Post on 24-Oct-2014
CHAPTER 1 OVERVIEW
Problem 1
Nemo company began operation on August 1, 2009. The following transactions
took place during the month of August
a. Owners invested $50,000 cash in the corporation in exchange for 5,000
shares of common stock
b. Equipment is purchased for $20,000 cash
c. On the first day of August, $6,000 rent on building is paid for the month
of August and September
d. Merchandise inventory costing $38,000 is purchased on account. The
company uses the perpetual inventory system
e. $30,000 is borrowed from a local bank, and a note payable is signed
f. Credit sales for the month are $40,000. The cost of merchandise sold is
$22,000
g. $15,000 is collected on account from customer
h. $20,000 is paid on account to suppliers of merchandise
i. Salaries of $7,000 are paid to employee for August
j. The bill for $2,000 is received from the local utility company for the
month of August
k. $20,000 cash was loaned to another company, evidenced by note
receivable
l. The corporation paid its shareholders a cash dividend of $1,000
Required:
1. Prepare a journal entry for each transaction
2. Prepare an unadjusted trial balance as of August 31, 2003
Problem 2:
Further information of Nemo:
a. The company anticipates that of the $25,000 in account receivable from
customers $2,500 will not be collected
b. The note payable require the entire $30,000 in principal plus interest at
10% to be paid on July 31, 2010. The date of the loan is August 1, 2009
c. Depreciation on the equipment for the month of August is $500
d. The note receivable is dated August 16, 2009. The note requires the
entire $20,000 in principal plus interest at 12% to be repaid in four
months (the loan was outstanding for one-half month during August)
e. The prepaid rent of $6,000 represents rent for the months of August and
September
Required:
1. Prepare adjusting entries
2. Prepare an adjusted trial balance as at August 31, 2009
3. What is the total net effect on income (overstated or understated) if the
adjusting entries are not made? 6150
Problem 3:
MICKEY LTD CO Adjusted trial balance 31-Mar-09 Account title Dr Cr cash 68,500 Accounts receivable 2,000 Allowance for uncollectible account 500 Supplies 1,200 Prepaid rent 22,000 Inventory 38,000 Furniture and fixtures 12,000 Accumulated depreciation -Furniture and fixtures 200 Accounts payable 35,000 Notes payable 40,000 Unearned rent revenue 750 Salaries payable 5,500 Interest payable 333 Common stock 60,000 Retained earnings 1,000 Sales revenue 38,500 Rent revenue 250 Cost of goods sold 22,000 Salaries expense 10,500 Supplies expense 800
Rent expense 2,000 depreciation expense 200 Interest expense 333 Bad debt expense 500 Totals 181,033 181,033
Required:
a. Prepare closing entries
b. Prepare post closing trial balance
c. Prepare an Income statement for the year ended March 31, 2009 and a
Balance Sheet as at March 31, 2009
CHAPTER 2 CASH AND RECEIVABLES
Problem 1
Gemma is reconciling her cash book to the bank statement. Her cash balance is: $2357 and the balance on her statement is $25 overdrawn. She finds the following differences:
- Bank charges of $23 and direct debit totaling $100 have not been posted to the cash book
- There are unpresented check of $324 - She paid in a batch of checks two days ago totaling $2503 and these have
not yet been credited to her account - A check she paid in last week for $80 has been dishonored
What will the reconciled balance be?
Problem 2
The Hawthorne Manufacturing Company maintains a general checking account at the First Pacific Bank. First Pacific provides bank statement and canceled checks once a month. The cutoff date is the last day of the month. The bank statement for the month of May is summarized as follows:
Balance, May 1, 2003 $32,120
Deposits 82,140
Checks processed (78,433)
Services charges (80)
NSF checks (2,187)
Note payment collected by bank (includes $120 interest) 1,120
Balance, May 31, 2003 $34,680
The company’s general ledger cash account has a balance of $35,276 at the end of May. A review of the company records and the bank statement reveals the following:
1. Checks not yet deposited totaled $2,965. 2. A deposit of $1,020 was made on May 31 that was not credited to the
company’s account until June. 3. All checks written in Aril have been processed by the bank. Checks
written in May that had not been processed by the bank total $5,536. 4. A check written for $1,790 was incorrectly recorded by the company as a
$790 disbursement. The check was for payment to a supplier of raw materials.
