance |1 |2,100 | | | | | Insurance Expense |1 | |2,100 | | | | | | | | | |(c) |Supplies |1 |400 | | | | | Supplies Expense |1 | |400 | | | | | |...
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