Practice_questions_for_mid_semester_exam.pdf

Practice questions for mid-semester exam

Non- Current Assets Question 1

Fantastic Tiling Corporation is a tiling manufacturer. Jon Tiler, the founder of the company,

recently approved the purchase of a new truck to support the companys expected growing

business. The companys purchasing manager quickly acquires a truck at the advertised price

of $60,000. She also had to pay $2,500 for dealer related transportation charges, $1,700 for

vehicle related state stamp duty costs, $1,000 for registration costs. Fantastic Tiling expects

to use the truck for 4 years, and estimates that it will have a salvage value of $3,000 at the

end of its 4 year use. She paid cash for all the above costs.

Of the three possible depreciation methods (straight line, reducing balance and units of

production depreciation methods), the accounting department determines that the Reducing

Balance method is the best method to use for depreciating the truck, and the company uses

the simplified method as per the ATO = 2.0 * straight line estimate to do so (NOT the formula based method). The company is not sure how the truck will be used over the next

four years, though they know the truck will travel approximately 60,000 kms over the 4

years.

The company is also replacing the machine used for glazing. The old machine was originally

recorded at a cost of $110,000 and depreciated over 10 years straight line with no salvage

value. The statement of financial position shows a book value net of accumulated

depreciation at the beginning of the financial year of $44,000. The cost of the new machine is

$150,000 and Jon negotiated to trade in the old machine for $40,000 and pays cash for the

balance.

Required:

1. What is the maximum cost that can be included as part of the trucks purchase cost, as

allowed by the accounting standards? Please journalise this transaction (5 marks) 2. Calculate the depreciation, accumulated depreciation and net book value for each of

the four years of the trucks life, using the reducing balance method as explained in

the question. For this section only please assume (part 2 only) the total recorded

original cost of the truck, which includes the purchase price and all other allowable

costs, is $53,000. It is suggested to use a table format to answer this question. (7 marks)

3. Calculate and journalise all entries relating to the disposal of the old glazing machine.

Show your workings. Assume the disposal happened at 1 January which is half year

into your financial year. (5 marks) 4. Jon also decides to re-value the land of his factory to $2,000,000. This is the first time

Jon is re-valuing the land which had an original cost of 1,500,000. Journalise the entry

necessary. (3 marks)

Solutions to Non-Current Assets Q1:

1. Amounts to include in the purchase cost are: Purchase price 60,000 Transportation charges 2,500 Stamp duty 1,700 Registration costs 1,000 Total capitalised cost $65,200

Note: The initial registration cost at time of purchase ($1000) is included in the cost of the asset. Subsequent registration costs are to be expensed. Journal to record the cost of the asset: Dr Motor Vehicle Truck 65,200 Cr Cash/Bank 65,200 2. For this second part of the question, you were to assume total purchase cost is

$53,000 (this is for exam marking purposes so any mistakes dont

Calculations: Year 1: Depreciation = 53,000 * 50% = 26,500 Year 2: Depreciation = 26,500 * 50% = 13,250 Year 3: Depreciation = 13,250 * 50% = 6,625 Year 4: Depreciation = 6,625 * 50% = 3,313 Note: The total amount of depreciation (accumulated depreciation) after 4 years ($49,688) is not exactly the same as the depreciable amount ($50,000) because of the inaccuracy using the simplified formula. Therefore the book value is also not exactly the same as the residual value.

3.

