SVKM’s NMIMS

(Deemed to be University)
Financial Accounting
Question Paper – Mid for the Batch of 2022

1. On January 01 of the financial year John Smith starts an incorporated CD and tape store
called Music Mart, Inc. He does this by depositing $25,000 of his own funds in a bank
account that he has opened in the name of the business entity and taking $25,000 of stock
certificates in return. He is the sole owner of the corporation. On January 02, Music Mart
borrows $12,500 from a bank as loan evidenced by a legal document called a note; The
following day Music Mart buys inventory (merchandise it intends to sell) in the amount
of $5,000 paying through bank. On the next day, the store sells $750 for cash the
merchandise that costs $500.

The balance sheet after these transactions is as follows:

Balance Sheet of Music Mart Inc.

As on January 04
Assets Amount Liabilities & Owner’s Equity Amount
Cash at Bank 33,250 Paid in Capital 25,000
Inventory 4,500 Retained Earnings 250
Notes Payable 12,500

37,750 37,750

Record the effect, if any, of the following events on the balance sheet, either by revising
existing figures (cross-out), rather than erase) or by adding new items as necessary. At
least one of these events does not affect the balance sheet. The basic equation, Assets =
Liabilities + Owners’ Equity, must be preserved at all times.

After you have recorded these events, prepare a balance sheet in proper form. Assume
that all these transactions occurred in January and that there were no other transactions
in January.
1) The store purchased and received merchandise for inventory for $5,000, agreeing to pay
within 30 days.
2) Merchandise costing $1,500 was sold for $2,300, which was received in cash;
3) Merchandise costing $1,700 was sold for $2,620, the customers agreeing to pay $2,620
within 30 days.
4) The store purchased a three year fire insurance policy for $1,224, paying cash;
 5) The store purchased two lots of land of equal size for a total of $24,000. It paid $6,000
in cash and gave a 10-year mortgage for $18,000.
6) The store sold one of the two lots of land for $12,000. It received $3,000 cash, and in
addition, the buyer assumed $9,000 of the mortgage that is, Music Mart, Inc. became no
longer responsible for this half.
7) Smith received a bona fide offer of $33,000 for the business, although his equity was
then only $26,970, he rejected the offer. It was evident that the store had already acquired
goodwill of $6,030.
8) Smith withdrew $1,000 cash from the store’s bank account for his personal use.
9) Smith took merchandise costing $750 from the store’s inventory for his personal use.
10) Smith learned that the individual who purchased the land (no.6 above) subsequently sold
it for $14,000. The lot still owned by Music Mart, Inc., was identical in value with this
other plot.
11) The store paid off $6,000 of its note payable (disregard interest).
12) Smith sold one third of the stock he owned in Music Mart, Inc. for $11,000 cash.
13) Merchandise costing $850 was sold for $1,310, which was received in cash.

2. Mr. Mrs. Ilyond Kim had purchased the Pinetree Motel in 1998 with their life savings,
supplemented by a loan from a close personal friend. The motel consisted of 20 units (i.e. rentable
rooms) and was located near a vacation area that was popular during both the summer and winter
seasons. The Kims had entered the motel business because Mrs. Kim had long wanted to run a
business of her own.
Both Mr. and Mrs. Kim felt that they had been successful. Each year saw a growth in revenue
from room rentals. Furthermore, their bank balance sheet had increased. They noted that many
of their customers returned year after year. This was attributed to their location and their efforts
to provide consistently clean rooms and up-to-date furnishings.
Kims has no formal business training but felt their experience since acquiring the motel had
altered them to the management problems involved. Both devoted their full time to operating the
motel. In addition, they hired part-time help for daily room-cleaning work. They had no dining
facilities but had installed vending machines to supplement room rentals. The vending machines
posed no inventory of maintenance problems as the vending machine company provided
servicing and maintenance.
A frequent guest at Pinetree Motel was Marcus Carter, controller of a large company. Mr. Carter
visited a company branch plant near the motel several times a year. As he stayed at the motel
during these trips, he became acquainted with the Kims.
In May 2006 Mrs. Kim showed Mr. Carter the current issue of a motel trade journal that contained
operating data for motels with 40 or fewer units for the calendar year 2005. Mrs. Kim commented
“these figures show a profit of 21 per cent. Our profit last year was 134,003 on sales of 244,461,
or 55 per cent. We think 2005 was our best year to date, but we can’t make our figures jibe with
those in the magazine, and we wonder if we really are 34 per cent ahead of the industry average.
Can you help us?
Mr. Carter was interested and willing to help. He told Mrs. Kim to get the available figures for
2005 so that he could look them over that evening. The principal records the kims kept to reflect
the motel’s financial transactions were a record of receipts taken from the cash register and a
check book describing cash paid out. In addition, certain rough notations of other expenses
incurred were available.
That evening Mrs. Kim showed Mr. Carter the cash summary for the year 2005, as given in
Exhibit 1. Mr. Carter immediately noted that the difference between receips and expenditures
was $47,903 and asked Mrs. Kim to explain why she had stated the profit was $134,003. Mrs.
Kim replined “Oh that’s easy. Our drawings aren’t expenses; after all, we are the owners. My
husband and I have consistently taken only about $85,000 a year out because we want the rest of
profits to accumulate in the business. As I said, out bank balance has steadily risen. Furthermore,
I have a local accountant make out the annual income tax statements so I don’t have to worry
about them, that income tax stuff is so complicated that I avoid it.”

