Version 1

Last Name: _________________________

First Name: _________________________

STUDENT ID #: ___________________

Commerce 1AA3 – Version 1

Duration of Examination: 2 hours Dr. Emad Mohammad and Prof. Aadil Merali

McMaster University Midterm Examination October 21, 2017

INSTRUCTIONS:
This examination paper comprises 14 pages (including cover page), 20 true/false questions, 1.0
point each, and 40 multiple-choice questions, 2 points each. You are responsible for ensuring
that your copy of the question paper is complete. Bring any discrepancy to the attention of the
invigilator.
The true/false and multiple-choice questions are to be answered on the computer answer sheet
provided.
Each question has only one correct answer. No correction factor will be applied to incorrect
answers.
On the question paper remember to fill in your name, student number and section number.
Only the McMaster Standard Calculator (Casio FX 991) may be used.
The special scanner, which scans the sheets, senses the shaded areas by their non-reflection of
light. A heavy mark must be made, completely filling the circular bubble, with an HB pencil.
Marks made with a pen or felt-tip marker will NOT be sensed. Erasures must be thorough or the
scanner may still sense a mark. Do NOT use correction fluid on sheets. DO NOT PUT ANY
OTHER MARKS OR WRITING ON THE SHEET, INCLUDING THE MARGINS.
Print your name, student number, course name, section number, and the date in the space
provided at the top of side 1 of the form. Then the sheet must be signed in the space marked
SIGNATURE.
Mark your student number in the space provided on sheet Side 1 and fill in the corresponding
bubbles underneath.
Mark only ONE choice from the alternatives (A, B, C, and D) provided for each question. The
question number is to the left of the bubbles. Make sure that the number of the question on the
scan sheet is the same as the question number on the test paper.
Pay particular attention to the Marking Directions on the form.
Begin answering questions using the first set of bubbles, marked “1”.

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For each of the following questions, choose the best answer then darken the identifying
letter to the corresponding number in the answer sheet.

True/False (20 questions x 1 point each = 20 points)

3. Statement of Cash Flows is prepared on the accrual basis under IFRS.

a. True
b. False

4. A company made a $5,000 overnight deposit with their bank on Tuesday September 5, 2017.
The bank reconciliation for the month of September does not require a reconciliation for that
deposit.
a. True
b. False

5. Outstanding checks result in the balance per books to be less than the balance per bank
statement.
a. True
b. False

6. Issuing bonds payable would be reported on a statement of cash flows under financing
activities.
a. True
b. False

7. Activities that increase or decrease long-term assets of a corporation are referred to as

investing activities.
a. True
b. False

8. Shareholders’ equity represents owners’ claims against the corporation’s assets after paying
all liabilities.
a. True
b. False

9. Payments to suppliers would have no effect on net income or shareholders' equity.

a. True
b. False

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10. A balance sheet is a required financial statement that reports the financial position of the
company for a period of time.
a. True
b. False

11. Net Income would increase if a company receives a deposit for work to be done later
a. True
b. False

12. Adjusting entries are prepared on a daily basis.

a. True
b. False

13. When reconciling net income to cash flows from operating activities under the indirect
method, depreciation expense is added because it is a non-cash expense.
a. True
b. False

14. Collections from customers have no effect on total assets, total liabilities, and shareholders’
equity.
a. True
b. False

15. The effect on the financial statements of recording depreciation on equipment is that net
income, assets, and shareholders’ equity are all decreased.
a. True
b. False

16. Under the Allowance method of accounting for bad debts, bad debt expense is recognized
when the debt is written off.
a. True
b. False

17. Some adjusting entries might debit or credit the cash account.
a. True
b. False

18. Under Indirect Method, gains represent a "flow" of cash during the current period.
a. True
b. False

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20. Prepaid rent is classified as a current asset.

a. True
b. False

Multiple-Choice (40 Questions x 2 each = 80 points)

22. A loan officer is evaluating an application for a short-term loan. To do that, the first thing
she must examine is:

a. Current assets and current liabilities

b. Cash flows from investing activities from the statement of cash flows
c. Shareholders’ equity
d. Long term assets and long-term liabilities from the balance sheet