Requirement: Prepare the bank reconciliation
Problem 3
The Pooh company offers credit terms to its customers. At the end of 2003,
accounts receivable totaled $625,000. The allowance method is used to
account for uncollectible accounts. The allowance for uncollectible account has
a credit balance of $32,000 at the beginning of 2009 and $21,000 in receivables
is written off during the year as uncollectible. Also $1,200 in cash was received
in December from a customer whose account previously had been written off.
The company estimates bad debt by applying 10% to account receivables at
the end of year.
Required:
1. Prepare journal entries to record the write–off of receivables, the
collection of $1,200 for previously written off receivables, and the year
end adjusting entry for bad debt expense
2. How would account receivable be shown in the 2009 year–end balance
sheet?
Problem 4
Match an item in List A with suitable item in List B bellow:
List A List B
1. Internal control 2. Trade discount 3. Cash equivalents 4. Allowance for uncollectible 5. Cash discount 6. Balance sheet approach 7. Income statement approach 8. Net method 9. Compensating balance 10. Discounting 11. Gross method 12. Direct write-off method 13. Factoring
a. Restriction on cash b. Cash discount not taken is sales
revenue c. Include separation of duties d. Bad debt expense is a % of credit
sales e. Recognize bad debt as they occur f. Sale of receivables to a financial
institution g. Include highly liquid investment h. Estimate of bad debt i. Reduction in amount paid by
credit customer j. Reduction below list price k. Cash discount not taken is
interest revenue l. Bad debt expense determined by
estimating realizable value m. Sale of note receivable to a
financial institution
Inventory – Question
Concepts
Listed below are several terms and phrases associated with inventory measurement.
Pair each item from List A (by letter) with the item from List B that is most
appropriately associated with it.
List A List B
1. Perpetual inventory system
a. Legal title passes when goods are delivered to common carrier.
2. Periodic inventory system b. Goods are transferred to another company but title remains with transferor.
3. F.o.b. shipping point c. Purchase discounts not taken are included in inventory cost.
4. Gross method d. Legal title passes when goods arrive at location.
5. Net method e. Items sold are those acquired first.
6. Average cost f. Items sold are those acquired last.
7. F.o.b. destination g. Purchase discounts not taken are considered interest expense.
8. FIFO h. Adjust inventories at the end of the period
9. LIFO i. Continuously records changes in inventory.
10. Consignment j. Items sold come from a mixture of goods acquired during the period.
Problem 1
At the beginning of Month 2, the balance in the stores ledger for Material M27 was
2,400 kg at $3·60 per kg. The movements of the material in Month 2, and the prices
per kg, were as follows:
Day Receipts Issues
Quantity Price Quantity Price
kg $/kg kg $/kg
4 5,000 3·65
6 4,000 3·65
17 6,000 3·70
Required:
(a) State the pricing method used to value the material issues on Day 6.
(b) Calculate the closing inventory value at the end of Month 2.
In Month 3, no further purchases of Material M27 were made. Issues in the month
were:
Day 2 3,200 kg
Day 10 4,300 kg
Required:
(c) Prepare the inventory record for Material M27 for Month 3, showing both the
quantity AND the value of:
(i) each of the issues; and
(ii) the balance remaining after each issue.
Problem 3
The Collins Company has five inventory items on hand at the end of 2009. The year-
end unit costs (determined by applying the average cost method), current unit selling
prices, and estimated disposal (selling) costs for each of the items are presented
below. The gross profit ra-tio for each of the products is 20% of selling price.
