2014S1 PracExamQuestions Answers

ACCT1501 Practice Exam Questions & Solutions 2014S1

1

QUESTION 1 (8 Marks) Financial Reporting Principles, Accounting Standards and Auditing, & Sustainability Reporting Provide short answers to the following:

1. What are generally accepted accounting principles? (2 Marks)

The rules, standards and usual practices that companies are expected to follow in preparing their financial statements. 2 marks – must refer to both of (1) rules/standards (or like term e.g. laws) and (2) practices and relate to accounting reports or financial statements or financial accounting 1 mark – must refer to one of rules/standards/practices and relate to accounting reports or financial statements or financial accounting

2. If you have a good idea and expect to make a lot of money from the idea is

that a sufficient reason to recognise an asset? Explain why or why not. (2

Marks)

The definition of an asset requires a past transaction or event. It is unlikely that a mere act of having an idea would satisfy this part of the definition. OR An asset could not be recognised because there is no indication that the idea will yield probable future economic benefits or that reliable measurement is possible. 2 marks – must refer to no recognition because the probability criteria is not met 2 marks – must refer to no recognition because the asset would not have a cost or other value that could be reliably measured 1 mark – the definition of an asset requires a past transaction or event. The mere act of having an idea may not satisfy this part of the definition.


2

3. How can financial information be relevant to the users of financial reports? (2

Marks)

Information is relevant when it fulfils the roles of aiding prediction and confirmation. It assists users to make predictions about future financial affairs and confiim to what extent past predictions have been realised. 2 marks – must refer to information being useful for making economic decisions by aiding either of prediction or confirmation. 1 mark – must refer to the information being useful for making economic decisions.

4. What is meant by sustainability reporting? (2 Marks)

Sustainability reporting describes an organisations' reporting on its environmental, social and economic performance. 2 marks – must refer to reporting on all three dimensions – environmental social and economic performance 1 mark – must refer to reporting on at least one of environmental or social performance


3

QUESTION 2 Financial Statement Analysis (8 marks)

BPS Ltd, a supplier of telecommunications equipment, retails its products through suburban outlets. Shown below are the calculations of some of its key financial ratios for 2011 and 2012.

2012 2011 Return on Equity 13% 12% Return on Assets 8% 9% Profit margin 20% 18% Asset turnover 0.40 0.50 Days in inventory 72 days 55 days Days in debtors 42 days 42 days Current ratio 1.6 1.5 Quick ratio Debt-to-Equity ratio

0.7 1.4

1.1 1.0

Return on Equity

Operating Profit after Tax

Shareholders' Equity

Return on Assets

Operating Profit after Tax Total Assets

Financial Leverage Total Assets

Total Shareholders’ Equity

Profit Margin Earnings Before Interest and Tax Sales

Asset Turnover Sales

Total Assets

Days in Inventory Average Inventory x 365 COGS

Days in Debtors Average Trade Debtors x 365

Credit Sales

Current Ratio Current Assets Current Liabilities

Quick Ratio Debt to Equity Ratio

Current Assets - Inventory Current Liabilities

Total Liabilities

Total Shareholders' Equity


4

Required

Analyse BPS’s profitability, asset management, liquidity and financial

structure for 2012 using the ratio information shown above.

Profitability ROE has increased from 12 per cent to 13 per cent while the return on assets has fallen from 9 per cent to 8 per cent. Given that ROA = Profit Margin × Asset Turnover (e.g. 20 x 0.4 per cent = 8 per cent for 2012), the fall in ROA is due to the fall in asset turnover. While the profit margin has increased from 18 per cent to 20 per cent, asset turnover has decreased from 0.50 to 0.40, thus overall ROA has decreased. [2 marks fully correct; 1 mark partially correct] Asset management: The average time to collect debtors has stayed constant. However, the days in inventory has increased from 55 days to 72 days, meaning that, on average, it is taking much longer to sell inventory. These extra days need to be financed by the company. The reasons for the build up in inventory should be investigated (e.g. stocking up for some large orders, as opposed to lack of demand, for the product, require very different actions). [2 marks fully correct; 1 mark partially correct] Liquidity: The current ratio has increased (mainly due to the build up in inventory, see above) while the quick ratio has dropped below 1 to 0.7 indicating the company may have problems paying their bills in the short term. [2 mark fully correct; 1 mark partially correct] Financial structure: Debt-to-equity ratio has increased substantially from 1 to 1.4. The ability of the company to pay its interest bill needs to be considered, particularly given the decrease in profitability as indicated by the lower ROA. [2 marks fully correct; 1 mark partially correct]