23. Mika Corporation sold a truck for $50,000 cash. The truck cost $100,000, and had
accumulated depreciation $20,000. Which of the following statements regarding this sale is
incorrect?

a. Shareholders' equity on Mika's balance sheet will not change

b. Mika will report a loss on the sale of the truck
c. Total assets on Mika's balance sheet will decrease
d. Total liabilities will not change

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24. Fleetwood Inc. made sales of $825 million during 2017. Of this amount, Fleetwood Inc.
collected cash for all but $28 million. The company's cost of goods sold was $290 million,
and all other expenses for the year totalled $ 400 million. Also during 2017, Fleetwood Inc.
paid $370 million for its inventory and $295 million for everything else. Beginning cash was
$95 million. What is Fleetwood Inc.’s net income for 2017?

a. $135 million
b. $227 million
c. $132 million
d. $425 million

25. Shareholders' equity for Raisin Corporation on January 1, 2017 and December 31, 2017
were $60,000 and $75,000, respectively. Assets on January 1, 2017 and December 31, 2017
were $115,000 and $105,000, respectively. Liabilities on January 1, 2017 were $55,000.
What is the amount of liabilities on December 31, 2017?

a. $55,000
b. $30,000
c. $15,000
d. $40,000

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Use the following information to answer the next 4 questions

Dan Shoe, manager of Worthen Inc., prepared the company's balance sheet while the accountant
was ill. The balance sheet contains numerous errors. In particular, Shoe knew that the balance
sheet should balance, so he plugged in the shareholders' equity amount needed to achieve this
balance. The shareholders' equity amount is not correct. Beginning retained earnings is $20,000,
and dividends declared is $42,900. All other amounts are accurate.
Worthen Inc.
Balance Sheet
As of December 31, 2017
Assets Liabilities
Cash 18,100 Accounts receivable 10,500
Store fixtures 10,200 Sales revenue 47,000
Accounts payable 16,000 Interest expense 12,900
Prepaid expenses 27,000 Unearned revenue 15,000
Rent expense 3,500 Note payable- long-term 10,000
Salaries expense 1,600 Accrued liabilities 1,600
Land 44,000 Total liabilities 97,000
Advertising expense 3,300 Shareholders' Equity
Shareholders' equity 26,700
Total liabilities and
Total assets 123,700 shareholders' equity 123,700

28. Net income is:

a. $40,700
b. $25,700
c. $38,600
d. $13,700

29. Ending retained earnings is:

a. $2,800
b. $15,700
c. $17,800
d. ($9,200)

30. Total current assets is:

a. $28,600
b. $65,800
c. $61,100
d. $55,600

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31. Total current liabilities is:

a. $32,600
b. $27,100
c. $17,600
d. $31,000

32. If a company received $20,000 as a payment on accounts receivable and used the money to
pay $20,000 on accounts payable, then:

a. both assets and shareholders' equity would decrease by $20,000

b. both assets and liabilities would decrease by $20,000
c. assets would increase by $20,000 while liabilities would decrease by $20,000
d. liabilities would decrease by $20,000 while shareholders' equity would increase by $20,000

33. On October 31 of the current year, a contract was signed and a cheque received for services
to be performed by October 31 of the following year.
Assuming services were performed evenly during the
remainder of the year, the adjusting entry on December 31 will involve a:

a. credit to Service Revenue for $4,000

b. debit to Unearned Service Revenue $4,000
c. credit to Service Revenue $800
d. credit to Unearned Service Revenue $800

34. Upper Canada Corp. bought $72,000 of equipment with an estimated service life of 4 years.
The equipment will have a salvage value of $12,000 the end of its life. The total amount of
depreciation on this equipment over the useful life is:

a. $15,000
b. $60,000
c. $0
d. $72,000

35. If a bank reconciliation included deposits in transit amounting to $1,500, the journal entry to
record this reconciling item would include:

a. No entry is required
b. a credit to Accounts Receivable for $1,500
c. a credit to Cash for $1,500
d. a debit to Cash for $1,500

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Use the following information to answer the next 2 questions