First bring depreciation up to date: Cost = 110,000/10 years = 11,000 depreciation per year/2 (used half year in current year) = $5,500 Dr Depreciation expense $5,500

Cost of the Asset 53,000 Residual value 3,000 Depreciable amount 50,000 Reducing balance rate (2*25%) 50%

Depreciation per year

Accumulated depreciation

Book value at year end

Year 1 26,500 26,500 26,500 Year 2 13,250 39,750 13,250 Year 3 6,625 46,375 6,625 Year 4 3,313 49,688 3,313 49,688

Cr Accumulated Depreciation $5,500 Book value at beginning of the year: $44,000 Less depreciation current year ($5,500) Book value at disposal $38,500 [Accumulated depreciation at disposal = original cost ($110,000) less BV at disposal ($38,500) = $71,500) Trade in value $40,000 Less BV at disposal $38,500 Gain on disposal $1,500 Dr New machine $150,000 Dr Accumulated depr. (old machine)$71,500 Cr Old machine $110,000 Cr Gain on sale of asset $1,500 Cr Cash $110,000

4. Dr Land $500,000 Cr Asset Revaluation Reserve $500,000

Non- Current Assets Q2



business. The companys purchasing manager quickly acquires a truck advertised at a price

of $60,000 and receives a 10% discount. She also had to pay $1,500 to customise the loading

platform, $500 registration for the truck being delivered from Perth $1,700 for vehicle related

state stamp duty costs, $1,500 for non-compulsory car insurance costs. Fantastic Tiling

expects to use the truck for 4 years, and estimates that it will have a salvage value of $3,000

at the end of its 4 year use. She paid cash for all the above costs.


production depreciation methods), the accounting department determines that the straight line

method is the best method to use for depreciating the truck. The truck will travel

approximately 60,000 kms over the 4 years estimated life.


recorded at a cost of $110,000 and depreciated over 10 years straight line with no salvage

value. The statement of financial position shows a book value net of accumulated

depreciation at the beginning of the financial year of $44,000. The cost of the new machine is

$150,000 and Jon negotiated to trade in the old machine for $30,000 and pays cash for the

balance.

Required:



the four years of the trucks life, using the straight line method as explained in the

question. For this section only please assume (part 2 only) the total recorded original

cost of the truck, which includes the purchase price and all other allowable costs, is

$53,000. It is suggested to use a table format to answer this question. (7 marks) 7. Calculate and journalise all entries relating to the disposal of the old glazing machine.


into your financial year. (5 marks)

8. Jon also decides to re-value the land of his factory to $1,500,000. This is the first time

Jon is re-valuing the land which had an original cost of 2,000,000. Journalise the entry

necessary. (3 marks)


5. Amounts to include in the purchase cost are: Purchase price less discount 54,000 Customising of loading deck 1,500 Insurance for transport 500 Stamp duty 1,700 Total capitalised cost $57,700

Non-compulsory insurance ($1,500) is not necessary to bring the asset to its intended purpose (i.e. to be used) and does not form part of the cost of the asset. Journal entry to record the cost of the asset: Dr Motor Vehicle Truck 57,700 Cr Cash/Bank 57,700 6.

Calculations: Year 1 to 4: Depreciation = 50,000 * 25% = 12,500

7.

First bring depreciation up to date: Cost = 110,000/10 years = 11,000 depreciation per year/2 (used half year in current year) = $5,500 Dr Depreciation expense $5,500 Cr Accumulated Depreciation $5,500 Book value at beginning of the year: $44,000 Less depreciation current year ($5,500) Book value at disposal $38,500 [Accumulated depreciation at disposal = original cost ($110,000) less BV at disposal ($38,500) = $71,500) Trade in value $30,000 Less BV at disposal $38,500 Loss on disposal $8,500

Cost of the Asset 53,000 Residual value 3,000 Depreciable amount 50,000 Depreciation rate 25%


Accumulated Depreciation

BV at year end

Year 1 12,500 12,500 40,500 Year 2 12,500 25,000 28,000 Year 3 12,500 37,500 15,500 Year 4 12,500 50,000 3,000 50,000

Dr New machine $150,000 Dr Accumulated depr. (old machine)$71,500 Dr Loss on sale of asset $8,500 Cr Old machine $110,000 Cr Cash $120,000