5

QUESTION 3 (7 marks) Accounts Receivable On 1st January 2011, Parker Company has a debit balance of $21,000 in Accounts

Receivable and a credit balance of $1,550 in the Allowance for Doubtful Debts.

During the year to 31st December 2011, Parker made sales on credit terms for $99,100

and collected cash from customers on accounts receivable amounting to $82,000. On

1st August 2011, Parker wrote off a bad debt on an account for $230. An ageing

analysis at 31st December 2011 indicates that the allowance for doubtful debts account

should have a credit balance of $2,150.

Parker Company’s financial year ends on 31st December 2011.

Required:

a) (i) Prepare the journal entry to record credit sales. (1 mark)

Debit Credit

Accounts receivable Sales revenue

[1 mark: entries and amount correct]

99,100 99,100

(ii) Prepare the journal entry to record cash collected from customers (1 mark)

Debit Credit

Cash Accounts receivable


82,000 82,000

(iii) Prepare the journal entry to write off the uncollectible account of $230

against the allowance for doubtful debts (1 mark)

Debit Credit

Allowance for doubtful debts Accounts receivable


230

230


6

(iv) Prepare the adjusting journal entry to the allowance for doubtful debts

based on the ageing analysis at 31st December 2011 (2 marks)

Debit Credit

Bade debts expense Allowance for doubtful debts

[2 marks: 1 mark for each account]

830 830

(v) Prepare the closing journal entry for bad debts expense (2 marks)

Debit Credit

Profit and loss summary Bad debts expense

[2 marks: 1 mark for each account]

830 830


7

QUESTION 4 ADJUSTING ENTRIES AND FINANCIAL STATEMENTS (22 Marks) The following pre-adjusted trial balance has been prepared for Sydney Company as at 30 June 2014 (for the 12 months beginning on 1 July 2013):

DR CR

Cash at Bank 10,000

Accounts Receivable 200,000

Allowance for Doubtful Debts 1,000

Inventory 100,000

Prepaid Rent 10,000

Property, Plant and Equipment 450,000

Accumulated Depreciation - PPE 200,000

Accounts Payable 60,000

Bank loan 50,000

Contributed Capital 310,000

Retained Profit at 1 July 2013 34,000

Sales 450,000

Cost of Goods Sold 265,000

Interest Expense 5,000

Wages Expenses 80,000

Rent Expense 5,000

1,115,000 1,115,000

The following information is given which may give rise to year end adjustments:

•••• Depreciation on Property, Plant and Equipment is provided for on a straight line basis at 10% per annum, and it is assumed that it will have no salvage value.

•••• The balance in Prepaid Rent relates to the 12 month period from 1 January 2014 to 31 December 2014.

•••• An ageing analysis shows that $4,000 of Accounts Receivable is estimated to be uncollectible.

•••• On 30 June 2014, the directors declared a dividend of $5,000, which the shareholders authorised. The dividend is to be paid on 15 September 2014.


8

•••• It is discovered that $10,000 cash received during the year and credited to sales are actually related to services to be delivered in July 2014.

•••• $5,000 of wages relating to June 2014 have not been paid and need to be accrued. Part A (12 Marks) Prepare journal entries for the necessary end of period adjustments.