At December 31, 2017 before any year-end adjustments, the Accounts Receivable balance of
Sunset Hills Clinic is $235,000. Credit sales for the 2017 are $600,000, and allowance for bad
debt has a $6,500 beginning credit balance. Sunset Hills prepares the following aging schedule
for accounts receivable:
Age Amount Estimated Uncollectible
0–30 Days $110,000 0.50%
31-60 Days $60,000 1.00%
61-90 Days $50,000 6.00%
Over 90 Days $15,000 40%

37. What is the bad debt expense for 2017 assuming Sunset Hills Clinic uses the aging of
accounts method?

a. $16,150
b. $6,000
c. $3,650
d. $12,500

38. Timothy Cassidy Lake Corporation sold some of its used equipment for $65,000. The
indirect method statement of cash flows shows an addition to net income of $6,000. The
accumulated depreciation on the equipment to date of sale was $63,000. The original cost of
the equipment was:
a. $69,000
b. $122,000
c. $134,000
d. $71,000

39. All of the following might appear on an indirect method statement of cash flows except:

a. decrease in inventory
b. depreciation expense
c. loss on sale of capital assets
d. interest received on notes receivable

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Use the following information to answer the next question

Asante Inc.’s comparative balance sheets and income statement follow:

Balance sheet, December 31 2015 2016

Assets:
Cash $150,000 $120,000
Accounts receivable 30,000 48,000
Inventory 20,000 36,000
Equipment 600,000 700,000
Accumulated depreciation (300,000) (320,000)
Total assets $ 500,000 $ 584,000
======== ========

Liabilities and shareholders' equity

Bonds payable $ 98,000 $ 92,000
Dividends payable 16,000 10,000
Common shares 178,000 300,000
Retained earnings 208,000 182,000
Total liabilities and stockholders' equity $ 500,000 $ 584,000
======== ========

Income statement for year ended December 31, 2016

Sales revenue $ 310,000

Cost of goods sold (214,000)
Gross margin 96,000
Depreciation expense (26,000)
Loss on sale of equipment (26,000)
Net income $ 44,000
========

Additional information:
During 2016, $80,000 of bonds payable and $80,000 cash was issued in exchange for
new equipment.

40. If cash inflow from operating activities is $62,000, and cash outflow from investing
activities is $52,000, then net cash from financing activities should be:

a. $30,000 inflow
b. $30,000 outflow
c. $40,000 outflow
d. $40,000 inflow

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41. On an indirect method statement of cash flows, the purchase of machinery in exchange for
common shares is:

a. shown in the schedule of noncash investing and financing activities which accompanies the
statement of cash flows
b. ignored
c. reflected in the investing activities section
d. reflected in the operating activities section

42. Which of the following best describes a liability?

a. Liabilities are a form of share capital

b. Liabilities are economic obligations to creditors to be paid at some future date by the
company
c. Liabilities are accounts receivable of the company
d. Liabilities are future economic benefits to which a company is entitled

43. During 2017, Dr. Veenstra, collected $300,000 from his patients, of which $50,000 was for
services that were rendered during 2016 and $10,000 was for service to be rendered during
2018. Dr. Veenstra also performed services in an amount of $90,000 during 2017 but has not
yet collected this amount.
What is Dr. Veenstra’s service revenue for 2017 under the cash-basis and accrual-basis?

Cash-Basis Accrual-Basis
a. $300,000 $340,000
b. $310,000 $390,000
c. $310,000 $330,000
d. $300,000 $330,000

44. The following information is provided for Sawa Inc.: Ending retained earnings $24,000,
beginning retained earning $22,000, net income $5,000, and increase dividends payable
$1,000. Cash payment for dividends is:

a. $2,000
b. $3,000
c. $4,000
d. $1,000

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45. A business owner owns a building, valued at $100,000 with an $80,000 outstanding
mortgage. If the owner transfers the building and the mortgage into her business, the result
of this transfer is an:

a. increase in assets by $20,000

b. increase in assets by $80,000
c. increase in shareholders' equity by $20,000
d. increase in shareholders' equity by $100,000

46. Accounting systems should record:

a. all economic events

b. events that result in a change in assets, liabilities, or equities
c. only events that involve cash
d. items of interest to the shareholders