8. Dr Revaluation expense $500,000 Cr Land $500,000

Non- Current Assets Q3



business. The companys purchasing manager quickly acquires a truck at the advertised price

of $60,000. When the company driver picked up the new truck from the factory he incurred a

speeding fine of $1,000 driving too fast in a school zone. She also had to pay $1,000 for

vehicle related state stamp duty costs, $2,000 for registration costs. Fantastic Tiling expects

to use the truck for 4 years, and estimates that it will have a salvage value of $3,000 at the

end of its 4 year use. She paid cash for all the above costs.


production depreciation methods), the accounting department determines that the units of

production method is the best method to use for depreciating the truck. The truck will travel

approximately 60,000 kms over the 4 years estimated life.


recorded at a cost of $110,000 with an estimated $10,000 salvage value and depreciated over

10 years straight line. The statement of financial position shows a book value net of

accumulated depreciation at the beginning of the financial year of $55,000. The cost of the

new machine is $150,000 and Jon negotiated to trade in the old machine for $40,000 and pays

cash for the balance.

Required:



the four years of the trucks life, using the units of production assuming the km driven

in year 1 to 4 are 17,000km; 16,000km; 15,000km and 14,000km respectively. For

this section only please assume (part 2 only) the total recorded original cost of the

truck, which includes the purchase price and all other allowable costs, is $53,000. It is

suggested to use a table format to answer this question. (7 marks)

11. Calculate and journalise all entries relating to the disposal of the old glazing machine.


into your financial year. (5 marks) 12. Jon also decides to re-value the land of his factory with a current book value of

$2,000,000 to $1,700,000. There is also an account called Asset Revaluation Reserve

(Land) that has a credit balance of $500,000. Journalise the entry necessary. (3 marks)


9. Amounts to include in the purchase cost are: Purchase price 60,000 Stamp duty 1,000 Registration costs 2,000 Total capitalised cost $63,000

Note: The initial registration cost at time of purchase ($2000) is included in the cost of the asset. Subsequent registration costs are to be expensed. Speeding fines do not form part of the cost of the asset. Journal entry to record the cost of the asset Dr Motor Vehicle Truck 63,000 Cr Cash/Bank 63,000 10.

Calculations: Year 1: Depreciation = 17,000km * 0.83 = 14,167 Year 2: Depreciation = 16,000km * 0.83 = 13,333 Year 3: Depreciation = 15,000km * 0.83 = 12,500 Year 4: Depreciation = 12,000km * 0.83 = 10,000 * Even though 14,000km were driven in this year the maximum depreciation for that year left is 12,000km

11. First bring depreciation up to date: Cost = 100,000/10 years = 10,000 depreciation per year/2 (used half year in current year) = $5,000 Dr Depreciation expense $5,000 Cr Accumulated Depreciation $5,000 Book value at beginning of the year: $55,000

Cost of the Asset 53,000 Residual value 3,000 Depreciable amount 50,000 Depreciation rate (50,000/60,000km) 0.83 cents per km

km travelled per year


Accumulated Depreciation

BV at year end

Year 1 17,000 14,167 14,167 38,833 Year 2 16,000 13,333 27,500 25,500 Year 3 15,000 12,500 40,000 13,000 Year 4 *12,000 10,000 50,000 3,000 60,000 50,000

Less depreciation current year ($5,000) Book value at disposal $50,000 [Accumulated depreciation at disposal = original cost ($110,000) less BV at disposal ($50,000) = $60,000] Trade in value $40,000 Less BV at disposal ($50,000) Loss on disposal ($10,000) Dr New machine $150,000 Dr Accumulated depr. (old machine) $60,000 Dr Loss on sale of asset $10,000 Cr Old machine $110,000 Cr Cash $110,000

12. Dr Asset Revaluation Reserve $300,000 Cr Land $300,000

Partnerships question 1

Jane Doe formed a partnership with Jack Jones to start a business offering cleaning services

in Sydney. Jane contributes cash of $100,000 and equipment she purchased a year ago for

$25,000 with a current market value of $20,000. Jack contributes machinery he purchased a

year ago for $40,000, with a current market value of $30,000. The partners decide to split the

first $30,000 of their profits/losses in proportion to their capital contributions to the

partnership, and any additional profits/losses in the proportions of 60% to Jane and 40% to

Jack.

