Accounting Practice Questions and Solutions - Exam Preparation

Part 1 – Answer the following question

Part 1 – Answer the following question
Question 1 (40 marks) 
A- The following working paper shows the unadjusted and the adjusted trial balance for Farah Company as of December 31, 2019. 

Required: 
1- Prepare the adjusting entries that have been made in Farah Company. (11 Marks)
2- Explain the differences between the adjusting entries and other journal entries. Also, explain why adjusting entries are needed.  (3 Marks)
3- Prepare Farah’s income statement for the year ended December 31, 2019.  (2.75 Marks)
4- Prepare Farah’s balance sheet as at December 31, 2019. (2.75 Marks)

B- The following information pertains to Nour Company:
1- Equipment was purchased on July 1, 2018 for $140,000. It is useful life is 5 years and it can be sold after the 5 years for $20,000.
2- Building was purchased on January 1, 2018 for $200,000. It is useful life is 20 years and depreciated on a reducing balance rate of 10%.
3- Furniture was purchased on April 1, 2017 for $80,000. Its salvage value is $20,000 and depreciated on a straight-line balance rate of 20%.
4- On December 31, 2019 the balance of Receivables was $110,000 and the balance of Allowance of  irrecoverable receivables was $14,000. Before adjusting the accounts, Nour finds that receivables of $10,000 need to be written off as irrecoverable, and the allowance for receivables is to be set at ten percent of the remaining outstanding receivables as at 31 December 2019.

Required:
1- Prepare the necessary adjusting entries in Nour Company at the end of its fiscal year, Dec 31, 2019. Show your calculations

2- Prepare a partial income statement and a partial balance sheet for the year ended December 31,2019  to show the effect of the adjusting entries on these statements (Show you computations) (16.5 marks)

C- What will be the effect on the financial statements if the adjusting entry for an accrued expense is recorded twice at the end of the year? (4 marks)

Question 2 (30 marks)
A- AAA Company accumulates the following data concerning a mixed cost, using miles as the activity level.
Miles Driven    Total Cost
January            10,000    $15,625
February           8 000    13,500
March               9,000    14,400
April                  7,500    12,500

Required:
1.    Compute the variable and fixed cost elements using the high-low method
2.    If it is estimated that 15,000 miles will be driven in May, what is the expected total cost for May?  
3.    Explain the various methods used to estimate the variable component and the fixed component of the mixed cost and state which method is the most accurate? Why? (12.5 Marks)

Question 1 (40 marks)

B- XYZ Manufacturing Company has fixed costs $240,000, it sells its only product at $50 per unit. For every $1 generated by the sale of their product, they have $0.20 that contributes to fixed costs and profit.

Required: 
1. Calculate the variable cost per unit.
2. Assume that the company plans to sell 20,000 units this year. In your opinion, would the Company be better off with this plan? Support your answer with necessary calculations
3. How many units the company needs to sell to start making profit? Why? Prove your answer. (12.5 marks)
                      
C- The calculation of cost of goods sold does not differ between merchandising companies and manufacturing companies. Discuss this statement and support your answer with a numerical examples. (5 marks)

Question 3 (30 marks)
A- ABC Corporation has two divisions--Women and Men. The divisions have the following revenues and expenses:
Women    Men
Sales    $    100,000         $    110,000     
Variable costs         40,000              57,000     
Traceable fixed costs         30,000              36,000     
Allocated common corporate costs         27,000              34,000     
Net income (loss)    $    3,000         $    (17,000)    )
The management of ABC is considering the elimination of the Men Division. If the Men Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. 

Required:
1- Should the Company drop Men division? Explain in light of the effect of your decision on the company profitability. (Support you answer with the necessary calculations).
 2- Will your decision be changed if you know that  all traceable fixed costs to Men division could be avoided and 40% of total common corporate costs assigned to Men division would be unaffected  by this decision. (Support you answer with the necessary calculations).  (12 marks)

B-

ABC Corporation is a manufacturing Company. The following information concerns operations for 2021:
1. The company’s single product sells for $8 per unit. Budgeted unit sales for the next four quarters are as follows (all sales are on credit):
    Quarter 1    Quarter 2    Quarter 3    Quarter 4
Budgeted unit sales    40,000    60,000    100,000    50,000

2. Sales are collected in the following pattern: 70% in the quarter the sales are made, and the remaining 30% in the following quarter. On January 1, 2021, the company’s balance sheet showed $75,000 in accounts receivable, all of which will be collected in the first quarter of the year. Bad debts are negligible and can be ignored.

Required:
1- Prepare the sales budget for the 2021.
2- Prepare the expected cash collections schedule for 2021.
3- What is the expected accounts receivable balance on December 31, 2021? (13 marks)                                

C-
The following information have been take from a manufacturing company for the year 2020:
Sales revenues    $74,000
inventory of raw materials;  January 1, 2020    5,000
inventory of raw materials;  December 31, 2020    6,000
inventory of work in progress;  January 1, 2020    8,000
inventory of work in progress; December 31, 2020    7,000
inventory of finished goods;  January 1 2020    6,000
inventory of finished goods;  December 31, 2020    4,000
Sales returns    1,500
cost of goods produced    56,000
Trade discount allowed    2,500
Cash discount allowed    2,000
Salaries Expense    10,000

Required: Calculate cost of goods sold and gross profit for the year ended December 31, 2020. (5 Marks)