Debit Credit

Depreciation Expense – PPE Accumulated Depreciation – PPE (1 mark for each entry) Rent Expense Prepaid Rent (1 mark for each entry) Bad Debts Expense Allowance for doubtful debts (1 mark for each entry) Retained Profits Dividend Payable (1 mark for each entry) Sales Unearned revenue (1 mark for each entry) Wages Expense Wages Payable (1 mark for each entry)

45 000

5 000

3 000

5 000

10,000

5,000

45 000

5 000

3 000

5 000

10,000

5,000


9

Part B (6 Marks) Prepare an Income Statement for the year ended 30 June 2014:

Sydney Company Income Statement for year ended 30 June 2014 Sales (1 mark) Less COGS ( 1 mark if COGS is in correct place) Gross Profit Less Operating Expenses Interest expense Depreciation expense (1 mark) Rent expense (1 mark) Bad debts expense (1 mark) Wages expense (1 mark) Net Profit

5 000 45 000 10 000 3 000 85 000

440 000 265 000 175 000

148 000

$27 000

Part C (4 Marks) In the Balance Sheet as at 30 June 2014, what would be the closing balance of retained profits? Show all workings.

Opening Balance Plus Net Profit for Period Less Dividends declared Closing Balance (1 mark for each item & correct figure )

34 000 (1 mark) 27 000 (1 mark) 5 000 (1 mark)

$56 000 (1 mark)


10

QUESTION 5 (12 Marks) Inventory The following information is taken from the accounting records of Noiseworks Ltd

for the year ended 30 June 2011.

$

Inventory 1 July 2010 50,000

Purchases (all credit) 300,000

Sales (all credit) 360,000

Inventory 30 June 2011 90,000

The company’s mark-up is 50% on cost

Required:

a) Assuming all purchases and sales were in single transactions, prepare the

summary journal entries relevant to the determination of the balances for

inventory and cost of sales using:

i. Perpetual inventory method (4 marks)

Debit Credit

Inventory Accounts payable

[1 mark: entries and amount correct] COGS Inventory

[1 mark: entries and amount correct] Inventory shortage expense Inventory

[1 mark: entries and amount correct] Profit and loss summary COGS Inventory shortage expense


300,000 240,000 20,000 260,000

300,000 240,000 20,000 240,000 20,000


11

ii. Periodic inventory method (4 marks)

Debit Credit

Purchases Accounts payable

[1 mark: entries and amount correct] Profit and loss summary Inventory 30 June 2011 Purchases Inventory 1 July 2010

[1 mark: entries and amount correct] Inventory 1 July 2010 Inventory

[1 mark: entries and amount correct] Inventory Inventory 30 June 2011


300,000 260,000 90,000 50,000 90,000

300,000 300,000 50,000 50,000 90,000

b) Prepare an extract of income statements for the year ended 30 June 2011

showing sales, cost of sales and gross profit based on:

i. Perpetual inventory method (2 marks)

Noiseworks Ltd

Extract of Income Statement for year ended 30 June 2011 $ $

Sales 360,000

Less: Cost of goods sold 240,000

Inventory shortage 20,000 260,000

Gross profit 100,000

[2 marks fully correct; 1 mark partially correct]


12

ii. Periodic inventory method (2 marks)

Noiseworks Ltd Extract of Income Statement for year ended 30 June 2011

$ $

Sales 360,000

Less: Cost of goods sold

Inventory 1 July 2010 50,000

Purchases 300,000

Available for sale 350,000

Less Inventory 30 June 2011 90,000 260,000

Gross profit 100,000

[2 marks fully correct; 1 mark partially correct]


13

QUESTION 6 (8 Marks) Non-current Assets A car was purchased on 1 January 2009 for $50,000. The car was depreciated using

straight-line depreciation with an estimated useful life of four years and expected

residual value of $10,000.