Their business turns out to be quite successful, and earns a profit of $50,000 in their first

year. Michael Williams is impressed at Jane and Jacks management of the business, and

offers $20,000 cash to them personally for a 10% stake in the partnership. Jack and Jane

accept this offer, sharing the cash equally and give Michael 10% of the partnership capital.

This 10% capital is contributed in the proportion of their initial capital contributions when

starting the business.

The partnership earns a lower profit of $15,000 in their second year, which they agree to split

in proportion to their current capital balances. Finally, the partners revalue their machinery

upwards by $20,000, and equipment downwards by $10,000, and distribute any revaluations

equally.

Required: Please journalise all transactions relevant for the above events.

Solution Partnerships question 1:

1. Journalise the formation of the partnership Dr Cash $100,000 Dr Equipment $20,000 Dr Machinery $30,000 Cr Jane Doe Capital $120,000 Cr Jack Jones Capital $30,000 Note: Jane contributes 120,000 of 150,000 in total capital (80%), therefore Jack contributes 20%.

2. Journalise the distribution of profit in year 1 Jane profit share ($30,000*80% + 60%*$20,000) = $36,000 Jack profit share ($30,000*20% + 40%*$20,000) = $14,000

Dr. Income summary $50,000 Cr Jane Doe Capital $36,000 Cr Jack Jones Capital $14,000

3. Journalise entry of Michael Williams into the partnership. Total capital now in the partnership: Jane Doe $120,000 + $36,000 = $156,000 Jack Jones $30,000 + $14,000 = $44,000 Total capital = $200,000, so 10% is $20,000. Jane gives $80% of $20,000 = $16,000, while Jack gives the remaining 20% or $4,000. The journal entry is therefore as follows: Dr. Jane Doe Capital $16,000 Dr Jack Jones Capital $4,000 Cr. Michael Williams Capital $20,000

4. Journalising 2nd year profit of $15,000 Jane Doe capital is $156,000 - $16000 = $140,000 Jack Jones capital is $44,000 - $4,000 = $40,000 Michael Williams capital = $20,000 Dr. Income summary $15,000 Cr. Jane Doe Capital (140,000/200,000 * 15000) $10,500

Cr. Jack Jones Capital (40,000/200,000 * 15000) $3,000 Cr. Michael Williams Capital (20,000/200,000 * 15000) $1,500

5. Journalise upwards and downwards revaluations Dr Machinery $20,000 Cr. Equipment $10,000 Cr. Jane Doe Capital (10,000* 1/3) $3,333.33

Cr. Jack Jones Capital (10,000* 1/3) $3,333.33 Cr. Michael Williams Capital (10,000* 1/3) $3,333.33

Partnerships question 2

Mandy, Dave and Bill form a partnership to start a business selling toys. Mandy provides

cash of $60,000, while Dave contributes toys he bought a year ago for $30,000, and with a

market value of $40,000. Bill contributes $30,000 to purchase equipment for moving large

boxes of toys. All partners agree that profits/losses will be split equally.

The toy shop performs surprisingly well, and at the end of its first year, reports a profit of

$60,000. Mandy and Dave agree to contribute another $25,000 each to the partnership, to

allow an expansion of the business into two toy stores. All partners agree that profits in the

future will be split 40% to Mandy, 40% to Dave, and 20% to Bill. The partnership earns a

profit of $80,000 in its second year.

Bill is quite upset that Mandy and Dave are earning double the profit share that he does, and

he requests to exit the partnership. He agrees to accept a $50,000 payout from the

partnership, and any bonus or loss received or incurred by Mandy and Dave in relation to

Bills partnership payout, is shared 60% by Mandy and 40% by Dave.

Required: Please journalise all transactions relating to the above events.