Exhibit 1 – Cash Resister and Check book Summary During 2005

Receipts Amount in $
From Rooms 236,758
From Vending Machines 7,703
Total 244,461

Checks Drawn
Owners’ Drawings 86,100
Wages and Salaries 26,305
Paid to Laundry 8,800
Replacement of Glasses, Bed Linens, and towels 1,660
Advertising 2,335
Payroll Taxes 2,894
Fuel for Heating 12,205
Repairs and Maintenance 8,980
Cleaning and Other Supplies 6,820
Telephone 2,789
Electricity 5,611
Property Taxes 9,870
Insurance 11,584
Interest 10,605
Total 196,558

Mr. Carter worked with the trade journal’s figures (Exhibit 2) and the cash summary (Exhibit 1)
that evening and quickly found he needed more information. He told Mr. Kim that he was
returning to the home office the next morning but would be back in two weeks for another visit
to the branch plant. Mean-while, he wanted Mrs. Kim to get together some additional information.
Mr. Carter suggested to Mrs. Kim that an important non-cash expense was depreciation. Mr.
Carter also wanted to know about expenses that had been incurred in 2004 but not paid until
2005. He told Mrs. Kim to check up on wages and salaries, insurance, advertising, taxes, utilities,
and any other items paid in 2005 but applicable to 2004.
In addition, Mr. Carter instructed Mrs. Kim to try to find items of expense properly chargeable
to 2005 but not paid by December 31, 2005. Mrs. Kim told Mr. Carter the same types of expenses
were involved, that is, wages and salaries, insurance, advertising, taxes, and so forth. Also Mr.
Carter inquired about income from room rentals. He asked if any of the cash receipts during 2005
related to rentals during 2004 and if there were any rentals during 2005 that had not been
collected.
During two weeks Mr. Carter was back at the home office. Mrs. Kim checked the records and
compiled the additional information requested to the Pinetree Motel, Mrs. Kim gave him a
summary of the information she had gathered (Exhibit 3). With all the additional information,
Mr. Carter constructed a 2005 operating statement that matched in form the one appearing in the
trade journal. He calculated both the dollar amounts and percentage composition of each expense
for more useful comparison with the journal’s figures.
Exhibit 2 – 2005 operating Data for Motels with 40 or fewer units
(expressed as percentages of total revenues)
Receipts %
Room Rentals 98.70
Other Revenue 1.30
Total Revenues 100.00

Operating Expenses
Payroll Costs 22.50
Administrative and General 4.20
Direct Operating Expense 5.90
Fees and Commission 3.30
Advertising and Promotion 1.20
Repairs and Maintenance 4.80
Utilities 7.50
Total 49.40
Fixed Expenses
Property Tax, Fees 4.40
Insurance 2.50
Depreciation 12.50
Interest 7.70
Rent 2.80
Total 29.90
Profit (pre-tax) 20.70
 Exhibit – 3: Additional Information about the Business
Chargeable in 2004 – but paid in January 2005 Amount in $
Wages and Salaries 795
Advertising 600
Payroll Taxes 84
Fuel for Heating 933
Telephone 105
Electricity 360
Property Tax 1,005
Insurance 2,025
Interest 687

Chargeable in 2005 – But not paid by December 31, 2005

Wages and Salaries 1,128
Advertising 996
Payroll Taxes 126
Fuel for Heating 840
Cleaning and Other Supplies 75
Telephone 153
Electricity 492
Property Tax 1,119
Interest 579

 Also, 2005 depreciation charges of $30,280

 Also, 2005 cash receipts included a $1,660 payment from a company that had rented several units during December 2004 for a
convention in the nearby city. There were no such uncollected rentals as of December 31,2005.

Questions:
1. Prepare a 2005 operating statement for the Pinetree Motel such as the one shown in Exhibit 2,
showing dollar amounts and percentages of total revenues;
2. As Mr. Carter, what comments would you make to the Kims regarding the motel’s progress to
date?