1. Calculate depreciation for the first year that the company holds the car, and provide the journal entry. What is the carrying value of the car on January 1, 2010? (4 marks)

Straight Line Depreciation = (Cost – Residual) / Useful Life Cost = 50,000 Residual = 10 000 Useful Life = 4 years

Depreciation Expense per year = (50 000 – 10 000) / 4

= 10 000 (1 mark)

Dec 31 2009

Dr Depreciation expense -car 10 000

Cr Accumulated depreciation – car 10 000

1 mark for each correct line (2 marks total)

Carrying value of the car on Jan 1 2010 = 50,000 -10,000 = 40,000 (1 mark)

2. On 31 December 2012 the car was sold for $8,000. Determine the profit or loss on disposal, and show the relevant accounting journal entries to account for the disposal. (4 marks)

Sold after 4 years. Since we are depreciating the car on a straight-line basis over 4 years, the book value at the end of the fourth year will be the residual value. Accumulated depreciation on the car at 31 Dec 2012 = 40,000 (50k – 10k) (1 mark) Loss on sale = Sale price – Carrying value = 8,000 – 10,000 = -2,000 (1 mark. Do not penalize for carry-on errors) Journal Entry to record the sale: Dr Cash at bank 8 000 Dr Accumulated Depreciation – Car 40 000 Dr Loss on sale 2000 Cr Car 50 000 (2 marks = 0.5 for each part of the journal entry)


14

Question 7 Management Accounting and Cost Concepts (9 marks) Part A (7 marks)

Earth Ltd. manufactures tents. At the beginning and end of June 2011, the following information on inventory was provided by the company’s accountant: 1 June 2011 30 June 2011 Raw Materials inventory $255,000 $236,000 Work in progress inventory $180,000 $220,000 Finished Goods inventory $110,000 $95,000

During June, cost for direct labour amounted to $350,000, new purchases for raw materials were $200,000 on 6 June and $300,000 on 27 June. The total overhead cost was $1,200,000. Prepare a cost of goods manufactured statement for June 2011.

Earth Ltd. Statement of Cost of Goods Manufactured

For the Month Ended June 30, 2011 (correct title 0.5)

Direct materials:

Beginning raw materials inventory

$255,000 name and figure 0.5

Add: Purchases 500,000 (name 0.5; figure 0.5) Materials available $755,000 name and figure 0.5 Less: Ending inventory 236,000 name and figure 0.5

Direct materials used name and figure 0.5 $ 519,000 Direct labour name and figure 0.5 350,000 Manufacturing overhead name and figure 0.5 1,200,000 Manufacturing costs added name and figure 0.5 $2,069,000 Add: Beginning work in process name and figure 0.5 180,000 Total manufacturing costs name and figure 0.5 $2,249,000 Less: Ending work in process name and figure 0.5 220,000 Cost of goods manufactured name and figure 0.5 $2,029,000


15

Part B (2 marks)

Tree & Woods Corp., an international furniture company, manufactures and sells furniture of unique natural material. In 2010, the company sold all 25,000 chairs that it produced at $200 each. Total costs amounted to $3,300,000 comprised of $1,300,000 variable costs and $2,000,000 fixed costs. In 2011, the company purchases a new saw mill for $110,000. The useful life is estimated to be 5 years with a salvage value of $10,000. Each year, the same amount of depreciation expense is recorded. The usage of the new saw mill allows Tree & Woods to reduce variable costs for producing one chair by $7. All other costs remain the same as in 2010.

What was Tree & Woods Corp.’s break-even point in number of units in 2010?

Production and sale of 25,000 units => UVC = $52 (1,300,000 / 25,000) BEP = FC/(Price – UVC) = 13,513.51 => 13,514 units Calculation 2 marks UVC 1 mark, correct result 1 mark [Note: allow 0.5 marks if wrong figures but correct formula written down

somewhere]


16

Question 8 - MCQ practice questions

You have seen samples of MCQ in the lectures and in your quiz attempts.

2014S1 PracExamQuestions Answers

Documents

Transcript of 2014S1 PracExamQuestions Answers