Solution to Partnerships question 2

1. Journalise formation of partnership Dr Cash $60,000 Dr. Toys Inventory $40,000 Dr. Equipment $30,000 Cr Mandy Capital $60,000 Cr Dave Capital $40,000 Cr Bill Capital $30,000

2. Journalise distribution of profit in year 1

Dr Income summary $60,000 Cr Mandy Capital $20,000 Cr Dave Capital $20,000 Cr Bill Capital $20,000

3. Journalise additional contributions by Mandy and Dave

Dr Cash $50,000 Cr. Mandy Capital $25,000 Cr. Dave Capital $25,000

4. Journalise distribution of profit in year 2 Dr. Income summary $80,000 Cr Mandy Capital $32,000 Cr Dave Capital $32,000 Cr Bill Capital $16,000

5. Journalise Bills exit from the partnership Mandys capital balance is now 60000 + 20000 + 25000 + 32000 = $137,000 Daves capital balance is now 40000 + 20000 + 25000 + 32000 = $117,000 Bills capital balance is now 30000 + 20000 + 16000 = $66,000 Bill accepts 50,000, when his capital share is 66,000. The 16,000 extra capital is shared 60% to Mandy, 40% to Dave. Here is the following journal entry to reflect these events: Dr. Bill, capital $66,000 Cr Cash at Bank $50,000 Cr Mandy capital (60% of 16000) $9,600 Cr Dave capital (40% of 16000) $6,400

Partnerships question 3 Will and Kate form a partnership selling royal souvenirs to tourists. Both contribute cash of

$20,000 each to commence the partnership, but Kate also contributes $20,000 in souvenirs to

the business, while Will additionally contributes $30,000 in equipment to move the

souvenirs. They agree that any profits/losses will be shared equally.

The partnership struggles from the beginning, with tourists not really purchasing their

products. Within 6 months, both Will and Kate agree to go their separate ways, and

terminate the partnership.

Here is a brief of their balance sheet:

Assets: Cash $15,000

Inventory $15,000

Equipment (net book value) $25,000

Liabilities: Bank Loan $25,000

Partnership owners equity: Will Capital $20,000

Kate capital $10,000

Subsequently, the equipment is sold for $20,000. The souvenirs are sold at a fire sale,

yielding cash revenues equal to half their cost as reported in the asset section above.

Required: Journalise the formation of the partnership, and dissolution of the partnership.

Solutions to Partnerships question 3

1. Journalise the formation of the company Dr Cash $40,000 Dr Souvenirs Inventory $20,000 Dr Equipment $30,000 Cr. Will, capital $50,000 Cr. Kate, capital $40,000

2. Liquidating the company - sell assets for cash (step 1)

Dr Cash $27,500 Dr. Will, Capital $6,250 Dr. Kate, Capital $6,250 Cr Equipment $25,000 Cr Souvenirs Inventory $15,000 Step 2 pay off liabilities Dr Bank loan payable $25,000 Cr Cash $25,000 Step 3 use remaining cash to pay back owners Dr Will, capital (20,000 6250) $13,750 Dr Kate, capital (10,000 6250) $3,750 Cr. Cash $17,500

Cash Flows Question 1

Consider the following information, relating to Betty Ltds 2012 calendar year data:

Interest received $2,000

Gain on sale of old machinery $9,000

Interest Paid $3,000

Dividends Received $4,000

Dividends Paid $5,000

Amortisation Expense $12,000

Cash received from customers $45,000

Cash paid to shareholders for share buy-back $30,000

New machinery purchased for $50,000 cash - half paid now, remainder to be paid next year.