47. Expenses can be described as:

a. increases in assets resulting from operations

b. increases in retained earnings resulting from operations
c. increases in liabilities resulting from purchasing assets
d. decreases in retained earnings resulting from operations

48. The payment of an amount owed to a creditor would:

a. decrease net income

b. increase assets
c. increase liabilities
d. decrease liabilities

49. A business purchases a truck by signing a note payable to the seller. Such a transaction
would include a:

a. debit to Note Payable

b. credit to Note Payable
c. credit to Truck
d. debit to an expense account

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50. An incomplete A/R T-account for the month of July is as follows:

Accounts
Dr. Receivable Cr.
1-July 25,000
7-July 100,000

31-July 40,000

Assuming that all debits to A/R represent sales on account, how much was collected from
customer during the month of July?

a. $85,000
b. $165,000
c. $35,000
d. 115,000

51. Below is the T-account for prepaid insurance for 2017:

Dr. Prepaid Insurance Cr.

1/1 10,000

12/31 17,000

12/31 13,000

The company adjusts the accounts at the end of the year. Insurance purchased during 2017
is:

a. $14,000
b. $6,000
c. $23,000
d. $20,000

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53. Kencel Inc. forgot to adjust for expired prepaid rent. Which one of the following is correct?

a. Equity will be overstated

b. The current ratio will be overstated
c. Net income will be overstated
d. All of the above will be consequences of forgetting to adjust for expired prepaid rent

Use the following information to answer the next 2 questions

The accounting records of Magendo Inc. include the following unadjusted balances at January
31:
Accounts Receivable $1,400
Supplies $700
Salaries Payable $0
Unearned Service Revenue $850
Service Revenue $14,000
Salaries Expense $4,400
Supplies Expense $0

As Magendo’s accountant, you have developed the following data for the January 31 adjusting
entries:
i. Supplies on hand, $250
ii. Salary owed to employees, $1,700
iii. Service revenue accrued, $900
iv. Unearned service revenue that has been earned $750

54. Calculate the salaries expense for January:

a. $4,400
b. $1,700
c. $2,700
d. $6,100

55. Calculate the service revenue for January:

a. $14,900
b. $14,000
c. $14,750
d. $15,650

56. When the allowance method of recognizing uncollectible accounts is used, the entry to
record the write-off of a specific account:
a. Decreases both accounts receivable and the allowance for doubtful accounts
b. Decreases accounts receivable and increases the allowance for doubtful accounts
c. Increases the allowance for doubtful accounts and bad debt expense
d. Decreases accounts receivable and increases bad debt expense

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57. Records Management Corp. estimates that $8,000 of its accounts receivable will be
uncollectible. Prior to adjustment, the Allowance for Uncollectible Accounts had a debit
balance of $2,000. If Records Management uses the Aging Method, bad debt expense to be
reported on the income statement is:

a. 6,000
b. $10,000
c. $8,000
d. $2,000

58. On May 1, 2017, a company deposited $30,000 in a savings account that accrues an annual
interest of 6%. Interest is receivable once every six months on October 31 and April 30. The
adjusting December 31, 2017 will include a:

a. credit to interest revenue, 600

b. debit to interest receivable, $300
c. credit to interest revenue, $1,200
d. debit to interest receivable, $600

59. On a bank reconciliation statement, a cheque written to a customer for $53 but recorded as
$35 will require:

a. $18 to be added to the book balance

b. $18 to be subtracted from the bank balance
c. $18 to be subtracted from the book balance
d. $18 to be added to the bank balance

60. Before reconciliation, the unadjusted bank statement balance of cash is $50,000.
Outstanding cheques are $5,000; deposits in transit are $2,000; bank service fees are $200;
electronic fund transfer of direct deposit into the bank account is $4,000.
Given only the items above, what is the adjusted book balance after reconciliation?

a. $50,800
b. $44,800
c. $47,000
d. Cannot be determined since we don’t know the unadjusted book balance

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Q41 A
Q42 B
Q43 D
Q44 A
Q45 C
Q46 B
Q47 D
Q48 D
Q49 B
Q50 A
Q51 D
Q52 C
Q53 D
Q54 D
Q55 D
Q56 A
Q57 B
Q58 B
Q59 C
Q60 C

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