Item Cost Replacement cost Selling Price Estimated
Disposal Costs
A $50 $55 $100 $15
B 100 90 120 20
C 80 70 85 20
D 90 37 100 24
E 95 92 110 24
Required:
Use LCM to determine the carrying value of inventories and prepare necessary
adjusting entries regarding to inventories at the end of 2009.
Fixed Assets – Questions
Problem 1:
Part a
A business purchased two rivet-making machines on 1 January 20X5 at a cost
of $15,000 each. Each had an estimated life of five years and a nil residual
value. The straight line method of depreciation is used.
Owing to an unforeseen slump in market demand for rivets, the business
decided to reduce its output of rivets, and switch to making other products
instead. On 31 March 20X7, one rivet-making machine was sold (on credit) to
a buyer for $8,000.
Later in the year, however, it was decided to abandon production of rivets
altogether, and the second machine was sold on 1 December 20X7 for $2,500
cash.
Require:
Prepare the machinery account, depreciation of machinery
account and disposal of machinery account for the accounting
year to 31 December 20X7.
Part b
(a) What are the purposes of providing for depreciation? (b) In what circumstances is the reducing balance method more
appropriate than the straight-line method? Give reasons for your answer.
Problem 2
On 1 October 2007 Hardware Limited acquired a machine under the following terms:
Manufacturer's base price: $50,000
Trade discount (applying to base price only):10%
Early settlement discount taken (on the payable amount of the base cost only): 2%
Freight charges: $1,000
Electrical installation cost : $800
Staff training in use of machine: $900
Pre-production testing: $1,300
Purchase of a three-year maintenance contract: $7,500
Estimated residual value: $3,000
Estimated life in production units: 6,000
Units produced - year ended 30 September 2008: 1,200
-year ended 30 September 2009 (see below): 1,100
Hardware had incorrectly specified the power loading of the original electrical cable
to be installed by the contractor. The cost of correcting this error of $100,000 is
included in the above figure of $800,000.
On 1 October 2008 Hardware decided to upgrade the machine by adding new
components at a cost of $5 million. This upgrade led to a reduction in the production
time per unit of the goods being manufactured using the machine. The upgrade also
increased the estimated remaining life of the machine at 1 October 2008 to 5,500
production units and its estimated residual value was revised to $4 million.
Required:
Prepare extracts from the income statement and statement of financial position for
the above machine for each of the three years to 30 September 2008 and 2009.
Problem 3
Flightline is an airline which treats its aircraft as complex non-current assets. The cost and
other details of one of its aircraft are:
$'000 Estimated
life
Exterior structure – purchase date 1 April 1995 120,000 20 years
Interior cabin fittings – replaced 1 April 2005 25,000 5 years
Engines (2 at $9 million each) – replaced 1 April 2005 18,000 36,000 flying
hours
No residual values are attributed to any of the component parts.
At 1 April 2008 the aircraft log showed it had flown 10,800 hours since 1 April 2005. In the
year ended 31 March 2009, the aircraft flew for 1,200 hours for the six months to 30
September 2008 and a further 1,000 hours in the six months to 31 March 2009.
On 1 October 2008 the aircraft suffered a 'bird strike' accident which damaged one of the
engines beyond repair. This was replaced by a new engine with a life of 36,000 hours at cost
of $10·8 million. The other engine was also damaged, but was repaired at a cost of $3
million; however, its remaining estimated life was shortened to 15,000
hours. The accident also caused cosmetic damage to the exterior of the aircraft which
required repainting at a cost of $2 million. As the aircraft was out of service for some weeks
due to the accident, Flightline took the opportunity to upgrade its cabin facilities at a cost of
$4·5 million. This did not increase the estimated remaining life of the cabin fittings, but the
improved facilities enabled Flightline to substantially increase the air fares on this aircraft
Required:
Calculate the charges to the income statement in respect of the aircraft for the year
ended 31 March 2009 and itscarrying amount in the statement of financial position as
at that date. Note: the post accident changes are deemed effective from 1 October
2008.