Old machinery sold for cash payment $40,000

Rent paid $25,000

Depreciation $65,000

Loan repayment (principal only) $15,000

Required:

1. What is the cash flow from operations?

2. What are the net investing cash flows?

3. What is the net financing cash flow?

4. If their ending 2012 bank balance is $815,000, what was the starting 2012 bank balance?

Solutions to Cash Flows Question 1

1. Operating cash flows

Cash received from customers $45,000 Dividends Received $4,000 Interest Received $2,000 Interest Paid ($3,000) Rent paid ($25,000) Net cash inflows from operational activities $23,000 2. Investing cash flows New machinery purchased ($25,000) Old machinery sold $40,000 Net cash inflows from investing activities $15,000 3. Financing cash flows Dividends paid ($5,000) Loan repayment ($15,000) Share buyback ($30,000) Net cash outflows from financing activities ($50,000) 4. Ending cash balance = $815,000, change in cash = $23,000 + $15,000 - $50,000 = ($12,000), so beginning cash balance must be $815,000 ($12,000) = $827,000. The opening cash balance was therefore $827,000. This period, cash flows reduced by $12,000, explaining the ending cash balance of $815,000.

Cash Flows Question 2:

Consider the Johns Pty Ltd comparative balance sheet data below, as well as other

information. Please calculate the net cash flows from operating activities for the 2010

calendar year, using the data below:

Calendar year 2009 2010 Cash at Bank $10,000 $25,000

Acs Receivable $6,000 $9,000

Acs Payable $7,000 $12,000

Prepaid Insurance $10,000 $6,000

Unearned revenues $14,000 $7,000

Interest payable $8,000 $4,000

Inventory $12,000 $16,000

Motor vehicles $100,000 $90,000

Acc Depn Motor Vehicles $40,000 $55,000

Johns Pty Ltd sold some equipment for $18,000 in 2010. Its original cost was $25,000, and

its accumulated depreciation till the time of sale was $5,000. It purchased a replacement

vehicle on the last day of the 2010 calendar year. The net profit after tax for the 2010

calendar year was $25,000, and the 2009 calendar year was $15,000

Solution to Cash Flows Question 2 Net Profit $25,000 Add back: Depreciation ($55,000 - $40,000 + $5,000) $20,000 Add back: Loss on Sale of Equipment ($18,000 ($25,000 - $5,000) $2,000 Add back: Increase in Acs Payable $5,000 Decrease in Prepaid Insurance $4,000 Subtract: Increase in Acs Receivable ($3,000) Decrease in Unearned Revenues ($7,000)

Decrease in Interest Payable ($4,000) Increase in Inventory ($4,000)

Net Operating Cash Inflows $38,000

Cash Flows Question 3

A flood has washed away all electronic and physical records of Jamie Pty Ltds accounts, except the information below. Consider the following revenue and expense account balances, and comparative balance sheet items.

2012 Profit and loss statement items

Revenues $500,000

COGS ($200,000)

Interest revenue $20,000

Depreciation Expense ($15,000)

Taxation expense ($20,000)

Amortisation expense ($5,000)

Gain on sale of equipment $7,000

Loss on sale of machinery ($2,000)

Salary expense ($125,000)

There are no other profit and loss accounts this period, than those given above.

All relevant balance sheet items:

Acs Payable up $4,000 $7,000

Salary Payable down $17,000 $10,000

Inventory up $12,000 $20,000

Unearned Revenues up $10,000 $20,000

Interest receivable down $12,000 $5,000

Required: What is the net operating cash flow for 2012?

Solution to Cash Flows Question 3 Revenues $500,000 Interest revenue $20,000 Gain on sale of equipment $7,000 COGS ($200,000) Depreciation Expense ($15,000) Taxation expense ($20,000) Amortisation expense ($5,000) Loss on sale of machinery ($2,000) Salary expense ($125,000) Net Profit $160,000 Indirect cash flow method Net Profit: $160,000 Add back: Depreciation $15,000 Amortisation expense $5,000 Loss on sale of machinery $2,000 Subtract: Gain on sale of equipment ($7,000) Add back: Acs Payable increase $3,000 Unearned Revenues increase $10,000 Interest receivable decrease $7,000 Subtract: Salary payable decrease ($7,000) Inventory increase ($8,000) Net operating cash inflows $180,000

Practice_questions_for_mid_semester_exam.pdf

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